ait-20200930

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SEPTEMBER 30, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number 1-2299

APPLIED INDUSTRIAL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


Ohio			34-0117420
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification Number)

One Applied Plaza	Cleveland	Ohio	44115
(Address of principal executive offices)			(Zip Code)

(216) 426-4000

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, without par value	AIT	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

There were 38,759,994 (no par value) shares of common stock outstanding on October 16, 2020.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX

Page
No.

Part I:

FINANCIAL INFORMATION

Item 1:

Financial Statements

Condensed Statements of Consolidated Income - Three Months Ended September 3 0 , 2020 and 2019

Condensed Statements of Consolidated Comprehensive Income - Three M onths Ended September 30 , 2020 and 2019

Condensed Consolidated Balance Sheets - September 3 0 , 2020 and June 30, 20 20

Condensed Statements of Consolidated Cash Flows - Three Months Ended September 3 0 , 2020 and 2019

Condensed Statements of Shareholders' Equity - Three Months Ended September 3 0 , 2020 and 2019

Notes to Condensed Consolidated Financial Statements

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

Item 4:

Controls and Procedures

Part II:

OTHER INFORMATION

Item 1:

Legal Proceedings

Item 1A:

Risk Factors

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

Item 6:

Exhibits

Signatures

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PART I: FINANCIAL INFORMATION

ITEM I: FINANCIAL STATEMENTS

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended
	September 30,
	2020		2019
Net sales	$	747,807	$	856,404
Cost of sales	532,026		604,944
Gross profit	215,781		251,460
Selling, distribution and administrative expense, including depreciation	163,473		190,294

Operating income	52,308		61,166
Interest expense, net	7,653		10,059
Other income, net	(177)		—
Income before income taxes	44,832		51,107
Income tax expense	10,048		12,308
Net income	$	34,784	$	38,799
Net income per share - basic	$	0.90	$	1.00
Net income per share - diluted	$	0.89	$	1.00
Weighted average common shares outstanding for basic computation	38,722		38,611
Dilutive effect of potential common shares	366		350
Weighted average common shares outstanding for diluted computation	39,088		38,961

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)

(In thousands)


	Three Months Ended
	September 30,
	2020		2019
Net income per the condensed statements of consolidated income	$	34,784	$	38,799

Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	5,554		(4,034)
Post-employment benefits:
Reclassification of net actuarial losses (gains) and prior service cost into other income, net and included in net periodic pension costs	68		(17)


Unrealized loss on cash flow hedge	(17)		(2,180)
Reclassification of interest from cash flow hedge into interest expense	2,690		427
Total other comprehensive income ( loss), before tax	8,295		(5,804)
Income tax expense (benefit) related to items of other comprehensive loss	786		(557)
Other comprehensive income (loss), net of tax	7,509		(5,247)
Comprehensive income, net of tax	$	42,293	$	33,552

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)


	September 30, 2020		June 30, 2020
ASSETS
Current assets
Cash and cash equivalents	$	271,060	$	268,551
Accounts receivable, net	447,032		449,998
Inventories	365,355		389,150
Other current assets	52,887		52,070
Total current assets	1,136,334		1,159,769
Property, less accumulated depreciation of $197,143 and $192,054	120,285		121,901
Operating lease assets, net	89,622		90,636
Identifiable intangibles, net	333,613		343,215
Goodwill	541,357		540,594
Other assets	28,042		27,436
TOTAL ASSETS	$	2,249,253	$	2,283,551

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	181,627	$	186,270
Current portion of long-term debt	78,651		78,646
Compensation and related benefits	65,168		61,887
Other current liabilities	88,605		99,280
Total current liabilities	414,051		426,083
Long-term debt	792,827		855,143
Other liabilities	156,969		158,783
TOTAL LIABILITIES	1,363,847		1,440,009
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	10,000		10,000
Additional paid-in capital	176,007		176,492
Retained earnings	1,235,351		1,200,570
Treasury shares—at cost (15,453 and 15,503 shares, respectively)	(414,031)		(414,090)
Accumulated other comprehensive loss	(121,921)		(129,430)
TOTAL SHAREHOLDERS’ EQUITY	885,406		843,542
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,249,253	$	2,283,551

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

(In thousands)


	Three Months Ended
	September 30,
	2020		2019
Cash Flows from Operating Activities
Net income	$	34,784	$	38,799
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property	5,352		5,223
Amortization of intangibles	9,726		10,374


Amortization of stock options and appreciation rights	693		773

Other share-based compensation expense	677		919
Changes in operating assets and liabilities, net of acquisitions	24,559		(8,682)
Other, net	6,051		2,612
Net Cash provided by Operating Activities	81,842		50,018
Cash Flows from Investing Activities
Acquisition of businesses, net of cash acquired	—		(35,703)
Property purchases	(3,597)		(4,946)
Proceeds from property sales	193		88

Net Cash used in Investing Activities	(3,404)		(40,561)
Cash Flows from Financing Activities


Long-term debt repayments	(62,450)		(4,934)


Dividends paid	(12,415)		(11,985)
Acquisition holdback payments	(521)		(201)

Taxes paid for shares withheld for equity awards	(1,797)		(1,754)
Net Cash used in Financing Activities	(77,183)		(18,874)
Effect of Exchange Rate Changes on Cash	1,254		(598)
Increase (decrease) in Cash and Cash Equivalents	2,509		(10,015)
Cash and Cash Equivalents at Beginning of Period	268,551		108,219
Cash and Cash Equivalents at End of Period	$	271,060	$	98,204

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands)


For the Period Ended September 30, 2020	Shares of Common Stock Outstanding	Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Shares- at Cost		Accumulated Other Comprehensive Income (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						34,784						34,784
Other comprehensive income										7,509		7,509

Cash dividends — $0.32 per share						(18)						(18)

Treasury shares issued for:
Exercise of stock appreciation rights and options	13			(277)				12				(265)
Performance share awards	22			(985)				(20)				(1,005)
Restricted stock units	15			(593)				96				(497)
Compensation expense — stock appreciation rights and options				693								693
Other share-based compensation expense				677								677
Other						15		(29)				(14)
Balance at September 30, 2020	38,760	$	10,000	$	176,007	$	1,235,351	$	(414,031)	$	(121,921)	$	885,406


For the Period Ended September 30, 2019	Shares of Common Stock Outstanding	Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Shares- at Cost		Accumulated Other Comprehensive Income (Loss)		Total Shareholders' Equity
Balance at June 30, 2019	38,597	$	10,000	$	172,931	$	1,229,148	$	(415,159)	$	(99,886)	$	897,034
Net income						38,799						38,799
Other comprehensive loss										(5,247)		(5,247)
Cumulative effect of adopting accounting standards						(3,275)						(3,275)
Cash dividends — $0.31 per share						(20)						(20)

Treasury shares issued for:
Exercise of stock appreciation rights and options	5			(177)				61				(116)
Performance share awards	36			(1,540)				362				(1,178)
Restricted stock units	16			(631)				200				(431)
Compensation expense — stock appreciation rights and options				773								773
Other share-based compensation expense				919								919
Other	2			(52)		(4)		23				(33)
Balance at September 30, 2019	38,656	$	10,000	$	172,223	$	1,264,648	$	(414,513)	$	(105,133)	$	927,225

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position of Applied Industrial Technologies, Inc. (the “Company”, or “Applied”) as of September 30, 2020, and the results of its operations and its cash flows for the three month periods ended September 30, 2020 and 2019, have been included. The condensed consolidated balance sheet as of June 30, 2020 has been derived from the audited consolidated financial statements at that date. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2020.

Operating results for the three month period ended September 30, 2020 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, 2021.

Inventory

The Company uses the LIFO method of valuing U.S. inventories. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory determination.

Recently Adopted Accounting Guidance

Accounting for current expected credit losses

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 adopted the new guidance in the first quarter of fiscal 2021. 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 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, 2020, 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 this pronouncement on its financial statements and related disclosures.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

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 three months ended September 30, 2020 and 2019. Other countries consist of Mexico, Australia, New Zealand, and Singapore.


	Three Months Ended September 30,
	2020						2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
Geographic Areas:
United States	$	415,242	$	228,815	$	644,057	$	492,873	$	250,113	$	742,986
Canada	56,896		—		56,896		65,946		—		65,946
Other countries	41,146		5,708		46,854		44,341		3,131		47,472
Total	$	513,284	$	234,523	$	747,807	$	603,160	$	253,244	$	856,404

The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the three months ended September 30, 2020 and 2019:


	Three Months Ended September 30,
	2020						2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
General Industry	36.0	%	39.4	%	37.0	%	34.8	%	43.7	%	37.5	%
Industrial Machinery	9.4	%	26.7	%	14.9	%	10.2	%	22.1	%	13.7	%
Food	14.1	%	3.0	%	10.7	%	11.1	%	2.7	%	8.6	%
Metals	10.2	%	7.0	%	9.2	%	12.4	%	8.2	%	11.1	%
Forest Products	10.8	%	2.9	%	8.3	%	7.7	%	3.1	%	6.4	%
Chem/Petrochem	3.5	%	13.3	%	6.6	%	2.8	%	12.7	%	5.7	%
Cement & Aggregate	7.7	%	1.1	%	5.6	%	6.8	%	1.0	%	5.1	%
Transportation	4.7	%	5.4	%	4.9	%	4.9	%	4.6	%	4.8	%
Oil & Gas	3.6	%	1.2	%	2.8	%	9.3	%	1.9	%	7.1	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

The following tables present the Company’s percentage of revenue by reportable segment and product line for the three months ended September 30, 2020 and 2019:


	Three Months Ended September 30,
	2020						2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
Power Transmission	37.7	%	7.6	%	28.3	%	34.5	%	9.3	%	27.1	%
Fluid Power	13.1	%	39.1	%	21.3	%	13.3	%	39.7	%	21.1	%
Bearings, Linear & Seals	29.0	%	0.4	%	20.0	%	25.9	%	0.3	%	18.3	%
General Maintenance; Hose Products	20.2	%	13.8	%	18.1	%	26.3	%	8.0	%	20.9	%
Specialty Flow Control	—	%	39.1	%	12.3	%	—	%	42.7	%	12.6	%
Total	100	%	100	%	100	%	100	%	100	%	100	%

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 condensed consolidated balance sheet, is as follows:


	September 30, 2020		June 30, 2020		$ Change		% Change
Contract assets	$	9,536	$	8,435	$	1,101	13.1	%

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.

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 2020 Acquisition

On August 21, 2019, the Company acquired 100% of the outstanding shares of Olympus Controls (Olympus), a Portland, Oregon automation solutions provider - including design, assembly, integration, and distribution - of motion control, machine vision, and robotic technologies. Olympus is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $36,642, net tangible assets acquired were $9,540, and intangible assets including goodwill was $27,102 based upon estimated fair values at the acquisition date. 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.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

4. GOODWILL AND INTANGIBLES

The changes in the carrying amount of goodwill for both the Service Center Based Distribution segment and the Fluid Power & Flow Control segment for the fiscal year ended June 30, 2020 and the three month period ended September 30, 2020 are as follows:


	Service Center Based Distribution		Fluid Power & Flow Control		Total
Balance at June 30, 2019	$	213,634	$	448,357	$	661,991
Goodwill acquired during the period	(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


Other, primarily currency translation	763		—		763
Balance at September 30, 2020	$	209,333	$	332,024	$	541,357

The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2020. The Company concluded that seven (7) of the reporting units’ fair value exceeded their carrying amounts by at least 10% as of January 1, 2020. Among these, 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 $27,770 and $5,365, respectively, as of September 30, 2020. As of January 1, 2020, the carrying value of the final reporting unit, which is comprised of the FCX Performance Inc. (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 September 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.

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

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

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; (ii) inability to achieve the sales from our strategic growth initiatives.

At September 30, 2020 and June 30, 2020, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment. At September 30, 2020 and June 30, 2020, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $167,605 related to the Fluid Power & Flow Control segment.

The Company’s identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:


September 30, 2020	Amount		Accumulated Amortization		Net Book Value
Finite-Lived Identifiable Intangibles:
Customer relationships	$	426,471	$	170,805	$	255,666
Trade names	111,488		36,794		74,694
Vendor relationships	11,376		9,170		2,206
Other	2,078		1,031		1,047
Total Identifiable Intangibles	$	551,413	$	217,800	$	333,613


June 30, 2020	Amount		Accumulated Amortization		Net Book Value
Finite-Lived Identifiable 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 Identifiable Intangibles	$	550,877	$	207,662	$	343,215

Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.

Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. Sustained significant softness in certain end market concentrations could result in impairment of certain intangible assets in future periods.

Estimated future amortization expense by fiscal year (based on the Company’s identifiable intangible assets as of September 30, 2020) for the next five years is as follows: $28,600 for the remainder of 2021, $36,200 for 2022, $34,000 for 2023, $29,800 for 2024, $26,800 for 2025 and $24,800 for 2026.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

5. DEBT

A summary of long-term debt, including the current portion, follows:


	September 30, 2020		June 30, 2020
Term Loan	$	579,500	$	589,250
Trade receivable securitization facility	162,300		175,000
Series C notes	80,000		120,000
Series D notes	25,000		25,000
Series E notes	25,000		25,000
Other	1,026		1,026
Total debt	$	872,826	$	935,276
Less: unamortized debt issuance costs	1,348		1,487
	$	871,478	$	933,789

Revolving Credit Facility & Term Loan

In January 2018, the Company refinanced its existing credit facility and entered into a new five-year credit facility with a group of banks expiring in January 2023. This agreement provides for a $780,000 unsecured term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range from 0.10% to 0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. The Company had no amount outstanding under the revolver at September 30, 2020 or June 30, 2020. Unused lines under this facility, net of outstanding letters of credit of $731 and $1,873, respectively, to secure certain insurance obligations, totaled $249,269 and $248,127 at September 30, 2020 and June 30, 2020, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.94% as of September 30, 2020 and June 30, 2020.

Additionally, the Company had letters of credit outstanding with separate banks, not associated with the revolving credit agreement, in the amount of $4,499 and $4,475 as of September 30, 2020 and June 30, 2020, 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 the AR Securitization Facility is $175,000. 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 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. Borrowings under this facility carry variable interest rates tied to LIBOR and fees on the AR Securitization Facility are 0.90% per year. The interest rate on the AR Securitization Facility was 1.07% as of September 30, 2020 and June 30, 2020. 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.

Other Long-Term Borrowings

At September 30, 2020 and June 30, 2020, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $130,000 and $170,000, 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 "Series C" notes, which had an original principal amount of $120,000, carry a fixed interest rate of 3.19%. A $40,000 principal payment was made on the "Series C" notes in July 2020, and the remaining principal balance of $80,000 is due in equal payments in July 2021 and 2022. The "Series D" notes have a remaining principal balance of $25,000, carry a fixed interest rate of 3.21%, and are due in October 2023. The “Series E” notes have a principal amount of $25,000, carry a fixed interest rate of 3.08%, and are due in October 2024.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

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, and matures in May 2024.

6. 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 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. The interest rate swap converts $431,000 of variable rate debt to a rate of 4.36% as of September 30, 2020 and June 30, 2020, respectively. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $23,505 and $26,179 as of September 30, 2020 and June 30, 2020, respectively, which is included in other current liabilities and other liabilities in the condensed consolidated balance sheet. Realized losses related to the interest rate cash flow hedge were not material during the three months ended September 30, 2020 and 2019.

7. FAIR VALUE MEASUREMENTS

Marketable securities measured at fair value at September 30, 2020 and June 30, 2020 totaled $13,533 and $12,259, 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 accompanying condensed consolidated balance sheets and their fair values were determined using quoted market prices (Level 1 in the fair value hierarchy).

As of September 30, 2020 and June 30, 2020, the carrying values of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximated fair value (Level 2 in the fair value hierarchy).

The revolving credit facility, the term loan and the AR Securitization Facility contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

8. SHAREHOLDERS' EQUITY

Accumulated Other Comprehensive Loss

Changes in the accumulated other comprehensive loss are comprised of the following amounts, shown net of taxes:


	Three Months Ended September 30, 2020
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at June 30, 2020	$	(105,094)	$	(4,564)	$	(19,772)	$	(129,430)
Other comprehensive income (loss)	5,439		—		(13)		5,426
Amounts reclassified from accumulated other comprehensive (loss) income	—		51		2,032		2,083

Net current-period other comprehensive income	5,439		51		2,019		7,509
Balance at September 30 2020	$	(99,655)	$	(4,513)	$	(17,753)	$	(121,921)


	Three Months Ended September 30, 2019
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at June 30, 2019	$	(86,330)	$	(2,852)	$	(10,704)	$	(99,886)
Other comprehensive loss	(3,913)		—		(1,643)		(5,556)
Amounts reclassified from accumulated other comprehensive (loss) income	—		(13)		322		309
Net current-period other comprehensive loss	(3,913)		(13)		(1,321)		(5,247)
Balance at September 30, 2019	$	(90,243)	$	(2,865)	$	(12,025)	$	(105,133)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

Other Comprehensive Income (Loss)

Details of other comprehensive income (loss) are as follows:


	Three Months Ended September 30,
	2020						2019
	Pre-Tax Amount		Tax Expense (Benefit)		Net Amount		Pre-Tax Amount		Tax (Benefit) Expense		Net Amount
Foreign currency translation adjustments	$	5,554	$	115	$	5,439	$	(4,034)	$	(121)	$	(3,913)
Post-employment benefits:
Reclassification of net actuarial losses (gains) and prior service cost into other income, net and included in net periodic pension costs	68		17		51		(17)		(4)		(13)
Unrealized loss on cash flow hedge	(17)		(4)		(13)		(2,180)		(537)		(1,643)
Reclassification of interest from cash flow hedge into interest expense	2,690		658		2,032		427		105		322


Other comprehensive income (loss)	$	8,295	$	786	$	7,509	$	(5,804)	$	(557)	$	(5,247)

Anti-dilutive Common Stock Equivalents

In the three month periods ended September 30, 2020 and September 30, 2019, stock options and stock appreciation rights related to 578 and 740 shares of common stock, respectively, were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive.

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(Amounts in thousands, except per share amounts) (Unaudited)

9. SEGMENT INFORMATION

The accounting policies of the Company’s reportable segments are generally the same as those used to prepare the condensed consolidated financial statements. LIFO expense of $1,133 and $358 in the three months ended September 30, 2020 and 2019, respectively, is recorded in cost of sales in the condensed statements of income, and is included in operating income for the Service Center Based Distribution segment. The Company allocates LIFO expense between the segments in the fourth quarter of its fiscal year. Intercompany sales, primarily from the Fluid Power & Flow Control segment to the Service Center Based Distribution segment, of $7,496 and $7,313, in the three months ended September 30, 2020 and 2019, respectively, have been eliminated in the Segment Financial Information tables below.


Three Months Ended	Service Center Based Distribution		Fluid Power & Flow Control		Total
September 30, 2020
Net sales	$	513,284	$	234,523	$	747,807
Operating income for reportable segments	49,901		25,861		75,762
Assets used in business	1,283,031		966,222		2,249,253
Depreciation and amortization of property	4,395		957		5,352
Capital expenditures	3,088		509		3,597

September 30, 2019
Net sales	$	603,160	$	253,244	$	856,404
Operating income for reportable segments	60,360		26,857		87,217
Assets used in business	1,289,592		1,140,140		2,429,732
Depreciation and amortization of property	4,178		1,045		5,223
Capital expenditures	4,195		751		4,946

A reconciliation of operating income for reportable segments to the condensed consolidated income before income taxes is as follows:


	Three Months Ended
	September 30,
	2020		2019
Operating income for reportable segments	$	75,762	$	87,217
Adjustment for:
Intangible amortization—Service Center Based Distribution	2,581		3,054
Intangible amortization—Fluid Power & Flow Control	7,145		7,320


Corporate and other expense, net	13,728		15,677
Total operating income	52,308		61,166
Interest expense, net	7,653		10,059
Other income, net	(177)		—
Income before income taxes	$	44,832	$	51,107

The change in corporate and other expense, net is 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

10. OTHER INCOME, NET

Other income, net consists of the following:


	Three Months Ended
	September 30,
	2020		2019
Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan	$	(819)	$	(