Applied Industrial Annual Report 2020

Plain-text annual report

APPLIED® AT A GLANCE Applied Industrial Technologies 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 and OEM end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, and expertise. Joe Mangiapane Managing Director – Australia & New Zealand Jeremy S. Moorman Vice President – Operational Excellence Sergio H. Nevárez President – Applied Mexico Darren B. “Ben” Padd Vice President – Midwest Area Jason W. Vasquez Vice President – Sales & Marketing, U.S. Service Centers Kurt J. Weinheimer Vice President – Western Area SENIOR MANAGEMENT Mike R. Allen President – Applied Industrial Technologies, LP (Canada) Ivan J. Batista General Director – Rafael Benitez Carrillo, Inc. (Puerto Rico) Barbara D. Emery Vice President – Human Resources David S. Green Vice President – North Atlantic Area Thomas R. Hayes Vice President – Southeast Area James A. Jeffiers Vice President – Central States Area Lonny D. Lawrence Vice President – Information Technology Tracie M. Longpre Vice President – Supply Chain DIRECTORS Peter C. Wallace (2, 3, 4) Chairman of the Board of Directors Former Chief Executive Officer Gardner Denver, Inc. (Equipment Manufacturer) Former President and Chief Executive Officer Robbins & Myers, Inc. (Equipment Manufacturer) Madhuri A. Andrews (1, 2) Senior Vice President, Chief Digital and Information Officer Jacobs Engineering Group Inc. (Technical, Professional, and Construction Services) Peter A. Dorsman (2, 3, 4) Former Executive Vice President, Services NCR Corporation (Self-Service Technology Solutions) Mary Dean Hall (1, 2) Senior Vice President, Chief Financial Officer and Treasurer Quaker Houghton (Industrial Process Fluids) Dan P. Komnenovich (1, 2) Former President and Chief Executive Officer Aviall, Inc. (Aviation Parts, Related Aftermarket Operations) Robert J. Pagano, Jr. (1, 2, 4) President and Chief Executive Officer Watts Water Technologies, Inc. (Plumbing, Heating, and Water Quality Solutions) Vincent K. Petrella (1, 2, 3, 4) Executive Vice President Lincoln Electric Holdings, Inc. (Welding, Brazing Products Manufacturer) Joe A. Raver (2, 4) President and Chief Executive Officer Hillenbrand, Inc. (Diversified Industrial Company) Neil A. Schrimsher (3) President & Chief Executive Officer Applied Industrial Technologies, Inc. Committees of The Board (1) Audit Committee Chair: Vincent K. Petrella (2) Corporate Governance Committee Chair: Peter C. Wallace (3) Executive Committee Chair: Peter C. Wallace (4) Executive Organization and Compensation Committee Chair: Peter A. Dorsman OFFICERS Neil A. Schrimsher President & Chief Executive Officer David K. Wells Vice President – Chief Financial Officer & Treasurer Fred D. Bauer Vice President – General Counsel & Secretary Warren E. “Bud” Hoffner Vice President, General Manager – Fluid Power & Flow Control Kurt W. Loring Vice President – Chief Human Resources Officer Christopher Macey Corporate Controller Ryan D. Cieslak Assistant Treasurer HEADQUARTERS Cleveland, Ohio USA Fluid Power Specialty Flow Control Bearings & Power Transmission Robotics & Machinery Automation #1 industry position #1 industry position #2 industry position emerging provider APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES | 2020 ANNUAL REPORT TO OUR STAKEHOLDERS Fiscal 2020 had its share of challenges, but it also brought opportunities. Many have used the word unprecedented to describe recent events and the subsequent business environment we have experienced. Here at Applied®, the word unwavering stands out, as it characterizes the dedication of our associates during these challenging times brought on by the COVID-19 pandemic. While COVID has reset the stage in many ways, we know how we respond determines our performance… and success. Across our business, we have implemented operational procedures and followed guidelines from the CDC and other health organizations. Through social distancing, virtual meetings and sales calls, distance learning and more, we have remained productive and have learned many best practices along the way – all in an effort to serve our customers and keep industry running. I am incredibly proud of our teamwork and innovation which allow us to proactively and effectively respond across many industries where we play a key role in keeping the industrial infrastructure running productively. Our track record of operational discipline while preserving our capability to serve is once again apparent in this environment. This was highlighted in fiscal 2020 as we controlled costs and margins, generated record cash, and enhanced our balance sheet despite the softer demand environment. We understand our requirements and know how to manage through any part of the cycle. More than ever before, our comprehensive portfolio of products and services – combined with our specialized expertise and know-how – is bridging today’s challenges with tomorrow’s opportunities. FISCAL 2020 FINANCIAL HIGHLIGHTS » Sales of $3.2 billion down 6.5% year-over-year and down 9.4% organically, reflecting the softer economic environment and impact from COVID-19 » Record cash generation including cash from operations of $296.7 million up 64% year-over-year » Returned $48.9 million to shareholders » EPS of $0.62; Non-GAAP adjusted EPS of $3.81 through dividends down 13.5% year-over-year(a) » Raised quarterly dividend to $0.32 » Reduced net debt by 22% year-over-year(b) per common share, the 11th dividend increase since 2010 (a) Please refer to the section entitled “Reconciliation of Net income per share to Adjusted net income per share” on the inside back cover. (b) Net debt is defined as Total debt (Current portion of long-term debt and Long-term debt) less Cash and cash equivalents. 97+ years of leadership in distribution 6,200+ 3,200+ $2. B employee associates customer-facing associates market capitalization 11 ,000+ 580+ distribution centers product manufacturers operating facilities Data current as of June 30, 2020 7M+ operating facilities SKUs available to customers 1 The resilient nature of our value proposition is apparent across other facets of our Company as well. This includes providing leading fluid power solutions such as advanced electronic control integration supporting greater safety and precision of industrial equipment, as well as pneumatic solutions facilitating various areas of technology and life sciences. Today’s environment is also prompting us to identify new opportunities through our specialty flow control capabilities, as well as complementary consumables and emerging automation technologies. Olympus Controls, acquired in August 2019, is providing many relevant and timely opportunities, including ventilator innovation, autonomous UV-C cleaning technology, contact tracing and proximity tools, and more. We have proven to be valuable on multiple fronts. Targeted investments in recent years have positioned Applied as the leading distributor of technical solutions across the industrial supply chain. This has differentiated our value proposition and will continue to be ever more relevant as the industrial economy starts its next phase of growth with increasing supply chain and technical requirements. As industrial equipment and facility infrastructure continues to ramp, it will increase critical break-fix demand across our network, where we can respond with local expertise and the most comprehensive suite of motion control technologies and services within our industry… and in our Company’s history. Additionally, behaviors reshaped by the pandemic will reinforce secular growth opportunities tied to our technical service and engineered solutions portfolio, which has become a greater portion of our business in recent years. In particular, we believe customers will increasingly focus on addressing skilled labor constraints, plant efficiency, and regulatory requirements, while considerations From the onset of the pandemic, we were classified as an essential business supporting the important industrial infrastructure with critical products and services. Our facilities remained open and operational through the various shelter-in-place and stay-at-home orders, while adhering to health and safety protocols. With more than 50% of our service center network demand tied to break-fix requirements, customers depend on us for critical parts, services and solutions that sustain operations and support vital areas of the economy. For some customers, a slowdown prompts incremental maintenance on their direct production infrastructure and systems, and we remain a valued partner in supporting their engineering and maintenance teams in addressing related needs. 2 around manufacturing re-shoring and U.S. industrial infrastructure have potential to gain momentum. Ultimately, this could accelerate customers’ outsourcing of technical MRO and service needs, investments in automation, and the consolidation of market share toward leading distribution platforms given increasing service, operational and capital requirements. As a value-added business partner, we continue to look for new and innovative ways to work with our customers and suppliers to maximize productivity and investment returns. Emerging technologies have effectively impact our customers and the important demonstrated encouraging capabilities in helping industrial infrastructure. A focus on living the Applied reduce downtime and MRO costs through a network Core Values is reinforced in this business climate, further of sensors, smart devices and machine learning supporting our efforts and helping to generate success algorithms. This data and digitization movement – for our customers and Applied. often referred to as the Industrial Internet of Things (IIoT) – has been steadily building momentum throughout the industrial and manufacturing sectors. Through the Applied IoT ConnectTM Program, we continue to develop the best ways to leverage these offerings and implement solutions for connected operations. These values continue to influence how we engage new end users, fellow associates, suppliers, communities, and other important stakeholders. We have received letters from customers across our globally-served industries acknowledging our support and the value we provide. Our core values are also fundamental to our Environmental, Social and Governance (ESG) practices, We are also leveraging technology and data internally which emphasize Corporate Governance; Supply for continuous improvement and team collaboration Chain Management; Environmental, Health & Safety; on staying “close” to our customers and executing Sustainability Initiatives; and our Corporate Citizenship & business during these times. Our Applied Maintenance Human Rights Statement. Supplies & SolutionsSM team has introduced virtual ordering by integrating a video conferencing app to scan product bins and place orders, providing a contactless and touchless ordering option. Furthermore, we are strengthening our Applied.com channel and digital sales capabilities through chat assistance and engagement initiatives, further enhancing our customers’ procurement experience and driving new growth opportunities. From our foundation as a distributor and related low carbon footprint, to advising customers on energy savings and eco-friendly products, we play an important role in supporting the environment. Additionally, we continue to have an opportunity – and collective responsibility – to further develop plans, actions and results that promote fair, honest and ethical practices across our business. We are proud to note that we have been ranked among the top 15 of Ohio Fortune 1000 companies Across our organization, we have many significant and for Diversity in Corporate Governance, according to a exciting near-term opportunities to productively and recent report from the National Diversity Council. 3 Throughout Applied, our teams are fully engaged in serving our customers, executing our long-range strategic plan, and living our core values with an emphasis on: Customer Focus Dedicated to serving customer needs; providing value-add at every touch point Accountability Responsible for our actions and results Continuous Improvement Becoming better as individuals and as a team Innovation Creative and embracing change for new opportunities and future readiness Teamwork Working Together, Winning Together! We Are AppliedSM, and we have a strong foundation, expanding capabilities and outstanding potential as the leading technical products, services and solutions provider to industrial markets. As we enter fiscal 2021, we see significant opportunity as we leverage our industry position to effectively adapt to the evolving industrial landscape, and invest in new and emerging growth opportunities. While we are facing some challenges as the industrial economy transitions from a generational pandemic, we have a remarkably strong business model that generates cash and adapts well throughout the cycle, as we have demonstrated. Our strategy is deeply focused on the opportunities ahead of us and moving the Company toward its long-term financial goals for significant earnings growth and value creation in the coming years. With our 100-year anniversary approaching, I firmly believe our best days are ahead! Thank you for your continued support. On behalf of all of us at Applied, we wish you all the best during this time. Neil A. Schrimsher President & Chief Executive Officer August 14, 2020 I firmly believe our best days are ahead! 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the ﬁscal year ended June 30, 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 (State or other jurisdiction of incorporation or organization) 34-0117420 (I.R.S. Employer Identiﬁcation No.) (Address of Principal Executive Ofﬁces) 1 Applied Plaza Cleveland Ohio 44115 (Zip Code) (216) 426-4000 Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, without par value Trading Symbol AIT Name of each exchange on which registered New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as deﬁned in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to ﬁle reports pursuant to Section 13 or Section 15(d) of the Act. Yes No 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 No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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). 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): Yes No Large accelerated ﬁler Non-accelerated ﬁler Accelerated ﬁler 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 has ﬁled a report on and attestation to its management’s assessment of the effectiveness of its internal control over ﬁnancial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting ﬁrm that prepared or issued its audit report. Indicate by check mark whether the registrant is a shell company (as deﬁned in Rule 12b-2 of the Act). Yes No State the aggregate market value of the voting and non-voting common equity held by non-afﬁliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second ﬁscal quarter (December 31, 2019): $2,554,970,000. The registrant had outstanding 38,711,670 shares of common stock as of August 7, 2020. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual meeting of shareholders of Applied Industrial Technologies, Inc., to be held October 27, 2020, are incorporated by reference into Parts II, III, and IV of this Form 10-K. TABLE OF CONTENTS CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures EXECUTIVE OFFICERS OF THE REGISTRANT PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Item 16. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Ofﬁcers and Corporate Governance Executive Compensation Security Ownership of Certain Beneﬁcial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules Form 10-K Summary SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS SIGNATURES Page 1 2 6 13 13 14 14 14 15 16 17 28 29 63 63 66 66 66 67 67 67 68 71 72 73 CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT This report, including the documents incorporated by reference, 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 our 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 Applied Industrial Technologies, Inc. ("Applied") and its management as to future occurrences and trends. Applied 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 forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside Applied'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 Applied or another person that the results expressed in the statements will be achieved. In addition, Applied assumes no obligation publicly to update or revise forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law. Applied believes its primary risk factors include, but are not limited to, those identiﬁed in the following sections of this annual report on Form 10-K: “Risk Factors” in Item 1A; “Narrative Description of Business,” in Item 1, section (c); and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. PLEASE READ THOSE DISCLOSURES CAREFULLY. 1 PART I ITEM 1. BUSINESS In this annual report on Form 10-K, “Applied” refers to Applied Industrial Technologies, Inc., an Ohio corporation. References to “we,” “us,” “our,” and “the Company” refer to Applied and its subsidiaries. We are a leading distributor and solutions provider of industrial motion, power, and control technologies. Through our comprehensive network of approximately 6,200 associates and 580 facilities including service center, ﬂuid power, ﬂow control, and automation operations, as well as repair shops and distribution centers, we offer a selection of more than 7 million stock keeping units with a focus on industrial bearings, power transmission products, ﬂuid power components and systems, specialty ﬂow control solutions, and robotics and machinery automation. We market our products with a set of service solutions including inventory management, engineering, design, repair, and systems integration, as well as customized mechanical, fabricated rubber, and shop services. Our customers use our products and services for both MRO (maintenance, repair, and operating) and OEM (original equipment manufacturing) applications across a variety of end markets primarily in North America, as well as Australia, New Zealand, and Singapore. Headquartered in Cleveland, Ohio, Applied and its predecessor companies have engaged in business since 1923. Our internet address is www.applied.com. The following documents are available free of charge via hyperlink from the investor relations area of our website: • Applied's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, together with Section 16 insider beneﬁcial stock ownership reports - these documents are posted as soon as reasonably practicable after they are electronically ﬁled with, or furnished to, the Securities and Exchange Commission • Applied's Code of Business Ethics • Applied's Board of Directors Governance Principles and Practices • Applied's Director Independence Standards • Charters for the Audit, Corporate Governance, and Executive Organization & Compensation Committees of Applied's Board of Directors The information available via hyperlink from our website is not incorporated into this annual report on Form 10-K. GENERAL DEVELOPMENT OF BUSINESS Information regarding developments in our business can be found in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference. VALUE PROPOSITION We serve a segment of the industrial distribution market that requires technical expertise and service given that our products and solutions are directly tied to industrial companies’ production and efﬁciency initiatives. As such, we believe we are integral to our customers’ supply chains considering the critical nature and direct exposure our solutions have on our customers’ core production equipment and plant capabilities. While we compete with other distributors and service providers offering products and solutions addressing this area of the industrial supply chain, we believe our industry position and value proposition beneﬁts from relative advantages tied to the following key attributes: 1) Technical expertise in motion control technologies and related service offerings 2) Broad in-stock product offering, inventory availability, and repair capabilities 3) Tenured relationships with industrial customers and leading suppliers 4) Scale and proximity of our service center network relative to customer facilities 5) Leading positions in engineered ﬂuid power and ﬂow control solutions 6) Expanding capabilities in machinery and robotic automation 7) Talent acquisition and development of technically-oriented sales associates, engineers, and service personnel 8) Business systems and distribution capabilities 9) Complementary offerings including indirect consumable supply inventory management We focus on helping customers minimize their production downtime, improve machine performance, and reduce overall procurement and maintenance costs. A primary focus for our service center network is responding to a critical “break-ﬁx” situation, which requires knowledge of a customer’s facility, localized inventory, timely delivery capabilities, service execution, and accountability. In addition, our ﬂuid power, ﬂow control, and automation operations design, engineer, and integrate solutions focused on making a customer’s operations and equipment more productive, cost-efﬁcient, and automated. We believe our products and solutions are increasingly critical 2 within the industrial supply chain given an aging and tighter customer labor force, more sophisticated production equipment and processes, a greater focus on plant ﬂoor optimization, and compliance and regulatory requirements. INDUSTRY AND COMPETITION We primarily compete within North America which we believe offers signiﬁcant growth potential given our industry position, established distribution and sales network, market fragmentation, and customer technical requirements, as well as opportunities tied to automation and smart technologies. Growth within our industry is inﬂuenced by broader industrial production and capacity utilization, as well as inﬂation, labor dynamics, capital spending, geopolitical events, factory optimization initiatives, changes in industrial equipment technologies, and supply chain requirements. Our principal competitors are specialist and general line distributors of bearings, power transmission products, ﬂuid power components and systems, ﬂow control solutions, industrial rubber products, and linear motion components, and to a lesser extent providers of tools, safety products, and other industrial and maintenance supplies. These competitors include local, regional, national, and multinational operations. We also compete with original equipment manufacturers and integrators. The identity and number of our competitors vary throughout the geographic, industry, and product markets we serve. STRATEGIC GROWTH AND OPERATIONAL OPPORTUNITIES • Capture market share across our core service center network. Our network of service centers located close to industrial companies allows us to respond quickly and effectively to critical MRO situations involving direct production infrastructure and industrial equipment. We believe more sophisticated industrial production processes, customer labor constraints, and increased manufacturing activity across North America could drive greater demand for our products and services. We continue to deploy initiatives to further enhance our capabilities across our service center network and gain market share. These include investments in analytics, strategic account penetration, sales process optimization, talent development, and digital capabilities, as well as fully leveraging and cross-selling our expanded product and service platform across ﬂuid power, ﬂow control, automation, and consumables solutions. • Extend our leading ﬂuid power and ﬂow control position as demand for comprehensive solutions grows. We provide innovative ﬂuid power and ﬂow control solutions including systems design and engineering, electronic control integration, software programing, valve actuation, compliance consulting, fabrication and assembly, and dedicated service and repair. Demand for these solutions is increasing across a variety of industrial, off-highway mobile, technology, and process related applications given a greater focus on power consumption, plant efﬁciency and automation, emissions control, remote monitoring, advancements in machining, regulatory and compliance standards, and data analytics. We believe our service and engineering capabilities, shop network, and supplier relationships are key competitive advantages supporting our ability to capture a greater share of this market growth opportunity in coming years. • Leverage technical industry position in developing growth around emerging industrial technologies. We believe we are positioned to capture emerging opportunities relating to automation and smart technologies focused on optimizing and connecting customers’ industrial supply chains. Our position reﬂects our technical product focus, service capabilities, embedded customer relationships and knowledge across direct production infrastructure and equipment, and existing supplier relationships. Following our acquisition of Olympus Controls in ﬁscal 2020, we now offer products and solutions focused on the design, assembly, integration, and distribution of motion control, machine vision, and robotic technologies. We expect to continue to expand our automation footprint and capabilities in coming years, as well as pursue opportunities tied to the Industrial Internet of Things (IIoT). We believe this market potential could be meaningful as technology continues to converge within traditional industrial supply chains and end-markets. • Execute ongoing operational initiatives supporting margin proﬁle. We have a number of initiatives focused on driving operational improvements throughout the organization. Systems investments in recent years including common ERP platforms are supporting opportunities in leveraging shared services, reﬁning our sales management process, and standardizing pricing and sourcing functions, while we continue to optimize our shop and distribution network and analytics. We also remain focused on achieving margin synergies across our operations following expansion into ﬂow control and automation. This includes enhanced pricing functions, leveraging vendor procurement, freight savings, and reﬁned cost management. Combined with growth in more proﬁtable areas of our business, we see ongoing opportunity to optimize our margin proﬁle and cash generation in coming years. • Pursue acquisitions to supplement growth and strengthen industry position. We expect to pursue additional acquisitions aligned with our growth strategy and long-term ﬁnancial targets. We view acquisitions 3 as an important growth consideration given high fragmentation, greater operational and technical requirements, and supplier authorizations within the markets we serve. We believe our sourcing strategy, cash generation capabilities, and operational discipline are key to our acquisition success. Over the near to intermediate-term, our acquisition priorities are focused on continuing to expand our current offerings, while further enhancing our technical differentiation and value-added service capabilities. OPERATIONS Our distribution and sales network consists of approximately 460 locations in our Service Center Distribution segment and 120 locations in our Fluid Power & Flow Control segment. This includes service centers, distribution centers, and facilities tied to our ﬂuid power, ﬂow control, and automation operations. Our service centers resemble local inventory hubs located in close proximity to our customers and focused primarily on MRO related fulﬁllment and service needs. Our ﬂuid power, ﬂow control, and automation locations support technical and shop-oriented services integral to the more specialized and integrated nature of the products and solutions they provide. Other operations and channels we market through include inventory management services for indirect consumable supplies and digital solutions including our Applied.com website, electronic data interchange (EDI) and other electronic interfaces with customers' technology platforms and plant maintenance systems. Our distribution centers provide daily service to our service centers, helping replenish inventories and shipping products directly to customers where appropriate. An efﬁcient supply chain and timely delivery of our products is vital to our value proposition particularly when customers require products for emergency repairs. We utilize dedicated third-party transportation providers, our own delivery vehicles, as well as surface and air common carrier and courier services. Customers may also pick up items at our service centers. We maintain product inventory levels at each service center tailored to the local market. These inventories consist of standard items as well as other items speciﬁc to local customer demand. Our operations are primarily based in the U.S. where 87% of our ﬁscal 2020 sales were generated. We also have international operations, the largest of which is in Canada (8% of ﬁscal 2020 sales) with the balance (5% of ﬁscal 2020 sales) in Mexico, Australia, New Zealand, and Singapore. SUPPLIERS We are a leading distributor of products including bearings, power transmission products, engineered ﬂuid power components and systems, specialty ﬂow control solutions, machinery and robotics automation products, industrial rubber products, linear motion components, tools, safety products, and other industrial and maintenance supplies. These products are generally supplied to us by manufacturers whom we serve as a non-exclusive distributor. The suppliers also may provide us product training, as well as sales and marketing support. Authorizations to represent particular suppliers and product lines vary by geographic region, particularly for our ﬂuid power and ﬂow control businesses. We believe our supplier relationships are generally good, and many have existed for decades. The disruption of relationships with certain suppliers, or the disruption of their operations, could adversely affect our business. Our product suppliers typically conﬁne their direct sales activities to large-volume transactions, mainly with large original equipment manufacturers. The suppliers generally do not sell maintenance and repair products directly to the customer, but instead refer the customer to us or another distributor. MARKETS We purchase from thousands of product manufacturers and resell the products to thousands of customers in a wide variety of industries, including agriculture and food processing, cement, chemicals and petrochemicals, fabricated metals, forest products, industrial machinery and equipment, mining, oil and gas, primary metals, transportation, and utilities, as well as to government entities. Customers range from very large businesses, with which we may have multiple-location relationships, to very small ones. We are not signiﬁcantly dependent on a single customer or group of customers, the loss of which would have a material adverse effect on our business as a whole, and no single customer accounts for more than 3% of our ﬁscal 2020 sales. SERVICES We believe part of our success, differentiation, and competitive advantage is attributable to the comprehensive set of services and solutions we provide, which we view as critical given the technical nature and application of our core product offering of motion, power, control, and automation technologies. The foundation of our service capabilities lies with our technically oriented associate team, which includes engineers, industry segment specialists, mechanics, technicians, ﬂuid power specialists, as well as our systems, shop network, and supplier relationships. We believe knowledge and service capabilities relating to our core product offering are increasingly needed across our customer base given skilled labor constraints within their operations, maintenance requirements, and more sophisticated plant equipment and processes. Our services and solutions help customers minimize production downtime, improve 4 machine performance, and reduce overall procurement and maintenance costs. By providing high levels of service, product and industry expertise, and technical support, while at the same time offering product breadth and competitive pricing, we believe we develop stronger, longer-lasting, and more proﬁtable customer relationships. See the Reportable Segments section below for more detail on the various service solutions we provide to customers. REPORTABLE SEGMENTS We report results of operations in two segments: 1) Service Center Based Distribution, and 2) Fluid Power & Flow Control. In ﬁscal 2020, our Service Center Based Distribution segment represented 69% of our total sales, while our Fluid Power & Flow Control segment represented 31% of our total sales. Service Center Based Distribution. Our Service Center Based Distribution segment includes our legacy MRO distribution operations across North America, Australia, and New Zealand. This business operates through local service centers and distribution centers with a focus on providing products and services addressing the maintenance and repair of motion control infrastructure and production equipment. Products primarily include industrial bearings, motors, belting, drives, couplings, pumps, linear motion products, hydraulic and pneumatic components, ﬁltration supplies, and hoses, as well as other related supplies for general operational needs of customers’ machinery and equipment. Service center locations are stocked with product inventory tailored to each local market and staffed with customer sales and service representatives, account managers, as well as product and industry specialists. Customer sales and service representatives receive, process, and expedite customer orders, provide product information, and assist account managers in serving customers. Account managers make onsite calls to customers to provide product information, identify customer requirements, make recommendations, and assist in implementing equipment maintenance and storeroom management programs. Industry specialists assist with product applications in their areas of expertise. Service centers market product offerings with a suite of services that create additional value for the customer. This includes onsite training, product fabrication and repair, and inventory management solutions. We also provide analysis and measurement of productivity improvement and cost savings potential from these services through our Applied Documented Value-Added® (DVA®) reports. The segment includes operations focused on certain end markets and indirect consumable supplies through vendor managed inventory solutions, as well as regional fabricated rubber shops and service ﬁeld crews, which install, modify, and repair conveyor belts and rubber linings, and make hose assemblies in accordance with customer requirements. Fluid Power & Flow Control. Our Fluid Power & Flow Control segment includes our operations that specialize in distributing, engineering, designing, integrating, and repairing hydraulic and pneumatic ﬂuid power technologies, and engineered ﬂow control products and services. We believe we are the largest distributor and solutions provider of ﬂuid power and industrial ﬂow control products and solutions in the U.S. The segment also includes our operations that focus on robotic and machinery automation solutions following the acquisition of Olympus Controls in August 2019. Our ﬂuid power operations offer products and services primarily used within industrial, off-highway mobile, and technology applications. Fluid power products include hydraulic and pneumatic technologies using liquids and gases to transmit power, typically in smaller spaces than other forms of power transmission. Hydraulic products offer high power to weight ratios, high torque at low speeds, and power reliability, while pneumatic products are focused on lightweight applications in need of speed and precision. Our ﬂuid power products and solutions are commonly used for off-highway equipment, heavy industrial equipment and machines at factories, marine and offshore equipment, factory automation, food processing equipment, packaging operations, and downstream energy process systems. Operations are supported by a team of certiﬁed ﬂuid power specialists, mechanics, technicians, and engineers that provide technical services ranging from system design and integration, electronic control integration, hydraulic assemblies, repair and rebuild, manifold design and assembly, customized ﬁltration solutions, software programming and repair, and hydraulic system retroﬁts. Our specialty ﬂow control operations encompass the operations of our ﬁscal 2018 acquisition of FCX Performance, Inc., which provides highly engineered process ﬂow control products, solutions, and services. Products include pumps, valves, ﬁttings, hoses, process instrumentation, actuators, and ﬁltration supplies which are used to control the ﬂow of liquids and gases in mission-critical industrial applications. Our ﬂow control products and services are focused on MRO related applications; OEMs; and engineering, procurement, and construction (EPC) ﬁrms across a variety of industries including chemicals, steel, power, oil and gas, pulp and paper, pharmaceuticals, food and beverage, and general industrials. Similar to our ﬂuid power operations, our ﬂow control offering includes technical service capabilities such as ﬂow control systems integration, repair services, valve actuation, process instrumentation, pipe and hose fabrication, and compliance consulting. 5 Our robotic and machinery automation operations encompass our ﬁscal 2020 acquisition of Olympus Controls, which provides solutions focused on the design, assembly, integration, and distribution of motion control, machine vision, and robotic technologies for OEMs, machine builders, integrators, and other industrial and technology end users. Products and solutions are marketed across a variety of industries including technology, medical, life sciences, logistics, and general industrial. Olympus Controls helps customers develop, produce, and integrate machine automation solutions using comprehensive technology and industry processes. BACKLOG AND SEASONALITY Backlog orders are not material to our business as a whole, although they are a more important factor for our ﬂuid power and ﬂow control businesses. Our business has exhibited minor seasonality. In particular, sales per day during the ﬁrst half of our ﬁscal year have historically been slightly lower than the second half due, in part, to the impact of customer plant shutdowns, summer vacations and holidays. PATENTS, TRADEMARKS, TRADE NAMES, AND LICENSES Customer recognition of our service marks and trade names, including Applied Industrial Technologies®, Applied®, and AIT®, is an important contributing factor to our sales. Patents and licenses are not of material importance to our business. RAW MATERIALS AND GENERAL BUSINESS CONDITIONS Our operations are dependent on general industrial and economic conditions. We would be adversely affected by the unavailability of raw materials to our suppliers, prolonged labor disputes experienced by suppliers or customers, or by events or conditions that have an adverse effect on industrial activity generally in the markets we serve or on key customer industries. NUMBER OF EMPLOYEES At June 30, 2020, we had approximately 6,200 employees. WORKING CAPITAL Our working capital position is discussed in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference. We require substantial working capital related to accounts receivable and inventories. Signiﬁcant amounts of inventory are carried to meet customers' delivery requirements. We generally require payments for sales on account within 30 days. Returns are not considered to have a material effect on our working capital requirements. We believe these practices are generally consistent among companies in our industry. ENVIRONMENTAL LAWS We believe that compliance with laws regulating the discharge of materials into the environment or otherwise relating to environmental protection will not have a material adverse effect on our capital expenditures, earnings, or competitive position. ITEM 1A. RISK FACTORS. In addition to other information set forth in this report, you should carefully consider the following factors that could materially affect our business, ﬁnancial condition, or results of operations. The risks described below are not the only risks facing the Company. Certain risks are identiﬁed below in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference. Additional risks not currently known to us, risks that could apply broadly to issuers, or risks that we currently deem immaterial, may also impact our business and operations. Risks can also change over time. Our business depends heavily on the operating levels of our customers and the factors that affect them, including general economic conditions. The markets for our products and services are subject to conditions or events that affect demand for goods and materials that our customers produce. Consequently, demand for our products and services has been and will continue to be inﬂuenced by most of the same factors that affect demand for and production of customers' goods and materials. When customers or prospective customers reduce production levels because of lower demand, increased supply, higher costs, tight credit conditions, unfavorable currency exchange rates, adverse trade policies, foreign competition, other competitive disadvantage, offshoring of production, or other reasons, their need for our products and services diminishes. Selling prices and terms of sale come under pressure, adversely affecting the proﬁtability and the durability of customer relationships, and credit losses may increase. Inventory management becomes more difﬁcult in times of economic uncertainty. Volatile economic and credit conditions also make it more difﬁcult for us, as well as our customers and suppliers, to forecast and plan future business activities. 6 The extent to which the COVID-19 pandemic and measures taken in response thereto continue to impact our results of operations and ﬁnancial condition will depend on future developments, which are uncertain and cannot be predicted. The COVID-19 pandemic has created signiﬁcant volatility, uncertainty, and economic disruption. The extent to which the pandemic continues to impact our results of operations and ﬁnancial condition will depend on evolving factors that are uncertain and cannot be predicted, including the following: the duration, spread, and severity of the pandemic in the countries in which we operate; responsive measures taken by governmental authorities, businesses, and individuals; the effect on our customers and their demand for our products and services; the effect on our suppliers and disruptions to the global supply chain; our ability to sell and provide our products and services and otherwise operate effectively, including as a result of travel restrictions and associates working from home; disruptions to our operations resulting from associate illness; restrictions or disruptions to, or reduced availability of, transportation; customers’ ability to pay for our services and products; closures of our facilities or those of our customers or suppliers; the impact of reduced customer demand on purchasing incentives we earn from suppliers; and how quickly and to what extent normal economic and operating conditions can resume. The effects of the COVID-19 pandemic have resulted and will result in lost or delayed sales to us, and we have experienced business disruptions as we have modiﬁed our business practices (including travel, work locations, and cancellation of physical participation in meetings). In addition, the pandemic’s impact on the economy may affect the proper functioning of ﬁnancial and capital markets, foreign currency exchange rates, product and energy costs, and interest rates. Even after the pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. The pandemic’s effects may also amplify the other risks and uncertainties described in this Annual Report on Form 10-K, and may continue to materially and adversely affect our business, ﬁnancial condition, results of operations, and/or stock price. Our business could be adversely affected if we do not successfully execute our strategies to grow sales and earnings. We have numerous strategies and initiatives to grow sales, leveraging the breadth of our product offering, supplier relationships, and value-added technical capabilities to differentiate us and improve our competitive position. We also continually seek to enhance gross margins, manage costs, and otherwise improve earnings. Many of our activities target improvements to the consistency of our operating practices across our hundreds of locations. If we do not implement these initiatives effectively, or if for other reasons they are unsuccessful, our business could be adversely affected. Consolidation in our customers' and suppliers' industries could adversely affect our business and ﬁnancial results. Consolidation continues among our product suppliers and customers. As customer industries consolidate or customers otherwise aggregate their purchasing power, a greater proportion of our sales could be derived from large volume contracts, which could adversely impact margins. Consolidation among customers can trigger changes in their purchasing strategies, potentially shifting blocks of business among competing distributors and contributing to volatility in our sales and pressure on prices. Similarly, continued consolidation among our suppliers could reduce our ability to negotiate favorable pricing and other commercial terms for our inventory purchases. There can be no assurance we will be able to take advantage of consolidation trends. Loss of key supplier authorizations, lack of product availability, or changes in distribution programs could adversely affect our sales and earnings. Our business depends on maintaining an immediately available supply of various products to meet customer demand. Many of our relationships with key product suppliers are longstanding, but are terminable by either party. The loss of key supplier authorizations, or a substantial decrease in the availability of their products, could put us at a competitive disadvantage and have a material adverse effect on our business. Supply interruptions could arise from raw materials shortages, inadequate manufacturing capacity or utilization to meet demand, ﬁnancial problems or insolvency, trade issues, labor disputes, public health emergencies, weather conditions affecting suppliers' production, transportation disruptions, or other reasons beyond our control. In addition, as a distributor, we face the risk of key product suppliers changing their relationships with distributors generally, or us in particular, in a manner that adversely impacts us. For example, key suppliers could change the following: the prices we must pay for their products relative to other distributors or relative to competing brands; the geographic or product line breadth of distributor authorizations; supplier purchasing incentive or other support programs; product purchase or stocking expectations; or the extent to which the suppliers seek to serve end users directly. An increase in competition could decrease sales or earnings. We operate in a highly competitive industry. The industry remains fragmented, but is consolidating. Our principal competitors are specialist and general line distributors of bearings, power transmission products, ﬂuid power components and systems, ﬂow control solutions, automation technologies, industrial rubber products, linear motion components, tools, safety products, oilﬁeld supplies, and other industrial and maintenance supplies. These competitors include local, regional, national, and 7 multinational operations, and can include catalog and e-commerce companies. Competition is largely focused in the local service area and is generally based on product line breadth, product availability, service capabilities, and price. Existing competitors have, and future competitors may have, greater ﬁnancial or other resources than we do, broader or more appealing product or service offerings, greater market presence, stronger relationships with key suppliers or customers, or better name recognition. If existing or future competitors seek to gain or to retain market share by aggressive pricing strategies and sales methods, or otherwise through competitive advantage, our sales and proﬁtability could be adversely affected. Our success will also be affected by our ability to continue to provide competitive offerings as customer preferences or demands evolve, for example with respect to our product and services portfolio or our e-commerce and inventory management solutions. Technological evolution or other factors can render product offerings obsolete, potentially impairing our competitive position and our inventory values. The purchasing incentives we earn from product suppliers can be impacted if we reduce our purchases in response to declining customer demand. Certain product suppliers have historically offered to their distributors, including us, incentives for purchasing their products. In addition to market or customer account-speciﬁc incentives, certain suppliers pay incentives to the distributor for attaining speciﬁc purchase volumes during a program period. In some cases, to earn incentives, we must achieve year-over-year growth in purchases with the supplier. When demand for our products declines, we may be less inclined to add inventory to take advantage of certain incentive programs, thereby potentially adversely impacting our proﬁtability. Trade policies can have an adverse impact on industries we sell into, potentially negatively affecting our net sales and proﬁts. Changes to trade policies or agreements, including the recently enacted United States- Mexico-Canada Agreement (USMCA), can disrupt geographic and industry demand trends. While Applied primarily serves markets in the United States, a signiﬁcant portion of our domestic customer base exports or serves exporters. U.S. government-imposed tariffs or taxes that penalize imports can be met with countermeasures by foreign governments, or can otherwise impact industrial production, and it becomes difﬁcult to determine what the net effect of such actions is on Applied’s net sales and proﬁts. It is possible that such changes could adversely affect our ﬁnancial results. Volatility in product, energy, and other costs can affect our proﬁtability. Product manufacturers may adjust the prices of products we distribute for many reasons, including changes in their costs for raw materials, components, energy, labor, and tariffs and taxes on imports. In addition, a portion of our own distribution costs is composed of fuel for our sales and delivery vehicles, freight, and utility expenses for our facilities. Our ability to pass along increases in our product and distribution costs in a timely manner to our customers depends on execution, market conditions, and contractual limitations. Failing to pass along price increases timely in an inﬂationary environment, or not maintaining sales volume while increasing prices, could signiﬁcantly reduce our proﬁtability. While increases in the cost of products or energy could be damaging to us, decreases in those costs, particularly if severe, could also adversely impact us by creating deﬂation in selling prices, which could cause our gross proﬁt margin to deteriorate. Changes in energy or raw materials costs can also adversely affect customers; for example, declines in oil, gas, and coal prices may negatively impact customers operating in those industries and, consequently, our sales to those customers. Changes in customer or product mix and downward pressure on sales prices could cause our gross proﬁt percentage to ﬂuctuate or decline. Because we serve thousands of customers in many end markets, and offer millions of products, with varying proﬁtability levels, changes in our customer or product mix could cause our gross proﬁt percentage to ﬂuctuate or decline. Downward pressure on sales prices could also cause our gross proﬁt percentage to ﬂuctuate or decline. We can experience downward pressure on sales prices as a result of deﬂation, pressure from customers to reduce costs, or increased competition. Our ability to transact business is highly reliant on information systems. A disruption or security breach could materially affect our business, ﬁnancial condition, or results of operation. We depend on information systems to, among other things, process customer orders, manage inventory and accounts receivable collections, purchase products, manage accounts payable processes, ship products to customers on a timely basis, maintain cost- effective operations, provide superior service to customers, conduct business communications, and compile ﬁnancial results. A serious, prolonged disruption of our information systems, due to man-made or natural causes, including power or telecommunications outage, or breach in security, could materially impair fundamental business processes and increase expenses, decrease sales, or otherwise reduce earnings. Because of our reliance on information systems, we are vulnerable to the growing threat of damage or intrusion from computer viruses or other cyber-attacks, including ransomware and business e-mail compromise, on our systems. Despite precautions taken to prevent or mitigate the risks of such incidents, breaches of our systems could not only cause business disruption, but could also result in the theft of funds, the theft, loss, or disclosure of 8 proprietary or conﬁdential information, or the breach of customer, supplier, or employee information. A security incident involving our systems, or even an inadvertent failure to comply with data privacy and security laws and regulations, could negatively impact our sales, damage our reputation, and cause us to incur unanticipated legal liability, remediation costs, and other losses and expenses. In recent years, we replaced multiple legacy information system applications with newer software platforms, to enhance our business information and transaction systems to support future growth. We continue with and consider additional enterprise resource planning system conversions, on a smaller scale, in discrete business operations. Despite extensive planning, we could experience disruptions related to the implementation because of the projects' complexity. The potential adverse consequences could include delays, loss of information, diminished management reporting capabilities, damage to our ability to process transactions timely, harm to our control environment, diminished employee productivity, and unanticipated increases in costs. Further, our ability to achieve anticipated operational beneﬁts from new platforms is not assured. Acquisitions are a key component of our anticipated growth. We may not be able to identify or to complete future acquisitions, to integrate them effectively into our operations, or to realize their anticipated beneﬁts. Many industries we serve are mature. As a result, acquisitions of businesses have been important to our growth. While we wish to continue to acquire businesses, we may not be able to identify and to negotiate suitable acquisitions, to obtain ﬁnancing for them on satisfactory terms, or otherwise to complete acquisitions. In addition, existing and future competitors, and private equity ﬁrms, increasingly compete with us for acquisitions, which can increase prices and reduce the number of suitable opportunities; the acquisitions they make can also adversely impact our market position. We seek acquisition opportunities that complement and expand our operations. However, substantial costs, delays, or other difﬁculties related to integrating acquisitions could adversely affect our business or ﬁnancial results. For example, we could face signiﬁcant challenges in consolidating functions, integrating information systems, personnel, and operations, and implementing procedures and controls in a timely and efﬁcient manner. Further, even if we successfully integrate the acquisitions with our operations, we may not be able to realize cost savings, sales, proﬁt levels, or other beneﬁts that we anticipate from these acquisitions, either as to amount or in the time frame we expect. Our ability to realize anticipated beneﬁts may be affected by a number of factors, including the following: our ability to achieve planned operating results, to reduce duplicative expenses and inventory effectively, and to consolidate facilities; economic and market factors; the incurrence of signiﬁcant integration costs or charges in order to achieve those beneﬁts; our ability to retain key product supplier authorizations, customer relationships, and employees; our ability to address competitive, distribution, and regulatory challenges arising from entering into new markets (geographic, product, service, end-industry, or otherwise), especially those in which we may have limited or no direct experience; and exposure to unknown or contingent liabilities of the acquired company. In addition, acquisitions could place signiﬁcant demand on administrative, operational, and ﬁnancial resources. We incurred a substantial amount of debt in 2018 to complete the acquisition of FCX Performance, Inc. ("FCX"), a distributor of specialty process ﬂow control products and services. The aggregate purchase price of FCX was $781.8 million. To service our debt, we require a signiﬁcant amount of cash that may limit our ability to pay dividends, repurchase our shares, or complete other acquisitions or strategic initiatives. In connection with the FCX acquisition, we entered into a new credit facility pursuant to which we incurred approximately $780.0 million in term loan indebtedness and approximately $250.0 million in revolving indebtedness capacity. This indebtedness substantially increased our leverage and requires signiﬁcant future principal and interest payments. As of June 30, 2020, we had total debt obligations outstanding of $935.3 million. Our ability to service our debt and fund our other liquidity needs will depend on our ability to generate cash in the future. The additional leverage may (i) require us to dedicate a substantial portion of our cash ﬂows from operations to the payment of debt service, reducing the availability of our cash ﬂow to fund planned capital expenditures, pay dividends, repurchase our shares, complete other acquisitions or strategic initiatives, and other general corporate purposes; (ii) limit our ability to obtain additional ﬁnancing in the future (either at all or on satisfactory terms) to enable us to react to changes in our business or execute our growth strategies; and (iii) place us at a competitive disadvantage compared to businesses in our industry that have lower levels of indebtedness. Additionally, any failure to comply with covenants in the instruments governing our debt could result in an event of default. Any of the foregoing events or circumstances relating to our additional indebtedness may adversely affect our business, ﬁnancial position, or results of operations and may cause our stock price to decline. Goodwill, long-lived, and other intangible assets recorded as a result of our acquisitions could become impaired. We review goodwill, long-lived assets, including property, plant and equipment and identiﬁable amortizing intangible assets, for impairment whenever changes in circumstances or events may indicate that the 9 carrying amounts are not recoverable. Factors which may cause an impairment of long-lived assets include signiﬁcant changes in the manner of use of these assets, negative industry or market trends, signiﬁcant underperformance relative to historical or projected future operating results, or a likely sale or disposal of the asset before the end of its estimated useful life. In 2020, we recorded a $131.0 million non-cash impairment charge for goodwill associated with the FCX business. As of June 30, 2020, we had $540.6 million of goodwill and $343.2 million of other intangible assets, net. We assess all existing goodwill at least annually for impairment on a reporting unit basis. The techniques used in our qualitative assessment and goodwill impairment tests incorporate a number of estimates and assumptions that are subject to change. Although we believe these estimates and assumptions are reasonable and reﬂect market conditions forecasted at the assessment date, any changes to these assumptions and estimates due to market conditions or otherwise may lead to an outcome where impairment charges would be required in future periods. Tight credit markets could impact our ability to obtain ﬁnancing on reasonable terms or increase the cost of future ﬁnancing. Although the credit market turmoil of a decade ago did not have a signiﬁcant adverse impact on our liquidity or borrowing costs, the availability of funds tightened and credit spreads on corporate debt increased. If credit market volatility were to return, obtaining additional or replacement ﬁnancing could be more difﬁcult and the cost of issuing new debt or replacing a credit facility could be higher than under our current facilities. Tight credit conditions could limit our ability to ﬁnance acquisitions on terms acceptable to us. For more information regarding borrowing and interest rates, see the following sections below: “Liquidity and Capital Resources” in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations;” Item 7A under the caption “Quantitative and Qualitative Disclosures about Market Risk;” and notes 6 and 7 to the consolidated ﬁnancial statements, included below in Item 8 under the caption “Financial Statements and Supplementary Data.” That information is incorporated here by reference. Our ability to maintain effective internal control over ﬁnancial reporting may be insufﬁcient to allow us to accurately report our ﬁnancial results or prevent fraud, and this could cause our ﬁnancial statements to become materially misleading and adversely affect the trading price of our common stock. We require effective internal control over ﬁnancial reporting in order to provide reasonable assurance with respect to our ﬁnancial reports and to effectively prevent fraud. Internal control over ﬁnancial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of ﬁnancial statements. If we cannot provide reasonable assurance with respect to our ﬁnancial statements and effectively prevent fraud, our ﬁnancial statements could be materially misstated, which could adversely affect the trading price of our common stock. If we are not able to maintain the adequacy of our internal control over ﬁnancial reporting, including any failure to implement required new or improved controls, or if we experience difﬁculties in their implementation, our business, ﬁnancial condition and operating results could be harmed. Any material weakness could affect investor conﬁdence in the accuracy and completeness of our ﬁnancial statements. As a result, our ability to obtain any additional ﬁnancing, or additional ﬁnancing on favorable terms, could be materially and adversely affected. This, in turn, could materially and adversely affect our business, ﬁnancial condition, and the market value of our stock and require us to incur additional costs to improve our internal control systems and procedures. In addition, perceptions of the Company among customers, suppliers, lenders, investors, securities analysts, and others could also be adversely affected. We cannot assure that any material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control over ﬁnancial reporting. In addition, although we have been successful historically in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of our ﬁnancial statements included in our periodic reports ﬁled with the SEC. Our business depends on our ability to attract, develop, motivate, and retain qualiﬁed employees. Our success depends on hiring, developing, motivating, and retaining key employees, including executive, managerial, sales, professional, and other personnel. We may have difﬁculty identifying and hiring qualiﬁed personnel. In addition, we may have difﬁculty retaining such personnel once hired, and key people may leave and compete against us. With respect to sales and customer service positions in particular, we greatly beneﬁt from having employees who are familiar with the products and services we sell, and their applications, as well as with our customer and supplier relationships. The loss of key employees or our failure to attract and retain other qualiﬁed workers could disrupt or adversely affect our business. In addition, our operating results could be adversely affected by increased competition 10 for employees, shortages of qualiﬁed workers, higher employee turnover (including through retirement as the workforce ages), or increased employee compensation or beneﬁt costs. An interruption of operations at our headquarters or distribution centers, or in our means of transporting product, could adversely impact our business. Our business depends on maintaining operating activity at our headquarters and distribution centers, and being able to receive and deliver product in a timely manner. A serious, prolonged interruption due to power or telecommunications outage, security incident, terrorist attack, public health emergency, earthquake, extreme weather events, other natural disasters, ﬁre, ﬂood, transportation disruption, or other interruption could have a material adverse effect on our business and ﬁnancial results. There is no assurance that we will continue to pay dividends on our common stock. The timing, declaration, amount, and payment of dividends to our shareholders fall within the discretion of our Board of Directors and depend on many factors, including our ﬁnancial condition and results of operations, as well as applicable law and business considerations that our Board of Directors considers relevant. There can be no assurance that we will continue to pay a quarterly dividend. Additionally, if we cannot generate sufﬁcient cash ﬂow from operations to meet our debt payment obligations, then our ability to pay dividends, if so determined by the Board of Directors, will be impaired and we may be required to attempt to restructure or reﬁnance our debt, raise additional capital, or take other actions such as selling assets, reducing, or delaying capital expenditures, or reducing our dividend. There can be no assurance, however, that any such actions could be effected on satisfactory terms, if at all, or would be permitted by the terms of our debt or our other credit and contractual arrangements. Our operations outside the United States increase our exposure to global economic and political conditions and currency exchange volatility. Foreign operations contributed 13% of our sales in 2020. This presence outside the U.S. increases risks associated with exposure to more volatile economic conditions, political instability, cultural and legal differences in conducting business (including corrupt practices), economic and trade policy actions, and currency exchange ﬂuctuations. Our foreign operations' results are reported in the local currency and then translated into U.S. dollars at applicable exchange rates for inclusion in our consolidated ﬁnancial statements. Fluctuations in currency exchange rates affect our operating results and ﬁnancial position, as well as the comparability of results between ﬁnancial periods. We may be adversely affected by changes in LIBOR reporting practices or the method by which LIBOR is determined. As of June 30, 2020, we had approximately $764.3 million of aggregate consolidated indebtedness that was indexed to the London Interbank Offered Rate (“LIBOR”). In addition, as of June 30, 2020, approximately $431.0 million of this variable rate debt was converted to a ﬁxed rate through an interest rate swap. The swap agreement was entered into in January 2019 and is indexed to LIBOR. Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and ofﬁcial sector representatives with the goal of ﬁnding suitable replacements for LIBOR based on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority (FCA), which regulates LIBOR, has announced that it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but that it will not use its powers to compel contributions beyond such date. Accordingly, there is considerable uncertainty regarding the publication of such rates beyond 2021. The Federal Reserve Bank of New York and various other authorities have commenced the publication of reforms and actions relating to alternatives to U.S. dollar LIBOR. Although the full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have a material adverse impact on the availability of ﬁnancing, including LIBOR-based loans, and on our ﬁnancing costs. We are subject to litigation and regulatory risk due to the nature of our business, which may have a material adverse effect on our business. From time to time, we are involved in lawsuits or other legal proceedings that arise from our business. These may, for example, relate to product liability claims, commercial disputes, personal injuries, or employment-related matters. In addition, we could face claims over other matters, such as claims arising from our status as a public company or government contractor, our engagement in international trade, or otherwise relating to our compliance with a wide array of laws and regulations to which we are subject. Our contracts with federal, state, and local governments subject us to various laws and regulations governing these contracts, increased costs of compliance, and the potential for government audits. The defense and ultimate outcome of lawsuits or other legal proceedings or inquiries may result in higher operating expenses, the inability to participate in existing or future government contacts, or other adverse consequences, which could have a material adverse effect on our business, ﬁnancial condition, or results of operations. 11 Our business is subject to risks, some for which we maintain third-party insurance and some for which we self-insure. We may incur losses and be subject to liability claims that could have a material adverse effect on our ﬁnancial condition, results of operations, or cash ﬂows. We maintain insurance policies that provide limited coverage for some, but not all, of the potential risks and liabilities associated with our business. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insured basis. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. Because of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Even where insurance coverage applies, insurers may contest their obligations to make payments. Our ﬁnancial condition, results of operations, and cash ﬂows could be materially and adversely affected by losses and liabilities from uninsured or underinsured events, as well as by delays in the payment of insurance proceeds, or the failure by insurers to make payments. In addition to the risks identiﬁed above, other risks to our future performance include, but are not limited to, the following: • changes in customer preferences for products and services of the nature, brands, quality, or cost sold by us; • changes in customer procurement policies and practices; • changes in the market prices for products and services relative to the costs of providing them; • changes in operating expenses; • organizational changes in the Company; • government regulation, legislation, or policies, including with respect to federal tax policy, international trade, data privacy and security, and government contracting; • the variability and timing of new business opportunities including acquisitions, customer relationships, and supplier authorizations; • the incurrence of debt and contingent liabilities in connection with acquisitions; and • changes in accounting policies and practices that could impact our ﬁnancial reporting and increase compliance costs. 12 ITEM 1B. UNRESOLVED STAFF COMMENTS. Not applicable. ITEM 2. PROPERTIES. We believe having a local presence is important to serving our customers, so we maintain service centers and other operations in local markets throughout the countries in which we operate. At June 30, 2020, we owned real properties at 117 locations and leased 433 locations. Certain properties house more than one operation. The following were our principal owned real properties (each of which has more than 50,000 square feet of ﬂoor space) at June 30, 2020: Location of Principal Owned Real Property Cleveland, Ohio Atlanta, Georgia Florence, Kentucky Baldwinsville, New York Carlisle, Pennsylvania Fort Worth, Texas Type of Facility Corporate headquarters Distribution center, service center, hose shop Distribution center Ofﬁces, warehouse, and ﬂuid power shop Distribution center Distribution center and rubber shop Our principal leased real properties (each of which has more than 50,000 square feet of ﬂoor space) at June 30, 2020 were: Location of Principal Leased Real Property Fontana, California Newark, California Midland, Michigan Elyria, Ohio Strongsville, Ohio Portland, Oregon Stafford, Texas Longview, Washington Nisku, Alberta Winnipeg, Manitoba Type of Facility Distribution center, rubber shop, ﬂuid power shop, and service center Fluid power shop Flow control shop Product return center and service center Ofﬁces and warehouse Distribution center Ofﬁces, warehouse, and ﬂow control shop Service center, rubber shop, and ﬂuid power shop Ofﬁces, service center, and shops Distribution center and service center The properties in Baldwinsville, Newark, Midland, and Stafford are used in our Fluid Power & Flow Control segment. The Fontana and Longview properties are used in both the Service Center Based Distribution segment and the Fluid Power & Flow Control segment. The remaining properties are used in the Service Center Based Distribution segment. We consider our properties generally sufﬁcient to meet our requirements for ofﬁce space and inventory stocking. A service center's size is primarily inﬂuenced by the amount and types of inventory the service center requires to meet customers' needs. When opening new operations, we have tended to lease rather than purchase real property. We do not consider any service center, distribution center, or shop property to be material, because we believe that, if it becomes necessary or desirable to relocate an operation, other suitable property could be found. In addition to operating locations, we own or lease certain properties which in the aggregate are not material and are either for sale, lease, or sublease to third parties due to a relocation or closing. We also may lease or sublease to others unused portions of buildings. 13 ITEM 3. LEGAL PROCEEDINGS. Applied and/or one of its subsidiaries is a party to pending legal proceedings with respect to 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, we do 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 Applied's consolidated ﬁnancial position, results of operations, or cash ﬂows. ITEM 4. MINE SAFETY DISCLOSURES. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd- Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this annual report on Form 10-K. EXECUTIVE OFFICERS OF THE REGISTRANT. Applied's executive ofﬁcers are elected by the Board of Directors for a term of one year, or until their successors are chosen and qualiﬁed, at the Board's organization meeting held following the annual meeting of shareholders. The following is a list of the executive ofﬁcers and a description of their business experience during the past ﬁve years. Except as otherwise stated, the positions and ofﬁces indicated are with Applied, and the persons were most recently elected to their current positions on October 29, 2019: Name Neil A. Schrimsher Fred D. Bauer Warren E. Hoffner Kurt W. Loring David K. Wells : Positions and Experience President since 2013 and Chief Executive Ofﬁcer since 2011. Vice President-General Counsel & Secretary since 2002. Vice President, General Manager-Fluid Power & Flow Control since October 2018. He served as Vice President, General Manager-Fluid Power from 2003 to October 2018. The Board of Directors designated Mr. Hoffner an executive ofﬁcer in October 2015. Vice President-Chief Human Resources Ofﬁcer since 2014. Vice President-Chief Financial Ofﬁcer & Treasurer since September 2017. He served as Vice President-Finance from May 2017 through August 2017. Prior to joining Applied, from 2015 to May 2017, Mr. Wells was Vice President & Chief Financial Ofﬁcer of ESAB, a manufacturer of welding and material cutting products and a division of Colfax Corporation (NYSE: CFX). Prior to then he was Vice President & Chief Financial Ofﬁcer of Apex Tool Group, a manufacturer of hand and power tools. Age 56 54 60 51 57 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Applied's common stock, without par value, is listed for trading on the New York Stock Exchange with the ticker symbol “AIT.” Information concerning the quarterly stock dividends for the ﬁscal years ended June 30, 2020, 2019, and 2018 and the number of shareholders of record as of August 7, 2020 are set forth in Item 8, “Financial Statements and Supplementary Data,” in the “Quarterly Operating Results” table. That information is incorporated here by reference. The following table summarizes Applied's repurchases of its common stock in the quarter ended June 30, 2020. Period April 1, 2020 to April 30, 2020 May 1, 2020 to May 31, 2020 June 1, 2020 to June 30, 2020 Total (a) Total Number of Shares (b) Average Price Paid per Share ($) 0 0 0 0 — — — — (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 0 0 0 0 (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) 864,618 864,618 864,618 864,618 (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. 15 ITEM 6. SELECTED FINANCIAL DATA. This selected ﬁnancial data should be read in conjunction with Applied's consolidated ﬁnancial statements and related notes included elsewhere in this annual report as well as the section of the annual report titled Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (In thousands, except per share amounts and statistical data) 2020 2019 2018 (c) 2017 2016 Consolidated Operations — Year Ended June 30 Net sales Depreciation and amortization of property Amortization: Intangible assets SARs and stock options Operating income (a) (b) (e) Net income (a) (b) (d) (e) Per share data: Net income: Basic Diluted (a) (b) (d) (e) Cash dividend $3,245,652 21,196 $ 3,472,739 20,236 $3,073,274 17,798 $2,593,746 15,306 $ 2,519,428 15,966 41,553 2,954 88,989 24,042 0.62 0.62 1.26 41,883 2,437 233,788 143,993 32,065 1,961 225,827 141,625 24,371 1,891 175,386 133,910 3.72 3.68 1.22 3.65 3.61 1.18 3.43 3.40 1.14 25,580 1,543 89,782 29,577 0.75 0.75 1.10 Year-End Position — June 30 Working capital Long-term debt (including portion classified as current) Total assets Shareholders’ equity $ 733,686 935,276 2,283,551 843,542 $ 724,344 959,829 2,331,697 897,034 $ 625,469 966,063 2,285,741 814,963 $ 572,789 291,982 1,387,595 745,256 $ 507,238 328,334 1,312,025 657,916 Year-End Statistics — June 30 Current ratio Operating facilities Shareholders of record (f) Return on assets (a) (b) (d) (e) (g) Return on equity (a) (b) (d) (e) (h) Capital expenditures Cash Returned to Shareholders During the Year Dividends paid Purchases of treasury shares Total 2.7 580 3,772 1.0% 2.8% 2.7 600 4,165 6.3% 16.8% 2.4 610 4,323 8.0% 18.2% 2.8 552 4,687 10.2% 19.1% 2.8 559 5,372 2.2% 4.2% $ $ $ 20,115 48,873 — 48,873 $ $ $ 18,970 47,266 11,158 58,424 $ $ $ 23,230 45,858 22,778 68,636 $ $ $ 17,045 44,619 8,242 52,861 $ $ $ 13,130 43,330 37,465 80,795 (a) A goodwill impairment charge in fiscal 2020 reduced operating income by $131.0 million, net income by $118.8 million, and diluted earnings per share by $3.04. Excluding the goodwill impairment charge, the fiscal 2020 return on assets would be 6.5% and return on equity would be 16.4%. (b) A long-lived intangible asset impairment charge in fiscal 2019 reduced operating income by $31.6 million, net income by $26.9 million, and diluted earnings per share by $0.69, which includes the impact of a $3.8 million valuation allowance on certain Canadian deferred tax assets. Excluding the long-lived intangible asset impairment charge, the fiscal 2019 return on assets would be 7.5% and return on equity would be 20.0%. (c) FY 2018 includes the acquisition of FCX Performance, Inc. from the acquisition date of 1/31/2018. (d) FY 2017 includes a tax benefit pertaining to a worthless stock tax deduction of $22.2 million, or $0.56 per share. Excluding the worthless stock tax deduction, the fiscal 2017 return on assets would be 8.5% and return on equity would be 16.2%. (e) A goodwill impairment charge in fiscal 2016 reduced operating income by $64.8 million, net income by $63.8 million, and diluted earnings per share by $1.62. Excluding the goodwill impairment charge, the fiscal 2016 return on assets would be 6.7% and return on equity would be 12.8%. Includes participant-shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan and shareholders in the Company's direct stock purchase program. (f) (g) Return on assets is calculated as net income divided by monthly average assets. (h) Return on equity is calculated as net income divided by the average shareholders’ equity (beginning of the year plus end of the year divided by 2). 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW With more than 6,200 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. At June 30, 2020, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore from approximately 580 facilities. The following is Management's Discussion and Analysis of signiﬁcant factors that have affected our ﬁnancial condition, results of operations and cash ﬂows during the periods included in the accompanying consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash ﬂows in Item 8 under the caption "Financial Statements and Supplementary Data." When reviewing the discussion and analysis set forth below, please note that a signiﬁcant number of SKUs (Stock Keeping Units) we sell in any given year were not 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. Our ﬁscal 2020 consolidated sales were $3.2 billion, a decrease of $227.0 million or 6.5% compared to the prior year, with the acquisitions of Fluid Power Sales Inc. (FPS), MilRoc Distribution (MilRoc), Woodward Steel (Woodward) and Olympus Controls (Olympus) increasing sales by $80.7 million or 2.3% and unfavorable foreign currency translation of $10.5 million decreasing sales by 0.3%. Gross proﬁt margin decreased to 28.9% for ﬁscal 2020 from 29.0% for ﬁscal 2019. The gross margin was negatively affected by 12 basis points for $3.9 million of non-routine expense recorded in cost of sales related to inventory reserves for excess and obsolete inventory for certain locations that were closed during the year within the U.S. operations of the Service Center Based Distribution segment. Operating margin decreased to 2.7% in ﬁscal 2020 from 6.7% in ﬁscal 2019. The reduction in operating margin is primarily due to a $131.0 million non-cash goodwill impairment charge recorded during ﬁscal 2020 related to the goodwill associated with the Company's FCX Performance, Inc. (FCX) operations within the Fluid Power & Flow Control segment. The prior ﬁscal year included a $31.6 million non-cash intangible impairment charge related to the long-lived intangible assets associated with the Company's Canadian operations within the Service Center Based Distribution segment. The non-cash impairment charges decreased net income by $118.8 million and earnings per share by $3.04 per share for ﬁscal 2020 and decreased net income by $23.1 million and earnings per share by $0.59 per share for ﬁscal 2019. During ﬁscal 2020, the Company recorded non-routine expense of $9.0 million related to consolidating locations and reducing headcount primarily within the Company's U.S. operations of the Service Center Based Distribution segment. Of the total, $3.9 million related to inventory reserves for excess and obsolete inventory for certain locations that were closed during the year recorded within cost of sales, and $5.1 million related to severance and facility consolidation recorded within selling, distribution and administrative expense. Also, the Company recorded a $1.0 million tax beneﬁt related to the Coronavirus Aid, Relief, and Economic Security (CARES) Act within income tax expense. Total non-routine charges reduced gross proﬁt by $3.9 million, decreased operating income by $9.0 million, and decreased net income by $5.8 million for ﬁscal 2020. During the current ﬁscal year, the COVID-19 pandemic signiﬁcantly impacted the business. We are classiﬁed as critical infrastructure and our facilities remain open and operational as they adhere to health and safety policies. Demand was challenging in the second half of the ﬁscal year as customers in many of our core manufacturing end markets idled or reduced production capacity and facility utilization in response to the pandemic. Underlying trends remain subdued but are exhibiting stability into our ﬁscal 2021 ﬁrst quarter with organic sales down mid-teens year- over-year through early August. 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. Our earnings per share was $0.62 in ﬁscal 2020 versus $3.68 in ﬁscal year 2019. 17 Shareholders’ equity was $843.5 million at June 30, 2020 compared to $897.0 million at June 30, 2019. Working capital increased $9.3 million from June 30, 2019 to $733.7 million at June 30, 2020. The current ratio was 2.7 to 1 at June 30, 2020 and at June 30, 2019. 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 decreased during the second half of ﬁscal 2020 correlating with an overall decline in the industrial economy in the same period. The ISM PMI registered 52.6 in June 2020, an increase from the June 2019 revised reading of 51.6. A reading above 50 generally indicates expansion. The index readings for the months during the current quarter, along with the revised indices for previous quarter ends, were as follows: Month June 2020 May 2020 April 2020 March 2020 December 2019 September 2019 June 2019 MCU 68.6 65.1 64.2 73.5 77.2 77.4 77.7 Index Reading PMI 52.6 43.1 41.5 49.1 47.8 48.2 51.6 IP 93.3 87.0 83.8 99.6 105.1 104.5 105.0 RESULTS OF OPERATIONS This discussion and analysis deals with comparisons of material changes in the consolidated ﬁnancial statements for the years ended June 30, 2020 and 2019. For the comparison of the years ended June 30, 2019 and 2018, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2019 Annual Report on Form 10-K. The following table is included to aid in review of Applied’s statements of consolidated income. Net Sales Gross Profit Margin Selling, Distribution & Administrative Operating Income Net Income Year Ended June 30, As a % of Net Sales Change in $'s Versus Prior Period 2020 2019 % Change 100.0% 100.0% 28.9% 22.1% 2.7% 0.7% 29.0% 21.4% 6.7% 4.1% (6.5)% (6.9)% (3.3)% (61.9)% (83.3)% Sales in ﬁscal 2020 were $3.2 billion, which was $227.0 million or 6.5% below the prior year, with sales from acquisitions adding $80.7 million or 2.3% and unfavorable foreign currency translation accounting for a decrease of $10.5 million or 0.3%. There were 253.5 selling days in ﬁscal 2020 and 251.5 selling days in ﬁscal 2019. Excluding the impact of businesses acquired and foreign currency translation, sales were down $297.2 million or 8.5% during the year, driven by a 9.4% decrease from operations due to weak demand across key end markets, further impacted by the economic slowdown resulting from the COVID-19 pandemic, offset by an increase of 0.9% due to two additional sales days. 18 The following table shows changes in sales by reportable segment. Amounts in millions Sales by Reportable Segment Year ended June 30, Sales 2020 2019 Decrease Acquisitions Foreign Currency Organic Change Amount of change due to Service Center Based Distribution $ 2,242.0 $ 2,452.9 $ (210.9) $ 23.8 $ (10.5) $ (224.2) Fluid Power & Flow Control 1,003.7 1,019.8 (16.1) 56.9 — (73.0) Total $ 3,245.7 $ 3,472.7 $ (227.0) $ 80.7 $ (10.5) $ (297.2) Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $210.9 million, or 8.6%. Acquisitions within this segment increased sales by $23.8 million or 1.0%, and unfavorable foreign currency translation decreased sales by $10.5 million or 0.4%. Excluding the impact of businesses acquired and the impact of foreign currency translation, sales decreased $224.2 million or 9.2% during the year, driven by a 10.0% decrease from operations due to weak demand across key end markets, offset by an increase of 0.8% due to two additional sales days. Sales of our Fluid Power & Flow Control segment decreased $16.1 million or 1.6%. Acquisitions within this segment, primarily Olympus, increased sales $56.9 million or 5.6%. Excluding the impact of businesses acquired, sales decreased $73.0 million or 7.2%, driven by a 8.0% decrease from operations, offset by an 0.8% increase due to two additional sales days. The decrease from operations is primarily due to slower demand in our ﬂow control operations and weaker activity across our industrial OEM customer base. The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore. Amounts in millions Sales by Geographic Area United States Canada Other countries Total Amount of change due to Year ended June 30, Sales 2020 2019 Decrease Acquisitions Foreign Currency Organic Change $ 2,819.4 $ 3,016.7 $ (197.3) $ 80.7 $ — $ (278.0) 248.6 177.7 271.3 184.7 (22.7) (7.0) — — (2.7) (7.8) (20.0) 0.8 $ 3,245.7 $ 3,472.7 $ (227.0) $ 80.7 $ (10.5) $ (297.2) Sales in our U.S. operations decreased $197.3 million or 6.5%, with acquisitions adding $80.7 million or 2.7%. Excluding the impact of businesses acquired, U.S. sales were down $278.0 million or 9.2%, driven by a decrease of 10.0% from operations, offset by an increase of 0.8% due to two additional sales days. Sales from our Canadian operations decreased $22.7 million or 8.4%, and unfavorable foreign currency translation decreased Canadian sales by $2.7 million or 1.0%. Excluding the impact of foreign currency translation, Canadian sales were down $20.0 million or 7.4%, driven by a decrease of 8.2% from operations, offset by an increase of 0.8% due to two additional sales days. Consolidated sales from our other country operations decreased $7.0 million or 3.8% compared to the prior year. Unfavorable foreign currency translation decreased other country sales by $7.8 million or 4.2%. Excluding the impact of foreign currency translation, other country sales were up $0.8 million or 0.4% compared to the prior year, driven by an increase of 1.2% due to additional sales days, offset by a 0.8% decrease from operations. Our gross proﬁt margin decreased to 28.9% in ﬁscal 2020 compared to 29.0% in ﬁscal 2019. The gross margin was negatively affected by 12 basis points for $3.9 million of non-routine expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for certain locations that were closed during the year within the U.S. operations of the Service Center Based Distribution segment. 19 The following table shows the changes in selling, distribution, and administrative expense (SD&A). Amounts in millions SD&A Amount of change due to Year ended June 30, SD&A 2020 2019 Decrease Acquisitions Foreign Currency Organic Change $ 717.7 $ 742.2 $ (24.5) $ 20.8 $ (2.5) $ (42.8) SD&A consists of associate compensation, beneﬁts and other expenses associated with selling, purchasing, warehousing, supply chain management, and marketing and distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, facility related expenses and expenses incurred in acquiring businesses. SD&A decreased $24.5 million or 3.3% during ﬁscal 2020 compared to the prior year, and as a percentage of sales increased to 22.1% in ﬁscal 2020 compared to 21.4% in ﬁscal 2019. Changes in foreign currency exchange rates had the effect of decreasing SD&A by $2.5 million or 0.3% compared to the prior year. SD&A from businesses acquired added $20.8 million or 2.8%, including $1.9 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the favorable impact from foreign currency translation, SD&A decreased $42.8 million or 5.8% during ﬁscal 2020 compared to ﬁscal 2019. The Company incurred $5.1 million of non-routine expenses related to severance and facility consolidation primarily within the U.S. Operations of the Service Center Based Distribution segment during ﬁscal 2020, compared to $1.6 million of restructuring expenses incurred in ﬁscal 2019. Excluding the impact of acquisitions, total compensation excluding severance decreased $39.8 million during ﬁscal 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. All other expenses within SD&A were down $6.5 million. During the quarter ended March 31, 2020, the Company performed its annual goodwill impairment test. As a result of this test, the Company recorded a $131.0 million non-cash goodwill impairment charge related to the Company's FCX operations in the Fluid Power & Flow Control segment, primarily due to the overall decline in the industrial economy, speciﬁcally slower demand in FCX's end markets. The non-cash goodwill impairment charge decreased net income by $118.8 million and earnings per share by $3.04 per share for ﬁscal 2020. In ﬁscal 2019, the Company recognized a non-cash impairment charge of $31.6 million for intangible assets related to the Company's Canadian operations within the Service Center Based Distribution segment, which decreased net income by $23.1 million and earnings per share by $0.59 per share for ﬁscal 2019. Operating income decreased $144.8 million, or 61.9%, to $89.0 million during ﬁscal 2020 from $233.8 million during ﬁscal 2019, and as a percentage of sales, decreased to 2.7% from 6.7%, primarily as a result of the goodwill impairment expense recorded during the current year. Operating income, before intangible impairment charges, as a percentage of sales for the Service Center Based Distribution segment decreased to 9.4% in ﬁscal 2020 from 10.4% in ﬁscal 2019. Operating income, before goodwill impairment charges, as a percentage of sales for the Fluid Power & Flow Control segment decreased to 10.9% in ﬁscal 2020 from 11.0% in ﬁscal 2019. Segment operating income is impacted by changes in the amounts and levels of certain supplier support beneﬁts and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross proﬁt and operating expense. Other income, net, represents certain non-operating items of income and expense, and was $2.8 million of income in ﬁscal 2020 compared to $0.9 million of income in ﬁscal 2019. Current year income primarily consists of unrealized gains on investments held by non-qualiﬁed deferred compensation trusts of $0.5 million and foreign currency transaction gains of $2.5 million, offset by other expense of $0.2 million. Fiscal 2019 income consisted primarily of unrealized gains on investments held by non-qualiﬁed deferred compensation trusts of $0.7 million and life insurance income of $0.5 million, offset by foreign currency transaction losses of $0.3 million. The effective income tax rate was 56.5% for ﬁscal 2020 compared to 26.0% for ﬁscal 2019. The increase in the effective tax rate is primarily due to the FCX goodwill impairment charge, which increased the effective tax rate by 31.4% during ﬁscal 2020. The Company also recorded a $1.0 million tax beneﬁt related to the CARES Act during the current year, which favorably impacted the rate by 1.8% in ﬁscal 2020. We expect our income tax rate for ﬁscal 2021 to be in the range of 23.0% to 25.0%. As a result of the factors discussed above, net income for ﬁscal 2020 decreased $120.0 million from the prior year. Net income per share was $0.62 per share for ﬁscal 2020 compared to $3.68 per share for ﬁscal 2019. Current year 20 results were negatively impacted by $3.04 per share for the goodwill impairment and $0.18 per share for non- routine expenses, offset by a favorable impact of $0.03 per share for the CARES Act tax beneﬁt. The prior year results included positive impacts on earnings per share of $0.48 per share for acquisitions, $0.37 per share for tax reform, offset by a $0.69 per share unfavorable impact from the intangible impairment, which includes the impact of recording the $3.8 million valuation allowance in the third quarter of ﬁscal 2019, and a $0.04 per share unfavorable impact from restructuring charges during ﬁscal 2019. At June 30, 2020, we had a total of 580 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore, versus 600 at June 30, 2019. The approximate number of Company employees was 6,200 at June 30, 2020 and 6,650 at June 30, 2019. LIQUIDITY AND CAPITAL RESOURCES Our primary source of capital is cash ﬂow from operations, supplemented as necessary by bank borrowings or other sources of debt. At June 30, 2020 we had total debt obligations outstanding of $935.3 million compared to $959.8 million at June 30, 2019. 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 we operate in, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit ﬁnancing could be obtained based on the Company’s credit standing and ﬁnancial strength. The Company’s working capital at June 30, 2020 was $733.7 million compared to $724.3 million at June 30, 2019. The current ratio was 2.7 to 1 at both June 30, 2020 and June 30, 2019. Net Cash Flows The following table is included to aid in review of Applied’s statements of consolidated cash ﬂows; all amounts are in thousands. Net Cash Provided by (Used in): Operating Activities Investing Activities Financing Activities Exchange Rate Effect Increase in Cash and Cash Equivalents Year Ended June 30, 2020 2019 $ 296,714 $ 180,601 (55,404) (78,238) (2,740) (55,102) (71,539) 109 $ 160,332 $ 54,069 The increase in cash provided by operating activities during ﬁscal 2020 is driven by operating results and the changes in working capital for the year: Decrease in accounts receivable Decrease in inventory Decrease in accounts payable $ $ $ 65,972 73,618 (24,068) Net cash used in investing activities in ﬁscal 2020 included $37.2 million used for the acquisition of Olympus and $20.1 million used for capital expenditures. Net cash used in investing activities in ﬁscal 2019 included $37.5 million used for the acquisitions of FPS, MilRoc and Woodward, and $19.0 million for capital expenditures. Net cash used in ﬁnancing activities included $49.6 million and $161.7 million of long-term debt repayments in 2020 and 2019, respectively, offset by $25.0 million of cash borrowings under a unsecured shelf facility agreement with Prudential Investment Management in 2020 and $175.0 million of cash borrowings from the trade receivable securitization facility in 2019. Further uses of cash in 2020 were $48.9 million for dividend payments, $2.6 million used to pay taxes for shares withheld, and $2.4 million used for acquisition holdback payments. Further uses of cash in 2019 were $47.3 million for dividend payments, $11.2 million used to repurchase 192,082 shares of treasury stock, $3.5 million used to pay taxes for shares withheld, and $2.6 million used for acquisition holdback payments. The increase in dividends over the year is the result of regular increases in our dividend payout rates. We paid dividends of $1.26 and $1.22 per share in ﬁscal 2020 and 2019, respectively. 21 Capital Expenditures We expect capital expenditures for ﬁscal 2021 to be in the $15.0 million to $20.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for ﬁscal 2021 is expected to be in the range of $22.5 million to $23.5 million. Share Repurchases The Board of Directors has authorized the repurchase of shares of the Company’s stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. At June 30, 2020, we had authorization to purchase an additional 864,618 shares. The Company did not repurchase shares in ﬁscal 2020. In ﬁscal 2019 and 2018, we repurchased 192,082 and 393,300 shares of the Company’s common stock, respectively, at an average price per share of $58.10,and $57.92, respectively. Borrowing Arrangements A summary of long-term debt, including the current portion, follows; all amounts are in thousands: June 30, Unsecured credit facility Trade receivable securitization facility Series C notes Series D Notes Series E Notes Other Total debt Less: unamortized debt issuance costs 2020 589,250 175,000 120,000 25,000 25,000 1,026 935,276 1,487 933,789 $ $ $ 2019 613,625 175,000 120,000 50,000 — 1,204 959,829 1,943 957,886 $ $ $ 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 as of June 30, 2020 and June 30, 2019. Unused lines under this facility, net of outstanding letters of credit of $1.9 million and $3.2 million, respectively, to secure certain insurance obligations, totaled $248.1 million and $246.8 million at June 30, 2020 and June 30, 2019, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.94% and 4.19% as of June 30, 2020 and June 30, 2019, respectively. 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 as of June 30, 2020 and June 30, 2019 was 1.07% and 3.33%, respectively. At June 30, 2020 and June 30, 2019, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 million. 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 have a principal amount of $120.0 million, carry a ﬁxed interest rate of 3.19%, and are due in equal principal payments in July 2020, 2021, and 2022. A $40.0 million principal payment was made on the "Series C" notes in July 2020. The "Series D" notes have a principal amount of $50.0 million and carry a ﬁxed interest rate of 3.21%. A $25.0 million principal payment was made on the "Series D" notes during ﬁscal 2020, and the remaining principal balance of $25.0 million 22 is due in October 2023. In October 2019, the Company amended its unsecured shelf facility agreement with Prudential Investment Management to authorize the issuance of "Series E" notes, which have a principal amount of $25.0 million, carry a ﬁxed interest rate of 3.08%, and are due in October 2024. The Company entered into an interest rate swap which mitigates variability in forecasted interest payments on $431.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. For more information, see note 7, Derivatives, to the consolidated ﬁnancial statements, included in Item 8 under the caption “Financial Statements and Supplementary Data.” The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, ﬁnancial ratios, and other covenants. At June 30, 2020, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as deﬁned). At June 30, 2020, the Company's net indebtedness was less than 3.1 times consolidated income before interest, taxes, depreciation and amortization (as deﬁned). The Company was in compliance with all ﬁnancial covenants at June 30, 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 (all dollar amounts are in thousands): June 30, Accounts receivable, gross Allowance for doubtful accounts Accounts receivable, net Allowance for doubtful accounts, % of gross receivables Year Ended June 30, Provision for losses on accounts receivable Provision as a % of net sales 2020 $ 463,659 2019 $ 551,400 13,661 10,498 $ 449,998 $ 540,902 2.9% 1.9% 2020 $ 14,055 $ 2019 4,058 0.43% 0.12% 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 55.9 at June 30, 2020 versus 55.2 at June 30, 2019. Approximately 4.6% of our accounts receivable balances are more than 90 days past due at June 30, 2020 compared to 3.0% at June 30, 2019. On an overall basis, our provision for losses from uncollected receivables represents 0.43% of our sales in the year ended June 30, 2020, compared to 0.12% of sales for the year ended June 30, 2019. This increase primarily relates to provisions recorded in the current year for customer credit deterioration and bankruptcies primarily in the U.S. and Mexican operations of the Service Center Based Distribution segment. Historically, this percentage is around 0.10% to 0.15%. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels. Inventory Analysis Inventories are valued using the last-in, ﬁrst-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. As activities slowed in the second half of ﬁscal 2020, the Company took actions to reduce its overall inventory, which resulted in a net decrease in inventory of $58.4 million. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis and uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the period ended June 30, 2020 was 3.8 versus 4.2 at June 30, 2019. We believe our inventory turnover ratio in ﬁscal 2021 will be slightly better than our ﬁscal 2020 levels. 23 CONTRACTUAL OBLIGATIONS The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 2020 (in thousands): Operating leases $ 104,165 $ 29,979 $ 39,328 $ 19,540 $ 15,318 Total Period Less Than 1 yr Period 2-3 yrs Period 4-5 yrs Period Over 5 yrs Planned funding of post-retirement obligations Unrecognized income tax benefit liabilities, including interest and penalties Long-term debt obligations Interest on long-term debt obligations (1) Acquisition holdback payments Total Contractual Cash Obligations 10,000 6,000 935,276 40,100 4,086 900 — 79,181 17,000 2,563 1,800 — 805,744 21,900 1,448 500 — 50,351 1,200 75 6,800 — — — — $1,099,627 $ 129,623 $ 870,220 $ 71,666 $ 22,118 $ 6,000 Other — — 6,000 — — — (1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations. Rates in effect as of June 30, 2020 are used for variable rate debt. Purchase orders for inventory and other goods and services are not included in our estimates as we are unable to aggregate the amount of such purchase orders that represent enforceable and legally binding agreements specifying all signiﬁcant terms. The previous table includes the gross liability for unrecognized income tax beneﬁts including interest and penalties in the “Other” column as the Company is unable to make a reasonable estimate regarding the timing of cash settlements, if any, with the respective taxing authorities. CRITICAL ACCOUNTING POLICIES The preparation of ﬁnancial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates at a speciﬁc point in time that affect the amounts reported in the consolidated ﬁnancial statements and disclosed in the accompanying notes. The Business and Accounting Policies note to the consolidated ﬁnancial statements describes the signiﬁcant accounting policies and methods used in preparation of the consolidated ﬁnancial statements. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates. The following critical accounting policies are impacted signiﬁcantly by judgments, assumptions and estimates used in the preparation of the consolidated ﬁnancial statements. LIFO Inventory Valuation and Methodology Inventories are valued at the average cost method, using the last-in, ﬁrst-out (LIFO) method for U.S. inventories, and the average cost method for foreign inventories. We adopted the link chain dollar value LIFO method for accounting for U.S. inventories in ﬁscal 1974. Approximately 17.3% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $155.5 million as reﬂected in our consolidated balance sheet at June 30, 2020. The Company maintains ﬁve LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, ﬂuid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. See the Inventories note to the consolidated ﬁnancial statements in Item 8 under the caption "Financial Statements and Supplementary Data," for further information. Allowances for Slow-Moving and Obsolete Inventories We evaluate the recoverability of our slow-moving and inactive inventories at least quarterly. We estimate the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. Our ability to recover our cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. A signiﬁcant portion of the products we hold in inventory have long shelf lives, are not highly susceptible to obsolescence. As of June 30, 2020 and 2019, the Company's reserve for slow-moving or obsolete inventories was $42.9 million and $41.1 million, respectively, recorded in inventories in the consolidated balance sheets. 24 Allowances for Doubtful Accounts We evaluate the collectibility of trade accounts receivable based on a combination of factors. Initially, we estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of certain customers and industries estimated to be a greater credit risk, trends within the entire customer pool and changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Accounts are written off against the allowance when it becomes evident that collection will not occur. As of June 30, 2020 and 2019, our allowance for doubtful accounts was 2.9% and 1.9% of gross receivables, respectively. Our provision for losses on accounts receivable was $14.1 million, $4.1 million and $2.8 million in ﬁscal 2020, 2019 and 2018, respectively. Goodwill and Intangibles The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. Goodwill for acquired businesses is accounted for using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash ﬂows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. As part of acquisition accounting, we recognize acquired identiﬁable intangible assets such as customer relationships, vendor relationships, trade names, and non- competition agreements apart from goodwill. Finite-lived identiﬁable intangibles are evaluated for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a ﬁnite-lived intangible asset be tested for possible impairment, the Company ﬁrst compares undiscounted cash ﬂows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the ﬁnite-lived intangible asset is not recoverable on an undiscounted cash ﬂow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash ﬂow model. We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall ﬁnancial performance, other relevant entity-speciﬁc events, speciﬁc events affecting the reporting unit or sustained decrease in share price. Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a one-step approach. The fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Goodwill on our consolidated ﬁnancial statements relates to both the Service Center Based Distribution segment and the Fluid Power & Flow Control segment. The Company has eight reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2020. The Company concluded that seven of the reporting units’ fair value exceeded their carrying amounts by at least 10% as of January 1, 2020. Speciﬁcally, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The Canada and Mexico reporting units have goodwill balances of $27.2 million and $5.2 million, respectively, as of June 30, 2020. The carrying value of the ﬁnal reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131.0 million. The non-cash impairment charge was the result of the overall decline in the industrial economy, speciﬁcally slower demand in FCX's end markets. This led to reduced spending by customers and reduced revenue expectations. As of June 30, 2020, the Company's goodwill balance was $540.6 million, of which $309.0 million relates to the FCX reporting unit. If the Company does not achieve forecasted sales growth and margin improvements goodwill could be further impaired. 25 The fair values of the reporting units in accordance with the goodwill impairment test were determined using the income and market approaches. The income approach employs the discounted cash ﬂow method reﬂecting projected cash ﬂows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make signiﬁcant estimates and assumptions related to forecasts of future revenues, operating margins, and discount rates. The market approach utilizes an analysis of comparable publicly traded companies and requires management to make signiﬁcant estimates and assumptions related to the forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA) and multiples that are applied to management’s forecasted revenues and EBITDA estimates. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Speciﬁcally, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reﬂection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values. Income Taxes Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for ﬁnancial reporting and income tax purposes, giving consideration to enacted tax laws. As of June 30, 2020, the Company recognized $38.1 million of net deferred tax liabilities. Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the beneﬁt of such assets on a jurisdiction by jurisdiction basis. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future taxable income levels. 26 CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT This Form 10-K, including Management’s Discussion and Analysis, contains statements that are forward- looking based on management’s current expectations about the future. Forward-looking statements are often identiﬁed by qualiﬁers, such as “guidance”, “expect”, “believe”, “plan”, “intend”, “will”, “should”, “could”, “would”, “anticipate”, “estimate”, “forecast”, “may”, "optimistic" and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward- looking statements. These statements may discuss, among other things, expected growth, future sales, future cash ﬂows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases. Readers are cautioned not to place undue reliance on any forward-looking statements. All forward- looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’s control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward- looking statements, whether because of new information or events, or otherwise, except as may be required by law. Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; 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 our Form 10-K, as well as other of our ﬁlings with the Securities and Exchange Commission. 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates. We occasionally utilize derivative instruments as part of our overall ﬁnancial risk management policy, but do not use derivative instruments for speculative or trading purposes. Foreign Currency Exchange Rate Risk Because we operate throughout North America, Australia and New Zealand and approximately 13.1% of our ﬁscal year 2020 net sales were generated outside the United States, foreign currency exchange rates can impact our ﬁnancial position, results of operations and competitive position. The ﬁnancial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive loss as reported in the statements of consolidated comprehensive income. Transaction gains and losses arising from ﬂuctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the statements of consolidated income as a component of other income, net. Applied does not currently hedge the net investments in our foreign operations. During the course of the ﬁscal year, the Canadian, Mexican, Australian and New Zealand currency exchange rates decreased in relation to the U.S. dollar by 4.0%, 17.1%, 1.8% and 4.0%, respectively. In the twelve months ended June 30, 2020, we experienced net foreign currency translation losses totaling $18.5 million, which were included in other comprehensive loss. We utilize a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in foreign currency rates. Excluding the non-cash goodwill impairment charge recorded in ﬁscal 2020, a 10% strengthening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2020 would have resulted in a $1.3 million decrease in net income for the year ended June 30, 2020. Excluding the non-cash goodwill impairment charge recorded in ﬁscal 2020, a 10% weakening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2020 would have resulted in a $1.3 million increase in net income for the year ended June 30, 2020. Interest Rate Risk Our primary exposure to interest rate risk results from our outstanding debt obligations with variable interest rates. The levels of fees and interest charged on our various debt facilities are based upon leverage levels and market interest rates. The Company uses interest rate swap instruments to mitigate variability in forcasted interest rates. Our variable interest rate debt facilities outstanding include our ﬁve-year credit facility, which provides for a revolving credit facility with a capacity of up to $250.0 million in borrowings with no balance outstanding at June 30, 2020, a $780.0 million term loan, of which $589.3 million was outstanding at June 30, 2020, and a $175.0 million trade receivable securitization facility, all of which was outstanding at June 30, 2020. In January 2019, the Company entered into an interest rate swap on $463.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. The notional amount of the interest rate swap was $431.0 million as of June 30, 2020. The interest rate swap effectively converts a portion of the ﬂoating rate interest payment into a ﬁxed rate interest payment. The Company designated the interest rate swap as a pay-ﬁxed, receive-ﬂoating interest rate swap instrument and is accounting for this derivative as a cash ﬂow hedge. Fixed interest rate debt facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $1.0 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $782.0 million during ﬁscal 2020. The impact of a hypothetical 1.0% increase in the interest rates on our average variable interest rate bank borrowings (not considering the impact of our interest rate swap) would have resulted in a $7.8 million increase in interest expense. Due to the interest rate swap, the impact of a hypothetical 1.0% increase in the variable interest rate would have reduced net cash interest paid by $4.3 million. Changes in market interest rates would also impact interest rates on these facilities. For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and notes 6 and 7 to the consolidated ﬁnancial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Applied Industrial Technologies, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2020 and 2019, the related statements of consolidated income, comprehensive income, shareholders' equity, and cash ﬂows for each of the three years in the period ended June 30, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "ﬁnancial statements"). In our opinion, the ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash ﬂows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over ﬁnancial reporting as of June 30, 2020, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 14, 2020, expressed an unqualiﬁed opinion on the Company's internal control over ﬁnancial reporting. Change in Accounting Principle As discussed in Note 1 to the ﬁnancial statements, effective July 1, 2019, the Company adopted the FASB’s new standard related to leases using the optional transition method, which required application of the new guidance to only those leases that existed at the date of adoption. Basis for Opinion These ﬁnancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's ﬁnancial statements based on our audits. We are a public accounting ﬁrm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the ﬁnancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the ﬁnancial statements. Our audits also included evaluating the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall presentation of the ﬁnancial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the ﬁnancial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the ﬁnancial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the ﬁnancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill - FCX and Canada Reporting Units - Refer to Note 5 to the ﬁnancial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the income and market approaches. The determination of the fair value using the income approach requires management to make signiﬁcant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. The determination of the fair value using the market approach requires management to make signiﬁcant estimates and assumptions related to the forecasts of future revenues, EBITDA and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The goodwill balance was 29 $540.6 million as of June 30, 2020, of which $309.0 million related to the FCX reporting unit and $27.2 million related to the Canada reporting unit. The fair value of the FCX reporting unit did not exceed its carrying value as of the measurement date and, therefore, an impairment charge of $131.0 million was recognized in 2020. The fair value of the Canada reporting unit exceeded its carrying value by 12% as of the measurement date and, therefore, no impairment was recognized. Given the nature of the FCX and Canada reporting units’ operations, the sensitivity of the business to changes in the economy, the reporting unit’s historical performance as compared to projections, and the difference between its fair value and the carrying value, auditing management’s judgments regarding forecasts of future revenues and EBITDA, as well as selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates for the FCX and Canada reporting units, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the forecasts of future revenues and EBITDA (“forecasts”), and the selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates (“market multiples”) for the FCX and Canada reporting units included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, such as controls related to management’s forecasts and the selection of the discount rate and market multiples used. • We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in industry reports for the various industries the reporting units operate within. • With the assistance of our fair value specialists, we evaluated the discount rate, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rate selected by management. • With the assistance of our fair value specialists, we evaluated the market multiples by evaluating the selected comparable publicly traded companies and the adjustments made for differences in growth prospects and risk proﬁles between the reporting units and the comparable publicly traded companies. We tested the underlying source information and mathematical accuracy of the calculations. • With the assistance of our fair value specialists, we evaluated the fair value of the reporting units based upon reconciling the fair values of the reporting units to the market capitalization of the Company. /s/ Deloitte & Touche LLP Cleveland, Ohio August 14, 2020 We have served as the Company's auditor since 1966. 30 STATEMENTS OF CONSOLIDATED INCOME (In thousands, except per share amounts) Year Ended June 30, Net sales Cost of sales Gross profit Selling, distribution and administrative expense, including depreciation Goodwill and intangible impairment Operating income Interest expense Interest income Other income, net Income before income taxes Income tax expense Net income Net income per share — basic Net income per share — diluted See notes to consolidated financial statements. 2020 2019 2018 $ 3,245,652 $ 3,472,739 $ 3,073,274 2,307,916 2,465,116 2,189,279 937,736 717,747 131,000 88,989 37,264 (729) (2,782) 55,236 31,194 24,042 0.62 0.62 1,007,623 742,241 31,594 233,788 40,788 (600) (881) 194,481 50,488 143,993 3.72 3.68 $ $ $ $ $ $ 883,995 658,168 — 225,827 24,142 (657) (2,376) 204,718 63,093 141,625 3.65 3.61 $ $ $ 31 STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (In thousands) Year Ended June 30, Net income per the statements of consolidated income 2020 24,042 2019 $ 143,993 2018 $ 141,625 $ Other comprehensive (loss) income, before tax: Foreign currency translation adjustments Post-employment benefits: Actuarial (loss) gain on re-measurement Reclassification of actuarial (gains) losses and prior service cost into other income, net and included in net periodic pension costs Unrealized gain on investment securities available for sale Cumulative effect of adopting accounting standard Unrealized loss on cash flow hedge Reclassification of interest from cash flow hedge into interest expense Total other comprehensive loss, before tax Income tax (benefit) expense related to items of other comprehensive loss Other comprehensive loss, net of tax Comprehensive (loss) income (18,499) 2,021 (8,875) (2,192) (372) 709 (306) (66) — — (50) — (14,446) (16,615) 244 4,638 (12,909) (32,734) (3,246) (3,190) (29,544) (9,663) (5,502) $ 134,330 (73) 37 — — — (8,202) 319 (8,521) $ 133,104 $ See notes to consolidated financial statements. 32 CONSOLIDATED BALANCE SHEETS (In thousands) June 30, Assets Current assets Cash and cash equivalents Accounts receivable, net Inventories Other current assets Total current assets Property — at cost Land Buildings Equipment, including computers and software Total property — at cost Less accumulated depreciation Property — net Operating lease assets, net Identifiable intangibles, net Goodwill Other assets Total Assets Liabilities Current liabilities Accounts payable Current portion of long-term debt Compensation and related benefits Other current liabilities Total current liabilities Long-term debt Other liabilities Total Liabilities Shareholders’ Equity Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,710 and 38,597 shares outstanding, respectively Additional paid-in capital Retained earnings Treasury shares — at cost (15,503 and 15,616 shares), respectively Accumulated other comprehensive loss Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity See notes to consolidated financial statements. 33 2020 2019 $ 268,551 449,998 389,150 52,070 1,159,769 $ 108,219 540,902 447,555 51,462 1,148,138 14,339 104,396 195,220 313,955 192,054 121,901 90,636 343,215 540,594 27,436 $ 2,283,551 14,452 101,338 189,579 305,369 181,066 124,303 — 368,866 661,991 28,399 $ 2,331,697 $ 186,270 78,646 61,887 99,280 426,083 855,143 158,783 1,440,009 $ 237,289 49,036 67,978 69,491 423,794 908,850 102,019 1,434,663 — — 10,000 176,492 1,200,570 (414,090) (129,430) 843,542 $ 2,283,551 10,000 172,931 1,229,148 (415,159) (99,886) 897,034 $ 2,331,697 STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands) Year Ended June 30, Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Goodwill & Intangible impairment Depreciation and amortization of property Amortization of intangibles Amortization of stock appreciation rights and options Deferred income taxes Provision for losses on accounts receivable Unrealized foreign exchange transaction (gains) losses Other share-based compensation expense Gain on sale of property Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Inventories Other operating assets Accounts payable Other operating liabilities Cash provided by Operating Activities Cash Flows from Investing Activities Capital expenditures Proceeds from property sales Cash paid for acquisition of businesses, net of cash acquired Other Cash used in Investing Activities Cash Flows from Financing Activities Net (repayments) borrowings under revolving credit facility Borrowings under long-term debt facilities Long-term debt repayments Payment of debt issuance costs Purchases of treasury shares Dividends paid Acquisition holdback payments Exercise of stock appreciation rights and options Taxes paid for shares withheld Cash (used in) provided by Financing Activities Effect of exchange rate changes on cash Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and Cash Equivalents at End of Year Supplemental Cash Flow Information Cash paid during the year for: Income taxes Interest See notes to consolidated financial statements. 34 2020 2019 2018 $ 24,042 $ 143,993 $ 141,625 131,000 21,196 41,553 2,954 (13,292) 14,055 (1,357) 4,000 (1,157) 74,437 57,028 (5,268) (53,856) 1,379 296,714 (20,115) 1,948 (37,237) — (55,404) — 25,000 (49,553) (95) — (48,873) (2,440) 330 31,594 20,236 41,883 2,437 2,368 4,058 238 4,474 (459) 8,465 (16,590) (7,738) (29,788) (24,570) 180,601 (18,970) 1,003 (37,526) 391 (55,102) (19,500) 175,000 (161,738) (775) (11,158) (47,266) (2,610) — (2,607) (78,238) (2,740) 160,332 108,219 $ 268,551 (3,492) (71,539) 109 54,069 54,150 $ 108,219 $ — 17,798 32,065 1,961 1,615 2,803 (667) 4,666 (335) (83,103) (33,436) 6,947 50,345 5,020 147,304 (23,230) 978 (775,654) — (797,906) 19,500 780,000 (125,420) (3,298) (22,778) (45,858) (319) 102 (1,645) 600,284 (589) (50,907) 105,057 54,150 41,162 36,648 54,294 40,142 41,724 25,560 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands) Shares of Common Stock Outstanding Common Stock Additional Paid-In Capital Retained Earnings Treasury Shares- at Cost Accumulated Other Comprehensive Loss Total Shareholders' Equity 39,041 $ 10,000 $ 164,655 $1,033,751 $ (381,448) $ (81,702) $ 745,256 Purchases of common stock for treasury (393) Other comprehensive income (loss) Cumulative effect of adopting accounting standards Cash dividends — $1.22 per share Purchases of common stock for treasury (192) For the Years Ended June 30, 2020, 2019 and 2018 Balance at June 30, 2017 Net income Other comprehensive income (loss) Reclassifications of certain income tax effects from accumulated other comprehensive loss Cash dividends — $1.18 per share Treasury shares issued for: Exercise of stock appreciation rights and options Performance share awards Restricted stock units Compensation expense — stock appreciation rights and options Other share-based compensation expense Other Balance at June 30, 2018 Net income Treasury shares issued for: Exercise of stock appreciation rights and options Performance share awards Restricted stock units Compensation expense — stock appreciation rights and options Other share-based compensation expense Other Balance at June 30, 2019 Net income Other comprehensive income (loss) Cumulative effect of adopting accounting standards Cash dividends — $1.26 per share Treasury shares issued for: Exercise of stock appreciation rights and options Performance share awards Restricted stock units Compensation expense — stock appreciation rights and options Other share-based compensation expense Other 19 5 15 16 30 18 23 15 38,703 10,000 169,383 1,129,678 (403,875) (90,223) 141,625 471 (46,162) (8,050) (471) (22,778) 84 (24) (56) (7) 347 (482) (273) (740) 1,961 4,666 (404) (9,663) 143,993 3,056 (47,621) (11,158) (59) (301) (120) 42 354 (1,069) (844) (1,057) 2,437 4,474 (393) 38,597 10,000 172,931 1,229,148 (415,159) (99,886) 24,042 (3,275) (49,305) (29,544) 43 36 17 17 (730) (1,540) (671) 2,954 4,000 (452) 71 362 213 (40) 423 141,625 (8,050) — (46,162) (22,778) (398) (297) (796) 1,961 4,666 (64) 814,963 143,993 (9,663) 3,056 (47,621) (11,158) (1,128) (1,145) (1,177) 2,437 4,474 3 897,034 24,042 (29,544) (3,275) (49,305) (659) (1,178) (458) 2,954 4,000 (69) Balance at June 30, 2020 38,710 $ 10,000 $ 176,492 $1,200,570 $ (414,090) $ (129,430) $ 843,542 See notes to consolidated financial statements. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) NOTE 1: BUSINESS AND ACCOUNTING POLICIES Business Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is a leading value-added distributor and technical solutions provider of industrial motion, ﬂuid power, ﬂow control, automation technologies, and related maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, and expertise. Although the Company does not generally manufacture the products it sells, it does assemble and repair certain products and systems. Consolidation The consolidated ﬁnancial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Foreign Currency The ﬁnancial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive loss in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other income, net. Estimates The preparation of ﬁnancial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ﬁnancial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated ﬁnancial statements. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. Marketable Securities The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualiﬁed deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classiﬁed as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other income, net in the statements of consolidated income. Concentration of Credit Risk The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and Singapore. As such, the Company does not believe that a signiﬁcant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While the Company monitors the creditworthiness of these institutions, a crisis in the ﬁnancial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand. Accounts Receivable Accounts receivable are stated at their estimated net realizable value and consist of amounts billed or billable and currently due from customers. The Company maintains an allowance for doubtful accounts, which reﬂects management’s best estimate of probable losses based on an analysis of customer accounts, known troubled accounts, historical experience with write-offs, and other currently available evidence. Allowances for Doubtful Accounts The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be 36 greater credit risks, trends within the entire customer pool, and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. The allowance for doubtful accounts was $13,661 and $10,498 at June 30, 2020 and June 30, 2019, respectively. Inventories Inventories are valued at average cost, using the last-in, ﬁrst-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S. inventories in ﬁscal 1974. At June 30, 2020, approximately 17.3% of the Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains ﬁve LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, ﬂuid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. The Company evaluates the recoverability of its slow moving and inactive inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence, and, in certain instances, can be eligible for return under supplier return programs. Supplier Purchasing Programs The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s ﬁscal year end or the supplier’s year end; however, program length and ending dates can vary. Incentives are received in the form of cash or credits against purchases upon attainment of speciﬁed purchase volumes and are received either monthly, quarterly or annually. The incentives are generally a speciﬁed percentage of the Company’s net purchases based upon achieving speciﬁc purchasing volume levels. These percentages can increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases expected during the life of the program. Supplier programs are analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon program completion, differences between estimates and actual incentives subsequently received have not been material. Beneﬁts under these supplier purchasing programs are recognized under the Company’s inventory accounting methods as a reduction of cost of sales when the inventories representing these purchases are recorded as cost of sales. Accrued incentives expected to be settled as a credit against future purchases are reported on the consolidated balance sheets as an offset to amounts due to the related supplier. Property and Related Depreciation and Amortization Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and is included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease if a shorter period, and equipment is depreciated over three to ten years. The Company capitalizes internal use software development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use. Amortization of software begins when it is ready for its intended use, and is computed on a straight-line basis over the estimated useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classiﬁed as property on the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the asset group's recorded value cannot be recovered from undiscounted future cash ﬂows. Impairment losses, if any, would be measured based upon the difference between the carrying amount of an asset group and its fair value. 37 Goodwill and Intangible Assets Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in conditions indicate an evaluation should be completed. These conditions could include a signiﬁcant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a signiﬁcant portion of a reporting unit. The Company utilizes the income and market approaches to determine the fair value of reporting units. Evaluating impairment requires signiﬁcant judgment by management, including estimated future operating results, estimated future cash ﬂows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While the Company uses available information to prepare the estimates and evaluations, actual results could differ signiﬁcantly. The Company recognizes acquired identiﬁable intangible assets such as customer relationships, trade names, vendor relationships, and non-competition agreements apart from goodwill. Customer relationship identiﬁable intangibles are amortized using the sum-of-the-years-digits method or the expected cash ﬂow method over estimated useful lives consistent with assumptions used in the determination of their value. Amortization of all other ﬁnite-lived identiﬁable intangible assets is computed using the straight-line method over the estimated period of beneﬁt. Amortization of identiﬁable intangible assets is included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Identiﬁable intangible assets with ﬁnite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a ﬁnite-lived intangible asset be tested for possible impairment, the Company ﬁrst compares undiscounted cash ﬂows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the ﬁnite-lived intangible asset is not recoverable on an undiscounted cash ﬂow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash ﬂow model. Identiﬁable intangible assets with indeﬁnite lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed. The Company does not currently have any indeﬁnite-lived identiﬁable intangible assets. Self-Insurance Liabilities The Company maintains business insurance programs with signiﬁcant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. The Company accrues estimated losses including those incurred but not reported using actuarial calculations, models and assumptions based on historical loss experience. The Company also maintains a self-insured health beneﬁts plan which provides medical beneﬁts to U.S. based employees electing coverage under the plan. The Company estimates its reserve for all unpaid medical claims, including those incurred but not reported, based on historical experience, adjusted as necessary based upon management’s reasoned judgment. Revenue Recognition The Company primarily sells purchased products distributed through its network of service centers and recognizes revenue at a point in time when control of the product transfers to the customer, typically upon shipment from an Applied facility or directly from a supplier. For products that ship directly from suppliers to customers, Applied acts as the principal in the transaction and recognizes revenue on a gross basis. Revenue recognized over time is not signiﬁcant. Revenue is measured as the amount of consideration expected to be received in exchange for the products and services provided, net of allowances for product returns, variable consideration, and any taxes collected from customers that will be remitted to governmental authorities. Shipping and handling costs are recognized in net sales when they are billed to the customer. The Company has elected to account for shipping and handling activities as fulﬁllment costs. There are no signiﬁcant costs associated with obtaining customer contracts. Payment terms with customers vary by the type and location of the customer and the products or services offered. The Company does not adjust the promised amount of consideration for the effects of signiﬁcant ﬁnancing components based on the expectation that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not signiﬁcant. The Company’s products are generally sold with a right of return and may include variable consideration in the form of incentives, discounts, credits or rebates. Product returns are estimated based on historical return rates. The returns reserve was $9,883 and $7,265 at June 30, 2020 and June 30, 2019, respectively. The Company estimates and recognizes variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to a customer. The Company records variable consideration as an adjustment to the transaction price in the period it 38 is incurred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not signiﬁcant. Shipping and Handling Costs The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and administrative expense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expense were approximately $19,620, $24,090 and $19,320 for the ﬁscal years ended June 30, 2020, 2019 and 2018, respectively. Income Taxes Income taxes are determined based upon income and expenses recorded for ﬁnancial reporting purposes. Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for ﬁnancial reporting and income tax purposes, giving consideration to enacted tax laws. Uncertain tax positions meeting a more-likely-than-not recognition threshold are recognized in accordance with Accounting Standards Codiﬁcation (ASC) Topic 740 - Income Taxes. The Company recognizes accrued interest and penalties related to unrecognized income tax beneﬁts in the provision for income taxes. Share-Based Compensation Share-based compensation represents the cost related to share-based awards granted to employees under the 2019 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, or the 2007 Long-Term Performance Plan. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service period. Non- qualiﬁed stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant and the fair values are determined using a Black- Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and have ten-year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on the closing market price of Company common stock on the grant date. Treasury Shares Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital. Derivatives The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisﬁed the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or ﬁrm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash ﬂows, or other types of forecasted transactions, are considered cash ﬂow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash ﬂow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative ﬁnancial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Retirement Savings Plan Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company’s expense for matching of employees’ 401(k) contributions was $5,959, $7,711 and $6,551 during 2020, 2019 and 2018, respectively. 39 Deferred Compensation Plans The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock. Post-employment Beneﬁt Plans The Company provides the following post-employment beneﬁts which, except for the Qualiﬁed Deﬁned Beneﬁt Retirement Plan and Key Executive Restoration Plan, are unfunded: Supplemental Executive Retirement Beneﬁts Plan The Company has a non-qualiﬁed pension plan to provide supplemental retirement beneﬁts to certain ofﬁcers. Beneﬁts are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant beneﬁts (credited service and ﬁnal average earnings) and entry into the Supplemental Executive Retirement Beneﬁts Plan (SERP) effective December 31, 2011. The Company recorded net periodic beneﬁt costs associated with the SERP of $317, $414, and $679 in ﬁscal 2020, 2019, and 2018, respectively. The Company expects to make payments of approximately $800 under the SERP in each of ﬁscal 2021, 2022 and 2023. Key Executive Restoration Plan In ﬁscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualiﬁed deferred compensation plan, to replace the SERP. The Company recorded $189, $400, and $359 of expense associated with this plan in ﬁscal 2020, 2019, and 2018, respectively. Qualiﬁed Deﬁned Beneﬁt Retirement Plan The Company has a qualiﬁed deﬁned beneﬁt retirement plan that provides beneﬁts to certain hourly employees at retirement. These employees did not participate in the Retirement Savings Plan. The beneﬁts are based on length of service and date of retirement. The plan accruals were frozen as of April 16, 2018, and employees are permitted to participate in the Retirement Savings Plan, following that date. The Company recorded net periodic (beneﬁts) costs associated with this plan of $(116), $(34), and $149 in ﬁscal 2020, 2019, and 2018, respectively Retiree Health Care Beneﬁts The Company provides health care beneﬁts, through third-party policies, to eligible retired employees who pay a speciﬁed monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a ﬁscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical beneﬁt plan which provides health care beneﬁts to eligible retired employees at no cost to the individual. The Company recorded net periodic beneﬁts associated with these plans of $257, $418, and $452 in ﬁscal 2020, 2019, and 2018, respectively. The Company has determined that the related disclosures under ASC Topic 715 - Compensation, Retirement Beneﬁts, for these post-employment beneﬁt plans are not material to the consolidated ﬁnancial statements. Leases The Company leases facilities for certain service centers, warehouses, distribution centers and ofﬁce space. The Company also leases ofﬁce equipment and vehicles. All leases are classiﬁed as operating. The Company’s leases expire at various dates through 2031, with terms ranging from 1 year to 15 years. Many of the Company’s real estate leases contain renewal provisions to extend lease terms up to 5 years. The exercise of renewal options is solely at the Company’s discretion. The Company’s lease agreements do not contain material variable lease payments, residual value guarantees or restrictive covenants. The Company does not recognize right-of-use assets or lease liabilities for short-term leases with initial terms of 12 months or less. Leased vehicles comprise the majority of the Company’s short-term leases. All other leases are recorded on the balance sheet with right-of-use assets representing the right to use the underlying asset for the lease term and lease liabilities representing lease payment obligations. The Company’s leases do not provide implicit rates; therefore the Company uses its incremental borrowing rate as the discount rate for measuring lease liabilities. Non-lease components are accounted for separately from lease components. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, distribution and administrative expense on the statements of consolidated income. 40 Recently Adopted Accounting Guidance Reference Rate Reform In March 2020, the FASB issued its ﬁnal standard on the facilitation of the effects of reference rate reform on ﬁnancial reporting. This standard, issued as ASU 2020-04, provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on ﬁnancial reporting. This update is effective as of March 12, 2020 through December 31, 2022. The Company adopted the new guidance as it became effective in the third quarter of ﬁscal 2020. The adoption of this guidance did not have a material impact on the Company's ﬁnancial statements or related disclosures. Leases In February 2016, the FASB issued its ﬁnal standard on accounting for leases. This standard, issued as ASU 2016-02, and codiﬁed into ASC Topic 842, Leases, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. This update is effective for annual ﬁnancial statement periods beginning after December 15, 2018, with earlier application permitted. In July 2018, the FASB issued ASU 2018-10 which clariﬁes the guidance in ASU 2016-02 and ASU 2018-11 which provides entities with an additional transition method option for adopting the new standard. In December 2018 and January 2019, the FASB issued ASU 2018-20 and ASU 2019-01, respectively, which further clarify the guidance. The Company adopted the new guidance effective July 1, 2019 using the optional transition method, which required application of the new guidance to only those leases that existed at the date of adoption. The Company elected the “package of practical expedients,” which permitted the Company to not reassess under the new standard its prior conclusions about lease identiﬁcation, lease classiﬁcation and initial direct costs. Adoption of the new standard resulted in the recognition of right-of-use (ROU) assets and lease liabilities of $83,533 and $89,778, respectively, on July 1, 2019. The difference between the ROU assets and lease liabilities related primarily to the impairment of certain leases in Canada and the United States. In addition, the adoption resulted in an adjustment to opening retained earnings of $3,275, net of tax, on July 1, 2019 primarily due to the impairment of the leases. The standard did not have a material impact on the Company’s statements of consolidated income or cash ﬂows. Cash Flows In August 2016, the FASB issued its ﬁnal standard on the classiﬁcation of certain cash receipts and cash payments within the statement of cash ﬂows. This standard, issued as ASU 2016-15, makes a number of changes meant to add or clarify guidance on the classiﬁcation of certain cash receipts and payments in the statement of cash ﬂows. This update is effective for annual and interim ﬁnancial statement periods beginning after December 15, 2018, with early adoption permitted. The Company adopted the new guidance in the ﬁrst quarter of ﬁscal 2020. The adoption of this guidance did not have a material impact on the Company's ﬁnancial statements or related disclosures. Recently Issued Accounting Guidance In June 2016, the FASB issued its ﬁnal standard on measurement of credit losses on ﬁnancial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain ﬁnancial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for annual and interim ﬁnancial statement periods beginning after December 15, 2019, with early adoption permitted for ﬁnancial statement periods beginning after December 15, 2018. In November 2018, April 2019, May 2019, November 2019, and February 2020, the FASB issued ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11 and ASU 2020-02, respectively, which clarify the guidance in ASU 2016-13. The Company has not yet determined the impact of these pronouncements on its ﬁnancial statements and related disclosures. In December 2019, the FASB issued its ﬁnal standard on simplifying the accounting for income taxes. This standard, issued as ASU 2019-12, makes a number of changes meant to add or clarify guidance on accounting for income taxes. This update is effective for annual and interim ﬁnancial statement periods beginning after December 15, 2021, with early adoption permitted in any interim period for which ﬁnancial statements have not yet been ﬁled. The Company has not yet determined the impact of these pronouncements on its ﬁnancial statements and related disclosures. 41 NOTE 2: REVENUE RECOGNITION Disaggregation of Revenues The following tables present the Company's net sales by reportable segment and by geographic areas based on the location of the facility shipping the product for the years ended June 30, 2020, 2019 and 2018. Other countries consist of Mexico, Australia, New Zealand, and Singapore. Geographic Areas: United States Canada Other countries Total Geographic Areas: United States Canada Other countries Total Geographic Areas: United States Canada Other countries Total Year Ended June 30, 2020 Service Center Based Distribution Fluid Power & Flow Control Total $ $ 1,833,275 $ 248,610 160,064 2,241,949 $ 986,125 $ — 17,578 1,003,703 $ 2,819,400 248,610 177,642 3,245,652 Year Ended June 30, 2019 Service Center Based Distribution Fluid Power & Flow Control Total $ $ 2,009,479 $ 271,305 172,121 2,452,905 $ 1,007,280 $ — 12,554 1,019,834 $ 3,016,759 271,305 184,675 3,472,739 Year Ended June 30, 2018 Service Center Based Distribution Fluid Power & Flow Control Total $ $ 1,903,388 $ 273,622 169,408 2,346,418 $ 711,653 $ — 15,203 726,856 $ 2,615,041 273,622 184,611 3,073,274 The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the years ended June 30, 2020 and 2019: General Industry Industrial Machinery Metals Food Forest Products Chem/Petrochem Oil & Gas Cement & Aggregate Transportation Total Year Ended June 30, 2020 Service Center Based Distribution 35.0% 9.7% 11.1% 12.2% 9.3% Fluid Power & Flow Control 41.2% 24.4% 7.2% 3.1% 3.7% 3.3% 7.5% 7.3% 4.6% 100.0% 13.4% 1.6% 1.0% 4.4% 100.0% Total 36.8% 14.3% 9.9% 9.4% 7.6% 6.4% 5.7% 5.4% 4.5% 100.0% 42 General Industry Industrial Machinery Metals Food Forest Products Chem/Petrochem Oil & Gas Cement & Aggregate Transportation Total Year Ended June 30, 2019 Service Center Based Distribution 33.7% 10.4% 12.6% 10.6% 8.0% 3.1% 10.1% 6.7% 4.8% 100.0% Fluid Power & Flow Control 43.0% 21.8% 9.4% 2.7% 3.1% 13.8% 2.1% 1.0% 3.1% 100.0% Total 36.3% 13.8% 11.6% 8.3% 6.6% 6.3% 7.8% 5.0% 4.3% 100.0% The following tables present the Company’s percentage of revenue by reportable segment and product line for the years ended June 30, 2020 and 2019: Power Transmission Fluid Power General Maintenance; Hose Products Bearings, Linear & Seals Specialty Flow Control Total Power Transmission Fluid Power General Maintenance; Hose Products Bearings, Linear & Seals Specialty Flow Control Total Contract Assets Year Ended June 30, 2020 Service Center Based Distribution 35.4% 13.4% 24.6% 26.6% —% 100.0% Fluid Power & Flow Control 9.5% 39.0% 11.7% 0.3% 39.5% 100.0% Year Ended June 30, 2019 Service Center Based Distribution 33.9% 13.5% 25.1% 27.5% —% 100.0% Fluid Power & Flow Control 1.6% 39.4% 5.3% 0.3% 53.4% 100.0% Total 27.4% 21.3% 20.6% 18.5% 12.2% 100.0% Total 24.4% 21.1% 19.3% 19.5% 15.7% 100.0% The Company’s contract assets consist of un-billed amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer. Activity related to contract assets, which are included in other current assets on the consolidated balance sheet, is as follows: Contract assets June 30, 2020 June 30, 2019 $ 8,435 $ 8,920 $ $ Change (485) % Change (5.4)% 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. 43 NOTE 3: BUSINESS COMBINATIONS The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition. Fiscal 2020 Acquisitions 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. Fiscal 2019 Acquisitions On March 4, 2019, the Company acquired substantially all of the net assets of MilRoc Distribution (MilRoc) and Woodward Steel (Woodward). MilRoc is an Oklahoma based distributor of oilﬁeld speciﬁc products, namely pumps and valves, as well as equipment repair services and industrial parts to the oil & gas industry. Woodward is an Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc and Woodward are both included in the Service Center Based Distribution segment. The purchase price for the acquisition was $35,000, net tangible assets acquired were $17,788, and intangible assets including goodwill was $17,212 based upon estimated fair values at the acquisition date. The purchase price includes acquisition holdback payments of $4,375, of which $1,666 was paid during the year ended June 30, 2020. The remaining balance of $2,709 is included in other current liabilities and other liabilities on the consolidated balance sheet as of June 30, 2020, and which will be paid on the second and third anniversaries of the acquisition date with interest at a ﬁxed rate of 2.0% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated ﬁnancial statements. On November 2, 2018, the Company acquired substantially all of the net assets of Fluid Power Sales, Inc. (FPS), a Baldwinsville, New York based manufacturer and distributor of ﬂuid power components, specializing in the engineering and fabrication of manifolds and power units. FPS is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $8,066, net tangible assets acquired were $4,151, and goodwill was $3,915 based upon estimated fair values at the acquisition date. The purchase price includes acquisition holdback payments of $1,200, of which $600 was paid during the year-end June 30, 2020. The remaining balance of $600 is included in other current liabilities on the consolidated balance sheet as of June 30, 2020, and will be paid on the second anniversary of the acquisition date with interest at a ﬁxed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated ﬁnancial statements. FCX Acquisition On January 31, 2018, the Company completed the acquisition of 100% of the outstanding shares of FCX Performance, Inc. (FCX), a Columbus, Ohio based distributor of specialty process ﬂow control products and services. The total consideration transferred for the acquisition was $781,781, which was ﬁnanced by cash-on-hand and a new credit facility comprised of a $780,000 Term Loan A and a $250,000 revolver, effective with the transaction closing. See note 6 Debt. As a distributor of engineered valves, instruments, pumps and lifecycle services to MRO and OEM customers across diverse industrial and process end markets, this business is included in the Fluid Power & Flow Control Segment. 44 The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of FCX based on their estimated fair values at the acquisition date. Cash Accounts receivable Inventories Other current assets Property Identifiable intangible assets Goodwill Other assets Total assets acquired Accounts payable and accrued liabilities Other liabilities Deferred tax liabilities Net assets acquired Purchase price Reconciliation of fair value transferred: Working Capital Adjustments Total Consideration The change in the carrying amount of goodwill for FCX since the acquisition is as follows: Balance at 1/31/2018 Impairment Balance at 6/30/2020 FCX Acquisition 2018 11,141 80,836 44,669 1,753 8,282 305,420 440,012 775 892,888 54,035 2,677 54,395 781,781 784,281 (2,500) 781,781 440,012 131,000 309,012 $ $ $ $ $ $ $ Goodwill acquired of $161,452 was deductible for income tax purposes at the time of the acquisition. Subsequent to the goodwill impairment recorded during the year ended June 30, 2020, $112,922 remains deductible for income tax purposes as of June 30, 2020. Net sales, operating income and net income from the FCX acquisition included in the Company’s results since January 31, 2018, the date of the acquisition, are as follows: Net sales Operating income Net income 2020 (1) 2019 January 31, 2018 to June 30, 2018 $ 490,743 $ 549,833 $ 249,752 (97,300) (91,739) 38,186 28,075 16,845 8,758 (1) There was a $131,000 goodwill impairment charge during the year ended June 30, 2020. See note 5, Goodwill and Intangibles, for further information. The Company incurred $2,849 in third-party costs during 2018 pertaining to the acquisition of FCX, which are included in selling, distribution and administration expense in the statements of consolidated income for ﬁscal 2018. Other Fiscal 2018 Acquisition On July 3, 2017, the Company acquired 100% of the outstanding stock of Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a distributor of accessories and components for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment. The purchase price for the acquisition was $5,920, net tangible assets acquired were $3,395, and goodwill was 45 $2,525 based upon estimated fair values at the acquisition date. The purchase price includes $906 of acquisition holdback payments, of which $201 and $219 was paid during ﬁscal year 2020 and 2019, respectively. Due to changes in foreign currency exchange rates, the remaining balance of $356 is included in other current liabilities on the consolidated balance sheet as of June 30, 2020, which will be paid on the third anniversary of the acquisition date with interest at a ﬁxed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated ﬁnancial statements. Holdback Liabilities for Acquisitions Acquisition holdback payments of approximately $2,563, $1,448 and $75 will be made in ﬁscal 2021, 2022 and 2024, respectively. The related liabilities for these payments are recorded in the consolidated balance sheets in other current liabilities for the amounts due in ﬁscal year 2021 and other liabilities for the amounts due in ﬁscal years 2022 and 2024. NOTE 4: INVENTORIES Inventories consist of the following: June 30, U.S. inventories at average cost Foreign inventories at average cost Less: Excess of average cost over LIFO cost for U.S. inventories Inventories on consolidated balance sheets NOTE 5: GOODWILL AND INTANGIBLES $ $ 2020 431,866 112,795 544,661 155,511 2019 473,949 125,260 599,209 151,654 $ 389,150 $ 447,555 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 years ended June 30, 2020 and 2019 are as follows: Balance at July 1, 2018 Goodwill acquired during the year Other, primarily currency translation Balance at June 30, 2019 Goodwill adjusted/acquired during the year Impairment Other, primarily currency translation Balance at June 30, 2020 $ Service Center Based Distribution 203,084 9,943 607 213,634 (3,393) — (1,671) 208,570 $ $ Fluid Power & Flow Control 443,559 4,798 — 448,357 14,667 (131,000) — 332,024 $ Total 646,643 14,741 607 661,991 11,274 (131,000) (1,671) 540,594 $ $ During the ﬁrst quarter of ﬁscal 2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the MilRoc/Woodward acquisition. The fair values of the customer relationships, trade name, and other intangible assets were increased by $1,524, $1,809, and $60, respectively, with a corresponding total decrease to goodwill of $3,393. The changes to the preliminary estimated fair values resulted in an increase to amortization expense of $303 during the year ended June 30, 2020, which is recorded in selling, distribution, and administrative expense on the statements of consolidated income. During the second quarter of ﬁscal 2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the Olympus acquisition. The trade name and other intangible assets were increased by $4,260 and $980, respectively, with a corresponding decrease to the customer relationship intangible asset of $5,504 and an increase to goodwill of $264. The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of $24 during the year ended June 30, 2020, which is recorded in selling, distribution, and administrative expense on the statements of consolidated income. 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 values exceeded their carrying amounts by at least 10% as of January 1, 2020. Speciﬁcally, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The Canada 46 and Mexico reporting units have goodwill balances of $27,186 and $5,185, respectively, as of June 30, 2020. The carrying value of the ﬁnal reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131,000. The non-cash impairment charge is the result of the overall decline in the industrial economy, speciﬁcally slower demand in FCX's end markets. This has led to reduced spending by customers and reduced revenue expectations. The remaining goodwill for the FCX reporting unit as of June 30, 2020 is $309,012. Because the carrying value of the FCX reporting unit approximated fair value of the reporting unit after the impairment was recorded, a future decline in the estimated cash ﬂows could result in an additional impairment loss. A future decline in the estimated cash ﬂows could result from a signiﬁcant or extended decline in various end markets. The fair values of the reporting units in accordance with the goodwill impairment test were determined using the income and market approaches. The income approach employs the discounted cash ﬂow method reﬂecting projected cash ﬂows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make signiﬁcant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. The market approach utilizes an analysis of comparable publicly traded companies and requires management to make signiﬁcant estimates and assumptions related to the forecasts of future revenues, EBITDA, and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reﬂect known market conditions at the measurement date. Assumptions in estimating future cash ﬂows are subject to a degree of judgment. The Company makes all efforts to forecast future cash ﬂows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Speciﬁcally, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reﬂection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the Company’s reporting units may include such items as: (i) a decrease in expected future cash ﬂows, speciﬁcally, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends; and (ii) inability to achieve the sales targeted by our strategic growth initiatives. At June 30, 2020 and 2019, accumulated goodwill impairment losses subsequent to ﬁscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment. At June 30, 2020 and 2019, accumulated goodwill impairment losses subsequent to ﬁscal year 2002 totaled $167,605 and $36,605, respectively, related to the Fluid Power & Flow Control segment. 47 The Company's identiﬁable intangible assets resulting from business combinations are amortized over their estimated period of beneﬁt and consist of the following: June 30, 2020 Finite-Lived Intangibles: Customer relationships Trade names Vendor relationships Other Total Intangibles June 30, 2019 Finite-Lived Intangibles: Customer relationships Trade names Vendor relationships Other Total Intangibles Amount Accumulated Amortization Net Book Value $ $ $ $ 426,017 111,453 11,329 2,078 550,877 $ $ 162,965 34,815 8,934 948 207,662 $ $ 263,052 76,638 2,395 1,130 343,215 Amount 422,367 105,946 11,367 2,702 542,382 Accumulated Amortization Net Book Value $ $ 135,879 27,232 8,156 2,249 173,516 $ $ 286,488 78,714 3,211 453 368,866 Amounts include the impact of foreign currency translation. Fully amortized amounts are written off. During ﬁscal 2020, the Company acquired identiﬁable intangible assets with an acquisition cost allocation and weighted-average life as follows: Customer relationships Trade names Other Total Intangibles Acquired Acquisition Cost Allocation 7,160 $ 4,260 980 12,400 $ Weighted- Average Life 20.0 15.0 6.8 17.2 Due to a sustained decline in economic conditions in the upstream oil and gas industry in western Canada, management also assessed the long-lived intangible assets related to the Reliance asset group in Canada for impairment during the third quarter of ﬁscal 2019. The Reliance asset group is located in western Canada and primarily serves customers in the upstream oil and gas industry. The asset group carrying value exceeded the sum of the undiscounted cash ﬂows, indicating impairment. The fair value of the asset group was then determined using the income approach, using Level 3 assumptions in the fair value hierarchy, and the analysis resulted in the measurement of a full impairment loss of $31,594, which was recorded in the third quarter of ﬁscal 2019. Sustained signiﬁcant softness in certain end market concentrations could result in impairment of certain intangible assets in future periods. Amortization of identiﬁable intangibles totaled $41,553, $41,883 and $32,065 in ﬁscal 2020, 2019 and 2018, respectively, and is included in selling, distribution and administrative expense in the statements of consolidated income. Future amortization expense based on the Company’s identiﬁable intangible assets as of June 30, 2020 is estimated to be $38,300 for 2021, $36,100 for 2022, $34,000 for 2023, $29,800 for 2024 and $26,300 for 2025. 48 NOTE 6: DEBT A summary of long-term debt, including the current portion, follows: June 30, Unsecured credit facility Trade receivable securitization facility Series C Notes Series D Notes Series E Notes Other Total debt Less: unamortized debt issuance costs Revolving Credit Facility & Term Loan 2020 589,250 175,000 120,000 25,000 25,000 1,026 935,276 1,487 933,789 $ $ $ 2019 613,625 175,000 120,000 50,000 — 1,204 959,829 1,943 957,886 $ $ $ 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 as of June 30, 2020 and June 30, 2019. Unused lines under this facility, net of outstanding letters of credit of $1,873 and $3,215, respectively, to secure certain insurance obligations, totaled $248,127 and $246,785 at June 30, 2020 and June 30, 2019, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.94% and 4.19% as of June 30, 2020 and June 30, 2019, respectively. Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving credit agreement, in the amount of $4,475 and $2,698 as of June 30, 2020 and June 30, 2019, 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 June 30, 2020 and June 30, 2019 was 1.07% and 3.33%, respectively. Other Long-Term Borrowings At June 30, 2020 and June 30, 2019, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170,000. 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 have a principal amount of $120,000, carry a ﬁxed interest rate of 3.19%, and are due in equal principal payments in July 2020, 2021, and 2022. A $40,000 principal payment was made on the "Series C" notes in July 2020. The "Series D" notes have a principal amount of $50,000 and carry a ﬁxed interest rate of 3.21%. A $25,000 principal payment was made on the "Series D" notes during ﬁscal 2020, and the remaining principal balance of $25,000 is due in October 2023. In October 2019, the Company amended its unsecured shelf facility agreement with Prudential Investment management to authorize the issuance of "Series E" notes, which have a principal amount of $25,000, carry a ﬁxed interest rate of 3.08%, and are due in October 2024. 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, maturing in May 2024. 49 The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing arrangements for each of the next ﬁve years: Fiscal Year 2021 2022 2023 2024 2025 Covenants Aggregate Maturity $ 79,181 259,120 546,624 25,351 25,000 The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, ﬁnancial ratios, and other covenants. At June 30, 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 June 30, 2020, the Company's net indebtedness was less than 3.1 times consolidated income before interest, taxes, depreciation and amortization (as deﬁned). The Company was in compliance with all ﬁnancial covenants at June 30, 2020. NOTE 7: DERIVATIVES Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative ﬁnancial instruments. Speciﬁcally, the Company enters into derivative ﬁnancial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative ﬁnancial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash ﬂow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making ﬁxed-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives designated and that qualify as cash ﬂow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive loss and subsequently reclassiﬁed into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassiﬁed to interest expense as interest payments are made on the Company’s variable-rate debt. In January 2019, the Company entered into an interest rate swap to mitigate variability in forecasted interest payments on $463,000 of the Company’s U.S. dollar-denominated unsecured variable rate debt. The interest rate swap effectively converts a portion of the ﬂoating rate interest payment into a ﬁxed rate interest payment. The Company designated the interest rate swap as a pay-ﬁxed, receive-ﬂoating interest rate swap instrument and is accounting for this derivative as a cash ﬂow hedge. The interest rate swap converts $431,000 of variable rate debt to a rate of 4.36% as of June 30, 2020 and as of June 30, 2019 converted $463,000 of variable rate debt to a rate of 4.36%. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash ﬂow hedge was $26,179 and $14,202 as of June 30, 2020 and June 30, 2019, respectively, which is included in other current liabilities and other liabilities in the consolidated balance sheet. Realized losses related to the interest rate cash ﬂow hedge were not material in the years ended June 30, 2020 or 2019. NOTE 8: FAIR VALUE MEASUREMENTS Marketable securities measured at fair value at June 30, 2020 and June 30, 2019 totaled $12,259 and $11,246, respectively. The majority of these marketable securities are held in a rabbi trust for a non-qualiﬁed deferred 50 compensation plan. The marketable securities are included in other assets on the consolidated balance sheets and their fair values were valued using quoted market prices (Level 1 in the fair value hierarchy). As of June 30, 2020, the carrying value of the Company's ﬁxed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximates fair value (Level 2 in the fair value hierarchy). The revolving credit facility and the term loan contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy). NOTE 9: INCOME TAXES Income Before Income Taxes The components of income before income taxes are as follows: Year Ended June 30, U.S. Foreign Income before income taxes Provision The provision (beneﬁt) for income taxes consists of: Year Ended June 30, Current: Federal State and local Foreign Total current Deferred: Federal State and local Foreign Total deferred Total 2020 36,161 19,075 55,236 $ $ 2019 204,462 (9,981) 194,481 $ $ 2018 186,874 17,844 204,718 $ $ 2020 2019 2018 $ 31,149 $ 34,437 $ 48,131 7,580 5,757 44,486 (8,594) (3,098) (1,600) (13,292) 7,965 5,718 48,120 6,265 1,947 (5,844) 2,368 8,038 5,309 61,478 5,955 (586) (3,754) 1,615 $ 31,194 $ 50,488 $ 63,093 During the third quarter of ﬁscal 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in the U.S. As a result of the CARES Act, the Company recorded a $1,000 tax beneﬁt related to the carryback of a tax net operating loss incurred in a year in which the U.S. federal corporate income tax rate was 21% to a year in which the U.S. federal corporate income tax rate was higher. On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making signiﬁcant changes to U.S. tax law. The Act reduced the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminated U.S. federal income tax on dividends from foreign subsidiaries, and created new taxes on certain foreign-sourced earnings. During ﬁscal 2018, the Company revised its estimated annual effective tax rate to reﬂect the change in the federal statutory rate from 35% to 21%. The rate change was administratively effective as of the beginning of the Company's ﬁscal 2018, resulting in a blended statutory rate for ﬁscal 2018 of 28.06%. The SEC staff issued SAB 118, which provided guidance on accounting for the tax effects of the Act for which the accounting under ASC 740 was incomplete. To the extent that a company's accounting for certain income tax effects of the Act was incomplete but it was able to determine a reasonable estimate, it was required to record a provisional estimate in the ﬁnancial statements. If a company could not determine a provisional estimate to be included in the ﬁnancial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act. As of June 30, 2019, the Company recorded a net tax expense of $5,802 related to the one time transition tax and re-measurement of deferred tax balances. 51 Effective Tax Rates The following reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate: Year Ended June 30, Statutory income tax rate Effects of: State and local taxes U.S. federal tax reform CARES Act NOL carryback Goodwill impairment Stock compensation GILTI/FDII R & D credit U.S. tax on foreign income, net Impact of foreign operations Non-deductibles Interest deduction Deductible dividend Valuation allowance Other, net Effective income tax rate 2020 21.0% 2019 21.0% 2018 28.1% 6.4 — (1.8) 31.4 (1.3) 3.6 (1.2) (3.1) 1.6 1.2 (4.0) (0.6) 2.6 0.7 4.4 (0.3) — — (0.5) 0.7 (0.4) 0.5 (0.6) 0.6 (1.2) (0.2) 2.9 (0.9) 3.1 3.1 — — (0.4) — (0.3) — 0.7 0.3 (1.6) (1.3) (0.3) (0.6) 56.5% 26.0% 30.8% Consolidated Balance Sheets Signiﬁcant components of the Company’s deferred tax assets and liabilities are as follows: June 30, Deferred tax assets: Compensation liabilities not currently deductible Other expenses and reserves not currently deductible Goodwill and intangibles Leases Net operating loss carryforwards Hedging instrument Other Total deferred tax assets Less: Valuation allowance Deferred tax assets, net of valuation allowance Deferred tax liabilities: Inventories Goodwill and intangibles Leases Depreciation and differences in property bases Total deferred tax liabilities Net deferred tax liabilities Net deferred tax liabilities are classified as follows: Other assets Other liabilities Net deferred tax liabilities 2020 2019 $ 17,252 15,272 — 24,016 8,859 6,406 757 72,562 (7,494) 65,068 (8,284) (58,506) (23,407) (13,018) (103,215) (38,147) $ 17,401 13,050 2,398 — 8,466 3,498 1,173 45,986 (5,597) 40,389 (8,600) (75,504) — (10,777) (94,881) (54,492) $ 4,749 (42,896) (38,147) $ 3,859 (58,351) (54,492) $ $ $ $ As of June 30, 2020 and 2019, the Company had foreign net operating loss carryforwards of approximately $29,584 and $27,024, respectively, which will expire at various dates beginning in 2033. Also, as of June 30, 2020 and 52 2019, the Company had state net operating loss carryforwards, the tax beneﬁt of which is approximately $1,177 and $2,098 respectively, which will expire at various dates beginning in 2027. Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the beneﬁt of such assets. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory tax rates and future income levels. During the year ended June 30, 2020, the Company recorded a valuation allowance of $2,124 related to certain deferred tax assets in Canada due to the uncertainty in realizing these net deferred tax assets. As of June 30, 2020, the Company had accumulated undistributed earnings of non-U.S. subsidiaries of approximately $114,070. The vast majority of such earnings have previously been subjected to the one-time transition tax or the Global Intangible Low Taxed Income ("GILTI") inclusion implemented by the Act. Therefore, any additional taxes due with respect to such earnings or the excess of the amount for ﬁnancial reporting over the tax basis of our foreign investments would generally be limited to foreign withholding and state income taxes. In addition, we expect foreign tax credits would be available to either offset or partially reduce the tax cost in the event of a distribution. We intend, however, to indeﬁnitely reinvest these earnings and expect future U.S. cash generation to be sufﬁcient to meet future U.S. cash needs. Unrecognized Income Tax Beneﬁts The Company and its subsidiaries ﬁle income tax returns in U.S. federal, various state, local and foreign jurisdictions. The following table sets forth the changes in the amount of unrecognized tax beneﬁts for the years ended June 30, 2020 and 2019: Year Ended June 30, Unrecognized Income Tax Benefits at beginning of the year Current year tax positions Prior year tax positions Expirations of statutes of limitations Unrecognized Income Tax Benefits at end of year 2020 4,979 $ $ 105 177 (306) $ 4,955 $ 2019 3,988 105 1,151 (265) 4,979 The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. During 2020 and 2019, the Company recognized $256 and $161 of expense, respectively, for interest and penalties related to unrecognized income tax beneﬁts in its statements of consolidated income. The Company had a liability for penalties and interest of $1,094 and $838 as of June 30, 2020 and 2019, respectively. The Company does not anticipate a signiﬁcant change to the total amount of unrecognized income tax beneﬁts within the next twelve months. Included in the balance of unrecognized income tax beneﬁts at June 30, 2020 and 2019 are $4,708 and $4,701, respectively, of income tax beneﬁts that, if recognized, would affect the effective income tax rate. The Company is subject to U.S. federal income tax examinations for the tax years 2017 through 2020 and to state and local income tax examinations for the tax years 2014 through 2020. In addition, the Company is subject to foreign income tax examinations for the tax years 2013 through 2020. The Company’s unrecognized income tax beneﬁts are included in other liabilities in the consolidated balance sheets since payment of cash is not expected within one year, or as a reduction of a deferred tax asset. 53 NOTE 10: SHAREHOLDERS’ EQUITY Treasury Shares At June 30, 2020, 128 shares of the Company’s common stock held as treasury shares were restricted as collateral under escrow arrangements relating to change in control and director and ofﬁcer indemniﬁcation agreements. Accumulated Other Comprehensive Loss Changes in the accumulated other comprehensive loss for the years ended June 30, 2020, 2019, and 2018, are comprised of the following amounts, shown net of taxes: Foreign currency translation adjustment Unrealized gain (loss) on securities available for sale Post- employment benefits Cash flow hedge Total accumulated other comprehensive loss Balance at July 1, 2017 $ (79,447) $ Other comprehensive (loss) income Amounts reclassified from accumulated other comprehensive loss Amounts reclassified for certain income tax effects to retained earnings Net current-period other comprehensive (loss) income Balance at June 30, 2018 Other comprehensive income (loss) Amounts reclassified from accumulated other comprehensive loss Cumulative effect of adopting accounting standards Net current-period other comprehensive income (loss) Balance at June 30, 2019 Other comprehensive loss Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive loss (8,549) — 22 (8,527) (87,974) 1,644 — — 1,644 (86,330) (18,764) — (18,764) 21 20 — 9 29 50 — — (50) (50) — — — — $ (2,276) $ — $ (81,702) 524 (45) (502) (23) (2,299) — — — — — (327) (10,887) (226) — (553) (2,852) (1,662) (50) (1,712) 183 — (10,704) (10,704) (12,572) 3,504 (9,068) (8,005) (45) (471) (8,521) (90,223) (9,570) (43) (50) (9,663) (99,886) (32,998) 3,454 (29,544) Balance at June 30, 2020 $ (105,094) $ — $ (4,564) $ (19,772) $ (129,430) 54 Other Comprehensive Loss Details of other comprehensive loss are as follows: Year Ended June 30, 2020 Tax Expense (Benefit) Pre-Tax Amount Net Amount Pre-Tax Amount 2019 Tax Expense (Benefit) Net Amount Pre-Tax Amount 2018 Tax (Benefit) Expense Net Amount Foreign currency translation adjustments $ (18,499) $ 265 $ (18,764) $ 2,021 $ 377 $ 1,644 $ (8,875) $ (326) $ (8,549) Post-employment benefits: Actuarial (loss) gain on re-measurement Reclassification of actuarial gains and prior service cost into other income, net and included in net periodic pension costs Unrealized gain on investment securities available for sale Unrealized loss on cash flow hedge Reclassification of interest from cash flow hedge into interest expense Cumulative effect of adopting accounting standard Reclassification of certain income tax effects to retained earnings (2,192) (530) (1,662) (372) (45) (327) 709 185 524 (66) (16) (50) (306) (80) (226) (73) (28) (45) — — — — — — (16,615) (4,043) (12,572) (14,446) (3,559) (10,887) 4,638 1,134 3,504 244 — — — — — — (50) — 61 — — 183 (50) — 37 — — — — 17 — — — 20 — — — 471 319 (471) $ (8,521) Other comprehensive loss $ (32,734) $ (3,190) $ (29,544) $(12,909) $ (3,246) $ (9,663) $ (8,202) $ Net Income Per Share Basic net income per share is based on the weighted-average number of common shares outstanding. Diluted net income per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing net income per share, non-vested share-based payment awards that contain rights to receive non- forfeitable dividends are considered participating securities. The Company’s participating securities include Restricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury stock method and the two-class method. For the years presented there were no material differences in the net income per share amounts calculated using the two methods. Accordingly, the treasury stock method is disclosed below. The following table presents amounts used in computing net income per share and the effect on the weighted- average number of shares of dilutive potential common shares: Year Ended June 30, Net Income Average Shares Outstanding: Weighted-average common shares outstanding for basic computation Dilutive effect of potential common shares Weighted-average common shares outstanding for dilutive computation Net Income Per Share — Basic Net Income Per Share — Diluted 2020 24,042 2019 $ 143,993 2018 $ 141,625 38,658 341 38,999 38,670 490 39,160 0.62 0.62 $ $ 3.72 3.68 $ $ 38,752 529 39,281 3.65 3.61 $ $ $ 55 Stock awards relating to 726, 226 and 66 shares of common stock were outstanding at June 30, 2020, 2019 and 2018, respectively, but were not included in the computation of diluted earnings per share for the ﬁscal years then ended as they were anti-dilutive. NOTE 11: SHARE-BASED COMPENSATION Share-Based Incentive Plans Following approval by the Company's shareholders in October 2019, the 2019 Long-Term Performance Plan (the "2019 Plan") replaced the 2015 Long-Term Performance Plan. The 2019 Plan, which expires in 2024, provides for granting of SARs, stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or, in the case of director awards, the Corporate Governance Committee of the Board of Directors (together referred to as the Committee) may determine to ofﬁcers, other key employees and members of the Board of Directors. Grants are generally made at regularly scheduled committee meetings. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below: Year Ended June 30, SARs and options Performance shares Restricted stock and RSUs Total compensation costs under award programs 2020 2,954 854 3,146 6,954 $ $ 2019 2,440 2,082 2,391 6,913 $ $ 2018 1,961 2,006 2,660 6,627 $ $ Such amounts are included in selling, distribution and administrative expense in the accompanying statements of consolidated income. The total income tax beneﬁt recognized in the statements of consolidated income for share- based compensation plans was $2,189, $2,709 and $1,923 for ﬁscal years 2020, 2019 and 2018, respectively. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with shares. The aggregate unrecognized compensation cost for share-based award programs with the potential to be paid at June 30, 2020 is summarized in the table below: June 30, SARs and options Performance shares Restricted stock and RSUs Total unrecognized compensation costs under award programs Average Expected Period of Expected Recognition (Years) 2.2 1.8 2.1 2.0 2020 $ 4,113 4,580 3,028 $ 11,721 Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.0 years. The aggregate number of shares of common stock which may be awarded under the 2019 Plan is 2,250; shares available for future grants at June 30, 2020 were 2,221. Stock Appreciation Rights and Stock Options The weighted-average assumptions used for SARs and stock option grants issued in ﬁscal 2020, 2019 and 2018 are: Expected life, in years Risk free interest rate Dividend yield Volatility Per share fair value of SARs granted during the year 2020 6.2 1.6% 2.3% 2019 6.0 2.8% 1.8% 2018 6.0 2.1% 2.5% 23.7% 22.5% 24.3% $10.12 $16.15 $11.25 The expected life is based upon historical exercise experience of the ofﬁcers, other key employees and members of the Board of Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds with remaining terms equal to the expected life of the SARs and stock options. The assumed dividend yield has been estimated based upon the Company’s historical results and expectations for changes in dividends 56 and stock prices. The volatility assumption is calculated based upon historical daily price observations of the Company’s common stock for a period equal to the expected life. SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be settled by the holder with cash or by tendering Company common stock. A summary of SARs and stock options activity is presented below: Year Ended June 30, 2020 (Shares in thousands) Outstanding, beginning of year Granted Exercised Forfeited Outstanding, end of year Exercisable at end of year Expected to vest at end of year Shares 1,479 296 (139) (16) 1,620 996 1,607 Weighted- Average Exercise Price 49.42 54.20 39.06 60.64 51.07 46.10 51.01 $ $ $ $ The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and expected to vest at June 30, 2020 were 6.0, 4.7, and 6.0 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and expected to vest at June 30, 2020 were $20,862 $16,795, and $20,780, respectively. The aggregate intrinsic value of the SARs and stock options exercised during ﬁscal 2020, 2019, and 2018 was $3,460, $3,363, and $1,765, respectively. The total fair value of shares vested during ﬁscal 2020, 2019, and 2018 was $2,285, $1,846, and $2,149, respectively. Performance Shares Performance shares are paid in shares of Applied stock at the end of a three-year period provided the Company achieves goals established by the Committee. The number of Applied shares payable will vary depending on the level of the goals achieved. A summary of non-vested performance shares activity at June 30, 2020 is presented below: Year Ended June 30, 2020 (Shares in thousands) Non-vested, beginning of year Awarded Vested Non-vested, end of year Shares 97 17 (58) 56 $ Weighted- Average Grant-Date Fair Value 50.88 52.86 47.87 54.62 $ The Committee set three one-year goals for each of the 2020, 2019, and 2018 grants. Each ﬁscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular ﬁscal year is awarded and “banked” for payout at the end of the three-year term. For the outstanding grants as of June 30, 2020, the maximum number of shares that could be earned in future periods was 79. 57 Restricted Stock and Restricted Stock Units Restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective shares, but are restricted from selling or transferring the shares prior to vesting. Restricted stock awards vest over periods of one to four years. RSUs are grants valued in shares of Applied stock, but shares are not issued until the grants vest three to ﬁve years from the award date, assuming continued employment with Applied. Applied primarily pays dividend equivalents on RSUs on a current basis, however dividend equivalents on RSU grants under the 2019 Plan will be paid upon vesting. A summary of the status of the Company’s non-vested restricted stock and RSUs at June 30, 2020 is presented below: Year Ended June 30, 2020 (Share amounts in thousands) Non-vested, beginning of year Granted Vested Non-vested, end of year NOTE 12: LEASES Shares 89 81 (40) 130 $ Weighted- Average Grant-Date Fair Value 59.93 56.74 53.60 59.91 $ The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, distribution and administrative expense on the statements of consolidated income. Operating lease costs and short-term lease costs were $33,152 and $10,581 for the year ended June 30, 2020, respectively. Rental expense incurred for operating leases under ASC Topic 840, Leases, was $45,000 for the year ended June 30, 2019. Variable lease costs and sublease income were not material. Information related to operating leases is as follows: June 30, Operating lease assets, net Operating lease liabilities Other current liabilities Other liabilities Total operating lease liabilities June 30, Weighted average remaining lease term (years) Weighted average incremental borrowing rate Year Ended June 30, Cash paid for operating leases Right of use assets obtained in exchange for new operating lease liabilities 2020 90,636 27,231 67,926 95,157 2020 3.6 3.45% 2020 34,642 39,136 $ $ $ $ $ 58 The table below summarizes the aggregate maturities of liabilities pertaining to operating leases with terms greater than one year for each of the next ﬁve years: Fiscal Year 2021 2022 2023 2024 2025 Thereafter Total lease payments Less interest Present value of lease liabilities Maturity of Operating Lease Liabilities $ $ 29,979 22,900 16,428 12,842 6,698 15,318 104,165 9,008 95,157 The table below summarizes the future minimum annual rental commitments for operating leases accounted for in accordance with ASC Topic 840, Leases, as of June 30, 2019: Fiscal Year 2020 2021 2022 2023 2024 Thereafter Total minimum lease payments Operating Leases 33,707 23,407 16,420 10,653 7,838 12,135 104,160 $ $ The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $2,500 in 2020 and $2,400 in both 2019 and 2018, respectively. NOTE 13: SEGMENT INFORMATION The Company's reportable segments are: Service Center Based Distribution and Fluid Power & Flow Control. These reportable segments contain the Company's various operating segments which have been aggregated based upon similar economic and operating characteristics. The Service Center Based Distribution segment operates through local service centers and distribution centers with a focus on providing products and services addressing the maintenance and repair of motion control infrastructure and production equipment. Products primarily include industrial bearings, motors, belting, drives, couplings, pumps, linear motion products, hydraulic and pneumatic components, ﬁltration supplies, and hoses, as well as other related supplies for general operational needs of customers’ machinery and equipment. The Fluid Power & Flow Control segment includes our operations that specialize in distributing, engineering, designing, integrating, and repairing hydraulic and pneumatic ﬂuid power technologies, and engineered ﬂow control products and services. The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power & Flow Control segment to the Service Center Based Distribution segment of $29,582, $28,677, and $25,556, in 2020, 2019, and 2018, respectively, have been eliminated in the following table. 59 Segment Financial Information Year Ended June 30, 2020 Net sales Operating income for reportable segments Assets used in the business Depreciation and amortization of property Capital expenditures Year Ended June 30, 2019 Net sales Operating income for reportable segments Assets used in the business Depreciation and amortization of property Capital expenditures Year Ended June 30, 2018 Net sales Operating income for reportable segments Assets used in the business Depreciation and amortization of property Capital expenditures Service Center Based Distribution Fluid Power & Flow Control $ $ $ $ $ $ 2,241,949 211,667 1,314,011 17,133 17,063 2,452,905 254,954 1,265,093 15,982 16,475 2,346,418 238,322 1,198,296 15,336 18,492 $ $ $ 1,003,703 109,847 969,540 4,063 3,052 1,019,834 112,117 1,066,604 4,254 2,495 726,856 83,175 1,087,445 2,462 4,738 Total 3,245,652 321,514 2,283,551 21,196 20,115 3,472,739 367,071 2,331,697 20,236 18,970 3,073,274 321,497 2,285,741 17,798 23,230 A reconciliation of operating income for reportable segments to the consolidated income before income taxes is as follows: Year Ended June 30, Operating income for reportable segments Adjustments for: Intangible amortization — Service Center Based Distribution Intangible amortization — Fluid Power & Flow Control Intangible Impairment — Service Center Based Distribution Goodwill Impairment — Fluid Power & Flow Control Corporate and other expense, net Total operating income Interest expense, net Other income, net Income before income taxes 2020 321,514 $ 2019 367,071 $ 2018 321,497 $ 12,385 29,168 — 131,000 59,972 88,989 36,535 (2,782) 55,236 $ 13,639 28,244 31,594 — 59,806 233,788 40,188 (881) 194,481 $ 17,375 14,690 — — 63,605 225,827 23,485 (2,376) 204,718 $ Fluctuations in corporate and other expense, net, are due to changes in corporate expenses, as well as in the amounts and levels of certain expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items. Geographic Information Long-lived assets are based on physical locations and are comprised of the net book value of property, intangible assets and right of use assets. Information by geographic area is as follows: June 30, Long-Lived Assets: United States Canada Other Countries Total 2020 2019 2018 $ $ 523,739 23,865 8,148 555,752 $ $ 474,910 13,291 4,968 493,169 $ $ 501,373 50,261 5,656 557,290 60 NOTE 14: COMMITMENTS AND CONTINGENCIES The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company does not expect that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated ﬁnancial position, results of operations, or cash ﬂows. NOTE 15: OTHER INCOME, NET Other income, net, consists of the following: Year Ended June 30, Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan Foreign currency transaction (gains) losses Net other periodic post-employment (benefits) costs Life insurance expense (income), net Other, net Total other income, net 2020 (458) $ $ (2,463) (120) 233 26 $ (2,782) $ 2019 (689) $ 334 (85) (479) 38 2018 (785) (210) 245 (1,628) 2 (881) $ (2,376) NOTE 16: SUBSEQUENT EVENTS We have evaluated events and transactions occurring subsequent to June 30, 2020 through the date the ﬁnancial statements were issued. 61 QUARTERLY OPERATING RESULTS (In thousands, except per share amounts) (UNAUDITED) 2020 First Quarter Second Quarter Third Quarter Fourth Quarter 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Net Sales Gross Profit Operating Income (loss) Net Income (loss) Net Income (loss) Cash Dividend Per Common Share $ 856,404 $ 251,460 $ 61,166 $ 38,799 $ 833,375 830,797 725,076 3,245,652 864,515 840,038 885,443 882,743 3,472,739 $ $ $ 241,234 236,752 208,290 937,736 251,853 242,860 255,559 257,351 1,007,623 $ $ $ $ $ $ 58,745 (77,950) 47,028 88,989 66,339 60,965 34,509 71,975 233,788 $ $ $ 38,031 (82,777) 29,989 24,042 48,938 38,717 16,535 39,803 143,993 $ $ $ 1.00 0.97 (2.14) 0.77 0.62 1.24 0.99 0.42 1.02 3.68 $ $ $ $ 0.31 0.31 0.32 0.32 1.26 0.30 0.30 0.31 0.31 1.22 On August 7, 2020, there were 3,742 shareholders of record including 2,522 shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company’s common stock is listed on the New York Stock Exchange. The closing price on August 7, 2020 was $67.26 per share. The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the number of weighted shares outstanding and the effects of rounding for each period. Cost of sales for interim ﬁnancial statements are computed using estimated gross proﬁt percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are primarily made based on periodic physical inventory and the effect of year-end inventory quantities on LIFO costs. Fiscal 2020 The decline in net sales in the third and fourth quarters of ﬁscal 2020 is due to slowness in key end markets largely attributable to the impact of the COVID-19 pandemic. During the ﬁrst quarter of ﬁscal 2020, the Company adopted ASC 842 – accounting for leases. Adoption of the new standard resulted in the recognition of right-of-use assets and lease liabilities of $83.5 million and $89.8 million, respectively, on July 1, 2019. In addition, the adoption resulted in an adjustment to opening retained earnings of approximately $3.3 million, net of tax, on July 1, 2019. During the ﬁrst quarter of ﬁscal 2020, the Company acquired 100% of the outstanding shares of Olympus Controls, a Portland, Oregon based full-service provider of innovative technologies and complete engineered solutions for original equipment manufacturers, machine builders, integrators, and end users. Olympus Controls is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $36.6 million. During the third quarter of ﬁscal 2020, the Company recognized a non-cash goodwill impairment charge of $131.0 million related to the operations of FCX Performance, Inc. (FCX) within the Company's Fluid Power & Flow Control segment. During the third quarter of ﬁscal 2020, the Company incurred certain non-routine charges primarily related to its U.S. operations in the Service Center Based Distribution segment. Total non-routine charges reduced gross proﬁt by $3.9 million, increased the operating loss by $6.0 million, and increased the quarter net loss by $3.6 million. Fiscal 2019 During the third quarter of ﬁscal 2019, the Company acquired substantially all of the net assets of MilRoc Distribution and Woodward Steel for a purchase price of $35.0 million. MilRoc Distribution is an Oklahoma based distributor of oilﬁeld speciﬁc products, namely pumps and valves, as well as equipment repair services and industrial trailer parts to the oil & gas industry. Woodward Steel is a Woodward, Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc Distribution and Woodward steel are both included in the Service Center Based Distribution segment. 62 During the third quarter of ﬁscal 2019, the Company incurred certain restructuring charges primarily for oil & gas operations. Total restructuring charges reduced gross proﬁt for the quarter by $0.7 million and operating income by $2.3 million. During the third quarter of ﬁscal 2019, the Company performed an impairment analysis for certain long-lived intangible assets related to the Company's upstream oil & gas operations in Canada as a result of the continued decline in the oil & gas industry in Western Canada. As a result of this test, the Company determined that the net book values of these long-lived intangible assets were impaired and recognized a non-cash impairment charge of $31.6 million. The Company also recorded a valuation allowance against its Canadian deferred tax assets of $3.8 million. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures The Company's management, under the supervision and with the participation of the Chief Executive Ofﬁcer (CEO) and Chief Financial Ofﬁcer (CFO), evaluated the effectiveness of the Company's disclosure controls and procedures, as deﬁned in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective. Management's Report on Internal Control over Financial Reporting The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate internal control over ﬁnancial reporting. Internal control over ﬁnancial reporting is a process designed by, or under the supervision of, the President & Chief Executive Ofﬁcer and the Vice President - Chief Financial Ofﬁcer & Treasurer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the preparation of consolidated ﬁnancial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over ﬁnancial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated ﬁnancial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s Management and Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated ﬁnancial statements. Because of inherent limitations, internal control over ﬁnancial reporting can provide only reasonable, not absolute, assurance with respect to the preparation and presentation of the consolidated ﬁnancial statements and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over ﬁnancial reporting may vary over time. Management conducted an evaluation of the effectiveness of the Company’s internal control over ﬁnancial reporting as of June 30, 2020. This evaluation was based on the criteria set forth in the framework "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management determined that the Company’s internal control over ﬁnancial reporting was effective as of June 30, 2020. The effectiveness of the Company’s internal control over ﬁnancial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting ﬁrm, as stated in their report which is included herein. /s/ Neil A. Schrimsher President & Chief Executive Ofﬁcer /s/ David K. Wells Vice President - Chief Financial Ofﬁcer & Treasurer August 14, 2020 63 Changes in Internal Control Over Financial Reporting There have not been any changes in internal control over ﬁnancial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over ﬁnancial reporting. As a result of the COVID-19 pandemic, a signiﬁcant portion of our workforce began working remotely in March 2020. These changes to the working environment did not have a material effect on our internal controls over ﬁnancial reporting during the most recent quarter. We are continually monitoring and assessing the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness. 64 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over ﬁnancial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over ﬁnancial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated ﬁnancial statements as of and for the year ended June 30, 2020, of the Company and our report dated August 14, 2020, expressed an unqualiﬁed opinion on those consolidated ﬁnancial statements and included an explanatory paragraph regarding the Company's adoption of the FASB's new standard related to leases. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over ﬁnancial reporting and for its assessment of the effectiveness of internal control over ﬁnancial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over ﬁnancial reporting based on our audit. We are a public accounting ﬁrm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over ﬁnancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over ﬁnancial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Deﬁnition and Limitations of Internal Control over Financial Reporting A company's internal control over ﬁnancial reporting is a process designed to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over ﬁnancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the ﬁnancial statements. Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Cleveland, Ohio August 14, 2020 65 ITEM 9B. OTHER INFORMATION. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this Item as to Applied's directors is incorporated by reference to Applied's proxy statement relating to the annual meeting of shareholders to be held October 27, 2020, under the caption “Item 1 - Election of Directors.” The information required by this Item as to Applied's executive ofﬁcers has been furnished in this report in Part I, after Item 4, under the caption “Information about our Executive Ofﬁcers.” The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to Applied's proxy statement, under the caption “Delinquent Section 16(a) Reports." Applied has a code of ethics, named the Code of Business Ethics, that applies to our employees, including our principal executive ofﬁcer, principal ﬁnancial ofﬁcer, and principal accounting ofﬁcer. The Code of Business Ethics is posted via hyperlink at the investor relations area of our www.applied.com website. In addition, amendments to and waivers from the Code of Business Ethics will be disclosed promptly at the same location. Information regarding the composition of Applied’s audit committee and the identiﬁcation of audit committee ﬁnancial experts serving on the audit committee is incorporated by reference to Applied's proxy statement, under the caption “Corporate Governance.” ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020, under the captions “Executive Compensation” and “Compensation Committee Report.” 66 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Applied's shareholders have approved the following equity compensation plans: the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2019 Long-Term Performance Plan, the Deferred Compensation Plan (no active employees participate in the plan), and the Deferred Compensation Plan for Non-Employee Directors (two active directors participate in the plan). All of these plans are currently in effect. The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied as of June 30, 2020. Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights 1,606,961 — 1,606,961 $51.01 — $51.01 Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans * — * * The 2019 Long-Term Performance Plan was adopted in October 2019 to replace the 2015 Long-Term Performance Plan and, similarly, the 2015 Long-Term Performance Plan replaced the 2011 Long-Term Performance Plan, which itself had replaced the 2007 Long-Term Performance Plan. Stock options, stock appreciation rights, and other awards remain outstanding under the 2007, 2011, and 2015 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 2019 Long-Term Performance Plan at June 30, 2020 was 2,221,129. Information concerning the security ownership of certain beneﬁcial owners and management is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020, under the caption “Holdings of Major Shareholders, Ofﬁcers, and Directors.” ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020, under the caption “Corporate Governance.” ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2020, under the caption “Item 3 - Ratiﬁcation of Auditors.” 67 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE. (a)1. Financial Statements. The following consolidated ﬁnancial statements, notes thereto, the reports of independent registered public accounting ﬁrm, and supplemental data are included in Item 8 of this report: • Report of Independent Registered Public Accounting Firm • Statements of Consolidated Income for the Years Ended June 30, 2020, 2019, and 2018 • Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2020, 2019, and 2018 • Consolidated Balance Sheets at June 30, 2020 and 2019 • Statements of Consolidated Cash Flows for the Years Ended June 30, 2020, 2019, and 2018 • Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2020, 2019, and 2018 • Notes to Consolidated Financial Statements for the Years Ended June 30, 2020, 2019, and 2018 • Supplementary Data: • Quarterly Operating Results (a)2. Financial Statement Schedule. The following schedule is included in this Part IV, and is found in this report at the page indicated: Page No. Schedule II - Valuation and Qualifying Accounts: Pg. 72 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated ﬁnancial statements and notes thereto. (a)3. Exhibits. * Asterisk indicates an executive compensation plan or arrangement. Exhibit No. Description 3.1 3.2 4.1 4.2 4.3 Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit 3(a) to Applied's Form 10-Q for the quarter ended December 31, 2005, SEC File No. 1-2299, and incorporated here by reference). Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference). Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). Amended and Restated Note Purchase and Private Shelf Agreement dated as of October 30, 2019, between Applied Industrial Technologies, Inc. and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), and certain of its affiliates (filed as Exhibit 10.1 to Applied’s Form 8-K filed November 5, 2019, SEC File No. 1-2299, and incorporated here by reference). Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K filed July 2, 2014, SEC File No. 1-2299, and incorporated here by reference). 68 4.4 4.5 4.6 4.7 *10.1 *10.2 *10.3 *10.4 *10.5 *10.6 *10.7 *10.8 *10.9 *10.10 *10.11 *10.12 *10.13 *10.14 *10.15 *10.16 *10.17 Request for Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 4.5 to Applied's Form 10-Q for the quarter ended September 30, 2014, SEC File No. 1-2299, and incorporated here by reference). Credit Agreement dated as of January 31, 2018, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 10.1 to Applied's Form 8-K filed February 6, 2018, SEC File No. 1-2299, and incorporated here by reference). Receivables Financing Agreement dated as of August 31, 2018 among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.1 to the Company's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference). Description of Applied's securities. A written description of Applied's director compensation program is incorporated by reference to Applied’s proxy statement for the annual meeting of shareholders to be held October 27, 2020 under the caption “Director Compensation.” Deferred Compensation Plan for Non-Employee Directors (September 1, 2003 Restatement), the terms of which govern benefits vested as of December 31, 2004, for Peter A. Dorsman, an Applied director (filed as Exhibit 10(c) to Applied's Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference). Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.2 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference). Amendment to the Applied Industrial Technologies, Inc. Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.1 to Applied’s Form 10-Q for the quarter ended March 31, 2014, SEC File No. 1-2299, and incorporated here by reference). Form of Director and Officer Indemnification Agreement entered into between Applied and each of its directors and executive officers (filed as Exhibit 10(g) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 2007 Long-Term Performance Plan (filed as Exhibit 10 to Applied's Form 8-K filed October 23, 2007, SEC File No. 1-2299, and incorporated here by reference). Section 409A Amendment to the 2007 Long-Term Performance Plan (filed as Exhibit 10.5 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference). 2011 Long-Term Performance Plan (filed as Appendix to Applied’s proxy statement for the annual meeting of shareholders held on October 25, 2011, SEC File No. 1-2299, and incorporated here by reference). 2015 Long-Term Performance Plan (filed as Appendix to Applied's proxy statement for the annual meeting of shareholders held on October 27, 2015, SEC File No. 1-2299, and incorporated here by reference). 2019 Long-Term Performance Plan, amended and restated (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended September 30, 2019, SEC File No. 1-2299, and incorporated here by reference). Non-Statutory Stock Option Award Terms and Conditions (Directors) (filed as Exhibit 10 to Applied's Form 8-K filed November 30, 2005, SEC File No. 1-2299, and incorporated here by reference). Restricted Stock Award Terms and Conditions (Directors) (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended March 31, 2020, SEC File No. 1-2299, and incorporated here by reference). Stock Appreciation Rights Award Terms and Conditions (Officers) (August 2017 revision) (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference). Restricted Stock Units Terms and Conditions (filed as Exhibit 10.2 to Applied's Form 10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference). Performance Shares Terms and Conditions (filed as Exhibit 10.2 to Applied's Form 10-Q for the quarter ended September 30, 2019, SEC File No. 1-2299, and incorporated here by reference). Management Incentive Plan General Terms (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended September 30, 2019, SEC File No. 1-2299, and incorporated here by reference). Key Executive Restoration Plan, as amended and restated (filed as Exhibit 10.1 to Applied's Form 8-K filed August 16, 2013, SEC File No. 1-2299, and incorporated here by reference). 69 *10.18 *10.19 *10.20 *10.21 *10.22 *10.23 *10.24 *10.25 *10.26 *10.27 *10.28 *10.29 *10.30 *10.31 *10.32 *10.33 21 23 24 31 32 95 Schedule of executive officer participants in the Key Executive Restoration Plan, as amended and restated (filed as Exhibit 10.2 to Applied's Form 10-Q for the quarter ended September 30, 2018, SEC File No. 1-2299, and incorporated here by reference). Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms), in which Fred D. Bauer participates (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference). First Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to Applied's Form 8-K filed December 22, 2011, SEC File No. 1-2299, and incorporated here by reference). Second Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to Applied's Form 8-K filed October 26, 2012, SEC File No. 1-2299, and incorporated here by reference). Supplemental Defined Contribution Plan (January 1, 1997 Restatement), the terms of which govern benefits vested as of December 31, 2004, for Fred D. Bauer (filed as Exhibit 10(m) to Applied’s Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). First Amendment to Supplemental Defined Contribution Plan effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied’s Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). Second Amendment to Supplemental Defined Contribution Plan effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299, and incorporated here by reference). Supplemental Defined Contribution Plan (Post-2004 Terms), restated effective as of January 1, 2017 (filed as Exhibit 10.27 to Applied's Form 10-K for the year ended June 30, 2017, SEC File No. 1-2299, and incorporated here by reference.) Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K filed October 31, 2011, SEC File No. 1-2299, and incorporated here by reference). Amendment to Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K filed October 26, 2012, SEC File No. 1-2299, and incorporated here by reference). Change in Control Agreement for Neil A. Schrimsher (filed as Exhibit 10.3 to Applied's Form 8-K filed October 31, 2011, SEC File No. 1-2299, and incorporated here by reference). Change in Control Agreement for Fred D. Bauer (filed as Exhibit 99.1 to Applied's Form 8-K filed April 25, 2008, SEC File No. 1-2299, and incorporated here by reference). Form of Change in Control Agreement for Kurt W. Loring and David K. Wells (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended September 30, 2013, SEC File No. 1-2299, and incorporated here by reference). A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers (filed as Exhibit 10.33 to Applied's Form 10-K for the year ended June 30, 2017, SEC File No. 1-2299, and incorporated here by reference). A written description of Applied's Long-Term Disability Insurance for executive officers (filed as Exhibit 10.34 to Applied's Form 10-K for the year ended June 30, 2017, SEC File No. 1-2299, and incorporated here by reference). A written description of Applied's Retiree Health Care Coverage for Neil A. Schrimsher and Fred D. Bauer (filed as Exhibit 10.35 to Applied's Form 10-K for the year ended June 30, 2017, SEC File No. 1-2299, and incorporated here by reference). Applied’s subsidiaries at June 30, 2020. Consent of Independent Registered Public Accounting Firm. Powers of attorney. Rule 13a-14(a)/15d-14(a) certifications. Section 1350 certifications. Mine safety and health disclosure. 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 70 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Applied will furnish a copy of any exhibit described above and not contained herein upon payment of a speciﬁed reasonable fee, which shall be limited to Applied's reasonable expenses in furnishing the exhibit. Certain instruments with respect to long-term debt have not been ﬁled as exhibits because the total amount of securities authorized under any one of the instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each such instrument. ITEM 16. FORM 10-K SUMMARY. Not applicable. 71 APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2020, 2019, AND 2018 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E DESCRIPTION Year Ended June 30, 2020 Reserve deducted from assets to which it applies — Accounts receivable: Allowance for doubtful accounts Returns reserve Year Ended June 30, 2019 Reserve deducted from assets to which it applies — Accounts receivable: Allowance for doubtful accounts Returns reserve Year Ended June 30, 2018 Reserve deducted from assets to which it applies — Accounts receivable: Allowance for doubtful accounts Returns reserve Balance at Beginning of Period Additions Charged to Cost and Expenses Additions (Deductions) Charged to Other Accounts Deductions from Reserve Balance at End of Period $ $ $ $ $ $ 10,498 7,265 17,763 10,964 2,602 13,566 8,056 1,572 9,628 $ $ $ $ $ $ 14,055 — 14,055 4,058 738 4,796 2,803 — 2,803 $ $ $ $ $ $ — 2,618 (B) 2,618 — 3,925 (B) 3,925 3,548 (A) 1,030 (A) 4,578 $ $ $ $ $ $ 10,892 (C) — 10,892 4,524 (C) — 4,524 3,443 (C) — 3,443 $ $ $ $ $ $ 13,661 9,883 23,544 10,498 7,265 17,763 10,964 2,602 13,566 (A) Amounts in the year ending June 30, 2018 represent reserves recorded through purchase accounting for acquisitions made during the year of $3,548 and for the return of merchandise by customers of $1,030. (B) Amounts in the year ending June 30, 2020 and 2019 represent reserves recorded for the return of merchandise by customers. The Company adopted ASC 606 - Revenue from Contracts with Customers effective July 1, 2018 which requires the Company's sales returns reserve to be established at the gross sales value with an asset established for the value of the expected product to be returned. (C) Amounts represent uncollectible accounts charged off. 72 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED INDUSTRIAL TECHNOLOGIES, INC. /s/ Neil A. Schrimsher Neil A. Schrimsher President & Chief Executive Ofﬁcer /s/ Christopher Macey Christopher Macey Corporate Controller (Principal Accounting Ofﬁcer) Date: August 14, 2020 /s/ David K. Wells David K. Wells Vice President-Chief Financial Ofﬁcer & Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. * * Madhuri A. Andrews, Director Peter A. Dorsman, Director * Dan P. Komnenovich, Director * Vincent K. Petrella, Director /s/ Neil A. Schrimsher Neil A. Schrimsher, President & Chief Executive Ofﬁcer and Director * Mary Dean Hall, Director * Robert J. Pagano, Jr., Director * Joe A. Raver, Director * Peter C. Wallace, Director and Chairman /s/ Fred D. Bauer Fred D. Bauer, as attorney in fact for persons indicated by “*” Date: August 14, 2020 73 SHAREHOLDER INFORMATION RECONCILIATION OF NET INCOME PER SHARE TO ADJUSTED NET INCOME PER SHARE Applied Industrial Technologies, Inc. common stock is listed on the New York Stock Exchange under the symbol AIT. The Company is identified in most financial listings as “AppliedIndlTch.” FY2020 FY2019 RESEARCH ON APPLIED INDUSTRIAL TECHNOLOGIES IS AVAILABLE THROUGH: Net income per share - diluted $0.62 $3.68 CLEVELAND RESEARCH COMPANY Adam Uhlman 216/649-7241 ROBERT W. BAIRD & CO. David Manthey 813/288-8503 KEYBANC CAPITAL MARKETS Steve Barger 216/689-0210 SIDOTI & COMPANY, LLC Joseph Mondillo 212/894-3339 LONGBOW RESEARCH Chris Dankert 216/525-8486 WELLS FARGO SECURITIES, LLC Mike McGinn 212/214-5052 Adjustments: Goodwill & intangible impairment Non-routine costs Non-routine tax (benefit) expense 3.04 0.18 (0.03) 0.59 0.04 0.10 Adjusted net income per share - diluted $3.81 $4.41 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN SHAREHOLDER INQUIRIES ANNUAL REPORT ON FORM 10-K Requests to transfer Applied The Applied Industrial Applied Industrial Technologies, Inc., Standard & Poor’s 500, Dow Jones US Industrial Suppliers Index, and Old Peer Group Industrial Technologies, Inc. Technologies, Inc. Annual (Performance Results from 7/1/2015 through 6/30/2020) shares and all correspondence Report on Form 10-K for the regarding address change fiscal year ended June 30, information, duplicate mailings, 2020, including the financial missing certificates, failure to statements and schedules receive dividend checks in a timely manner or to participate in the Company’s direct stock thereto, is available at our website www.Applied.com. It is also available without purchase program should be charge upon written request directed to the Company’s to the Director – Investor transfer agent and registrar: Relations & Treasury at the address shown. ANNUAL MEETING The Annual Meeting of Shareholders will be held at 9:00 a.m., Tuesday, October 27, 2020, at the Corporate Headquarters of Applied Industrial Technologies: 1 Applied Plaza, East 36th and Euclid Avenue, Cleveland, Ohio 44115 COMPUTERSHARE P.O. Box 505000 Louisville, KY 40233-5000 800/988-5291 INVESTOR RELATIONS INQUIRIES SHOULD BE DIRECTED TO: RYAN D. CIESLAK Director – Investor Relations & Treasury Applied Industrial Technologies 1 Applied Plaza Cleveland, OH 44115 Telephone: 216/426-4887 E-mail: rcieslak@applied.com $200.00 $160.00 $120.00 $80.00 $40.00 $0.00 Applied Industrial Technologies, Inc. Standard and Poor's 500 Dow Jones US Industrial Suppliers Index Old Peer Group 2015 2016 2017 2018 2019 2020 Assumes $100 invested at the close of trading 6/30/2015 in Applied Industrial Technologies, Inc. common stock, Standard & Poor’s 500, Dow Jones US Industrial Suppliers Index, and Old Peer Group. Cumulative total return assumes reinvestment of dividends. The returns of the companies in the Old Peer Group are weighted based on the companies’ relative stock market capitalization. After reevaluating the Old Peer Group this year, Applied elected to replace it with a published index because we believe the Dow Jones US Industrial Suppliers Index provides a meaningful comparison of total shareholder return performance and will be more convenient to administer. The Old Peer Group is comprised of DXP Enterprises, Inc.; Fastenal Company; Genuine Parts Company; W. W. Grainger, Inc.; Kaman Corporation; Lawson Products, Inc.; MSC Industrial Direct Co., Inc.; and WESCO International, Inc. Applied Industrial Technologies, Inc. Standard & Poor’s 500 Dow Jones US Industrial Suppliers Index Old Peer Group Source: Zacks Investment Research, Inc. 2015 100.00 100.00 100.00 100.00 2016 116.96 103.99 101.80 103.70 2017 156.13 122.60 97.46 100.48 2018 188.96 140.23 119.21 123.21 2019 169.00 154.83 126.59 134.38 2020 175.13 166.45 153.80 148.81 This report contains statements that are forward-looking, as that term is defined by the Securities and Exchange Commission in its rules, regulations and releases. Applied intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors, including those identified on pages 1, 6-12 and 27 of Applied’s Form 10-K for the fiscal year ended June 30, 2020 included herein. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by Applied or any other person that results expressed will be achieved. Corporate Headquarters 1 Applied Plaza Cleveland, Ohio 44115 216/426-4000 Applied.com

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