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Table of Contents
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 DECEMBER 31, 2020

OR        
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)
(216426-4000
Registrant's telephone number, including area code


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, without par valueAITNew 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 



Table of Contents
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 38,832,046 (no par value) shares of common stock outstanding on January 15, 2021.


Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page
No.
Part I:
Item 1:
Item 2:
Item 3:
Item 4:
Part II:
Item 1:
Item 1A:
Item 2:
Item 6:
1

Table of Contents
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 EndedSix Months Ended
December 31,December 31,
 2020201920202019
Net sales$751,287 $833,375 $1,499,094 $1,689,779 
Cost of sales541,753 592,141 1,073,779 1,197,085 
Gross profit209,534 241,234 425,315 492,694 
Selling, distribution and administrative expense, including depreciation
162,428 182,489 325,901 372,783 
Intangible and other impairment49,528  49,528  
Operating (loss) income(2,422)58,745 49,886 119,911 
Interest expense, net7,658 9,583 15,311 19,642 
Other expense (income), net88 (215)(89)(215)
(Loss) income before income taxes(10,168)49,377 34,664 100,484 
Income tax (benefit) expense(4,834)11,346 5,214 23,654 
Net (loss) income$(5,334)$38,031 $29,450 $76,830 
Net (loss) income per share - basic$(0.14)$0.98 $0.76 $1.99 
Net (loss) income per share - diluted$(0.14)$0.97 $0.75 $1.97 
Weighted average common shares outstanding for basic computation38,781 38,649 38,751 38,630 
Dilutive effect of potential common shares 398 414 370 
Weighted average common shares outstanding for diluted computation38,781 39,047 39,165 39,000 
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 EndedSix Months Ended
December 31,December 31,
2020201920202019
Net (loss) income per the condensed statements of consolidated income$(5,334)$38,031 $29,450 $76,830 
Other comprehensive income, before tax:
Foreign currency translation adjustments14,471 5,445 20,025 1,411 
Post-employment benefits:
Reclassification of net actuarial losses (gains) and prior service cost into other income, net and included in net periodic pension costs67 (16)135 (33)
  Unrealized (loss) gain on cash flow hedge(2,724)1,822 (2,741)(358)
  Reclassification of interest from cash flow hedge into interest expense2,822 906 5,512 1,333 
Total other comprehensive income, before tax14,636 8,157 22,931 2,353 
Income tax expense related to items of other comprehensive income79 584 865 27 
Other comprehensive income, net of tax14,557 7,573 22,066 2,326 
Comprehensive income, net of tax$9,223 $45,604 $51,516 $79,156 
See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
December 31,
2020
June 30,
2020
ASSETS
Current assets
Cash and cash equivalents$288,775 $268,551 
Accounts receivable, net444,200 449,998 
Inventories363,757 389,150 
Other current assets54,864 52,070 
Total current assets1,151,596 1,159,769 
Property, less accumulated depreciation of $198,572 and $192,054
120,530 121,901 
Operating lease assets, net86,977 90,636 
Identifiable intangibles, net294,581 343,215 
Goodwill557,257 540,594 
Other assets30,076 27,436 
TOTAL ASSETS$2,241,017 $2,283,551 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable$196,468 $186,270 
Current portion of long-term debt78,638 78,646 
Compensation and related benefits67,253 61,887 
Other current liabilities83,508 99,280 
Total current liabilities425,867 426,083 
Long-term debt783,076 855,143 
Other liabilities151,367 158,783 
TOTAL LIABILITIES1,360,310 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 capital175,016 176,492 
Retained earnings1,217,582 1,200,570 
Treasury shares—at cost (15,382 and 15,503 shares, respectively)
(414,527)(414,090)
Accumulated other comprehensive loss(107,364)(129,430)
TOTAL SHAREHOLDERS’ EQUITY880,707 843,542 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$2,241,017 $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)
Six Months Ended
December 31,
20202019
Cash Flows from Operating Activities
Net income$29,450 $76,830 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property10,561 10,617 
Amortization of intangibles18,002 20,569 
Intangible and other impairment49,528  
Amortization of stock options and appreciation rights1,328 1,494 
Other share-based compensation expense2,167 1,837 
Changes in operating assets and liabilities, net of acquisitions52,005 (11,660)
Other, net(3,685)5,212 
Net Cash provided by Operating Activities159,356 104,899 
Cash Flows from Investing Activities
Acquisition of businesses, net of cash acquired(31,078)(36,390)
Capital expenditures(8,449)(11,965)
Proceeds from property sales292 325 
Net Cash used in Investing Activities(39,235)(48,030)
Cash Flows from Financing Activities
Long-term debt borrowings 25,000 
Long-term debt repayments(72,260)(34,868)
Interest rate swap settlement payments(549) 
Payment of debt issuance costs (16)
Dividends paid(24,899)(24,002)
Acquisition holdback payments(1,138)(777)
Exercise of stock options and appreciation rights163 330 
Taxes paid for shares withheld for equity awards(5,571)(1,988)
Net Cash used in Financing Activities(104,254)(36,321)
Effect of Exchange Rate Changes on Cash4,357 (618)
Increase in Cash and Cash Equivalents20,224 19,930 
Cash and Cash Equivalents at Beginning of Period268,551 108,219 
Cash and Cash Equivalents at End of Period$288,775 $128,149 
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
December 31, 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, 202038,710 $10,000 $176,492 $1,200,570 $(414,090)$(129,430)$843,542 
Net income34,784 34,784 
Other comprehensive income7,509 7,509 
Cash dividends — $0.32 per share
(18)(18)
Treasury shares issued for:
Exercise of stock appreciation rights and options13 (277)12 (265)
Performance share awards22 (985)(20)(1,005)
Restricted stock units15 (593)96 (497)
Compensation expense — stock appreciation rights and options693 693 
Other share-based compensation expense677 677 
Other15 (29)(14)
Balance at September 30, 202038,760 $10,000 $176,007 $1,235,351 $(414,031)$(121,921)$885,406 
Net loss(5,334)(5,334)
Other comprehensive income14,557 14,557 
Cash dividends — $0.32 per share
(12,483)(12,483)
Treasury shares issued for:
Exercise of stock appreciation rights and options71 (3,116)(496)(3,612)
Compensation expense — stock appreciation rights and options635 635 
Other share-based compensation expense1,490 1,490 
Other48  48 
Balance at December 31, 202038,831 $10,000 $175,016 $1,217,582 $(414,527)$(107,364)$880,707 





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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
For the Period Ended
December 31, 2019
Shares of Common Stock OutstandingCommon StockAdditional Paid-In CapitalRetained EarningsTreasury Shares-
at Cost
Accumulated Other Comprehensive Income (Loss)Total Shareholders' Equity
Balance at June 30, 201938,597 $10,000 $172,931 $1,229,148 $(415,159)$(99,886)$897,034 
Net income38,799 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 options5 (177)61 (116)
Performance share awards36 (1,540)362 (1,178)
Restricted stock units16 (631)200 (431)
Compensation expense — stock appreciation rights and options773 773 
Other share-based compensation expense919 919 
Other2 (52)(4)23 (33)
Balance at September 30, 201938,656 $10,000 $172,223 $1,264,648 $(414,513)$(105,133)$927,225 
Net income38,031 38,031 
Other comprehensive income7,573 7,573 
Cash dividends — $0.31 per share
(12,017)(12,017)
Treasury shares issued for:
Exercise of stock appreciation rights and options22 (185)(47)(232)
Compensation expense — stock appreciation rights and options721 721 
Other share-based compensation expense918 918 
Other23 (1)22 
Balance at December 31, 201938,678 $10,000 $173,677 $1,290,685 $(414,561)$(97,560)$962,241 
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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 December 31, 2020, and the results of its operations and its cash flows for the six month periods ended December 31, 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 six month period ended December 31, 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 and six months ended December 31, 2020 and 2019. Other countries consist of Mexico, Australia, New Zealand, and Singapore.
Three Months Ended December 31,
20202019
Service Center Based DistributionFluid Power & Flow ControlTotalService Center Based DistributionFluid Power & Flow ControlTotal
Geographic Areas:
United States$417,456 $230,358 $647,814 $467,191 $253,149 $720,340 
Canada57,809  57,809 67,897  67,897 
Other countries40,425 5,239 45,664 40,700 4,438 45,138 
Total$515,690 $235,597 $751,287 $575,788 $257,587 $833,375 

Six Months Ended December 31,
20202019
Service Center Based DistributionFluid Power & Flow ControlTotalService Center Based DistributionFluid Power & Flow ControlTotal
Geographic Areas:
United States$832,698 $459,173 $1,291,871 $960,064 $503,262 $1,463,326 
Canada114,705  114,705 133,843  133,843 
Other countries81,571 10,947 92,518 85,041 7,569 92,610 
Total$1,028,974 $470,120 $1,499,094 $1,178,948 $510,831 $1,689,779 

The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the three and six months ended December 31, 2020 and 2019:
Three Months Ended December 31,
 20202019
Service Center Based DistributionFluid Power & Flow ControlTotalService Center Based DistributionFluid Power & Flow ControlTotal
General Industry35.8 %39.8 %37.1 %34.4 %41.0 %36.4 %
Industrial Machinery9.3 %26.3 %14.6 %9.1 %24.2 %13.8 %
Food14.1 %3.0 %10.6 %12.0 %3.0 %9.2 %
Metals10.5 %6.6 %9.3 %10.7 %7.6 %9.8 %
Forest Products10.8 %3.1 %8.4 %9.5 %2.9 %7.5 %
Chem/Petrochem3.3 %14.5 %6.8 %3.6 %14.4 %6.9 %
Cement & Aggregate7.6 %1.0 %5.5 %7.8 %1.0 %5.7 %
Transportation4.9 %4.6 %4.8 %4.8 %4.1 %4.6 %
Oil & Gas3.7 %1.1 %2.9 %8.1 %1.8 %6.1 %
Total100.0 %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)
Six Months Ended December 31,
 20202019
Service Center Based DistributionFluid Power & Flow ControlTotalService Center Based DistributionFluid Power & Flow ControlTotal
General Industry36.0 %39.6 %37.1 %34.6 %42.4 %37.0 %
Industrial Machinery9.3 %26.5 %14.7 %9.7 %23.2 %13.8 %
Food14.1 %3.0 %10.6 %11.5 %2.8 %8.9 %
Metals10.3 %6.8 %9.2 %11.5 %7.9 %10.4 %
Forest Products10.8 %3.0 %8.4 %8.6 %3.0 %6.9 %
Chem/Petrochem3.4 %13.9 %6.7 %3.2 %13.5 %6.3 %
Cement & Aggregate7.7 %1.1 %5.6 %7.3 %1.0 %5.4 %
Transportation4.8 %5.0 %4.8 %4.9 %4.3 %4.7 %
Oil & Gas3.6 %1.1 %2.9 %8.7 %1.9 %6.6 %
Total100.0 %100.0 %100.0 %100.0 %100.0 %100.0 %
The following tables present the Company’s percentage of revenue by reportable segment and product line for the three and six months ended December 31, 2020 and 2019:
Three Months Ended December 31, 2020
 20202019
Service Center Based DistributionFluid Power & Flow ControlTotalService Center Based DistributionFluid Power & Flow ControlTotal
Power Transmission37.3 %8.0 %28.1 %35.4 %11.8 %28.1 %
Fluid Power13.3 %37.1 %20.8 %13.4 %35.8 %20.3 %
Bearings, Linear & Seals28.9 %0.5 %20.0 %26.2 %0.4 %18.2 %
General Maintenance; Hose Products20.5 %15.4 %18.9 %25.0 %13.3 %21.4 %
Specialty Flow Control %39.0 %12.2 % %38.7 %12.0 %
Total100 %100 %100 %100 %100 %100 %
Six Months Ended December 31,
 20202019
Service Center Based DistributionFluid Power & Flow ControlTotalService Center Based DistributionFluid Power & Flow ControlTotal
Power Transmission37.5 %7.8 %28.2 %34.9 %10.5 %27.6 %
Fluid Power13.2 %38.1 %21.0 %13.4 %37.5 %20.7 %
Bearings, Linear & Seals28.9 %0.4 %20.0 %26.0 %0.3 %18.3 %
General Maintenance; Hose Products20.4 %14.7 %18.6 %25.7 %10.7 %21.0 %
Specialty Flow Control %39.0 %12.2 % %41.0 %12.4 %
Total100 %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.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
Activity related to contract assets, which are included in other current assets on the condensed consolidated balance sheet, is as follows:
December 31, 2020June 30, 2020$ Change% Change
Contract assets$7,314 $8,435 $(1,121)(13.3)%
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 2021 Acquisitions
On December 31, 2020, the Company acquired 100% of the outstanding shares of Gibson Engineering (Gibson), a Norwood, Massachusetts provider of automation products, services, and engineered solutions focused on machine vision, motion control, mobile and collaborative robotic solutions, intelligent sensors, and other related equipment. Gibson is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $15,221, net tangible assets acquired were $3,681, and intangible assets including goodwill was $11,540 based upon preliminary estimated fair values at the acquisition date, which are subject to change. The purchase price includes $1,938 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of December 31, 2020, and which will be paid on the first and second anniversaries of the acquisition date with interest at a fixed rate of 1.0% 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.
On October 5, 2020, the Company acquired substantially all of the net assets of Advanced Control Solutions (ACS), which operates four locations in Georgia, Tennessee and Alabama. ACS is a provider of automation products, services, and engineered solutions focused on machine vision equipment and software, mobile and collaborative robotic solutions, intelligent sensors, logic controllers, and other related equipment. ACS is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $17,795, net tangible assets acquired were $1,406, and intangible assets including goodwill was $16,389 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 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 six month period ended December 31, 2020 are as follows:
Service Center Based DistributionFluid Power & Flow ControlTotal
Balance at June 30, 2019$213,634 $448,357 $661,991 
Goodwill adjusted/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 
Goodwill acquired during the period 13,939 13,939 
Other, primarily currency translation2,724  2,724 
Balance at December 31, 2020$211,294 $345,963 $557,257 

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 $29,070 and $6,026, respectively, as of December 31, 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 December 31, 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 December 31, 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 and $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:
December 31, 2020AmountAccumulated
Amortization
Net Book
Value
Finite-Lived Identifiable Intangibles:
Customer relationships$354,043 $131,233 $222,810 
Trade names103,134 34,673 68,461 
Vendor relationships11,501 9,477 2,024 
Other1,775 489 1,286 
Total Identifiable Intangibles$470,453 $175,872 $294,581 

June 30, 2020AmountAccumulated
Amortization
Net Book
Value
Finite-Lived Identifiable Intangibles:
Customer relationships$426,017 $162,965 $263,052 
Trade names111,453 34,815 76,638 
Vendor relationships11,329 8,934 2,395 
Other2,078 948 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.
During the six month period ended December 31, 2020, the Company acquired identifiable intangible assets with a preliminary acquisition cost allocation and weighted-average life as follows:
Acquisition Cost AllocationWeighted-Average life
Customer relationships$11,820 20.0
Trade names1,650 15.0
Other520 6.4
Total Identifiable Intangibles$13,990 18.9
Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. Sustained significant weakness in certain end market concentrations could result in impairment of certain intangible assets in future periods.
The Company has three asset groups that have significant exposure to oil and gas end markets. Due to the prolonged economic downturn in these end markets, the Company determined during the second quarter of fiscal 2021 that certain carrying values may not be recoverable. The Company determined that an impairment existed in two of the three asset groups as the asset groups' carrying values exceeded the sum of the undiscounted cash flows. The fair values of the long-lived assets were then determined using the income approach, and the analyses resulted in the measurement of an intangible asset impairment loss of $45,033, which was recorded in the three months ended December 31, 2020, 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, earnings before interest, taxes, depreciation, and amortization (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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
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 in the three months ended December 31, 2020.
Estimated future amortization expense by fiscal year (based on the Company’s identifiable intangible assets as of December 31, 2020) for the next five years is as follows: $16,500 for the remainder of 2021, $31,400 for 2022, $29,600 for 2023, $25,800 for 2024, $23,600 for 2025 and $21,900 for 2026.

5.     DEBT
A summary of long-term debt, including the current portion, follows:
December 31, 2020June 30, 2020
Term Loan$569,750 $589,250 
Trade receivable securitization facility162,300 175,000 
Series C notes80,000 120,000 
Series D notes25,000 25,000 
Series E notes25,000 25,000 
Other966 1,026 
Total debt$863,016 $935,276 
Less: unamortized debt issuance costs1,302 1,487 
$861,714 $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 December 31, 2020 or June 30, 2020. Unused lines under this facility, net of outstanding letters of credit of $681 and $1,873, respectively, to secure certain insurance obligations, totaled $249,319 and $248,127 at December 31, 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 December 31, 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 $4,559 and $4,475 as of December 31, 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 as of December 31, 2020 and June 30, 2020 was 1.09% and 1.07%, 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.
Unsecured Shelf Facility
At December 31, 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,
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
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" 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.
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, 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. 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 new 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. The interest rate swap converts $420,000 of variable rate debt to a rate of 3.38% as of December 31, 2020. The interest rate swap converted $431,000 of variable rate debt to a rate of 4.36% as of June 30, 2020. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $23,372 and $26,179 as of December 31, 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 six months ended December 31, 2020 and 2019.

7.    FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at December 31, 2020 and June 30, 2020 totaled $15,160 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).
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
As of December 31, 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).

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 December 31, 2020
Foreign currency translation adjustment Post-employment benefitsCash flow hedgeTotal Accumulated other comprehensive (loss) income
Balance at September 30, 2020$(99,655)$(4,513)$(17,753)$(121,921)
Other comprehensive income (loss)14,433  (2,058)12,375 
Amounts reclassified from accumulated other comprehensive (loss) income 51 2,131 2,182 
Net current-period other comprehensive income14,433 51 73 14,557 
Balance at December 31, 2020$(85,222)$(4,462)$(17,680)$(107,364)

Three Months Ended December 31, 2019
Foreign currency translation adjustment Post-employment benefitsCash flow hedgeTotal Accumulated other comprehensive (loss) income
Balance at September 30, 2019$(90,243)$(2,865)$(12,025)$(105,133)
Other comprehensive income5,556  1,343 6,899 
Amounts reclassified from accumulated other comprehensive (loss) income (12)686 674 
Net current-period other comprehensive income (loss)5,556 (12)2,029 7,573 
Balance at December 31, 2019$(84,687)$(2,877)$(9,996)$(97,560)

Six Months Ended December 31, 2020
Foreign currency translation adjustment Post-employment benefitsCash flow hedgeTotal Accumulated other comprehensive (loss) income
Balance at June 30, 2020$(105,094)$(4,564)$(19,772)$(129,430)
Other comprehensive income (loss)19,872  (2,071)17,801 
Amounts reclassified from accumulated other comprehensive (loss) income 102 4,163 4,265 
Net current-period other comprehensive income19,872 102 2,092 22,066 
Balance at December 31, 2020$(85,222)$(4,462)$(17,680)$(107,364)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
Six Months Ended December 31, 2019
Foreign currency translation adjustment Post-employment benefitsCash flow hedgeTotal Accumulated other comprehensive (loss) income
Balance at June 30, 2019$(86,330)$(2,852)$(10,704)$(99,886)
Other comprehensive income (loss)1,643  (300)1,343 
Amounts reclassified from accumulated other comprehensive (loss) income (25)1,008 983 
Net current-period other comprehensive income (loss)1,643 (25)708 2,326 
Balance at December 31, 2019$(84,687)$(2,877)$(9,996)$(97,560)

Other Comprehensive Income (Loss)
Details of other comprehensive income (loss) are as follows:
Three Months Ended December 31,
20202019
Pre-Tax AmountTax Expense (Benefit)Net AmountPre-Tax AmountTax (Benefit) ExpenseNet Amount
Foreign currency translation adjustments$14,471 $38 $14,433 $5,445 $(111)$5,556 
Post-employment benefits:
Reclassification of net actuarial losses (gains) and prior service cost into other income, net and included in net periodic pension costs67 16 51 (16)(4)(12)
Unrealized (gain) loss on cash flow hedge(2,724)(666)(2,058)1,822 479 1,343 
Reclassification of interest from cash flow hedge into interest expense2,822 691 2,131 906 220 686 
Other comprehensive income$14,636 $79 $14,557 $8,157 $584 $7,573 
Six Months Ended December 31,
20202019
Pre-Tax AmountTax Expense (Benefit)Net AmountPre-Tax AmountTax (Benefit) ExpenseNet Amount
Foreign currency translation adjustments$20,025 $153 $19,872 $1,411 $(232)$1,643 
Post-employment benefits:
Reclassification of net actuarial losses (gains) and prior service cost into other income, net and included in net periodic pension costs135 33 102 (33)(8)(25)
Unrealized gain on cash flow hedge(2,741)(670)(2,071)(358)(58)(300)
Reclassification of interest from cash flow hedge into interest expense5,512 1,349 4,163 1,333 325 1,008 
Other comprehensive income$22,931 $865 $22,066 $2,353 $27 $2,326 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
Anti-dilutive Common Stock Equivalents
In the three month period ended December 31, 2019, stock options and stock appreciation rights related to 503 shares of common stock were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive. In the six month periods ended December 31, 2020 and December 31, 2019, stock options and stock appreciation rights related to 294 and 722 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.

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 $863 and $1,929 in the three months ended December 31, 2020 and 2019, respectively, and $1,996 and $2,287 in the six months ended December 31, 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 $7,442 and $7,436, in the three months ended December 31, 2020 and 2019, and $14,938, respectively, and $14,749 in the six months ended December 31, 2020 and 2019, respectively, have been eliminated in the Segment Financial Information tables below.
Three Months EndedService Center Based DistributionFluid Power & Flow ControlTotal
December 31, 2020
Net sales$515,690 $235,597 $751,287 
Operating income for reportable segments42,654 26,647 69,301 
Depreciation and amortization of property4,252 957 5,209 
Capital expenditures4,442 410 4,852 
December 31, 2019
Net sales$575,788 $257,587 $833,375 
Operating income for reportable segments53,905 29,449 83,354 
Depreciation and amortization of property4,280 1,114 5,394 
Capital expenditures6,239 780 7,019 

Six Months EndedService Center Based DistributionFluid Power & Flow ControlTotal
December 31, 2020
Net sales$1,028,974 $470,120 $1,499,094 
Operating income for reportable segments92,555 52,508 145,063 
Assets used in business1,257,457 983,560 2,241,017 
Depreciation and amortization of property8,647 1,914 10,561 
Capital expenditures7,530 919 8,449 
December 31, 2019
Net sales$1,178,948 $510,831 $1,689,779 
Operating income for reportable segments114,265 56,306 170,571 
Assets used in business1,291,399 1,127,598 2,418,997 
Depreciation and amortization of property8,458 2,159 10,617 
Capital expenditures10,434 1,531 11,965 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
A reconciliation of operating income for reportable segments to the condensed consolidated income before income taxes is as follows:
Three Months EndedSix Months Ended
December 31,December 31,
2020201920202019
Operating income for reportable segments$69,301 $83,354 $145,063 $170,571 
Adjustment for:
Intangible amortization—Service Center Based Distribution
982 2,832 3,563 5,886 
Intangible amortization—Fluid Power & Flow Control
7,293 7,363 14,438 14,683 
Impairment—Service Center Based Distribution49,528  49,528  
Corporate and other expense, net13,920 14,414 27,648 30,091 
Total operating (loss) income(2,422)58,745 49,886 119,911 
Interest expense, net7,658 9,583 15,311 19,642 
Other expense (income), net88 (215)(89)(215)
(Loss) income before income taxes$(10,168)$49,377 $34,664 $100,484 

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.

10.    OTHER EXPENSE (INCOME), NET
Other expense (income), net consists of the following:
 Three Months EndedSix Months Ended
December 31,December 31,
 2020201920202019
Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan$(1,643)$(766)$(2,462)$(821)
Foreign currency transactions loss1,805 556 2,221 334 
Net other periodic post-employment benefits (costs)71 (30)142 (60)
Life insurance (income) expense, net(36)59 141 359 
Other, net(109)(34)(131)(27)
Total other expense (income), net$88 $(215)$(89)$(215)



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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

With more than 6,000 employees across North America, Australia, New Zealand, and Singapore, Applied Industrial Technologies (“Applied,” the “Company,” “We,” “Us” or “Our”) 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. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During the second quarter of fiscal 2021, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore from 572 facilities.
The following is Management's Discussion and Analysis of significant factors which have affected our financial condition, results of operations and cash flows during the periods included in the accompanying condensed consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash flows. When reviewing the discussion and analysis set forth below, please note that the majority of SKUs (Stock Keeping Units) we sell in any given period were not necessarily sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used comparative metrics analyzing sales, such as changes in product mix and volume.
Overview
Consolidated sales for the quarter ended December 31, 2020 decreased $82.1 million or 9.9% compared to the prior year quarter, with acquisitions increasing sales by $4.1 million or 0.5% and favorable foreign currency translation of $0.5 million increasing sales by 0.1%. The Company incurred an operating loss of $2.4 million, or a negative operating margin of 0.3% of sales for the quarter ended December 31, 2020 compared to operating income of $58.7 million, or operating margin of 7.0% of sales for the same quarter in the prior year. The quarter ended December 31, 2020 had a net loss of $5.3 million compared to net income of $38.0 million in the prior year quarter. The current ratio was 2.7 to 1 at December 31, 2020 and June 30, 2020.
Fiscal 2021 second quarter results include a $49.5 million pre-tax non-cash charge related to the impairment of certain intangible, lease, and fixed assets, as well as non-routine costs of $7.8 million pre-tax. The items are the result of weaker economic conditions and business alignment initiatives across a portion of the Service Center segment operations exposed to oil and gas end markets. Total non-routine costs of $7.8 million pre-tax include a $7.4 million inventory reserve charge recorded within cost of sales, and $0.4 million related to severance and facility consolidation recorded in selling, distribution and administrative expense. Combined, the non-cash impairment charge and non-routine costs unfavorably impacted operating (loss) income by $57.3 million and net (loss) income by $43.7 million.
We continued to face challenges during the quarter from the COVID-19 pandemic, although underlying demand sustained gradual improvement. We are classified as critical infrastructure and our facilities remain open and operational as they adhere to health and safety policies.  While general economic uncertainty remains, underlying sales improvement has continued into January with organic sales month to date down by a mid-single digit percent year over year. We are continuing to monitor the impact of the COVID-19 pandemic and continue to take appropriate cost actions.  Cost measures implemented to date include reduced discretionary spend, staff realignments, temporary furloughs and pay reductions, suspension of 401(k) company match, and other expense reduction actions. A portion of the temporary cost actions were restored during the first half of fiscal 2021.
Applied monitors several economic indices that have been key indicators for industrial economic activity in the United States. These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply Management (ISM). Historically, our performance correlates well with the MCU, which measures productivity and calculates a ratio of actual manufacturing output versus potential full capacity output. When manufacturing plants are running at a high rate of capacity, they tend to wear out machinery and require replacement parts.
The MCU (total industry) and IP indices have increased since June 2020. The MCU for December 2020 was 74.5, which is up from both the September and June 2020 revised readings of 72.3 and 68.9, respectively. The ISM PMI registered 60.7 in December, up from the September and June 2020 readings of 55.4 and 52.6, respectively. The indices for the months during the current quarter were as follows:
Index Reading
MonthMCUPMIIP
December 202074.560.7102.2
November 202073.457.5101.3
October 202073.059.3100.5

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The number of Company employees was 6,054 at December 31, 2020, 6,289 at June 30, 2020, and 6,536 at December 31, 2019. The number of operating facilities totaled 572 at December 31, 2020, 584 at June 30, 2020 and 601 at December 31, 2019.
Results of Operations
Three months Ended December 31, 2020 and 2019
The following table is included to aid in review of Applied's condensed statements of consolidated income.
Three Months Ended December 31,Change in $'s Versus Prior Period -
% Decrease
As a Percent of Net Sales
20202019
Net sales100.0 %100.0 %(9.9)%
Gross profit27.9 %28.9 %(13.1)%
Selling, distribution & administrative expense21.6 %21.9 %(11.0)%
Operating (loss) income(0.3)%7.0 %(104.1)%
Net (loss) income(0.7)%4.6 %(114.0)%
During the quarter ended December 31, 2020, sales decreased $82.1 million or 9.9% compared to the prior year quarter, with sales from acquisitions adding $4.1 million or 0.5% and favorable foreign currency translation accounting for an increase of $0.5 million or 0.1%. There were 62 selling days in both the quarter ended December 31, 2020 and December 31, 2019. Excluding the impact of businesses acquired and foreign currency translation, sales were down $86.7 million or 10.5% during the quarter, due to weak demand across key end markets.
The following table shows changes in sales by reportable segment.
Sales by Reportable SegmentThree Months Ended
December 31,
Sales DecreaseAmount of change due to
Foreign CurrencyOrganic Change
20202019Acquisitions
Service Center Based Distribution$515.7 $575.8 $(60.1)$— $0.5 $(60.6)
Fluid Power & Flow Control235.6 257.6 (22.0)4.1 — (26.1)
Total$751.3 $833.4 $(82.1)$4.1 $0.5 $(86.7)
Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $60.1 million or 10.4%. Unfavorable foreign currency translation decreased sales by $0.5 million or 0.1%. Excluding the impact of foreign currency translation, sales decreased $60.6 million or 10.5%, reflecting weaker industrial end-market demand from the impact of the COVID-19 pandemic, although sales improved as the quarter progressed. Weakness remains the greatest within heavy industries but is stabilizing, with positive momentum across the food and beverage, pulp and paper, aggregates, rubber, and forestry end markets.
Sales from our Fluid Power & Flow Control segment decreased $22.0 million or 8.5%. The acquisition within this segment increased sales by $4.1 million or 1.6%. Excluding the impact of businesses acquired, sales decreased $26.1 million or 10.1%, driven by a decrease from operations due to ongoing soft demand across industrial, off-highway mobile, and process-related end markets; partially offset by growth within technology, life sciences, chemical, utilities, transportation, and aggregates end markets.

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following table shows changes in sales by geographic area. Other countries includes Mexico, Australia, New Zealand, and Singapore.
Three Months Ended
December 31,
Sales (Decrease) IncreaseAmount of change due to
Foreign CurrencyOrganic Change
Sales by Geographic Area20202019Acquisitions
United States$647.8 $720.3 $(72.5)$4.1 $— $(76.6)
Canada57.8 67.9 (10.1)— 0.8 (10.9)
Other countries45.7 45.2 0.5 — (0.3)0.8 
Total$751.3 $833.4 $(82.1)$4.1 $0.5 $(86.7)
Sales in our U.S. operations were down $72.5 million or 10.1%, as acquisitions added $4.1 million or 0.6%. Excluding the impact of businesses acquired, U.S. sales were down $76.6 million or 10.7%. Sales from our Canadian operations decreased $10.1 million or 14.9%. Favorable foreign currency translation increased Canadian sales by $0.8 million or 1.2%. Excluding the impact of foreign currency translation, Canadian sales were down $10.9 million or 16.1%. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, increased $0.5 million or 1.2% from the prior year. Unfavorable foreign currency translation decreased other country sales by $0.3 million or 0.7%. Excluding the impact of currency translation, other country sales were up $0.8 million, or 1.9% during the quarter.
Our gross profit margin was 27.9% in the quarter ended December 31, 2020 compared to 28.9% in the prior period. The gross profit margin for the quarter was negatively impacted by 98 basis points due to a $7.4 million of inventory reserve charge recorded within cost of sales related to closed locations. The gross profit margin for the current quarter was positively impacted by a $1.1 million decrease in LIFO expense between quarters. The remaining change is attributable to a lower mix of local account business and the organic sales decline coupled with subdued pricing opportunities given the weaker demand environment.
The following table shows the changes in selling, distribution and administrative expense (SD&A).
Three Months Ended
December 31,
SD&A DecreaseAmount of change due to
Foreign CurrencyOrganic Change
20202019Acquisitions
SD&A$162.4 $182.5 $(20.1)$1.6 $0.2 $(21.9)
SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing 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, and facility related expenses. SD&A was 21.6% of sales in the quarter ended December 31, 2020 compared to 21.9% in the prior year quarter. SD&A decreased $20.1 million or 11.0% compared to the prior year quarter. Changes in foreign currency exchange rates had the effect of increasing SD&A during the quarter ended December 31, 2020 by $0.2 million or 0.1% compared to the prior year quarter. SD&A from businesses acquired added $1.6 million or 0.9% of SD&A expenses, including $0.2 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the favorable currency translation impact, SD&A decreased $21.9 million or 12.0% during the quarter ended December 31, 2020 compared to the prior year quarter. The Company incurred $0.4 million of non-routine expenses related to severance and closed facilities during the quarter ended December 31, 2020. Excluding the impact of acquisitions and severance, total compensation decreased $11.7 million during the quarter ended December 31, 2020, primarily due to cost reduction actions taken 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. Also, travel & entertainment expense decreased $2.6 million during the quarter ended December 31, 2020 primarily due to continued reduced travel activity related to COVID-19. Further, excluding the impact of acquisitions, intangible amortization expense decreased $2.1 million during the quarter ended December 31, 2020 primarily due to the intangible impairment recorded during the quarter. All other expenses within SD&A were down $5.9 million.
The Company has three asset groups that have significant exposure to oil and gas end markets. Due to the prolonged economic downturn in these end markets, the Company determined during the second quarter of fiscal 2021 that certain carrying values
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may not be recoverable. The Company determined that an impairment existed in two of the three asset groups as the asset groups' carrying values exceeded the sum of the undiscounted cash flows. The fair values of the long-lived assets were then determined using the income approach, and the analyses resulted in the measurement of an intangible asset impairment loss of $45.0 million, which was recorded in the three months ended December 31, 2020, 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, earnings before interest, taxes, depreciation, and amortization (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 $2.0 million and $2.5 million, respectively, which were recorded in the three months ended December 31, 2020.
The Company had an operating loss of $2.4 million during the quarter ended December 31, 2020, which was a decrease of $61.2 million from operating income of $58.7 million in the prior year quarter, primarily due to impairment charges of $49.5 million.
Operating income, before impairment, as a percentage of sales for the Service Center Based Distribution segment decreased to 8.3% in the current year quarter from 9.4% in the prior year quarter. Operating income as a percentage of sales for the Fluid Power & Flow Control segment decreased to 11.3% in the current year quarter from 11.4% in the prior year quarter.
Other expense (income), net was expense of $0.1 million for the quarter, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $1.6 million and $0.1 million of income from other items, offset by net unfavorable foreign currency transaction losses of $1.8 million. During the prior year quarter, other expense (income), net was income of $0.2 million, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $0.8 million, offset by net unfavorable foreign currency transaction losses of $0.6 million.
The effective income tax rate was 47.5% for the quarter ended December 31, 2020 compared to 23.0% for the quarter ended December 31, 2019. The increase in the effective tax rate over the prior year is due to changes in compensation-related deductions and uncertain tax positions during the quarter ended December 31, 2020 compared to the prior year quarter.
As a result of the factors addressed above, the Company incurred a net loss of $5.3 million during the quarter ended December 31, 2020, a decrease of $43.4 million compared to net income of $38.0 million in the prior year quarter. Net loss per share was $0.14 per share for the quarter ended December 31, 2020 compared to net income per share of $0.97 in the prior year quarter.
Results of Operations
Six months Ended December 31, 2020 and 2019
The following table is included to aid in review of Applied's condensed statements of consolidated income.
Six Months Ended December 31, 2020Change in $'s Versus Prior Period -
% Decrease
As a Percent of Net Sales
20202019
Net sales100.0 %100.0 %(11.3)%
Gross profit28.4 %29.2 %(13.7)%
Selling, distribution & administrative expense21.7 %22.1 %(12.6)%
Operating income3.3 %7.1 %(58.4)%
Net income2.0 %4.5 %(61.7)%
During the six months ended December 31, 2020, sales decreased $190.7 million or 11.3% compared to the prior year period, with sales from acquisitions adding $13.8 million or 0.8% and unfavorable foreign currency translation accounting for a decrease of $2.5 million or 0.1%. There were 126 selling days in the six months ended December 31, 2020 and December 31, 2019. Excluding the impact of businesses acquired and foreign currency translation, sales were down $202.0 million or 12.0% during the period, due to weak demand across key end markets.

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The following table shows changes in sales by reportable segment.
Sales by Reportable SegmentSix Months Ended December 31,Sales DecreaseAmount of change due to
Foreign CurrencyOrganic Change
20202019Acquisitions
Service Center Based Distribution$1,029.0 $1,179.0 $(150.0)$— $(2.5)$(147.5)
Fluid Power & Flow Control470.1 510.8 (40.7)13.8 — (54.5)
Total$1,499.1 $1,689.8 $(190.7)$13.8 $(2.5)$(202.0)
Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $150.0 million or 12.7%. Unfavorable foreign currency translation decreased sales by $2.5 million or 0.2%. Excluding the impact of foreign currency translation, sales decreased $147.5 million or 12.5%, reflecting weaker industrial end-market demand from the impact of the COVID-19 pandemic, although sales improved as the year progressed. Weakness remains the greatest within heavy industries but is stabilizing, with positive momentum across the food and beverage, pulp and paper, aggregates, rubber, and forestry end markets.
Sales from our Fluid Power & Flow Control segment decreased $40.7 million or 8.0%. The acquisition within this segment increased sales by $13.8 million or 2.7%. Excluding the impact of businesses acquired, sales decreased $54.5 million or 10.7%, driven by a decrease from operations due to ongoing soft demand across industrial, off-highway mobile, and process-related end markets; partially offset by growth within technology, life sciences, and food and beverage end markets, as well as internal growth initiatives and automation-related sales.
The following table shows changes in sales by geographic area. Other countries includes Mexico, Australia, New Zealand, and Singapore.
Six Months Ended December 31,Sales DecreaseAmount of change due to
Foreign CurrencyOrganic Change
Sales by Geographic Area20202019Acquisitions
United States$1,291.9 $1,463.3 $(171.4)$13.8 $— $(185.2)
Canada114.7 133.8 (19.1)— 0.2 (19.3)
Other countries92.5 92.7 (0.2)— (2.7)2.5 
Total$1,499.1 $1,689.8 $(190.7)$13.8 $(2.5)$(202.0)
Sales in our U.S. operations were down $171.4 million or 11.7%, as acquisitions added $13.8 million or 0.9%. Excluding the impact of businesses acquired, U.S. sales were down $185.2 million or 12.6%. Sales from our Canadian operations decreased $19.1 million million or 14.3%. Favorable foreign currency translation increased Canadian sales by $0.2 million or 0.1%. Excluding the impact of foreign currency translation, Canadian sales were down $19.3 million or 14.4%. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, decreased $0.2 million or 0.1% from the prior year. Unfavorable foreign currency translation decreased other country sales by $2.7 million or 2.9%. Excluding the impact of currency translation, other country sales were up $2.5 million, or 2.8% during the period.
Our gross profit margin was 28.4% in the six months ended December 31, 2020 compared to 29.2% in the prior year period. The gross profit margin for the six months ended December 31, 2020 was negatively impacted by 49 basis points due to $7.4 million of non-routine costs from ongoing business alignment initiatives and cost actions recorded in the period. The remaining change is attributable to a lower mix of local account business and the organic sales decline coupled with subdued pricing opportunities given the softer demand environment.
The following table shows the changes in selling, distribution and administrative expense (SD&A).
Six Months Ended December 31,SD&A DecreaseAmount of change due to
Foreign CurrencyOrganic Change
20202019Acquisitions
SD&A$325.9 $372.8 $(46.9)$3.7 $(0.3)$(50.3)
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SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing 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, and facility related expenses. SD&A was 21.7% of sales in the six months ended December 31, 2020 compared to 22.1% in the prior year period. SD&A decreased $46.9 million or 12.6% compared to the prior year period. Changes in foreign currency exchange rates had the effect of decreasing SD&A during the six months ended December 31, 2020 by $0.3 million or 0.1% compared to the prior year period. SD&A from businesses acquired added $3.7 million or 1.0% of SD&A expenses, including $0.4 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the favorable currency translation impact, SD&A decreased $50.3 million or 13.5% during the six months ended December 31, 2020 compared to the prior year period. The Company incurred $0.4 million of non-routine expenses related to severance and closed facilities during the six months ended December 31, 2020 and $1.5 million related to severance during the prior period. Excluding the impact of acquisitions and severance, total compensation decreased $34.0 million during the six months ended December 31, 2020, primarily due to cost reduction actions taken 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. Also, travel & entertainment expense decreased $6.0 million during the six months ended December 31, 2020 primarily due to continued reduced travel activity related to COVID-19. Further, excluding the impact of acquisitions, intangible amortization expense decreased $2.9 million during the six ended December 31, 2020 primarily due to the intangible impairment recorded during the period. All other expenses within SD&A were down $6.3 million.
The Company has three asset groups that have significant exposure to oil and gas end markets. Due to the prolonged economic downturn in these end markets, the Company determined during the second quarter of fiscal 2021 that certain carrying values may not be recoverable. The Company determined that an impairment existed in two of the three asset groups as the asset groups' carrying values exceeded the sum of the undiscounted cash flows. The fair values of the long-lived assets were then determined using the income approach, and the analyses resulted in the measurement of an intangible asset impairment loss of $45.0 million, which was recorded in the three months ended December 31, 2020, 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, earnings before interest, taxes, depreciation, and amortization (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 $2.0 million and $2.5 million, respectively, which were recorded in the three months ended December 31, 2020.
Operating income decreased $70.0 million or 58.4%, primarily due to impairment charges of $49.5 million, and as a percent of sales decreased to 3.3% from 7.1% during the prior year period.
Operating income, before impairment charges, as a percentage of sales for the Service Center Based Distribution segment decreased to 9.0% in the current year period from 9.7% in the prior year period. Operating income as a percentage of sales for the Fluid Power & Flow Control segment increased to 11.2% in the current year period from 11.0% in the prior year period.
Other expense (income), net was income of $0.1 million for the six months ended December 31, 2020, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $2.5 million, offset by net unfavorable foreign currency transaction losses of $2.2 million and $0.2 million of expense from other items. During the prior year period, other expense (income), net was income of $0.2 million and included unrealized gains on investments held by non-qualified deferred compensation trusts of $0.8 million, offset by net unfavorable foreign currency transaction losses of $0.3 million and $0.3 million of expense from other items.
The effective income tax rate was 15.0% for the six months ended December 31, 2020 compared to 23.5% for the six months ended December 31, 2019. The decrease in the effective tax rate over the prior year is due to changes in compensation-related deductions and uncertain tax positions during the six months ended December 31, 2020 compared to the prior year period. We expect our full year tax rate for fiscal 2021 to be in the 23.0% to 25.0% range.
As a result of the factors addressed above, net income for the six months ended December 31, 2020 decreased $47.4 million or 61.7% compared to the prior year period. Net income was $0.75 per share for the six months ended December 31, 2020 compared to $1.97 per share in the prior year period, a decrease of 61.9%.


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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 December 31, 2020, we had total debt obligations outstanding of $863.0 million compared to $935.3 million at June 30, 2020. 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, 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 based on the Company's credit standing and financial strength.
The Company's working capital at December 31, 2020 was $725.7 million, compared to $733.7 million at June 30, 2020. The current ratio was 2.7 to 1 at December 31, 2020 and June 30, 2020, respectively.
Net Cash Flows
The following table is included to aid in review of Applied's condensed statements of consolidated cash flows; all amounts are in thousands.
Six Months Ended December 31,
Net Cash Provided by (Used in):20202019
Operating Activities$159,356 $104,899 
Investing Activities(39,235)(48,030)
Financing Activities(104,254)(36,321)
Exchange Rate Effect4,357 (618)
Increase in Cash and Cash Equivalents$20,224 $19,930 
Net cash provided by operating activities was $159.4 million for the six months ended December 31, 2020 compared to $104.9 million provided by operating activities in the prior period. The increase in cash provided by operating activities during the six months ended December 31, 2020 is related to working capital improvements, primarily driven by changes in accounts receivable, inventory, and accounts payable, which increased cash provided by operating activities by a combined $44.9 million.
Net cash used in investing activities during the six months ended December 31, 2020 decreased from the prior period primarily due to $31.1 million used for the acquisitions of Gibson Engineering and Advanced Control Solutions compared to $36.4 million used for the acquisition of Olympus Controls in the prior year period.
Net cash used in financing activities during the six months ended December 31, 2020 increased from the prior period primarily due to a change in net debt activity, as there was $72.3 million of debt payments in the current year period compared to $9.9 million of net debt payments in the prior year period.
Share Repurchases
The Board of Directors has authorized the repurchase of shares of the Company's common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. During the six months ended December 31, 2020 and 2019, the Company did not acquire any shares of treasury stock on the open market. At December 31, 2020, we had authorization to repurchase 864,618 shares.

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Borrowing Arrangements
A summary of long-term debt, including the current portion, follows (amounts in thousands):
December 31, 2020June 30, 2020
Unsecured credit facility$569,750 $589,250 
Trade receivable securitization facility162,300 175,000 
Series C notes80,000 120,000 
Series D notes25,000 25,000 
Series E notes25,000 25,000 
Other966 1,026 
Total debt$863,016 $935,276 
Less: unamortized debt issuance costs1,302 1,487 
$861,714 $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 $780.0 million unsecured term loan and a $250.0 million 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 December 31, 2020 or June 30, 2020. Unused lines under this facility, net of outstanding letters of credit of $0.7 million and $1.9 million, respectively, to secure certain insurance obligations, totaled $249.3 million and $248.1 million at December 31, 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 December 31, 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 $4.6 million and $4.5 million as of December 31, 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 $175.0 million. 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 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. 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 1.09% as of December 31, 2020 and 1.07% as of 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 December 31, 2020 and June 30, 2020, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $130.0 million and $170.0 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 "Series C" notes, which had an original principal amount of $120.0 million, carry a fixed interest rate of 3.19%. A $40.0 million principal payment was made on the "Series C" in July 2020, and the remaining principal balance of $80.0 million is due in equal payments in July 2021 and 2022. The "Series D" notes have a remaining principal balance of $25.0 million, carry a fixed interest rate of 3.21%, and are due in October 2023. The “Series E” notes 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 May 2024.
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The Company entered into an interest rate swap which mitigates variability in forecasted interest payments on $420.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. For more information, see note 6, Derivatives, to the consolidated financial statements, included in Item 1 under the caption “Notes to Condensed Consolidated Financial Statements.”
The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At December 31, 2020, 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 December 31, 2020, the Company's net indebtedness was 2.9 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at December 31, 2020.

Accounts Receivable Analysis
The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable:
December 31,June 30,
20202020
Accounts receivable, gross$461,018 $463,659 
Allowance for doubtful accounts16,818 13,661 
Accounts receivable, net$444,200 $449,998 
Allowance for doubtful accounts, % of gross receivables
3.6 %2.9 %
Three Months Ended December 31,Six Months Ended December 31,
2020201920202019
Provision for losses on accounts receivable$697 $2,517 $5,795 $4,692 
Provision as a % of net sales0.09 %0.30 %0.39 %0.28 %
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.
On a consolidated basis, DSO was 53.2 at December 31, 2020 compared to 55.9 at June 30, 2020.
As of December 31, 2020, approximately 4.8% of our accounts receivable balances are more than 90 days past due, compared to 4.6% at June 30, 2020. On an overall basis, our provision for losses on accounts receivable represents 0.09% of our sales in the three months ended December 31, 2020, compared to 0.30% of sales for the three months ended December 31, 2019. The decrease primarily relates to provisions recorded in the prior year for for customer bankruptcies primarily in the U.S. operations of the Service Center Based Distribution segment. The provision for losses on accounts receivable represents 0.39% of sales for the six months ended December 31, 2020 compared to 0.28% of sales for the six months ended December 31, 2019. 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 accounts receivable 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.  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 believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis.  The annualized inventory turnover based on average costs was 3.9 for the period ended December 31, 2020 and 3.8 for the period ended June 30, 2020.  We believe our inventory turnover ratio at the end of the year will be similar or slightly better than the ratio at December 31, 2020.


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Cautionary Statement Under Private Securities Litigation Reform Act

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; risks relating to the effects of the COVID-19 pandemic; 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, 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, 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.
We discuss certain of these matters and other risk factors more fully throughout this Form 10-Q as well as other of our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended June 30, 2020.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk, see Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended June 30, 2020.

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ITEM 4: 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.
Changes in Internal Control Over Financial Reporting
There have not been any changes in internal control over financial reporting during the three months ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II.     OTHER INFORMATION

ITEM 1.     Legal Proceedings

The Company is a party to pending legal proceedings with respect to various product liability, commercial, personal injury, employment, and other matters. Although it is not possible to predict the outcome of these proceedings or the range of reasonably possible loss, the Company does not expect, based on circumstances currently known, that the ultimate resolution of any of these proceedings 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.


ITEM 2.     Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of common stock in the quarter ended December 31, 2020 were as follows:
Period(a) Total Number of Shares (b) Average Price Paid per Share ($)(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2020 to October 31, 20200$0.000864,618
November 1, 2020 to November 30, 20200$0.000864,618
December 1, 2020 to December 31, 20200$0.000864,618
Total0$0.000864,618

(1)On October 24, 2016, the Board of Directors authorized the repurchase of up to 1.5 million shares of the Company's common stock, replacing the prior authorization. We publicly announced the new authorization on October 26, 2016. Purchases can be made in the open market or in privately negotiated transactions.
The authorization is in effect until all shares are purchased, or the Board revokes or amends the authorization.



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ITEM 6.         Exhibits
Exhibit No.Description
3.1
3.2
4.1
4.2
4.3
4.4
4.5
31
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101.INSXBRL 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.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
The Company 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 the Company’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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Company)
Date:January 29, 2021
By: /s/ Neil A. Schrimsher
Neil A. Schrimsher
President & Chief Executive Officer
Date:January 29, 2021
By: /s/ David K. Wells
David K. Wells
Vice President-Chief Financial Officer & Treasurer

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