APPLIED INDUSTRIAL TECHNOLOGIES, INC. With more than 6,000 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 third quarter of fiscal 2022, business was conducted inthe United States ,Puerto Rico ,Canada ,Mexico ,Australia ,New Zealand , andSingapore from 566 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 endedMarch 31, 2022 increased$139.7 million or 16.6% compared to the prior year quarter, with acquisitions increasing sales by$3.5 million or 0.4%, and unfavorable foreign currency translation of$1.1 million decreasing sales by 0.1%. The Company had operating income of$95.8 million , or operating margin of 9.8% of sales for the quarter endedMarch 31, 2022 compared to an operating income of$74.5 million , or operating margin of 8.9% of sales for the same quarter in the prior year. The quarter endedMarch 31, 2022 had net income of$68.3 million compared to net income of$56.1 million in the prior year quarter. The current ratio was 2.8 to 1 atMarch 31, 2022 and 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) and IP indices have increased sinceJune 2021 . The MCU forMarch 2022 was 78.3, which is up from the December and June revised readings of 76.3 and 75.7, respectively. The ISM PMI registered 57.1 in March, down from the December andJune 2021 revised readings of 58.8 and 60.9, respectively. The indices for the months during the current quarter, along with the indices for the prior fiscal year end and prior quarter end, were as follows: Index Reading Month MCU PMI IP March 2022 78.3 57.1 102.6 February 2022 77.7 58.6 101.7 January 2022 77.0 57.6 100.5 December 2021 76.3 58.8 100.4 June 2021 75.7 60.9 98.2 The number of Company employees was 6,008 atMarch 31, 2022 , 5,976 atJune 30, 2021 , and 6,032 atMarch 31, 2021 . The number of operating facilities totaled 566 atMarch 31, 2022 , 568 atJune 30, 2021 and 571 atMarch 31, 2021 . 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
Results of Operations
Three Months Ended
The following table is included to aid in review of Applied's condensed statements of consolidated income.
Three Months Ended March 31, Change in $'s Versus
As a Percent of Net Sales Prior Period -
2022 2021 % Increase
Net sales 100.0 % 100.0 % 16.6 %
Gross profit 29.3 % 29.4 % 16.2 %
Selling, distribution & administrative expense 19.5 % 20.5 % 10.8 %
Operating income 9.8 % 8.9 % 28.7 %
Net income 7.0 % 6.7 % 21.8 %
During the quarter ended March 31, 2022 , sales increased $139.7 million or 16.6%
compared to the prior year quarter, with sales from acquisitions adding $3.5
million or 0.4% and unfavorable foreign currency translation accounting for a
decrease of $1.1 million or 0.1%. There were 64 selling days in the quarter
ended March 31, 2022 and 63 selling days in the quarter ended March 31, 2021 .
Excluding the impact of businesses acquired and foreign currency translation,
sales were up $137.3 million or 16.3% during the quarter, driven by an increase
from operations of 14.7% reflecting positive industrial activity, as well as a
1.6% increase due to one additional sales day.
The following table shows changes in sales by reportable segment (amounts in
millions).
Three Months Ended Amount of change due to
March 31, Foreign
Sales by Reportable Segment 2022 2021 Sales Increase Acquisitions Currency Organic Change Service Center Based Distribution
$ 659.0 $ 572.9 $ 86.1 $ -$ (1.1) $ 87.2 Fluid Power & Flow Control 321.7 268.0 53.6 3.5 - 50.1 Total$ 980.7 $ 840.9 $ 139.7 $ 3.5$ (1.1) $ 137.3 Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased$86.1 million or 15.0%. Unfavorable foreign currency translation decreased sales by$1.1 million or 0.2%. Excluding the impact of foreign currency translation, sales increased$87.2 million or 15.2%, driven by an increase of 13.6% from operations due to benefits from break-fix MRO activity, stronger local account growth and sales process initiatives, as well as a 1.6% increase due to one additional sales day. Sales from ourFluid Power & Flow Control segment increased$53.6 million or 20.0%. Acquisitions within this segment increased sales by$3.5 million or 1.3%. Excluding the impact of businesses acquired, sales increased$50.1 million or 18.7%, driven by an increase of 17.1% from operations due to strong demand across the technology, off-highway mobile, life sciences, chemical, metals and machinery industries, and emerging strength across the refinery and petro-chemical end markets, as well as a 1.6% increase due to one additional sales day. 21
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows changes in sales by geographic area. Other countries
includes Mexico , Australia , New Zealand , and Singapore (amounts in millions).
Three Months Ended Amount of change due to
March 31, Foreign
Sales by Geographic Area 2022 2021 Sales Increase Acquisitions Currency Organic Change United States$ 856.2 $ 724.6 $ 131.6 $ 3.5 $ -$ 128.1 Canada 70.5 66.1 4.3 - 0.1 4.2 Other countries 54.0 50.2 3.8 - (1.2) 5.0 Total$ 980.7 $ 840.9 $ 139.7 $ 3.5$ (1.1) $ 137.3 Sales in ourU.S. operations were up$131.6 million or 18.2%, as acquisitions added$3.5 million or 0.5%. Excluding the impact of businesses acquired,U.S. sales were up$128.1 million or 17.7%, driven by a 16.1% increase in operations, as well as a 1.6% increase due to one additional sales day. Sales from our Canadian operations increased$4.3 million or 6.6%. Favorable foreign currency translation increased Canadian sales by$0.1 million or 0.1%. Excluding the impact of foreign currency translation, Canadian sales increased$4.2 million or 6.5%. Consolidated sales from our other country operations, which includeMexico ,Australia ,New Zealand , andSingapore , increased$3.8 million or 7.5% from the prior year. Unfavorable foreign currency translation decreased other country sales by$1.2 million or 2.4%. Excluding the impact of currency translation, other country sales were up$5.0 million , or 9.9% during the quarter. Our gross profit margin was 29.3% in the quarter endedMarch 31, 2022 compared to 29.4% in the prior year quarter. The gross profit margin for the current year quarter was negatively impacted by 67 basis points due to a$6.6 million increase in LIFO expense over the prior year quarter driven by inflation. The decrease in gross profit margin from the prior year quarter is offset by price actions, channel execution, effective freight management, and other ongoing margin initiatives providing benefit.
The following table shows the changes in selling, distribution and administrative expense (SD&A) (amounts in millions).
Three Months Ended Amount of change due to
March 31, Foreign
2022 2021 SD&A Increase Acquisitions Currency Organic Change
SD&A $ 191.5 $ 172.8 $ 18.7 $ 0.9 $ (0.4) $ 18.2
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 19.5% of sales in the quarter ended March 31, 2022
compared to 20.5% in the prior year quarter. SD&A increased $18.7 million or
10.8% compared to the prior year quarter. Changes in foreign currency exchange
rates had the effect of decreasing SD&A during the quarter ended March 31, 2022
by $0.4 million or 0.2% compared to the prior year quarter. SD&A from businesses
acquired added $0.9 million or 0.5% of SD&A expenses, including $0.1 million of
intangibles amortization related to acquisitions. Excluding the impact of
businesses acquired and the favorable currency translation impact, SD&A
increased $18.2 million or 10.5% during the quarter ended March 31, 2022
compared to the prior year quarter. Excluding the impact of acquisitions, total
compensation increased $10.4 million during the quarter ended March 31, 2022 as
a result of merit increases and improved Company performance. Also, travel &
entertainment and fleet expenses increased $1.8 million during the quarter ended
March 31, 2022 primarily driven by higher fuel costs in the current quarter
along with reduced travel activity related to COVID-19 in the prior year
quarter. In addition, bad debt expense increased $1.8 million , primarily tied to
the increase in sales. All other expenses within SD&A were up $4.2 million .
Operating income increased
Operating income, as a percentage of sales for the Service Center Based Distribution segment increased to 12.4% in the current year quarter from 11.4% in the prior year quarter. Operating income, as a percentage of sales for theFluid Power & Flow Control segment increased to 12.6% in the current year quarter from 11.5% in the prior year quarter.
Other expense (income), net was expense of
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
million, and $0.2 million of other expense, offset by $1.2 million of life
insurance income. During the prior year quarter, other expense (income), net was
income of $1.7 million , which included unrealized gains on investments held by
non-qualified deferred compensation trusts of $0.6 million , net favorable
foreign currency transaction gains of $0.5 million , and $0.6 million of income
from other items.
The effective income tax rate was 23.7% for the quarter ended March 31, 2022
compared to 18.2% for the quarter ended March 31, 2021 . The increase in the
effective tax rate is due to changes in compensation-related deductions and
uncertain tax positions during the quarter ended March 31, 2022 compared to the
prior year quarter.
As a result of the factors addressed above, net income for the quarter ended
March 31, 2022 increased $12.2 million compared to the prior year quarter. Net
income per share was $1.75 per share for the quarter ended March 31, 2022
compared to $1.42 per share in the prior year quarter.
Results of Operations
Nine Months Ended
The following table is included to aid in review of Applied's condensed statements of consolidated income.
Nine Months Ended
March 31, 2022 Change in $'s Versus
As a Percent of Net Sales Prior Period -
2022 2021 % Increase
Net sales 100.0 % 100.0 % 17.5 %
Gross profit 29.1 % 28.7 % 19.0 %
Selling, distribution & administrative expense 20.1 % 21.3 % 10.6 %
Operating income 9.0 % 5.3 % 99.9 %
Net income 6.5 % 3.7 % 108.5 %
During the nine months ended March 31, 2022 , sales increased $409.2 million or
17.5% compared to the prior year period, with sales from acquisitions adding
$31.1 million or 1.3% and favorable foreign currency translation accounting for
an increase of $6.9 million or 0.3%. There were 189 selling days in both the
nine months ended March 31, 2022 and March 31, 2021 . Excluding the impact of
businesses acquired and foreign currency translation, sales were up $371.2
million or 15.9% during the period, driven by an increase from operations due to
increased demand across key end markets.
The following table shows changes in sales by reportable segment (amounts in
millions).
Nine Months Ended Amount of change due to
March 31,Sales by Reportable Segment 2022 2021 Sales Increase
Acquisitions Foreign Currency Organic Change
Service Center Based
Distribution $ 1,847.1 $ 1,601.9 $ 245.2 $ - $ 6.9 $ 238.3
Fluid Power & Flow Control 902.1 738.2 164.0 31.1 - 132.9
Total $ 2,749.2 $ 2,340.1 $ 409.2 $ 31.1 $ 6.9 $ 371.2
Sales from our Service Center Based Distribution segment, which operates
primarily in MRO markets, increased $245.2 million or 15.3%. Favorable foreign
currency translation increased sales by $6.9 million or 0.4%. Excluding the
impact of foreign currency translation, sales increased $238.3 million or 14.9%,
driven by an increase from operations due to benefits from break-fix MRO
activity, stronger local account growth, and sales process initiatives.
Sales from our Fluid Power & Flow Control segment increased $164.0 million or
22.2%. Acquisitions within this segment increased sales by $31.1 million or
4.2%. Excluding the impact of businesses acquired, sales increased $132.9
million or 18.0%, driven by an increase from operations due to strong demand
across the technology, off-highway mobile, life sciences, chemical, metals and
machinery industries, and emerging strength across the refinery and
petro-chemical end markets.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows changes in sales by geographic area. Other countries
includes Mexico , Australia , New Zealand , and Singapore (amounts in millions).
Nine Months Ended Amount of change due to
March 31,
Sales by Geographic Area 2022 2021 Sales Increase Acquisitions Foreign Currency Organic Change
United States $ 2,377.2 $ 2,016.5 $ 360.7 $ 31.1 $ - $ 329.6
Canada 211.3 180.9 30.5 - 5.5 25.0
Other countries 160.7 142.7 18.0 - 1.4 16.6
Total $ 2,749.2 $ 2,340.1 $ 409.2 $ 31.1 $ 6.9 $ 371.2
Sales in our U.S. operations were up $360.7 million or 17.9%, as acquisitions
added $31.1 million or 1.5%. Excluding the impact of businesses acquired, U.S.
sales were up $329.6 million or 16.4%. Sales from our Canadian operations
increased $30.5 million or 16.8%. Favorable foreign currency translation
increased Canadian sales by $5.5 million or 3.0%. Excluding the impact of
foreign currency translation, Canadian sales were up $25.0 million or 13.8%.
Consolidated sales from our other country operations, which include Mexico ,
Australia , New Zealand , and Singapore , increased $18.0 million or 12.6% from the
prior year. Favorable foreign currency translation increased other country sales
by $1.4 million or 1.0%. Excluding the impact of currency translation, other
country sales were up $16.6 million , or 11.6%, during the period.
Our gross profit margin was 29.1% in the nine months ended March 31, 2022
compared to 28.7% in the prior year period. The gross profit margin for the
prior year period was negatively impacted by 31 basis points due to $7.4 million
of non-routine costs from business alignment initiatives and cost actions
recorded in the nine months ended March 31, 2021 . This was offset by 47 basis
points due to a $12.9 million increase in LIFO expense over the prior year
period driven by inflation. Gross profit margins expanded year over year and
sequentially primarily reflecting broad-based execution across the business and
countermeasures in response to ongoing inflation and supply chain dynamics.
The following table shows the changes in selling, distribution and administrative expense (SD&A) (amounts in millions).
Nine Months Ended Amount of change due to
March 31,
2022 2021 SD&A Increase Acquisitions Foreign Currency Organic Change
SD&A $ 551.7 $ 498.7 $ 53.0 $ 8.1 $ 1.6 $ 43.3
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 20.1% of sales in the nine months ended March 31,
2022 compared to 21.3% in the prior year period. SD&A increased $53.0 million or
10.6% compared to the prior year period. Changes in foreign currency exchange
rates had the effect of increasing SD&A during the nine months ended March 31,
2022 by $1.6 million or 0.3% compared to the prior year period. SD&A from
businesses acquired added $8.1 million or 1.6% of SD&A expenses, including $0.7
million of intangibles amortization related to acquisitions. Excluding the
impact of businesses acquired and the unfavorable currency translation impact,
SD&A increased $43.3 million or 8.7% during the nine months ended March 31, 2022
compared to the prior year period. The Company incurred $0.4 million of
non-routine expenses related to severance and closed facilities during the nine
months ended March 31, 2021 . Excluding the impact of acquisitions and severance,
total compensation increased $39.7 million during the nine months ended March
31, 2022 as a result of merit increases and improved Company performance, in
addition 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.
All other expenses within SD&A were up $4.0 million .
The Company has three asset groups that have significant exposure to oil and gas
end markets. Due to the prolonged economic downturn in these end markets, the
Company determined during the second quarter of fiscal 2021 that certain
carrying values may not be recoverable. The Company determined that an
impairment existed in two of the three asset groups as the asset groups'
carrying values exceeded the sum of the undiscounted cash flows. The fair values
of the long-lived assets were then determined using the income approach, and the
analyses resulted in the measurement of an intangible asset impairment loss of
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
$45.0 million , which was recorded in the nine months ended March 31, 2021 , as
the fair value of the intangible assets was determined to be zero. The income
approach employs the discounted cash flow method reflecting projected cash flows
expected to be generated by market participants and then adjusted for time value
of money factors, and requires management to make significant estimates and
assumptions related to forecasts of future revenues, earnings before interest,
taxes, depreciation, and amortization (EBITDA), and discount rates. Key
assumptions (Level 3 in the fair value hierarchy) relate to pricing trends,
inventory costs, customer demand, and revenue growth. A number of benchmarks
from independent industry and other economic publications were also used. The
analyses of these asset groups also resulted in a fixed asset impairment loss
and leased asset impairment loss of $2.0 million and $2.5 million , respectively,
which were recorded in the nine months ended March 31, 2021 .
Operating income increased
Operating income, before impairment charges, as a percentage of sales for the Service Center Based Distribution segment increased to 11.6% in the current year period from 9.9% in the prior year period. Operating income, as a percentage of sales for theFluid Power & Flow Control segment increased to 12.4% in the current year period from 11.3% in the prior year period. Other expense (income), net was income of$0.7 million for the nine months endedMarch 31, 2022 , which included$1.3 million of life insurance income, offset by other periodic post-employment costs of$0.5 million and other expense of$0.1 million . During the prior year period, other expense (income), net was income of$1.7 million and included unrealized gains on investments held by non-qualified deferred compensation trusts of$3.1 million and$0.3 million of income from other items, offset by net unfavorable foreign currency transaction losses of$1.7 million . The effective income tax rate was 22.2% for the nine months endedMarch 31, 2022 compared to 17.1% for the nine months endedMarch 31, 2021 . The increase in the effective tax rate is due to changes in compensation-related deductions and uncertain tax positions during the nine months endedMarch 31, 2022 compared to the prior year period. 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 nine months endedMarch 31, 2022 increased$92.8 million compared to the prior year period. Net income was$4.56 per share for the nine months endedMarch 31, 2022 compared to$2.18 per share in the prior year period.
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. AtMarch 31, 2022 , we had total debt obligations outstanding of$721.6 million compared to$829.4 million atJune 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 atMarch 31, 2022 was$830.7 million , compared to$768.9 million atJune 30, 2021 . The current ratio was 2.8 to 1 atMarch 31, 2022 andJune 30, 2021 . Net Cash Flows
The following table is included to aid in review of Applied's condensed statements of consolidated cash flows (amounts in thousands).
Nine Months Ended March 31,
Net Cash Provided by (Used in): 2022 2021
Operating Activities $ 133,823 $ 203,409
Investing Activities (29,830) (41,509)
Financing Activities (173,366) (130,534)
Exchange Rate Effect (288) 4,099
(Decrease) Increase in Cash and Cash Equivalents $
(69,661)
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AND RESULTS OF OPERATIONS
The decrease in cash provided by operating activities during the nine months
ended March 31, 2022 is driven by increases in working capital in this
expansionary environment partially offset by increased operating results.
Changes in cash flows between periods related to working capital were driven by
(amounts in thousands):
Accounts receivable $ (50,537)
Inventories $ (106,225)
Accounts payable $ 20,556
Net cash used in investing activities during the nine months ended March 31,
2022 decreased from the prior period primarily due to $7.0 million used for the
acquisition of R.R. Floody in the current year compared to $30.0 million used
for the acquisitions of Gibson Engineering and Advanced Control Solutions in the
prior year period, offset by $14.8 million in cash payments for loans on
company-owned life insurance in the current year.
Net cash used in financing activities during the nine months ended March 31,
2022 increased from the prior year period primarily due to a change in net debt
activity, as there was $107.8 million of net debt payments in the current year
period compared to $82.1 million of debt payments in the prior year period.
Further, the Company used $13.6 million of cash for the purchase of treasury
shares during the nine months ended March 31, 2022 , while no shares were
purchased 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 35,000 shares of treasury stock on the open market in the three months endedMarch 31, 2022 for$3.5 million . During the nine months endedMarch 31, 2022 , we acquired 146,658 shares of treasury stock for$13.6 million . During the nine months endedMarch 31, 2021 , the Company did not acquire any shares of treasury stock on the open market. AtMarch 31, 2022 , we had authorization to repurchase 317,960 shares. Borrowing Arrangements A summary of long-term debt, including the current portion, follows (amounts in thousands): March 31, 2022 March 31, 2021 Revolving credit facility$ 442,592 $ - Term Loan - 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 664 846 Total debt$ 721,556 $ 829,396 Less: unamortized debt issuance costs 193 1,016$ 721,363 $ 828,380
Revolving Credit Facility & Term Loan
InDecember 2021 , the Company entered into a new revolving credit facility with a group of banks to refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes. This agreement provides a$900.0 million unsecured revolving credit facility and an uncommitted accordion feature which allows the Company to request an increase in the borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to$500.0 million . Borrowings under this agreement bear interest, at the Company's election, at either the base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or LIBOR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of$0.2 million to secure certain insurance obligations, totaled$457.2 million atMarch 31, 2022 , and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the revolving credit facility was 1.3% as ofMarch 31, 2022 . 26
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AND RESULTS OF OPERATIONS
The new credit facility replaced the Company's previous credit facility
agreement. The Company used its initial borrowings on the new revolving credit
facility along with cash on hand of $98.2 million to extinguish the term loan
balance outstanding under the previous credit facility of $540.5 million . The
Company had no amount outstanding under the revolver at June 30, 2021 . The
interest rate on the term loan was 1.88% as of June 30, 2021 .
The Company paid $2.0 million of debt issuance costs related to the new
revolving credit facility in the nine months ended March 31, 2022 , which are
included in other current assets and other assets on the condensed consolidated
balance sheet as of March 31, 2022 and will be amortized over the five-year term
of the new credit facility. The Company analyzed the unamortized debt issuance
costs related to the previous credit facility under Accounting Standards
Codification (ASC) Topic 470 - Debt. As a result of this analysis, $0.1 million
of unamortized debt issuance costs were expensed and included within interest
expense, net on the condensed statements of consolidated income in the nine
months ended March 31, 2022 , and $0.5 million of unamortized debt issuance costs
were rolled forward into the new credit facility and were reclassified from the
current portion of long-term debt and long term debt into other current assets
and other assets on the condensed consolidated balance sheet as of March 31,
2022 , and will be amortized over the five-year term of the new credit facility.
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 March 31, 2022 and June 30, 2021 , respectively,
in order to secure certain insurance obligations.
Trade Receivable Securitization Facility
InAugust 2018 , the Company established a trade receivable securitization facility (the "AR Securitization Facility"). OnMarch 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 theU.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 ofMarch 31, 2022 andJune 30, 2021 was 1.16% and 1.20%, respectively. The termination date of the AR Securitization isMarch 26, 2024 .
Unsecured Shelf Facility
AtMarch 31, 2022 andJune 30, 2021 , the Company had borrowings outstanding under its unsecured shelf facility agreement withPrudential Investment Management of$90.0 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 had an original principal amount of$120.0 million , carry a fixed interest rate of 3.19%, and the remaining principal balance is due inJuly 2022 . The "Series D" notes had an original principal amount of$50.0 million , carry a fixed interest rate of 3.21%, and the remaining principal balance is due inOctober 2023 . The "Series E" notes have a principal amount of$25.0 million , carry a fixed interest rate of 3.08%, and are due inOctober 2024 .
Other Long-Term Borrowing
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 theState of Ohio Development Services Agency , and matures inMay 2024 . The Company entered into an interest rate swap which mitigates variability in forecasted interest payments on$409.0 million of the Company'sU.S. dollar-denominated unsecured variable rate debt. For more information, see note 6, Derivatives, to the consolidated financial statements, included in Item 1 under the caption "Notes to Condensed Consolidated Financial Statements." The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. AtMarch 31, 2022 , 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). AtMarch 31, 2022 , the Company's net indebtedness was below 1.5 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants atMarch 31, 2022 . 27
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Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Accounts Receivable Analysis
The following table is included to aid in analysis of accounts receivable and
the associated provision for losses on accounts receivable (amounts in
thousands):
March 31, June 30,
2022 2021
Accounts receivable, gross $ 636,177 $ 532,777
Allowance for doubtful accounts 18,098 16,455
Accounts receivable, net $ 618,079 $ 516,322
Allowance for doubtful accounts, % of gross receivables 2.8 % 3.1 %
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 2021
Provision for losses on accounts
receivable $ 1,577 $ (200) $ 2,905 $ 5,595
Provision as a % of net sales 0.16 % (0.02) % 0.11 % 0.24 %
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 56.7 at
As ofMarch 31, 2022 , approximately 4.3% 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 on accounts receivable represents 0.16% of our sales in the three months endedMarch 31, 2022 , compared to 0.02% of sales for the three months endedMarch 31, 2021 , and 0.11% of sales for the nine months endedMarch 31, 2022 compared to 0.24% of sales for the nine months endedMarch 31, 2021 . 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 accounts receivable 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 was 4.7 for the period endedMarch 31, 2022 and 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 atMarch 31, 2022 . 28
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Table of Contents
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 theSecurities 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 (such as due to supply chain strains), changes in supplier distribution programs, inability of suppliers to perform, and transportation disruptions; inflationary or deflationary trends in the cost of products, energy, labor 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, war, 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 theSecurities and Exchange Commission , including our Annual Report on Form 10-K for the year endedJune 30, 2021 . 29 --------------------------------------------------------------------------------APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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