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
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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
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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.
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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.
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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
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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
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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