| Year Ended June 30, As a % of Net Sales | | Change in Sales in fiscal 20202023 were $3.2$4.4 billion, which was $227.0$602.1 million or 6.5% below15.8% above the prior year, with sales from acquisitions adding $80.7$20.0 million or 2.3%0.5% and unfavorable foreign currency translation accounting for a decrease of $10.5$16.3 million or 0.3%0.4%. There were 253.5252.5 selling days in both fiscal 20202023 and 251.5 selling days in fiscal 2019.2022. Excluding the impact of businesses acquired and foreign currency translation, sales were down $297.2up $598.4 million or 8.5%15.7% during the year, driven by a 9.4% decreasean increase from operations due to weakreflecting resilient underlying demand across key endboth segments, structural and secular tailwinds across legacy and new markets, further impacted by the economic slowdown resultingand support from the COVID-19 pandemic, offset by an increase of 0.9% due to two additional sales days. company-specific growth opportunities.
The following table shows changes in sales by reportable segment. | | Amounts in millions | | Amount of change due to | Amounts in millions | | Amount of change due to | | Year ended June 30, | Sales Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Year ended June 30, | Sales Increase | Acquisitions | Foreign Currency | Organic Change | Sales by Reportable Segment | 2020 |
| 2019 |
| Sales by Reportable Segment | 2023 | 2022 | Service Center Based Distribution | $ | 2,242.0 |
| $ | 2,452.9 |
| $ | (210.9 | ) | $ | 23.8 |
| $ | (10.5 | ) | $ | (224.2 | ) | Service Center Based Distribution | $ | 2,966.8 | | $ | 2,565.6 | | $ | 401.2 | | $ | — | | $ | (16.3) | | $ | 417.5 | | Fluid Power & Flow Control | 1,003.7 |
| 1,019.8 |
| (16.1 | ) | 56.9 |
| — |
| (73.0 | ) | | Engineered Solutions | | Engineered Solutions | 1,446.0 | | 1,245.1 | | 200.9 | | 20.0 | | — | | 180.9 | | Total | $ | 3,245.7 |
| $ | 3,472.7 |
| $ | (227.0 | ) | $ | 80.7 |
| $ | (10.5 | ) | $ | (297.2 | ) | Total | $ | 4,412.8 | | $ | 3,810.7 | | $ | 602.1 | | $ | 20.0 | | $ | (16.3) | | $ | 598.4 | |
Sales ofin our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $210.9increased $401.2 million, or 8.6%15.6%. Acquisitions within this segment increased sales by $23.8 million or 1.0%, and unfavorableUnfavorable foreign currency translation decreased sales by $10.5$16.3 million or 0.4%0.6%. Excluding the impact of businesses acquired and the impact of foreign currency translation, sales decreased $224.2increased $417.5 million or 9.2%16.2% during the year, driven by a 10.0% decreasean increase from operations due to weak demandongoing benefits from market position, sales process initiatives, solid growth across key end markets, offset by an increase of 0.8% due to two additional sales days.national strategic accounts, as well as benefits from cross-selling actions. Sales ofin our Fluid Power & Flow ControlEngineered Solutions segment decreased $16.1increased $200.9 million or 1.6%16.1%. Acquisitions within this segment, primarily Olympus,Automation, Inc., increased sales $56.9$20.0 million or 5.6%1.6%. Excluding the impact of businesses acquired, sales decreased $73.0increased $180.9 million or 7.2%14.5%, reflecting positive underlying segment demand and driven by a 8.0% decrease from operations,expanding technical and engineering capabilities, diverse end-market mix, and cross-selling initiatives, partially offset by an 0.8% increase due to two additional sales days. The decrease from operations is primarily due to slower demand in our flow control operations and weakerorder activity across our industrial OEM customer base.the technology sector and ongoing supply chain constraints.
The following table shows changes in sales by geographical area. Other countries includesinclude Mexico, Australia, New Zealand, and Singapore. | | Amounts in millions | | Amount of change due to | Amounts in millions | | Amount of change due to | | Year ended June 30, | Sales Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Year ended June 30, | Sales Increase | Acquisitions | Foreign Currency | Organic Change | Sales by Geographic Area | 2020 |
| 2019 |
| Sales by Geographic Area | 2023 | 2022 | United States | $ | 2,819.4 |
| $ | 3,016.7 |
| $ | (197.3 | ) | $ | 80.7 |
| $ | — |
| $ | (278.0 | ) | United States | $ | 3,860.4 | | $ | 3,299.8 | | $ | 560.6 | | $ | 20.0 | | $ | — | | $ | 540.6 | | Canada | 248.6 |
| 271.3 |
| (22.7 | ) | — |
| (2.7 | ) | (20.0 | ) | Canada | 315.5 | | 291.5 | | 24.0 | | — | | (16.0) | | 40.0 | | Other countries | 177.7 |
| 184.7 |
| (7.0 | ) | — |
| (7.8 | ) | 0.8 |
| | Other Countries | | Other Countries | 236.9 | | 219.4 | | 17.5 | | — | | (0.3) | | 17.8 | | Total | $ | 3,245.7 |
| $ | 3,472.7 |
| $ | (227.0 | ) | $ | 80.7 |
| $ | (10.5 | ) | $ | (297.2 | ) | Total | $ | 4,412.8 | | $ | 3,810.7 | | $ | 602.1 | | $ | 20.0 | | $ | (16.3) | | $ | 598.4 | |
Sales in our U.S. operations decreased $197.3increased $560.6 million or 6.5%17.0%, with acquisitions adding $80.7$20.0 million or 2.7%0.6%. Excluding the impact of businesses acquired, U.S. sales were down $278.0up $540.6 million or 9.2%, driven by a decrease of 10.0% from operations, offset by an increase of 0.8% due to two additional sales days.16.4%. Sales from our Canadian operations decreased $22.7increased $24.0 million or 8.4%, and unfavorable8.2%. Unfavorable foreign currency translation decreased Canadian sales by $2.7$16.0 million or 1.0%5.5%. Excluding the impact of foreign currency translation, Canadian sales were down $20.0up $40.0 million or 7.4%, driven by a decrease of 8.2% from operations, offset by an increase of 0.8% due to two additional sales days.13.7%. Consolidated sales from our other countrycountries operations decreased $7.0increased $17.5 million or 3.8%8.0% compared to the prior year. Unfavorable foreign currency translation decreased other countrycountries sales by $7.8$0.3 million or 4.2%0.1%. Excluding the impact of foreign currency translation, other countrycountries sales were up $0.8$17.8 million or 0.4%8.1% compared to the prior year, driven by an increase of 1.2%from operations, primarily an $11.5 million increase in Mexican sales due to additional sales days, offset by a 0.8% decrease from operations.increased industrial activity, mainly related to the automotive industry. Our gross profit margin decreasedincreased to 28.9%29.2% in fiscal 20202023 compared to 29.0% in fiscal 2019.2022. Gross profit margin expanded year over year primarily reflecting broad-based execution across the business and countermeasures in response to ongoing inflation and supply chain dynamics. The gross profit margin for the current year was negatively affectedimpacted by 1218 basis points for $3.9due to a $7.7 million of non-routineincrease in LIFO expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for certain locations that were closed duringover the year within the U.S. operations of the Service Center Based Distribution segment. prior year.
The following table shows the changes in selling, distribution, and administrative expense (SD&A). | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | SD&A Increase | Acquisitions | Foreign Currency | Organic Change | | 2023 | 2022 | SD&A | $ | 813.8 | | $ | 749.1 | | $ | 64.7 | | $ | 6.4 | | $ | (4.3) | | $ | 62.6 | |
| | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | SD&A Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | 2020 |
| 2019 |
| SD&A | $ | 717.7 |
| $ | 742.2 |
| $ | (24.5 | ) | $ | 20.8 |
| $ | (2.5 | ) | $ | (42.8 | ) |
SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management, and marketing and distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, facility related expenses and expenses incurred in acquiring businesses. SD&A decreased $24.5increased $64.7 million or 3.3%8.6% during fiscal 20202023 compared to the prior year, and as a percentage of sales increaseddecreased to 22.1%18.4% in fiscal 20202023 compared to 21.4%19.7% in fiscal 2019.2022. Changes in foreign currency exchange rates had the effect of decreasing SD&A by $2.5 $4.3 million or 0.3%0.6% compared to the prior year. SD&A from businesses acquired added $20.8$6.4 million or 2.8%0.9%, including $1.9$0.9 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the favorableunfavorable impact from foreign currency translation, SD&A decreased $42.8increased $62.6 million or 5.8%8.3% during fiscal 20202023 compared to fiscal 2019. The Company incurred $5.1 million of non-routine expenses related to severance and facility consolidation primarily within the U.S. Operations of the Service Center Based Distribution segment during fiscal 2020, compared to $1.6 million of restructuring expenses incurred in fiscal 2019.2022. Excluding the impact of acquisitions, total compensation excluding severance decreased $39.8increased $47.3 million during fiscal 2020,2023, as a result of annual calendar year merit increases and an increase in employee incentive compensation correlating with the improved company performance. Also, excluding the impact of acquisitions, travel & entertainment and fleet expenses increased $4.7 million during 2023, primarily driven by higher fuel costs and the return of travel activity in the current year after travel constraints in the prior year due to cost reduction actions takenCOVID-19. Additionally, excluding the impact of acquisitions, occupancy costs increased $5.3 million during 2023, primarily driven by the Company in response to the COVID-19 pandemic, including headcount reductions, temporary furloughs and pay reductions, and suspension of the 401(k) company match.increased building lease costs. All other expenses within SD&A were down $6.5up $5.3 million. During the quarter ended March 31, 2020, the Company performed its annual goodwill impairment test. As a result of this test, the Company recorded a $131.0 million non-cash goodwill impairment charge related to the Company's FCX operations in the Fluid Power & Flow Control segment, primarily due to the overall decline in the industrial economy, specifically slower demand in FCX's end markets. The non-cash goodwill impairment charge decreased net income by $118.8 million and earnings per share by $3.04 per share for fiscal 2020. In fiscal 2019, the Company recognized a non-cash impairment charge of $31.6 million for intangible assets related to the Company's Canadian operations within the Service Center Based Distribution segment, which decreased net income by $23.1 million and earnings per share by $0.59 per share for fiscal 2019.
Operating income decreased $144.8increased $115.3 million, or 61.9%32.2%, to $89.0$473.2 million during fiscal 20202023 from $233.8$357.9 million during fiscal 2019,2022, and as a percentage of sales, decreasedincreased to 2.7%10.7% from 6.7%9.4%, primarily as a resultdue to gross profit margin expansion, volume leverage, and control of the goodwill impairmentSD&A expense recorded during the current year.in fiscal 2023. Operating income, before intangible impairment charges, as a percentage of sales for the Service Center Based Distribution segment decreasedincreased to 9.4%12.6% in fiscal 20202023 from 10.4%11.8% in fiscal 2019.2022. Operating income before goodwill impairment charges, as a percentage of sales for the Fluid Power & Flow ControlEngineered Solutions segment decreasedincreased to 10.9%14.1% in fiscal 20202023 from 11.0%12.6% in fiscal 2019.2022.
Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense. Other income,expense (income), net, represents certain non-operating items of income and expense, and was $2.8$1.7 million of incomeexpense in fiscal 20202023 compared to $0.9$1.8 million of incomeexpense in fiscal 2019.2022. Current year incomeexpense primarily consists of unrealized gains on investments held by non-qualified deferredcompensation trusts of $0.5 million and foreign currency transaction gainslosses of $2.5$3.3 million and other periodic post-employment costs of $1.5 million, offset by other expense of $0.2 million. Fiscal 2019 income consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $0.7$2.2 million, and life insurance income of $0.5$0.7 million and other income of $0.2 million. Fiscal 2022 expense consisted primarily of unrealized loss on investments held by non-qualified deferred compensation trusts of $2.6 million and other periodic post-employment costs of $0.6 million, offset by foreign currency transaction losseslife insurance income of $0.3$1.4 million. The effective income tax rate was 56.5%22.9% for fiscal 20202023 compared to 26.0%21.9% for fiscal 2019.2022. The increase in the effective tax rate is primarily due to the FCX goodwill impairment charge, which increased the effective tax rate by 31.4% duringchanges in compensation-related deductions in fiscal 2020. The Company also recorded a $1.0 million tax benefit related2023 compared to the CARES Act during the current year, which favorably impacted the rate by 1.8% in fiscal 2020. We expect our income tax rate for fiscal 2021 to be in the range of 23.0% to 25.0%.prior year.
As a result of the factors discussed above, net income for fiscal 2020 decreased $120.02023 increased $89.3 million from the prior year. NetDiluted net income per share was $0.62$8.84 per share for fiscal 20202023 compared to $3.68$6.58 per share for fiscal 2019. Current year
results were negatively impacted by $3.04 per share for the goodwill impairment and $0.18 per share for non-routine expenses, offset by a favorable impact of $0.03 per share for the CARES Act tax benefit. The prior year results included positive impacts on earnings per share of $0.48 per share for acquisitions, $0.37 per share for tax reform, offset by a $0.69 per share unfavorable impact from the intangible impairment, which includes the impact of recording the $3.8 million valuation allowance in the third quarter of fiscal 2019, and a $0.04 per share unfavorable impact from restructuring charges during fiscal 2019.2022.
At June 30, 2020,2023, we had a total ofapproximately 580 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore versus 600 at June 30, 2019.2023, versus 568 June 30, 2022. The approximate number of Company employees was 6,200 at June 30, 20202023 and 6,6506,100 at June 30, 2019.2022. LIQUIDITY AND CAPITAL RESOURCES Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At June 30, 20202023 we had total debt obligations outstanding of $935.3$622.2 million compared to $959.8$689.5 million at June 30, 2019.2022. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations, will be sufficient to finance normal working capital needs in each of the countries in which we operate, in, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained if necessary based on the Company’s credit standing and financial strength. The Company’s working capital at June 30, 20202023 was $733.7$1,106.5 million compared to $724.3$859.9 million at June 30, 2019.2022. The current ratio was 3.0 to 1 at June 30, 2023 and 2.7 to 1 at both June 30, 2020 and June 30, 2019.2022. Net Cash Flows The following table is included to aid in review of Applied’s statements of consolidated cash flows; all amounts are in thousands.flows. | | | Year Ended June 30, | | Amounts in thousands | | Amounts in thousands | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2023 | | 2022 | Net Cash Provided by (Used in): | | | | Net Cash Provided by (Used in): | | | Operating Activities | $ | 296,714 |
| | $ | 180,601 |
| Operating Activities | $ | 343,966 | | | $ | 187,570 | | Investing Activities | (55,404 | ) | | (55,102 | ) | Investing Activities | (60,833) | | | (35,658) | | Financing Activities | (78,238 | ) | | (71,539 | ) | Financing Activities | (126,888) | | | (223,029) | | Exchange Rate Effect | (2,740 | ) | | 109 |
| Exchange Rate Effect | 3,317 | | | (2,154) | | Increase in Cash and Cash Equivalents | $ | 160,332 |
| | $ | 54,069 |
| | Increase (Decrease) in Cash and Cash Equivalents | | Increase (Decrease) in Cash and Cash Equivalents | $ | 159,562 | | | $ | (73,271) | |
The increase in cash provided by operating activities during fiscal 20202023 is driven by operating results and the changes in working capital for the year:year and by increased operating results. Changes in cash flows between years related to working capital were driven by (amounts in thousands): | | | | | Decrease in accounts receivable | $ | 65,972 |
| Decrease in inventory | $ | 73,618 |
| Decrease in accounts payable | $ | (24,068 | ) |
| | | | | | Accounts receivable | $ | 94,460 | | Inventory | $ | 49,448 | | Accounts payable | $ | (15,915) | |
Net cash used in investing activities in fiscal 20202023 included $37.2$35.8 million used for the acquisitionacquisitions of OlympusAutomation, Inc. and $20.1AMS and $26.5 million used for capital expenditures. Net cash used in investing activities in fiscal 20192022 included $37.5$7.0 million used for the acquisitionsacquisition of FPS, MilRocFloody, $14.8 million million in cash payments for loans on company-owned life insurance and Woodward, and $19.0$18.1 million used for capital expenditures.
Net cash used in financing activities included $49.6 million and $161.7decreased from the prior year period primarily due to a change in net debt activity, as there was $67.2 million of long-termnet debt repaymentspayments in 2020 and 2019, respectively, offset by $25.0fiscal 2023 compared to $139.9 million of cash borrowings under a unsecured shelf facility agreement with Prudential Investment Managementnet debt payments in 2020 and $175.0 million of cash borrowings from the trade receivable securitization facility in 2019.2022. Further uses of cash in 20202023 were $48.9$53.4 million for dividend payments $2.6and $12.9 million used to pay taxes for shares withheld. Further uses of cash in 2022 were $51.8 million for dividend payments, $8.1 million used to pay taxes for shares withheld, and $2.4 million used for acquisition holdback payments. Further uses of cash in 2019 were $47.3 million for dividend payments, $11.2$13.8 million used to repurchase 192,082148,658 shares of treasury stock, $3.5 million used to pay taxes for shares withheld, and $2.6 million used for acquisition holdback payments.stock. The increase in dividends over the year is the result of regular increases in our dividend payout rates. We paid dividends of $1.26$1.38 and $1.22$1.34 per share in fiscal 20202023 and 2019,2022, respectively.
Capital Expenditures We expect capital expenditures for fiscal 20212024 to be in the $15.0$27.0 million to $20.0$29.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for fiscal 2021 is expected to be in the range of $22.5 million to $23.5 million. Share Repurchases The Board of Directors has authorized the repurchase of shares of the Company’s stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. At June 30, 2020,2023, we had authorization to purchase an additional 864,6181,500,000 shares. The Company did not repurchase shares in fiscal 2020. In fiscal 2019 and 2018,2023, we repurchased 192,082 and 393,300purchased 8,000 shares of the Company’sCompany's common stock respectively, at an average price per share of $58.10,and $57.92, respectively.$89.46. In fiscal 2022, we repurchased 148,658 shares of the Company's common stock at an average price per share of $92.72. In fiscal 2021,we repurchased 400,000 shares of the Company's common stock at an average price per share of $100.22.
Borrowing Arrangements A summary of long-term debt, including the current portion, follows; all amountsfollows (amounts are in thousands:thousands): | | June 30, | 2020 |
| | 2019 |
| June 30, | 2023 | | 2022 | Unsecured credit facility | $ | 589,250 |
| | $ | 613,625 |
| | Revolving credit facility | | Revolving credit facility | $ | 383,592 | | | $ | 410,592 | | Trade receivable securitization facility | 175,000 |
| | 175,000 |
| Trade receivable securitization facility | 188,300 | | | 188,300 | | Series C notes | 120,000 |
| | 120,000 |
| | Series C Notes | | Series C Notes | — | | | 40,000 | | Series D Notes | 25,000 |
| | 50,000 |
| Series D Notes | 25,000 | | | 25,000 | | Series E Notes | 25,000 |
| | — |
| Series E Notes | 25,000 | | | 25,000 | | Other | 1,026 |
| | 1,204 |
| Other | 356 | | | 603 | | Total debt | $ | 935,276 |
| | $ | 959,829 |
| Total debt | $ | 622,248 | | | $ | 689,495 | | Less: unamortized debt issuance costs | 1,487 |
| | 1,943 |
| Less: unamortized debt issuance costs | 152 | | | 171 | | | $ | 933,789 |
| | $ | 957,886 |
| | $ | 622,096 | | | $ | 689,324 | |
In January 2018,December 2021, the Company refinanced its existing credit facility and entered into a new five-yearrevolving credit facility with a group of banks expiring in January 2023. This agreementto refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes. The revolving credit facility provides for a $780.0 million unsecured term loan and a $250.0$900.0 million unsecured revolving credit facility. Fees on this facility range from 0.10%and an uncommitted accordion feature which allows the Company to 0.20% per year based uponrequest an increase in the Company's leverage ratio at each quarter end.borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500.0 million. In May 2023, the Company and the administrative agent entered into an amendment to the credit facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR. Borrowings under this agreement carry variablebear interest, rates tied to either LIBOR or prime at the Company's discretion. The Company had no amount outstanding underelection, at either the revolver as of June 30, 2020 and June 30, 2019.base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or SOFR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of $1.9$0.2 million and $3.2 million, respectively, to secure certain insurance obligations, totaled $248.1$516.2 million and $246.8$489.2 million at June 30, 20202023 and June 30, 2019,2022, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loanrevolving credit facility was 1.94%6.11% and 4.19%2.81% as of June 30, 20202023 and June 30, 2019,2022, respectively.
Additionally, the Company had letters of credit outstanding not associated with the revolving credit agreement, in the amount of $4.0 million and $4.7 million as of June 30, 2023 and June 30, 2022, respectively, in order to secure certain insurance obligations.
In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021. The maximum availability under. On March 26, 2021, the Company amended the AR Securitization Facility is $175.0 million.to expand the eligible receivables, which increased the maximum availability to $250.0 million and increased the fees on the AR Securitization Facility to 0.98% per year. Availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain
times, we may not be able to fully access the $175.0$250.0 million of funding available under the AR Securitization Facility. The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the Service Center Based Distribution reportable segment’s U.S. operations’ trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. BorrowingsIn May 2023, the Company entered into an amendment to the AR Securitization facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR, therefore borrowings under this facility carry variable interest rates tied to LIBOR and fees on the AR Securitization Facility are 0.90% per year.SOFR. The interest rate on the AR Securitization Facility as of June 30, 20202023 and June 30, 20192022 was 1.07%6.16% and 3.33%2.60%, respectively. The Company classified the AR Securitization Facility as long-term debt as it has the ability and intent to extend or refinance this amount on a long-term basis. On August 4, 2023, the Company amended the AR Securitization Facility and extended the term to August 4, 2026. At June 30, 20202023 and June 30, 2019,2022, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 million.$50.0 million and $90.0 million, respectively. Fees on this facility range from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end. The remaining principal balance on the "Series C" notes of the $40.0 million was paid in July 2022. The "Series D" notes have a remaining principal amount of $120.0$25.0 million, carry a fixed interest rate of 3.19%3.21%, and are due in equal principal payments in July 2020, 2021, and 2022. A $40.0 million principal payment was made on the "Series C" notes in July 2020.October 2023. The "Series D" notes have a principal amount of $50.0 million and carry a fixed interest rate of 3.21%. A $25.0 million principal payment was made on the "Series D" notes during fiscal 2020, and the remaining principal balance of $25.0 million
is due in October 2023. In October 2019, the Company amended its unsecured shelf facility agreement with Prudential Investment Management to authorize the issuance of "Series E" notes which have a principal amount of $25.0 million, carry a fixed interest rate of 3.08%, and are due in October 2024.
In 2014, the Company assumed $2.4 million of debt as a part of the headquarters facility acquisition. The 1.50% fixed interest rate note is held by the State of Ohio Development Services Agency and matures in November 2024. In 2019, the Company entered into an interest rate swap which mitigates variability in forecasted interest payments on $431.0$384.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. For more information, see note 7, Derivatives, to the consolidated financial statements, included in Item 8 under the caption “Financial Statements and Supplementary Data.” The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2020,2023, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At June 30, 2020,2023, the Company's net indebtedness was less than 3.10.7 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at June 30, 2020.2023. Accounts Receivable Analysis The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable (all dollar amounts are in thousands): | | June 30, | 2020 |
| | 2019 |
| June 30, | 2023 | | 2022 | Accounts receivable, gross | $ | 463,659 |
| | $ | 551,400 |
| Accounts receivable, gross | $ | 730,729 | | | $ | 673,951 | | Allowance for doubtful accounts | 13,661 |
| | 10,498 |
| Allowance for doubtful accounts | 22,334 | | | 17,522 | | Accounts receivable, net | $ | 449,998 |
| | $ | 540,902 |
| Accounts receivable, net | $ | 708,395 | | | $ | 656,429 | | Allowance for doubtful accounts, % of gross receivables | 2.9 | % | | 1.9 | % | Allowance for doubtful accounts, % of gross receivables | 3.1 | % | | 2.6 | % | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| Year Ended June 30, | 2023 | | 2022 | Provision for losses on accounts receivable | $ | 14,055 |
| | $ | 4,058 |
| Provision for losses on accounts receivable | $ | 5,619 | | | $ | 3,193 | | Provision as a % of net sales | 0.43 | % | | 0.12 | % | Provision as a % of net sales | 0.13 | % | | 0.08 | % |
Accounts receivable are reported at net realizable value and consist of trade receivables from customers. Management monitors accounts receivable by reviewing Days Sales Outstanding (DSO) and the aging of receivables for each of the Company's locations. The Company experienced a significant increase in accounts receivable during fiscal 2023 commensurate with the increase in sales. On a consolidated basis, DSO was 55.955.1 at June 30, 20202023 versus 55.255.7 at June 30, 2019. 2022. Approximately 4.6%2.5% of our accounts receivable balances are more than 90 days past due at June 30, 20202023 compared to 3.0%3.4% at June 30, 2019.2022. On an overall basis, our provision for losses from uncollected receivables represents 0.43%0.13% of our sales infor the year ended June 30, 2020,2023, compared to 0.12%0.08% of sales for the year ended June 30, 2019. This2022. The increase primarily relates to provisions recorded in the current year for customer credit deterioration and bankruptcies primarily in the U.S. and Mexican operations of the Service Center Based Distribution segment. Historically, this percentage is around 0.10% to 0.15%. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels.
Inventory Analysis Inventories are valued using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. As activities slowed in the second half ofInventory increased throughout fiscal 2020, the Company took actions2022 to reduce its overall inventory, which resulted in a net decrease in inventory of $58.4 million.meet increasing customer demand. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis and uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the periodyear ended June 30, 20202023 was 3.84.4 versus 4.2 at4.7 for the year ended June 30, 2019. We believe our inventory turnover ratio in fiscal 2021 will be slightly better than our fiscal 2020 levels. 2022.
CONTRACTUAL OBLIGATIONS The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 20202023 (in thousands): | | | Total |
| | Period Less Than 1 yr |
| | Period 2-3 yrs |
| | Period 4-5 yrs |
| | Period Over 5 yrs |
| | Other |
| | Total | | Period Less Than 1 yr | | Period 2-3 yrs | | Period 4-5 yrs | | Period Over 5 yrs | | Other | Operating leases | $ | 104,165 |
| | $ | 29,979 |
| | $ | 39,328 |
| | $ | 19,540 |
| | $ | 15,318 |
| | — |
| Operating leases | $ | 113,251 | | | $ | 34,235 | | | $ | 44,995 | | | $ | 22,646 | | | $ | 11,375 | | | $ | — | | Planned funding of post-retirement obligations | 10,000 |
| | 900 |
| | 1,800 |
| | 500 |
| | 6,800 |
| | — |
| Planned funding of post-retirement obligations | 6,561 | | | 1,360 | | | 2,770 | | | 460 | | | 1,971 | | | — | | Unrecognized income tax benefit liabilities, including interest and penalties | 6,000 |
| | — |
| | — |
| | — |
| | — |
| | 6,000 |
| Unrecognized income tax benefit liabilities, including interest and penalties | 5,900 | | | — | | | — | | | — | | | — | | | 5,900 | | Long-term debt obligations | 935,276 |
| | 79,181 |
| | 805,744 |
| | 50,351 |
| | — |
| | — |
| Long-term debt obligations | 622,248 | | | 25,251 | | | 25,105 | | | 571,892 | | | — | | | — | | Interest on long-term debt obligations (1) | 40,100 |
| | 17,000 |
| | 21,900 |
| | 1,200 |
| | — |
| | — |
| Interest on long-term debt obligations (1) | 68,000 | | | 22,300 | | | 34,000 | | | 11,700 | | | — | | | — | | Acquisition holdback payments | 4,086 |
| | 2,563 |
| | 1,448 |
| | 75 |
| | — |
| | — |
| Acquisition holdback payments | 810 | | | 684 | | | 126 | | | — | | | — | | | — | | Total Contractual Cash Obligations | $ | 1,099,627 |
| | $ | 129,623 |
| | $ | 870,220 |
| | $ | 71,666 |
| | $ | 22,118 |
| | $ | 6,000 |
| Total Contractual Cash Obligations | $ | 816,770 | | | $ | 83,830 | | | $ | 106,996 | | | $ | 606,698 | | | $ | 13,346 | | | $ | 5,900 | |
(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations.obligations net of receipts under the terms of the interest rate swap. Rates in effect as of June 30, 20202023 are used for variable rate debt. Purchase orders for inventory and other goods and services are not included in our estimates as we are unable to aggregate the amount of such purchase orders that represent enforceable and legally binding agreements specifying all significant terms. The previous table includes the gross liability for unrecognized income tax benefits including interest and penalties in the “Other” column as the Company is unable to make a reasonable estimate regarding the timing of cash settlements, if any, with the respective taxing authorities. CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. The Business and Accounting Policies note to the consolidated financial statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. LIFO Inventory Valuation and Methodology Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories, and the average cost method for foreign inventories. We adopted the link chain dollar value LIFO method for accounting for U.S. inventories in fiscal 1974. Approximately 17.3%14.2% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $155.5$215.3 million as reflected in our consolidated balance sheet at June 30, 2020.2023. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. See the Inventories note to the consolidated financial statements in Item 8 under the caption "Financial Statements and Supplementary Data," for further information.
Allowances for Slow-Moving and Obsolete Inventories We evaluate the recoverability of our slow-moving and inactive inventories at least quarterly. We estimate the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. Our ability to recover our cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. A significant portion of the products we hold in inventory have long shelf lives and are not highly susceptible to obsolescence. As of June 30, 20202023 and 2019,2022, the Company's reserve for slow-moving or obsolete inventories was $42.9$42.6 million and $41.1$39.2 million, respectively, recorded in inventories in the consolidated balance sheets.
Allowances for Doubtful Accounts We evaluate the collectibility of trade accounts receivable based on a combination of factors. Initially, we estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of certain customers and industries estimated to be a greater credit risk, trends within the entire customer pool and changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Accounts are written off against the allowance when it becomes evident that collection will not occur. As of June 30, 20202023 and 2019,2022, our allowance for doubtful accounts was 2.9%3.1% and 1.9%2.6% of gross receivables, respectively. Our provision for losses on accounts receivable was $14.1$5.6 million, $4.1$3.2 million, and $2.8$6.5 million in fiscal 2020, 20192023, 2022, and 2018,2021, respectively. Goodwill and Intangibles The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. Goodwill for acquired businesses is accounted for using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. As part of acquisition accounting, we recognize acquired identifiable intangible assets such as customer relationships, vendor relationships, trade names, and non-competition agreements apart from goodwill. Finite-lived identifiable intangibles are evaluated for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model. We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price. Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a one-step approach. The fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Goodwill on our consolidated financial statements relates to both the Service Center Based Distribution segment and the Fluid Power & Flow ControlEngineered Solutions segment. The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2020.2023. The Company concluded that sevenall of the reporting units’ fair valuevalues exceeded their carrying amounts by at least 10%20% as of January 1, 2020. Specifically, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The Canada and Mexico reporting units have goodwill balances2023.
Table of $27.2 million and $5.2 million, respectively, as of June 30, 2020. The carrying value of the final reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131.0 million. The non-cash impairment charge was the result of the overall decline in the industrial economy, specifically slower demand in FCX's end markets. This led to reduced spending by customers and reduced revenue expectations. As of June 30, 2020, the Company's goodwill balance was $540.6 million, of which $309.0 million relates to the FCX reporting unit. If the Company does not achieve forecasted sales growth and margin improvements goodwill could be further impaired.Contents
The fair values of the reporting units in accordance with the goodwill impairment test were determined using the income and market approaches. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margins, and discount rates. The market approach utilizes an analysis of comparable publicly traded companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA) and multiples that are applied to management’s forecasted revenues and EBITDA estimates. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values. Income Taxes Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. As of June 30, 2020,2023, the Company recognized $38.1$35.0 million of net deferred tax liabilities. Valuation allowances are provided against net deferred tax assets, determined on a jurisdiction by jurisdiction basis, where it is considered more-likely-than-not that the Company will not realize the benefit of such assets on a jurisdiction by jurisdiction basis.assets. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future taxable income levels.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT This Form 10-K, including Management’s Discussion and Analysis, contains statements that are forward-looking based on management’s current expectations about the future. Forward-looking statements are often identified by qualifiers, such as “guidance”, “expect”, “believe”, “plan”, “intend”, “will”, “should”, “could”, “would”, “anticipate”, “estimate”, “forecast”, “may”, "optimistic" and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations, and releases. Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’s control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law. Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; continuing risks relating to the effects of the COVID-19 pandemic; inflationary or deflationary trends in the cost of products, energy, labor and other operating costs, and changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability (such as due to supply chain strains), changes in supplier distribution programs, inability of suppliers to perform, and transportation disruptions; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems and risks relating to their proper functioning, the security of those systems, and the data stored in or transmitted through them; the impact of economic conditions on the collectability of trade receivables; reduced demand for our products in targeted markets due to reasons including consolidation in customer industries; our ability to retain and attract qualified sales and customer service personnel and other skilled executives, managers and professionals; our ability to identify and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability, timing and nature of new business opportunities including acquisitions, alliances, customer relationships, and supplier authorizations; the incurrence of debt and contingent liabilities in connection with acquisitions; our ability to access capital markets as needed on reasonable terms; disruption of operations at our headquarters or distribution centers; risks and uncertainties associated with our foreign operations, including volatile economic conditions, political instability, cultural and legal differences, and currency exchange fluctuations; the potential for goodwill and intangible asset impairment; changes in accounting policies and practices; our ability to maintain effective internal control over financial reporting; organizational changes within the Company; risks related to legal proceedings to which we are a party; potentially adverse government regulation, legislation, or policies, both enacted and under consideration, including with respect to federal tax policy, international trade, data privacy and security, and government contracting; and the occurrence of extraordinary events (including prolonged labor disputes, power outages, telecommunication outages, terrorist acts, war, public health emergency, earthquakes, extreme weather events, other natural disasters, fires, floods, and accidents). Other factors and unanticipated events could also adversely affect our business, financial condition, or results of operations. Risks can also change over time. Further, the disclosure of a risk should not be interpreted to imply that the risk has not already materialized. We discuss certain of these matters and other risk factors more fully throughout our Form 10-K, as well as other of our filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates. We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. Foreign Currency Exchange Rate Risk Because we operate throughout North America, Australia and New Zealand and approximately 13.1%13% of our fiscal year 20202023 net sales were generated outside the United States, foreign currency exchange rates can impact our financial position, results of operations and competitive position. The financial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive lossincome as reported in the statements of consolidated comprehensive income. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the statements of consolidated income as a component of other income,expense (income), net. Applied does not currently hedge the net investments in our foreign operations. During the course of the fiscal year, the Canadian, Mexican, Australian and New Zealand currency exchange rates decreased in relation to the U.S. dollar by 4.0%2.9%, 17.1%3.9%, 1.8% and 4.0%2.5%, respectively.respectively, while the Mexican currency exchange rate increased in relation to the U.S. dollar by 17.7%. In the twelve months ended June 30, 2020,2023, we experienced net foreign currency translation lossesgains totaling $18.5$7.7 million, which were included in other comprehensive loss.income. We utilize a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in foreign currency rates. Excluding the non-cash goodwill impairment charge recorded in fiscal 2020, aA 10% strengthening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 20202023 would have resulted in a $1.3$1.7 million decrease in net income for the year ended June 30, 2020. Excluding the non-cash goodwill impairment charge recorded in fiscal 2020, a 10% weakening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2020 would have resulted in a $1.3 million increase in net income for the year ended June 30, 2020.2023. Interest Rate Risk Our primary exposure to interest rate risk results from our outstanding debt obligations with variable interest rates. The levels of fees and interest charged on our various debt facilities are based upon leverage levels and market interest rates. The Company uses interest rate swap instruments to mitigate variability in forcastedforecasted interest rates. Our variable interest rate debt facilities outstanding include our five-year credit facility, which provides for a revolving credit facility with a capacity of up to $250.0$900.0 million in borrowings with no balance$383.6 million outstanding at June 30, 2020, a $780.0 million term loan, of which $589.3 million was outstanding at June 30, 2020,2023, and a $175.0$188.3 million trade receivable securitization facility, all of which was outstanding at June 30, 2020.2023. In January 2019, the Company entered into an interest rate swap on $463.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. The notional amount of the interest rate swap was $431.0$384.0 million as of June 30, 2020.2023. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. Fixed interest rate debt facilities include $170.0$50.0 million outstanding under our unsecured shelf facility agreement, as well as $1.0$0.4 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $782.0$587.1 million during fiscal 2020.2023. The impact of a hypothetical 1.0% increase in the interest rates on our average variable interest rate bank borrowings (not considering the impact of ourthe interest rate swap) would have resulted in a $7.8$5.9 million increase in interest expense. Due toIncluding the impact of the interest rate swap, the impact of a hypothetical 1.0% increase in the variable interest rate would have reduced net cashresulted in a $2.0 million increase in interest paid by $4.3 million. Changes in market interest rates would also impact interest rates on these facilities.expense. For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysisof Financial Condition and Results of Operations” in Item 7 and notes 6 and 7 to the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Applied Industrial Technologies, Inc.
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 20202023 and 2019,2022, the related statements of consolidated income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2020,2023, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 20202023 and 2019,2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020,2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2020,2023, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 14, 2020,11, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective July 1, 2019, the Company adopted the FASB’s new standard related to leases using the optional transition method, which required application of the new guidance to only those leases that existed at the date of adoption.
Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill - FCX and Canada Reporting UnitsEngineered Solutions Segment - Refer to NoteNotes 1 and 5 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the income and market approaches. The determination of the fair value using the income approach requires management to make significant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. The determination of the fair value using the market approach requires management to make significant estimates and assumptions related to the forecasts of future revenues, EBITDA and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The goodwill balance was
$540.6 $578.4 million as of June 30, 2020,2023, of which $309.0$367.2 million related to reporting units within the FCX reporting unit and $27.2 million related to the Canada reporting unit.Engineered Solutions segment. The fair value of the FCXall reporting unit did not exceed its carrying value as of the measurement date and, therefore, an impairment charge of $131.0 million was recognized in 2020. The fair value of the Canada reporting unitunits exceeded itstheir carrying value by 12%at least 20% as of the measurement date and, therefore, no impairment was recognized.
Given the nature of one of the FCX and Canada reporting units’unit’s operations within the Engineered Solutions segment, the sensitivity of the businessreporting unit to changes in the economy, the reporting unit’s historical performance as compared to projections,
and the difference between its fair value and the carrying value, auditing management’s judgments regarding forecasts of future revenues and EBITDA, as well as selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates for the FCX and Canada reporting units,unit, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the forecasts of future revenues and EBITDA (“forecasts”), and the selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates (“market multiples”) for this reporting unit within the FCX and Canada reporting unitsEngineered Solutions segment included the following, among others: •We tested the effectiveness of controls over management’s goodwill impairment evaluation, such as controls related to management’s forecasts and the selection of the discount rate and market multiples used. •We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. •We evaluated the reasonableness of management’s forecasts by comparing the current forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in industry reports for the various industries the reporting units operateunit operates within. •With the assistance of our fair value specialists, we evaluated the discount rate, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rate selected by management. •With the assistance of our fair value specialists, we evaluated the market multiples by evaluating the selected comparable publicly traded companies and the adjustments made for differences in growth prospects and risk profiles between the reporting unitsunit and the comparable publicly traded companies. We tested the underlying source information and mathematical accuracy of the calculations. With the assistance of our fair value specialists, we evaluated the fair value of the reporting units based upon reconciling the fair values of the reporting units to the market capitalization of the Company.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 14, 202011, 2023
We have served as the Company's auditor since 1966.
STATEMENTS OF CONSOLIDATED INCOME (In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | | 2023 | | 2022 | | 2021 | Net sales | | $ | 4,412,794 | | | $ | 3,810,676 | | | $ | 3,235,919 | | Cost of sales | | 3,125,829 | | | 2,703,760 | | | 2,300,395 | | Gross profit | | 1,286,965 | | | 1,106,916 | | | 935,524 | | Selling, distribution and administrative expense, including depreciation | | 813,814 | | | 749,058 | | | 680,542 | | Impairment expense | | — | | | — | | | 49,528 | | Operating income | | 473,151 | | | 357,858 | | | 205,454 | | Interest expense | | 24,790 | | | 26,785 | | | 30,807 | | Interest income | | (3,151) | | | (522) | | | (215) | | Other expense (income), net | | 1,701 | | | 1,805 | | | (2,200) | | Income before income taxes | | 449,811 | | | 329,790 | | | 177,062 | | Income tax expense | | 103,072 | | | 72,376 | | | 32,305 | | Net income | | $ | 346,739 | | | $ | 257,414 | | | $ | 144,757 | | Net income per share — basic | | $ | 8.98 | | | $ | 6.69 | | | $ | 3.73 | | Net income per share — diluted | | $ | 8.84 | | | $ | 6.58 | | | $ | 3.68 | |
| | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| Net sales | | $ | 3,245,652 |
| | $ | 3,472,739 |
| | $ | 3,073,274 |
| Cost of sales | | 2,307,916 |
| | 2,465,116 |
| | 2,189,279 |
| Gross profit | | 937,736 |
| | 1,007,623 |
| | 883,995 |
| Selling, distribution and administrative expense, including depreciation | | 717,747 |
| | 742,241 |
| | 658,168 |
| Goodwill and intangible impairment | | 131,000 |
| | 31,594 |
| | — |
| Operating income | | 88,989 |
| | 233,788 |
| | 225,827 |
| Interest expense | | 37,264 |
| | 40,788 |
| | 24,142 |
| Interest income | | (729 | ) | | (600 | ) | | (657 | ) | Other income, net | | (2,782 | ) | | (881 | ) | | (2,376 | ) | Income before income taxes | | 55,236 |
| | 194,481 |
| | 204,718 |
| Income tax expense | | 31,194 |
| | 50,488 |
| | 63,093 |
| Net income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| Net income per share — basic | | $ | 0.62 |
| | $ | 3.72 |
| | $ | 3.65 |
| Net income per share — diluted | | $ | 0.62 |
| | $ | 3.68 |
| | $ | 3.61 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (In thousands)
| | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | | 2023 | | 2022 | | 2021 | | Net income per the statements of consolidated income | | $ | 346,739 | | | $ | 257,414 | | | $ | 144,757 | | | | | | | | | | | Other comprehensive income, before tax: | | | | | | | | Foreign currency translation adjustments | | 7,723 | | | (9,862) | | | 24,352 | | | Post-employment benefits: | | | | | | | | Actuarial gain on re-measurement | | 405 | | | 2,839 | | | 903 | | | Termination of pension plan | | 1,031 | | | — | | | — | | | Reclassification of net actuarial losses and prior service cost into other expense (income), net and included in net periodic pension costs | | 36 | | | 300 | | | 270 | | | Unrealized gain on cash flow hedge | | 18,174 | | | 26,204 | | | 3,250 | | | Reclassification of interest from cash flow hedge into interest expense | | (7,285) | | | 11,361 | | | 11,553 | | | Total other comprehensive income, before tax | | 20,084 | | | 30,842 | | | 40,328 | | | Income tax expense related to items of other comprehensive income | | 3,085 | | | 10,045 | | | 3,990 | | | Other comprehensive income, net of tax | | 16,999 | | | 20,797 | | | 36,338 | | | Comprehensive income | | $ | 363,738 | | | $ | 278,211 | | | $ | 181,095 | | |
| | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| Net income per the statements of consolidated income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| | | | | | | | Other comprehensive (loss) income, before tax: | | | | | | | Foreign currency translation adjustments | | (18,499 | ) | | 2,021 |
| | (8,875 | ) | Post-employment benefits: | | | | | | | Actuarial (loss) gain on re-measurement | | (2,192 | ) | | (372 | ) | | 709 |
| Reclassification of actuarial (gains) losses and prior service cost into other income, net and included in net periodic pension costs | | (66 | ) | | (306 | ) | | (73 | ) | Unrealized gain on investment securities available for sale | | — |
| | — |
| | 37 |
| Cumulative effect of adopting accounting standard | | — |
| | (50 | ) | | — |
| Unrealized loss on cash flow hedge | | (16,615 | ) | | (14,446 | ) | | — |
| Reclassification of interest from cash flow hedge into interest expense | | 4,638 |
| | 244 |
| | — |
| Total other comprehensive loss, before tax | | (32,734 | ) | | (12,909 | ) | | (8,202 | ) | Income tax (benefit) expense related to items of other comprehensive loss | | (3,190 | ) | | (3,246 | ) | | 319 |
| Other comprehensive loss, net of tax | | (29,544 | ) | | (9,663 | ) | | (8,521 | ) | Comprehensive (loss) income | | $ | (5,502 | ) | | $ | 134,330 |
| | $ | 133,104 |
|
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (In thousands)
| | | | | | | | | | | | | | | June 30, | | 2023 | | 2022 | Assets | | | | | Current assets | | | | | Cash and cash equivalents | | $ | 344,036 | | | $ | 184,474 | | Accounts receivable, net | | 708,395 | | | 656,429 | | Inventories | | 501,184 | | | 449,821 | | Other current assets | | 93,192 | | | 68,805 | | Total current assets | | 1,646,807 | | | 1,359,529 | | Property — at cost | | | | | Land | | 14,219 | | | 14,319 | | Buildings | | 109,884 | | | 108,119 | | Equipment, including computers and software | | 219,979 | | | 204,473 | | Total property — at cost | | 344,082 | | | 326,911 | | Less accumulated depreciation | | 229,041 | | | 215,015 | | Property — net | | 115,041 | | | 111,896 | | Operating lease assets, net | | 100,677 | | | 108,052 | | Identifiable intangibles, net | | 235,549 | | | 250,590 | | Goodwill | | 578,418 | | | 563,205 | | Other assets | | 66,840 | | | 59,316 | | Total Assets | | $ | 2,743,332 | | | $ | 2,452,588 | | Liabilities | | | | | Current liabilities | | | | | Accounts payable | | $ | 301,685 | | | $ | 259,463 | | Current portion of long-term debt | | 25,170 | | | 40,174 | | Compensation and related benefits | | 98,740 | | | 91,166 | | Other current liabilities | | 114,749 | | | 108,824 | | Total current liabilities | | 540,344 | | | 499,627 | | Long-term debt | | 596,926 | | | 649,150 | | Other liabilities | | 147,625 | | | 154,456 | | Total Liabilities | | 1,284,895 | | | 1,303,233 | | Shareholders’ Equity | | | | | Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding | | — | | | — | | Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,657 and 38,499 shares outstanding, respectively | | 10,000 | | | 10,000 | | Additional paid-in capital | | 188,646 | | | 183,822 | | Retained earnings | | 1,792,632 | | | 1,499,676 | | Treasury shares — at cost (15,556 and 15,714 shares, respectively) | | (477,545) | | | (471,848) | | Accumulated other comprehensive loss | | (55,296) | | | (72,295) | | Total Shareholders’ Equity | | 1,458,437 | | | 1,149,355 | | Total Liabilities and Shareholders’ Equity | | $ | 2,743,332 | | | $ | 2,452,588 | |
| | | | | | | | | | June 30, | | 2020 |
| | 2019 |
| Assets | | | | | Current assets | | | | | Cash and cash equivalents | | $ | 268,551 |
| | $ | 108,219 |
| Accounts receivable, net | | 449,998 |
| | 540,902 |
| Inventories | | 389,150 |
| | 447,555 |
| Other current assets | | 52,070 |
| | 51,462 |
| Total current assets | | 1,159,769 |
| | 1,148,138 |
| Property — at cost | | | | | Land | | 14,339 |
| | 14,452 |
| Buildings | | 104,396 |
| | 101,338 |
| Equipment, including computers and software | | 195,220 |
| | 189,579 |
| Total property — at cost | | 313,955 |
| | 305,369 |
| Less accumulated depreciation | | 192,054 |
| | 181,066 |
| Property — net | | 121,901 |
| | 124,303 |
| Operating lease assets, net | | 90,636 |
| | — |
| Identifiable intangibles, net | | 343,215 |
| | 368,866 |
| Goodwill | | 540,594 |
| | 661,991 |
| Other assets | | 27,436 |
| | 28,399 |
| Total Assets | | $ | 2,283,551 |
| | $ | 2,331,697 |
| Liabilities | | | | | Current liabilities | | | | | Accounts payable | | $ | 186,270 |
| | $ | 237,289 |
| Current portion of long-term debt | | 78,646 |
| | 49,036 |
| Compensation and related benefits | | 61,887 |
| | 67,978 |
| Other current liabilities | | 99,280 |
| | 69,491 |
| Total current liabilities | | 426,083 |
| | 423,794 |
| Long-term debt | | 855,143 |
| | 908,850 |
| Other liabilities | | 158,783 |
| | 102,019 |
| Total Liabilities | | 1,440,009 |
| | 1,434,663 |
| Shareholders’ Equity | | | | | Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding | | — |
| | — |
| Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,710 and 38,597 shares outstanding, respectively | | 10,000 |
| | 10,000 |
| Additional paid-in capital | | 176,492 |
| | 172,931 |
| Retained earnings | | 1,200,570 |
| | 1,229,148 |
| Treasury shares — at cost (15,503 and 15,616 shares), respectively | | (414,090 | ) | | (415,159 | ) | Accumulated other comprehensive loss | | (129,430 | ) | | (99,886 | ) | Total Shareholders’ Equity | | 843,542 |
| | 897,034 |
| Total Liabilities and Shareholders’ Equity | | $ | 2,283,551 |
| | $ | 2,331,697 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands) | | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| Cash Flows from Operating Activities | | | | | | | Net income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Goodwill & Intangible impairment | | 131,000 |
| | 31,594 |
| | — |
| Depreciation and amortization of property | | 21,196 |
| | 20,236 |
| | 17,798 |
| Amortization of intangibles | | 41,553 |
| | 41,883 |
| | 32,065 |
| Amortization of stock appreciation rights and options | | 2,954 |
| | 2,437 |
| | 1,961 |
| Deferred income taxes | | (13,292 | ) | | 2,368 |
| | 1,615 |
| Provision for losses on accounts receivable | | 14,055 |
| | 4,058 |
| | 2,803 |
| Unrealized foreign exchange transaction (gains) losses | | (1,357 | ) | | 238 |
| | (667 | ) | Other share-based compensation expense | | 4,000 |
| | 4,474 |
| | 4,666 |
| Gain on sale of property | | (1,157 | ) | | (459 | ) | | (335 | ) | Changes in operating assets and liabilities, net of acquisitions: | | | | | | | Accounts receivable | | 74,437 |
| | 8,465 |
| | (83,103 | ) | Inventories | | 57,028 |
| | (16,590 | ) | | (33,436 | ) | Other operating assets | | (5,268 | ) | | (7,738 | ) | | 6,947 |
| Accounts payable | | (53,856 | ) | | (29,788 | ) | | 50,345 |
| Other operating liabilities | | 1,379 |
| | (24,570 | ) | | 5,020 |
| Cash provided by Operating Activities | | 296,714 |
| | 180,601 |
| | 147,304 |
| Cash Flows from Investing Activities | | | | | | | Capital expenditures | | (20,115 | ) | | (18,970 | ) | | (23,230 | ) | Proceeds from property sales | | 1,948 |
| | 1,003 |
| | 978 |
| Cash paid for acquisition of businesses, net of cash acquired | | (37,237 | ) | | (37,526 | ) | | (775,654 | ) | Other | | — |
| | 391 |
| | — |
| Cash used in Investing Activities | | (55,404 | ) | | (55,102 | ) | | (797,906 | ) | Cash Flows from Financing Activities | | | | | | | Net (repayments) borrowings under revolving credit facility | | — |
| | (19,500 | ) | | 19,500 |
| Borrowings under long-term debt facilities | | 25,000 |
| | 175,000 |
| | 780,000 |
| Long-term debt repayments | | (49,553 | ) | | (161,738 | ) | | (125,420 | ) | Payment of debt issuance costs | | (95 | ) | | (775 | ) | | (3,298 | ) | Purchases of treasury shares | | — |
| | (11,158 | ) | | (22,778 | ) | Dividends paid | | (48,873 | ) | | (47,266 | ) | | (45,858 | ) | Acquisition holdback payments | | (2,440 | ) | | (2,610 | ) | | (319 | ) | Exercise of stock appreciation rights and options | | 330 |
| | — |
| | 102 |
| Taxes paid for shares withheld | | (2,607 | ) | | (3,492 | ) | | (1,645 | ) | Cash (used in) provided by Financing Activities | | (78,238 | ) | | (71,539 | ) | | 600,284 |
| Effect of exchange rate changes on cash | | (2,740 | ) | | 109 |
| | (589 | ) | Increase (decrease) in cash and cash equivalents | | 160,332 |
| | 54,069 |
| | (50,907 | ) | Cash and cash equivalents at beginning of year | | 108,219 |
| | 54,150 |
| | 105,057 |
| Cash and Cash Equivalents at End of Year | | $ | 268,551 |
| | $ | 108,219 |
| | $ | 54,150 |
| | | | | | | | Supplemental Cash Flow Information | | | | | | | Cash paid during the year for: | | | | | | | Income taxes | | 41,162 |
| | 54,294 |
| | 41,724 |
| Interest | | 36,648 |
| | 40,142 |
| | 25,560 |
|
| | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | | 2023 | | 2022 | | 2021 | Cash Flows from Operating Activities | | | | | | | Net income | | $ | 346,739 | | | $ | 257,414 | | | $ | 144,757 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Impairment Expense | | — | | | — | | | 49,528 | | Depreciation and amortization of property | | 22,266 | | | 21,676 | | | 20,780 | | Amortization of intangibles | | 30,805 | | | 31,879 | | | 34,365 | | Amortization of stock appreciation rights and options | | 2,785 | | | 3,284 | | | 2,526 | | Deferred income taxes | | (5,716) | | | 15,176 | | | (31,080) | | Provision for losses on accounts receivable | | 5,619 | | | 3,193 | | | 6,540 | | Other share-based compensation expense | | 9,576 | | | 8,558 | | | 6,454 | | Other | | 1,145 | | | (1,752) | | | 1,446 | | Changes in operating assets and liabilities, net of acquisitions: | | | | | | | Accounts receivable | | (51,059) | | | (145,519) | | | (59,119) | | Inventories | | (42,977) | | | (92,425) | | | 41,318 | | Other operating assets | | (25,254) | | | (4,982) | | | (5,262) | | Accounts payable | | 37,682 | | | 53,597 | | | 10,919 | | Other operating liabilities | | 12,355 | | | 37,471 | | | 18,525 | | Cash provided by Operating Activities | | 343,966 | | | 187,570 | | | 241,697 | | Cash Flows from Investing Activities | | | | | | | Cash paid for acquisition of businesses, net of cash acquired | | (35,785) | | | (6,964) | | | (30,230) | | Capital expenditures | | (26,476) | | | (18,124) | | | (15,852) | | Proceeds from property sales | | 1,428 | | | 1,107 | | | 1,152 | | Life insurance proceeds | | — | | | 3,158 | | | — | | Cash payments for loans on company-owned life insurance | | — | | | (14,835) | | | — | | | | | | | | | Cash used in Investing Activities | | (60,833) | | | (35,658) | | | (44,930) | | Cash Flows from Financing Activities | | | | | | | Repayments under revolving credit facility | | (27,000) | | | — | | | — | | Net borrowings under revolving credit facility | | — | | | 410,592 | | | — | | Borrowings under long-term debt facilities | | — | | | — | | | 26,000 | | Long-term debt repayments | | (40,247) | | | (550,493) | | | (131,883) | | Interest rate swap settlement receipts (payments) | | 8,800 | | | (5,703) | | | (3,737) | | Payment of debt issuance costs | | — | | | (1,956) | | | (399) | | Purchases of treasury shares | | (716) | | | (13,784) | | | (40,089) | | Dividends paid | | (53,446) | | | (51,805) | | | (50,664) | | | | | | | | | Acquisition holdback payments | | (1,510) | | | (2,361) | | | (2,345) | | Exercise of stock appreciation rights and options | | 127 | | | 555 | | | 163 | | Taxes paid for shares withheld | | (12,896) | | | (8,074) | | | (10,083) | | | | | | | | | Cash used in Financing Activities | | (126,888) | | | (223,029) | | | (213,037) | | Effect of exchange rate changes on cash | | 3,317 | | | (2,154) | | | 5,464 | | Increase (decrease) in cash and cash equivalents | | 159,562 | | | (73,271) | | | (10,806) | | Cash and cash equivalents at beginning of year | | 184,474 | | | 257,745 | | | 268,551 | | Cash and Cash Equivalents at End of Year | | $ | 344,036 | | | $ | 184,474 | | | $ | 257,745 | | Supplemental Cash Flow Information | | | | | | | Cash paid during the year for: | | | | | | | Income taxes | | $ | 108,084 | | | $ | 53,301 | | | $ | 64,394 | | Interest (includes interest rate swap settlements) | | $ | 22,567 | | | $ | 20,164 | | | $ | 27,492 | | See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended June 30, 2023, 2022 and 2021 | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Shares- at Cost | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity | Balance at June 30, 2020 | | 38,710 | | | $ | 10,000 | | | $ | 176,492 | | | $ | 1,200,570 | | | $ | (414,090) | | | $ | (129,430) | | | $ | 843,542 | | Net income | | | | | | | | 144,757 | | | | | | | 144,757 | | Other comprehensive income | | | | | | | | | | | | 36,338 | | | 36,338 | | Cash dividends — $1.30 per share | | | | | | | | (50,992) | | | | | | | (50,992) | | Purchases of common stock for treasury | | (400) | | | | | | | | | (40,089) | | | | | (40,089) | | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 152 | | | | | (6,379) | | | | | (2,009) | | | | | (8,388) | | Performance share awards | | 22 | | | | | (985) | | | | | (20) | | | | | (1,005) | | Restricted stock units | | 19 | | | | | (740) | | | | | 95 | | | | | (645) | | Compensation expense — stock appreciation rights | | | | | | 2,526 | | | | | | | | | 2,526 | | Other share-based compensation expense | | | | | | 6,454 | | | | | | | | | 6,454 | | Other | | 13 | | | | | (354) | | | 78 | | | 324 | | | | | 48 | | Balance at June 30, 2021 | | 38,516 | | | 10,000 | | | 177,014 | | | 1,294,413 | | | (455,789) | | | (93,092) | | | 932,546 | | Net income | | | | | | | | 257,414 | | | | | | | 257,414 | | Other comprehensive income | | | | | | | | | | | | 20,797 | | | 20,797 | | Cash dividends — $1.34 per share | | | | | | | | (52,175) | | | | | | | (52,175) | | Purchases of common stock for treasury | | (149) | | | | | | | | | (13,784) | | | | | (13,784) | | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 104 | | | | | (3,945) | | | | | (2,132) | | | | | (6,077) | | Performance share awards | | 5 | | | | | (222) | | | | | (73) | | | | | (295) | | Restricted stock units | | 12 | | | | | (598) | | | | | (138) | | | | | (736) | | Compensation expense — stock appreciation rights | | | | | | 3,284 | | | | | | | | | 3,284 | | Other share-based compensation expense | | | | | | 8,558 | | | | | | | | | 8,558 | | Other | | 11 | | | | | (269) | | | 24 | | | 68 | | | | | (177) | | Balance at June 30, 2022 | | 38,499 | | | 10,000 | | | 183,822 | | | 1,499,676 | | | (471,848) | | | (72,295) | | | 1,149,355 | | Net income | | | | | | | | 346,739 | | | | | | | 346,739 | | Other comprehensive income | | | | | | | | | | | | 16,999 | | | 16,999 | | Cash dividends — $1.38 per share | | | | | | | | (53,887) | | | | | | | (53,887) | | Purchases of common stock for treasury | | (8) | | | | | | | | | (716) | | | | | (716) | | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 92 | | | | | (4,256) | | | | | (3,773) | | | | | (8,029) | | Performance share awards | | 23 | | | | | (1,290) | | | | | (758) | | | | | (2,048) | | Restricted stock units | | 34 | | | | | (1,712) | | | | | (932) | | | | | (2,644) | | Compensation expense — stock appreciation rights | | | | | | 2,785 | | | | | | | | | 2,785 | | Other share-based compensation expense | | | | | | 9,576 | | | | | | | | | 9,576 | | Other | | 17 | | | | | (279) | | | 104 | | | 482 | | | | | 307 | | Balance at June 30, 2023 | | 38,657 | | | $ | 10,000 | | | $ | 188,646 | | | $ | 1,792,632 | | | $ | (477,545) | | | $ | (55,296) | | | $ | 1,458,437 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended June 30, 2020, 2019 and 2018 | | Shares of Common Stock Outstanding |
| | Common Stock |
| | Additional Paid-In Capital |
| |
Retained Earnings |
| | Treasury Shares- at Cost |
| | Accumulated Other Comprehensive Loss |
| | Total Shareholders' Equity |
| Balance at June 30, 2017 | | 39,041 |
| | $ | 10,000 |
| | $ | 164,655 |
| | $ | 1,033,751 |
| | $ | (381,448 | ) | | $ | (81,702 | ) | | $ | 745,256 |
| Net income | | | | | | | | 141,625 |
| | | | | | 141,625 |
| Other comprehensive income (loss) | | | | | | | | | | | | (8,050 | ) | | (8,050 | ) | Reclassifications of certain income tax effects from accumulated other comprehensive loss | | | | | | | | 471 |
| | | | (471 | ) | | — |
| Cash dividends — $1.18 per share | | | | | | | | (46,162 | ) | | | | | | (46,162 | ) | Purchases of common stock for treasury | | (393 | ) | | | | | | | | (22,778 | ) | | | | (22,778 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 19 |
| | | | (482 | ) | | | | 84 |
| | | | (398 | ) | Performance share awards | | 5 |
| | | | (273 | ) | | | | (24 | ) | | | | (297 | ) | Restricted stock units | | 15 |
| | | | (740 | ) | | | | (56 | ) | | | | (796 | ) | Compensation expense — stock appreciation rights and options | | | | | | 1,961 |
| | | | | | | | 1,961 |
| Other share-based compensation expense | | | | | | 4,666 |
| | | | | | | | 4,666 |
| Other | | 16 |
| | | | (404 | ) | | (7 | ) | | 347 |
| | | | (64 | ) | Balance at June 30, 2018 | | 38,703 |
| | 10,000 |
| | 169,383 |
| | 1,129,678 |
| | (403,875 | ) | | (90,223 | ) | | 814,963 |
| Net income | | | | | | | | 143,993 |
| | | | | | 143,993 |
| Other comprehensive income (loss) | | | | | | | | | | | | (9,663 | ) | | (9,663 | ) | Cumulative effect of adopting accounting standards | | | | | | | | 3,056 |
| | | | | | 3,056 |
| Cash dividends — $1.22 per share | | | | | | | | (47,621 | ) | | | | | | (47,621 | ) | Purchases of common stock for treasury | | (192 | ) | | | | | | | | (11,158 | ) | | | | (11,158 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 30 |
| | | | (1,069 | ) | | | | (59 | ) | | | | (1,128 | ) | Performance share awards | | 18 |
| | | | (844 | ) | | | | (301 | ) | | | | (1,145 | ) | Restricted stock units | | 23 |
| | | | (1,057 | ) | | | | (120 | ) | | | | (1,177 | ) | Compensation expense — stock appreciation rights and options | | | | | | 2,437 |
| | | | | | | | 2,437 |
| Other share-based compensation expense | | | | | | 4,474 |
| | | | | | | | 4,474 |
| Other | | 15 |
| | | | (393 | ) | | 42 |
| | 354 |
| | | | 3 |
| Balance at June 30, 2019 | | 38,597 |
| | 10,000 |
| | 172,931 |
| | 1,229,148 |
| | (415,159 | ) | | (99,886 | ) | | 897,034 |
| Net income | | | | | | | | 24,042 |
| | | | | | 24,042 |
| Other comprehensive income (loss) | | | | | | | | | | | | (29,544 | ) | | (29,544 | ) | Cumulative effect of adopting accounting standards | | | | | | | | (3,275 | ) | | | | | | (3,275 | ) | Cash dividends — $1.26 per share | | | | | | | | (49,305 | ) | | | | | | (49,305 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 43 |
| | | | (730 | ) | | | | 71 |
| | | | (659 | ) | Performance share awards | | 36 |
| | | | (1,540 | ) | | | | 362 |
| | | | (1,178 | ) | Restricted stock units | | 17 |
| | | | (671 | ) | | | | 213 |
| | | | (458 | ) | Compensation expense — stock appreciation rights and options | | | | | | 2,954 |
| | | | | | | | 2,954 |
| Other share-based compensation expense | | | | | | 4,000 |
| | | | | | | | 4,000 |
| Other | | 17 |
| | | | (452 | ) | | (40 | ) | | 423 |
| | | | (69 | ) | Balance at June 30, 2020 | | 38,710 |
| | $ | 10,000 |
| | $ | 176,492 |
| | $ | 1,200,570 |
| | $ | (414,090 | ) | | $ | (129,430 | ) | | $ | 843,542 |
|
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES Business Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, and expertise. Although the Company does not generally manufacture the products it sells, it does assemble and repair certain products and systems. Consolidation The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Foreign Currency The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive lossincome (loss) in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other income,expense (income), net. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. Marketable Securities The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other income,expense (income), net in the statements of consolidated income. Concentration of Credit Risk The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and Singapore. As such, the Company does not believe that a significant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While the Company monitors the creditworthiness of these institutions, a crisis in the financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand. Accounts Receivable Accounts receivable are stated at their estimated net realizable value and consist of amounts billed or billable and currently due from customers. Allowances for Doubtful Accounts The Company maintains an allowance for doubtful accounts, which reflects management’s best estimate of probable losses based on an analysis of customer accounts, known troubled accounts, historical experience with write-offs, and other currently available evidence. Allowances for Doubtful Accounts
The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be
greater credit risks, trends within the entire customer
pool, and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. The allowance for doubtful accounts was $13,661$22,334 and $10,498$17,522 at June 30, 20202023 and June 30, 2019,2022, respectively. Inventories Inventories are valued at average cost, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S. inventories in fiscal 1974. At June 30, 2020,2023, approximately 17.3%14.2% of the Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. The Company evaluates the recoverability of its slow moving and inactive inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence, and, in certain instances, can be eligible for return under supplier return programs. Supplier Purchasing Programs The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s fiscal year end or the supplier’s year end; however, program length and ending dates can vary. Incentives are received in the form of cash or credits against purchases upon attainment of specified purchase volumes and are received either monthly, quarterly or annually. The incentives are generally a specified percentage of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases expected during the life of the program. Supplier programs are analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon program completion, differences between estimates and actual incentives subsequently received have not been material. Benefits under these supplier purchasing programs are recognized under the Company’s inventory accounting methods as a reduction of cost of sales when the inventories representing these purchases are recorded as cost of sales. Accrued incentives expected to be settled as a credit against future purchases are reported on the consolidated balance sheets as an offset to amounts due to the related supplier. Property and Related Depreciation and Amortization Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and is included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease if a shorter period, and equipment is depreciated over three to ten years. The Company capitalizes internal use software development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use. Amortization of software begins when it is ready for its intended use, and is computed on a straight-line basis over the estimated useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the asset group's recorded value cannot be recovered from undiscounted future cash flows. Impairment losses, if any, would be measured based upon the difference between the carrying amount of an asset group and its fair value.
Goodwill and Intangible Assets Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in conditions indicate an evaluation should be completed. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. The Company utilizes the income and market approaches to determine the fair value of reporting units. Evaluating impairment requires significant judgment by management,
including estimated future operating results, estimated future cash flows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While the Company uses available information to prepare the estimates and evaluations, actual results could differ significantly. The Company recognizes acquired identifiable intangible assets such as customer relationships, trade names, vendor relationships, and non-competition agreements apart from goodwill. Customer relationship identifiable intangibles are amortized using the sum-of-the-years-digits method or the expected cash flow method over estimated useful lives consistent with assumptions used in the determination of their value. Amortization of all other finite-lived identifiable intangible assets is computed using the straight-line method over the estimated period of benefit. Amortization of identifiable intangible assets is included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model. Identifiable intangible assets with indefinite lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed. The Company does not currently have any indefinite-lived identifiable intangible assets. Self-Insurance Liabilities The Company maintains business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. The Company accrues estimated losses including those incurred but not reported using actuarial calculations, models and assumptions based on historical loss experience. The Company also maintains a self-insured health benefits plan which provides medical benefits to U.S. based employees electing coverage under the plan. The Company estimates its reserve for all unpaid medical claims, including those incurred but not reported, based on historical experience, adjusted as necessary based upon management’s reasoned judgment. Revenue Recognition The Company primarily sells purchased products distributed through its network of service centers and recognizes revenue at a point in time when control of the product transfers to the customer, typically upon shipment from an Applied facility or directly from a supplier. For products that ship directly from suppliers to customers, Applied generally acts as the principal in the transaction and recognizes revenue on a gross basis. Revenue recognized over time is not significant. Revenue is measured as the amount of consideration expected to be received in exchange for the products and services provided, net of allowances for product returns, variable consideration, and any taxes collected from customers that will be remitted to governmental authorities. Shipping and handling costs are recognized in net sales when they are billed to the customer. The Company has elected to account for shipping and handling activities as fulfillment costs. There are no significant costs associated with obtaining customer contracts. Payment terms with customers vary by the type and location of the customer and the products or services offered. The Company does not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant. The Company’s products are generally sold with a right of return and may include variable consideration in the form of incentives, discounts, credits or rebates. Product returns are estimated based on historical return rates. The returns reserve was $9,883$12,635 and $7,265$10,522 at June 30, 20202023 and June 30, 2019,2022, respectively. The Company estimates and recognizes variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to a customer. The Company records variable consideration as an adjustment to the transaction price in the period it
is incurred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant. Shipping and Handling Costs The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and administrative expense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expense were approximately $19,620, $24,090$22,170, $17,890 and $19,320$15,970 for the fiscal years ended June 30, 2020, 20192023, 2022 and 2018,2021, respectively.
Income Taxes Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. Uncertain tax positions meeting a more-likely-than-not recognition threshold are recognized in accordance with Accounting Standards Codification (ASC) Topic 740 - Income Taxes. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes. Share-Based Compensation Share-based compensation represents the cost related to share-based awards granted to employees under the 2019 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, or the 20072011 Long-Term Performance Plan. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service period. Non-qualified stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and have ten-year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on the closing market price of Company common stock on the grant date. Treasury Shares Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital. Derivatives The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Retirement Savings Plan Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company suspended the 401(k) match starting in the fourth quarter of 2020 and restored it in the third quarter of fiscal 2021. The Company’s expense for matching of employees’ 401(k) contributions was $5,959, $7,711$9,989, $9,149 and $6,551$3,945 during 2020, 20192023, 2022 and 2018,2021, respectively.
Deferred Compensation Plans The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.
Post-employment Benefit Plans The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded: Supplemental Executive Retirement Benefits Plan The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011. The Company recorded net periodic benefit costs associated with the SERP of $317, $414,$399, $450, and $679$401 in fiscal 20202023, 20192022, and 2018,2021, respectively. The Company expects to make payments of approximately $800$1,300 under the SERP in each of fiscal 2021, 20222024 and 2023.2025, respectively. Key Executive Restoration Plan In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $189, $400,$456, $514, and $359$334 of expense associated with this plan in fiscal 20202023, 20192022, and 2018,2021, respectively. Qualified Defined Benefit Retirement Plan The Company has aCompany's qualified defined benefit retirement plan that providesprovided benefits to certain hourly employees at retirement. These employees did not participate in the Retirement Savings Plan. The benefits areretirement based on length of service and date of retirement. The plan accruals were frozen as of April 16, 2018, and employees arewere permitted to participate in the Retirement Savings Plan, following that date. The Company terminated the plan effective February 28, 2022. Participants elected to receive benefits as either a lump sum payment or through an annuity contract and the settlement of $8,895 was paid from plan assets in the second quarter of fiscal 2023. As a result of the plan termination, the Company recognized a loss of $1,184 in the year ended June 30, 2023, which is recorded in other expense (income), net in the statements of consolidated income. The Company recorded net periodic (benefits) costs associated with this plan of $(116), $(34),$282 and $149$46 in fiscal 20202022, 2019, and 2018, respectively2021, respectively. Retiree Health Care Benefits The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees at no cost to the individual. The Company recorded net periodic benefits associated with these plans of $257, $418,$113, $123, and $452$161 in fiscal 20202023, 20192022, and 2018,2021, respectively. The Company has determined that the related disclosures under ASC Topic 715 - Compensation, Retirement Benefits, for these post-employment benefit plans are not material to the consolidated financial statements. Leases The Company leases facilities for certain service centers, warehouses, distribution centers and office space. The Company also leases office equipment and vehicles. All leases are classified as operating. The Company’s leases expire at various dates through 2031,2034, with terms ranging from 1 year to 15 years. Many of the Company’s real estate leases contain renewal provisions to extend lease terms up to 5 years. The exercise of renewal options is solely at the Company’s discretion. The Company’s lease agreements do not contain material variable lease payments, residual value guarantees or restrictive covenants. The Company does not recognize right-of-use assets or lease liabilities for short-term leases with initial terms of 12 months or less. Leased vehicles comprise the majority of the Company’s short-term leases. All other leases are recorded on the balance sheet with right-of-use assets representing the right to use the underlying asset for the lease term and lease liabilities representing lease payment obligations. The Company’s leases do not provide implicit rates; therefore the Company uses its incremental borrowing rate as the discount rate for measuring lease liabilities. Non-lease components are accounted for separately from lease components. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, distribution and administrative expense on the statements of consolidated income.
Recently Adopted Accounting Guidance
In March 2020, the FASB issued its final standard on the facilitationLeases
In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, and codified into ASC Topic 842, Leases, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. This update is effective for annual financial statement periods beginning after December 15, 2018, with earlier application permitted. In July 2018, the FASB issued ASU 2018-10 which clarifies the guidance in ASU 2016-02 and ASU 2018-11 which provides entities with an additional transition method option for adopting the new standard. In December 2018 and January 2019, the FASB issued ASU 2018-20 and ASU 2019-01, respectively, which further clarify the guidance. The Company adopted the new guidance effective July 1, 2019 using the optional transition method, which required application of the new guidance to only those leases that existed at the date of adoption. The Company elected the “package of practical expedients,” which permitted the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Adoption of the new standard resulted in the recognition of right-of-use (ROU) assets and lease liabilities of $83,533 and $89,778, respectively, on July 1, 2019. The difference between the ROU assets and lease liabilities related primarily to the impairment of certain leases in Canada and the United States. In addition, the adoption resulted in an adjustment to opening retained earnings of $3,275, net of tax, on July 1, 2019 primarily due to the impairment of the leases. The standard did not have a material impact on the Company’s statements of consolidated income or cash flows.
Cash Flows
In August 2016, the FASB issued its final standard on the classification of certain cash receipts and cash payments within the statement of cash flows. This standard, issued as ASU 2016-15, makes a number of changes meant to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2018, with early adoption permitted. The Company adopted the new guidance in the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on the Company's financial statements or related disclosures.
Recently Issued Accounting Guidance
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. In November 2018, April 2019, May 2019, November 2019, and February 2020, the FASB issued ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11 and ASU 2020-02, respectively, which clarify the guidance in ASU 2016-13. The Company has not yet determined the impact of these pronouncements on its financial statements and related disclosures.
In December 2019, the FASB issued its final standard on simplifying the accounting for income taxes. This standard, issued as ASU 2019-12, makes a number of changes meant to add or clarify guidance on accounting for income taxes. This update is effective for annual and interim financial statement periods beginning after December 15, 2021, with early adoption permitted in any interim period for which financial statements have not yet been filed. The Company has not yet determined the impact of these pronouncements on its financial statements and related disclosures.
NOTE 2: REVENUE RECOGNITION Disaggregation of Revenues The following tables present the Company's net sales by reportable segment and by geographic areas based on the location of the facility shipping the product for the years ended June 30, 2020, 20192023, 2022 and 2018.2021. Other countries consist of Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | Year Ended June 30, 2020 | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| Geographic Areas: | | | | United States | $ | 1,833,275 |
| $ | 986,125 |
| $ | 2,819,400 |
| Canada | 248,610 |
| — |
| 248,610 |
| Other countries | 160,064 |
| 17,578 |
| 177,642 |
| Total | $ | 2,241,949 |
| $ | 1,003,703 |
| $ | 3,245,652 |
|
| | | | | | | | | | | | | Year Ended June 30, 2023 | | Service Center Based Distribution | Engineered Solutions | Total | Geographic Areas: | | | | United States | $ | 2,441,281 | | $ | 1,419,140 | | $ | 3,860,421 | | Canada | 315,499 | | — | | 315,499 | | Other Countries | 210,062 | | 26,812 | | 236,874 | | Total | $ | 2,966,842 | | $ | 1,445,952 | | $ | 4,412,794 | |
| | | | | | | | | | | | | Year Ended June 30, 2022 | | Service Center Based Distribution | Engineered Solutions | Total | Geographic Areas: | | | | United States | $ | 2,081,566 | | $ | 1,218,184 | | $ | 3,299,750 | | Canada | 291,530 | | — | | 291,530 | | Other Countries | 192,508 | | 26,888 | | 219,396 | | Total | $ | 2,565,604 | | $ | 1,245,072 | | $ | 3,810,676 | |
| | | Year Ended June 30, 2019 | | Year Ended June 30, 2021 | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| | Service Center Based Distribution | Engineered Solutions | Total | Geographic Areas: | | Geographic Areas: | | United States | $ | 2,009,479 |
| $ | 1,007,280 |
| $ | 3,016,759 |
| United States | $ | 1,768,965 | | $ | 1,013,894 | | $ | 2,782,859 | | Canada | 271,305 |
| — |
| 271,305 |
| Canada | 255,360 | | — | | 255,360 | | Other countries | 172,121 |
| 12,554 |
| 184,675 |
| | Other Countries | | Other Countries | 175,208 | | 22,492 | | 197,700 | | Total | $ | 2,452,905 |
| $ | 1,019,834 |
| $ | 3,472,739 |
| Total | $ | 2,199,533 | | $ | 1,036,386 | | $ | 3,235,919 | |
| | | | | | | | | | | | Year Ended June 30, 2018 | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| Geographic Areas: | | | | United States | $ | 1,903,388 |
| $ | 711,653 |
| $ | 2,615,041 |
| Canada | 273,622 |
| — |
| 273,622 |
| Other countries | 169,408 |
| 15,203 |
| 184,611 |
| Total | $ | 2,346,418 |
| $ | 726,856 |
| $ | 3,073,274 |
|
The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the years ended June 30, 20202023, 2022, and 2019:2021: | | | | | | | | | | | | | | | | | | | Year Ended June 30, 2023 | | Service Center Based Distribution | | Engineered Solutions | | Total | General Industry | 34.0 | % | | 41.2 | % | | 36.2 | % | Industrial Machinery | 9.8 | % | | 26.1 | % | | 15.2 | % | Food | 13.2 | % | | 2.7 | % | | 9.8 | % | Metals | 10.6 | % | | 7.5 | % | | 9.6 | % | Forest Products | 12.1 | % | | 2.8 | % | | 9.1 | % | Chem/Petrochem | 2.8 | % | | 13.9 | % | | 6.4 | % | Cement & Aggregate | 7.8 | % | | 1.3 | % | | 5.7 | % | Oil & Gas | 6.0 | % | | 1.4 | % | | 4.5 | % | Transportation | 3.7 | % | | 3.1 | % | | 3.5 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | Year Ended June 30, 2020 | | Year Ended June 30, 2022 | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Service Center Based Distribution | | Engineered Solutions | | Total | General Industry | 35.0 | % | | 41.2 | % | | 36.8 | % | General Industry | 34.9 | % | | 40.1 | % | | 36.7 | % | Industrial Machinery | 9.7 | % | | 24.4 | % | | 14.3 | % | Industrial Machinery | 10.3 | % | | 28.3 | % | | 16.2 | % | Food | | Food | 12.6 | % | | 2.5 | % | | 9.3 | % | Metals | 11.1 | % | | 7.2 | % | | 9.9 | % | Metals | 11.2 | % | | 7.4 | % | | 9.9 | % | Food | 12.2 | % | | 3.1 | % | | 9.4 | % | | Forest Products | 9.3 | % | | 3.7 | % | | 7.6 | % | Forest Products | 10.8 | % | | 2.4 | % | | 8.0 | % | Chem/Petrochem | 3.3 | % | | 13.4 | % | | 6.4 | % | Chem/Petrochem | 3.1 | % | | 13.8 | % | | 6.6 | % | Cement & Aggregate | | Cement & Aggregate | 7.6 | % | | 1.0 | % | | 5.5 | % | Oil & Gas | 7.5 | % | | 1.6 | % | | 5.7 | % | Oil & Gas | 5.4 | % | | 1.2 | % | | 4.0 | % | Cement & Aggregate | 7.3 | % | | 1.0 | % | | 5.4 | % | | Transportation | 4.6 | % | | 4.4 | % | | 4.5 | % | Transportation | 4.1 | % | | 3.3 | % | | 3.8 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | Year Ended June 30, 2021 | | Service Center Based Distribution | | Engineered Solutions | | Total | General Industry | 35.8 | % | | 40.0 | % | | 37.2 | % | Industrial Machinery | 9.8 | % | | 26.8 | % | | 15.2 | % | Food | 13.5 | % | | 2.9 | % | | 10.1 | % | Metals | 10.5 | % | | 6.8 | % | | 9.3 | % | Forest Products | 10.7 | % | | 2.9 | % | | 8.2 | % | Chem/Petrochem | 3.3 | % | | 13.6 | % | | 6.6 | % | Cement & Aggregate | 7.9 | % | | 1.1 | % | | 5.7 | % | Oil & Gas | 3.9 | % | | 1.1 | % | | 3.0 | % | Transportation | 4.6 | % | | 4.8 | % | | 4.7 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | Year Ended June 30, 2019 | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| General Industry | 33.7 | % | | 43.0 | % | | 36.3 | % | Industrial Machinery | 10.4 | % | | 21.8 | % | | 13.8 | % | Metals | 12.6 | % | | 9.4 | % | | 11.6 | % | Food | 10.6 | % | | 2.7 | % | | 8.3 | % | Forest Products | 8.0 | % | | 3.1 | % | | 6.6 | % | Chem/Petrochem | 3.1 | % | | 13.8 | % | | 6.3 | % | Oil & Gas | 10.1 | % | | 2.1 | % | | 7.8 | % | Cement & Aggregate | 6.7 | % | | 1.0 | % | | 5.0 | % | Transportation | 4.8 | % | | 3.1 | % | | 4.3 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
The following tables present the Company’s percentage of revenue by reportable segment and product line for the years ended June 30, 20202023, 2022, and 2019:2021: | | | | | | | | | | | | | | | | | | | Year Ended June 30, 2023 | | Service Center Based Distribution | | Engineered Solutions | | Total | Power Transmission | 37.3 | % | | 10.6 | % | | 28.5 | % | General Maintenance; Hose Products | 21.1 | % | | 19.3 | % | | 20.6 | % | Fluid Power | 13.3 | % | | 34.3 | % | | 20.2 | % | Bearings, Linear & Seals | 28.3 | % | | 0.4 | % | | 19.1 | % | Specialty Flow Control | — | % | | 35.4 | % | | 11.6 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | Year Ended June 30, 2020 | | Year Ended June 30, 2022 | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Service Center Based Distribution | | Engineered Solutions | | Total | Power Transmission | 35.4 | % | | 9.5 | % | | 27.4 | % | Power Transmission | 37.1 | % | | 10.6 | % | | 28.4 | % | General Maintenance; Hose Products | | General Maintenance; Hose Products | 20.9 | % | | 18.9 | % | | 20.3 | % | Fluid Power | 13.4 | % | | 39.0 | % | | 21.3 | % | Fluid Power | 12.8 | % | | 37.2 | % | | 20.8 | % | General Maintenance; Hose Products | 24.6 | % | | 11.7 | % | | 20.6 | % | | Bearings, Linear & Seals | 26.6 | % | | 0.3 | % | | 18.5 | % | Bearings, Linear & Seals | 29.2 | % | | 0.4 | % | | 19.8 | % | Specialty Flow Control | — | % | | 39.5 | % | | 12.2 | % | Specialty Flow Control | — | % | | 32.9 | % | | 10.7 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | Year Ended June 30, 2019 | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Power Transmission | 33.9 | % | | 1.6 | % | | 24.4 | % | Fluid Power | 13.5 | % | | 39.4 | % | | 21.1 | % | General Maintenance; Hose Products | 25.1 | % | | 5.3 | % | | 19.3 | % | Bearings, Linear & Seals | 27.5 | % | | 0.3 | % | | 19.5 | % | Specialty Flow Control | — | % | | 53.4 | % | | 15.7 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | Year Ended June 30, 2021 | | Service Center Based Distribution | | Engineered Solutions | | Total | Power Transmission | 37.3 | % | | 7.5 | % | | 27.8 | % | General Maintenance; Hose Products | 20.5 | % | | 16.9 | % | | 19.3 | % | Fluid Power | 13.2 | % | | 38.0 | % | | 21.2 | % | Bearings, Linear & Seals | 29.0 | % | | 0.4 | % | | 19.8 | % | Specialty Flow Control | — | % | | 37.2 | % | | 11.9 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
Contract Assets The Company’s contract assets consist of un-billed amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer. Activity related to contract assets, which are included in other current assets on the consolidated balance sheet, is as follows: | | | | | | | | | | | | | | June 30, 2020 |
| June 30, 2019 |
| $ Change |
| % Change |
| Contract assets | $ | 8,435 |
| $ | 8,920 |
| $ | (485 | ) | (5.4 | )% |
| | | | | | | | | | | | | | | | June 30, 2023 | June 30, 2022 | $ Change | % Change | Contract assets | $ | 17,911 | | $ | 18,050 | | $ | (139) | | (0.8) | % |
The difference between the opening and closing balances of the Company's contract assets primarily results from the timing difference between the Company's performance and when the customer is billed.
NOTE 3: BUSINESS COMBINATIONS The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition. Fiscal 20202023 Acquisitions On August 21, 2019,March 31, 2023, the Company acquired 100%substantially all of the outstanding sharesnet assets of Olympus Controls (Olympus)Advanced Motion Systems Inc. (AMS), a Portland, Oregonwestern New York based provider of automation products, services, and engineered solutions provider - including design, assembly, integration,focused on a full range of machine vision, robotics, and distribution - of motion control machine vision,products and robotic technologies. OlympusAMS is included in the Fluid Power & Flow ControlEngineered Solutions segment. The purchase price for the acquisition was $36,642,$10,118, net tangible assets acquired were $9,540,$1,768, and intangible assets including goodwill was $27,102were $8,350 based upon preliminary estimated fair values at the acquisition date.date, which are subject to adjustment. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2019 Acquisitions
On March 4, 2019,November 1, 2022, the Company acquired substantially all of the net assets of MilRoc Distribution (MilRoc) and Woodward Steel (Woodward). MilRoc is an OklahomaAutomation, Inc., a Minneapolis, Minnesota based distributorprovider of oilfield specificautomation products, namely pumps and valves, as well as equipment repair services, and industrial parts to the oil & gas industry. Woodwardengineered solutions focused on machine vision, collaborative and mobile robotics, motion control, intelligent sensors, pneumatics, and other related products and solutions. Automation, Inc. is an Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc and Woodward are both included in the Service Center Based DistributionEngineered Solutions segment. The purchase price for the acquisition was $35,000,$25,667, net tangible assets acquired were $17,788,$3,689, and intangible assets including goodwill were $21,978 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The Company
funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2022 Acquisitions On August 18, 2021, the Company acquired substantially all of the net assets of R.R. Floody Company (Floody), a Rockford, Illinois provider of high technology solutions for advanced factory automation. Floody is included in the Engineered Solutions segment. The purchase price for the acquisition was $17,212$8,038, net tangible assets acquired were $1,040, and intangible assets including goodwill were $6,998 based upon estimated fair values at the acquisition date. The purchase price includes $1,000 of acquisition holdback payments, of $4,375, of which $1,666$500 was paid during the year endedyear-ended June 30, 2020.2023. The remaining balance of $2,709$500 is included in other current liabilities and other liabilities on the consolidated balance sheet as of June 30, 2020,2023, and which will be paid on the second and third anniversariesanniversary of the acquisition date with interest at a fixed rate of 2.0% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2021 Acquisitions On November 2, 2018,December 31, 2020, the Company acquired substantially all100% of the net assetsoutstanding shares of Fluid Power Sales, Inc. (FPS)Gibson Engineering (Gibson), a Baldwinsville, New York based manufacturerNorwood, Massachusetts provider of automation products, services, and distributor of fluid power components, specializing in the engineeringengineered solutions focused on machine vision, motion control, mobile and fabrication of manifoldscollaborative robotic solutions, intelligent sensors, and power units. FPSother related equipment. Gibson is included in the Fluid Power & Flow ControlEngineered Solutions segment. The purchase price for the acquisition was $8,066,$15,341, net tangible assets acquired were $4,151,$955, and intangible assets including goodwill was $3,915were $14,386 based upon estimated fair values at the acquisition date. The purchase price includesincluded $1,904 of acquisition holdback payments, of $1,200, of which $600$850 was paid during the year-endyear-ended June 30, 2020. The remaining balance of $600 is included in other current liabilities on the consolidated balance sheet as of June 30, 2020, and will be paid on the second anniversary of the acquisition date with interest at a fixed rate of 1.5% per annum.2023. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. FCX Acquisition
On January 31, 2018,October 5, 2020, the Company completed the acquisition of 100%acquired substantially all of the outstanding sharesnet assets of FCX Performance, Inc. (FCX)Advanced Control Solutions (ACS), which operates four locations in Georgia, Tennessee and Alabama. ACS is a Columbus, Ohio based distributorprovider of specialty process flow controlautomation products, services, and services. The total consideration transferred for the acquisition was $781,781, which was financed by cash-on-handengineered solutions focused on machine vision equipment and a new credit facility comprised of a $780,000 Term Loan Asoftware, mobile and a $250,000 revolver, effective with the transaction closing. See note 6 Debt. As a distributor of engineered valves, instruments, pumpscollaborative robotic solutions, intelligent sensors, logic controllers, and lifecycle services to MRO and OEM customers across diverse industrial and process end markets, this businessother related equipment. ACS is included in the Fluid Power & Flow Control Segment.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of FCX based on their estimated fair values at the acquisition date. | | | | | | FCX Acquisition |
| | 2018 |
| Cash | $ | 11,141 |
| Accounts receivable | 80,836 |
| Inventories | 44,669 |
| Other current assets | 1,753 |
| Property | 8,282 |
| Identifiable intangible assets | 305,420 |
| Goodwill | 440,012 |
| Other assets | 775 |
| Total assets acquired | $ | 892,888 |
| Accounts payable and accrued liabilities | 54,035 |
| Other liabilities | 2,677 |
| Deferred tax liabilities | 54,395 |
| Net assets acquired | $ | 781,781 |
| | | Purchase price | $ | 784,281 |
| Reconciliation of fair value transferred: | | Working Capital Adjustments | (2,500 | ) | Total Consideration | $ | 781,781 |
|
The change in the carrying amount of goodwill for FCX since the acquisition is as follows:
| | | | | Balance at 1/31/2018 | $ | 440,012 |
| Impairment | 131,000 |
| Balance at 6/30/2020 | $ | 309,012 |
|
Goodwill acquired of $161,452 was deductible for income tax purposes at the time of the acquisition. Subsequent to the goodwill impairment recorded during the year ended June 30, 2020, $112,922 remains deductible for income tax purposes as of June 30, 2020.
Net sales, operating income and net income from the FCX acquisition included in the Company’s results since January 31, 2018, the date of the acquisition, are as follows: | | | | | | | | | | | | 2020 (1) |
| 2019 |
| January 31, 2018 to June 30, 2018 |
| Net sales | $ | 490,743 |
| $ | 549,833 |
| $ | 249,752 |
| Operating income | (97,300 | ) | 38,186 |
| 16,845 |
| Net income | (91,739 | ) | 28,075 |
| 8,758 |
|
| | (1) | There was a $131,000 goodwill impairment charge during the year ended June 30, 2020. See note 5, Goodwill and Intangibles, for further information. |
The Company incurred $2,849 in third-party costs during 2018 pertaining to the acquisition of FCX, which are included in selling, distribution and administration expense in the statements of consolidated income for fiscal 2018.
Other Fiscal 2018 Acquisition
On July 3, 2017, the Company acquired 100% of the outstanding stock of Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a distributor of accessories and components for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based DistributionEngineered Solutions segment. The purchase price for the acquisition was $5,920,$17,867, net tangible assets acquired were $3,395,$1,210, and intangible assets including goodwill was
$2,525were $16,657 based upon estimated fair values at the acquisition date. The purchase price includes $906 of acquisition holdback payments, of which $201 and $219 was paid during fiscal year 2020 and 2019, respectively. Due to changes in foreign currency exchange rates, the remaining balance of $356 is included in other current liabilities on the consolidated balance sheet as of June 30, 2020, which will be paid on the third anniversary of the acquisition date with interest at a fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
Holdback Liabilities for Acquisitions
Acquisition holdback payments of approximately $2,563, $1,448 and $75 will be made in fiscal 2021, 2022 and 2024, respectively. The related liabilities for these payments are recorded in the consolidated balance sheets in other current liabilities for the amounts due in fiscal year 2021 and other liabilities for the amounts due in fiscal years 2022 and 2024.
NOTE 4: INVENTORIES Inventories consist of the following: | | | | | | | | | | | | | | | June 30, | | 2023 | | 2022 | U.S. inventories at average cost | | $ | 558,299 | | | $ | 487,555 | | Foreign inventories at average cost | | 158,165 | | | 141,176 | | | | 716,464 | | | 628,731 | | Less: Excess of average cost over LIFO cost for U.S. inventories | | 215,280 | | | 178,910 | | Inventories on consolidated balance sheets | | $ | 501,184 | | | $ | 449,821 | |
| | | | | | | | | | June 30, | | 2020 |
| | 2019 |
| U.S. inventories at average cost | | $ | 431,866 |
| | $ | 473,949 |
| Foreign inventories at average cost | | 112,795 |
| | 125,260 |
| | | 544,661 |
| | 599,209 |
| Less: Excess of average cost over LIFO cost for U.S. inventories | | 155,511 |
| | 151,654 |
| Inventories on consolidated balance sheets | | $ | 389,150 |
| | $ | 447,555 |
|
The overall impact of LIFO layer liquidations increased gross profit by $127, $501, and $3,895 in fiscal 2023, fiscal 2022, and fiscal 2021, respectively.
NOTE 5: GOODWILL AND INTANGIBLES The changes in the carrying amount of goodwill for both the Service Center Based Distribution segment and the Fluid Power & Flow ControlEngineered Solutions segment for the years ended June 30, 20202023 and 20192022 are as follows: | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Balance at July 1, 2018 | $ | 203,084 |
| | $ | 443,559 |
| | $ | 646,643 |
| Goodwill acquired during the year | 9,943 |
| | 4,798 |
| | 14,741 |
| Other, primarily currency translation | 607 |
| | — |
| | 607 |
| Balance at June 30, 2019 | 213,634 |
| | 448,357 |
| | 661,991 |
| Goodwill adjusted/acquired during the year | (3,393 | ) | | 14,667 |
| | 11,274 |
| Impairment | — |
| | (131,000 | ) | | (131,000 | ) | Other, primarily currency translation | (1,671 | ) | | — |
| | (1,671 | ) | Balance at June 30, 2020 | $ | 208,570 |
| | $ | 332,024 |
| | $ | 540,594 |
|
During the first quarter of fiscal 2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the MilRoc/Woodward acquisition. The fair values of the customer relationships, trade name, and other intangible assets were increased by $1,524, $1,809, and $60, respectively, with a corresponding total decrease to goodwill of $3,393. The changes to the preliminary estimated fair values resulted in an increase to amortization expense of $303 during the year ended June 30, 2020, which is recorded in selling, distribution, and administrative expense on the statements of consolidated income.
During the second quarter of fiscal 2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the Olympus acquisition. The trade name and other intangible assets were increased by $4,260 and $980, respectively, with a corresponding decrease to the customer relationship intangible asset of $5,504 and an increase to goodwill of $264. The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of $24 during the year ended June 30, 2020, which is recorded in selling, distribution, and administrative expense on the statements of consolidated income. | | | | | | | | | | | | | | | | | | | Service Center Based Distribution | | Engineered Solutions | | Total | Balance at July 1, 2021 | $ | 212,296 | | | $ | 347,781 | | | $ | 560,077 | | Goodwill acquired during the year | — | | | 3,984 | | | 3,984 | | | | | | | | Other, primarily currency translation | (1,286) | | | 430 | | | (856) | | Balance at June 30, 2022 | 211,010 | | | 352,195 | | | 563,205 | | Goodwill acquired during the year | — | | | 14,517 | | | 14,517 | | | | | | | | Other, primarily currency translation | 221 | | | 475 | | | 696 | | Balance at June 30, 2023 | $ | 211,231 | | | $ | 367,187 | | | $ | 578,418 | |
The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2020.2023. The Company concluded that seven (7)all of the reporting units’ fair values exceeded their carrying amounts by at least 10%20% as of January 1, 2020. Specifically, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The Canada
and Mexico reporting units have goodwill balances of $27,186 and $5,185, respectively, as of June 30, 2020. The carrying value of the final reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131,000. The non-cash impairment charge is the result of the overall decline in the industrial economy, specifically slower demand in FCX's end markets. This has led to reduced spending by customers and reduced revenue expectations. The remaining goodwill for the FCX reporting unit as of June 30, 2020 is $309,012. Because the carrying value of the FCX reporting unit approximated fair value of the reporting unit after the impairment was recorded, a future decline in the estimated cash flows could result in an additional impairment loss. A future decline in the estimated cash flows could result from a significant or extended decline in various end markets.2023.
The fair values of the reporting units in accordance with the goodwill impairment test were determined using the income and market approaches. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. The market approach utilizes an analysis of comparable publicly traded companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues, EBITDA, and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the Company’s reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends; and (ii) inability to achieve the sales targeted byfrom our strategic growth initiatives. At June 30, 20202023 and 2019,2022, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment. At June 30, 2020segment and 2019, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $167,605 and $36,605, respectively, related to the Fluid Power & Flow ControlEngineered Solutions segment.
The Company's identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following: | | | | | | | | | | | | | | | | | | June 30, 2023 | Amount | | Accumulated Amortization | | Net Book Value | Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 364,572 | | | $ | 188,804 | | | $ | 175,768 | | Trade names | 108,301 | | | 50,823 | | | 57,478 | | Vendor relationships | 9,861 | | | 9,744 | | | 117 | | Other | 3,347 | | | 1,161 | | | 2,186 | | Total Intangibles | $ | 486,081 | | | $ | 250,532 | | | $ | 235,549 | |
| | | | | | | | | | | | | June 30, 2020 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 426,017 |
| | $ | 162,965 |
| | $ | 263,052 |
| Trade names | 111,453 |
| | 34,815 |
| | 76,638 |
| Vendor relationships | 11,329 |
| | 8,934 |
| | 2,395 |
| Other | 2,078 |
| | 948 |
| | 1,130 |
| Total Intangibles | $ | 550,877 |
| | $ | 207,662 |
| | $ | 343,215 |
|
| | | | | | | | | | | | | June 30, 2019 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 422,367 |
| | $ | 135,879 |
| | $ | 286,488 |
| Trade names | 105,946 |
| | 27,232 |
| | 78,714 |
| Vendor relationships | 11,367 |
| | 8,156 |
| | 3,211 |
| Other | 2,702 |
| | 2,249 |
| | 453 |
| Total Intangibles | $ | 542,382 |
| | $ | 173,516 |
| | $ | 368,866 |
|
| | | | | | | | | | | | | | | | | | June 30, 2022 | Amount | | Accumulated Amortization | | Net Book Value | Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 353,836 | | | $ | 166,623 | | | $ | 187,213 | | Trade names | 105,629 | | | 44,637 | | | 60,992 | | Vendor relationships | 11,320 | | | 10,533 | | | 787 | | Other | 2,321 | | | 723 | | | 1,598 | | Total Intangibles | $ | 473,106 | | | $ | 222,516 | | | $ | 250,590 | |
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off. During fiscal 2020,2021, due to the Company acquired identifiable intangible assets with an acquisition cost allocation and weighted-average life as follows: | | | | | | | | Acquisition Cost Allocation |
| | Weighted-Average Life | Customer relationships | $ | 7,160 |
| | 20.0 | Trade names | 4,260 |
| | 15.0 | Other | 980 |
| | 6.8 | Total Intangibles Acquired | $ | 12,400 |
| | 17.2 |
Due to a sustained declineeconomic downturn in economic conditions in the upstream oil and gas industry in western Canada,
management also assessedend markets, the long-lived intangible assets relatedCompany determined that certain carrying values may not be recoverable within the Company's three asset groups that have significant exposure to the Reliance asset group in Canada for
impairment during the third quarter of fiscal 2019. The Reliance asset group is located in western Canada and
primarily serves customers in the upstream oil and gas industry.end markets. The Company determined that an impairment existed in two of the three asset groupgroups as the asset groups' carrying valuevalues exceeded the sum of
the undiscounted cash flows, indicating impairment.flows. The fair valuevalues of the asset group waslong-lived assets were then determined using the income approach, using Level 3 assumptions in the fair value hierarchy, and the analysisanalyses resulted in the measurement of a fullan intangible asset impairment loss of $31,594,$45,033, which was recorded induring the thirdsecond quarter of fiscal 2019.2021, as the fair value of the intangible assets was determined to be zero. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, EBITDA, and discount rates. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used. The analyses of these asset groups also resulted in a fixed asset impairment loss and leased asset impairment loss of $1,983 and $2,512, respectively, which were recorded during the second quarter of fiscal 2021. Sustained significant softness in certain end market concentrations could result in impairment of certain intangible assets in future periods. During fiscal 2023, the Company acquired identifiable intangible assets with an acquisition cost allocation and weighted-average life as follows: | | | | | | | | | | | | | Acquisition Cost Allocation | | Weighted-Average Life | Customer relationships | $ | 11,176 | | | 20.0 | Trade names | 3,610 | | | 15.0 | Other | 1,025 | | | 6.7 | Total Intangibles Acquired | $ | 15,811 | | | 18.0 |
Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. Amortization of identifiable intangibles totaled $41,553, $41,883$30,805, $31,879 and $32,065$34,365 in fiscal 2020, 20192023, 2022 and 2018,2021, respectively, and is included in selling, distribution and administrative expense in the statements of consolidated income. Future amortization expense based on the Company’s identifiable intangible assets as of June 30, 20202023 is estimated to be $38,300 for 2021, $36,100 for 2022, $34,000 for 2023, $29,800$27,500 for 2024, $25,300 for 2025, $23,600 for 2026, $21,800 for 2027 and $26,300$20,200 for 2025.2028.
NOTE 6: DEBT A summary of long-term debt, including the current portion, follows: | | | | | | | | | June 30, | 2020 |
| | 2019 |
| Unsecured credit facility | $ | 589,250 |
| | $ | 613,625 |
| Trade receivable securitization facility | 175,000 |
| | 175,000 |
| Series C Notes | 120,000 |
| | 120,000 |
| Series D Notes | 25,000 |
| | 50,000 |
| Series E Notes | 25,000 |
| | — |
| Other | 1,026 |
| | 1,204 |
| Total debt | $ | 935,276 |
| | $ | 959,829 |
| Less: unamortized debt issuance costs | 1,487 |
| | 1,943 |
| | $ | 933,789 |
| | $ | 957,886 |
|
| | | | | | | | | | | | June 30, | 2023 | | 2022 | Revolving credit facility | $ | 383,592 | | | $ | 410,592 | | Trade receivable securitization facility | 188,300 | | | 188,300 | | Series C Notes | — | | | 40,000 | | Series D Notes | 25,000 | | | 25,000 | | Series E Notes | 25,000 | | | 25,000 | | Other | 356 | | | 603 | | Total debt | $ | 622,248 | | | $ | 689,495 | | Less: unamortized debt issuance costs | 152 | | | 171 | | | $ | 622,096 | | | $ | 689,324 | |
Revolving Credit Facility & Term Loan In January 2018,December 2021, the Company refinanced its existing credit facility and entered into a new five-yearrevolving credit facility with a group of banks expiring in January 2023. This agreementto refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes. The revolving credit facility provides for a $780,000 unsecured term loan and a $250,000$900,000 unsecured revolving credit facility. Fees on this facility range from 0.10%and an uncommitted accordion feature which allows the Company to 0.20% per year based uponrequest an increase in the Company's leverage ratio at each quarter end.borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500,000. In May 2023, the Company and the administrative agent entered into an amendment to the credit facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR. Borrowings under this agreement carry variablebear interest, rates tied to either LIBOR or prime at the Company's discretion. The Company had no amount outstanding underelection, at either the revolver as of June 30, 2020 and June 30, 2019.base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or SOFR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of $1,873 and $3,215, respectively,$200 to secure certain insurance obligations, totaled $248,127$516,208 and $246,785$489,208 at June 30, 20202023 and June 30, 2019,2022, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loanrevolving credit facility was 1.94%6.11% and 4.19%2.81% as of June 30, 20202023 and June 30, 2019,2022, respectively. Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving credit agreement, in the amount of $4,475$4,046 and $2,698$4,735 as of June 30, 20202023 and June 30, 2019,2022, respectively, in order to secure certain insurance obligations. Trade Receivable Securitization Facility In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021. The maximum availability under. On March 26, 2021, the Company amended the AR Securitization Facility is $175,000.to expand the eligible receivables, which increased the maximum availability to $250,000 and increased the fees on the AR Securitization Facility to 0.98% per year. Availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the $175,000$250,000 of funding available under the AR Securitization Facility. The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the Service Center Based Distribution reportable segment’s U.S. operations’ trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. BorrowingsIn May 2023, the Company entered into an amendment to the AR Securitization facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR, therefore borrowings under this facility carry variable interest rates tied to LIBOR and fees on the AR Securitization Facility are 0.90% per year.SOFR. The interest rate on the AR Securitization Facility as of June 30, 20202023 and June 30, 20192022 was 1.07%6.16% and 3.33%2.60%, respectively. The Company classified the AR Securitization Facility as long-term debt as it has the ability and intent to extend or refinance this amount on a long-term basis. On August 4, 2023, the Company amended the AR Securitization Facility and extended the term to August 4, 2026. Other Long-Term BorrowingsUnsecured Shelf Facility
At June 30, 20202023 and June 30, 2019,2022, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170,000.$50,000 and $90,000, respectively. Fees on this facility range from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end. The remaining principal balance on the "Series C" notes of the $40,000 was paid in July 2022. The "Series D" notes have a remaining principal amount of $120,000,$25,000, carry a fixed interest rate of 3.19%3.21%, and are due in equal principal payments in July 2020, 2021, and 2022. A $40,000 principal payment was made on the "Series C" notes in July 2020.October 2023. The "Series D" notes have a principal amount of $50,000 and carry a fixed interest rate of 3.21%. A $25,000 principal payment was made on the "Series D" notes during fiscal 2020, and the remaining principal balance of $25,000 is due in October 2023. In October 2019, the Company amended its unsecured shelf facility agreement with Prudential Investment management to authorize the issuance of "Series E" notes which have a principal amount of $25,000, carry a fixed interest rate of 3.08%, and are due in October 2024.
Other Long-Term Borrowing In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% fixed interest rate note is held by the State of Ohio Development Services Agency maturingand matures in MayNovember 2024.
The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing arrangements for each of the next five years: | | | | | Fiscal Year | Aggregate Maturity |
| 2021 | $ | 79,181 |
| 2022 | 259,120 |
| 2023 | 546,624 |
| 2024 | 25,351 |
| 2025 | 25,000 |
|
| | | | | | Fiscal Year | Aggregate Maturity | 2024 | $ | 25,251 | | 2025 | 25,105 | | 2026 | — | | 2027 | 571,892 | | 2028 | — | | | |
Covenants The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2020,2023, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At June 30, 2020,2023, the Company's net indebtedness was less than 3.10.7 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at June 30, 2020.2023. NOTE 7: DERIVATIVES Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. In January 2019, the Company entered into an interest rate swap to mitigate variability in forecasted interest payments on $463,000 of the Company’s U.S. dollar-denominated unsecured variable rate debt. The notional amount declines over time. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. During the quarter ended December 31, 2020, the Company completed a transaction to amend and extend the interest rate swap agreement which resulted in an extension of the maturity date by an additional three years and a decrease of the weighted average fixed pay rate from 2.61% to 1.63%. The pay-fixed interest rate swap is considered a hybrid instrument with a financing component and an embedded at-market derivative that was designated as a cash flow hedge. In May 2023, the Company entered into bilateral agreements with its swap counterparties to transition its interest rate swap agreements to SOFR, and further decreased the weighted average fixed pay rate to 1.58%. The Company
made various ASC 848 elections related to changes in critical terms of the hedging relationship due to reference rate reform to not result in a dedesignation of the hedging relationship. As of May 31, 2023, the Company's interest rate swap agreement was indexed to SOFR. The interest rate swap converts $431,000converted $384,000 of variable rate debt to a rate of 4.36%2.59% as of June 30, 2020 and as of June 30, 20192023. The interest rate swap converted $463,000$409,000 of variable rate debt to a rate of 4.36%.2.75% as of June 30, 2022. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $26,179$27,044 and $14,202$17,827 as of June 30, 20202023 and June 30, 2019,2022, respectively, which is included in other current liabilitiesassets and other liabilitiesassets in the consolidated balance sheet. Realized losses relatedAmounts reclassified from other comprehensive income, before tax, to the interest rate cash flow hedge were not material in the years ended June 30, 2020 or 2019.expense totaled $(7,285), $11,361, and $11,553 for fiscal 2023, 2022, and 2021, respectively. NOTE 8: FAIR VALUE MEASUREMENTS Marketable securities measured at fair value at June 30, 20202023 and June 30, 20192022 totaled $12,259$18,637 and $11,246,$15,317, respectively. The majority of these marketable securities are held in a rabbi trust for a non-qualified deferred
compensation plan. The marketable securities are included in other assets on the consolidated balance sheets and their fair values were valued using quoted market prices (Level 1 in the fair value hierarchy). As of June 30, 2020,2023, the carrying value of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximates fair value (Level 2 in the fair value hierarchy). The revolving credit facility and the term loan containcontains variable interest rates and theirits carrying values approximatevalue approximates fair value (Level 2 in the fair value hierarchy). NOTE 9: INCOME TAXES Income Before Income Taxes The components of income before income taxes are as follows: | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| U.S. | $ | 36,161 |
| | $ | 204,462 |
| | $ | 186,874 |
| Foreign | 19,075 |
| | (9,981 | ) | | 17,844 |
| Income before income taxes | $ | 55,236 |
| | $ | 194,481 |
| | $ | 204,718 |
|
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | U.S. | $ | 423,316 | | | $ | 287,367 | | | $ | 152,202 | | Foreign | 26,495 | | | 42,423 | | | 24,860 | | Income before income taxes | $ | 449,811 | | | $ | 329,790 | | | $ | 177,062 | |
Provision The provision (benefit) for income taxes consists of: | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Current: | | | | | | Federal | $ | 84,294 | | | $ | 40,608 | | | $ | 46,685 | | State and local | 19,026 | | | 10,188 | | | 11,035 | | Foreign | 5,468 | | | 6,404 | | | 5,665 | | Total current | 108,788 | | | 57,200 | | | 63,385 | | Deferred: | | | | | | Federal | (1,881) | | | 12,467 | | | (24,168) | | State and local | (84) | | | 2,659 | | | (4,740) | | Foreign | (3,751) | | | 50 | | | (2,172) | | Total deferred | (5,716) | | | 15,176 | | | (31,080) | | Total | $ | 103,072 | | | $ | 72,376 | | | $ | 32,305 | |
| | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| Current: | | | | | | Federal | $ | 31,149 |
| | $ | 34,437 |
| | $ | 48,131 |
| State and local | 7,580 |
| | 7,965 |
| | 8,038 |
| Foreign | 5,757 |
| | 5,718 |
| | 5,309 |
| Total current | 44,486 |
| | 48,120 |
| | 61,478 |
| Deferred: | | | | | | Federal | (8,594 | ) | | 6,265 |
| | 5,955 |
| State and local | (3,098 | ) | | 1,947 |
| | (586 | ) | Foreign | (1,600 | ) | | (5,844 | ) | | (3,754 | ) | Total deferred | (13,292 | ) | | 2,368 |
| | 1,615 |
| Total | $ | 31,194 |
| | $ | 50,488 |
| | $ | 63,093 |
|
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to U.S. tax law. The Act reduced the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminated U.S. federal income tax on dividends from foreign subsidiaries, and created new taxes on certain foreign-sourced earnings. During fiscal 2018, the Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate from 35% to 21%. The rate change was administratively effective as of the beginning of the Company's fiscal 2018, resulting in a blended statutory rate for fiscal 2018 of 28.06%.
The SEC staff issued SAB 118, which provided guidance on accounting for the tax effects of the Act for which the accounting under ASC 740 was incomplete. To the extent that a company's accounting for certain income tax effects of the Act was incomplete but it was able to determine a reasonable estimate, it was required to record a provisional estimate in the financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act. As of June 30, 2019, the Company recorded a net tax expense of $5,802 related to the one time transition tax and re-measurement of deferred tax balances.
Effective Tax Rates The following reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate: | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| Statutory income tax rate | 21.0 | % | | 21.0 | % | | 28.1 | % | Effects of: | | | | | | State and local taxes | 6.4 |
| | 4.4 |
| | 3.1 |
| U.S. federal tax reform | — |
| | (0.3 | ) | | 3.1 |
| CARES Act NOL carryback | (1.8 | ) | | — |
| | — |
| Goodwill impairment | 31.4 |
| | — |
| | — |
| Stock compensation | (1.3 | ) | | (0.5 | ) | | (0.4 | ) | GILTI/FDII | 3.6 |
| | 0.7 |
| | — |
| R & D credit | (1.2 | ) | | (0.4 | ) | | (0.3 | ) | U.S. tax on foreign income, net | (3.1 | ) | | 0.5 |
| | — |
| Impact of foreign operations | 1.6 |
| | (0.6 | ) | | 0.7 |
| Non-deductibles | 1.2 |
| | 0.6 |
| | 0.3 |
| Interest deduction | (4.0 | ) | | (1.2 | ) | | (1.6 | ) | Deductible dividend | (0.6 | ) | | (0.2 | ) | | (1.3 | ) | Valuation allowance | 2.6 |
| | 2.9 |
| | (0.3 | ) | Other, net | 0.7 |
| | (0.9 | ) | | (0.6 | ) | Effective income tax rate | 56.5 | % | | 26.0 | % | | 30.8 | % |
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % | Effects of: | | | | | | State and local taxes | 3.5 | | | 3.3 | | | 3.2 | | Stock compensation | (1.0) | | | (1.5) | | | (2.5) | | GILTI/FDII | (0.2) | | | 0.2 | | | 0.1 | | R & D credit | (0.4) | | | (0.4) | | | (1.5) | | U.S. tax on foreign income, net | — | | | (0.4) | | | (0.5) | | Impact of foreign operations | 0.2 | | | 0.4 | | | — | | Non-deductibles/Deductible dividend | 0.6 | | | 0.2 | | | — | | Interest deduction | (0.4) | | | (0.6) | | | (1.1) | | Valuation allowance | (0.6) | | | (0.6) | | | 0.1 | | Other, net | 0.2 | | | 0.3 | | | (0.6) | | Effective income tax rate | 22.9 | % | | 21.9 | % | | 18.2 | % |
Consolidated Balance Sheets Significant components of the Company’s deferred tax assets and liabilities are as follows: | | | | | | | | | June 30, | 2020 |
| | 2019 |
| Deferred tax assets: | | | | Compensation liabilities not currently deductible | $ | 17,252 |
| | $ | 17,401 |
| Other expenses and reserves not currently deductible | 15,272 |
| | 13,050 |
| Goodwill and intangibles | — |
| | 2,398 |
| Leases | 24,016 |
| | — |
| Net operating loss carryforwards | 8,859 |
| | 8,466 |
| Hedging instrument | 6,406 |
| | 3,498 |
| Other | 757 |
| | 1,173 |
| Total deferred tax assets | 72,562 |
| | 45,986 |
| Less: Valuation allowance | (7,494 | ) | | (5,597 | ) | Deferred tax assets, net of valuation allowance | 65,068 |
| | 40,389 |
| Deferred tax liabilities: | | | | Inventories | (8,284 | ) | | (8,600 | ) | Goodwill and intangibles | (58,506 | ) | | (75,504 | ) | Leases | (23,407 | ) | | — |
| Depreciation and differences in property bases | (13,018 | ) | | (10,777 | ) | Total deferred tax liabilities | (103,215 | ) | | (94,881 | ) | Net deferred tax liabilities | $ | (38,147 | ) | | $ | (54,492 | ) | Net deferred tax liabilities are classified as follows: | | | | Other assets | $ | 4,749 |
| | $ | 3,859 |
| Other liabilities | (42,896 | ) | | (58,351 | ) | Net deferred tax liabilities | $ | (38,147 | ) | | $ | (54,492 | ) |
| | | | | | | | | | | | June 30, | 2023 | | 2022 | Deferred tax assets: | | | | Compensation liabilities not currently deductible | $ | 17,726 | | | $ | 19,131 | | Other expenses and reserves not currently deductible | 18,215 | | | 17,143 | | | | | | Leases | 26,345 | | | 26,688 | | | | | | Net operating loss carryforwards | 6,809 | | | 7,371 | | Capitalization of R&D costs | 11,646 | | | — | | Other | 381 | | | 563 | | Total deferred tax assets | $ | 81,122 | | | $ | 70,896 | | Less: Valuation allowance | (3,459) | | | (6,271) | | Deferred tax assets, net of valuation allowance | $ | 77,663 | | | $ | 64,625 | | Deferred tax liabilities: | | | | Inventories | $ | (15,174) | | | $ | (13,728) | | Goodwill and intangibles | (52,463) | | | (46,513) | | Leases | (26,179) | | | (26,509) | | Hedging instrument | (9,081) | | | (6,446) | | Depreciation and differences in property bases | (9,757) | | | (9,760) | | Total deferred tax liabilities | (112,654) | | | (102,956) | | Net deferred tax liabilities | $ | (34,991) | | | $ | (38,331) | | Net deferred tax liabilities are classified as follows: | | | | Other assets | $ | 9,990 | | | $ | 5,677 | | Other liabilities | (44,981) | | | (44,008) | | Net deferred tax liabilities | $ | (34,991) | | | $ | (38,331) | |
As of June 30, 20202023 and 2019,2022, the Company had foreign net operating loss carryforwards of approximately $29,584$29,374 and $27,024,$32,018, respectively, the tax benefit of which is approximately $6,440 and $6,677, respectively. These loss carryforwards will expire at various dates beginning in 2033. Also, as of June 30, 20202023 and
2019, 2022, the Company had state net operating loss carryforwards, the tax benefit of which is approximately $1,177$466 and $2,098$878, respectively, which will expire at various dates beginning in 2027.
Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory tax rates and future income levels. DuringThe Company evaluates the yearrealization of its deferred tax assets each quarter throughout the year. During the years ended June 30, 2020,2023 and 2022, the Company recorded a net tax benefit related to the change in valuation allowances of $2,657 and $1,937, respectively. The total valuation allowance of $2,124 related to certainprovided against the deferred tax assets in Canada due to the uncertainty in realizing these net deferred tax assets.and Mexico is $3,415 and $6,228 as of June 30, 2023 and 2022, respectively. As of June 30, 2020,2023, the Company had accumulated undistributed earnings of non-U.S. subsidiaries of approximately $114,070.$172,914. The vast majority of such earnings have previously been subjected to the one-time transition tax or the Global Intangible Low Taxed Income ("GILTI") inclusion implemented by the Act.inclusion. Therefore, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign withholding and state income taxes. In addition, we expect foreign tax credits would be available to either offset or partially reduce the tax cost in the event of a distribution. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs. Unrecognized Income Tax Benefits The Company and its subsidiaries file income tax returns in U.S. federal, various state, local and foreign jurisdictions. The following table sets forth the changes in the amount of unrecognized tax benefits for the years ended June 30, 20202023, 2022, and 2019:2021: | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| Unrecognized Income Tax Benefits at beginning of the year | $ | 4,979 |
| | $ | 3,988 |
| Current year tax positions | 105 |
| | 105 |
| Prior year tax positions | 177 |
| | 1,151 |
| Expirations of statutes of limitations | (306 | ) | | (265 | ) | Unrecognized Income Tax Benefits at end of year | $ | 4,955 |
| | $ | 4,979 |
|
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Unrecognized Income Tax Benefits at beginning of the year | $ | 4,926 | | | $ | 5,230 | | | $ | 4,955 | | Current year tax positions | 622 | | | 505 | | | 285 | | Prior year tax positions | (86) | | | (83) | | | 620 | | Expirations of statutes of limitations | (641) | | | (726) | | | (630) | | | | | | | | Unrecognized Income Tax Benefits at end of year | $ | 4,821 | | | $ | 4,926 | | | $ | 5,230 | |
The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. During 20202023, 2022, and 2019,2021, the Company recognized $256$239, $(362), and$161 $144 of expense (income), respectively, for interest and penalties related to unrecognized income tax benefits in its statements of consolidated income. The Company had a liability for penalties and interest of $1,094$1,115, $876, and $838$1,238 as of June 30, 20202023, 2022, and 2019,2021, respectively. The Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next twelve months. Included in the balance of unrecognized income tax benefits at June 30, 20202023, 2022, and 20192021 are $4,708$4,722, $4,813, and $4,701,$4,986 respectively, of income tax benefits that, if recognized, would affect the effective income tax rate. The Company is subject to U.S. federal income tax examinations for the tax years 20172019 through 20202023 and to state and local income tax examinations for the tax years 20142017 through 2020.2023. In addition, the Company is subject to foreign income tax examinations for the tax years 20132016 through 2020.2023. The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment of cash is not expected within one year, or as a reduction of a deferred tax asset.
NOTE 10: SHAREHOLDERS’ EQUITY Treasury Shares At June 30, 2020,2023, 128 shares of the Company’s common stock held as treasury shares were restricted as collateral under escrow arrangements relating to change in control and director and officer indemnification agreements. Accumulated Other Comprehensive Loss Changes in the accumulated other comprehensive loss for the years ended June 30, 2020, 2019,2023, 2022, and 2018,2021, are comprised of the following amounts, shown net of taxes: | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment |
| | Unrealized gain (loss) on securities available for sale |
| | Post-employment benefits |
| | Cash flow hedge |
| | Total accumulated other comprehensive loss |
| Balance at July 1, 2017 | $ | (79,447 | ) | | $ | 21 |
| | $ | (2,276 | ) | | $ | — |
| | $ | (81,702 | ) | Other comprehensive (loss) income | (8,549 | ) | | 20 |
| | 524 |
| | — |
| | (8,005 | ) | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (45 | ) | | — |
| | (45 | ) | Amounts reclassified for certain income tax effects to retained earnings | 22 |
| | 9 |
| | (502 | ) | | — |
| | (471 | ) | Net current-period other comprehensive (loss) income | (8,527 | ) | | 29 |
| | (23 | ) | | — |
| | (8,521 | ) | Balance at June 30, 2018 | (87,974 | ) | | 50 |
| | (2,299 | ) | | — |
| | (90,223 | ) | Other comprehensive income (loss) | 1,644 |
| | — |
| | (327 | ) | | (10,887 | ) | | (9,570 | ) | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (226 | ) | | 183 |
| | (43 | ) | Cumulative effect of adopting accounting standards | — |
| | (50 | ) | | — |
| | — |
| | (50 | ) | Net current-period other comprehensive income (loss) | 1,644 |
| | (50 | ) | | (553 | ) | | (10,704 | ) | | (9,663 | ) | Balance at June 30, 2019 | (86,330 | ) | | — |
| | (2,852 | ) | | (10,704 | ) | | (99,886 | ) | Other comprehensive loss | (18,764 | ) | | — |
| | (1,662 | ) | | (12,572 | ) | | (32,998 | ) | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (50 | ) | | 3,504 |
| | 3,454 |
| Net current-period other comprehensive loss | (18,764 | ) | | — |
| | (1,712 | ) | | (9,068 | ) | | (29,544 | ) | Balance at June 30, 2020 | $ | (105,094 | ) | | $ | — |
| | $ | (4,564 | ) | | $ | (19,772 | ) | | $ | (129,430 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | Post-employment benefits | | Cash flow hedge | | Total accumulated other comprehensive loss | Balance at July 1, 2020 | $ | (105,094) | | | $ | (4,564) | | | $ | (19,772) | | | $ | (129,430) | | Other comprehensive income | 24,256 | | | 687 | | | 2,480 | | | 27,423 | | Amounts reclassified from accumulated other comprehensive loss | — | | | 204 | | | 8,711 | | | 8,915 | | | | | | | | | | Net current-period other comprehensive income | 24,256 | | | 891 | | | 11,191 | | | 36,338 | | Balance at June 30, 2021 | (80,838) | | | (3,673) | | | (8,581) | | | (93,092) | | Other comprehensive (loss) income | (9,900) | | | 2,142 | | | 19,770 | | | 12,012 | | Amounts reclassified from accumulated other comprehensive loss | — | | | 228 | | | 8,557 | | | 8,785 | | Net current-period other comprehensive (loss) income | (9,900) | | | 2,370 | | | 28,327 | | | 20,797 | | Balance at June 30, 2022 | (90,738) | | | (1,303) | | | 19,746 | | | (72,295) | | Other comprehensive income | 7,639 | | | 1,082 | | | 13,759 | | | 22,480 | | Amounts reclassified from accumulated other comprehensive loss | — | | | 24 | | | (5,505) | | | (5,481) | | Net current-period other comprehensive income | 7,639 | | | 1,106 | | | 8,254 | | | 16,999 | | Balance at June 30, 2023 | $ | (83,099) | | | $ | (197) | | | $ | 28,000 | | | $ | (55,296) | |
Other Comprehensive LossIncome Details of other comprehensive lossincome are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | | Pre-Tax Amount | | Tax Expense (Benefit) | | Net Amount | | Pre-Tax Amount | | Tax Expense | | Net Amount | | Pre-Tax Amount | | Tax Expense | | Net Amount | Foreign currency translation adjustments | $ | 7,723 | | | $ | 84 | | | $ | 7,639 | | | $ | (9,862) | | | $ | 38 | | | $ | (9,900) | | | $ | 24,352 | | | $ | 96 | | | $ | 24,256 | | Post-employment benefits: | | | | | | | | | | | | | | | | | | Actuarial gain on re-measurement | 405 | | | 100 | | | 305 | | | 2,839 | | | 697 | | | 2,142 | | | 903 | | | 216 | | | 687 | | Reclassification of actuarial losses and prior service cost into other expense (income), net and included in net periodic pension costs | 36 | | | 12 | | | 24 | | | 300 | | | 72 | | | 228 | | | 270 | | | 66 | | | 204 | | Termination of pension plan | 1,031 | | | 254 | | | 777 | | | — | | | — | | | — | | | — | | | — | | | — | | Unrealized gain on cash flow hedge | 18,174 | | | 4,415 | | | 13,759 | | | 26,204 | | | 6,434 | | | 19,770 | | | 3,250 | | | 770 | | | 2,480 | | Reclassification of interest from cash flow hedge into interest expense | (7,285) | | | (1,780) | | | (5,505) | | | 11,361 | | | 2,804 | | | 8,557 | | | 11,553 | | | 2,842 | | | 8,711 | | | | | | | | | | | | | | | | | | | | Other comprehensive income | $ | 20,084 | | | $ | 3,085 | | | $ | 16,999 | | | $ | 30,842 | | | $ | 10,045 | | | $ | 20,797 | | | $ | 40,328 | | | $ | 3,990 | | | $ | 36,338 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2020 | | 2019 | | 2018 | | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax (Benefit) Expense |
| | Net Amount |
| Foreign currency translation adjustments | $ | (18,499 | ) | | $ | 265 |
| | $ | (18,764 | ) | | $ | 2,021 |
| | $ | 377 |
| | $ | 1,644 |
| | $ | (8,875 | ) | | $ | (326 | ) | | $ | (8,549 | ) | Post-employment benefits: | | | | | | | | | | | | | | | | | | Actuarial (loss) gain on re-measurement | (2,192 | ) | | (530 | ) | | (1,662 | ) | | (372 | ) | | (45 | ) | | (327 | ) | | 709 |
| | 185 |
| | 524 |
| Reclassification of actuarial gains and prior service cost into other income, net and included in net periodic pension costs | (66 | ) | | (16 | ) | | (50 | ) | | (306 | ) | | (80 | ) | | (226 | ) | | (73 | ) | | (28 | ) | | (45 | ) | Unrealized gain on investment securities available for sale | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 37 |
| | 17 |
| | 20 |
| Unrealized loss on cash flow hedge | (16,615 | ) | | (4,043 | ) | | (12,572 | ) | | (14,446 | ) | | (3,559 | ) | | (10,887 | ) | | — |
| | — |
| | — |
| Reclassification of interest from cash flow hedge into interest expense | 4,638 |
| | 1,134 |
| | 3,504 |
| | 244 |
| | 61 |
| | 183 |
| | — |
| | — |
| | — |
| Cumulative effect of adopting accounting standard | — |
| | — |
| | — |
| | (50 | ) | | — |
| | (50 | ) | | — |
| | — |
| | — |
| Reclassification of certain income tax effects to retained earnings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 471 |
| | (471 | ) | Other comprehensive loss | $ | (32,734 | ) | | $ | (3,190 | ) | | $ | (29,544 | ) | | $ | (12,909 | ) | | $ | (3,246 | ) | | $ | (9,663 | ) | | $ | (8,202 | ) | | $ | 319 |
| | $ | (8,521 | ) |
Net Income Per Share Basic net income per share is based on the weighted-average number of common shares outstanding. Diluted net income per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing net income per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include Restricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury stock method and the two-class method. For the years presented there were no material differences in the net income per share amounts calculated using the two methods. Accordingly, the treasury stock method is disclosed below. The following table presents amounts used in computing net income per share and the effect on the weighted-average number of shares of dilutive potential common shares: | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| Net Income | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| Average Shares Outstanding: | | | | | | Weighted-average common shares outstanding for basic computation | 38,658 |
| | 38,670 |
| | 38,752 |
| Dilutive effect of potential common shares | 341 |
| | 490 |
| | 529 |
| Weighted-average common shares outstanding for dilutive computation | 38,999 |
| | 39,160 |
| | 39,281 |
| Net Income Per Share — Basic | $ | 0.62 |
| | $ | 3.72 |
| | $ | 3.65 |
| Net Income Per Share — Diluted | $ | 0.62 |
| | $ | 3.68 |
| | $ | 3.61 |
|
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Net Income | $ | 346,739 | | | $ | 257,414 | | | $ | 144,757 | | Average Shares Outstanding: | | | | | | Weighted-average common shares outstanding for basic computation | 38,592 | | | 38,471 | | | 38,758 | | Dilutive effect of potential common shares | 628 | | | 634 | | | 538 | | Weighted-average common shares outstanding for dilutive computation | 39,220 | | | 39,105 | | | 39,296 | | Net Income Per Share — Basic | $ | 8.98 | | | $ | 6.69 | | | $ | 3.73 | | Net Income Per Share — Diluted | $ | 8.84 | | | $ | 6.58 | | | $ | 3.68 | |
Stock awards relating to 726, 22684, 106 and 66234 shares of common stock were outstanding at June 30, 2020, 20192023, 2022 and 2018,2021, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive. NOTE 11: SHARE-BASED COMPENSATION Share-Based Incentive Plans Following approval by the Company's shareholders in October 2019, the 2019 Long-Term Performance Plan (the "2019 Plan") replaced the 2015 Long-Term Performance Plan. The 2019 Plan, which expires in 2024, provides for granting of SARs, stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or, in the case of director awards, the Corporate Governance & Sustainability Committee of the Board of Directors (together referred to as the Committee) may determine to officers, other key employees and members of the Board of Directors. Grants are generally made at regularly scheduled committee meetings. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below: | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| SARs and options | $ | 2,954 |
| | $ | 2,440 |
| | $ | 1,961 |
| Performance shares | 854 |
| | 2,082 |
| | 2,006 |
| Restricted stock and RSUs | 3,146 |
| | 2,391 |
| | 2,660 |
| Total compensation costs under award programs | $ | 6,954 |
| | $ | 6,913 |
| | $ | 6,627 |
|
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | SARs | $ | 2,785 | | | $ | 3,284 | | | $ | 2,526 | | Performance shares | 5,302 | | | 4,549 | | | 2,494 | | Restricted stock and RSUs | 4,274 | | | 4,009 | | | 3,960 | | Total compensation costs under award programs | $ | 12,361 | | | $ | 11,842 | | | $ | 8,980 | |
Such amounts are included in selling, distribution and administrative expense in the accompanying statements of consolidated income. The total income tax benefit recognized in the statements of consolidated income for share-based compensation plans was $2,189, $2,709$7,886, $5,105, and $1,923$6,649 for fiscal years 2020, 20192023, 2022, and 2018,2021, respectively. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with shares.
The aggregate unrecognized compensation cost for share-based award programs with the potential to be paid at June 30, 20202023 is summarized in the table below: | | | | | | | June 30, | 2020 |
| | Average Expected Period of Expected Recognition (Years) | SARs and options | $ | 4,113 |
| | 2.2 | Performance shares | 4,580 |
| | 1.8 | Restricted stock and RSUs | 3,028 |
| | 2.1 | Total unrecognized compensation costs under award programs | $ | 11,721 |
| | 2.0 |
| | | | | | | | | | | | June 30, | 2023 | | Average Expected Period of Expected Recognition (Years) | SARs | $ | 3,267 | | | 2.7 | Performance shares | 5,694 | | | 1.7 | Restricted stock and RSUs | 4,036 | | | 1.8 | Total unrecognized compensation costs under award programs | $ | 12,997 | | | 2.0 |
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.0 years. The aggregate number of shares of common stock which may be awarded under the 2019 Plan is 2,250; shares available for future grants at June 30, 20202023 were 2,221.1,653. Stock Appreciation Rights and Stock Options The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2020, 2019
2023, 2022 and 20182021 are: | | | | | | | | | | | 2020 |
| | 2019 |
| | 2018 |
| Expected life, in years | 6.2 |
| | 6.0 |
| | 6.0 |
| Risk free interest rate | 1.6 | % | | 2.8 | % | | 2.1 | % | Dividend yield | 2.3 | % | | 1.8 | % | | 2.5 | % | Volatility | 23.7 | % | | 22.5 | % | | 24.3 | % | Per share fair value of SARs granted during the year | $10.12 | | $16.15 | | $11.25 |
| | | | | | | | | | | | | | | | | | | 2023 | | 2022 | | 2021 | Expected life, in years | 6.2 | | 6.4 | | 7.0 | Risk free interest rate | 2.9 | % | | 1.0 | % | | 0.5 | % | Dividend yield | 1.3 | % | | 1.5 | % | | 1.9 | % | Volatility | 35.5 | % | | 34.3 | % | | 32.0 | % | Per share fair value of SARs granted during the year | $35.98 | | $26.18 | | $17.97 |
The expected life is based upon historical exercise experience of the officers, other key employees and members of the Board of Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds with remaining terms equal to the expected life of the SARs and stock options.SARs. The assumed dividend yield has been estimated based upon the Company’s historical results and expectations for changes in dividends
and stock prices. The volatility assumption is calculated based upon historical daily price observations of the Company’s common stock for a period equal to the expected life. SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be settled by the holder with cash or by tendering Company common stock. A summary of SARs and stock options activity is presented below: | | | | | | | | | Shares |
| | Weighted-Average Exercise Price |
| Year Ended June 30, 2020 | | (Shares in thousands) | | Outstanding, beginning of year | 1,479 |
| | $ | 49.42 |
| Granted | 296 |
| | 54.20 |
| Exercised | (139 | ) | | 39.06 |
| Forfeited | (16 | ) | | 60.64 |
| Outstanding, end of year | 1,620 |
| | $ | 51.07 |
| Exercisable at end of year | 996 |
| | $ | 46.10 |
| Expected to vest at end of year | 1,607 |
| | $ | 51.01 |
|
| | | | | | | | | | | | | Shares | | Weighted-Average Exercise Price | Year Ended June 30, 2023 | | (Shares in thousands) | | Outstanding, beginning of year | 965 | | | $ | 61.85 | | Granted | 112 | | | 104.33 | | Exercised | (257) | | | 53.84 | | Forfeited | (4) | | | 77.65 | | Outstanding, end of year | 816 | | | $ | 70.11 | | Exercisable at end of year | 537 | | | $ | 62.64 | | Expected to vest at end of year | 810 | | | $ | 69.90 | |
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and expected to vest at June 30, 20202023 were 6.0, 4.7,5.0, and 6.0 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and expected to vest at June 30, 20202023 were $20,862 $16,795,$60,964 $44,125, and $20,780,$60,689, respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2020, 2019,2023, 2022, and 20182021 was $3,460, $3,363,$20,170, $17,015, and $1,765,$21,189, respectively. The total fair value of shares vested during fiscal 2020, 2019,2023, 2022, and 20182021 was $2,285, $1,846,$2,691, $2,341, and $2,149,$2,880, respectively.
Performance Shares Performance shares are paid in shares of Applied stock at the end of a three-year period provided the Company achieves goals established by the Committee. The number of Applied shares payable will vary depending on the level of the goals achieved. A summary of non-vested performance shares activity at June 30, 20202023 is presented below: | | | | | | | | | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Year Ended June 30, 2020 | | (Shares in thousands) | | Non-vested, beginning of year | 97 |
| | $ | 50.88 |
| Awarded | 17 |
| | 52.86 |
| Vested | (58 | ) | | 47.87 |
| Non-vested, end of year | 56 |
| | $ | 54.62 |
|
| | | | | | | | | | | | | Shares | | Weighted-Average Grant-Date Fair Value | Year Ended June 30, 2023 | | (Shares in thousands) | | Non-vested, beginning of year | 131 | | | $ | 58.27 | | Awarded | 73 | | | 74.10 | | Forfeitures | (2) | | | 62.43 | | Vested | (43) | | | 53.63 | | Non-vested, end of year | 159 | | | $ | 96.37 | |
The Committee set three one-year goals for each of the 2020, 2019,2023, 2022, and 20182021 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. For the outstanding grants as of June 30, 2020,2023, the maximum number of shares that could be earned in future periods was 79. 65.
Restricted Stock and Restricted Stock Units RestrictedUnder the 2019 Plan, restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective shares, but are restricted from selling or transferring the shares prior to vesting; dividends are accrued and paid upon vesting. Restricted stock awards vest over periods of one to four years. RSUs are grants valued in shares of Applied stock, but shares are not issued until the grants vest three to five years from the award date, assuming continued employment with Applied. Applied primarily paysApplied; dividend equivalents on RSUs on a current basis, however dividend equivalents on RSU grants under the 2019 Plan will beare accrued and paid upon vesting.
A summary of the status of the Company’s non-vested restricted stock and RSUs at June 30, 20202023 is presented below: | | | | | | | | | | | | | Shares | | Weighted-Average Grant-Date Fair Value | Year Ended June 30, 2023 | | (Share amounts in thousands) | | Non-vested, beginning of year | 177 | | | $ | 69.23 | | Granted | 37 | | | 108.60 | | Forfeitures | (5) | | | 76.91 | | Vested | (66) | | | 60.02 | | Non-vested, end of year | 143 | | | $ | 83.35 | |
| | | | | | | | | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Year Ended June 30, 2020 | | (Share amounts in thousands) | | Non-vested, beginning of year | 89 |
| | $ | 59.93 |
| Granted | 81 |
| | 56.74 |
| Vested | (40 | ) | | 53.60 |
| Non-vested, end of year | 130 |
| | $ | 59.91 |
|
NOTE 12: LEASES The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, distribution and administrative expense on the statements of consolidated income. Operating lease costs and short-term lease costs were $33,152$35,982 and $10,581$9,153, respectively, for the year ended June 30, 2020, respectively. Rental expense incurred for operating leases under ASC Topic 840, Leases, was $45,0002023 and $34,144 and $7,501, respectively, for the year ended June 30, 2019.2022. Variable lease costs and sublease income were not material. Information related to operating leases is as follows: | | | | | | | | | | | | | | | June 30, | | 2023 | | 2022 | Operating lease assets, net | | $ | 100,677 | | | $ | 108,052 | | | | | | | Operating lease liabilities | | | | | Other current liabilities | | $ | 31,173 | | | $ | 30,114 | | Other liabilities | | 72,704 | | | 80,807 | | Total operating lease liabilities | | $ | 103,877 | | | $ | 110,921 | |
| | | | | | June 30, | | 2020 |
| Operating lease assets, net | | $ | 90,636 |
| | | | Operating lease liabilities | | | Other current liabilities | | $ | 27,231 |
| Other liabilities | | 67,926 |
| Total operating lease liabilities | | $ | 95,157 |
|
| | | | | | | | | | | | | | | June 30, | | 2023 | | 2022 | Weighted average remaining lease term (years) | | 4.9 | | 5.5 | Weighted average incremental borrowing rate | | 3.67 | % | | 2.92 | % |
| | | | | | | | | | | | | | | Year Ended June 30, | | 2023 | | 2022 | Cash paid for operating leases | | $ | 35,545 | | | $ | 35,313 | | Right of use assets obtained in exchange for new operating lease liabilities | | $ | 30,605 | | | $ | 50,743 | |
| | | | | June 30, | | 2020 |
| Weighted average remaining lease term (years) | | 3.6 |
| Weighted average incremental borrowing rate | | 3.45 | % |
| | | | | | Year Ended June 30, | | 2020 |
| Cash paid for operating leases | | $ | 34,642 |
| Right of use assets obtained in exchange for new operating lease liabilities | | $ | 39,136 |
|
The table below summarizes the aggregate maturities of liabilities pertaining to operating leases with terms greater than one year for each of the next five years: | | | | | | Fiscal Year | Maturity of Operating Lease Liabilities | 2024 | $ | 34,235 | | 2025 | 25,253 | | 2026 | 19,742 | | 2027 | 14,230 | | 2028 | 8,416 | | Thereafter | 11,375 | | Total lease payments | 113,251 | | Less interest | 9,374 | | Present value of lease liabilities | $ | 103,877 | |
| | | | | Fiscal Year | Maturity of Operating Lease Liabilities |
| 2021 | $ | 29,979 |
| 2022 | 22,900 |
| 2023 | 16,428 |
| 2024 | 12,842 |
| 2025 | 6,698 |
| Thereafter | 15,318 |
| Total lease payments | 104,165 |
| Less interest | 9,008 |
| Present value of lease liabilities | $ | 95,157 |
|
The table below summarizes the future minimum annual rental commitments for operating leases accounted for in accordance with ASC Topic 840, Leases, as of June 30, 2019:
| | | | | Fiscal Year | Operating Leases |
| 2020 | $ | 33,707 |
| 2021 | 23,407 |
| 2022 | 16,420 |
| 2023 | 10,653 |
| 2024 | 7,838 |
| Thereafter | 12,135 |
| Total minimum lease payments | $ | 104,160 |
|
The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $2,500$1,500 in 20202023, and $2,400$2,100 in both 2019each of 2022 and 2018, respectively.2021. NOTE 13: SEGMENT INFORMATION The Company's reportable segments are: Service Center Based Distribution and Engineered Solutions (formerly known as Fluid Power & Flow Control.Control). The Company changed the reportable segment name to Engineered Solutions in the first quarter of fiscal 2023. There was no change in the composition of either reportable segment. These reportable segments contain the Company's various operating segments which have been aggregated based upon similar economic and operating characteristics. The Service Center Based Distribution segment operates through local service centers and distribution centers with a focus on providing products and services addressing the maintenance and repair of motion control infrastructure and production equipment. Products primarily include industrial bearings, motors, belting, drives, couplings, pumps, linear motion products, hydraulic and pneumatic components, filtration supplies, and hoses, as well as other related supplies for general operational needs of
customers’ machinery and equipment. The Fluid Power & Flow ControlEngineered Solutions segment includes our operations that specialize in distributing, engineering, designing, integrating, and repairing hydraulic and pneumatic fluid power technologies, and engineered flow control products and services. This segment also includes our operations that focus on advanced automation solutions including machine vision, robotics, motion control, and smart technologies. The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power & Flow ControlEngineered Solutions segment to the Service Center Based Distribution segment of $29,582, $28,677,$48,450, $37,163, and $25,556,$31,615, in 2020, 2019,2023, 2022, and 2018,2021, respectively, have been eliminated in the following table.
Segment Financial Information | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Year Ended June 30, 2020 | | | | | | Net sales | $ | 2,241,949 |
| | $ | 1,003,703 |
| | $ | 3,245,652 |
| Operating income for reportable segments | 211,667 |
| | 109,847 |
| | 321,514 |
| Assets used in the business | 1,314,011 |
| | 969,540 |
| | 2,283,551 |
| Depreciation and amortization of property | 17,133 |
| | 4,063 |
| | 21,196 |
| Capital expenditures | 17,063 |
| | 3,052 |
| | 20,115 |
| Year Ended June 30, 2019 | | | | | | Net sales | $ | 2,452,905 |
| | $ | 1,019,834 |
| | $ | 3,472,739 |
| Operating income for reportable segments | 254,954 |
| | 112,117 |
| | 367,071 |
| Assets used in the business | 1,265,093 |
| | 1,066,604 |
| | 2,331,697 |
| Depreciation and amortization of property | 15,982 |
| | 4,254 |
| | 20,236 |
| Capital expenditures | 16,475 |
| | 2,495 |
| | 18,970 |
| Year Ended June 30, 2018 | | | | | | Net sales | $ | 2,346,418 |
| | $ | 726,856 |
| | $ | 3,073,274 |
| Operating income for reportable segments | 238,322 |
| | 83,175 |
| | 321,497 |
| Assets used in the business | 1,198,296 |
| | 1,087,445 |
| | 2,285,741 |
| Depreciation and amortization of property | 15,336 |
| | 2,462 |
| | 17,798 |
| Capital expenditures | 18,492 |
| | 4,738 |
| | 23,230 |
|
| | | | | | | | | | | | | | | | | | | Service Center Based Distribution | | Engineered Solutions | | Total | Year Ended June 30, 2023 | | | | | | Net sales | $ | 2,966,842 | | | $ | 1,445,952 | | | $ | 4,412,794 | | Operating income for reportable segments | 373,439 | | | 203,404 | | | 576,843 | | Assets used in the business | 1,736,393 | | | 1,006,939 | | | 2,743,332 | | Depreciation and amortization of property | 17,932 | | | 4,334 | | | 22,266 | | Capital expenditures | 15,390 | | | 11,086 | | | 26,476 | | Year Ended June 30, 2022 | | | | | | Net sales | $ | 2,565,604 | | | $ | 1,245,072 | | | $ | 3,810,676 | | Operating income for reportable segments | 301,881 | | | 156,644 | | | 458,525 | | Assets used in the business | 1,455,293 | | | 997,295 | | | 2,452,588 | | Depreciation and amortization of property | 17,509 | | | 4,167 | | | 21,676 | | Capital expenditures | 14,486 | | | 3,638 | | | 18,124 | | Year Ended June 30, 2021 | | | | | | Net sales | $ | 2,199,533 | | | $ | 1,036,386 | | | $ | 3,235,919 | | Operating income for reportable segments | 225,206 | | | 121,782 | | | 346,988 | | Assets used in the business | 1,332,720 | | | 939,087 | | | 2,271,807 | | Depreciation and amortization of property | 17,155 | | | 3,625 | | | 20,780 | | Capital expenditures | 13,735 | | | 2,117 | | | 15,852 | |
A reconciliation of operating income for reportable segments to the consolidated income before income taxes is as follows: | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| Operating income for reportable segments | $ | 321,514 |
| | $ | 367,071 |
| | $ | 321,497 |
| Adjustments for: | | | | | | Intangible amortization — Service Center Based Distribution | 12,385 |
| | 13,639 |
| | 17,375 |
| Intangible amortization — Fluid Power & Flow Control | 29,168 |
| | 28,244 |
| | 14,690 |
| Intangible Impairment — Service Center Based Distribution | — |
| | 31,594 |
| | — |
| Goodwill Impairment — Fluid Power & Flow Control | 131,000 |
| | — |
| | — |
| Corporate and other expense, net | 59,972 |
| | 59,806 |
| | 63,605 |
| Total operating income | 88,989 |
| | 233,788 |
| | 225,827 |
| Interest expense, net | 36,535 |
| | 40,188 |
| | 23,485 |
| Other income, net | (2,782 | ) | | (881 | ) | | (2,376 | ) | Income before income taxes | $ | 55,236 |
| | $ | 194,481 |
| | $ | 204,718 |
|
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Operating income for reportable segments | $ | 576,843 | | | $ | 458,525 | | | $ | 346,988 | | Adjustments for: | | | | | | Intangible amortization — Service Center Based Distribution | 2,857 | | | 3,435 | | | 5,426 | | Intangible amortization — Engineered Solutions | 27,948 | | | 28,444 | | | 28,938 | | Impairment — Service Center Based Distribution | — | | | — | | | 49,528 | | | | | | | | Corporate and other expense, net | 72,887 | | | 68,788 | | | 57,642 | | Total operating income | 473,151 | | | 357,858 | | | 205,454 | | Interest expense, net | 21,639 | | | 26,263 | | | 30,592 | | Other expense (income), net | 1,701 | | | 1,805 | | | (2,200) | | Income before income taxes | $ | 449,811 | | | $ | 329,790 | | | $ | 177,062 | |
Fluctuations in corporate and other expense, net, are due to changes in corporate expenses, as well as in the amounts and levels of certain expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.
Geographic Information Long-lived assets are based on physical locations and are comprised of the net book value of property intangible assets and right of use assets. Information by geographic area is as follows: | | | | | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | 2018 |
| Long-Lived Assets: | | | | | | United States | $ | 523,739 |
| | $ | 474,910 |
| | $ | 501,373 |
| Canada | 23,865 |
| | 13,291 |
| | 50,261 |
| Other Countries | 8,148 |
| | 4,968 |
| | 5,656 |
| Total | $ | 555,752 |
| | $ | 493,169 |
| | $ | 557,290 |
|
| | | | | | | | | | | | | | | | | | June 30, | 2023 | | 2022 | | 2021 | Long-Lived Assets: | | | | | | United States | $ | 176,025 | | | $ | 178,522 | | | $ | 173,335 | | Canada | 29,817 | | | 31,728 | | | 21,458 | | Other Countries | 9,876 | | | 9,698 | | | 7,907 | | Total | $ | 215,718 | | | $ | 219,948 | | | $ | 202,700 | |
NOTE 14: COMMITMENTS AND CONTINGENCIES The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company does not expect that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. NOTE 15: OTHER INCOME,EXPENSE (INCOME), NET Other income,expense (income), net, consists of the following: | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (458 | ) | | $ | (689 | ) | | $ | (785 | ) | Foreign currency transaction (gains) losses | (2,463 | ) | | 334 |
| | (210 | ) | Net other periodic post-employment (benefits) costs | (120 | ) | | (85 | ) | | 245 |
| Life insurance expense (income), net | 233 |
| | (479 | ) | | (1,628 | ) | Other, net | 26 |
| | 38 |
| | 2 |
| Total other income, net | $ | (2,782 | ) | | $ | (881 | ) | | $ | (2,376 | ) |
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Unrealized (gain) loss on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (2,223) | | | $ | 2,612 | | | $ | (4,048) | | Foreign currency transaction losses (gains) | 3,284 | | | (65) | | | 2,091 | | Net other periodic post-employment costs | 1,470 | | | 610 | | | 283 | | Life insurance income, net | (668) | | | (1,374) | | | (296) | | Other, net | (162) | | | 22 | | | (230) | | Total other expense (income), net | $ | 1,701 | | | $ | 1,805 | | | $ | (2,200) | |
NOTE 16: SUBSEQUENT EVENTS We have evaluated events and transactions occurring subsequent to June 30, 20202023 through the date the financial statements were issued.
QUARTERLY OPERATING RESULTS
(In thousands, except per share amounts)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Per Common Share | | Net Sales |
| | Gross Profit |
| | Operating Income (loss) |
| | Net Income (loss) |
| | Net Income (loss) |
| | Cash Dividend |
| 2020 | | | | | | | | | | | | First Quarter | $ | 856,404 |
| | $ | 251,460 |
| | $ | 61,166 |
| | $ | 38,799 |
| | $ | 1.00 |
| | $ | 0.31 |
| Second Quarter | 833,375 |
| | 241,234 |
| | 58,745 |
| | 38,031 |
| | 0.97 |
| | 0.31 |
| Third Quarter | 830,797 |
| | 236,752 |
| | (77,950 | ) | | (82,777 | ) | | (2.14 | ) | | 0.32 |
| Fourth Quarter | 725,076 |
| | 208,290 |
| | 47,028 |
| | 29,989 |
| | 0.77 |
| | 0.32 |
| | $ | 3,245,652 |
| | $ | 937,736 |
| | $ | 88,989 |
| | $ | 24,042 |
| | $ | 0.62 |
| | $ | 1.26 |
| 2019 | | | | | | | | | | | | First Quarter | $ | 864,515 |
| | $ | 251,853 |
| | $ | 66,339 |
| | $ | 48,938 |
| | $ | 1.24 |
| | $ | 0.30 |
| Second Quarter | 840,038 |
| | 242,860 |
| | 60,965 |
| | 38,717 |
| | 0.99 |
| | 0.30 |
| Third Quarter | 885,443 |
| | 255,559 |
| | 34,509 |
| | 16,535 |
| | 0.42 |
| | 0.31 |
| Fourth Quarter | 882,743 |
| | 257,351 |
| | 71,975 |
| | 39,803 |
| | 1.02 |
| | 0.31 |
| | $ | 3,472,739 |
| | $ | 1,007,623 |
| | $ | 233,788 |
| | $ | 143,993 |
| | $ | 3.68 |
| | $ | 1.22 |
|
On August 7, 2020, there were 3,742 shareholdersThe sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the number of weighted shares outstanding and the effects of rounding for each period.
Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are primarily made based on periodic physical inventory and the effect of year-end inventory quantities on LIFO costs.
Fiscal 2020
The decline in net sales in the third and fourth quarters of fiscal 2020 is due to slowness in key end markets largely attributable to the impact of the COVID-19 pandemic.
During the first quarter of fiscal 2020, the Company adopted ASC 842 – accounting for leases. Adoption of the new standard resulted in the recognition of right-of-use assets and lease liabilities of $83.5 million and $89.8 million, respectively, on July 1, 2019. In addition, the adoption resulted in an adjustment to opening retained earnings of approximately $3.3 million, net of tax, on July 1, 2019.
During the first quarter of fiscal 2020, the Company acquired 100% of the outstanding shares of Olympus Controls, a Portland, Oregon based full-service provider of innovative technologies and complete engineered solutions for original equipment manufacturers, machine builders, integrators, and end users. Olympus Controls is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $36.6 million.
During the third quarter of fiscal 2020, the Company recognized a non-cash goodwill impairment charge of $131.0 million related to the operations of FCX Performance, Inc. (FCX) within the Company's Fluid Power & Flow Control segment.
During the third quarter of fiscal 2020, the Company incurred certain non-routine charges primarily related to its U.S. operations in the Service Center Based Distribution segment. Total non-routine charges reduced gross profit by $3.9 million, increased the operating loss by $6.0 million, and increased the quarter net loss by $3.6 million.
Fiscal 2019
During the third quarter of fiscal 2019, the Company acquired substantially all of the net assets of MilRoc Distribution and Woodward Steel for a purchase price of $35.0 million. MilRoc Distribution is an Oklahoma based distributor of oilfield specific products, namely pumps and valves, as well as equipment repair services and industrial trailer parts to the oil & gas industry. Woodward Steel is a Woodward, Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc Distribution and Woodward steel are both included in the Service Center Based Distribution segment.
During the third quarter of fiscal 2019, the Company incurred certain restructuring charges primarily for oil & gas operations. Total restructuring charges reduced gross profit for the quarter by $0.7 million and operating income by $2.3 million.
During the third quarter of fiscal 2019, the Company performed an impairment analysis for certain long-lived intangible assets related to the Company's upstream oil & gas operations in Canada as a result of the continued decline in the oil & gas industry in Western Canada. As a result of this test, the Company determined that the net book values of these long-lived intangible assets were impaired and recognized a non-cash impairment charge of $31.6 million. The Company also recorded a valuation allowance against its Canadian deferred tax assets of $3.8 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures The Company's management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective. Management's Report on Internal Control over Financial Reporting The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President & Chief Executive Officer and the Vice President - Chief Financial Officer, Treasurer, & Treasurer,Principal Accounting Officer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s Management and Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of inherent limitations, internal control over financial reporting can provide only reasonable, not absolute, assurance with respect to the preparation and presentation of the consolidated financial statements and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2020.2023. This evaluation was based on the criteria set forth in the framework "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management determined that the Company’s internal control over financial reporting was effective as of June 30, 2020.2023. The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein. | | | | | | | | | /s/ Neil A. Schrimsher | | /s/ David K. Wells | President & Chief Executive Officer | | Vice President - Chief Financial Officer, Treasurer, & TreasurerPrincipal Accounting Officer |
August 14, 202011, 2023
Changes in Internal Control Over Financial Reporting There have not been any changes in internal control over financial reporting during the quarter ended June 30, 20202023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. As a result
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2020,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2020,2023, of the Company and our report dated August 14, 2020,11, 2023, expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Company's adoption of the FASB's new standard related to leases.statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP
Cleveland, Ohio August 14, 202011, 2023
ITEM 9B. OTHER INFORMATION. During the fiscal quarter ended June 30, 2023, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement" (in each case, as defined in Item 408 of Regulation S-K). ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this Item as to Applied's directors is incorporated by reference to Applied's proxy statement relating to the annual meeting of shareholders to be held October 27, 2020,24, 2023, under the caption “Item 1 - Election of Directors.” The information required by this Item as to Applied's executive officers has been furnished in this report in Part I, after Item 4, under the caption “Information about our Executive Officers.” The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to Applied's proxy statement, under the caption “Delinquent Section 16(a) Reports." Applied has a code of ethics, named theApplied’s Code of Business Ethics that applies to our employees, including our principal executive officer, principal financial officer, and principal accounting officer. The Code of Business Ethics is posted via hyperlink at the investor relations area of our www.applied.com website. In addition, amendments to and waivers from the Code of Business Ethics will be disclosed promptly at the same location.
Applied has adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of Applied's securities by directors, officers, and employees. Information regarding the composition of Applied’s audit committee and the identification of audit committee financial experts serving on the audit committee is incorporated by reference to Applied's proxy statement, under the caption “Corporate Governance.”
ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020,24, 2023, under the captions "Director Compensation," “Executive Compensation”Compensation,” "Compensation Committee Interlocks and Insider Participation," and “Compensation Committee Report.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Equity compensation plan information is incorporated herein by reference to Applied's proxy statement for the annual meeting of shareholders have approvedto be held October 24, 2023, under the following equity compensation plans: the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2019 Long-Term Performance Plan, the Deferredcaption "Equity Compensation Plan (no active employees participate in the plan), and the Deferred Compensation Plan for Non-Employee Directors (two active directors participate in the plan). All of these plans are currently in effect. The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied asInformation (as of June 30, 2020.2023)".
| | | | | | | | | | | | | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | Equity compensation plans approved by security holders | 1,606,961 |
| | | $51.01 | | * | Equity compensation plans not approved by security holders | — |
| | | — |
| | | — |
| | Total | 1,606,961 |
| | | $51.01 |
| * |
| | * | The 2019 Long-Term Performance Plan was adopted in October 2019 to replace the 2015 Long-Term Performance Plan and, similarly, the 2015 Long-Term Performance Plan replaced the 2011 Long-Term Performance Plan, which itself had replaced the 2007 Long-Term Performance Plan. Stock options, stock appreciation rights, and other awards remain outstanding under the 2007, 2011, and 2015 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 2019 Long-Term Performance Plan at June 30, 2020 was 2,221,129. |
Information concerning the security ownership of certain beneficial owners and management is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020,24, 2023, under the caption “Holdings of Major Shareholders, Officers, and Directors.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020,24, 2023, under the caption “Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The informationPrincipal accountant, Deloitte & Touche LLP (PCAOB ID No. 34), fees and services required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020,24, 2023, under the caption “Item 35 - Ratification of Auditors.”
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE. (a)1. Financial Statements. The following consolidated financial statements, notes thereto, the reports of independent registered public accounting firm, and supplemental data are included in Item 8 of this report: | | | | | | | | | • | Report of Independent Registered Public Accounting Firm | | | | • | Statements of Consolidated Income for the Years Ended June 30, 2020, 2019,2023, 2022, and 20182021 | | | | • | Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2020, 2019,2023, 2022, and 20182021 | | | | • | Consolidated Balance Sheets at June 30, 20202023 and 20192022 | | | | • | Statements of Consolidated Cash Flows for the Years Ended June 30, 2020, 2019,2023, 2022, and 20182021 | | | | • | Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2020, 2019,2023, 2022, and 20182021 | | | | • | Notes to Consolidated Financial Statements for the Years Ended June 30, 2020, 2019,2023, 2022, and 20182021 | | | | • | Supplementary Data: | | | | | • | Quarterly Operating Results |
(a)2. Financial Statement Schedule. The following schedule is included in this Part IV, and is found in this report at the page indicated: | | | | | | | | | | Page No. | | | | | Page No. | | | | | Schedule II - Valuation and Qualifying Accounts: Pg. 7266 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto. (a)3. Exhibits. | | | | | | | | | | | | * Asterisk indicates an executive compensation plan or arrangement. | | | Exhibit No. | Description | | | | | | | 3.1 | | | | | | | | 3.2 | | | | | | | | 4.1 | | | | | | | | 4.2 | | | | | | | | 4.3 | Request forAmendment No. 1 to Amended and Restated Note Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as amended,of March 26, 2021 between Applied Industrial Technologies, Inc. and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), and certain of its affiliates (filed as Exhibit 10.14.3 to Applied’sApplied's Form 8-K filed July 2, 2014,10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference). | | |
| | | | | 4.4 | Request forAmendment No. 2 to Amended and Restated Note Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement, dated November 27, 1996, as amended,of December 9, 2021, between Applied Industrial Technologies, Inc. and Prudential Investment Management,PGIM, Inc. (filed as Exhibit 4.510.2 to Applied'sthe Company's Form 10-Q for the quarter ended September 30, 2014,8-K filed December 14, 2021, SEC File No. 1-2299, and incorporated here by reference). | | | | | | |
| | | | | | | | | | | | 4.5 | | | | | | | | 4.6 | Credit Agreement dated as of January 31, 2018,December 9, 2021, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 10.1 to Applied'sthe Company's Form 8-K filed February 6, 2018,December 14, 2021, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.64.7 | | | | | | | | 4.8 | Receivables Financing Agreement dated as of August 31, 2018, among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.1 to the Company'sApplied's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.74.9 | Amendment No. 1 to Receivables Financing Agreement and Reaffirmation of Performance Guaranty dated as of March 26, 2021 among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.2 to Applied's Form 8-K filed March 29, 2021, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.10 | Amendment No. 2 to Receivables Financing Agreement and Reaffirmation of Performance Guaranty, dated as of May 12, 2023, by and among AIT Receivables, LLC, Applied Industrial Technologies, Inc., PNC Bank, National Association, Regions Bank, and PNC Capital Markets LLC. | | | | | | | 4.11 | Purchase and Sale Agreement dated as of August 31, 2018 among various entities listed on Schedule I thereto (including Applied Industrial Technologies, Inc.), as originators, Applied Industrial Technologies, Inc., as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to Applied's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.12 | Amendment No. 1 to Purchase and Sale Agreement dated as of November 19, 2018 among Applied Industrial Technologies, Inc. and various of its affiliates, as originators, Applied Industrial Technologies, Inc., as servicer, and AIT Receivables LLC, as buyer(filed as Exhibit 4.10 to Applied's Form 10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.13 | Amendment No. 2 to Purchase and Sale Agreement dated as of March 26, 2021, among various entities listed on Schedule 1 thereto (including Applied Industrial Technologies, Inc.), as originators, Applied Industrial Technologies, Inc, as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to Applied's Form 8-K filed March 29, 2021, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.14 | Description of Applied's securities.securities (filed as Exhibit 4.7 to Applied's Form 10-K for the year ended June 30, 2020, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.15 | Amendment No. 3 to Receivables Financing Agreement and Reaffirmation of Performance Guaranty dated as of August 6, 2023 among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent, and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.1 to Applied’s Form 8-K filed August 9, 2023, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.16 | Amendment No. 3 to Purchase and Sale Agreement dated as of August 4, 2023 among various entities listed on Schedule I thereto (including Applied Industrial Technologies, Inc.), as originators, Applied Industrial Technologies, Inc., as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to Applied’s Form 8-K filed August 9, 2023, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | *10.1 | A written description of Applied's director compensation program is incorporated by reference to Applied’s proxy statement for the annual meeting of shareholders to be held October 27, 202024, 2023 under the caption “Director Compensation.” | | | | | | | *10.2 | | | | *10.3 | | | | | | | | *10.410.3 | | | | | | | | *10.510.4 | | | | | | | | *10.610.5 | | | | *10.7 | | | | *10.8 | | | | | | | |
| | | | | | | | | | | | *10.910.6 | | | | | | | | *10.1010.7 | | | | | | | | *10.1110.8 | | | | | | | | *10.1210.9 | | | | | | | | *10.1310.10 | | | | | | | | *10.1410.11 | | | | | | | | *10.1510.12 | | | | | | | | *10.1610.13 | | | | | | | | *10.14 | | | | | | | | *10.15 | | | | | | | | *10.16 | | | | | | | | *10.17 | | | |
| | | | | *10.18 | | | | | | | | *10.19 | | | | | | | | *10.20 | | | | | | | | *10.21 | | | | | | | | *10.22 | | | | | | | | *10.23 | | | | | | | | *10.24 | | | | | | | | *10.25 | | | | | | | | *10.26 | | | | | | | | *10.27 | | | | | | | |
| | | | | | | | | | | | *10.28 | | | | | | | | *10.2710.29 | | | | | | | | *10.2810.30 | | | | | | | | *10.2910.31 | | | | *10.30 | | | | | | | | *10.3110.32 | | | | | | | | *10.3210.33 | | | | | | | | *10.3310.34 | | | | | | | | 2119 | | | | | | | | 21 | | | | | | | | 23 | | | | | | | | 24 | | | | | | | | 31 | | | | | | | | 32 | | | | | | | | 95 | | | | 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | |
| | | 101.SCH | XBRL Taxonomy Extension Schema Document | 101 | The following financial information from Applied Industrial Technologies, Inc.'s Annual Report on Form 10-K for the year ended June 30, 2023, formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Statements of Consolidated Income, (ii) the Statements of Consolidated Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Statements of Consolidated Cash Flows, (v) the Statements of Consolidated Shareholders' Equity, and (vi) the Notes to the Consolidated Financial Statements. | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | 104 | | 101.DEFCover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | XBRL Taxonomy Extension Definition Linkbase Document | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Applied will furnish a copy of any exhibit described above and not contained herein upon payment of a specified reasonable fee, which shall be limited to Applied's reasonable expenses in furnishing the exhibit. Certain instruments with respect to long-term debt have not been filed as exhibits because the total amount of securities authorized under any one of the instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each such instrument.
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2020, 2019,2023, 2022, AND 20182021 (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | DESCRIPTION | | Balance at Beginning of Period | | Additions Charged to Cost and Expenses | | Additions (Deductions) Charged to Other Accounts | | | Deductions from Reserve | | | Balance at End of Period | Year Ended June 30, 2023 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 17,522 | | | $ | 5,619 | | | $ | — | | | | $ | 807 | | (B) | | $ | 22,334 | | Returns reserve | | 10,522 | | | — | | | 2,113 | | (A) | | — | | | | 12,635 | | | | $ | 28,044 | | | $ | 5,619 | | | $ | 2,113 | | | | $ | 807 | | | | $ | 34,969 | | Year Ended June 30, 2022 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 16,455 | | | $ | 3,193 | | | $ | — | | | | $ | 2,126 | | (B) | | $ | 17,522 | | Returns reserve | | 9,772 | | | — | | | 750 | | (A) | | — | | | | 10,522 | | | | $ | 26,227 | | | $ | 3,193 | | | $ | 750 | | | | $ | 2,126 | | | | $ | 28,044 | | Year Ended June 30, 2021 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 13,661 | | | $ | 6,540 | | | $ | — | | | | $ | 3,746 | | (B) | | $ | 16,455 | | Returns reserve | | 9,883 | | | — | | | (111) | | (A) | | — | | | | 9,772 | | | | $ | 23,544 | | | $ | 6,540 | | | $ | (111) | | | | $ | 3,746 | | | | $ | 26,227 | |
| | | | | | | | | | | | | | | | | | | | | | | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | DESCRIPTION | | Balance at Beginning of Period |
| | Additions Charged to Cost and Expenses |
| | Additions (Deductions) Charged to Other Accounts |
| | | Deductions from Reserve |
| | | Balance at End of Period |
| Year Ended June 30, 2020 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 10,498 |
| | $ | 14,055 |
| | $ | — |
| | | $ | 10,892 |
| (C) | | $ | 13,661 |
| Returns reserve | | 7,265 |
| | — |
| | 2,618 |
| (B) | | — |
| | | 9,883 |
| | | $ | 17,763 |
| | $ | 14,055 |
| | $ | 2,618 |
| | | $ | 10,892 |
| | | $ | 23,544 |
| Year Ended June 30, 2019 | | |
| | |
| | |
| | | |
| | | |
| Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | |
|
| |
|
| |
|
| | |
|
| | |
|
| Allowance for doubtful accounts | | $ | 10,964 |
| | $ | 4,058 |
| | $ | — |
| | | $ | 4,524 |
| (C) | | $ | 10,498 |
| Returns reserve | | 2,602 |
| | 738 |
| | 3,925 |
| (B) | | — |
| | | 7,265 |
| | | $ | 13,566 |
| | $ | 4,796 |
| | $ | 3,925 |
| | | $ | 4,524 |
| | | $ | 17,763 |
| Year Ended June 30, 2018 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 8,056 |
| | $ | 2,803 |
| | $ | 3,548 |
| (A) | | $ | 3,443 |
| (C) | | $ | 10,964 |
| Returns reserve | | 1,572 |
| | — |
| | 1,030 |
| (A) | | — |
| | | 2,602 |
| | | $ | 9,628 |
| | $ | 2,803 |
| | $ | 4,578 |
| | | $ | 3,443 |
| | | $ | 13,566 |
|
(A)Amounts in the years ending June 30, 2023, 2022 and 2021 represent reserves recorded for the return of merchandise by customers. The Company adopted ASC 606 - Revenue from Contracts with Customers effective July 1, 2018 which requires the Company's sales returns reserve to be established at the gross sales value with an asset established for the value of the expected product to be returned.(B)Amounts represent uncollectible accounts charged off.
| | (A) | Amounts in the year ending June 30, 2018 represent reserves recorded through purchase accounting for acquisitions made during the year of $3,548 and for the return of merchandise by customers of $1,030. |
| | (B) | Amounts in the year ending June 30, 2020 and 2019 represent reserves recorded for the return of merchandise by customers. The Company adopted ASC 606 - Revenue from Contracts with Customers effective July 1, 2018 which requires the Company's sales returns reserve to be established at the gross sales value with an asset established for the value of the expected product to be returned. |
| | (C) | Amounts represent uncollectible accounts charged off. |
SIGNATURESSIGNATURES.
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED INDUSTRIAL TECHNOLOGIES, INC. | | | | | | | | | /s/ Neil A. Schrimsher | | /s/ David K. Wells | Neil A. Schrimsher President & Chief Executive Officer
| | David K. Wells Vice President-Chief Financial Officer,
Treasurer, & Treasurer | | | | /s/ Christopher Macey | | | Christopher Macey Corporate Controller (PrincipalPrincipal Accounting Officer) | | Officer |
Date: August 14, 202011, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. | | | | | | | | | * | | * | Madhuri A. Andrews, Director | | Shelly M. Chadwick, Director | | | | * | | * | Madhuri A. Andrews, Director | | Peter A. Dorsman, Director | | | | * | | * | Mary Dean Hall, Director | | Dan P. Komnenovich, Director | | | | * | | * | Robert J. Pagano, Jr., Director | | Vincent K. Petrella, Director | | | | * | | /s/ Neil A. Schrimsher | Joe A. Raver, Director | | Neil A. Schrimsher, President & Chief Executive Officer and Director | | | | * | |
| Peter C. Wallace, Director and Chairman
| |
|
| | | /s/ Fred D. Bauer Jon S. Ploetz | Fred D. Bauer,Jon S. Ploetz, as attorney in fact | for persons indicated by “*” |
Date: August 14, 202011, 2023
s Versus Prior Period |
| | Year Ended June 30, As a % of Net Sales | | Change in Sales in fiscal 20202023 were $3.2$4.4 billion, which was $227.0$602.1 million or 6.5% below15.8% above the prior year, with sales from acquisitions adding $80.7$20.0 million or 2.3%0.5% and unfavorable foreign currency translation accounting for a decrease of $10.5$16.3 million or 0.3%0.4%. There were 253.5252.5 selling days in both fiscal 20202023 and 251.5 selling days in fiscal 2019.2022. Excluding the impact of businesses acquired and foreign currency translation, sales were down $297.2up $598.4 million or 8.5%15.7% during the year, driven by a 9.4% decreasean increase from operations due to weakreflecting resilient underlying demand across key endboth segments, structural and secular tailwinds across legacy and new markets, further impacted by the economic slowdown resultingand support from the COVID-19 pandemic, offset by an increase of 0.9% due to two additional sales days. company-specific growth opportunities.
The following table shows changes in sales by reportable segment. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Sales by Reportable Segment | 2020 |
| 2019 |
| Service Center Based Distribution | $ | 2,242.0 |
| $ | 2,452.9 |
| $ | (210.9 | ) | $ | 23.8 |
| $ | (10.5 | ) | $ | (224.2 | ) | Fluid Power & Flow Control | 1,003.7 |
| 1,019.8 |
| (16.1 | ) | 56.9 |
| — |
| (73.0 | ) | Total | $ | 3,245.7 |
| $ | 3,472.7 |
| $ | (227.0 | ) | $ | 80.7 |
| $ | (10.5 | ) | $ | (297.2 | ) |
| | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Increase | Acquisitions | Foreign Currency | Organic Change | Sales by Reportable Segment | 2023 | 2022 | Service Center Based Distribution | $ | 2,966.8 | | $ | 2,565.6 | | $ | 401.2 | | $ | — | | $ | (16.3) | | $ | 417.5 | | Engineered Solutions | 1,446.0 | | 1,245.1 | | 200.9 | | 20.0 | | — | | 180.9 | | Total | $ | 4,412.8 | | $ | 3,810.7 | | $ | 602.1 | | $ | 20.0 | | $ | (16.3) | | $ | 598.4 | |
Sales ofin our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $210.9increased $401.2 million, or 8.6%15.6%. Acquisitions within this segment increased sales by $23.8 million or 1.0%, and unfavorableUnfavorable foreign currency translation decreased sales by $10.5$16.3 million or 0.4%0.6%. Excluding the impact of businesses acquired and the impact of foreign currency translation, sales decreased $224.2increased $417.5 million or 9.2%16.2% during the year, driven by a 10.0% decreasean increase from operations due to weak demandongoing benefits from market position, sales process initiatives, solid growth across key end markets, offset by an increase of 0.8% due to two additional sales days.national strategic accounts, as well as benefits from cross-selling actions. Sales ofin our Fluid Power & Flow ControlEngineered Solutions segment decreased $16.1increased $200.9 million or 1.6%16.1%. Acquisitions within this segment, primarily Olympus,Automation, Inc., increased sales $56.9$20.0 million or 5.6%1.6%. Excluding the impact of businesses acquired, sales decreased $73.0increased $180.9 million or 7.2%14.5%, reflecting positive underlying segment demand and driven by a 8.0% decrease from operations,expanding technical and engineering capabilities, diverse end-market mix, and cross-selling initiatives, partially offset by an 0.8% increase due to two additional sales days. The decrease from operations is primarily due to slower demand in our flow control operations and weakerorder activity across our industrial OEM customer base.the technology sector and ongoing supply chain constraints.
The following table shows changes in sales by geographical area. Other countries includesinclude Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Sales by Geographic Area | 2020 |
| 2019 |
| United States | $ | 2,819.4 |
| $ | 3,016.7 |
| $ | (197.3 | ) | $ | 80.7 |
| $ | — |
| $ | (278.0 | ) | Canada | 248.6 |
| 271.3 |
| (22.7 | ) | — |
| (2.7 | ) | (20.0 | ) | Other countries | 177.7 |
| 184.7 |
| (7.0 | ) | — |
| (7.8 | ) | 0.8 |
| Total | $ | 3,245.7 |
| $ | 3,472.7 |
| $ | (227.0 | ) | $ | 80.7 |
| $ | (10.5 | ) | $ | (297.2 | ) |
| | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Increase | Acquisitions | Foreign Currency | Organic Change | Sales by Geographic Area | 2023 | 2022 | United States | $ | 3,860.4 | | $ | 3,299.8 | | $ | 560.6 | | $ | 20.0 | | $ | — | | $ | 540.6 | | Canada | 315.5 | | 291.5 | | 24.0 | | — | | (16.0) | | 40.0 | | Other Countries | 236.9 | | 219.4 | | 17.5 | | — | | (0.3) | | 17.8 | | Total | $ | 4,412.8 | | $ | 3,810.7 | | $ | 602.1 | | $ | 20.0 | | $ | (16.3) | | $ | 598.4 | |
Sales in our U.S. operations decreased $197.3increased $560.6 million or 6.5%17.0%, with acquisitions adding $80.7$20.0 million or 2.7%0.6%. Excluding the impact of businesses acquired, U.S. sales were down $278.0up $540.6 million or 9.2%, driven by a decrease of 10.0% from operations, offset by an increase of 0.8% due to two additional sales days.16.4%. Sales from our Canadian operations decreased $22.7increased $24.0 million or 8.4%, and unfavorable8.2%. Unfavorable foreign currency translation decreased Canadian sales by $2.7$16.0 million or 1.0%5.5%. Excluding the impact of foreign currency translation, Canadian sales were down $20.0up $40.0 million or 7.4%, driven by a decrease of 8.2% from operations, offset by an increase of 0.8% due to two additional sales days.13.7%. Consolidated sales from our other countrycountries operations decreased $7.0increased $17.5 million or 3.8%8.0% compared to the prior year. Unfavorable foreign currency translation decreased other countrycountries sales by $7.8$0.3 million or 4.2%0.1%. Excluding the impact of foreign currency translation, other countrycountries sales were up $0.8$17.8 million or 0.4%8.1% compared to the prior year, driven by an increase of 1.2%from operations, primarily an $11.5 million increase in Mexican sales due to additional sales days, offset by a 0.8% decrease from operations.increased industrial activity, mainly related to the automotive industry. Our gross profit margin decreasedincreased to 28.9%29.2% in fiscal 20202023 compared to 29.0% in fiscal 2019.2022. Gross profit margin expanded year over year primarily reflecting broad-based execution across the business and countermeasures in response to ongoing inflation and supply chain dynamics. The gross profit margin for the current year was negatively affectedimpacted by 1218 basis points for $3.9due to a $7.7 million of non-routineincrease in LIFO expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for certain locations that were closed duringover the year within the U.S. operations of the Service Center Based Distribution segment. prior year.
The following table shows the changes in selling, distribution, and administrative expense (SD&A). | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | SD&A Increase | Acquisitions | Foreign Currency | Organic Change | | 2023 | 2022 | SD&A | $ | 813.8 | | $ | 749.1 | | $ | 64.7 | | $ | 6.4 | | $ | (4.3) | | $ | 62.6 | |
| | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | SD&A Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | 2020 |
| 2019 |
| SD&A | $ | 717.7 |
| $ | 742.2 |
| $ | (24.5 | ) | $ | 20.8 |
| $ | (2.5 | ) | $ | (42.8 | ) |
SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management, and marketing and distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, facility related expenses and expenses incurred in acquiring businesses. SD&A decreased $24.5increased $64.7 million or 3.3%8.6% during fiscal 20202023 compared to the prior year, and as a percentage of sales increaseddecreased to 22.1%18.4% in fiscal 20202023 compared to 21.4%19.7% in fiscal 2019.2022. Changes in foreign currency exchange rates had the effect of decreasing SD&A by $2.5 $4.3 million or 0.3%0.6% compared to the prior year. SD&A from businesses acquired added $20.8$6.4 million or 2.8%0.9%, including $1.9$0.9 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the favorableunfavorable impact from foreign currency translation, SD&A decreased $42.8increased $62.6 million or 5.8%8.3% during fiscal 20202023 compared to fiscal 2019. The Company incurred $5.1 million of non-routine expenses related to severance and facility consolidation primarily within the U.S. Operations of the Service Center Based Distribution segment during fiscal 2020, compared to $1.6 million of restructuring expenses incurred in fiscal 2019.2022. Excluding the impact of acquisitions, total compensation excluding severance decreased $39.8increased $47.3 million during fiscal 2020,2023, as a result of annual calendar year merit increases and an increase in employee incentive compensation correlating with the improved company performance. Also, excluding the impact of acquisitions, travel & entertainment and fleet expenses increased $4.7 million during 2023, primarily driven by higher fuel costs and the return of travel activity in the current year after travel constraints in the prior year due to cost reduction actions takenCOVID-19. Additionally, excluding the impact of acquisitions, occupancy costs increased $5.3 million during 2023, primarily driven by the Company in response to the COVID-19 pandemic, including headcount reductions, temporary furloughs and pay reductions, and suspension of the 401(k) company match.increased building lease costs. All other expenses within SD&A were down $6.5up $5.3 million. During the quarter ended March 31, 2020, the Company performed its annual goodwill impairment test. As a result of this test, the Company recorded a $131.0 million non-cash goodwill impairment charge related to the Company's FCX operations in the Fluid Power & Flow Control segment, primarily due to the overall decline in the industrial economy, specifically slower demand in FCX's end markets. The non-cash goodwill impairment charge decreased net income by $118.8 million and earnings per share by $3.04 per share for fiscal 2020. In fiscal 2019, the Company recognized a non-cash impairment charge of $31.6 million for intangible assets related to the Company's Canadian operations within the Service Center Based Distribution segment, which decreased net income by $23.1 million and earnings per share by $0.59 per share for fiscal 2019.
Operating income decreased $144.8increased $115.3 million, or 61.9%32.2%, to $89.0$473.2 million during fiscal 20202023 from $233.8$357.9 million during fiscal 2019,2022, and as a percentage of sales, decreasedincreased to 2.7%10.7% from 6.7%9.4%, primarily as a resultdue to gross profit margin expansion, volume leverage, and control of the goodwill impairmentSD&A expense recorded during the current year.in fiscal 2023. Operating income, before intangible impairment charges, as a percentage of sales for the Service Center Based Distribution segment decreasedincreased to 9.4%12.6% in fiscal 20202023 from 10.4%11.8% in fiscal 2019.2022. Operating income before goodwill impairment charges, as a percentage of sales for the Fluid Power & Flow ControlEngineered Solutions segment decreasedincreased to 10.9%14.1% in fiscal 20202023 from 11.0%12.6% in fiscal 2019.2022.
Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense. Other income,expense (income), net, represents certain non-operating items of income and expense, and was $2.8$1.7 million of incomeexpense in fiscal 20202023 compared to $0.9$1.8 million of incomeexpense in fiscal 2019.2022. Current year incomeexpense primarily consists of unrealized gains on investments held by non-qualified deferredcompensation trusts of $0.5 million and foreign currency transaction gainslosses of $2.5$3.3 million and other periodic post-employment costs of $1.5 million, offset by other expense of $0.2 million. Fiscal 2019 income consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $0.7$2.2 million, and life insurance income of $0.5$0.7 million and other income of $0.2 million. Fiscal 2022 expense consisted primarily of unrealized loss on investments held by non-qualified deferred compensation trusts of $2.6 million and other periodic post-employment costs of $0.6 million, offset by foreign currency transaction losseslife insurance income of $0.3$1.4 million. The effective income tax rate was 56.5%22.9% for fiscal 20202023 compared to 26.0%21.9% for fiscal 2019.2022. The increase in the effective tax rate is primarily due to the FCX goodwill impairment charge, which increased the effective tax rate by 31.4% duringchanges in compensation-related deductions in fiscal 2020. The Company also recorded a $1.0 million tax benefit related2023 compared to the CARES Act during the current year, which favorably impacted the rate by 1.8% in fiscal 2020. We expect our income tax rate for fiscal 2021 to be in the range of 23.0% to 25.0%.prior year.
As a result of the factors discussed above, net income for fiscal 2020 decreased $120.02023 increased $89.3 million from the prior year. NetDiluted net income per share was $0.62$8.84 per share for fiscal 20202023 compared to $3.68$6.58 per share for fiscal 2019. Current year
results were negatively impacted by $3.04 per share for the goodwill impairment and $0.18 per share for non-routine expenses, offset by a favorable impact of $0.03 per share for the CARES Act tax benefit. The prior year results included positive impacts on earnings per share of $0.48 per share for acquisitions, $0.37 per share for tax reform, offset by a $0.69 per share unfavorable impact from the intangible impairment, which includes the impact of recording the $3.8 million valuation allowance in the third quarter of fiscal 2019, and a $0.04 per share unfavorable impact from restructuring charges during fiscal 2019.2022.
At June 30, 2020,2023, we had a total ofapproximately 580 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore versus 600 at June 30, 2019.2023, versus 568 June 30, 2022. The approximate number of Company employees was 6,200 at June 30, 20202023 and 6,6506,100 at June 30, 2019.2022. LIQUIDITY AND CAPITAL RESOURCES Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At June 30, 20202023 we had total debt obligations outstanding of $935.3$622.2 million compared to $959.8$689.5 million at June 30, 2019.2022. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations, will be sufficient to finance normal working capital needs in each of the countries in which we operate, in, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained if necessary based on the Company’s credit standing and financial strength. The Company’s working capital at June 30, 20202023 was $733.7$1,106.5 million compared to $724.3$859.9 million at June 30, 2019.2022. The current ratio was 3.0 to 1 at June 30, 2023 and 2.7 to 1 at both June 30, 2020 and June 30, 2019.2022. Net Cash Flows The following table is included to aid in review of Applied’s statements of consolidated cash flows; all amounts are in thousands.flows. | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| Net Cash Provided by (Used in): | | | | Operating Activities | $ | 296,714 |
| | $ | 180,601 |
| Investing Activities | (55,404 | ) | | (55,102 | ) | Financing Activities | (78,238 | ) | | (71,539 | ) | Exchange Rate Effect | (2,740 | ) | | 109 |
| Increase in Cash and Cash Equivalents | $ | 160,332 |
| | $ | 54,069 |
|
| | | | | | | | | | | | Amounts in thousands | Year Ended June 30, | | 2023 | | 2022 | Net Cash Provided by (Used in): | | | | Operating Activities | $ | 343,966 | | | $ | 187,570 | | Investing Activities | (60,833) | | | (35,658) | | Financing Activities | (126,888) | | | (223,029) | | Exchange Rate Effect | 3,317 | | | (2,154) | | Increase (Decrease) in Cash and Cash Equivalents | $ | 159,562 | | | $ | (73,271) | |
The increase in cash provided by operating activities during fiscal 20202023 is driven by operating results and the changes in working capital for the year:year and by increased operating results. Changes in cash flows between years related to working capital were driven by (amounts in thousands): | | | | | Decrease in accounts receivable | $ | 65,972 |
| Decrease in inventory | $ | 73,618 |
| Decrease in accounts payable | $ | (24,068 | ) |
| | | | | | Accounts receivable | $ | 94,460 | | Inventory | $ | 49,448 | | Accounts payable | $ | (15,915) | |
Net cash used in investing activities in fiscal 20202023 included $37.2$35.8 million used for the acquisitionacquisitions of OlympusAutomation, Inc. and $20.1AMS and $26.5 million used for capital expenditures. Net cash used in investing activities in fiscal 20192022 included $37.5$7.0 million used for the acquisitionsacquisition of FPS, MilRocFloody, $14.8 million million in cash payments for loans on company-owned life insurance and Woodward, and $19.0$18.1 million used for capital expenditures.
Net cash used in financing activities included $49.6 million and $161.7decreased from the prior year period primarily due to a change in net debt activity, as there was $67.2 million of long-termnet debt repaymentspayments in 2020 and 2019, respectively, offset by $25.0fiscal 2023 compared to $139.9 million of cash borrowings under a unsecured shelf facility agreement with Prudential Investment Managementnet debt payments in 2020 and $175.0 million of cash borrowings from the trade receivable securitization facility in 2019.2022. Further uses of cash in 20202023 were $48.9$53.4 million for dividend payments $2.6and $12.9 million used to pay taxes for shares withheld. Further uses of cash in 2022 were $51.8 million for dividend payments, $8.1 million used to pay taxes for shares withheld, and $2.4 million used for acquisition holdback payments. Further uses of cash in 2019 were $47.3 million for dividend payments, $11.2$13.8 million used to repurchase 192,082148,658 shares of treasury stock, $3.5 million used to pay taxes for shares withheld, and $2.6 million used for acquisition holdback payments.stock. The increase in dividends over the year is the result of regular increases in our dividend payout rates. We paid dividends of $1.26$1.38 and $1.22$1.34 per share in fiscal 20202023 and 2019,2022, respectively.
Capital Expenditures We expect capital expenditures for fiscal 20212024 to be in the $15.0$27.0 million to $20.0$29.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for fiscal 2021 is expected to be in the range of $22.5 million to $23.5 million. Share Repurchases The Board of Directors has authorized the repurchase of shares of the Company’s stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. At June 30, 2020,2023, we had authorization to purchase an additional 864,6181,500,000 shares. The Company did not repurchase shares in fiscal 2020. In fiscal 2019 and 2018,2023, we repurchased 192,082 and 393,300purchased 8,000 shares of the Company’sCompany's common stock respectively, at an average price per share of $58.10,and $57.92, respectively.$89.46. In fiscal 2022, we repurchased 148,658 shares of the Company's common stock at an average price per share of $92.72. In fiscal 2021,we repurchased 400,000 shares of the Company's common stock at an average price per share of $100.22.
Borrowing Arrangements A summary of long-term debt, including the current portion, follows; all amountsfollows (amounts are in thousands:thousands): | | | | | | | | | June 30, | 2020 |
| | 2019 |
| Unsecured credit facility | $ | 589,250 |
| | $ | 613,625 |
| Trade receivable securitization facility | 175,000 |
| | 175,000 |
| Series C notes | 120,000 |
| | 120,000 |
| Series D Notes | 25,000 |
| | 50,000 |
| Series E Notes | 25,000 |
| | — |
| Other | 1,026 |
| | 1,204 |
| Total debt | $ | 935,276 |
| | $ | 959,829 |
| Less: unamortized debt issuance costs | 1,487 |
| | 1,943 |
| | $ | 933,789 |
| | $ | 957,886 |
|
| | | | | | | | | | | | June 30, | 2023 | | 2022 | Revolving credit facility | $ | 383,592 | | | $ | 410,592 | | Trade receivable securitization facility | 188,300 | | | 188,300 | | Series C Notes | — | | | 40,000 | | Series D Notes | 25,000 | | | 25,000 | | Series E Notes | 25,000 | | | 25,000 | | Other | 356 | | | 603 | | Total debt | $ | 622,248 | | | $ | 689,495 | | Less: unamortized debt issuance costs | 152 | | | 171 | | | $ | 622,096 | | | $ | 689,324 | |
In January 2018,December 2021, the Company refinanced its existing credit facility and entered into a new five-yearrevolving credit facility with a group of banks expiring in January 2023. This agreementto refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes. The revolving credit facility provides for a $780.0 million unsecured term loan and a $250.0$900.0 million unsecured revolving credit facility. Fees on this facility range from 0.10%and an uncommitted accordion feature which allows the Company to 0.20% per year based uponrequest an increase in the Company's leverage ratio at each quarter end.borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500.0 million. In May 2023, the Company and the administrative agent entered into an amendment to the credit facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR. Borrowings under this agreement carry variablebear interest, rates tied to either LIBOR or prime at the Company's discretion. The Company had no amount outstanding underelection, at either the revolver as of June 30, 2020 and June 30, 2019.base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or SOFR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of $1.9$0.2 million and $3.2 million, respectively, to secure certain insurance obligations, totaled $248.1$516.2 million and $246.8$489.2 million at June 30, 20202023 and June 30, 2019,2022, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loanrevolving credit facility was 1.94%6.11% and 4.19%2.81% as of June 30, 20202023 and June 30, 2019,2022, respectively.
Additionally, the Company had letters of credit outstanding not associated with the revolving credit agreement, in the amount of $4.0 million and $4.7 million as of June 30, 2023 and June 30, 2022, respectively, in order to secure certain insurance obligations.
In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021. The maximum availability under. On March 26, 2021, the Company amended the AR Securitization Facility is $175.0 million.to expand the eligible receivables, which increased the maximum availability to $250.0 million and increased the fees on the AR Securitization Facility to 0.98% per year. Availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain
times, we may not be able to fully access the $175.0$250.0 million of funding available under the AR Securitization Facility. The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the Service Center Based Distribution reportable segment’s U.S. operations’ trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. BorrowingsIn May 2023, the Company entered into an amendment to the AR Securitization facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR, therefore borrowings under this facility carry variable interest rates tied to LIBOR and fees on the AR Securitization Facility are 0.90% per year.SOFR. The interest rate on the AR Securitization Facility as of June 30, 20202023 and June 30, 20192022 was 1.07%6.16% and 3.33%2.60%, respectively. The Company classified the AR Securitization Facility as long-term debt as it has the ability and intent to extend or refinance this amount on a long-term basis. On August 4, 2023, the Company amended the AR Securitization Facility and extended the term to August 4, 2026. At June 30, 20202023 and June 30, 2019,2022, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 million.$50.0 million and $90.0 million, respectively. Fees on this facility range from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end. The remaining principal balance on the "Series C" notes of the $40.0 million was paid in July 2022. The "Series D" notes have a remaining principal amount of $120.0$25.0 million, carry a fixed interest rate of 3.19%3.21%, and are due in equal principal payments in July 2020, 2021, and 2022. A $40.0 million principal payment was made on the "Series C" notes in July 2020.October 2023. The "Series D" notes have a principal amount of $50.0 million and carry a fixed interest rate of 3.21%. A $25.0 million principal payment was made on the "Series D" notes during fiscal 2020, and the remaining principal balance of $25.0 million
is due in October 2023. In October 2019, the Company amended its unsecured shelf facility agreement with Prudential Investment Management to authorize the issuance of "Series E" notes which have a principal amount of $25.0 million, carry a fixed interest rate of 3.08%, and are due in October 2024.
In 2014, the Company assumed $2.4 million of debt as a part of the headquarters facility acquisition. The 1.50% fixed interest rate note is held by the State of Ohio Development Services Agency and matures in November 2024. In 2019, the Company entered into an interest rate swap which mitigates variability in forecasted interest payments on $431.0$384.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. For more information, see note 7, Derivatives, to the consolidated financial statements, included in Item 8 under the caption “Financial Statements and Supplementary Data.” The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2020,2023, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At June 30, 2020,2023, the Company's net indebtedness was less than 3.10.7 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at June 30, 2020.2023. Accounts Receivable Analysis The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable (all dollar amounts are in thousands): | | | | | | | | | June 30, | 2020 |
| | 2019 |
| Accounts receivable, gross | $ | 463,659 |
| | $ | 551,400 |
| Allowance for doubtful accounts | 13,661 |
| | 10,498 |
| Accounts receivable, net | $ | 449,998 |
| | $ | 540,902 |
| Allowance for doubtful accounts, % of gross receivables | 2.9 | % | | 1.9 | % | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| Provision for losses on accounts receivable | $ | 14,055 |
| | $ | 4,058 |
| Provision as a % of net sales | 0.43 | % | | 0.12 | % |
| | | | | | | | | | | | June 30, | 2023 | | 2022 | Accounts receivable, gross | $ | 730,729 | | | $ | 673,951 | | Allowance for doubtful accounts | 22,334 | | | 17,522 | | Accounts receivable, net | $ | 708,395 | | | $ | 656,429 | | Allowance for doubtful accounts, % of gross receivables | 3.1 | % | | 2.6 | % | | | | | Year Ended June 30, | 2023 | | 2022 | Provision for losses on accounts receivable | $ | 5,619 | | | $ | 3,193 | | Provision as a % of net sales | 0.13 | % | | 0.08 | % |
Accounts receivable are reported at net realizable value and consist of trade receivables from customers. Management monitors accounts receivable by reviewing Days Sales Outstanding (DSO) and the aging of receivables for each of the Company's locations. The Company experienced a significant increase in accounts receivable during fiscal 2023 commensurate with the increase in sales. On a consolidated basis, DSO was 55.955.1 at June 30, 20202023 versus 55.255.7 at June 30, 2019. 2022. Approximately 4.6%2.5% of our accounts receivable balances are more than 90 days past due at June 30, 20202023 compared to 3.0%3.4% at June 30, 2019.2022. On an overall basis, our provision for losses from uncollected receivables represents 0.43%0.13% of our sales infor the year ended June 30, 2020,2023, compared to 0.12%0.08% of sales for the year ended June 30, 2019. This2022. The increase primarily relates to provisions recorded in the current year for customer credit deterioration and bankruptcies primarily in the U.S. and Mexican operations of the Service Center Based Distribution segment. Historically, this percentage is around 0.10% to 0.15%. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels.
Inventory Analysis Inventories are valued using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. As activities slowed in the second half ofInventory increased throughout fiscal 2020, the Company took actions2022 to reduce its overall inventory, which resulted in a net decrease in inventory of $58.4 million.meet increasing customer demand. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis and uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the periodyear ended June 30, 20202023 was 3.84.4 versus 4.2 at4.7 for the year ended June 30, 2019. We believe our inventory turnover ratio in fiscal 2021 will be slightly better than our fiscal 2020 levels. 2022.
CONTRACTUAL OBLIGATIONS The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 20202023 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | Total |
| | Period Less Than 1 yr |
| | Period 2-3 yrs |
| | Period 4-5 yrs |
| | Period Over 5 yrs |
| | Other |
| Operating leases | $ | 104,165 |
| | $ | 29,979 |
| | $ | 39,328 |
| | $ | 19,540 |
| | $ | 15,318 |
| | — |
| Planned funding of post-retirement obligations | 10,000 |
| | 900 |
| | 1,800 |
| | 500 |
| | 6,800 |
| | — |
| Unrecognized income tax benefit liabilities, including interest and penalties | 6,000 |
| | — |
| | — |
| | — |
| | — |
| | 6,000 |
| Long-term debt obligations | 935,276 |
| | 79,181 |
| | 805,744 |
| | 50,351 |
| | — |
| | — |
| Interest on long-term debt obligations (1) | 40,100 |
| | 17,000 |
| | 21,900 |
| | 1,200 |
| | — |
| | — |
| Acquisition holdback payments | 4,086 |
| | 2,563 |
| | 1,448 |
| | 75 |
| | — |
| | — |
| Total Contractual Cash Obligations | $ | 1,099,627 |
| | $ | 129,623 |
| | $ | 870,220 |
| | $ | 71,666 |
| | $ | 22,118 |
| | $ | 6,000 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | Period Less Than 1 yr | | Period 2-3 yrs | | Period 4-5 yrs | | Period Over 5 yrs | | Other | Operating leases | $ | 113,251 | | | $ | 34,235 | | | $ | 44,995 | | | $ | 22,646 | | | $ | 11,375 | | | $ | — | | Planned funding of post-retirement obligations | 6,561 | | | 1,360 | | | 2,770 | | | 460 | | | 1,971 | | | — | | Unrecognized income tax benefit liabilities, including interest and penalties | 5,900 | | | — | | | — | | | — | | | — | | | 5,900 | | Long-term debt obligations | 622,248 | | | 25,251 | | | 25,105 | | | 571,892 | | | — | | | — | | Interest on long-term debt obligations (1) | 68,000 | | | 22,300 | | | 34,000 | | | 11,700 | | | — | | | — | | Acquisition holdback payments | 810 | | | 684 | | | 126 | | | — | | | — | | | — | | Total Contractual Cash Obligations | $ | 816,770 | | | $ | 83,830 | | | $ | 106,996 | | | $ | 606,698 | | | $ | 13,346 | | | $ | 5,900 | |
(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations.obligations net of receipts under the terms of the interest rate swap. Rates in effect as of June 30, 20202023 are used for variable rate debt. Purchase orders for inventory and other goods and services are not included in our estimates as we are unable to aggregate the amount of such purchase orders that represent enforceable and legally binding agreements specifying all significant terms. The previous table includes the gross liability for unrecognized income tax benefits including interest and penalties in the “Other” column as the Company is unable to make a reasonable estimate regarding the timing of cash settlements, if any, with the respective taxing authorities. CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. The Business and Accounting Policies note to the consolidated financial statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. LIFO Inventory Valuation and Methodology Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories, and the average cost method for foreign inventories. We adopted the link chain dollar value LIFO method for accounting for U.S. inventories in fiscal 1974. Approximately 17.3%14.2% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $155.5$215.3 million as reflected in our consolidated balance sheet at June 30, 2020.2023. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. See the Inventories note to the consolidated financial statements in Item 8 under the caption "Financial Statements and Supplementary Data," for further information.
Allowances for Slow-Moving and Obsolete Inventories We evaluate the recoverability of our slow-moving and inactive inventories at least quarterly. We estimate the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. Our ability to recover our cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. A significant portion of the products we hold in inventory have long shelf lives and are not highly susceptible to obsolescence. As of June 30, 20202023 and 2019,2022, the Company's reserve for slow-moving or obsolete inventories was $42.9$42.6 million and $41.1$39.2 million, respectively, recorded in inventories in the consolidated balance sheets.
Allowances for Doubtful Accounts We evaluate the collectibility of trade accounts receivable based on a combination of factors. Initially, we estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of certain customers and industries estimated to be a greater credit risk, trends within the entire customer pool and changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Accounts are written off against the allowance when it becomes evident that collection will not occur. As of June 30, 20202023 and 2019,2022, our allowance for doubtful accounts was 2.9%3.1% and 1.9%2.6% of gross receivables, respectively. Our provision for losses on accounts receivable was $14.1$5.6 million, $4.1$3.2 million, and $2.8$6.5 million in fiscal 2020, 20192023, 2022, and 2018,2021, respectively. Goodwill and Intangibles The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. Goodwill for acquired businesses is accounted for using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. As part of acquisition accounting, we recognize acquired identifiable intangible assets such as customer relationships, vendor relationships, trade names, and non-competition agreements apart from goodwill. Finite-lived identifiable intangibles are evaluated for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model. We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price. Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a one-step approach. The fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Goodwill on our consolidated financial statements relates to both the Service Center Based Distribution segment and the Fluid Power & Flow ControlEngineered Solutions segment. The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2020.2023. The Company concluded that sevenall of the reporting units’ fair valuevalues exceeded their carrying amounts by at least 10%20% as of January 1, 2020. Specifically, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The Canada and Mexico reporting units have goodwill balances2023.
Table of $27.2 million and $5.2 million, respectively, as of June 30, 2020. The carrying value of the final reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131.0 million. The non-cash impairment charge was the result of the overall decline in the industrial economy, specifically slower demand in FCX's end markets. This led to reduced spending by customers and reduced revenue expectations. As of June 30, 2020, the Company's goodwill balance was $540.6 million, of which $309.0 million relates to the FCX reporting unit. If the Company does not achieve forecasted sales growth and margin improvements goodwill could be further impaired.Contents
The fair values of the reporting units in accordance with the goodwill impairment test were determined using the income and market approaches. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margins, and discount rates. The market approach utilizes an analysis of comparable publicly traded companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA) and multiples that are applied to management’s forecasted revenues and EBITDA estimates. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values. Income Taxes Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. As of June 30, 2020,2023, the Company recognized $38.1$35.0 million of net deferred tax liabilities. Valuation allowances are provided against net deferred tax assets, determined on a jurisdiction by jurisdiction basis, where it is considered more-likely-than-not that the Company will not realize the benefit of such assets on a jurisdiction by jurisdiction basis.assets. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future taxable income levels.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT This Form 10-K, including Management’s Discussion and Analysis, contains statements that are forward-looking based on management’s current expectations about the future. Forward-looking statements are often identified by qualifiers, such as “guidance”, “expect”, “believe”, “plan”, “intend”, “will”, “should”, “could”, “would”, “anticipate”, “estimate”, “forecast”, “may”, "optimistic" and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations, and releases. Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’s control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law. Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; continuing risks relating to the effects of the COVID-19 pandemic; inflationary or deflationary trends in the cost of products, energy, labor and other operating costs, and changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability (such as due to supply chain strains), changes in supplier distribution programs, inability of suppliers to perform, and transportation disruptions; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems and risks relating to their proper functioning, the security of those systems, and the data stored in or transmitted through them; the impact of economic conditions on the collectability of trade receivables; reduced demand for our products in targeted markets due to reasons including consolidation in customer industries; our ability to retain and attract qualified sales and customer service personnel and other skilled executives, managers and professionals; our ability to identify and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability, timing and nature of new business opportunities including acquisitions, alliances, customer relationships, and supplier authorizations; the incurrence of debt and contingent liabilities in connection with acquisitions; our ability to access capital markets as needed on reasonable terms; disruption of operations at our headquarters or distribution centers; risks and uncertainties associated with our foreign operations, including volatile economic conditions, political instability, cultural and legal differences, and currency exchange fluctuations; the potential for goodwill and intangible asset impairment; changes in accounting policies and practices; our ability to maintain effective internal control over financial reporting; organizational changes within the Company; risks related to legal proceedings to which we are a party; potentially adverse government regulation, legislation, or policies, both enacted and under consideration, including with respect to federal tax policy, international trade, data privacy and security, and government contracting; and the occurrence of extraordinary events (including prolonged labor disputes, power outages, telecommunication outages, terrorist acts, war, public health emergency, earthquakes, extreme weather events, other natural disasters, fires, floods, and accidents). Other factors and unanticipated events could also adversely affect our business, financial condition, or results of operations. Risks can also change over time. Further, the disclosure of a risk should not be interpreted to imply that the risk has not already materialized. We discuss certain of these matters and other risk factors more fully throughout our Form 10-K, as well as other of our filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates. We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. Foreign Currency Exchange Rate Risk Because we operate throughout North America, Australia and New Zealand and approximately 13.1%13% of our fiscal year 20202023 net sales were generated outside the United States, foreign currency exchange rates can impact our financial position, results of operations and competitive position. The financial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive lossincome as reported in the statements of consolidated comprehensive income. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the statements of consolidated income as a component of other income,expense (income), net. Applied does not currently hedge the net investments in our foreign operations. During the course of the fiscal year, the Canadian, Mexican, Australian and New Zealand currency exchange rates decreased in relation to the U.S. dollar by 4.0%2.9%, 17.1%3.9%, 1.8% and 4.0%2.5%, respectively.respectively, while the Mexican currency exchange rate increased in relation to the U.S. dollar by 17.7%. In the twelve months ended June 30, 2020,2023, we experienced net foreign currency translation lossesgains totaling $18.5$7.7 million, which were included in other comprehensive loss.income. We utilize a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in foreign currency rates. Excluding the non-cash goodwill impairment charge recorded in fiscal 2020, aA 10% strengthening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 20202023 would have resulted in a $1.3$1.7 million decrease in net income for the year ended June 30, 2020. Excluding the non-cash goodwill impairment charge recorded in fiscal 2020, a 10% weakening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2020 would have resulted in a $1.3 million increase in net income for the year ended June 30, 2020.2023. Interest Rate Risk Our primary exposure to interest rate risk results from our outstanding debt obligations with variable interest rates. The levels of fees and interest charged on our various debt facilities are based upon leverage levels and market interest rates. The Company uses interest rate swap instruments to mitigate variability in forcastedforecasted interest rates. Our variable interest rate debt facilities outstanding include our five-year credit facility, which provides for a revolving credit facility with a capacity of up to $250.0$900.0 million in borrowings with no balance$383.6 million outstanding at June 30, 2020, a $780.0 million term loan, of which $589.3 million was outstanding at June 30, 2020,2023, and a $175.0$188.3 million trade receivable securitization facility, all of which was outstanding at June 30, 2020.2023. In January 2019, the Company entered into an interest rate swap on $463.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. The notional amount of the interest rate swap was $431.0$384.0 million as of June 30, 2020.2023. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. Fixed interest rate debt facilities include $170.0$50.0 million outstanding under our unsecured shelf facility agreement, as well as $1.0$0.4 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $782.0$587.1 million during fiscal 2020.2023. The impact of a hypothetical 1.0% increase in the interest rates on our average variable interest rate bank borrowings (not considering the impact of ourthe interest rate swap) would have resulted in a $7.8$5.9 million increase in interest expense. Due toIncluding the impact of the interest rate swap, the impact of a hypothetical 1.0% increase in the variable interest rate would have reduced net cashresulted in a $2.0 million increase in interest paid by $4.3 million. Changes in market interest rates would also impact interest rates on these facilities.expense. For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysisof Financial Condition and Results of Operations” in Item 7 and notes 6 and 7 to the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Applied Industrial Technologies, Inc.
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 20202023 and 2019,2022, the related statements of consolidated income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2020,2023, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 20202023 and 2019,2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020,2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2020,2023, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 14, 2020,11, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective July 1, 2019, the Company adopted the FASB’s new standard related to leases using the optional transition method, which required application of the new guidance to only those leases that existed at the date of adoption.
Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill - FCX and Canada Reporting UnitsEngineered Solutions Segment - Refer to NoteNotes 1 and 5 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the income and market approaches. The determination of the fair value using the income approach requires management to make significant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. The determination of the fair value using the market approach requires management to make significant estimates and assumptions related to the forecasts of future revenues, EBITDA and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The goodwill balance was
$540.6 $578.4 million as of June 30, 2020,2023, of which $309.0$367.2 million related to reporting units within the FCX reporting unit and $27.2 million related to the Canada reporting unit.Engineered Solutions segment. The fair value of the FCXall reporting unit did not exceed its carrying value as of the measurement date and, therefore, an impairment charge of $131.0 million was recognized in 2020. The fair value of the Canada reporting unitunits exceeded itstheir carrying value by 12%at least 20% as of the measurement date and, therefore, no impairment was recognized.
Given the nature of one of the FCX and Canada reporting units’unit’s operations within the Engineered Solutions segment, the sensitivity of the businessreporting unit to changes in the economy, the reporting unit’s historical performance as compared to projections,
and the difference between its fair value and the carrying value, auditing management’s judgments regarding forecasts of future revenues and EBITDA, as well as selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates for the FCX and Canada reporting units,unit, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the forecasts of future revenues and EBITDA (“forecasts”), and the selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates (“market multiples”) for this reporting unit within the FCX and Canada reporting unitsEngineered Solutions segment included the following, among others: •We tested the effectiveness of controls over management’s goodwill impairment evaluation, such as controls related to management’s forecasts and the selection of the discount rate and market multiples used. •We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. •We evaluated the reasonableness of management’s forecasts by comparing the current forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in industry reports for the various industries the reporting units operateunit operates within. •With the assistance of our fair value specialists, we evaluated the discount rate, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rate selected by management. •With the assistance of our fair value specialists, we evaluated the market multiples by evaluating the selected comparable publicly traded companies and the adjustments made for differences in growth prospects and risk profiles between the reporting unitsunit and the comparable publicly traded companies. We tested the underlying source information and mathematical accuracy of the calculations. With the assistance of our fair value specialists, we evaluated the fair value of the reporting units based upon reconciling the fair values of the reporting units to the market capitalization of the Company.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 14, 202011, 2023
We have served as the Company's auditor since 1966.
STATEMENTS OF CONSOLIDATED INCOME (In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | | 2023 | | 2022 | | 2021 | Net sales | | $ | 4,412,794 | | | $ | 3,810,676 | | | $ | 3,235,919 | | Cost of sales | | 3,125,829 | | | 2,703,760 | | | 2,300,395 | | Gross profit | | 1,286,965 | | | 1,106,916 | | | 935,524 | | Selling, distribution and administrative expense, including depreciation | | 813,814 | | | 749,058 | | | 680,542 | | Impairment expense | | — | | | — | | | 49,528 | | Operating income | | 473,151 | | | 357,858 | | | 205,454 | | Interest expense | | 24,790 | | | 26,785 | | | 30,807 | | Interest income | | (3,151) | | | (522) | | | (215) | | Other expense (income), net | | 1,701 | | | 1,805 | | | (2,200) | | Income before income taxes | | 449,811 | | | 329,790 | | | 177,062 | | Income tax expense | | 103,072 | | | 72,376 | | | 32,305 | | Net income | | $ | 346,739 | | | $ | 257,414 | | | $ | 144,757 | | Net income per share — basic | | $ | 8.98 | | | $ | 6.69 | | | $ | 3.73 | | Net income per share — diluted | | $ | 8.84 | | | $ | 6.58 | | | $ | 3.68 | |
| | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| Net sales | | $ | 3,245,652 |
| | $ | 3,472,739 |
| | $ | 3,073,274 |
| Cost of sales | | 2,307,916 |
| | 2,465,116 |
| | 2,189,279 |
| Gross profit | | 937,736 |
| | 1,007,623 |
| | 883,995 |
| Selling, distribution and administrative expense, including depreciation | | 717,747 |
| | 742,241 |
| | 658,168 |
| Goodwill and intangible impairment | | 131,000 |
| | 31,594 |
| | — |
| Operating income | | 88,989 |
| | 233,788 |
| | 225,827 |
| Interest expense | | 37,264 |
| | 40,788 |
| | 24,142 |
| Interest income | | (729 | ) | | (600 | ) | | (657 | ) | Other income, net | | (2,782 | ) | | (881 | ) | | (2,376 | ) | Income before income taxes | | 55,236 |
| | 194,481 |
| | 204,718 |
| Income tax expense | | 31,194 |
| | 50,488 |
| | 63,093 |
| Net income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| Net income per share — basic | | $ | 0.62 |
| | $ | 3.72 |
| | $ | 3.65 |
| Net income per share — diluted | | $ | 0.62 |
| | $ | 3.68 |
| | $ | 3.61 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (In thousands)
| | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | | 2023 | | 2022 | | 2021 | | Net income per the statements of consolidated income | | $ | 346,739 | | | $ | 257,414 | | | $ | 144,757 | | | | | | | | | | | Other comprehensive income, before tax: | | | | | | | | Foreign currency translation adjustments | | 7,723 | | | (9,862) | | | 24,352 | | | Post-employment benefits: | | | | | | | | Actuarial gain on re-measurement | | 405 | | | 2,839 | | | 903 | | | Termination of pension plan | | 1,031 | | | — | | | — | | | Reclassification of net actuarial losses and prior service cost into other expense (income), net and included in net periodic pension costs | | 36 | | | 300 | | | 270 | | | Unrealized gain on cash flow hedge | | 18,174 | | | 26,204 | | | 3,250 | | | Reclassification of interest from cash flow hedge into interest expense | | (7,285) | | | 11,361 | | | 11,553 | | | Total other comprehensive income, before tax | | 20,084 | | | 30,842 | | | 40,328 | | | Income tax expense related to items of other comprehensive income | | 3,085 | | | 10,045 | | | 3,990 | | | Other comprehensive income, net of tax | | 16,999 | | | 20,797 | | | 36,338 | | | Comprehensive income | | $ | 363,738 | | | $ | 278,211 | | | $ | 181,095 | | |
| | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| Net income per the statements of consolidated income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| | | | | | | | Other comprehensive (loss) income, before tax: | | | | | | | Foreign currency translation adjustments | | (18,499 | ) | | 2,021 |
| | (8,875 | ) | Post-employment benefits: | | | | | | | Actuarial (loss) gain on re-measurement | | (2,192 | ) | | (372 | ) | | 709 |
| Reclassification of actuarial (gains) losses and prior service cost into other income, net and included in net periodic pension costs | | (66 | ) | | (306 | ) | | (73 | ) | Unrealized gain on investment securities available for sale | | — |
| | — |
| | 37 |
| Cumulative effect of adopting accounting standard | | — |
| | (50 | ) | | — |
| Unrealized loss on cash flow hedge | | (16,615 | ) | | (14,446 | ) | | — |
| Reclassification of interest from cash flow hedge into interest expense | | 4,638 |
| | 244 |
| | — |
| Total other comprehensive loss, before tax | | (32,734 | ) | | (12,909 | ) | | (8,202 | ) | Income tax (benefit) expense related to items of other comprehensive loss | | (3,190 | ) | | (3,246 | ) | | 319 |
| Other comprehensive loss, net of tax | | (29,544 | ) | | (9,663 | ) | | (8,521 | ) | Comprehensive (loss) income | | $ | (5,502 | ) | | $ | 134,330 |
| | $ | 133,104 |
|
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (In thousands)
| | | | | | | | | | | | | | | June 30, | | 2023 | | 2022 | Assets | | | | | Current assets | | | | | Cash and cash equivalents | | $ | 344,036 | | | $ | 184,474 | | Accounts receivable, net | | 708,395 | | | 656,429 | | Inventories | | 501,184 | | | 449,821 | | Other current assets | | 93,192 | | | 68,805 | | Total current assets | | 1,646,807 | | | 1,359,529 | | Property — at cost | | | | | Land | | 14,219 | | | 14,319 | | Buildings | | 109,884 | | | 108,119 | | Equipment, including computers and software | | 219,979 | | | 204,473 | | Total property — at cost | | 344,082 | | | 326,911 | | Less accumulated depreciation | | 229,041 | | | 215,015 | | Property — net | | 115,041 | | | 111,896 | | Operating lease assets, net | | 100,677 | | | 108,052 | | Identifiable intangibles, net | | 235,549 | | | 250,590 | | Goodwill | | 578,418 | | | 563,205 | | Other assets | | 66,840 | | | 59,316 | | Total Assets | | $ | 2,743,332 | | | $ | 2,452,588 | | Liabilities | | | | | Current liabilities | | | | | Accounts payable | | $ | 301,685 | | | $ | 259,463 | | Current portion of long-term debt | | 25,170 | | | 40,174 | | Compensation and related benefits | | 98,740 | | | 91,166 | | Other current liabilities | | 114,749 | | | 108,824 | | Total current liabilities | | 540,344 | | | 499,627 | | Long-term debt | | 596,926 | | | 649,150 | | Other liabilities | | 147,625 | | | 154,456 | | Total Liabilities | | 1,284,895 | | | 1,303,233 | | Shareholders’ Equity | | | | | Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding | | — | | | — | | Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,657 and 38,499 shares outstanding, respectively | | 10,000 | | | 10,000 | | Additional paid-in capital | | 188,646 | | | 183,822 | | Retained earnings | | 1,792,632 | | | 1,499,676 | | Treasury shares — at cost (15,556 and 15,714 shares, respectively) | | (477,545) | | | (471,848) | | Accumulated other comprehensive loss | | (55,296) | | | (72,295) | | Total Shareholders’ Equity | | 1,458,437 | | | 1,149,355 | | Total Liabilities and Shareholders’ Equity | | $ | 2,743,332 | | | $ | 2,452,588 | |
| | | | | | | | | | June 30, | | 2020 |
| | 2019 |
| Assets | | | | | Current assets | | | | | Cash and cash equivalents | | $ | 268,551 |
| | $ | 108,219 |
| Accounts receivable, net | | 449,998 |
| | 540,902 |
| Inventories | | 389,150 |
| | 447,555 |
| Other current assets | | 52,070 |
| | 51,462 |
| Total current assets | | 1,159,769 |
| | 1,148,138 |
| Property — at cost | | | | | Land | | 14,339 |
| | 14,452 |
| Buildings | | 104,396 |
| | 101,338 |
| Equipment, including computers and software | | 195,220 |
| | 189,579 |
| Total property — at cost | | 313,955 |
| | 305,369 |
| Less accumulated depreciation | | 192,054 |
| | 181,066 |
| Property — net | | 121,901 |
| | 124,303 |
| Operating lease assets, net | | 90,636 |
| | — |
| Identifiable intangibles, net | | 343,215 |
| | 368,866 |
| Goodwill | | 540,594 |
| | 661,991 |
| Other assets | | 27,436 |
| | 28,399 |
| Total Assets | | $ | 2,283,551 |
| | $ | 2,331,697 |
| Liabilities | | | | | Current liabilities | | | | | Accounts payable | | $ | 186,270 |
| | $ | 237,289 |
| Current portion of long-term debt | | 78,646 |
| | 49,036 |
| Compensation and related benefits | | 61,887 |
| | 67,978 |
| Other current liabilities | | 99,280 |
| | 69,491 |
| Total current liabilities | | 426,083 |
| | 423,794 |
| Long-term debt | | 855,143 |
| | 908,850 |
| Other liabilities | | 158,783 |
| | 102,019 |
| Total Liabilities | | 1,440,009 |
| | 1,434,663 |
| Shareholders’ Equity | | | | | Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding | | — |
| | — |
| Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,710 and 38,597 shares outstanding, respectively | | 10,000 |
| | 10,000 |
| Additional paid-in capital | | 176,492 |
| | 172,931 |
| Retained earnings | | 1,200,570 |
| | 1,229,148 |
| Treasury shares — at cost (15,503 and 15,616 shares), respectively | | (414,090 | ) | | (415,159 | ) | Accumulated other comprehensive loss | | (129,430 | ) | | (99,886 | ) | Total Shareholders’ Equity | | 843,542 |
| | 897,034 |
| Total Liabilities and Shareholders’ Equity | | $ | 2,283,551 |
| | $ | 2,331,697 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands) | | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| Cash Flows from Operating Activities | | | | | | | Net income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Goodwill & Intangible impairment | | 131,000 |
| | 31,594 |
| | — |
| Depreciation and amortization of property | | 21,196 |
| | 20,236 |
| | 17,798 |
| Amortization of intangibles | | 41,553 |
| | 41,883 |
| | 32,065 |
| Amortization of stock appreciation rights and options | | 2,954 |
| | 2,437 |
| | 1,961 |
| Deferred income taxes | | (13,292 | ) | | 2,368 |
| | 1,615 |
| Provision for losses on accounts receivable | | 14,055 |
| | 4,058 |
| | 2,803 |
| Unrealized foreign exchange transaction (gains) losses | | (1,357 | ) | | 238 |
| | (667 | ) | Other share-based compensation expense | | 4,000 |
| | 4,474 |
| | 4,666 |
| Gain on sale of property | | (1,157 | ) | | (459 | ) | | (335 | ) | Changes in operating assets and liabilities, net of acquisitions: | | | | | | | Accounts receivable | | 74,437 |
| | 8,465 |
| | (83,103 | ) | Inventories | | 57,028 |
| | (16,590 | ) | | (33,436 | ) | Other operating assets | | (5,268 | ) | | (7,738 | ) | | 6,947 |
| Accounts payable | | (53,856 | ) | | (29,788 | ) | | 50,345 |
| Other operating liabilities | | 1,379 |
| | (24,570 | ) | | 5,020 |
| Cash provided by Operating Activities | | 296,714 |
| | 180,601 |
| | 147,304 |
| Cash Flows from Investing Activities | | | | | | | Capital expenditures | | (20,115 | ) | | (18,970 | ) | | (23,230 | ) | Proceeds from property sales | | 1,948 |
| | 1,003 |
| | 978 |
| Cash paid for acquisition of businesses, net of cash acquired | | (37,237 | ) | | (37,526 | ) | | (775,654 | ) | Other | | — |
| | 391 |
| | — |
| Cash used in Investing Activities | | (55,404 | ) | | (55,102 | ) | | (797,906 | ) | Cash Flows from Financing Activities | | | | | | | Net (repayments) borrowings under revolving credit facility | | — |
| | (19,500 | ) | | 19,500 |
| Borrowings under long-term debt facilities | | 25,000 |
| | 175,000 |
| | 780,000 |
| Long-term debt repayments | | (49,553 | ) | | (161,738 | ) | | (125,420 | ) | Payment of debt issuance costs | | (95 | ) | | (775 | ) | | (3,298 | ) | Purchases of treasury shares | | — |
| | (11,158 | ) | | (22,778 | ) | Dividends paid | | (48,873 | ) | | (47,266 | ) | | (45,858 | ) | Acquisition holdback payments | | (2,440 | ) | | (2,610 | ) | | (319 | ) | Exercise of stock appreciation rights and options | | 330 |
| | — |
| | 102 |
| Taxes paid for shares withheld | | (2,607 | ) | | (3,492 | ) | | (1,645 | ) | Cash (used in) provided by Financing Activities | | (78,238 | ) | | (71,539 | ) | | 600,284 |
| Effect of exchange rate changes on cash | | (2,740 | ) | | 109 |
| | (589 | ) | Increase (decrease) in cash and cash equivalents | | 160,332 |
| | 54,069 |
| | (50,907 | ) | Cash and cash equivalents at beginning of year | | 108,219 |
| | 54,150 |
| | 105,057 |
| Cash and Cash Equivalents at End of Year | | $ | 268,551 |
| | $ | 108,219 |
| | $ | 54,150 |
| | | | | | | | Supplemental Cash Flow Information | | | | | | | Cash paid during the year for: | | | | | | | Income taxes | | 41,162 |
| | 54,294 |
| | 41,724 |
| Interest | | 36,648 |
| | 40,142 |
| | 25,560 |
|
| | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | | 2023 | | 2022 | | 2021 | Cash Flows from Operating Activities | | | | | | | Net income | | $ | 346,739 | | | $ | 257,414 | | | $ | 144,757 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Impairment Expense | | — | | | — | | | 49,528 | | Depreciation and amortization of property | | 22,266 | | | 21,676 | | | 20,780 | | Amortization of intangibles | | 30,805 | | | 31,879 | | | 34,365 | | Amortization of stock appreciation rights and options | | 2,785 | | | 3,284 | | | 2,526 | | Deferred income taxes | | (5,716) | | | 15,176 | | | (31,080) | | Provision for losses on accounts receivable | | 5,619 | | | 3,193 | | | 6,540 | | Other share-based compensation expense | | 9,576 | | | 8,558 | | | 6,454 | | Other | | 1,145 | | | (1,752) | | | 1,446 | | Changes in operating assets and liabilities, net of acquisitions: | | | | | | | Accounts receivable | | (51,059) | | | (145,519) | | | (59,119) | | Inventories | | (42,977) | | | (92,425) | | | 41,318 | | Other operating assets | | (25,254) | | | (4,982) | | | (5,262) | | Accounts payable | | 37,682 | | | 53,597 | | | 10,919 | | Other operating liabilities | | 12,355 | | | 37,471 | | | 18,525 | | Cash provided by Operating Activities | | 343,966 | | | 187,570 | | | 241,697 | | Cash Flows from Investing Activities | | | | | | | Cash paid for acquisition of businesses, net of cash acquired | | (35,785) | | | (6,964) | | | (30,230) | | Capital expenditures | | (26,476) | | | (18,124) | | | (15,852) | | Proceeds from property sales | | 1,428 | | | 1,107 | | | 1,152 | | Life insurance proceeds | | — | | | 3,158 | | | — | | Cash payments for loans on company-owned life insurance | | — | | | (14,835) | | | — | | | | | | | | | Cash used in Investing Activities | | (60,833) | | | (35,658) | | | (44,930) | | Cash Flows from Financing Activities | | | | | | | Repayments under revolving credit facility | | (27,000) | | | — | | | — | | Net borrowings under revolving credit facility | | — | | | 410,592 | | | — | | Borrowings under long-term debt facilities | | — | | | — | | | 26,000 | | Long-term debt repayments | | (40,247) | | | (550,493) | | | (131,883) | | Interest rate swap settlement receipts (payments) | | 8,800 | | | (5,703) | | | (3,737) | | Payment of debt issuance costs | | — | | | (1,956) | | | (399) | | Purchases of treasury shares | | (716) | | | (13,784) | | | (40,089) | | Dividends paid | | (53,446) | | | (51,805) | | | (50,664) | | | | | | | | | Acquisition holdback payments | | (1,510) | | | (2,361) | | | (2,345) | | Exercise of stock appreciation rights and options | | 127 | | | 555 | | | 163 | | Taxes paid for shares withheld | | (12,896) | | | (8,074) | | | (10,083) | | | | | | | | | Cash used in Financing Activities | | (126,888) | | | (223,029) | | | (213,037) | | Effect of exchange rate changes on cash | | 3,317 | | | (2,154) | | | 5,464 | | Increase (decrease) in cash and cash equivalents | | 159,562 | | | (73,271) | | | (10,806) | | Cash and cash equivalents at beginning of year | | 184,474 | | | 257,745 | | | 268,551 | | Cash and Cash Equivalents at End of Year | | $ | 344,036 | | | $ | 184,474 | | | $ | 257,745 | | Supplemental Cash Flow Information | | | | | | | Cash paid during the year for: | | | | | | | Income taxes | | $ | 108,084 | | | $ | 53,301 | | | $ | 64,394 | | Interest (includes interest rate swap settlements) | | $ | 22,567 | | | $ | 20,164 | | | $ | 27,492 | | See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended June 30, 2023, 2022 and 2021 | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Shares- at Cost | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity | Balance at June 30, 2020 | | 38,710 | | | $ | 10,000 | | | $ | 176,492 | | | $ | 1,200,570 | | | $ | (414,090) | | | $ | (129,430) | | | $ | 843,542 | | Net income | | | | | | | | 144,757 | | | | | | | 144,757 | | Other comprehensive income | | | | | | | | | | | | 36,338 | | | 36,338 | | Cash dividends — $1.30 per share | | | | | | | | (50,992) | | | | | | | (50,992) | | Purchases of common stock for treasury | | (400) | | | | | | | | | (40,089) | | | | | (40,089) | | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 152 | | | | | (6,379) | | | | | (2,009) | | | | | (8,388) | | Performance share awards | | 22 | | | | | (985) | | | | | (20) | | | | | (1,005) | | Restricted stock units | | 19 | | | | | (740) | | | | | 95 | | | | | (645) | | Compensation expense — stock appreciation rights | | | | | | 2,526 | | | | | | | | | 2,526 | | Other share-based compensation expense | | | | | | 6,454 | | | | | | | | | 6,454 | | Other | | 13 | | | | | (354) | | | 78 | | | 324 | | | | | 48 | | Balance at June 30, 2021 | | 38,516 | | | 10,000 | | | 177,014 | | | 1,294,413 | | | (455,789) | | | (93,092) | | | 932,546 | | Net income | | | | | | | | 257,414 | | | | | | | 257,414 | | Other comprehensive income | | | | | | | | | | | | 20,797 | | | 20,797 | | Cash dividends — $1.34 per share | | | | | | | | (52,175) | | | | | | | (52,175) | | Purchases of common stock for treasury | | (149) | | | | | | | | | (13,784) | | | | | (13,784) | | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 104 | | | | | (3,945) | | | | | (2,132) | | | | | (6,077) | | Performance share awards | | 5 | | | | | (222) | | | | | (73) | | | | | (295) | | Restricted stock units | | 12 | | | | | (598) | | | | | (138) | | | | | (736) | | Compensation expense — stock appreciation rights | | | | | | 3,284 | | | | | | | | | 3,284 | | Other share-based compensation expense | | | | | | 8,558 | | | | | | | | | 8,558 | | Other | | 11 | | | | | (269) | | | 24 | | | 68 | | | | | (177) | | Balance at June 30, 2022 | | 38,499 | | | 10,000 | | | 183,822 | | | 1,499,676 | | | (471,848) | | | (72,295) | | | 1,149,355 | | Net income | | | | | | | | 346,739 | | | | | | | 346,739 | | Other comprehensive income | | | | | | | | | | | | 16,999 | | | 16,999 | | Cash dividends — $1.38 per share | | | | | | | | (53,887) | | | | | | | (53,887) | | Purchases of common stock for treasury | | (8) | | | | | | | | | (716) | | | | | (716) | | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 92 | | | | | (4,256) | | | | | (3,773) | | | | | (8,029) | | Performance share awards | | 23 | | | | | (1,290) | | | | | (758) | | | | | (2,048) | | Restricted stock units | | 34 | | | | | (1,712) | | | | | (932) | | | | | (2,644) | | Compensation expense — stock appreciation rights | | | | | | 2,785 | | | | | | | | | 2,785 | | Other share-based compensation expense | | | | | | 9,576 | | | | | | | | | 9,576 | | Other | | 17 | | | | | (279) | | | 104 | | | 482 | | | | | 307 | | Balance at June 30, 2023 | | 38,657 | | | $ | 10,000 | | | $ | 188,646 | | | $ | 1,792,632 | | | $ | (477,545) | | | $ | (55,296) | | | $ | 1,458,437 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended June 30, 2020, 2019 and 2018 | | Shares of Common Stock Outstanding |
| | Common Stock |
| | Additional Paid-In Capital |
| |
Retained Earnings |
| | Treasury Shares- at Cost |
| | Accumulated Other Comprehensive Loss |
| | Total Shareholders' Equity |
| Balance at June 30, 2017 | | 39,041 |
| | $ | 10,000 |
| | $ | 164,655 |
| | $ | 1,033,751 |
| | $ | (381,448 | ) | | $ | (81,702 | ) | | $ | 745,256 |
| Net income | | | | | | | | 141,625 |
| | | | | | 141,625 |
| Other comprehensive income (loss) | | | | | | | | | | | | (8,050 | ) | | (8,050 | ) | Reclassifications of certain income tax effects from accumulated other comprehensive loss | | | | | | | | 471 |
| | | | (471 | ) | | — |
| Cash dividends — $1.18 per share | | | | | | | | (46,162 | ) | | | | | | (46,162 | ) | Purchases of common stock for treasury | | (393 | ) | | | | | | | | (22,778 | ) | | | | (22,778 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 19 |
| | | | (482 | ) | | | | 84 |
| | | | (398 | ) | Performance share awards | | 5 |
| | | | (273 | ) | | | | (24 | ) | | | | (297 | ) | Restricted stock units | | 15 |
| | | | (740 | ) | | | | (56 | ) | | | | (796 | ) | Compensation expense — stock appreciation rights and options | | | | | | 1,961 |
| | | | | | | | 1,961 |
| Other share-based compensation expense | | | | | | 4,666 |
| | | | | | | | 4,666 |
| Other | | 16 |
| | | | (404 | ) | | (7 | ) | | 347 |
| | | | (64 | ) | Balance at June 30, 2018 | | 38,703 |
| | 10,000 |
| | 169,383 |
| | 1,129,678 |
| | (403,875 | ) | | (90,223 | ) | | 814,963 |
| Net income | | | | | | | | 143,993 |
| | | | | | 143,993 |
| Other comprehensive income (loss) | | | | | | | | | | | | (9,663 | ) | | (9,663 | ) | Cumulative effect of adopting accounting standards | | | | | | | | 3,056 |
| | | | | | 3,056 |
| Cash dividends — $1.22 per share | | | | | | | | (47,621 | ) | | | | | | (47,621 | ) | Purchases of common stock for treasury | | (192 | ) | | | | | | | | (11,158 | ) | | | | (11,158 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 30 |
| | | | (1,069 | ) | | | | (59 | ) | | | | (1,128 | ) | Performance share awards | | 18 |
| | | | (844 | ) | | | | (301 | ) | | | | (1,145 | ) | Restricted stock units | | 23 |
| | | | (1,057 | ) | | | | (120 | ) | | | | (1,177 | ) | Compensation expense — stock appreciation rights and options | | | | | | 2,437 |
| | | | | | | | 2,437 |
| Other share-based compensation expense | | | | | | 4,474 |
| | | | | | | | 4,474 |
| Other | | 15 |
| | | | (393 | ) | | 42 |
| | 354 |
| | | | 3 |
| Balance at June 30, 2019 | | 38,597 |
| | 10,000 |
| | 172,931 |
| | 1,229,148 |
| | (415,159 | ) | | (99,886 | ) | | 897,034 |
| Net income | | | | | | | | 24,042 |
| | | | | | 24,042 |
| Other comprehensive income (loss) | | | | | | | | | | | | (29,544 | ) | | (29,544 | ) | Cumulative effect of adopting accounting standards | | | | | | | | (3,275 | ) | | | | | | (3,275 | ) | Cash dividends — $1.26 per share | | | | | | | | (49,305 | ) | | | | | | (49,305 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 43 |
| | | | (730 | ) | | | | 71 |
| | | | (659 | ) | Performance share awards | | 36 |
| | | | (1,540 | ) | | | | 362 |
| | | | (1,178 | ) | Restricted stock units | | 17 |
| | | | (671 | ) | | | | 213 |
| | | | (458 | ) | Compensation expense — stock appreciation rights and options | | | | | | 2,954 |
| | | | | | | | 2,954 |
| Other share-based compensation expense | | | | | | 4,000 |
| | | | | | | | 4,000 |
| Other | | 17 |
| | | | (452 | ) | | (40 | ) | | 423 |
| | | | (69 | ) | Balance at June 30, 2020 | | 38,710 |
| | $ | 10,000 |
| | $ | 176,492 |
| | $ | 1,200,570 |
| | $ | (414,090 | ) | | $ | (129,430 | ) | | $ | 843,542 |
|
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES Business Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, and expertise. Although the Company does not generally manufacture the products it sells, it does assemble and repair certain products and systems. Consolidation The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Foreign Currency The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive lossincome (loss) in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other income,expense (income), net. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. Marketable Securities The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other income,expense (income), net in the statements of consolidated income. Concentration of Credit Risk The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and Singapore. As such, the Company does not believe that a significant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While the Company monitors the creditworthiness of these institutions, a crisis in the financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand. Accounts Receivable Accounts receivable are stated at their estimated net realizable value and consist of amounts billed or billable and currently due from customers. Allowances for Doubtful Accounts The Company maintains an allowance for doubtful accounts, which reflects management’s best estimate of probable losses based on an analysis of customer accounts, known troubled accounts, historical experience with write-offs, and other currently available evidence. Allowances for Doubtful Accounts
The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be
greater credit risks, trends within the entire customer
pool, and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. The allowance for doubtful accounts was $13,661$22,334 and $10,498$17,522 at June 30, 20202023 and June 30, 2019,2022, respectively. Inventories Inventories are valued at average cost, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S. inventories in fiscal 1974. At June 30, 2020,2023, approximately 17.3%14.2% of the Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. The Company evaluates the recoverability of its slow moving and inactive inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence, and, in certain instances, can be eligible for return under supplier return programs. Supplier Purchasing Programs The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s fiscal year end or the supplier’s year end; however, program length and ending dates can vary. Incentives are received in the form of cash or credits against purchases upon attainment of specified purchase volumes and are received either monthly, quarterly or annually. The incentives are generally a specified percentage of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases expected during the life of the program. Supplier programs are analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon program completion, differences between estimates and actual incentives subsequently received have not been material. Benefits under these supplier purchasing programs are recognized under the Company’s inventory accounting methods as a reduction of cost of sales when the inventories representing these purchases are recorded as cost of sales. Accrued incentives expected to be settled as a credit against future purchases are reported on the consolidated balance sheets as an offset to amounts due to the related supplier. Property and Related Depreciation and Amortization Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and is included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease if a shorter period, and equipment is depreciated over three to ten years. The Company capitalizes internal use software development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use. Amortization of software begins when it is ready for its intended use, and is computed on a straight-line basis over the estimated useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the asset group's recorded value cannot be recovered from undiscounted future cash flows. Impairment losses, if any, would be measured based upon the difference between the carrying amount of an asset group and its fair value.
Goodwill and Intangible Assets Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in conditions indicate an evaluation should be completed. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. The Company utilizes the income and market approaches to determine the fair value of reporting units. Evaluating impairment requires significant judgment by management,
including estimated future operating results, estimated future cash flows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While the Company uses available information to prepare the estimates and evaluations, actual results could differ significantly. The Company recognizes acquired identifiable intangible assets such as customer relationships, trade names, vendor relationships, and non-competition agreements apart from goodwill. Customer relationship identifiable intangibles are amortized using the sum-of-the-years-digits method or the expected cash flow method over estimated useful lives consistent with assumptions used in the determination of their value. Amortization of all other finite-lived identifiable intangible assets is computed using the straight-line method over the estimated period of benefit. Amortization of identifiable intangible assets is included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model. Identifiable intangible assets with indefinite lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed. The Company does not currently have any indefinite-lived identifiable intangible assets. Self-Insurance Liabilities The Company maintains business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. The Company accrues estimated losses including those incurred but not reported using actuarial calculations, models and assumptions based on historical loss experience. The Company also maintains a self-insured health benefits plan which provides medical benefits to U.S. based employees electing coverage under the plan. The Company estimates its reserve for all unpaid medical claims, including those incurred but not reported, based on historical experience, adjusted as necessary based upon management’s reasoned judgment. Revenue Recognition The Company primarily sells purchased products distributed through its network of service centers and recognizes revenue at a point in time when control of the product transfers to the customer, typically upon shipment from an Applied facility or directly from a supplier. For products that ship directly from suppliers to customers, Applied generally acts as the principal in the transaction and recognizes revenue on a gross basis. Revenue recognized over time is not significant. Revenue is measured as the amount of consideration expected to be received in exchange for the products and services provided, net of allowances for product returns, variable consideration, and any taxes collected from customers that will be remitted to governmental authorities. Shipping and handling costs are recognized in net sales when they are billed to the customer. The Company has elected to account for shipping and handling activities as fulfillment costs. There are no significant costs associated with obtaining customer contracts. Payment terms with customers vary by the type and location of the customer and the products or services offered. The Company does not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant. The Company’s products are generally sold with a right of return and may include variable consideration in the form of incentives, discounts, credits or rebates. Product returns are estimated based on historical return rates. The returns reserve was $9,883$12,635 and $7,265$10,522 at June 30, 20202023 and June 30, 2019,2022, respectively. The Company estimates and recognizes variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to a customer. The Company records variable consideration as an adjustment to the transaction price in the period it
is incurred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant. Shipping and Handling Costs The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and administrative expense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expense were approximately $19,620, $24,090$22,170, $17,890 and $19,320$15,970 for the fiscal years ended June 30, 2020, 20192023, 2022 and 2018,2021, respectively.
Income Taxes Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. Uncertain tax positions meeting a more-likely-than-not recognition threshold are recognized in accordance with Accounting Standards Codification (ASC) Topic 740 - Income Taxes. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes. Share-Based Compensation Share-based compensation represents the cost related to share-based awards granted to employees under the 2019 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, or the 20072011 Long-Term Performance Plan. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service period. Non-qualified stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and have ten-year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on the closing market price of Company common stock on the grant date. Treasury Shares Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital. Derivatives The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Retirement Savings Plan Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company suspended the 401(k) match starting in the fourth quarter of 2020 and restored it in the third quarter of fiscal 2021. The Company’s expense for matching of employees’ 401(k) contributions was $5,959, $7,711$9,989, $9,149 and $6,551$3,945 during 2020, 20192023, 2022 and 2018,2021, respectively.
Deferred Compensation Plans The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.
Post-employment Benefit Plans The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded: Supplemental Executive Retirement Benefits Plan The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011. The Company recorded net periodic benefit costs associated with the SERP of $317, $414,$399, $450, and $679$401 in fiscal 20202023, 20192022, and 2018,2021, respectively. The Company expects to make payments of approximately $800$1,300 under the SERP in each of fiscal 2021, 20222024 and 2023.2025, respectively. Key Executive Restoration Plan In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $189, $400,$456, $514, and $359$334 of expense associated with this plan in fiscal 20202023, 20192022, and 2018,2021, respectively. Qualified Defined Benefit Retirement Plan The Company has aCompany's qualified defined benefit retirement plan that providesprovided benefits to certain hourly employees at retirement. These employees did not participate in the Retirement Savings Plan. The benefits areretirement based on length of service and date of retirement. The plan accruals were frozen as of April 16, 2018, and employees arewere permitted to participate in the Retirement Savings Plan, following that date. The Company terminated the plan effective February 28, 2022. Participants elected to receive benefits as either a lump sum payment or through an annuity contract and the settlement of $8,895 was paid from plan assets in the second quarter of fiscal 2023. As a result of the plan termination, the Company recognized a loss of $1,184 in the year ended June 30, 2023, which is recorded in other expense (income), net in the statements of consolidated income. The Company recorded net periodic (benefits) costs associated with this plan of $(116), $(34),$282 and $149$46 in fiscal 20202022, 2019, and 2018, respectively2021, respectively. Retiree Health Care Benefits The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees at no cost to the individual. The Company recorded net periodic benefits associated with these plans of $257, $418,$113, $123, and $452$161 in fiscal 20202023, 20192022, and 2018,2021, respectively. The Company has determined that the related disclosures under ASC Topic 715 - Compensation, Retirement Benefits, for these post-employment benefit plans are not material to the consolidated financial statements. Leases The Company leases facilities for certain service centers, warehouses, distribution centers and office space. The Company also leases office equipment and vehicles. All leases are classified as operating. The Company’s leases expire at various dates through 2031,2034, with terms ranging from 1 year to 15 years. Many of the Company’s real estate leases contain renewal provisions to extend lease terms up to 5 years. The exercise of renewal options is solely at the Company’s discretion. The Company’s lease agreements do not contain material variable lease payments, residual value guarantees or restrictive covenants. The Company does not recognize right-of-use assets or lease liabilities for short-term leases with initial terms of 12 months or less. Leased vehicles comprise the majority of the Company’s short-term leases. All other leases are recorded on the balance sheet with right-of-use assets representing the right to use the underlying asset for the lease term and lease liabilities representing lease payment obligations. The Company’s leases do not provide implicit rates; therefore the Company uses its incremental borrowing rate as the discount rate for measuring lease liabilities. Non-lease components are accounted for separately from lease components. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, distribution and administrative expense on the statements of consolidated income.
Recently Adopted Accounting Guidance
In March 2020, the FASB issued its final standard on the facilitationLeases
In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, and codified into ASC Topic 842, Leases, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. This update is effective for annual financial statement periods beginning after December 15, 2018, with earlier application permitted. In July 2018, the FASB issued ASU 2018-10 which clarifies the guidance in ASU 2016-02 and ASU 2018-11 which provides entities with an additional transition method option for adopting the new standard. In December 2018 and January 2019, the FASB issued ASU 2018-20 and ASU 2019-01, respectively, which further clarify the guidance. The Company adopted the new guidance effective July 1, 2019 using the optional transition method, which required application of the new guidance to only those leases that existed at the date of adoption. The Company elected the “package of practical expedients,” which permitted the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Adoption of the new standard resulted in the recognition of right-of-use (ROU) assets and lease liabilities of $83,533 and $89,778, respectively, on July 1, 2019. The difference between the ROU assets and lease liabilities related primarily to the impairment of certain leases in Canada and the United States. In addition, the adoption resulted in an adjustment to opening retained earnings of $3,275, net of tax, on July 1, 2019 primarily due to the impairment of the leases. The standard did not have a material impact on the Company’s statements of consolidated income or cash flows.
Cash Flows
In August 2016, the FASB issued its final standard on the classification of certain cash receipts and cash payments within the statement of cash flows. This standard, issued as ASU 2016-15, makes a number of changes meant to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2018, with early adoption permitted. The Company adopted the new guidance in the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on the Company's financial statements or related disclosures.
Recently Issued Accounting Guidance
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. In November 2018, April 2019, May 2019, November 2019, and February 2020, the FASB issued ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11 and ASU 2020-02, respectively, which clarify the guidance in ASU 2016-13. The Company has not yet determined the impact of these pronouncements on its financial statements and related disclosures.
In December 2019, the FASB issued its final standard on simplifying the accounting for income taxes. This standard, issued as ASU 2019-12, makes a number of changes meant to add or clarify guidance on accounting for income taxes. This update is effective for annual and interim financial statement periods beginning after December 15, 2021, with early adoption permitted in any interim period for which financial statements have not yet been filed. The Company has not yet determined the impact of these pronouncements on its financial statements and related disclosures.
NOTE 2: REVENUE RECOGNITION Disaggregation of Revenues The following tables present the Company's net sales by reportable segment and by geographic areas based on the location of the facility shipping the product for the years ended June 30, 2020, 20192023, 2022 and 2018.2021. Other countries consist of Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | Year Ended June 30, 2020 | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| Geographic Areas: | | | | United States | $ | 1,833,275 |
| $ | 986,125 |
| $ | 2,819,400 |
| Canada | 248,610 |
| — |
| 248,610 |
| Other countries | 160,064 |
| 17,578 |
| 177,642 |
| Total | $ | 2,241,949 |
| $ | 1,003,703 |
| $ | 3,245,652 |
|
| | | | | | | | | | | | | Year Ended June 30, 2023 | | Service Center Based Distribution | Engineered Solutions | Total | Geographic Areas: | | | | United States | $ | 2,441,281 | | $ | 1,419,140 | | $ | 3,860,421 | | Canada | 315,499 | | — | | 315,499 | | Other Countries | 210,062 | | 26,812 | | 236,874 | | Total | $ | 2,966,842 | | $ | 1,445,952 | | $ | 4,412,794 | |
| | | | | | | | | | | | | Year Ended June 30, 2022 | | Service Center Based Distribution | Engineered Solutions | Total | Geographic Areas: | | | | United States | $ | 2,081,566 | | $ | 1,218,184 | | $ | 3,299,750 | | Canada | 291,530 | | — | | 291,530 | | Other Countries | 192,508 | | 26,888 | | 219,396 | | Total | $ | 2,565,604 | | $ | 1,245,072 | | $ | 3,810,676 | |
| | | | | | | | | | | | Year Ended June 30, 2019 | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| Geographic Areas: | | | | United States | $ | 2,009,479 |
| $ | 1,007,280 |
| $ | 3,016,759 |
| Canada | 271,305 |
| — |
| 271,305 |
| Other countries | 172,121 |
| 12,554 |
| 184,675 |
| Total | $ | 2,452,905 |
| $ | 1,019,834 |
| $ | 3,472,739 |
|
| | | | | | | | | | | | | Year Ended June 30, 2021 | | Service Center Based Distribution | Engineered Solutions | Total | Geographic Areas: | | | | United States | $ | 1,768,965 | | $ | 1,013,894 | | $ | 2,782,859 | | Canada | 255,360 | | — | | 255,360 | | Other Countries | 175,208 | | 22,492 | | 197,700 | | Total | $ | 2,199,533 | | $ | 1,036,386 | | $ | 3,235,919 | |
| | | | | | | | | | | | Year Ended June 30, 2018 | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| Geographic Areas: | | | | United States | $ | 1,903,388 |
| $ | 711,653 |
| $ | 2,615,041 |
| Canada | 273,622 |
| — |
| 273,622 |
| Other countries | 169,408 |
| 15,203 |
| 184,611 |
| Total | $ | 2,346,418 |
| $ | 726,856 |
| $ | 3,073,274 |
|
The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the years ended June 30, 20202023, 2022, and 2019:2021: | | | | | | | | | | | | | | | | | | | Year Ended June 30, 2023 | | Service Center Based Distribution | | Engineered Solutions | | Total | General Industry | 34.0 | % | | 41.2 | % | | 36.2 | % | Industrial Machinery | 9.8 | % | | 26.1 | % | | 15.2 | % | Food | 13.2 | % | | 2.7 | % | | 9.8 | % | Metals | 10.6 | % | | 7.5 | % | | 9.6 | % | Forest Products | 12.1 | % | | 2.8 | % | | 9.1 | % | Chem/Petrochem | 2.8 | % | | 13.9 | % | | 6.4 | % | Cement & Aggregate | 7.8 | % | | 1.3 | % | | 5.7 | % | Oil & Gas | 6.0 | % | | 1.4 | % | | 4.5 | % | Transportation | 3.7 | % | | 3.1 | % | | 3.5 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | Year Ended June 30, 2020 | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| General Industry | 35.0 | % | | 41.2 | % | | 36.8 | % | Industrial Machinery | 9.7 | % | | 24.4 | % | | 14.3 | % | Metals | 11.1 | % | | 7.2 | % | | 9.9 | % | Food | 12.2 | % | | 3.1 | % | | 9.4 | % | Forest Products | 9.3 | % | | 3.7 | % | | 7.6 | % | Chem/Petrochem | 3.3 | % | | 13.4 | % | | 6.4 | % | Oil & Gas | 7.5 | % | | 1.6 | % | | 5.7 | % | Cement & Aggregate | 7.3 | % | | 1.0 | % | | 5.4 | % | Transportation | 4.6 | % | | 4.4 | % | | 4.5 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | Year Ended June 30, 2022 | | Service Center Based Distribution | | Engineered Solutions | | Total | General Industry | 34.9 | % | | 40.1 | % | | 36.7 | % | Industrial Machinery | 10.3 | % | | 28.3 | % | | 16.2 | % | Food | 12.6 | % | | 2.5 | % | | 9.3 | % | Metals | 11.2 | % | | 7.4 | % | | 9.9 | % | Forest Products | 10.8 | % | | 2.4 | % | | 8.0 | % | Chem/Petrochem | 3.1 | % | | 13.8 | % | | 6.6 | % | Cement & Aggregate | 7.6 | % | | 1.0 | % | | 5.5 | % | Oil & Gas | 5.4 | % | | 1.2 | % | | 4.0 | % | Transportation | 4.1 | % | | 3.3 | % | | 3.8 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | Year Ended June 30, 2021 | | Service Center Based Distribution | | Engineered Solutions | | Total | General Industry | 35.8 | % | | 40.0 | % | | 37.2 | % | Industrial Machinery | 9.8 | % | | 26.8 | % | | 15.2 | % | Food | 13.5 | % | | 2.9 | % | | 10.1 | % | Metals | 10.5 | % | | 6.8 | % | | 9.3 | % | Forest Products | 10.7 | % | | 2.9 | % | | 8.2 | % | Chem/Petrochem | 3.3 | % | | 13.6 | % | | 6.6 | % | Cement & Aggregate | 7.9 | % | | 1.1 | % | | 5.7 | % | Oil & Gas | 3.9 | % | | 1.1 | % | | 3.0 | % | Transportation | 4.6 | % | | 4.8 | % | | 4.7 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | Year Ended June 30, 2019 | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| General Industry | 33.7 | % | | 43.0 | % | | 36.3 | % | Industrial Machinery | 10.4 | % | | 21.8 | % | | 13.8 | % | Metals | 12.6 | % | | 9.4 | % | | 11.6 | % | Food | 10.6 | % | | 2.7 | % | | 8.3 | % | Forest Products | 8.0 | % | | 3.1 | % | | 6.6 | % | Chem/Petrochem | 3.1 | % | | 13.8 | % | | 6.3 | % | Oil & Gas | 10.1 | % | | 2.1 | % | | 7.8 | % | Cement & Aggregate | 6.7 | % | | 1.0 | % | | 5.0 | % | Transportation | 4.8 | % | | 3.1 | % | | 4.3 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
The following tables present the Company’s percentage of revenue by reportable segment and product line for the years ended June 30, 20202023, 2022, and 2019:2021: | | | | | | | | | | | | | | | | | | | Year Ended June 30, 2023 | | Service Center Based Distribution | | Engineered Solutions | | Total | Power Transmission | 37.3 | % | | 10.6 | % | | 28.5 | % | General Maintenance; Hose Products | 21.1 | % | | 19.3 | % | | 20.6 | % | Fluid Power | 13.3 | % | | 34.3 | % | | 20.2 | % | Bearings, Linear & Seals | 28.3 | % | | 0.4 | % | | 19.1 | % | Specialty Flow Control | — | % | | 35.4 | % | | 11.6 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | Year Ended June 30, 2020 | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Power Transmission | 35.4 | % | | 9.5 | % | | 27.4 | % | Fluid Power | 13.4 | % | | 39.0 | % | | 21.3 | % | General Maintenance; Hose Products | 24.6 | % | | 11.7 | % | | 20.6 | % | Bearings, Linear & Seals | 26.6 | % | | 0.3 | % | | 18.5 | % | Specialty Flow Control | — | % | | 39.5 | % | | 12.2 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | Year Ended June 30, 2022 | | Service Center Based Distribution | | Engineered Solutions | | Total | Power Transmission | 37.1 | % | | 10.6 | % | | 28.4 | % | General Maintenance; Hose Products | 20.9 | % | | 18.9 | % | | 20.3 | % | Fluid Power | 12.8 | % | | 37.2 | % | | 20.8 | % | Bearings, Linear & Seals | 29.2 | % | | 0.4 | % | | 19.8 | % | Specialty Flow Control | — | % | | 32.9 | % | | 10.7 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | Year Ended June 30, 2019 | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Power Transmission | 33.9 | % | | 1.6 | % | | 24.4 | % | Fluid Power | 13.5 | % | | 39.4 | % | | 21.1 | % | General Maintenance; Hose Products | 25.1 | % | | 5.3 | % | | 19.3 | % | Bearings, Linear & Seals | 27.5 | % | | 0.3 | % | | 19.5 | % | Specialty Flow Control | — | % | | 53.4 | % | | 15.7 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | Year Ended June 30, 2021 | | Service Center Based Distribution | | Engineered Solutions | | Total | Power Transmission | 37.3 | % | | 7.5 | % | | 27.8 | % | General Maintenance; Hose Products | 20.5 | % | | 16.9 | % | | 19.3 | % | Fluid Power | 13.2 | % | | 38.0 | % | | 21.2 | % | Bearings, Linear & Seals | 29.0 | % | | 0.4 | % | | 19.8 | % | Specialty Flow Control | — | % | | 37.2 | % | | 11.9 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
Contract Assets The Company’s contract assets consist of un-billed amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer. Activity related to contract assets, which are included in other current assets on the consolidated balance sheet, is as follows: | | | | | | | | | | | | | | June 30, 2020 |
| June 30, 2019 |
| $ Change |
| % Change |
| Contract assets | $ | 8,435 |
| $ | 8,920 |
| $ | (485 | ) | (5.4 | )% |
| | | | | | | | | | | | | | | | June 30, 2023 | June 30, 2022 | $ Change | % Change | Contract assets | $ | 17,911 | | $ | 18,050 | | $ | (139) | | (0.8) | % |
The difference between the opening and closing balances of the Company's contract assets primarily results from the timing difference between the Company's performance and when the customer is billed.
NOTE 3: BUSINESS COMBINATIONS The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition. Fiscal 20202023 Acquisitions On August 21, 2019,March 31, 2023, the Company acquired 100%substantially all of the outstanding sharesnet assets of Olympus Controls (Olympus)Advanced Motion Systems Inc. (AMS), a Portland, Oregonwestern New York based provider of automation products, services, and engineered solutions provider - including design, assembly, integration,focused on a full range of machine vision, robotics, and distribution - of motion control machine vision,products and robotic technologies. OlympusAMS is included in the Fluid Power & Flow ControlEngineered Solutions segment. The purchase price for the acquisition was $36,642,$10,118, net tangible assets acquired were $9,540,$1,768, and intangible assets including goodwill was $27,102were $8,350 based upon preliminary estimated fair values at the acquisition date.date, which are subject to adjustment. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2019 Acquisitions
On March 4, 2019,November 1, 2022, the Company acquired substantially all of the net assets of MilRoc Distribution (MilRoc) and Woodward Steel (Woodward). MilRoc is an OklahomaAutomation, Inc., a Minneapolis, Minnesota based distributorprovider of oilfield specificautomation products, namely pumps and valves, as well as equipment repair services, and industrial parts to the oil & gas industry. Woodwardengineered solutions focused on machine vision, collaborative and mobile robotics, motion control, intelligent sensors, pneumatics, and other related products and solutions. Automation, Inc. is an Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc and Woodward are both included in the Service Center Based DistributionEngineered Solutions segment. The purchase price for the acquisition was $35,000,$25,667, net tangible assets acquired were $17,788,$3,689, and intangible assets including goodwill were $21,978 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The Company
funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2022 Acquisitions On August 18, 2021, the Company acquired substantially all of the net assets of R.R. Floody Company (Floody), a Rockford, Illinois provider of high technology solutions for advanced factory automation. Floody is included in the Engineered Solutions segment. The purchase price for the acquisition was $17,212$8,038, net tangible assets acquired were $1,040, and intangible assets including goodwill were $6,998 based upon estimated fair values at the acquisition date. The purchase price includes $1,000 of acquisition holdback payments, of $4,375, of which $1,666$500 was paid during the year endedyear-ended June 30, 2020.2023. The remaining balance of $2,709$500 is included in other current liabilities and other liabilities on the consolidated balance sheet as of June 30, 2020,2023, and which will be paid on the second and third anniversariesanniversary of the acquisition date with interest at a fixed rate of 2.0% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2021 Acquisitions On November 2, 2018,December 31, 2020, the Company acquired substantially all100% of the net assetsoutstanding shares of Fluid Power Sales, Inc. (FPS)Gibson Engineering (Gibson), a Baldwinsville, New York based manufacturerNorwood, Massachusetts provider of automation products, services, and distributor of fluid power components, specializing in the engineeringengineered solutions focused on machine vision, motion control, mobile and fabrication of manifoldscollaborative robotic solutions, intelligent sensors, and power units. FPSother related equipment. Gibson is included in the Fluid Power & Flow ControlEngineered Solutions segment. The purchase price for the acquisition was $8,066,$15,341, net tangible assets acquired were $4,151,$955, and intangible assets including goodwill was $3,915were $14,386 based upon estimated fair values at the acquisition date. The purchase price includesincluded $1,904 of acquisition holdback payments, of $1,200, of which $600$850 was paid during the year-endyear-ended June 30, 2020. The remaining balance of $600 is included in other current liabilities on the consolidated balance sheet as of June 30, 2020, and will be paid on the second anniversary of the acquisition date with interest at a fixed rate of 1.5% per annum.2023. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. FCX Acquisition
On January 31, 2018,October 5, 2020, the Company completed the acquisition of 100%acquired substantially all of the outstanding sharesnet assets of FCX Performance, Inc. (FCX)Advanced Control Solutions (ACS), which operates four locations in Georgia, Tennessee and Alabama. ACS is a Columbus, Ohio based distributorprovider of specialty process flow controlautomation products, services, and services. The total consideration transferred for the acquisition was $781,781, which was financed by cash-on-handengineered solutions focused on machine vision equipment and a new credit facility comprised of a $780,000 Term Loan Asoftware, mobile and a $250,000 revolver, effective with the transaction closing. See note 6 Debt. As a distributor of engineered valves, instruments, pumpscollaborative robotic solutions, intelligent sensors, logic controllers, and lifecycle services to MRO and OEM customers across diverse industrial and process end markets, this businessother related equipment. ACS is included in the Fluid Power & Flow Control Segment.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of FCX based on their estimated fair values at the acquisition date. | | | | | | FCX Acquisition |
| | 2018 |
| Cash | $ | 11,141 |
| Accounts receivable | 80,836 |
| Inventories | 44,669 |
| Other current assets | 1,753 |
| Property | 8,282 |
| Identifiable intangible assets | 305,420 |
| Goodwill | 440,012 |
| Other assets | 775 |
| Total assets acquired | $ | 892,888 |
| Accounts payable and accrued liabilities | 54,035 |
| Other liabilities | 2,677 |
| Deferred tax liabilities | 54,395 |
| Net assets acquired | $ | 781,781 |
| | | Purchase price | $ | 784,281 |
| Reconciliation of fair value transferred: | | Working Capital Adjustments | (2,500 | ) | Total Consideration | $ | 781,781 |
|
The change in the carrying amount of goodwill for FCX since the acquisition is as follows:
| | | | | Balance at 1/31/2018 | $ | 440,012 |
| Impairment | 131,000 |
| Balance at 6/30/2020 | $ | 309,012 |
|
Goodwill acquired of $161,452 was deductible for income tax purposes at the time of the acquisition. Subsequent to the goodwill impairment recorded during the year ended June 30, 2020, $112,922 remains deductible for income tax purposes as of June 30, 2020.
Net sales, operating income and net income from the FCX acquisition included in the Company’s results since January 31, 2018, the date of the acquisition, are as follows: | | | | | | | | | | | | 2020 (1) |
| 2019 |
| January 31, 2018 to June 30, 2018 |
| Net sales | $ | 490,743 |
| $ | 549,833 |
| $ | 249,752 |
| Operating income | (97,300 | ) | 38,186 |
| 16,845 |
| Net income | (91,739 | ) | 28,075 |
| 8,758 |
|
| | (1) | There was a $131,000 goodwill impairment charge during the year ended June 30, 2020. See note 5, Goodwill and Intangibles, for further information. |
The Company incurred $2,849 in third-party costs during 2018 pertaining to the acquisition of FCX, which are included in selling, distribution and administration expense in the statements of consolidated income for fiscal 2018.
Other Fiscal 2018 Acquisition
On July 3, 2017, the Company acquired 100% of the outstanding stock of Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a distributor of accessories and components for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based DistributionEngineered Solutions segment. The purchase price for the acquisition was $5,920,$17,867, net tangible assets acquired were $3,395,$1,210, and intangible assets including goodwill was
$2,525were $16,657 based upon estimated fair values at the acquisition date. The purchase price includes $906 of acquisition holdback payments, of which $201 and $219 was paid during fiscal year 2020 and 2019, respectively. Due to changes in foreign currency exchange rates, the remaining balance of $356 is included in other current liabilities on the consolidated balance sheet as of June 30, 2020, which will be paid on the third anniversary of the acquisition date with interest at a fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
Holdback Liabilities for Acquisitions
Acquisition holdback payments of approximately $2,563, $1,448 and $75 will be made in fiscal 2021, 2022 and 2024, respectively. The related liabilities for these payments are recorded in the consolidated balance sheets in other current liabilities for the amounts due in fiscal year 2021 and other liabilities for the amounts due in fiscal years 2022 and 2024.
NOTE 4: INVENTORIES Inventories consist of the following: | | | | | | | | | | | | | | | June 30, | | 2023 | | 2022 | U.S. inventories at average cost | | $ | 558,299 | | | $ | 487,555 | | Foreign inventories at average cost | | 158,165 | | | 141,176 | | | | 716,464 | | | 628,731 | | Less: Excess of average cost over LIFO cost for U.S. inventories | | 215,280 | | | 178,910 | | Inventories on consolidated balance sheets | | $ | 501,184 | | | $ | 449,821 | |
| | | | | | | | | | June 30, | | 2020 |
| | 2019 |
| U.S. inventories at average cost | | $ | 431,866 |
| | $ | 473,949 |
| Foreign inventories at average cost | | 112,795 |
| | 125,260 |
| | | 544,661 |
| | 599,209 |
| Less: Excess of average cost over LIFO cost for U.S. inventories | | 155,511 |
| | 151,654 |
| Inventories on consolidated balance sheets | | $ | 389,150 |
| | $ | 447,555 |
|
The overall impact of LIFO layer liquidations increased gross profit by $127, $501, and $3,895 in fiscal 2023, fiscal 2022, and fiscal 2021, respectively.
NOTE 5: GOODWILL AND INTANGIBLES The changes in the carrying amount of goodwill for both the Service Center Based Distribution segment and the Fluid Power & Flow ControlEngineered Solutions segment for the years ended June 30, 20202023 and 20192022 are as follows: | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Balance at July 1, 2018 | $ | 203,084 |
| | $ | 443,559 |
| | $ | 646,643 |
| Goodwill acquired during the year | 9,943 |
| | 4,798 |
| | 14,741 |
| Other, primarily currency translation | 607 |
| | — |
| | 607 |
| Balance at June 30, 2019 | 213,634 |
| | 448,357 |
| | 661,991 |
| Goodwill adjusted/acquired during the year | (3,393 | ) | | 14,667 |
| | 11,274 |
| Impairment | — |
| | (131,000 | ) | | (131,000 | ) | Other, primarily currency translation | (1,671 | ) | | — |
| | (1,671 | ) | Balance at June 30, 2020 | $ | 208,570 |
| | $ | 332,024 |
| | $ | 540,594 |
|
During the first quarter of fiscal 2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the MilRoc/Woodward acquisition. The fair values of the customer relationships, trade name, and other intangible assets were increased by $1,524, $1,809, and $60, respectively, with a corresponding total decrease to goodwill of $3,393. The changes to the preliminary estimated fair values resulted in an increase to amortization expense of $303 during the year ended June 30, 2020, which is recorded in selling, distribution, and administrative expense on the statements of consolidated income.
During the second quarter of fiscal 2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the Olympus acquisition. The trade name and other intangible assets were increased by $4,260 and $980, respectively, with a corresponding decrease to the customer relationship intangible asset of $5,504 and an increase to goodwill of $264. The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of $24 during the year ended June 30, 2020, which is recorded in selling, distribution, and administrative expense on the statements of consolidated income. | | | | | | | | | | | | | | | | | | | Service Center Based Distribution | | Engineered Solutions | | Total | Balance at July 1, 2021 | $ | 212,296 | | | $ | 347,781 | | | $ | 560,077 | | Goodwill acquired during the year | — | | | 3,984 | | | 3,984 | | | | | | | | Other, primarily currency translation | (1,286) | | | 430 | | | (856) | | Balance at June 30, 2022 | 211,010 | | | 352,195 | | | 563,205 | | Goodwill acquired during the year | — | | | 14,517 | | | 14,517 | | | | | | | | Other, primarily currency translation | 221 | | | 475 | | | 696 | | Balance at June 30, 2023 | $ | 211,231 | | | $ | 367,187 | | | $ | 578,418 | |
The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2020.2023. The Company concluded that seven (7)all of the reporting units’ fair values exceeded their carrying amounts by at least 10%20% as of January 1, 2020. Specifically, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The Canada
and Mexico reporting units have goodwill balances of $27,186 and $5,185, respectively, as of June 30, 2020. The carrying value of the final reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131,000. The non-cash impairment charge is the result of the overall decline in the industrial economy, specifically slower demand in FCX's end markets. This has led to reduced spending by customers and reduced revenue expectations. The remaining goodwill for the FCX reporting unit as of June 30, 2020 is $309,012. Because the carrying value of the FCX reporting unit approximated fair value of the reporting unit after the impairment was recorded, a future decline in the estimated cash flows could result in an additional impairment loss. A future decline in the estimated cash flows could result from a significant or extended decline in various end markets.2023.
The fair values of the reporting units in accordance with the goodwill impairment test were determined using the income and market approaches. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. The market approach utilizes an analysis of comparable publicly traded companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues, EBITDA, and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the Company’s reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends; and (ii) inability to achieve the sales targeted byfrom our strategic growth initiatives. At June 30, 20202023 and 2019,2022, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment. At June 30, 2020segment and 2019, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $167,605 and $36,605, respectively, related to the Fluid Power & Flow ControlEngineered Solutions segment.
The Company's identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following: | | | | | | | | | | | | | | | | | | June 30, 2023 | Amount | | Accumulated Amortization | | Net Book Value | Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 364,572 | | | $ | 188,804 | | | $ | 175,768 | | Trade names | 108,301 | | | 50,823 | | | 57,478 | | Vendor relationships | 9,861 | | | 9,744 | | | 117 | | Other | 3,347 | | | 1,161 | | | 2,186 | | Total Intangibles | $ | 486,081 | | | $ | 250,532 | | | $ | 235,549 | |
| | | | | | | | | | | | | June 30, 2020 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 426,017 |
| | $ | 162,965 |
| | $ | 263,052 |
| Trade names | 111,453 |
| | 34,815 |
| | 76,638 |
| Vendor relationships | 11,329 |
| | 8,934 |
| | 2,395 |
| Other | 2,078 |
| | 948 |
| | 1,130 |
| Total Intangibles | $ | 550,877 |
| | $ | 207,662 |
| | $ | 343,215 |
|
| | | | | | | | | | | | | June 30, 2019 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 422,367 |
| | $ | 135,879 |
| | $ | 286,488 |
| Trade names | 105,946 |
| | 27,232 |
| | 78,714 |
| Vendor relationships | 11,367 |
| | 8,156 |
| | 3,211 |
| Other | 2,702 |
| | 2,249 |
| | 453 |
| Total Intangibles | $ | 542,382 |
| | $ | 173,516 |
| | $ | 368,866 |
|
| | | | | | | | | | | | | | | | | | June 30, 2022 | Amount | | Accumulated Amortization | | Net Book Value | Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 353,836 | | | $ | 166,623 | | | $ | 187,213 | | Trade names | 105,629 | | | 44,637 | | | 60,992 | | Vendor relationships | 11,320 | | | 10,533 | | | 787 | | Other | 2,321 | | | 723 | | | 1,598 | | Total Intangibles | $ | 473,106 | | | $ | 222,516 | | | $ | 250,590 | |
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off. During fiscal 2020,2021, due to the Company acquired identifiable intangible assets with an acquisition cost allocation and weighted-average life as follows: | | | | | | | | Acquisition Cost Allocation |
| | Weighted-Average Life | Customer relationships | $ | 7,160 |
| | 20.0 | Trade names | 4,260 |
| | 15.0 | Other | 980 |
| | 6.8 | Total Intangibles Acquired | $ | 12,400 |
| | 17.2 |
Due to a sustained declineeconomic downturn in economic conditions in the upstream oil and gas industry in western Canada,
management also assessedend markets, the long-lived intangible assets relatedCompany determined that certain carrying values may not be recoverable within the Company's three asset groups that have significant exposure to the Reliance asset group in Canada for
impairment during the third quarter of fiscal 2019. The Reliance asset group is located in western Canada and
primarily serves customers in the upstream oil and gas industry.end markets. The Company determined that an impairment existed in two of the three asset groupgroups as the asset groups' carrying valuevalues exceeded the sum of
the undiscounted cash flows, indicating impairment.flows. The fair valuevalues of the asset group waslong-lived assets were then determined using the income approach, using Level 3 assumptions in the fair value hierarchy, and the analysisanalyses resulted in the measurement of a fullan intangible asset impairment loss of $31,594,$45,033, which was recorded induring the thirdsecond quarter of fiscal 2019.2021, as the fair value of the intangible assets was determined to be zero. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, EBITDA, and discount rates. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used. The analyses of these asset groups also resulted in a fixed asset impairment loss and leased asset impairment loss of $1,983 and $2,512, respectively, which were recorded during the second quarter of fiscal 2021. Sustained significant softness in certain end market concentrations could result in impairment of certain intangible assets in future periods. During fiscal 2023, the Company acquired identifiable intangible assets with an acquisition cost allocation and weighted-average life as follows: | | | | | | | | | | | | | Acquisition Cost Allocation | | Weighted-Average Life | Customer relationships | $ | 11,176 | | | 20.0 | Trade names | 3,610 | | | 15.0 | Other | 1,025 | | | 6.7 | Total Intangibles Acquired | $ | 15,811 | | | 18.0 |
Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. Amortization of identifiable intangibles totaled $41,553, $41,883$30,805, $31,879 and $32,065$34,365 in fiscal 2020, 20192023, 2022 and 2018,2021, respectively, and is included in selling, distribution and administrative expense in the statements of consolidated income. Future amortization expense based on the Company’s identifiable intangible assets as of June 30, 20202023 is estimated to be $38,300 for 2021, $36,100 for 2022, $34,000 for 2023, $29,800$27,500 for 2024, $25,300 for 2025, $23,600 for 2026, $21,800 for 2027 and $26,300$20,200 for 2025.2028.
NOTE 6: DEBT A summary of long-term debt, including the current portion, follows: | | | | | | | | | June 30, | 2020 |
| | 2019 |
| Unsecured credit facility | $ | 589,250 |
| | $ | 613,625 |
| Trade receivable securitization facility | 175,000 |
| | 175,000 |
| Series C Notes | 120,000 |
| | 120,000 |
| Series D Notes | 25,000 |
| | 50,000 |
| Series E Notes | 25,000 |
| | — |
| Other | 1,026 |
| | 1,204 |
| Total debt | $ | 935,276 |
| | $ | 959,829 |
| Less: unamortized debt issuance costs | 1,487 |
| | 1,943 |
| | $ | 933,789 |
| | $ | 957,886 |
|
| | | | | | | | | | | | June 30, | 2023 | | 2022 | Revolving credit facility | $ | 383,592 | | | $ | 410,592 | | Trade receivable securitization facility | 188,300 | | | 188,300 | | Series C Notes | — | | | 40,000 | | Series D Notes | 25,000 | | | 25,000 | | Series E Notes | 25,000 | | | 25,000 | | Other | 356 | | | 603 | | Total debt | $ | 622,248 | | | $ | 689,495 | | Less: unamortized debt issuance costs | 152 | | | 171 | | | $ | 622,096 | | | $ | 689,324 | |
Revolving Credit Facility & Term Loan In January 2018,December 2021, the Company refinanced its existing credit facility and entered into a new five-yearrevolving credit facility with a group of banks expiring in January 2023. This agreementto refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes. The revolving credit facility provides for a $780,000 unsecured term loan and a $250,000$900,000 unsecured revolving credit facility. Fees on this facility range from 0.10%and an uncommitted accordion feature which allows the Company to 0.20% per year based uponrequest an increase in the Company's leverage ratio at each quarter end.borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500,000. In May 2023, the Company and the administrative agent entered into an amendment to the credit facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR. Borrowings under this agreement carry variablebear interest, rates tied to either LIBOR or prime at the Company's discretion. The Company had no amount outstanding underelection, at either the revolver as of June 30, 2020 and June 30, 2019.base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or SOFR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of $1,873 and $3,215, respectively,$200 to secure certain insurance obligations, totaled $248,127$516,208 and $246,785$489,208 at June 30, 20202023 and June 30, 2019,2022, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loanrevolving credit facility was 1.94%6.11% and 4.19%2.81% as of June 30, 20202023 and June 30, 2019,2022, respectively. Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving credit agreement, in the amount of $4,475$4,046 and $2,698$4,735 as of June 30, 20202023 and June 30, 2019,2022, respectively, in order to secure certain insurance obligations. Trade Receivable Securitization Facility In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021. The maximum availability under. On March 26, 2021, the Company amended the AR Securitization Facility is $175,000.to expand the eligible receivables, which increased the maximum availability to $250,000 and increased the fees on the AR Securitization Facility to 0.98% per year. Availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the $175,000$250,000 of funding available under the AR Securitization Facility. The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the Service Center Based Distribution reportable segment’s U.S. operations’ trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. BorrowingsIn May 2023, the Company entered into an amendment to the AR Securitization facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR, therefore borrowings under this facility carry variable interest rates tied to LIBOR and fees on the AR Securitization Facility are 0.90% per year.SOFR. The interest rate on the AR Securitization Facility as of June 30, 20202023 and June 30, 20192022 was 1.07%6.16% and 3.33%2.60%, respectively. The Company classified the AR Securitization Facility as long-term debt as it has the ability and intent to extend or refinance this amount on a long-term basis. On August 4, 2023, the Company amended the AR Securitization Facility and extended the term to August 4, 2026. Other Long-Term BorrowingsUnsecured Shelf Facility
At June 30, 20202023 and June 30, 2019,2022, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170,000.$50,000 and $90,000, respectively. Fees on this facility range from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end. The remaining principal balance on the "Series C" notes of the $40,000 was paid in July 2022. The "Series D" notes have a remaining principal amount of $120,000,$25,000, carry a fixed interest rate of 3.19%3.21%, and are due in equal principal payments in July 2020, 2021, and 2022. A $40,000 principal payment was made on the "Series C" notes in July 2020.October 2023. The "Series D" notes have a principal amount of $50,000 and carry a fixed interest rate of 3.21%. A $25,000 principal payment was made on the "Series D" notes during fiscal 2020, and the remaining principal balance of $25,000 is due in October 2023. In October 2019, the Company amended its unsecured shelf facility agreement with Prudential Investment management to authorize the issuance of "Series E" notes which have a principal amount of $25,000, carry a fixed interest rate of 3.08%, and are due in October 2024.
Other Long-Term Borrowing In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% fixed interest rate note is held by the State of Ohio Development Services Agency maturingand matures in MayNovember 2024.
The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing arrangements for each of the next five years: | | | | | Fiscal Year | Aggregate Maturity |
| 2021 | $ | 79,181 |
| 2022 | 259,120 |
| 2023 | 546,624 |
| 2024 | 25,351 |
| 2025 | 25,000 |
|
| | | | | | Fiscal Year | Aggregate Maturity | 2024 | $ | 25,251 | | 2025 | 25,105 | | 2026 | — | | 2027 | 571,892 | | 2028 | — | | | |
Covenants The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2020,2023, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At June 30, 2020,2023, the Company's net indebtedness was less than 3.10.7 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at June 30, 2020.2023. NOTE 7: DERIVATIVES Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. In January 2019, the Company entered into an interest rate swap to mitigate variability in forecasted interest payments on $463,000 of the Company’s U.S. dollar-denominated unsecured variable rate debt. The notional amount declines over time. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. During the quarter ended December 31, 2020, the Company completed a transaction to amend and extend the interest rate swap agreement which resulted in an extension of the maturity date by an additional three years and a decrease of the weighted average fixed pay rate from 2.61% to 1.63%. The pay-fixed interest rate swap is considered a hybrid instrument with a financing component and an embedded at-market derivative that was designated as a cash flow hedge. In May 2023, the Company entered into bilateral agreements with its swap counterparties to transition its interest rate swap agreements to SOFR, and further decreased the weighted average fixed pay rate to 1.58%. The Company
made various ASC 848 elections related to changes in critical terms of the hedging relationship due to reference rate reform to not result in a dedesignation of the hedging relationship. As of May 31, 2023, the Company's interest rate swap agreement was indexed to SOFR. The interest rate swap converts $431,000converted $384,000 of variable rate debt to a rate of 4.36%2.59% as of June 30, 2020 and as of June 30, 20192023. The interest rate swap converted $463,000$409,000 of variable rate debt to a rate of 4.36%.2.75% as of June 30, 2022. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $26,179$27,044 and $14,202$17,827 as of June 30, 20202023 and June 30, 2019,2022, respectively, which is included in other current liabilitiesassets and other liabilitiesassets in the consolidated balance sheet. Realized losses relatedAmounts reclassified from other comprehensive income, before tax, to the interest rate cash flow hedge were not material in the years ended June 30, 2020 or 2019.expense totaled $(7,285), $11,361, and $11,553 for fiscal 2023, 2022, and 2021, respectively. NOTE 8: FAIR VALUE MEASUREMENTS Marketable securities measured at fair value at June 30, 20202023 and June 30, 20192022 totaled $12,259$18,637 and $11,246,$15,317, respectively. The majority of these marketable securities are held in a rabbi trust for a non-qualified deferred
compensation plan. The marketable securities are included in other assets on the consolidated balance sheets and their fair values were valued using quoted market prices (Level 1 in the fair value hierarchy). As of June 30, 2020,2023, the carrying value of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximates fair value (Level 2 in the fair value hierarchy). The revolving credit facility and the term loan containcontains variable interest rates and theirits carrying values approximatevalue approximates fair value (Level 2 in the fair value hierarchy). NOTE 9: INCOME TAXES Income Before Income Taxes The components of income before income taxes are as follows: | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| U.S. | $ | 36,161 |
| | $ | 204,462 |
| | $ | 186,874 |
| Foreign | 19,075 |
| | (9,981 | ) | | 17,844 |
| Income before income taxes | $ | 55,236 |
| | $ | 194,481 |
| | $ | 204,718 |
|
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | U.S. | $ | 423,316 | | | $ | 287,367 | | | $ | 152,202 | | Foreign | 26,495 | | | 42,423 | | | 24,860 | | Income before income taxes | $ | 449,811 | | | $ | 329,790 | | | $ | 177,062 | |
Provision The provision (benefit) for income taxes consists of: | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Current: | | | | | | Federal | $ | 84,294 | | | $ | 40,608 | | | $ | 46,685 | | State and local | 19,026 | | | 10,188 | | | 11,035 | | Foreign | 5,468 | | | 6,404 | | | 5,665 | | Total current | 108,788 | | | 57,200 | | | 63,385 | | Deferred: | | | | | | Federal | (1,881) | | | 12,467 | | | (24,168) | | State and local | (84) | | | 2,659 | | | (4,740) | | Foreign | (3,751) | | | 50 | | | (2,172) | | Total deferred | (5,716) | | | 15,176 | | | (31,080) | | Total | $ | 103,072 | | | $ | 72,376 | | | $ | 32,305 | |
| | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| Current: | | | | | | Federal | $ | 31,149 |
| | $ | 34,437 |
| | $ | 48,131 |
| State and local | 7,580 |
| | 7,965 |
| | 8,038 |
| Foreign | 5,757 |
| | 5,718 |
| | 5,309 |
| Total current | 44,486 |
| | 48,120 |
| | 61,478 |
| Deferred: | | | | | | Federal | (8,594 | ) | | 6,265 |
| | 5,955 |
| State and local | (3,098 | ) | | 1,947 |
| | (586 | ) | Foreign | (1,600 | ) | | (5,844 | ) | | (3,754 | ) | Total deferred | (13,292 | ) | | 2,368 |
| | 1,615 |
| Total | $ | 31,194 |
| | $ | 50,488 |
| | $ | 63,093 |
|
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to U.S. tax law. The Act reduced the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminated U.S. federal income tax on dividends from foreign subsidiaries, and created new taxes on certain foreign-sourced earnings. During fiscal 2018, the Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate from 35% to 21%. The rate change was administratively effective as of the beginning of the Company's fiscal 2018, resulting in a blended statutory rate for fiscal 2018 of 28.06%.
The SEC staff issued SAB 118, which provided guidance on accounting for the tax effects of the Act for which the accounting under ASC 740 was incomplete. To the extent that a company's accounting for certain income tax effects of the Act was incomplete but it was able to determine a reasonable estimate, it was required to record a provisional estimate in the financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act. As of June 30, 2019, the Company recorded a net tax expense of $5,802 related to the one time transition tax and re-measurement of deferred tax balances.
Effective Tax Rates The following reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate: | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| Statutory income tax rate | 21.0 | % | | 21.0 | % | | 28.1 | % | Effects of: | | | | | | State and local taxes | 6.4 |
| | 4.4 |
| | 3.1 |
| U.S. federal tax reform | — |
| | (0.3 | ) | | 3.1 |
| CARES Act NOL carryback | (1.8 | ) | | — |
| | — |
| Goodwill impairment | 31.4 |
| | — |
| | — |
| Stock compensation | (1.3 | ) | | (0.5 | ) | | (0.4 | ) | GILTI/FDII | 3.6 |
| | 0.7 |
| | — |
| R & D credit | (1.2 | ) | | (0.4 | ) | | (0.3 | ) | U.S. tax on foreign income, net | (3.1 | ) | | 0.5 |
| | — |
| Impact of foreign operations | 1.6 |
| | (0.6 | ) | | 0.7 |
| Non-deductibles | 1.2 |
| | 0.6 |
| | 0.3 |
| Interest deduction | (4.0 | ) | | (1.2 | ) | | (1.6 | ) | Deductible dividend | (0.6 | ) | | (0.2 | ) | | (1.3 | ) | Valuation allowance | 2.6 |
| | 2.9 |
| | (0.3 | ) | Other, net | 0.7 |
| | (0.9 | ) | | (0.6 | ) | Effective income tax rate | 56.5 | % | | 26.0 | % | | 30.8 | % |
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % | Effects of: | | | | | | State and local taxes | 3.5 | | | 3.3 | | | 3.2 | | Stock compensation | (1.0) | | | (1.5) | | | (2.5) | | GILTI/FDII | (0.2) | | | 0.2 | | | 0.1 | | R & D credit | (0.4) | | | (0.4) | | | (1.5) | | U.S. tax on foreign income, net | — | | | (0.4) | | | (0.5) | | Impact of foreign operations | 0.2 | | | 0.4 | | | — | | Non-deductibles/Deductible dividend | 0.6 | | | 0.2 | | | — | | Interest deduction | (0.4) | | | (0.6) | | | (1.1) | | Valuation allowance | (0.6) | | | (0.6) | | | 0.1 | | Other, net | 0.2 | | | 0.3 | | | (0.6) | | Effective income tax rate | 22.9 | % | | 21.9 | % | | 18.2 | % |
Consolidated Balance Sheets Significant components of the Company’s deferred tax assets and liabilities are as follows: | | | | | | | | | June 30, | 2020 |
| | 2019 |
| Deferred tax assets: | | | | Compensation liabilities not currently deductible | $ | 17,252 |
| | $ | 17,401 |
| Other expenses and reserves not currently deductible | 15,272 |
| | 13,050 |
| Goodwill and intangibles | — |
| | 2,398 |
| Leases | 24,016 |
| | — |
| Net operating loss carryforwards | 8,859 |
| | 8,466 |
| Hedging instrument | 6,406 |
| | 3,498 |
| Other | 757 |
| | 1,173 |
| Total deferred tax assets | 72,562 |
| | 45,986 |
| Less: Valuation allowance | (7,494 | ) | | (5,597 | ) | Deferred tax assets, net of valuation allowance | 65,068 |
| | 40,389 |
| Deferred tax liabilities: | | | | Inventories | (8,284 | ) | | (8,600 | ) | Goodwill and intangibles | (58,506 | ) | | (75,504 | ) | Leases | (23,407 | ) | | — |
| Depreciation and differences in property bases | (13,018 | ) | | (10,777 | ) | Total deferred tax liabilities | (103,215 | ) | | (94,881 | ) | Net deferred tax liabilities | $ | (38,147 | ) | | $ | (54,492 | ) | Net deferred tax liabilities are classified as follows: | | | | Other assets | $ | 4,749 |
| | $ | 3,859 |
| Other liabilities | (42,896 | ) | | (58,351 | ) | Net deferred tax liabilities | $ | (38,147 | ) | | $ | (54,492 | ) |
| | | | | | | | | | | | June 30, | 2023 | | 2022 | Deferred tax assets: | | | | Compensation liabilities not currently deductible | $ | 17,726 | | | $ | 19,131 | | Other expenses and reserves not currently deductible | 18,215 | | | 17,143 | | | | | | Leases | 26,345 | | | 26,688 | | | | | | Net operating loss carryforwards | 6,809 | | | 7,371 | | Capitalization of R&D costs | 11,646 | | | — | | Other | 381 | | | 563 | | Total deferred tax assets | $ | 81,122 | | | $ | 70,896 | | Less: Valuation allowance | (3,459) | | | (6,271) | | Deferred tax assets, net of valuation allowance | $ | 77,663 | | | $ | 64,625 | | Deferred tax liabilities: | | | | Inventories | $ | (15,174) | | | $ | (13,728) | | Goodwill and intangibles | (52,463) | | | (46,513) | | Leases | (26,179) | | | (26,509) | | Hedging instrument | (9,081) | | | (6,446) | | Depreciation and differences in property bases | (9,757) | | | (9,760) | | Total deferred tax liabilities | (112,654) | | | (102,956) | | Net deferred tax liabilities | $ | (34,991) | | | $ | (38,331) | | Net deferred tax liabilities are classified as follows: | | | | Other assets | $ | 9,990 | | | $ | 5,677 | | Other liabilities | (44,981) | | | (44,008) | | Net deferred tax liabilities | $ | (34,991) | | | $ | (38,331) | |
As of June 30, 20202023 and 2019,2022, the Company had foreign net operating loss carryforwards of approximately $29,584$29,374 and $27,024,$32,018, respectively, the tax benefit of which is approximately $6,440 and $6,677, respectively. These loss carryforwards will expire at various dates beginning in 2033. Also, as of June 30, 20202023 and
2019, 2022, the Company had state net operating loss carryforwards, the tax benefit of which is approximately $1,177$466 and $2,098$878, respectively, which will expire at various dates beginning in 2027.
Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory tax rates and future income levels. DuringThe Company evaluates the yearrealization of its deferred tax assets each quarter throughout the year. During the years ended June 30, 2020,2023 and 2022, the Company recorded a net tax benefit related to the change in valuation allowances of $2,657 and $1,937, respectively. The total valuation allowance of $2,124 related to certainprovided against the deferred tax assets in Canada due to the uncertainty in realizing these net deferred tax assets.and Mexico is $3,415 and $6,228 as of June 30, 2023 and 2022, respectively. As of June 30, 2020,2023, the Company had accumulated undistributed earnings of non-U.S. subsidiaries of approximately $114,070.$172,914. The vast majority of such earnings have previously been subjected to the one-time transition tax or the Global Intangible Low Taxed Income ("GILTI") inclusion implemented by the Act.inclusion. Therefore, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign withholding and state income taxes. In addition, we expect foreign tax credits would be available to either offset or partially reduce the tax cost in the event of a distribution. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs. Unrecognized Income Tax Benefits The Company and its subsidiaries file income tax returns in U.S. federal, various state, local and foreign jurisdictions. The following table sets forth the changes in the amount of unrecognized tax benefits for the years ended June 30, 20202023, 2022, and 2019:2021: | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| Unrecognized Income Tax Benefits at beginning of the year | $ | 4,979 |
| | $ | 3,988 |
| Current year tax positions | 105 |
| | 105 |
| Prior year tax positions | 177 |
| | 1,151 |
| Expirations of statutes of limitations | (306 | ) | | (265 | ) | Unrecognized Income Tax Benefits at end of year | $ | 4,955 |
| | $ | 4,979 |
|
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Unrecognized Income Tax Benefits at beginning of the year | $ | 4,926 | | | $ | 5,230 | | | $ | 4,955 | | Current year tax positions | 622 | | | 505 | | | 285 | | Prior year tax positions | (86) | | | (83) | | | 620 | | Expirations of statutes of limitations | (641) | | | (726) | | | (630) | | | | | | | | Unrecognized Income Tax Benefits at end of year | $ | 4,821 | | | $ | 4,926 | | | $ | 5,230 | |
The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. During 20202023, 2022, and 2019,2021, the Company recognized $256$239, $(362), and$161 $144 of expense (income), respectively, for interest and penalties related to unrecognized income tax benefits in its statements of consolidated income. The Company had a liability for penalties and interest of $1,094$1,115, $876, and $838$1,238 as of June 30, 20202023, 2022, and 2019,2021, respectively. The Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next twelve months. Included in the balance of unrecognized income tax benefits at June 30, 20202023, 2022, and 20192021 are $4,708$4,722, $4,813, and $4,701,$4,986 respectively, of income tax benefits that, if recognized, would affect the effective income tax rate. The Company is subject to U.S. federal income tax examinations for the tax years 20172019 through 20202023 and to state and local income tax examinations for the tax years 20142017 through 2020.2023. In addition, the Company is subject to foreign income tax examinations for the tax years 20132016 through 2020.2023. The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment of cash is not expected within one year, or as a reduction of a deferred tax asset.
NOTE 10: SHAREHOLDERS’ EQUITY Treasury Shares At June 30, 2020,2023, 128 shares of the Company’s common stock held as treasury shares were restricted as collateral under escrow arrangements relating to change in control and director and officer indemnification agreements. Accumulated Other Comprehensive Loss Changes in the accumulated other comprehensive loss for the years ended June 30, 2020, 2019,2023, 2022, and 2018,2021, are comprised of the following amounts, shown net of taxes: | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment |
| | Unrealized gain (loss) on securities available for sale |
| | Post-employment benefits |
| | Cash flow hedge |
| | Total accumulated other comprehensive loss |
| Balance at July 1, 2017 | $ | (79,447 | ) | | $ | 21 |
| | $ | (2,276 | ) | | $ | — |
| | $ | (81,702 | ) | Other comprehensive (loss) income | (8,549 | ) | | 20 |
| | 524 |
| | — |
| | (8,005 | ) | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (45 | ) | | — |
| | (45 | ) | Amounts reclassified for certain income tax effects to retained earnings | 22 |
| | 9 |
| | (502 | ) | | — |
| | (471 | ) | Net current-period other comprehensive (loss) income | (8,527 | ) | | 29 |
| | (23 | ) | | — |
| | (8,521 | ) | Balance at June 30, 2018 | (87,974 | ) | | 50 |
| | (2,299 | ) | | — |
| | (90,223 | ) | Other comprehensive income (loss) | 1,644 |
| | — |
| | (327 | ) | | (10,887 | ) | | (9,570 | ) | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (226 | ) | | 183 |
| | (43 | ) | Cumulative effect of adopting accounting standards | — |
| | (50 | ) | | — |
| | — |
| | (50 | ) | Net current-period other comprehensive income (loss) | 1,644 |
| | (50 | ) | | (553 | ) | | (10,704 | ) | | (9,663 | ) | Balance at June 30, 2019 | (86,330 | ) | | — |
| | (2,852 | ) | | (10,704 | ) | | (99,886 | ) | Other comprehensive loss | (18,764 | ) | | — |
| | (1,662 | ) | | (12,572 | ) | | (32,998 | ) | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (50 | ) | | 3,504 |
| | 3,454 |
| Net current-period other comprehensive loss | (18,764 | ) | | — |
| | (1,712 | ) | | (9,068 | ) | | (29,544 | ) | Balance at June 30, 2020 | $ | (105,094 | ) | | $ | — |
| | $ | (4,564 | ) | | $ | (19,772 | ) | | $ | (129,430 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | Post-employment benefits | | Cash flow hedge | | Total accumulated other comprehensive loss | Balance at July 1, 2020 | $ | (105,094) | | | $ | (4,564) | | | $ | (19,772) | | | $ | (129,430) | | Other comprehensive income | 24,256 | | | 687 | | | 2,480 | | | 27,423 | | Amounts reclassified from accumulated other comprehensive loss | — | | | 204 | | | 8,711 | | | 8,915 | | | | | | | | | | Net current-period other comprehensive income | 24,256 | | | 891 | | | 11,191 | | | 36,338 | | Balance at June 30, 2021 | (80,838) | | | (3,673) | | | (8,581) | | | (93,092) | | Other comprehensive (loss) income | (9,900) | | | 2,142 | | | 19,770 | | | 12,012 | | Amounts reclassified from accumulated other comprehensive loss | — | | | 228 | | | 8,557 | | | 8,785 | | Net current-period other comprehensive (loss) income | (9,900) | | | 2,370 | | | 28,327 | | | 20,797 | | Balance at June 30, 2022 | (90,738) | | | (1,303) | | | 19,746 | | | (72,295) | | Other comprehensive income | 7,639 | | | 1,082 | | | 13,759 | | | 22,480 | | Amounts reclassified from accumulated other comprehensive loss | — | | | 24 | | | (5,505) | | | (5,481) | | Net current-period other comprehensive income | 7,639 | | | 1,106 | | | 8,254 | | | 16,999 | | Balance at June 30, 2023 | $ | (83,099) | | | $ | (197) | | | $ | 28,000 | | | $ | (55,296) | |
Other Comprehensive LossIncome Details of other comprehensive lossincome are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | | Pre-Tax Amount | | Tax Expense (Benefit) | | Net Amount | | Pre-Tax Amount | | Tax Expense | | Net Amount | | Pre-Tax Amount | | Tax Expense | | Net Amount | Foreign currency translation adjustments | $ | 7,723 | | | $ | 84 | | | $ | 7,639 | | | $ | (9,862) | | | $ | 38 | | | $ | (9,900) | | | $ | 24,352 | | | $ | 96 | | | $ | 24,256 | | Post-employment benefits: | | | | | | | | | | | | | | | | | | Actuarial gain on re-measurement | 405 | | | 100 | | | 305 | | | 2,839 | | | 697 | | | 2,142 | | | 903 | | | 216 | | | 687 | | Reclassification of actuarial losses and prior service cost into other expense (income), net and included in net periodic pension costs | 36 | | | 12 | | | 24 | | | 300 | | | 72 | | | 228 | | | 270 | | | 66 | | | 204 | | Termination of pension plan | 1,031 | | | 254 | | | 777 | | | — | | | — | | | — | | | — | | | — | | | — | | Unrealized gain on cash flow hedge | 18,174 | | | 4,415 | | | 13,759 | | | 26,204 | | | 6,434 | | | 19,770 | | | 3,250 | | | 770 | | | 2,480 | | Reclassification of interest from cash flow hedge into interest expense | (7,285) | | | (1,780) | | | (5,505) | | | 11,361 | | | 2,804 | | | 8,557 | | | 11,553 | | | 2,842 | | | 8,711 | | | | | | | | | | | | | | | | | | | | Other comprehensive income | $ | 20,084 | | | $ | 3,085 | | | $ | 16,999 | | | $ | 30,842 | | | $ | 10,045 | | | $ | 20,797 | | | $ | 40,328 | | | $ | 3,990 | | | $ | 36,338 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2020 | | 2019 | | 2018 | | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax (Benefit) Expense |
| | Net Amount |
| Foreign currency translation adjustments | $ | (18,499 | ) | | $ | 265 |
| | $ | (18,764 | ) | | $ | 2,021 |
| | $ | 377 |
| | $ | 1,644 |
| | $ | (8,875 | ) | | $ | (326 | ) | | $ | (8,549 | ) | Post-employment benefits: | | | | | | | | | | | | | | | | | | Actuarial (loss) gain on re-measurement | (2,192 | ) | | (530 | ) | | (1,662 | ) | | (372 | ) | | (45 | ) | | (327 | ) | | 709 |
| | 185 |
| | 524 |
| Reclassification of actuarial gains and prior service cost into other income, net and included in net periodic pension costs | (66 | ) | | (16 | ) | | (50 | ) | | (306 | ) | | (80 | ) | | (226 | ) | | (73 | ) | | (28 | ) | | (45 | ) | Unrealized gain on investment securities available for sale | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 37 |
| | 17 |
| | 20 |
| Unrealized loss on cash flow hedge | (16,615 | ) | | (4,043 | ) | | (12,572 | ) | | (14,446 | ) | | (3,559 | ) | | (10,887 | ) | | — |
| | — |
| | — |
| Reclassification of interest from cash flow hedge into interest expense | 4,638 |
| | 1,134 |
| | 3,504 |
| | 244 |
| | 61 |
| | 183 |
| | — |
| | — |
| | — |
| Cumulative effect of adopting accounting standard | — |
| | — |
| | — |
| | (50 | ) | | — |
| | (50 | ) | | — |
| | — |
| | — |
| Reclassification of certain income tax effects to retained earnings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 471 |
| | (471 | ) | Other comprehensive loss | $ | (32,734 | ) | | $ | (3,190 | ) | | $ | (29,544 | ) | | $ | (12,909 | ) | | $ | (3,246 | ) | | $ | (9,663 | ) | | $ | (8,202 | ) | | $ | 319 |
| | $ | (8,521 | ) |
Net Income Per Share Basic net income per share is based on the weighted-average number of common shares outstanding. Diluted net income per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing net income per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include Restricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury stock method and the two-class method. For the years presented there were no material differences in the net income per share amounts calculated using the two methods. Accordingly, the treasury stock method is disclosed below. The following table presents amounts used in computing net income per share and the effect on the weighted-average number of shares of dilutive potential common shares: | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| Net Income | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| Average Shares Outstanding: | | | | | | Weighted-average common shares outstanding for basic computation | 38,658 |
| | 38,670 |
| | 38,752 |
| Dilutive effect of potential common shares | 341 |
| | 490 |
| | 529 |
| Weighted-average common shares outstanding for dilutive computation | 38,999 |
| | 39,160 |
| | 39,281 |
| Net Income Per Share — Basic | $ | 0.62 |
| | $ | 3.72 |
| | $ | 3.65 |
| Net Income Per Share — Diluted | $ | 0.62 |
| | $ | 3.68 |
| | $ | 3.61 |
|
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Net Income | $ | 346,739 | | | $ | 257,414 | | | $ | 144,757 | | Average Shares Outstanding: | | | | | | Weighted-average common shares outstanding for basic computation | 38,592 | | | 38,471 | | | 38,758 | | Dilutive effect of potential common shares | 628 | | | 634 | | | 538 | | Weighted-average common shares outstanding for dilutive computation | 39,220 | | | 39,105 | | | 39,296 | | Net Income Per Share — Basic | $ | 8.98 | | | $ | 6.69 | | | $ | 3.73 | | Net Income Per Share — Diluted | $ | 8.84 | | | $ | 6.58 | | | $ | 3.68 | |
Stock awards relating to 726, 22684, 106 and 66234 shares of common stock were outstanding at June 30, 2020, 20192023, 2022 and 2018,2021, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive. NOTE 11: SHARE-BASED COMPENSATION Share-Based Incentive Plans Following approval by the Company's shareholders in October 2019, the 2019 Long-Term Performance Plan (the "2019 Plan") replaced the 2015 Long-Term Performance Plan. The 2019 Plan, which expires in 2024, provides for granting of SARs, stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or, in the case of director awards, the Corporate Governance & Sustainability Committee of the Board of Directors (together referred to as the Committee) may determine to officers, other key employees and members of the Board of Directors. Grants are generally made at regularly scheduled committee meetings. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below: | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| SARs and options | $ | 2,954 |
| | $ | 2,440 |
| | $ | 1,961 |
| Performance shares | 854 |
| | 2,082 |
| | 2,006 |
| Restricted stock and RSUs | 3,146 |
| | 2,391 |
| | 2,660 |
| Total compensation costs under award programs | $ | 6,954 |
| | $ | 6,913 |
| | $ | 6,627 |
|
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | SARs | $ | 2,785 | | | $ | 3,284 | | | $ | 2,526 | | Performance shares | 5,302 | | | 4,549 | | | 2,494 | | Restricted stock and RSUs | 4,274 | | | 4,009 | | | 3,960 | | Total compensation costs under award programs | $ | 12,361 | | | $ | 11,842 | | | $ | 8,980 | |
Such amounts are included in selling, distribution and administrative expense in the accompanying statements of consolidated income. The total income tax benefit recognized in the statements of consolidated income for share-based compensation plans was $2,189, $2,709$7,886, $5,105, and $1,923$6,649 for fiscal years 2020, 20192023, 2022, and 2018,2021, respectively. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with shares.
The aggregate unrecognized compensation cost for share-based award programs with the potential to be paid at June 30, 20202023 is summarized in the table below: | | | | | | | June 30, | 2020 |
| | Average Expected Period of Expected Recognition (Years) | SARs and options | $ | 4,113 |
| | 2.2 | Performance shares | 4,580 |
| | 1.8 | Restricted stock and RSUs | 3,028 |
| | 2.1 | Total unrecognized compensation costs under award programs | $ | 11,721 |
| | 2.0 |
| | | | | | | | | | | | June 30, | 2023 | | Average Expected Period of Expected Recognition (Years) | SARs | $ | 3,267 | | | 2.7 | Performance shares | 5,694 | | | 1.7 | Restricted stock and RSUs | 4,036 | | | 1.8 | Total unrecognized compensation costs under award programs | $ | 12,997 | | | 2.0 |
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.0 years. The aggregate number of shares of common stock which may be awarded under the 2019 Plan is 2,250; shares available for future grants at June 30, 20202023 were 2,221.1,653. Stock Appreciation Rights and Stock Options The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2020, 2019
2023, 2022 and 20182021 are: | | | | | | | | | | | 2020 |
| | 2019 |
| | 2018 |
| Expected life, in years | 6.2 |
| | 6.0 |
| | 6.0 |
| Risk free interest rate | 1.6 | % | | 2.8 | % | | 2.1 | % | Dividend yield | 2.3 | % | | 1.8 | % | | 2.5 | % | Volatility | 23.7 | % | | 22.5 | % | | 24.3 | % | Per share fair value of SARs granted during the year | $10.12 | | $16.15 | | $11.25 |
| | | | | | | | | | | | | | | | | | | 2023 | | 2022 | | 2021 | Expected life, in years | 6.2 | | 6.4 | | 7.0 | Risk free interest rate | 2.9 | % | | 1.0 | % | | 0.5 | % | Dividend yield | 1.3 | % | | 1.5 | % | | 1.9 | % | Volatility | 35.5 | % | | 34.3 | % | | 32.0 | % | Per share fair value of SARs granted during the year | $35.98 | | $26.18 | | $17.97 |
The expected life is based upon historical exercise experience of the officers, other key employees and members of the Board of Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds with remaining terms equal to the expected life of the SARs and stock options.SARs. The assumed dividend yield has been estimated based upon the Company’s historical results and expectations for changes in dividends
and stock prices. The volatility assumption is calculated based upon historical daily price observations of the Company’s common stock for a period equal to the expected life. SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be settled by the holder with cash or by tendering Company common stock. A summary of SARs and stock options activity is presented below: | | | | | | | | | Shares |
| | Weighted-Average Exercise Price |
| Year Ended June 30, 2020 | | (Shares in thousands) | | Outstanding, beginning of year | 1,479 |
| | $ | 49.42 |
| Granted | 296 |
| | 54.20 |
| Exercised | (139 | ) | | 39.06 |
| Forfeited | (16 | ) | | 60.64 |
| Outstanding, end of year | 1,620 |
| | $ | 51.07 |
| Exercisable at end of year | 996 |
| | $ | 46.10 |
| Expected to vest at end of year | 1,607 |
| | $ | 51.01 |
|
| | | | | | | | | | | | | Shares | | Weighted-Average Exercise Price | Year Ended June 30, 2023 | | (Shares in thousands) | | Outstanding, beginning of year | 965 | | | $ | 61.85 | | Granted | 112 | | | 104.33 | | Exercised | (257) | | | 53.84 | | Forfeited | (4) | | | 77.65 | | Outstanding, end of year | 816 | | | $ | 70.11 | | Exercisable at end of year | 537 | | | $ | 62.64 | | Expected to vest at end of year | 810 | | | $ | 69.90 | |
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and expected to vest at June 30, 20202023 were 6.0, 4.7,5.0, and 6.0 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and expected to vest at June 30, 20202023 were $20,862 $16,795,$60,964 $44,125, and $20,780,$60,689, respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2020, 2019,2023, 2022, and 20182021 was $3,460, $3,363,$20,170, $17,015, and $1,765,$21,189, respectively. The total fair value of shares vested during fiscal 2020, 2019,2023, 2022, and 20182021 was $2,285, $1,846,$2,691, $2,341, and $2,149,$2,880, respectively.
Performance Shares Performance shares are paid in shares of Applied stock at the end of a three-year period provided the Company achieves goals established by the Committee. The number of Applied shares payable will vary depending on the level of the goals achieved. A summary of non-vested performance shares activity at June 30, 20202023 is presented below: | | | | | | | | | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Year Ended June 30, 2020 | | (Shares in thousands) | | Non-vested, beginning of year | 97 |
| | $ | 50.88 |
| Awarded | 17 |
| | 52.86 |
| Vested | (58 | ) | | 47.87 |
| Non-vested, end of year | 56 |
| | $ | 54.62 |
|
| | | | | | | | | | | | | Shares | | Weighted-Average Grant-Date Fair Value | Year Ended June 30, 2023 | | (Shares in thousands) | | Non-vested, beginning of year | 131 | | | $ | 58.27 | | Awarded | 73 | | | 74.10 | | Forfeitures | (2) | | | 62.43 | | Vested | (43) | | | 53.63 | | Non-vested, end of year | 159 | | | $ | 96.37 | |
The Committee set three one-year goals for each of the 2020, 2019,2023, 2022, and 20182021 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. For the outstanding grants as of June 30, 2020,2023, the maximum number of shares that could be earned in future periods was 79. 65.
Restricted Stock and Restricted Stock Units RestrictedUnder the 2019 Plan, restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective shares, but are restricted from selling or transferring the shares prior to vesting; dividends are accrued and paid upon vesting. Restricted stock awards vest over periods of one to four years. RSUs are grants valued in shares of Applied stock, but shares are not issued until the grants vest three to five years from the award date, assuming continued employment with Applied. Applied primarily paysApplied; dividend equivalents on RSUs on a current basis, however dividend equivalents on RSU grants under the 2019 Plan will beare accrued and paid upon vesting.
A summary of the status of the Company’s non-vested restricted stock and RSUs at June 30, 20202023 is presented below: | | | | | | | | | | | | | Shares | | Weighted-Average Grant-Date Fair Value | Year Ended June 30, 2023 | | (Share amounts in thousands) | | Non-vested, beginning of year | 177 | | | $ | 69.23 | | Granted | 37 | | | 108.60 | | Forfeitures | (5) | | | 76.91 | | Vested | (66) | | | 60.02 | | Non-vested, end of year | 143 | | | $ | 83.35 | |
| | | | | | | | | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Year Ended June 30, 2020 | | (Share amounts in thousands) | | Non-vested, beginning of year | 89 |
| | $ | 59.93 |
| Granted | 81 |
| | 56.74 |
| Vested | (40 | ) | | 53.60 |
| Non-vested, end of year | 130 |
| | $ | 59.91 |
|
NOTE 12: LEASES The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, distribution and administrative expense on the statements of consolidated income. Operating lease costs and short-term lease costs were $33,152$35,982 and $10,581$9,153, respectively, for the year ended June 30, 2020, respectively. Rental expense incurred for operating leases under ASC Topic 840, Leases, was $45,0002023 and $34,144 and $7,501, respectively, for the year ended June 30, 2019.2022. Variable lease costs and sublease income were not material. Information related to operating leases is as follows: | | | | | | | | | | | | | | | June 30, | | 2023 | | 2022 | Operating lease assets, net | | $ | 100,677 | | | $ | 108,052 | | | | | | | Operating lease liabilities | | | | | Other current liabilities | | $ | 31,173 | | | $ | 30,114 | | Other liabilities | | 72,704 | | | 80,807 | | Total operating lease liabilities | | $ | 103,877 | | | $ | 110,921 | |
| | | | | | June 30, | | 2020 |
| Operating lease assets, net | | $ | 90,636 |
| | | | Operating lease liabilities | | | Other current liabilities | | $ | 27,231 |
| Other liabilities | | 67,926 |
| Total operating lease liabilities | | $ | 95,157 |
|
| | | | | | | | | | | | | | | June 30, | | 2023 | | 2022 | Weighted average remaining lease term (years) | | 4.9 | | 5.5 | Weighted average incremental borrowing rate | | 3.67 | % | | 2.92 | % |
| | | | | | | | | | | | | | | Year Ended June 30, | | 2023 | | 2022 | Cash paid for operating leases | | $ | 35,545 | | | $ | 35,313 | | Right of use assets obtained in exchange for new operating lease liabilities | | $ | 30,605 | | | $ | 50,743 | |
| | | | | June 30, | | 2020 |
| Weighted average remaining lease term (years) | | 3.6 |
| Weighted average incremental borrowing rate | | 3.45 | % |
| | | | | | Year Ended June 30, | | 2020 |
| Cash paid for operating leases | | $ | 34,642 |
| Right of use assets obtained in exchange for new operating lease liabilities | | $ | 39,136 |
|
The table below summarizes the aggregate maturities of liabilities pertaining to operating leases with terms greater than one year for each of the next five years: | | | | | | Fiscal Year | Maturity of Operating Lease Liabilities | 2024 | $ | 34,235 | | 2025 | 25,253 | | 2026 | 19,742 | | 2027 | 14,230 | | 2028 | 8,416 | | Thereafter | 11,375 | | Total lease payments | 113,251 | | Less interest | 9,374 | | Present value of lease liabilities | $ | 103,877 | |
| | | | | Fiscal Year | Maturity of Operating Lease Liabilities |
| 2021 | $ | 29,979 |
| 2022 | 22,900 |
| 2023 | 16,428 |
| 2024 | 12,842 |
| 2025 | 6,698 |
| Thereafter | 15,318 |
| Total lease payments | 104,165 |
| Less interest | 9,008 |
| Present value of lease liabilities | $ | 95,157 |
|
The table below summarizes the future minimum annual rental commitments for operating leases accounted for in accordance with ASC Topic 840, Leases, as of June 30, 2019:
| | | | | Fiscal Year | Operating Leases |
| 2020 | $ | 33,707 |
| 2021 | 23,407 |
| 2022 | 16,420 |
| 2023 | 10,653 |
| 2024 | 7,838 |
| Thereafter | 12,135 |
| Total minimum lease payments | $ | 104,160 |
|
The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $2,500$1,500 in 20202023, and $2,400$2,100 in both 2019each of 2022 and 2018, respectively.2021. NOTE 13: SEGMENT INFORMATION The Company's reportable segments are: Service Center Based Distribution and Engineered Solutions (formerly known as Fluid Power & Flow Control.Control). The Company changed the reportable segment name to Engineered Solutions in the first quarter of fiscal 2023. There was no change in the composition of either reportable segment. These reportable segments contain the Company's various operating segments which have been aggregated based upon similar economic and operating characteristics. The Service Center Based Distribution segment operates through local service centers and distribution centers with a focus on providing products and services addressing the maintenance and repair of motion control infrastructure and production equipment. Products primarily include industrial bearings, motors, belting, drives, couplings, pumps, linear motion products, hydraulic and pneumatic components, filtration supplies, and hoses, as well as other related supplies for general operational needs of
customers’ machinery and equipment. The Fluid Power & Flow ControlEngineered Solutions segment includes our operations that specialize in distributing, engineering, designing, integrating, and repairing hydraulic and pneumatic fluid power technologies, and engineered flow control products and services. This segment also includes our operations that focus on advanced automation solutions including machine vision, robotics, motion control, and smart technologies. The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power & Flow ControlEngineered Solutions segment to the Service Center Based Distribution segment of $29,582, $28,677,$48,450, $37,163, and $25,556,$31,615, in 2020, 2019,2023, 2022, and 2018,2021, respectively, have been eliminated in the following table.
Segment Financial Information | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Year Ended June 30, 2020 | | | | | | Net sales | $ | 2,241,949 |
| | $ | 1,003,703 |
| | $ | 3,245,652 |
| Operating income for reportable segments | 211,667 |
| | 109,847 |
| | 321,514 |
| Assets used in the business | 1,314,011 |
| | 969,540 |
| | 2,283,551 |
| Depreciation and amortization of property | 17,133 |
| | 4,063 |
| | 21,196 |
| Capital expenditures | 17,063 |
| | 3,052 |
| | 20,115 |
| Year Ended June 30, 2019 | | | | | | Net sales | $ | 2,452,905 |
| | $ | 1,019,834 |
| | $ | 3,472,739 |
| Operating income for reportable segments | 254,954 |
| | 112,117 |
| | 367,071 |
| Assets used in the business | 1,265,093 |
| | 1,066,604 |
| | 2,331,697 |
| Depreciation and amortization of property | 15,982 |
| | 4,254 |
| | 20,236 |
| Capital expenditures | 16,475 |
| | 2,495 |
| | 18,970 |
| Year Ended June 30, 2018 | | | | | | Net sales | $ | 2,346,418 |
| | $ | 726,856 |
| | $ | 3,073,274 |
| Operating income for reportable segments | 238,322 |
| | 83,175 |
| | 321,497 |
| Assets used in the business | 1,198,296 |
| | 1,087,445 |
| | 2,285,741 |
| Depreciation and amortization of property | 15,336 |
| | 2,462 |
| | 17,798 |
| Capital expenditures | 18,492 |
| | 4,738 |
| | 23,230 |
|
| | | | | | | | | | | | | | | | | | | Service Center Based Distribution | | Engineered Solutions | | Total | Year Ended June 30, 2023 | | | | | | Net sales | $ | 2,966,842 | | | $ | 1,445,952 | | | $ | 4,412,794 | | Operating income for reportable segments | 373,439 | | | 203,404 | | | 576,843 | | Assets used in the business | 1,736,393 | | | 1,006,939 | | | 2,743,332 | | Depreciation and amortization of property | 17,932 | | | 4,334 | | | 22,266 | | Capital expenditures | 15,390 | | | 11,086 | | | 26,476 | | Year Ended June 30, 2022 | | | | | | Net sales | $ | 2,565,604 | | | $ | 1,245,072 | | | $ | 3,810,676 | | Operating income for reportable segments | 301,881 | | | 156,644 | | | 458,525 | | Assets used in the business | 1,455,293 | | | 997,295 | | | 2,452,588 | | Depreciation and amortization of property | 17,509 | | | 4,167 | | | 21,676 | | Capital expenditures | 14,486 | | | 3,638 | | | 18,124 | | Year Ended June 30, 2021 | | | | | | Net sales | $ | 2,199,533 | | | $ | 1,036,386 | | | $ | 3,235,919 | | Operating income for reportable segments | 225,206 | | | 121,782 | | | 346,988 | | Assets used in the business | 1,332,720 | | | 939,087 | | | 2,271,807 | | Depreciation and amortization of property | 17,155 | | | 3,625 | | | 20,780 | | Capital expenditures | 13,735 | | | 2,117 | | | 15,852 | |
A reconciliation of operating income for reportable segments to the consolidated income before income taxes is as follows: | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| Operating income for reportable segments | $ | 321,514 |
| | $ | 367,071 |
| | $ | 321,497 |
| Adjustments for: | | | | | | Intangible amortization — Service Center Based Distribution | 12,385 |
| | 13,639 |
| | 17,375 |
| Intangible amortization — Fluid Power & Flow Control | 29,168 |
| | 28,244 |
| | 14,690 |
| Intangible Impairment — Service Center Based Distribution | — |
| | 31,594 |
| | — |
| Goodwill Impairment — Fluid Power & Flow Control | 131,000 |
| | — |
| | — |
| Corporate and other expense, net | 59,972 |
| | 59,806 |
| | 63,605 |
| Total operating income | 88,989 |
| | 233,788 |
| | 225,827 |
| Interest expense, net | 36,535 |
| | 40,188 |
| | 23,485 |
| Other income, net | (2,782 | ) | | (881 | ) | | (2,376 | ) | Income before income taxes | $ | 55,236 |
| | $ | 194,481 |
| | $ | 204,718 |
|
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Operating income for reportable segments | $ | 576,843 | | | $ | 458,525 | | | $ | 346,988 | | Adjustments for: | | | | | | Intangible amortization — Service Center Based Distribution | 2,857 | | | 3,435 | | | 5,426 | | Intangible amortization — Engineered Solutions | 27,948 | | | 28,444 | | | 28,938 | | Impairment — Service Center Based Distribution | — | | | — | | | 49,528 | | | | | | | | Corporate and other expense, net | 72,887 | | | 68,788 | | | 57,642 | | Total operating income | 473,151 | | | 357,858 | | | 205,454 | | Interest expense, net | 21,639 | | | 26,263 | | | 30,592 | | Other expense (income), net | 1,701 | | | 1,805 | | | (2,200) | | Income before income taxes | $ | 449,811 | | | $ | 329,790 | | | $ | 177,062 | |
Fluctuations in corporate and other expense, net, are due to changes in corporate expenses, as well as in the amounts and levels of certain expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.
Geographic Information Long-lived assets are based on physical locations and are comprised of the net book value of property intangible assets and right of use assets. Information by geographic area is as follows: | | | | | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | 2018 |
| Long-Lived Assets: | | | | | | United States | $ | 523,739 |
| | $ | 474,910 |
| | $ | 501,373 |
| Canada | 23,865 |
| | 13,291 |
| | 50,261 |
| Other Countries | 8,148 |
| | 4,968 |
| | 5,656 |
| Total | $ | 555,752 |
| | $ | 493,169 |
| | $ | 557,290 |
|
| | | | | | | | | | | | | | | | | | June 30, | 2023 | | 2022 | | 2021 | Long-Lived Assets: | | | | | | United States | $ | 176,025 | | | $ | 178,522 | | | $ | 173,335 | | Canada | 29,817 | | | 31,728 | | | 21,458 | | Other Countries | 9,876 | | | 9,698 | | | 7,907 | | Total | $ | 215,718 | | | $ | 219,948 | | | $ | 202,700 | |
NOTE 14: COMMITMENTS AND CONTINGENCIES The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company does not expect that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. NOTE 15: OTHER INCOME,EXPENSE (INCOME), NET Other income,expense (income), net, consists of the following: | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (458 | ) | | $ | (689 | ) | | $ | (785 | ) | Foreign currency transaction (gains) losses | (2,463 | ) | | 334 |
| | (210 | ) | Net other periodic post-employment (benefits) costs | (120 | ) | | (85 | ) | | 245 |
| Life insurance expense (income), net | 233 |
| | (479 | ) | | (1,628 | ) | Other, net | 26 |
| | 38 |
| | 2 |
| Total other income, net | $ | (2,782 | ) | | $ | (881 | ) | | $ | (2,376 | ) |
| | | | | | | | | | | | | | | | | | Year Ended June 30, | 2023 | | 2022 | | 2021 | Unrealized (gain) loss on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (2,223) | | | $ | 2,612 | | | $ | (4,048) | | Foreign currency transaction losses (gains) | 3,284 | | | (65) | | | 2,091 | | Net other periodic post-employment costs | 1,470 | | | 610 | | | 283 | | Life insurance income, net | (668) | | | (1,374) | | | (296) | | Other, net | (162) | | | 22 | | | (230) | | Total other expense (income), net | $ | 1,701 | | | $ | 1,805 | | | $ | (2,200) | |
NOTE 16: SUBSEQUENT EVENTS We have evaluated events and transactions occurring subsequent to June 30, 20202023 through the date the financial statements were issued.
QUARTERLY OPERATING RESULTS
(In thousands, except per share amounts)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Per Common Share | | Net Sales |
| | Gross Profit |
| | Operating Income (loss) |
| | Net Income (loss) |
| | Net Income (loss) |
| | Cash Dividend |
| 2020 | | | | | | | | | | | | First Quarter | $ | 856,404 |
| | $ | 251,460 |
| | $ | 61,166 |
| | $ | 38,799 |
| | $ | 1.00 |
| | $ | 0.31 |
| Second Quarter | 833,375 |
| | 241,234 |
| | 58,745 |
| | 38,031 |
| | 0.97 |
| | 0.31 |
| Third Quarter | 830,797 |
| | 236,752 |
| | (77,950 | ) | | (82,777 | ) | | (2.14 | ) | | 0.32 |
| Fourth Quarter | 725,076 |
| | 208,290 |
| | 47,028 |
| | 29,989 |
| | 0.77 |
| | 0.32 |
| | $ | 3,245,652 |
| | $ | 937,736 |
| | $ | 88,989 |
| | $ | 24,042 |
| | $ | 0.62 |
| | $ | 1.26 |
| 2019 | | | | | | | | | | | | First Quarter | $ | 864,515 |
| | $ | 251,853 |
| | $ | 66,339 |
| | $ | 48,938 |
| | $ | 1.24 |
| | $ | 0.30 |
| Second Quarter | 840,038 |
| | 242,860 |
| | 60,965 |
| | 38,717 |
| | 0.99 |
| | 0.30 |
| Third Quarter | 885,443 |
| | 255,559 |
| | 34,509 |
| | 16,535 |
| | 0.42 |
| | 0.31 |
| Fourth Quarter | 882,743 |
| | 257,351 |
| | 71,975 |
| | 39,803 |
| | 1.02 |
| | 0.31 |
| | $ | 3,472,739 |
| | $ | 1,007,623 |
| | $ | 233,788 |
| | $ | 143,993 |
| | $ | 3.68 |
| | $ | 1.22 |
|
On August 7, 2020, there were 3,742 shareholdersThe sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the number of weighted shares outstanding and the effects of rounding for each period.
Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are primarily made based on periodic physical inventory and the effect of year-end inventory quantities on LIFO costs.
Fiscal 2020
The decline in net sales in the third and fourth quarters of fiscal 2020 is due to slowness in key end markets largely attributable to the impact of the COVID-19 pandemic.
During the first quarter of fiscal 2020, the Company adopted ASC 842 – accounting for leases. Adoption of the new standard resulted in the recognition of right-of-use assets and lease liabilities of $83.5 million and $89.8 million, respectively, on July 1, 2019. In addition, the adoption resulted in an adjustment to opening retained earnings of approximately $3.3 million, net of tax, on July 1, 2019.
During the first quarter of fiscal 2020, the Company acquired 100% of the outstanding shares of Olympus Controls, a Portland, Oregon based full-service provider of innovative technologies and complete engineered solutions for original equipment manufacturers, machine builders, integrators, and end users. Olympus Controls is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $36.6 million.
During the third quarter of fiscal 2020, the Company recognized a non-cash goodwill impairment charge of $131.0 million related to the operations of FCX Performance, Inc. (FCX) within the Company's Fluid Power & Flow Control segment.
During the third quarter of fiscal 2020, the Company incurred certain non-routine charges primarily related to its U.S. operations in the Service Center Based Distribution segment. Total non-routine charges reduced gross profit by $3.9 million, increased the operating loss by $6.0 million, and increased the quarter net loss by $3.6 million.
Fiscal 2019
During the third quarter of fiscal 2019, the Company acquired substantially all of the net assets of MilRoc Distribution and Woodward Steel for a purchase price of $35.0 million. MilRoc Distribution is an Oklahoma based distributor of oilfield specific products, namely pumps and valves, as well as equipment repair services and industrial trailer parts to the oil & gas industry. Woodward Steel is a Woodward, Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc Distribution and Woodward steel are both included in the Service Center Based Distribution segment.
During the third quarter of fiscal 2019, the Company incurred certain restructuring charges primarily for oil & gas operations. Total restructuring charges reduced gross profit for the quarter by $0.7 million and operating income by $2.3 million.
During the third quarter of fiscal 2019, the Company performed an impairment analysis for certain long-lived intangible assets related to the Company's upstream oil & gas operations in Canada as a result of the continued decline in the oil & gas industry in Western Canada. As a result of this test, the Company determined that the net book values of these long-lived intangible assets were impaired and recognized a non-cash impairment charge of $31.6 million. The Company also recorded a valuation allowance against its Canadian deferred tax assets of $3.8 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures The Company's management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective. Management's Report on Internal Control over Financial Reporting The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President & Chief Executive Officer and the Vice President - Chief Financial Officer, Treasurer, & Treasurer,Principal Accounting Officer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s Management and Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of inherent limitations, internal control over financial reporting can provide only reasonable, not absolute, assurance with respect to the preparation and presentation of the consolidated financial statements and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2020.2023. This evaluation was based on the criteria set forth in the framework "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management determined that the Company’s internal control over financial reporting was effective as of June 30, 2020.2023. The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein. | | | | | | | | | /s/ Neil A. Schrimsher | | /s/ David K. Wells | President & Chief Executive Officer | | Vice President - Chief Financial Officer, Treasurer, & TreasurerPrincipal Accounting Officer |
August 14, 202011, 2023
Changes in Internal Control Over Financial Reporting There have not been any changes in internal control over financial reporting during the quarter ended June 30, 20202023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. As a result
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2020,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2020,2023, of the Company and our report dated August 14, 2020,11, 2023, expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Company's adoption of the FASB's new standard related to leases.statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP
Cleveland, Ohio August 14, 202011, 2023
ITEM 9B. OTHER INFORMATION. During the fiscal quarter ended June 30, 2023, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement" (in each case, as defined in Item 408 of Regulation S-K). ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this Item as to Applied's directors is incorporated by reference to Applied's proxy statement relating to the annual meeting of shareholders to be held October 27, 2020,24, 2023, under the caption “Item 1 - Election of Directors.” The information required by this Item as to Applied's executive officers has been furnished in this report in Part I, after Item 4, under the caption “Information about our Executive Officers.” The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to Applied's proxy statement, under the caption “Delinquent Section 16(a) Reports." Applied has a code of ethics, named theApplied’s Code of Business Ethics that applies to our employees, including our principal executive officer, principal financial officer, and principal accounting officer. The Code of Business Ethics is posted via hyperlink at the investor relations area of our www.applied.com website. In addition, amendments to and waivers from the Code of Business Ethics will be disclosed promptly at the same location.
Applied has adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of Applied's securities by directors, officers, and employees. Information regarding the composition of Applied’s audit committee and the identification of audit committee financial experts serving on the audit committee is incorporated by reference to Applied's proxy statement, under the caption “Corporate Governance.”
ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020,24, 2023, under the captions "Director Compensation," “Executive Compensation”Compensation,” "Compensation Committee Interlocks and Insider Participation," and “Compensation Committee Report.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Equity compensation plan information is incorporated herein by reference to Applied's proxy statement for the annual meeting of shareholders have approvedto be held October 24, 2023, under the following equity compensation plans: the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2019 Long-Term Performance Plan, the Deferredcaption "Equity Compensation Plan (no active employees participate in the plan), and the Deferred Compensation Plan for Non-Employee Directors (two active directors participate in the plan). All of these plans are currently in effect. The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied asInformation (as of June 30, 2020.2023)".
| | | | | | | | | | | | | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | Equity compensation plans approved by security holders | 1,606,961 |
| | | $51.01 | | * | Equity compensation plans not approved by security holders | — |
| | | — |
| | | — |
| | Total | 1,606,961 |
| | | $51.01 |
| * |
| | * | The 2019 Long-Term Performance Plan was adopted in October 2019 to replace the 2015 Long-Term Performance Plan and, similarly, the 2015 Long-Term Performance Plan replaced the 2011 Long-Term Performance Plan, which itself had replaced the 2007 Long-Term Performance Plan. Stock options, stock appreciation rights, and other awards remain outstanding under the 2007, 2011, and 2015 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 2019 Long-Term Performance Plan at June 30, 2020 was 2,221,129. |
Information concerning the security ownership of certain beneficial owners and management is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020,24, 2023, under the caption “Holdings of Major Shareholders, Officers, and Directors.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020,24, 2023, under the caption “Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The informationPrincipal accountant, Deloitte & Touche LLP (PCAOB ID No. 34), fees and services required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020,24, 2023, under the caption “Item 35 - Ratification of Auditors.”
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE. (a)1. Financial Statements. The following consolidated financial statements, notes thereto, the reports of independent registered public accounting firm, and supplemental data are included in Item 8 of this report: | | | | | | | | | • | Report of Independent Registered Public Accounting Firm | | | | • | Statements of Consolidated Income for the Years Ended June 30, 2020, 2019,2023, 2022, and 20182021 | | | | • | Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2020, 2019,2023, 2022, and 20182021 | | | | • | Consolidated Balance Sheets at June 30, 20202023 and 20192022 | | | | • | Statements of Consolidated Cash Flows for the Years Ended June 30, 2020, 2019,2023, 2022, and 20182021 | | | | • | Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2020, 2019,2023, 2022, and 20182021 | | | | • | Notes to Consolidated Financial Statements for the Years Ended June 30, 2020, 2019,2023, 2022, and 20182021 | | | | • | Supplementary Data: | | | | | • | Quarterly Operating Results |
(a)2. Financial Statement Schedule. The following schedule is included in this Part IV, and is found in this report at the page indicated: | | | | | | | | | | Page No. | | | | | Page No. | | | | | Schedule II - Valuation and Qualifying Accounts: Pg. 7266 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto. (a)3. Exhibits. | | | | | | | | | | | | * Asterisk indicates an executive compensation plan or arrangement. | | | Exhibit No. | Description | | | | | | | 3.1 | | | | | | | | 3.2 | | | | | | | | 4.1 | | | | | | | | 4.2 | | | | | | | | 4.3 | Request forAmendment No. 1 to Amended and Restated Note Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as amended,of March 26, 2021 between Applied Industrial Technologies, Inc. and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), and certain of its affiliates (filed as Exhibit 10.14.3 to Applied’sApplied's Form 8-K filed July 2, 2014,10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference). | | |
| | | | | 4.4 | Request forAmendment No. 2 to Amended and Restated Note Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement, dated November 27, 1996, as amended,of December 9, 2021, between Applied Industrial Technologies, Inc. and Prudential Investment Management,PGIM, Inc. (filed as Exhibit 4.510.2 to Applied'sthe Company's Form 10-Q for the quarter ended September 30, 2014,8-K filed December 14, 2021, SEC File No. 1-2299, and incorporated here by reference). | | | | | | |
| | | | | | | | | | | | 4.5 | | | | | | | | 4.6 | Credit Agreement dated as of January 31, 2018,December 9, 2021, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 10.1 to Applied'sthe Company's Form 8-K filed February 6, 2018,December 14, 2021, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.64.7 | | | | | | | | 4.8 | Receivables Financing Agreement dated as of August 31, 2018, among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.1 to the Company'sApplied's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.74.9 | Amendment No. 1 to Receivables Financing Agreement and Reaffirmation of Performance Guaranty dated as of March 26, 2021 among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.2 to Applied's Form 8-K filed March 29, 2021, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.10 | Amendment No. 2 to Receivables Financing Agreement and Reaffirmation of Performance Guaranty, dated as of May 12, 2023, by and among AIT Receivables, LLC, Applied Industrial Technologies, Inc., PNC Bank, National Association, Regions Bank, and PNC Capital Markets LLC. | | | | | | | 4.11 | Purchase and Sale Agreement dated as of August 31, 2018 among various entities listed on Schedule I thereto (including Applied Industrial Technologies, Inc.), as originators, Applied Industrial Technologies, Inc., as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to Applied's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.12 | Amendment No. 1 to Purchase and Sale Agreement dated as of November 19, 2018 among Applied Industrial Technologies, Inc. and various of its affiliates, as originators, Applied Industrial Technologies, Inc., as servicer, and AIT Receivables LLC, as buyer(filed as Exhibit 4.10 to Applied's Form 10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.13 | Amendment No. 2 to Purchase and Sale Agreement dated as of March 26, 2021, among various entities listed on Schedule 1 thereto (including Applied Industrial Technologies, Inc.), as originators, Applied Industrial Technologies, Inc, as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to Applied's Form 8-K filed March 29, 2021, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.14 | Description of Applied's securities.securities (filed as Exhibit 4.7 to Applied's Form 10-K for the year ended June 30, 2020, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.15 | Amendment No. 3 to Receivables Financing Agreement and Reaffirmation of Performance Guaranty dated as of August 6, 2023 among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent, and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.1 to Applied’s Form 8-K filed August 9, 2023, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | 4.16 | Amendment No. 3 to Purchase and Sale Agreement dated as of August 4, 2023 among various entities listed on Schedule I thereto (including Applied Industrial Technologies, Inc.), as originators, Applied Industrial Technologies, Inc., as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to Applied’s Form 8-K filed August 9, 2023, SEC File No. 1-2299, and incorporated here by reference). | | | | | | | *10.1 | A written description of Applied's director compensation program is incorporated by reference to Applied’s proxy statement for the annual meeting of shareholders to be held October 27, 202024, 2023 under the caption “Director Compensation.” | | | | | | | *10.2 | | | | *10.3 | | | | | | | | *10.410.3 | | | | | | | | *10.510.4 | | | | | | | | *10.610.5 | | | | *10.7 | | | | *10.8 | | | | | | | |
| | | | | | | | | | | | *10.910.6 | | | | | | | | *10.1010.7 | | | | | | | | *10.1110.8 | | | | | | | | *10.1210.9 | | | | | | | | *10.1310.10 | | | | | | | | *10.1410.11 | | | | | | | | *10.1510.12 | | | | | | | | *10.1610.13 | | | | | | | | *10.14 | | | | | | | | *10.15 | | | | | | | | *10.16 | | | | | | | | *10.17 | | | |
| | | | | *10.18 | | | | | | | | *10.19 | | | | | | | | *10.20 | | | | | | | | *10.21 | | | | | | | | *10.22 | | | | | | | | *10.23 | | | | | | | | *10.24 | | | | | | | | *10.25 | | | | | | | | *10.26 | | | | | | | | *10.27 | | | | | | | |
| | | | | | | | | | | | *10.28 | | | | | | | | *10.2710.29 | | | | | | | | *10.2810.30 | | | | | | | | *10.2910.31 | | | | *10.30 | | | | | | | | *10.3110.32 | | | | | | | | *10.3210.33 | | | | | | | | *10.3310.34 | | | | | | | | 2119 | | | | | | | | 21 | | | | | | | | 23 | | | | | | | | 24 | | | | | | | | 31 | | | | | | | | 32 | | | | | | | | 95 | | | | 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | |
| | | 101.SCH | XBRL Taxonomy Extension Schema Document | 101 | The following financial information from Applied Industrial Technologies, Inc.'s Annual Report on Form 10-K for the year ended June 30, 2023, formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Statements of Consolidated Income, (ii) the Statements of Consolidated Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Statements of Consolidated Cash Flows, (v) the Statements of Consolidated Shareholders' Equity, and (vi) the Notes to the Consolidated Financial Statements. | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | 104 | | 101.DEFCover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | XBRL Taxonomy Extension Definition Linkbase Document | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Applied will furnish a copy of any exhibit described above and not contained herein upon payment of a specified reasonable fee, which shall be limited to Applied's reasonable expenses in furnishing the exhibit. Certain instruments with respect to long-term debt have not been filed as exhibits because the total amount of securities authorized under any one of the instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each such instrument.
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2020, 2019,2023, 2022, AND 20182021 (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | DESCRIPTION | | Balance at Beginning of Period | | Additions Charged to Cost and Expenses | | Additions (Deductions) Charged to Other Accounts | | | Deductions from Reserve | | | Balance at End of Period | Year Ended June 30, 2023 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 17,522 | | | $ | 5,619 | | | $ | — | | | | $ | 807 | | (B) | | $ | 22,334 | | Returns reserve | | 10,522 | | | — | | | 2,113 | | (A) | | — | | | | 12,635 | | | | $ | 28,044 | | | $ | 5,619 | | | $ | 2,113 | | | | $ | 807 | | | | $ | 34,969 | | Year Ended June 30, 2022 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 16,455 | | | $ | 3,193 | | | $ | — | | | | $ | 2,126 | | (B) | | $ | 17,522 | | Returns reserve | | 9,772 | | | — | | | 750 | | (A) | | — | | | | 10,522 | | | | $ | 26,227 | | | $ | 3,193 | | | $ | 750 | | | | $ | 2,126 | | | | $ | 28,044 | | Year Ended June 30, 2021 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 13,661 | | | $ | 6,540 | | | $ | — | | | | $ | 3,746 | | (B) | | $ | 16,455 | | Returns reserve | | 9,883 | | | — | | | (111) | | (A) | | — | | | | 9,772 | | | | $ | 23,544 | | | $ | 6,540 | | | $ | (111) | | | | $ | 3,746 | | | | $ | 26,227 | |
| | | | | | | | | | | | | | | | | | | | | | | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | DESCRIPTION | | Balance at Beginning of Period |
| | Additions Charged to Cost and Expenses |
| | Additions (Deductions) Charged to Other Accounts |
| | | Deductions from Reserve |
| | | Balance at End of Period |
| Year Ended June 30, 2020 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 10,498 |
| | $ | 14,055 |
| | $ | — |
| | | $ | 10,892 |
| (C) | | $ | 13,661 |
| Returns reserve | | 7,265 |
| | — |
| | 2,618 |
| (B) | | — |
| | | 9,883 |
| | | $ | 17,763 |
| | $ | 14,055 |
| | $ | 2,618 |
| | | $ | 10,892 |
| | | $ | 23,544 |
| Year Ended June 30, 2019 | | |
| | |
| | |
| | | |
| | | |
| Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | |
|
| |
|
| |
|
| | |
|
| | |
|
| Allowance for doubtful accounts | | $ | 10,964 |
| | $ | 4,058 |
| | $ | — |
| | | $ | 4,524 |
| (C) | | $ | 10,498 |
| Returns reserve | | 2,602 |
| | 738 |
| | 3,925 |
| (B) | | — |
| | | 7,265 |
| | | $ | 13,566 |
| | $ | 4,796 |
| | $ | 3,925 |
| | | $ | 4,524 |
| | | $ | 17,763 |
| Year Ended June 30, 2018 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 8,056 |
| | $ | 2,803 |
| | $ | 3,548 |
| (A) | | $ | 3,443 |
| (C) | | $ | 10,964 |
| Returns reserve | | 1,572 |
| | — |
| | 1,030 |
| (A) | | — |
| | | 2,602 |
| | | $ | 9,628 |
| | $ | 2,803 |
| | $ | 4,578 |
| | | $ | 3,443 |
| | | $ | 13,566 |
|
(A)Amounts in the years ending June 30, 2023, 2022 and 2021 represent reserves recorded for the return of merchandise by customers. The Company adopted ASC 606 - Revenue from Contracts with Customers effective July 1, 2018 which requires the Company's sales returns reserve to be established at the gross sales value with an asset established for the value of the expected product to be returned.(B)Amounts represent uncollectible accounts charged off.
| | (A) | Amounts in the year ending June 30, 2018 represent reserves recorded through purchase accounting for acquisitions made during the year of $3,548 and for the return of merchandise by customers of $1,030. |
| | (B) | Amounts in the year ending June 30, 2020 and 2019 represent reserves recorded for the return of merchandise by customers. The Company adopted ASC 606 - Revenue from Contracts with Customers effective July 1, 2018 which requires the Company's sales returns reserve to be established at the gross sales value with an asset established for the value of the expected product to be returned. |
| | (C) | Amounts represent uncollectible accounts charged off. |
SIGNATURESSIGNATURES.
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED INDUSTRIAL TECHNOLOGIES, INC. | | | | | | | | | /s/ Neil A. Schrimsher | | /s/ David K. Wells | Neil A. Schrimsher President & Chief Executive Officer
| | David K. Wells Vice President-Chief Financial Officer,
Treasurer, & Treasurer | | | | /s/ Christopher Macey | | | Christopher Macey Corporate Controller (PrincipalPrincipal Accounting Officer) | | Officer |
Date: August 14, 202011, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. | | | | | | | | | * | | * | Madhuri A. Andrews, Director | | Shelly M. Chadwick, Director | | | | * | | * | Madhuri A. Andrews, Director | | Peter A. Dorsman, Director | | | | * | | * | Mary Dean Hall, Director | | Dan P. Komnenovich, Director | | | | * | | * | Robert J. Pagano, Jr., Director | | Vincent K. Petrella, Director | | | | * | | /s/ Neil A. Schrimsher | Joe A. Raver, Director | | Neil A. Schrimsher, President & Chief Executive Officer and Director | | | | * | |
| Peter C. Wallace, Director and Chairman
| |
|
| | | /s/ Fred D. Bauer Jon S. Ploetz | Fred D. Bauer,Jon S. Ploetz, as attorney in fact | for persons indicated by “*” |
Date: August 14, 202011, 2023
s Versus Prior Period |