APPLIED INDUSTRIAL TECHNOLOGIES, INC. With more than 5,900 employees acrossNorth America ,Australia ,New Zealand , andSingapore ,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 inCleveland, Ohio . During the first quarter of fiscal 2022, business was conducted inthe United States ,Puerto Rico ,Canada ,Mexico ,Australia ,New Zealand , andSingapore from 570 facilities. The following is Management's Discussion and Analysis of significant factors which have affected our financial condition, results of operations and cash flows during the periods included in the accompanying condensed consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash flows. When reviewing the discussion and analysis set forth below, please note that the majority of SKUs (Stock Keeping Units) we sell in any given period were not necessarily sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used comparative metrics analyzing sales, such as changes in product mix and volume. Overview Consolidated sales for the quarter endedSeptember 30, 2021 increased$143.9 million or 19.2% compared to the prior year quarter, with acquisitions increasing sales by$15.4 million or 2.1% and favorable foreign currency translation of$6.0 million increasing sales by 0.8%. Operating margin was 8.4% of sales for the quarter endedSeptember 30, 2021 compared to 7.0% of sales for the same quarter in the prior year. Net income of$53.0 million increased 52.3% compared to the prior year quarter. The current ratio was 2.6 to 1 atSeptember 30, 2021 and 2.8 to 1 atJune 30, 2021 . Applied monitors several economic indices that have been key indicators for industrial economic activity inthe United States . These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published by theFederal Reserve Board and the Purchasing Managers Index (PMI) published by theInstitute 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) index has decreased while the IP index has increased sinceJune 2021 . The MCU forSeptember 2021 was 75.2, which is down from theJune 2021 revised reading of 75.6. The ISM PMI registered 61.1 in September, up from theJune 2021 reading of 60.6. The indices for the months during the current quarter, along with the indices for the prior fiscal year end, were as follows: Index Reading Month MCU PMI IP September 2021 75.2 61.1 98.7 August 2021 76.2 59.9 99.4 July 2021 76.3 59.5 99.8 June 2021 75.6 60.6 98.1
The number of Company employees was 5,998 at
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 2021 and 2020
The following table is included to aid in review of Applied's condensed
statements of consolidated income.
Three Months Ended September 30, Change in $'s Versus
As a Percent of Net Sales Prior Period -
2021 2020 % Decrease
Net sales 100.0 % 100.0 % 19.2 %
Gross profit 28.6 % 28.9 % 18.3 %
Selling, distribution & administrative expense 20.3 % 21.9 % 10.6 %
Operating income 8.4 % 7.0 % 42.6 %
Net income 5.9 % 4.7 % 52.3 %
During the quarter ended September 30, 2021 , sales increased $143.9 million or
19.2% compared to the prior year quarter, with sales from acquisitions adding
$15.4 million or 2.1% and favorable foreign currency translation accounting for
an increase of $6.0 million or 0.8%. There were 64 selling days in both the
quarters ended September 30, 2021 and September 30, 2020 . Excluding the impact
of businesses acquired and foreign currency translation, sales were up $122.5
million or 16.3% during the quarter, due to increased demand across key end
markets.
The following table shows changes in sales by reportable segment.
Three Months Ended Amount of change due to
September 30,
Sales by Reportable Segment 2021 2020 Sales Increase Acquisitions Foreign Currency Organic Change Service Center Based Distribution
$ 600.9 $ 513.3 $ 87.6 $ - $ 6.0 $ 81.6 Fluid Power & Flow Control 290.8 234.5 56.3 15.4 - 40.9 Total$ 891.7 $ 747.8 $ 143.9 $ 15.4 $ 6.0$ 122.5 Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased$87.6 million or 17.1%. Favorable foreign currency translation increased sales by$6.0 million or 1.2%. Excluding the impact of foreign currency translation, sales increased$81.6 million or 15.9%, driven by an increase from operations due to an ongoing end-market recovery, as well as internal sales process initiatives, partially offset by industry-wide supply chain constraints. Sales from ourFluid Power & Flow Control segment increased$56.3 million or 24.0%. Acquisitions within this segment increased sales by$15.4 million or 6.6%. Excluding the impact of businesses acquired, sales increased$40.9 million or 17.4%, driven by an increase from operations due to strong demand within the technology end market, as well as a ongoing recovery across off-highway mobile, life sciences, chemical, and industrial industries, partially offset by industry-wide supply chain constraints. The following table shows changes in sales by geographic area. Other countries includesMexico ,Australia ,New Zealand , andSingapore . Three Months Ended Amount of change due to September 30, Sales by Geographic Area 2021 2020 Sales Increase Acquisitions Foreign Currency Organic Change United States$ 764.2 $ 644.1 $ 120.1 $ 15.4 $ -$ 104.7 Canada 74.6 56.9 17.7 - 3.3 14.4 Other countries 52.9 46.8 6.1 - 2.7 3.4 Total$ 891.7 $ 747.8 $ 143.9 $ 15.4 $ 6.0$ 122.5 Sales in ourU.S. operations were up$120.1 million or 18.7%, as acquisitions added$15.4 million or 2.4%. Excluding the impact of businesses acquired,U.S. sales were up$104.7 million or 16.3%. Sales from our Canadian operations increased 18
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
$17.7 million or 31.1%. Favorable foreign currency translation increased
Canadian sales by $3.3 million or 5.9%. Excluding the impact of foreign currency
translation, Canadian sales were up $14.4 million or 25.2%. Consolidated sales
from our other country operations, which include Mexico , Australia , New Zealand ,
and Singapore , increased $6.1 million or 12.9% from the prior year. Favorable
foreign currency translation increased other country sales by $2.7 million or
5.8%. Excluding the impact of currency translation, other country sales were up
$3.4 million , or 7.1% during the quarter.
Our gross profit margin was 28.6% in the quarter ended September 30, 2021
compared to 28.9% in the prior period. The gross profit margin for the current
quarter was negatively impacted by 25 basis points due to a $2.4 million
increase in LIFO expense.
The following table shows the changes in selling, distribution and
administrative expense (SD&A).
Three Months Ended Amount of change due to
September 30,
2021 2020 SD&A Increase Acquisitions Foreign Currency Organic Change SD&A
$ 180.7 $ 163.5 $ 17.2 $ 4.5 $ 1.6 $ 11.1 SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was 20.3% of sales in the quarter endedSeptember 30, 2021 compared to 21.9% in the prior year quarter. SD&A increased$17.2 million or 10.6% compared to the prior year quarter. Changes in foreign currency exchange rates had the effect of increasing SD&A during the quarter endedSeptember 30, 2021 by$1.6 million or 1.0% compared to the prior year quarter. SD&A from businesses acquired added$4.5 million or 2.8% of SD&A expenses, including$0.4 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A increased$11.1 million or 6.8% during the quarter endedSeptember 30, 2021 compared to the prior year quarter. Excluding the impact of acquisitions, total compensation increased$17.9 million during the quarter endedSeptember 30, 2021 , primarily due to cost reduction actions taken by the Company in the prior year in response to the COVID-19 pandemic, including headcount reductions, temporary furloughs and pay reductions, and suspension of the 401(k) company match. All of the temporary cost reductions were reinstated in the second half of fiscal 2021. The increase was offset by a$4.3 million decrease in bad debt expense during the quarter endedSeptember 30, 2021 due to provisions recorded in the prior year for customer credit deterioration and bankruptcies primarily in theU.S. and Mexican operations of the Service Center Based Distribution segment. All other expenses within SD&A were down$2.5 million . Operating income increased$22.3 million or 42.6%, and as a percent of sales increased to 8.4% from 7.0% during the prior year quarter. Operating income, as a percentage of sales for the Service Center Based Distribution segment increased to 10.8% in the current year quarter from 9.7% in the prior year quarter. Operating income as a percentage of sales for theFluid Power & Flow Control segment increased to 12.0% in the current year quarter from 11.0% in the prior year quarter. Other income, net was income of$0.3 million for the current year quarter, which included favorable foreign currency transaction gains of$0.6 million , offset by net other periodic benefit costs of$0.2 million and$0.1 million of unrealized losses on investments held by non-qualified deferred compensation trusts. During the prior year quarter, other income, net was income of$0.2 million , which included unrealized gains on investments held by non-qualified deferred compensation trusts of$0.8 million , offset by net unfavorable foreign currency transaction losses of$0.4 million and$0.2 million of expense from other items. The effective income tax rate was 21.6% for the quarter endedSeptember 30, 2021 compared to 22.4% for the quarter endedSeptember 30, 2020 . The decrease in the effective tax rate over the prior year is primarily due to discrete adjustments during the quarter endedSeptember 30, 2021 . We expect our full year tax rate for fiscal 2022 to be in the 22.0% to 23.0% range. As a result of the factors addressed above, net income for the quarter endedSeptember 30, 2021 increased$18.2 million or 52.3% compared to the prior year quarter. Net income was$1.36 per share for the quarter endedSeptember 30, 2021 compared to$0.89 per share in the prior year quarter, an increase of 52.8%. 19
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 September 30, 2021 , we
had total debt obligations outstanding of $819.6 million compared to $829.4
million at June 30, 2021 . Management expects that our existing cash, cash
equivalents, funds available under the revolving credit facility, and cash
provided from operations will be sufficient to finance normal working capital
needs in each of the countries in which we operate, payment of dividends,
acquisitions, investments in properties, facilities and equipment, debt service,
and the purchase of additional Company common stock. Management also believes
that additional long-term debt and line of credit financing could be obtained
based on the Company's credit standing and financial strength.
The Company's working capital at September 30, 2021 was $743.7 million , compared
to $768.9 million at June 30, 2021 . The current ratio was 2.6 to 1 at
September 30, 2021 and 2.8 to 1 at June 30, 2021 .
Net Cash Flows
The following table is included to aid in review of Applied's condensed
statements of consolidated cash flows; all amounts are in thousands.
Three Months Ended September 30,
Net Cash Provided by (Used in): 2021 2020
Operating Activities $ 48,642 $ 81,842
Investing Activities (25,502) (3,404)
Financing Activities (31,980) (77,183)
Exchange Rate Effect (1,592) 1,254
(Decrease) Increase in Cash and Cash Equivalents $
(10,432)
The decrease in cash provided by operating activities during the three months endedSeptember 30, 2021 is driven by changes in working capital for the period offset by increased operating results. Changes in cash flows between periods related to working capital were driven by: Accounts receivable$ (16,294) Inventory$ (45,237) Accounts payable$ 10,710 Net cash used in investing activities during the three months endedSeptember 30, 2021 decreased from the prior period primarily due to$14.8 million used for payments for loans on company-owned life insurance as well as$7.1 million used for the acquisition ofR.R. Floody in the current year period. Net cash used in financing activities during the three months endedSeptember 30, 2021 decreased from the prior period primarily due to a change in net debt activity, as there was$9.8 million of debt payments in the current year period compared to$62.5 million of debt payments in the prior year period. Share Repurchases The Board of Directors has authorized the repurchase of shares of the Company's common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. We acquired 76,658 shares of treasury stock on the open market in the three months endedSeptember 30, 2021 for$6.5 million . During the three months endedSeptember 30, 2020 , the Company did not acquire any shares of treasury stock on the open market. AtSeptember 30, 2021 , we had authorization to repurchase 387,960 shares. 20
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Borrowing Arrangements
A summary of long-term debt, including the current portion, follows (amounts in
thousands):
September 30, 2021 June 30, 2021
Unsecured credit facility $ 540,500 $ 550,250
Trade receivable securitization facility 188,300 188,300
Series C notes 40,000 40,000
Series D notes 25,000 25,000
Series E notes 25,000 25,000
Other 786 846
Total debt $ 819,586 $ 829,396
Less: unamortized debt issuance costs 878 1,016
$ 818,708 $ 828,380
Revolving Credit Facility & Term Loan
In January 2018 , the Company refinanced its existing credit facility and entered
into a new five-year credit facility with a group of banks expiring in January
2023 . This agreement provides for a $780.0 million unsecured term loan and a
$250.0 million unsecured revolving credit facility. Fees on this facility range
from 0.10% to 0.20% per year based upon the Company's leverage ratio at each
quarter end. Borrowings under this agreement carry variable interest rates tied
to either LIBOR or prime at the Company's discretion. The Company had no amount
outstanding under the revolver at September 30, 2021 or June 30, 2021 . Unused
lines under this facility, net of outstanding letters of credit of $0.2 million
to secure certain insurance obligations, totaled $249.8 million at September 30,
2021 and June 30, 2021 , and were available to fund future acquisitions or other
capital and operating requirements. The interest rate on the term loan was 1.88%
as of September 30, 2021 and June 30, 2021 .
Additionally, the Company had letters of credit outstanding with separate banks,
not associated with the revolving credit agreement, in the amount of $4.8
million and $4.5 million as of September 30, 2021 and June 30, 2021 ,
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"). On March 26, 2021 , the Company
amended the AR Securitization Facility to expand the eligible receivables, which
increased the maximum availability to $250.0 million and increased the fees on
the AR Securitization Facility to 0.98% per year. Availability is further
subject to changes in the credit ratings of our customers, customer
concentration levels or certain characteristics of the accounts receivable being
transferred and, therefore, at certain times, we may not be able to fully access
the $250.0 million of funding available under the AR Securitization Facility.
The AR Securitization Facility effectively increases the Company's borrowing
capacity by collateralizing a portion of the amount of the 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. The interest rate on the AR Securitization Facility as of
September 30, 2021 and June 30, 2021 was 1.06% and 1.20%, respectively. The
termination date of the AR Securitization is March 26, 2024 .
Other Long-Term Borrowings
At September 30, 2021 and June 30, 2021 , the Company had borrowings outstanding
under its unsecured shelf facility agreement with Prudential Investment
Management of $90,000 . 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
had an original principal amount of $120,000 , carry a fixed interest rate of
3.19%, and the remaining principal balance is due in July 2022 . The "Series D"
notes had an original principal amount of $50,000 , carry a fixed interest rate
of 3.21%, and the remaining principal balance is due in October 2023 . The
"Series E" notes have a principal amount of $25,000 , carry a fixed interest rate
of 3.08%, and are due in October 2024 .
In 2014, the Company assumed $2.4 million of debt as a part of the headquarters
facility acquisition. The 1.50% fixed interest rate note is held by the State of
Ohio Development Services Agency , and matures in May 2024 .
The Company entered into an interest rate swap which mitigates variability in
forecasted interest payments on $420.0 million of the Company's U.S.
dollar-denominated unsecured variable rate debt. For more information, see note
6, Derivatives, to the consolidated financial statements, included in Item 1
under the caption "Notes to Condensed Consolidated Financial Statements."
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AND RESULTS OF OPERATIONS
The credit facility and the unsecured shelf facility contain restrictive
covenants regarding liquidity, net worth, financial ratios, and other covenants.
At September 30, 2021 , 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 September 30,
2021 , the Company's net indebtedness was less than 2.5 times consolidated income
before interest, taxes, depreciation and amortization (as defined). The Company
was in compliance with all financial covenants at September 30, 2021 .
Accounts Receivable Analysis
The following table is included to aid in analysis of accounts receivable and
the associated provision for losses on accounts receivable:
2021 2021
Accounts receivable, gross $ 547,296 $ 532,777
Allowance for doubtful accounts 16,472 16,455
Accounts receivable, net $ 530,824 $ 516,322
Allowance for doubtful accounts, % of gross receivables 3.0 % 3.1 %
Three Months Ended September 30,
2021 2020
Provision for losses on accounts receivable $ 798 $ 5,098
Provision as a % of net sales 0.09 % 0.68 %
Accounts receivable are reported at net realizable value and consist of trade receivables from customers. Management monitors accounts receivable by reviewing Days Sales Outstanding (DSO) and the aging of receivables for each of the Company's locations. On a consolidated basis, DSO was 53.6 atSeptember 30, 2021 compared to 51.9 atJune 30, 2021 . As ofSeptember 30, 2021 , approximately 3.6% of our accounts receivable balances are more than 90 days past due, compared to 3.0% atJune 30, 2021 . On an overall basis, our provision for losses from uncollected receivables represents 0.09% of our sales in the three months endedSeptember 30, 2021 , compared to 0.68% of sales for the three months endedSeptember 30, 2020 . The decrease primarily relates to provisions recorded in the prior year for customer credit deterioration and bankruptcies primarily in theU.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 forU.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis, and believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis. The annualized inventory turnover based on average costs for the period endedSeptember 30, 2021 was 4.5 versus 4.3 for the period endedJune 30, 2021 . We believe our inventory turnover ratio at the end of the year will be similar or slightly better than the ratio atSeptember 30, 2021 . 22
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Under Private Securities Litigation Reform Act
Management's Discussion and Analysis contains statements that are
forward-looking based on management's current expectations about the future.
Forward-looking statements are often identified by qualifiers, such as
"guidance", "expect", "believe", "plan", "intend", "will", "should", "could",
"would", "anticipate", "estimate", "forecast", "may", "optimistic" and
derivative or similar words or expressions. Similarly, descriptions of
objectives, strategies, plans, or goals are also forward-looking statements.
These statements may discuss, among other things, expected growth, future sales,
future cash flows, future capital expenditures, future performance, and the
anticipation and expectations of the Company and its management as to future
occurrences and trends. The Company intends that the forward-looking statements
be subject to the safe harbors established in the Private Securities Litigation
Reform Act of 1995 and by the Securities and Exchange Commission in its rules,
regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking
statements. All forward-looking statements are based on current expectations
regarding important risk factors, many of which are outside the Company's
control. Accordingly, actual results may differ materially from those expressed
in the forward-looking statements, and the making of those statements should not
be regarded as a representation by the Company or any other person that the
results expressed in the statements will be achieved. In addition, the Company
assumes no obligation publicly to update or revise any forward-looking
statements, whether because of new information or events, or otherwise, except
as may be required by law.
Important risk factors include, but are not limited to, the following: risks
relating to the operations levels of our customers and the economic factors that
affect them; risks relating to the effects of the COVID-19 pandemic; changes in
the prices for products and services relative to the cost of providing them;
reduction in supplier inventory purchase incentives; loss of key supplier
authorizations, lack of product availability, changes in supplier distribution
programs, inability of suppliers to perform, and transportation disruptions; the
cost of products and energy and other operating costs; changes in customer
preferences for products and services of the nature and brands sold by us;
changes in customer procurement policies and practices; competitive pressures;
our reliance on information systems and risks relating to their proper
functioning, the security of those systems, and the data stored in or
transmitted through them; the impact of economic conditions on the
collectability of trade receivables; reduced demand for our products in targeted
markets due to reasons including consolidation in customer industries; our
ability to retain and attract qualified sales and customer service personnel and
other skilled executives, managers and professionals; our ability to identify
and complete acquisitions, integrate them effectively, and realize their
anticipated benefits; the variability, timing and nature of new business
opportunities including acquisitions, alliances, customer relationships, and
supplier authorizations; the incurrence of debt and contingent liabilities in
connection with acquisitions; our ability to access capital markets as needed on
reasonable terms; disruption of operations at our headquarters or distribution
centers; risks and uncertainties associated with our foreign operations,
including volatile economic conditions, political instability, cultural and
legal differences, and currency exchange fluctuations; the potential for
goodwill and intangible asset impairment; changes in
accounting policies and practices; our ability to maintain effective internal
control over financial reporting; organizational changes within the Company;
risks related to legal proceedings to which we are a party; potentially adverse
government regulation, legislation, or policies, both enacted and under
consideration, including with respect to federal tax policy, international
trade, data privacy and security, and government contracting; and the occurrence
of extraordinary events (including prolonged labor disputes, power outages,
telecommunication outages, terrorist acts, public health emergency, earthquakes,
extreme weather events, other natural disasters, fires, floods, and accidents).
Other factors and unanticipated events could also adversely affect our business,
financial condition or results of operations. Risks can also change over time.
Further, the disclosure of a risk should not be interpreted to imply that the
risk has not already materialized.
We discuss certain of these matters and other risk factors more fully throughout
this Form 10-Q as well as other of our filings with the Securities and Exchange
Commission , including our Annual Report on Form 10-K for the year ended June 30,
2021 .
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