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 second quarter of fiscal 2021, business was conducted inthe United States ,Puerto Rico ,Canada ,Mexico ,Australia ,New Zealand , andSingapore from 572 facilities. The following is Management's Discussion and Analysis of significant factors which have affected our financial condition, results of operations and cash flows during the periods included in the accompanying condensed consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash flows. When reviewing the discussion and analysis set forth below, please note that the majority of SKUs (Stock Keeping Units) we sell in any given period were not necessarily sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used comparative metrics analyzing sales, such as changes in product mix and volume. Overview Consolidated sales for the quarter endedDecember 31, 2020 decreased$82.1 million or 9.9% compared to the prior year quarter, with acquisitions increasing sales by$4.1 million or 0.5% and favorable foreign currency translation of$0.5 million increasing sales by 0.1%. The Company incurred an operating loss of$2.4 million , or a negative operating margin of 0.3% of sales for the quarter endedDecember 31, 2020 compared to operating income of$58.7 million , or operating margin of 7.0% of sales for the same quarter in the prior year. The quarter endedDecember 31, 2020 had a net loss of$5.3 million compared to net income of$38.0 million in the prior year quarter. The current ratio was 2.7 to 1 atDecember 31, 2020 andJune 30, 2020 . Fiscal 2021 second quarter results include a$49.5 million pre-tax non-cash charge related to the impairment of certain intangible, lease, and fixed assets, as well as non-routine costs of$7.8 million pre-tax. The items are the result of weaker economic conditions and business alignment initiatives across a portion of the Service Center segment operations exposed to oil and gas end markets. Total non-routine costs of$7.8 million pre-tax include a$7.4 million inventory reserve charge recorded within cost of sales, and$0.4 million related to severance and facility consolidation recorded in selling, distribution and administrative expense. Combined, the non-cash impairment charge and non-routine costs unfavorably impacted operating (loss) income by$57.3 million and net (loss) income by$43.7 million . We continued to face challenges during the quarter from the COVID-19 pandemic, although underlying demand sustained gradual improvement. We are classified as critical infrastructure and our facilities remain open and operational as they adhere to health and safety policies. While general economic uncertainty remains, underlying sales improvement has continued into January with organic sales month to date down by a mid-single digit percent year over year. We are continuing to monitor the impact of the COVID-19 pandemic and continue to take appropriate cost actions. Cost measures implemented to date include reduced discretionary spend, staff realignments, temporary furloughs and pay reductions, suspension of 401(k) company match, and other expense reduction actions. A portion of the temporary cost actions were restored during the first half of fiscal 2021. Applied monitors several economic indices that have been key indicators for industrial economic activity 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 2020 . The MCU forDecember 2020 was 74.5, which is up from both the September andJune 2020 revised readings of 72.3 and 68.9, respectively. The ISM PMI registered 60.7 in December, up from the September andJune 2020 readings of 55.4 and 52.6, respectively. The indices for the months during the current quarter were as follows: Index Reading Month MCU PMI IP December 2020 74.5 60.7 102.2 November 2020 73.4 57.5 101.3 October 2020 73.0 59.3 100.5 20
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AND RESULTS OF OPERATIONS
The number of Company employees was 6,054 at December 31, 2020 , 6,289 at
June 30, 2020 , and 6,536 at December 31, 2019 . The number of operating
facilities totaled 572 at December 31, 2020 , 584 at June 30, 2020 and 601 at
December 31, 2019 .
Results of Operations
Three months Ended December 31, 2020 and 2019
The following table is included to aid in review of Applied's condensed
statements of consolidated income.
Three Months Ended December 31, Change in $'s Versus
As a Percent of Net Sales Prior Period -
2020 2019 % Decrease
Net sales 100.0 % 100.0 % (9.9) %
Gross profit 27.9 % 28.9 % (13.1) %
Selling, distribution & administrative expense 21.6 % 21.9 % (11.0) %
Operating (loss) income (0.3) % 7.0 % (104.1) %
Net (loss) income (0.7) % 4.6 % (114.0) %
During the quarter ended December 31, 2020 , sales decreased $82.1 million or
9.9% compared to the prior year quarter, with sales from acquisitions adding
$4.1 million or 0.5% and favorable foreign currency translation accounting for
an increase of $0.5 million or 0.1%. There were 62 selling days in both the
quarter ended December 31, 2020 and December 31, 2019 . Excluding the impact of
businesses acquired and foreign currency translation, sales were down $86.7
million or 10.5% during the quarter, due to weak demand across key end markets.
The following table shows changes in sales by reportable segment.
Three Months Ended Amount of change due to
December 31,
Sales by Reportable Segment 2020 2019 Sales Decrease Acquisitions Foreign Currency Organic Change Service Center Based Distribution
$ 515.7 $ 575.8 $ (60.1) $ - $ 0.5$ (60.6) Fluid Power & Flow Control 235.6 257.6 (22.0) 4.1 - (26.1) Total$ 751.3 $ 833.4 $ (82.1) $ 4.1 $ 0.5$ (86.7) Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased$60.1 million or 10.4%. Unfavorable foreign currency translation decreased sales by$0.5 million or 0.1%. Excluding the impact of foreign currency translation, sales decreased$60.6 million or 10.5%, reflecting weaker industrial end-market demand from the impact of the COVID-19 pandemic, although sales improved as the quarter progressed. Weakness remains the greatest within heavy industries but is stabilizing, with positive momentum across the food and beverage, pulp and paper, aggregates, rubber, and forestry end markets. Sales from ourFluid Power & Flow Control segment decreased$22.0 million or 8.5%. The acquisition within this segment increased sales by$4.1 million or 1.6%. Excluding the impact of businesses acquired, sales decreased$26.1 million or 10.1%, driven by a decrease from operations due to ongoing soft demand across industrial, off-highway mobile, and process-related end markets; partially offset by growth within technology, life sciences, chemical, utilities, transportation, and aggregates end markets. 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
Three Months Ended Amount of change due to
December 31, Sales (Decrease)
Sales by Geographic Area 2020 2019 Increase Acquisitions Foreign Currency Organic Change
United States $ 647.8 $ 720.3 $ (72.5) $ 4.1 $ - $ (76.6)
Canada 57.8 67.9 (10.1) - 0.8 (10.9)
Other countries 45.7 45.2 0.5 - (0.3) 0.8
Total $ 751.3 $ 833.4 $ (82.1) $ 4.1 $ 0.5 $ (86.7)
Sales in our U.S. operations were down $72.5 million or 10.1%, as acquisitions
added $4.1 million or 0.6%. Excluding the impact of businesses acquired, U.S.
sales were down $76.6 million or 10.7%. Sales from our Canadian operations
decreased $10.1 million or 14.9%. Favorable foreign currency translation
increased Canadian sales by $0.8 million or 1.2%. Excluding the impact of
foreign currency translation, Canadian sales were down $10.9 million or 16.1%.
Consolidated sales from our other country operations, which include Mexico ,
Australia , New Zealand , and Singapore , increased $0.5 million or 1.2% from the
prior year. Unfavorable foreign currency translation decreased other country
sales by $0.3 million or 0.7%. Excluding the impact of currency translation,
other country sales were up $0.8 million , or 1.9% during the quarter.
Our gross profit margin was 27.9% in the quarter ended December 31, 2020
compared to 28.9% in the prior period. The gross profit margin for the quarter
was negatively impacted by 98 basis points due to a $7.4 million of inventory
reserve charge recorded within cost of sales related to closed locations. The
gross profit margin for the current quarter was positively impacted by a $1.1
million decrease in LIFO expense between quarters. The remaining change is
attributable to a lower mix of local account business and the organic sales
decline coupled with subdued pricing opportunities given the weaker demand
environment.
The following table shows the changes in selling, distribution and
administrative expense (SD&A).
Three Months Ended Amount of change due to
December 31,
2020 2019 SD&A Decrease Acquisitions Foreign Currency Organic Change
SD&A $ 162.4 $ 182.5 $ (20.1) $ 1.6 $ 0.2 $ (21.9)
SD&A consists of associate compensation, benefits and other expenses associated
with selling, purchasing, warehousing, supply chain management and providing
marketing and distribution of the Company's products, as well as costs
associated with a variety of administrative functions such as human resources,
information technology, treasury, accounting, insurance, legal, and facility
related expenses. SD&A was 21.6% of sales in the quarter ended December 31, 2020
compared to 21.9% in the prior year quarter. SD&A decreased $20.1 million or
11.0% compared to the prior year quarter. Changes in foreign currency exchange
rates had the effect of increasing SD&A during the quarter ended December 31,
2020 by $0.2 million or 0.1% compared to the prior year quarter. SD&A from
businesses acquired added $1.6 million or 0.9% of SD&A expenses, including $0.2
million of intangibles amortization related to acquisitions. Excluding the
impact of businesses acquired and the favorable currency translation impact,
SD&A decreased $21.9 million or 12.0% during the quarter ended December 31, 2020
compared to the prior year quarter. The Company incurred $0.4 million of
non-routine expenses related to severance and closed facilities during the
quarter ended December 31, 2020 . Excluding the impact of acquisitions and
severance, total compensation decreased $11.7 million during the quarter ended
December 31, 2020 , primarily due to cost reduction actions taken by the Company
in response to the COVID-19 pandemic, including headcount reductions, temporary
furloughs and pay reductions, and suspension of the 401(k) company match. Also,
travel & entertainment expense decreased $2.6 million during the quarter ended
December 31, 2020 primarily due to continued reduced travel activity related to
COVID-19. Further, excluding the impact of acquisitions, intangible amortization
expense decreased $2.1 million during the quarter ended December 31, 2020
primarily due to the intangible impairment recorded during the quarter. All
other expenses within SD&A were down $5.9 million .
The Company has three asset groups that have significant exposure to oil and gas
end markets. Due to the prolonged economic downturn in these end markets, the
Company determined during the second quarter of fiscal 2021 that certain
carrying values
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
may not be recoverable. The Company determined that an impairment existed in two
of the three asset groups as the asset groups' carrying values exceeded the sum
of the undiscounted cash flows. The fair values of the long-lived assets were
then determined using the income approach, and the analyses resulted in the
measurement of an intangible asset impairment loss of $45.0 million , which was
recorded in the three months ended December 31, 2020 , as the fair value of the
intangible assets was determined to be zero. The income approach employs the
discounted cash flow method reflecting projected cash flows expected to be
generated by market participants and then adjusted for time value of money
factors, and requires management to make significant estimates and assumptions
related to forecasts of future revenues, earnings before interest, taxes,
depreciation, and amortization (EBITDA), and discount rates. Key assumptions
(Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs,
customer demand, and revenue growth. A number of benchmarks from independent
industry and other economic publications were also used. The analyses of these
asset groups also resulted in a fixed asset impairment loss and leased asset
impairment loss of $2.0 million and $2.5 million , respectively, which were
recorded in the three months ended December 31, 2020 .
The Company had an operating loss of $2.4 million during the quarter ended
December 31, 2020 , which was a decrease of $61.2 million from operating income
of $58.7 million in the prior year quarter, primarily due to impairment charges
of $49.5 million .
Operating income, before impairment, as a percentage of sales for the Service
Center Based Distribution segment decreased to 8.3% in the current year quarter
from 9.4% in the prior year quarter. Operating income as a percentage of sales
for the Fluid Power & Flow Control segment decreased to 11.3% in the current
year quarter from 11.4% in the prior year quarter.
Other expense (income), net was expense of $0.1 million for the quarter, which
included unrealized gains on investments held by non-qualified deferred
compensation trusts of $1.6 million and $0.1 million of income from other items,
offset by net unfavorable foreign currency transaction losses of $1.8 million .
During the prior year quarter, other expense (income), net was income of $0.2
million , which included unrealized gains on investments held by non-qualified
deferred compensation trusts of $0.8 million , offset by net unfavorable foreign
currency transaction losses of $0.6 million .
The effective income tax rate was 47.5% for the quarter ended December 31, 2020
compared to 23.0% for the quarter ended December 31, 2019 . The increase in the
effective tax rate over the prior year is due to changes in compensation-related
deductions and uncertain tax positions during the quarter ended December 31,
2020 compared to the prior year quarter.
As a result of the factors addressed above, the Company incurred a net loss of
$5.3 million during the quarter ended December 31, 2020 , a decrease of $43.4
million compared to net income of $38.0 million in the prior year quarter. Net
loss per share was $0.14 per share for the quarter ended December 31, 2020
compared to net income per share of $0.97 in the prior year quarter.
Results of Operations
Six months Ended December 31, 2020 and 2019
The following table is included to aid in review of Applied's condensed
statements of consolidated income.
Six Months Ended December 31, 2020 Change in $'s Versus
As a Percent of Net Sales Prior Period -
2020 2019 % Decrease
Net sales 100.0 % 100.0 % (11.3) %
Gross profit 28.4 % 29.2 % (13.7) %
Selling, distribution & administrative expense 21.7 % 22.1 % (12.6) %
Operating income 3.3 % 7.1 % (58.4) %
Net income 2.0 % 4.5 % (61.7) %
During the six months ended December 31, 2020 , sales decreased $190.7 million or
11.3% compared to the prior year period, with sales from acquisitions adding
$13.8 million or 0.8% and unfavorable foreign currency translation accounting
for a decrease of $2.5 million or 0.1%. There were 126 selling days in the six
months ended December 31, 2020 and December 31, 2019 . Excluding the impact of
businesses acquired and foreign currency translation, sales were down $202.0
million or 12.0% during the period, due to weak demand across key end markets.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows changes in sales by reportable segment.
Amount of change due to
Six Months Ended December 31, Foreign
Sales by Reportable Segment 2020 2019 Sales Decrease Acquisitions Currency Organic Change Service Center Based Distribution
$ 1,029.0 $ 1,179.0 $ (150.0) $ -$ (2.5) $ (147.5) Fluid Power & Flow Control 470.1 510.8 (40.7) 13.8 - (54.5) Total$ 1,499.1 $ 1,689.8 $ (190.7) $ 13.8 $ (2.5) $ (202.0) Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased$150.0 million or 12.7%. Unfavorable foreign currency translation decreased sales by$2.5 million or 0.2%. Excluding the impact of foreign currency translation, sales decreased$147.5 million or 12.5%, reflecting weaker industrial end-market demand from the impact of the COVID-19 pandemic, although sales improved as the year progressed. Weakness remains the greatest within heavy industries but is stabilizing, with positive momentum across the food and beverage, pulp and paper, aggregates, rubber, and forestry end markets. Sales from ourFluid Power & Flow Control segment decreased$40.7 million or 8.0%. The acquisition within this segment increased sales by$13.8 million or 2.7%. Excluding the impact of businesses acquired, sales decreased$54.5 million or 10.7%, driven by a decrease from operations due to ongoing soft demand across industrial, off-highway mobile, and process-related end markets; partially offset by growth within technology, life sciences, and food and beverage end markets, as well as internal growth initiatives and automation-related sales. The following table shows changes in sales by geographic area. Other countries includesMexico ,Australia ,New Zealand , andSingapore . Amount of change due to Six Months Ended December 31, Foreign Sales by Geographic Area 2020 2019 Sales Decrease Acquisitions Currency Organic Change United States$ 1,291.9 $ 1,463.3 $ (171.4) $ 13.8 $ -$ (185.2) Canada 114.7 133.8 (19.1) - 0.2 (19.3) Other countries 92.5 92.7 (0.2) - (2.7) 2.5 Total$ 1,499.1 $ 1,689.8 $ (190.7) $ 13.8 $ (2.5) $ (202.0) Sales in ourU.S. operations were down$171.4 million or 11.7%, as acquisitions added$13.8 million or 0.9%. Excluding the impact of businesses acquired,U.S. sales were down$185.2 million or 12.6%. Sales from our Canadian operations decreased$19.1 million million or 14.3%. Favorable foreign currency translation increased Canadian sales by$0.2 million or 0.1%. Excluding the impact of foreign currency translation, Canadian sales were down$19.3 million or 14.4%. Consolidated sales from our other country operations, which includeMexico ,Australia ,New Zealand , andSingapore , decreased$0.2 million or 0.1% from the prior year. Unfavorable foreign currency translation decreased other country sales by$2.7 million or 2.9%. Excluding the impact of currency translation, other country sales were up$2.5 million , or 2.8% during the period. Our gross profit margin was 28.4% in the six months endedDecember 31, 2020 compared to 29.2% in the prior year period. The gross profit margin for the six months endedDecember 31, 2020 was negatively impacted by 49 basis points due to$7.4 million of non-routine costs from ongoing business alignment initiatives and cost actions recorded in the period. The remaining change is attributable to a lower mix of local account business and the organic sales decline coupled with subdued pricing opportunities given the softer demand environment. The following table shows the changes in selling, distribution and administrative expense (SD&A). Amount of change due to Six Months Ended December 31, Foreign 2020 2019 SD&A Decrease Acquisitions Currency Organic Change SD&A $ 325.9$ 372.8 $ (46.9) $ 3.7$ (0.3) $ (50.3) 24
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SD&A consists of associate compensation, benefits and other expenses associated
with selling, purchasing, warehousing, supply chain management and providing
marketing and distribution of the Company's products, as well as costs
associated with a variety of administrative functions such as human resources,
information technology, treasury, accounting, insurance, legal, and facility
related expenses. SD&A was 21.7% of sales in the six months ended December 31,
2020 compared to 22.1% in the prior year period. SD&A decreased $46.9 million or
12.6% compared to the prior year period. Changes in foreign currency exchange
rates had the effect of decreasing SD&A during the six months ended December 31,
2020 by $0.3 million or 0.1% compared to the prior year period. SD&A from
businesses acquired added $3.7 million or 1.0% of SD&A expenses, including $0.4
million of intangibles amortization related to acquisitions. Excluding the
impact of businesses acquired and the favorable currency translation impact,
SD&A decreased $50.3 million or 13.5% during the six months ended December 31,
2020 compared to the prior year period. The Company incurred $0.4 million of
non-routine expenses related to severance and closed facilities during the six
months ended December 31, 2020 and $1.5 million related to severance during the
prior period. Excluding the impact of acquisitions and severance, total
compensation decreased $34.0 million during the six months ended December 31,
2020 , primarily due to cost reduction actions taken by the Company in response
to the COVID-19 pandemic, including headcount reductions, temporary furloughs
and pay reductions, and suspension of the 401(k) company match. Also, travel &
entertainment expense decreased $6.0 million during the six months ended
December 31, 2020 primarily due to continued reduced travel activity related to
COVID-19. Further, excluding the impact of acquisitions, intangible amortization
expense decreased $2.9 million during the six ended December 31, 2020 primarily
due to the intangible impairment recorded during the period. All other expenses
within SD&A were down $6.3 million .
The Company has three asset groups that have significant exposure to oil and gas
end markets. Due to the prolonged economic downturn in these end markets, the
Company determined during the second quarter of fiscal 2021 that certain
carrying values may not be recoverable. The Company determined that an
impairment existed in two of the three asset groups as the asset groups'
carrying values exceeded the sum of the undiscounted cash flows. The fair values
of the long-lived assets were then determined using the income approach, and the
analyses resulted in the measurement of an intangible asset impairment loss of
$45.0 million , which was recorded in the three months ended December 31, 2020 ,
as the fair value of the intangible assets was determined to be zero. The income
approach employs the discounted cash flow method reflecting projected cash flows
expected to be generated by market participants and then adjusted for time value
of money factors, and requires management to make significant estimates and
assumptions related to forecasts of future revenues, earnings before interest,
taxes, depreciation, and amortization (EBITDA), and discount rates. Key
assumptions (Level 3 in the fair value hierarchy) relate to pricing trends,
inventory costs, customer demand, and revenue growth. A number of benchmarks
from independent industry and other economic publications were also used. The
analyses of these asset groups also resulted in a fixed asset impairment loss
and leased asset impairment loss of $2.0 million and $2.5 million , respectively,
which were recorded in the three months ended December 31, 2020 .
Operating income decreased $70.0 million or 58.4%, primarily due to impairment
charges of $49.5 million , and as a percent of sales decreased to 3.3% from 7.1%
during the prior year period.
Operating income, before impairment charges, as a percentage of sales for the
Service Center Based Distribution segment decreased to 9.0% in the current year
period from 9.7% in the prior year period. Operating income as a percentage of
sales for the Fluid Power & Flow Control segment increased to 11.2% in the
current year period from 11.0% in the prior year period.
Other expense (income), net was income of $0.1 million for the six months ended
December 31, 2020 , which included unrealized gains on investments held by
non-qualified deferred compensation trusts of $2.5 million , offset by net
unfavorable foreign currency transaction losses of $2.2 million and $0.2 million
of expense from other items. During the prior year period, other expense
(income), net was income of $0.2 million and included unrealized gains on
investments held by non-qualified deferred compensation trusts of $0.8 million ,
offset by net unfavorable foreign currency transaction losses of $0.3 million
and $0.3 million of expense from other items.
The effective income tax rate was 15.0% for the six months ended December 31,
2020 compared to 23.5% for the six months ended December 31, 2019 . The decrease
in the effective tax rate over the prior year is due to changes in
compensation-related deductions and uncertain tax positions during the six
months ended December 31, 2020 compared to the prior year period. We expect our
full year tax rate for fiscal 2021 to be in the 23.0% to 25.0% range.
As a result of the factors addressed above, net income for the six months ended
December 31, 2020 decreased $47.4 million or 61.7% compared to the prior year
period. Net income was $0.75 per share for the six months ended December 31,
2020 compared to $1.97 per share in the prior year period, a decrease of 61.9%.
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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 December 31, 2020 , we
had total debt obligations outstanding of $863.0 million compared to $935.3
million at June 30, 2020 . Management expects that our existing cash, cash
equivalents, funds available under the revolving credit facility, and cash
provided from operations will be sufficient to finance normal working capital
needs in each of the countries in which we operate, payment of dividends,
acquisitions, investments in properties, facilities and equipment, debt service,
and the purchase of additional Company common stock. Management also believes
that additional long-term debt and line of credit financing could be obtained
based on the Company's credit standing and financial strength.
The Company's working capital at December 31, 2020 was $725.7 million , compared
to $733.7 million at June 30, 2020 . The current ratio was 2.7 to 1 at
December 31, 2020 and June 30, 2020 , respectively.
Net Cash Flows
The following table is included to aid in review of Applied's condensed
statements of consolidated cash flows; all amounts are in thousands.
Six Months Ended
Net Cash Provided by (Used in): 2020 2019
Operating Activities $ 159,356 $ 104,899
Investing Activities (39,235) (48,030)
Financing Activities (104,254) (36,321)
Exchange Rate Effect 4,357 (618)
Increase in Cash and Cash Equivalents $ 20,224 $ 19,930
Net cash provided by operating activities was $159.4 million for the six months
ended December 31, 2020 compared to $104.9 million provided by operating
activities in the prior period. The increase in cash provided by operating
activities during the six months ended December 31, 2020 is related to working
capital improvements, primarily driven by changes in accounts receivable,
inventory, and accounts payable, which increased cash provided by operating
activities by a combined $44.9 million .
Net cash used in investing activities during the six months ended December 31,
2020 decreased from the prior period primarily due to $31.1 million used for the
acquisitions of Gibson Engineering and Advanced Control Solutions compared to
$36.4 million used for the acquisition of Olympus Controls in the prior year
period.
Net cash used in financing activities during the six months ended December 31,
2020 increased from the prior period primarily due to a change in net debt
activity, as there was $72.3 million of debt payments in the current year period
compared to $9.9 million of net debt payments in the prior year period.
Share Repurchases
The Board of Directors has authorized the repurchase of shares of the Company's
common stock. These purchases may be made in open market and negotiated
transactions, from time to time, depending upon market conditions. During the
six months ended December 31, 2020 and 2019, the Company did not acquire any
shares of treasury stock on the open market. At December 31, 2020 , we had
authorization to repurchase 864,618 shares.
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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):
December 31, 2020 June 30, 2020
Unsecured credit facility $ 569,750 $ 589,250
Trade receivable securitization facility 162,300 175,000
Series C notes 80,000 120,000
Series D notes 25,000 25,000
Series E notes 25,000 25,000
Other 966 1,026
Total debt $ 863,016 $ 935,276
Less: unamortized debt issuance costs 1,302 1,487
$ 861,714 $ 933,789
Revolving Credit Facility & Term Loan
In January 2018 , the Company refinanced its existing credit facility and entered
into a new five-year credit facility with a group of banks expiring in January
2023 . This agreement provides for a $780.0 million unsecured term loan and a
$250.0 million unsecured revolving credit facility. Fees on this facility range
from 0.10% to 0.20% per year based upon the Company's leverage ratio at each
quarter end. Borrowings under this agreement carry variable interest rates tied
to either LIBOR or prime at the Company's discretion. The Company had no amount
outstanding under the revolver at December 31, 2020 or June 30, 2020 . Unused
lines under this facility, net of outstanding letters of credit of $0.7 million
and $1.9 million , respectively, to secure certain insurance obligations, totaled
$249.3 million and $248.1 million at December 31, 2020 and June 30, 2020 ,
respectively, and were available to fund future acquisitions or other capital
and operating requirements. The interest rate on the term loan was 1.94% as of
December 31, 2020 and June 30, 2020 .
Additionally, the Company had letters of credit outstanding with separate banks,
not associated with the revolving credit agreement, in the amount of $4.6
million and $4.5 million as of December 31, 2020 and June 30, 2020 ,
respectively, in order to secure certain insurance obligations.
Trade Receivable Securitization Facility
In August 2018 , the Company established a trade receivable securitization
facility (the "AR Securitization Facility") with a termination date of
August 31, 2021 . The maximum availability under the AR Securitization Facility
is $175.0 million . Availability is further subject to changes in the credit
ratings of our customers, customer concentration levels or certain
characteristics of the accounts receivable being transferred and, therefore, at
certain times, we may not be able to fully access the $175.0 million of funding
available under the AR Securitization Facility. The AR Securitization Facility
effectively increases the Company's borrowing capacity by collateralizing a
portion of the amount of the Service Center Based Distribution reportable
segment's U.S. operations' trade accounts receivable. The Company uses the
proceeds from the AR Securitization Facility as an alternative to other forms of
debt, effectively reducing borrowing costs. Borrowings under this facility carry
variable interest rates tied to LIBOR and fees on the AR Securitization Facility
are 0.90% per year. The interest rate on the AR Securitization Facility was
1.09% as of December 31, 2020 and 1.07% as of June 30, 2020 . The Company
classified the AR Securitization Facility as long-term debt as it has the
ability and intent to extend or refinance this amount on a long-term basis.
Other Long-Term Borrowings
At December 31, 2020 and June 30, 2020 , the Company had borrowings outstanding
under its unsecured shelf facility agreement with Prudential Investment
Management of $130.0 million and $170.0 million , respectively. Fees on this
facility range from 0.25% to 1.25% per year based on the Company's leverage
ratio at each quarter end. The "Series C" notes, which had an original principal
amount of $120.0 million , carry a fixed interest rate of 3.19%. A $40.0 million
principal payment was made on the "Series C" in July 2020 , and the remaining
principal balance of $80.0 million is due in equal payments in July 2021 and
2022. The "Series D" notes have a remaining principal balance of $25.0 million ,
carry a fixed interest rate of 3.21%, and are due in October 2023 . The "Series
E" notes have a principal amount of $25.0 million , carry a fixed interest rate
of 3.08%, and are due in October 2024 .
In 2014, the Company assumed $2.4 million of debt as a part of the headquarters
facility acquisition. The 1.50% fixed interest rate note is held by the State of
Ohio Development Services Agency , and matures in May 2024 .
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Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company entered into an interest rate swap which mitigates variability in
forecasted interest payments on $420.0 million of the Company's U.S.
dollar-denominated unsecured variable rate debt. For more information, see note
6, Derivatives, to the consolidated financial statements, included in Item 1
under the caption "Notes to Condensed Consolidated Financial Statements."
The credit facility and the unsecured shelf facility contain restrictive
covenants regarding liquidity, net worth, financial ratios, and other covenants.
At December 31, 2020 , the most restrictive of these covenants required that the
Company have net indebtedness less than 3.75 times consolidated income before
interest, taxes, depreciation and amortization (as defined). At December 31,
2020 , the Company's net indebtedness was 2.9 times consolidated income before
interest, taxes, depreciation and amortization (as defined). The Company was in
compliance with all financial covenants at December 31, 2020 .
Accounts Receivable Analysis
The following table is included to aid in analysis of accounts receivable and
the associated provision for losses on accounts receivable:
December 31, June 30,
2020 2020
Accounts receivable, gross $ 461,018 $ 463,659
Allowance for doubtful accounts 16,818 13,661
Accounts receivable, net $ 444,200 $ 449,998
Allowance for doubtful accounts, % of
gross receivables 3.6 % 2.9 %
Three Months Ended December 31, Six Months Ended December 31,
2020 2019 2020 2019
Provision for losses on accounts
receivable $ 697 $ 2,517 $ 5,795 $ 4,692
Provision as a % of net sales 0.09 % 0.30 % 0.39 % 0.28 %
Accounts receivable are reported at net realizable value and consist of trade
receivables from customers. Management monitors accounts receivable by reviewing
Days Sales Outstanding (DSO) and the aging of receivables for each of the
Company's locations.
On a consolidated basis, DSO was 53.2 at December 31, 2020 compared to 55.9 at
June 30, 2020 .
As of December 31, 2020 , approximately 4.8% of our accounts receivable balances
are more than 90 days past due, compared to 4.6% at June 30, 2020 . On an overall
basis, our provision for losses on accounts receivable represents 0.09% of our
sales in the three months ended December 31, 2020 , compared to 0.30% of sales
for the three months ended December 31, 2019 . The decrease primarily relates to
provisions recorded in the prior year for for customer bankruptcies primarily in
the U.S. operations of the Service Center Based Distribution segment. The
provision for losses on accounts receivable represents 0.39% of sales for the
six months ended December 31, 2020 compared to 0.28% of sales for the six months
ended December 31, 2019 . The increase primarily relates to provisions recorded
in the current year for customer credit deterioration and bankruptcies primarily
in the U.S. and Mexican operations of the Service Center Based Distribution
segment. Historically, this percentage is around 0.10% to 0.15%. Management
believes the overall receivables aging and provision for losses on accounts
receivable are at reasonable levels.
Inventory Analysis
Inventories are valued using the last-in, first-out (LIFO) method for U.S.
inventories and the average cost method for foreign inventories. Management
uses an inventory turnover ratio to monitor and evaluate inventory. Management
calculates this ratio on an annual as well as a quarterly basis, and believes
that using average costs to determine the inventory turnover ratio instead of
LIFO costs provides a more useful analysis. The annualized inventory turnover
based on average costs was 3.9 for the period ended December 31, 2020 and 3.8
for the period ended June 30, 2020 . We believe our inventory turnover ratio at
the end of the year will be similar or slightly better than the ratio at
December 31, 2020 .
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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, changes in supplier distribution programs, inability of suppliers to perform, and transportation disruptions; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems and risks relating to their proper functioning, the security of those systems, and the data stored in or transmitted through them; the impact of economic conditions on the collectability of trade receivables; reduced demand for our products in targeted markets due to reasons including consolidation in customer industries; our ability to retain and attract qualified sales and customer service personnel and other skilled executives, managers and professionals; our ability to identify and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability, timing and nature of new business opportunities including acquisitions, alliances, customer relationships, and supplier authorizations; the incurrence of debt and contingent liabilities in connection with acquisitions; our ability to access capital markets as needed on reasonable terms; disruption of operations at our headquarters or distribution centers; risks and uncertainties associated with our foreign operations, including volatile economic conditions, political instability, cultural and legal differences, and currency exchange fluctuations; the potential for goodwill and intangible asset impairment; changes in accounting policies and practices; our ability to maintain effective internal control over financial reporting; organizational changes within the Company; risks related to legal proceedings to which we are a party; potentially adverse government regulation, legislation, or policies, both enacted and under consideration, including with respect to federal tax policy, international trade, data privacy and security, and government contracting; and the occurrence of extraordinary events (including prolonged labor disputes, power outages, telecommunication outages, terrorist acts, public health emergency, earthquakes, extreme weather events, other natural disasters, fires, floods, and accidents). Other factors and unanticipated events could also adversely affect our business, financial condition or results of operations. We discuss certain of these matters and other risk factors more fully throughout this Form 10-Q as well as other of our filings with theSecurities and Exchange Commission , including our Annual Report on Form 10-K for the year endedJune 30, 2020 . 29 --------------------------------------------------------------------------------APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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