Applied Industrial Technologies : Q2 FY21 Recap Presentation

We Keep Industry Running	Fiscal Q2 2021 Recap
	January 28, 2021

Safe Harbor Statement

This presentation contains statements that are forward-looking, as that term is defined by the Securities and Exchange Commission in its rules, regulations and releases. Applied intends that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are often identified by qualifiers such as "expect," "outlook," "project" "guidance," "will" and derivative or similar expressions. All forward-looking statements are based on current expectations regarding important risk factors including trends in the industrial sector of the economy, the effects of the health crisis associated with the COVID-19 pandemic on our business operations, results of operations, and financial condition, and other risk factors identified in Applied's most recent periodic report and other filings made with the Securities and Exchange Commission, many of which risks are amplified by circumstances arising out of the COVID-19 pandemic. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by Applied or any other person that the results expressed therein will be achieved. Applied assumes no obligation to update publicly or revise any forward-looking statements, whether due to new information, or events, or otherwise.

Non-GAAP Financial Measures

This presentation sets forth certain non-GAAP financial measures including Adjusted Earnings per Share (EPS); Adjusted Net Income; Adjusted Gross Margin; Adjusted Selling, Distribution and Administrative (SD&A) Expense; EBITDA; Adjusted EBITDA; Adjusted EBITDA Margin; Free Cash Flow; Net Leverage Ratio - which are presented as supplemental disclosures to Net Income; Cash from Operations; Total Debt Outstanding; and reported results. Management believes these measures are useful indicators for normalizing earnings for non-routine items and facilitating effective evaluation of operating performance. A presentation of the most directly comparable GAAP measure and reconciliations of Adjusted Earnings per Share (EPS); Adjusted Net Income; Adjusted Gross Margin; Adjusted Selling, Distribution and Administrative (SD&A) Expense; EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Free Cash Flow, and Net Leverage Ratio are set forth in the appendix to this presentation.

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Primary Messages from Management

• F2Q21 results reflect solid execution and a favorable industry position despite a challenging but improving industrial backdrop.
• Underlying demand sustained gradual improvement in F2Q21 with YoY declines moderating and daily sales rates seasonally strong on a sequential basis.
• Industrial recovery exhibiting resiliency despite rising COVID rates; break-fix and maintenance activity increasing; fluid power backlog stronger YoY.
• Cost control and operational discipline drove a 12% YoY organic decline in adjusted SD&A in F2Q21; temporary cost actions continuing to roll off in F3Q21.
• Strong free cash generation of $73M in F2Q21 and $151M FY21 YTD (206% of adjusted net income) supports future growth initiatives and shareholder returns.
• Solid balance sheet with $289M of cash on hand and net debt down 30% YoY at Dec 31 inclusive of two acquisitions completed during F2Q21.
• Well positioned entering F2H21 as critical early-cycle MRO demand, secular growth tailwinds, and internal initiatives continue to unfold.

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Fiscal Q2 2021 Key Financial Highlights

• Sales down 9.9% YoY

1. Down 10.5% on an organic basis

• 1. Acquisitions +0.5%, currency +0.1%, selling days neutral this quarter
• Net Loss of $5.3M or $0.14 per share
• Non-GAAPAdjusted Net Income of $38.4M and Adjusted EPS of $0.98
• 1. Excludes, on a pre-tax basis, a non-cash asset impairment charge of $49.5M and non-routine costs of $7.8M; relates to reduced economic conditions and business alignment initiatives across a portion of the Service Center segment exposed to

oil & gas end markets

• 1. Includes discrete tax benefits related to stock option exercises and income tax credits
• Adjusted gross margin of 28.9% similar to prior year levels
• 1. Excludes a $7.4M non-routine charge

• 1. Down 19 bps YoY excluding LIFO expense ($0.9M vs. $1.9M in F2Q20)
  1. Unchanged on a sequential basis
• Adjusted SD&A expense 21.6% of sales vs. prior year of 21.9%
• 1. Excludes $0.4M of non-routine costs

• 1. Down 12% YoY on an organic basis
• Adjusted EBITDA of $68.3M
• 1. 9.1% of sales, up 14 bps YoY

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Current Investor Discussion Points

Discussion Point

1. Underlying Demand
2. End-MarketTrends
3. Sales Outlook
4. Inflation & Pricing
5. Decremental Margins
6. Capital Deployment
7. Automation Offering

Update	Detail
Improved sequentially through the quarter; customers	F2Q21 organic sales -10.5% YoY vs. -13.5% in F1Q21
remaining productive despite higher COVID rates;
with YoY declines improving each month; F2Q21 daily
seeing greater maintenance, break-fix, production,
sales up 3% sequentially on an organic daily basis
and equipment optimization spending
Weakness remains concentrated in "heavy"	Positive trends across food & beverage, aggregates,
industries, though underlying trends improved	technology, chemicals, lumber & wood, pulp & paper,
sequentially across several end markets	and transportation end markets
Environment remains challenging, though trends firm	Organic sales month to date in January down by a
into early F3Q21; vaccine distribution, fiscal	mid-single digit percent YoY; assuming normal
stimulus, improving heavy-industry indicators, and	seasonal patterns for the balance of the quarter, expect
growth initiatives provide support	F3Q21 organic sales to decline 3% to 4% YoY
The number of announced supplier price increases	Pricing relatively neutral to F2Q21 sales YoY;
up modestly on a sequential basis, though no	strong track record of managing price/cost dynamics
material change in underlying product cost inflation	and supplier inflation reflecting industry position,
YTD in FY21	internal initiatives, and positive mix opportunities
F2Q21 favorability driven by sequential sales	F2Q21 decremental margins of 5% on adj. EBIT and
improvement, firm gross margins, ongoing cost	8% on adj. EBITDA; project $170M-$175M of SD&A
control, lower amortization expense, and operating	expense in F3Q21, which assumes the continued roll
efficiencies	off of temporary cost actions
Remain balanced in light of ongoing macro	Made two acquisitions in F2Q21 expanding specialized
uncertainty but opportunistic given recent cash	automation offering; announced dividend increase;
generation, an improving outlook, and strategic	expect greater working capital requirements in F2H21
growth initiatives	given improving demand
Completed three related acquisitions the past 16	Expect $10M-$11M of inorganic sales contribution from
months including ACS and Gibson Engineering in	recent ACS and Gibson acquisitions in F3Q21; related
F2Q21; focused on next generation solutions tied to	M&A pipeline remains active; significant
robotics, vision, motion, and IIoT technologies	cross-selling opportunity longer-term

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Segment Results - Service Center Based Distribution

Segment Overview: Representing 69% of fiscal 2020 sales - the segment includes our legacy distribution operations including ~400 local service centers across North America, Australia, and New Zealand, primarily focused on our core bearings, power transmission, and fluid power MRO product offering, as well as other industrial supplies for scheduled maintenance and emergency repairs of customers' machinery and equipment.

• Sales down 10.4% YoY in F2Q21

o	Organic	- 10.5%
o	Currency	+ 0.1%

Service Center Distribution Sales, in Millions
$575.8	$574.4			$515.7
		$488.6	$513.3
2Q20	3Q20	4Q20	1Q21	2Q21
		Fiscal Quarter

• YoY declines reflect ongoing weakness across industrial end markets from the impact of COVID-19, but improved each month in the quarter
• Segment daily sales rates up 6% from the end of FY20; greatest improvement from pulp & paper, aggregates, food & beverage, lumber & wood, and rubber
• Customers continue to gradually increase production and facility utilization; engagement remains productive despite higher COVID cases
• Adjusted segment operating income of $50.4M in F2Q21

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Segment Results - Fluid Power & Flow Control

Fluid Power & Flow Control Sales, in Millions

Segment Overview: Representing 31% of fiscal 2020 sales - the segment consists of 1) our Fluid Power network specializing in distributing, engineering, designing, integrating, and repairing hydraulic and pneumatic technologies and related systems, 2) our specialty flow control products and engineered solutions, and 3) our automation products and solutions.

• Sales down 8.5% YoY in F2Q21

$257.6	$256.4
		$236.4	$234.5	$235.6
2Q20	3Q20	4Q20	1Q21	2Q21
		Fiscal Quarter

o	Organic	- 10.1%
o	Acquisitions	+ 1.6%

• Demand remains below prior year levels across industrial, off-highway mobile, process-related end markets
• Partially offset by growth in technology, life sciences, chemical, utilities, transportation, and aggregates end markets
• Backlog trends stronger with greater order activity tied to equipment optimization, automation, and technology end-market demand
• Segment operating income of $26.6M in F2Q21

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Adjusted Margin and Expense Highlights

Adjusted Gross Profit, Adjusted SD&A, and Adjusted EBITDA Metrics

				Excluding
	Q2 21(1)			LIFO
$ in millions	Q2 20	Chg YoY	Chg YoY
Gross Profit	$216.9	$241.2	(10.1%)	(10.4%)
Gross Margin	28.9%	28.9%	(8) bps	(19) bps
SD&A Expense	$162.0	$182.5	(11.2%)
% of Sales	21.6%	21.9%	33 bps
EBITDA	$68.3	$74.5	(8.4%)	(9.6%)
EBITDA Margin	9.1%	8.9%	14 bps	0 bps
Memo:	$0.9	$1.9
LIFO Expense

Adjusted EBITDA Margin

11%

10%

9.1%

9%

8%

7%

2Q19	3Q19	4Q19	1Q20	2Q20	3Q20	4Q20	1Q21	2Q21
			Fiscal Quarter

• Adj. gross margin down 8 bps YoY

• 1. Excluding LIFO expense, down 19 bps YoY
  1. Relatively unchanged on a sequential basis
  1. YoY decline reflects current demand backdrop, partially offset by ongoing margin initiatives
• Adj. SD&A down 11.2% YoY
• 1. Down 12% YoY on an organic basis

1. Reflects strong expense control, operational discipline, and cost actions

• 1. Remain diligent in current environment but continue to roll off temporary cost actions to align with recent performance, internal opportunities, and growth initiatives
• Adj. EBITDA margin up 14 bps YoY

(1) Excludes $7.8M of non-routine expense ($7.4M in cost of sales and $0.4M in SD&A)

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Cash Flow and Balance Sheet Leverage

Free Cash Flow (in Millions) - Fiscal 1H Period

millions	$180				Free cash flow										300%	incomenet
$150				As % of net income - 1H FY21
				As % of net income - Prior 8-Yr Avg				240%
	$120
in															180%	of
$90
flow,															120%	as%
$60
cashFree																	flowcash
														0%
	$30															60%
	$0																	Free
	($30)																(60%)
	2013	2014	2015	2016	2017	2018	2019	2020	2021

Fiscal 1H Period

Net Leverage Ratio (Net Debt to Trailing Adjusted EBITDA)

2.8x	2.8x	2.6x
	2.6x	2.5x	2.5x

2.3x	2.1x	2.1x

2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21

Fiscal Quarter

• F2Q21 cash from operations of $77.5M; free cash of $72.7M

1. 1H FY21 cash from operations of $159M; free cash of $151M (206% of adj. net income)

1. Reflects ongoing traction with working capital initiatives and current demand levels

• 1. Expect lower free cash generation into 2H FY21 assuming a sustainable recovery and resulting working capital requirements
• Net leverage ratio at 2.1x
• 1. Below prior year of 2.5x; unchanged from F1Q21
  1. Net debt down 30% YoY
  1. Total debt down over $200M since early 2018
  1. Funded two automation-related acquisitions in F2Q21 with cash on hand

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Debt Outstanding and Maturity Schedule, as of 12/31/20

• $862M of debt outstanding
• • $573M net of $289M of cash on hand
• ~$250M of available capacity under undrawn revolver
• $140M of available capacity on uncommitted shelf facility

Debt Maturity Schedule

in millions

$500			Term Loan									$477
$400			Private Placement Notes
		AR Securitization
$300
					$225
$200
$100
									$55	$15
$0	$10	$10			$10	$10	$15
	3Q21	4Q21	1Q22	2Q22	3Q22	4Q22	1Q23	2Q23	3Q23	4Q23
								Fiscal Quarter

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Appendix: Number of Selling Days by Fiscal Quarter and Full Year

Q1 Q2 Q3 Q4 Year

2019 63.0 62.0 63.0 63.5 251.5

2020 64.0 62.0 64.0 63.5 253.5

2021 64.0 62.0 63.0 63.5 252.5

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Appendix: Net Sales and Operating Income by Segment

		Three Months
		Ended December 31
(dollar amount in thousands)		Q2 FY20		Q2 FY21
Service Center Based Distribution Segment:
Net sales	$	575,788	$	515,690
Operating income	$	53,905	$	42,654
Non-routine costs		-		7,772
Adjusted segment operating income	$	53,905	$	50,426
Fluid Power & Flow Control Segment:
Net sales	$	257,587	$	235,597
Operating income	$	29,449	$	26,647
Non-routine costs		-		-
Adjusted segment operating income	$	29,449	$	26,647
Corporate and other expense, net (1)	$	24,609	$	71,723
Asset Impairment - Service Center Based Distribution		-		49,528
Adjusted corporate and other expense, net (1)	$	24,609	$	22,195

(1) Includes intangible amortization expense and related impairments

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Appendix: Reconciliation of Adjusted Net Income and EPS

				Three Months Ended December 31, 2020
								Per Share
								Diluted
(dollar amount in thousands)		Pre-tax		Tax Effect		Net of Tax		Impact	Tax Rate
Net loss and net loss per share	$	(10,168)	$	(4,834)	$	(5,334)	$	(0.14)	47.5%
Impairment expense		49,528		11,769		37,759		0.97	23.8%
Non-routine costs		7,772		1,847		5,925		0.15	23.8%
Adjusted net income and net income per share	$	47,132	$	8,782	$	38,350	$	0.98	18.6%

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Appendix: Reconciliation of Adjusted Gross Margin

(dollar amount in thousands)		Q2 FY20		Q2 FY21
Net Sales	$	833,375	$	751,287
Gross Profit		241,234		209,534
Non-routine costs in cost of sales		-		7,368
Adjusted Gross Profit	$	241,234	$	216,902
Adjusted Gross Margin		28.9%		28.9%

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Appendix: Reconciliation of Adjusted SD&A Expense

(dollar amount in thousands)		Three Months Ended
	Q2 FY20		Q2 FY21
SD&A (Operating Expense)	$	182,489	$	162,428
Non-routine costs		-		403
Adjusted SD&A (Adjusted Operating Expense)	$	182,489	$	162,025

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Appendix: Reconciliation of EBITDA and Adjusted EBITDA

(dollar amount in thousands)	Q2 FY19	Q3 FY19	Q4 FY19	Q1 FY20	Q2 FY20	Q3 FY20	Q4 FY20	Q1 FY21	Q2 FY21
Net Income	$	38,717	$	16,535	$	39,803	$	38,799	$	38,031	$	(82,777)	$	29,989	$	34,784	$	(5,334)
Interest expense, net		9,578		9,947		10,187		10,059		9,583		8,805		8,088		7,653		7,658
Income tax expense		11,724		9,283		22,317		12,308		11,346		(2,550)		10,090		10,048		(4,834)
Depreciation and amortization of property		5,038		5,026		5,191		5,223		5,394		5,380		5,199		5,352		5,209
Amortization of intangibles		10,991		9,911		10,060		10,374		10,195		10,048		9,882		9,726		8,276
EBITDA	$	76,048	$	50,702	$	87,558	$	76,763	$	74,549	$	(61,094)	$	63,248	$	67,563	$	10,975
Goodwill & intangible impairment				31,594								131,000						49,528
Non-routine costs				2,300				1,455				5,997		1,540				7,772
Adjusted EBITDA	$	76,048	$	84,596	$	87,558	$	78,218	$	74,549	$	75,903	$	64,788	$	67,563	$	68,275

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Appendix: Reconciliation of Adjusted EBITDA Margin

(dollar amount in thousands)	Q2 FY19	Q3 FY19	Q4 FY19	Q1 FY20	Q2 FY20	Q3 FY20	Q4 FY20	Q1 FY21	Q2 FY21
Net Sales	$ 840,038	$ 885,443	$ 882,743	$ 856,404	$ 833,375	$ 830,797	$ 725,076	$ 747,807	$ 751,287
Adjusted EBITDA	76,048	84,596	87,558	78,218	74,549	75,903	64,788	67,563	68,275
Adjusted EBITDA Margin	9.1%	9.6%	9.9%	9.1%	8.9%	9.1%	8.9%	9.0%	9.1%

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Appendix: Reconciliation of Free Cash Flow

					Three Months Ended September 30
(dollar amount in thousands)	Q1 FY14	Q1 FY15	Q1 FY16	Q1 FY17	Q1 FY18	Q1 FY19	Q1 FY20	Q1 FY21
Cash provided by Operating Activities	$	16,956	$ (18,101)	$	15,090	$	41,864	$	9,440	$	11,797	$	50,018	$	81,842
Capital Expenditures		(1,571)	(3,100)		(3,112)		(2,999)		(6,336)		(3,173)		(4,946)		(3,597)
Free Cash Flow	$	15,385	$ (21,201)	$	11,978	$	38,865	$	3,104	$	8,624	$	45,072	$	78,245

						Three Months Ended December 31
(dollar amount in thousands)	Q2 FY14	Q2 FY15	Q2 FY16	Q2 FY17	Q2 FY18	Q2 FY19	Q2 FY20	Q2 FY21
Cash provided by Operating Activities	$	15,707	$	19,274	$	18,355	$	3,794	$	11,744	$	53,783	$	54,881	$	77,514
Capital Expenditures		(2,555)		(4,706)		(2,625)		(3,711)		(5,124)		(3,923)		(7,019)		(4,852)
Free Cash Flow	$	13,152	$	14,568	$	15,730	$	83	$	6,620	$	49,860	$	47,862	$	72,662

						Six Months Ended December 31
(dollar amount in thousands)	1H FY14	1H FY15	1H FY16	1H FY17	1H FY18	1H FY19	1H FY20	1H FY21
Cash provided by Operating Activities	$	32,663	$	1,173	$	33,445	$	45,658	$	21,184	$	65,580	$	104,899	$ 159,356
Capital Expenditures		(4,126)		(7,806)		(5,737)		(6,710)		(11,460)		(7,096)		(11,965)	(8,449)
Free Cash Flow	$	28,537	$	(6,633)	$	27,708	$	38,948	$	9,724	$	58,484	$	92,934	$ 150,907

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Appendix: Reconciliation of Net Leverage Ratio

(dollar amount in thousands)	Q2 FY19	Q3 FY19	Q4 FY19	Q1 FY20	Q2 FY20	Q3 FY20	Q4 FY20	Q1 FY21	Q2 FY21
Net Income	$	38,717	$	16,535	$	39,803	$	38,799	$	38,031	$	(82,777)	$	29,989	$	34,784	$	(5,334)
Interest expense, net		9,578		9,947		10,187		10,059		9,583		8,805		8,088		7,653		7,658
Income tax expense		11,724		9,283		22,317		12,308		11,346		(2,550)		10,090		10,048		(4,834)
Depreciation and amortization of property		5,038		5,026		5,191		5,223		5,394		5,380		5,199		5,352		5,209
Amortization of intangibles		10,991		9,911		10,060		10,374		10,195		10,048		9,882		9,726		8,276
EBITDA	$	76,048	$	50,702	$	87,558	$	76,763	$	74,549	$	(61,094)	$	63,248	$	67,563	$	10,975
Goodwill & intangible impairment				31,594								131,000						49,528
Non-routine costs				2,300				1,455				5,997		1,540				7,772
Adjusted EBITDA	$	76,048	$	84,596	$	87,558	$	78,218	$	74,549	$	75,903	$	64,788	$	67,563	$	68,275
Trailing 4-Quarter EBITDA		317,777		330,125		330,682		326,420		324,921		316,228		293,458		282,803		276,529
Current portion of long-term debt	$	44,184	$	44,163	$	49,036	$	93,912	$	73,771	$	78,642	$	78,646	$	78,651	$	78,638
Long-term debt		923,410		937,536		908,850		859,172		874,423		864,758		855,143		792,827		783,076
Total Debt	$	967,594	$	981,699	$	957,886	$	953,084	$	948,194	$	943,400	$	933,789	$	871,478	$	861,714
Cash		79,827		47,367		108,219		98,204		128,149		165,464		268,551		271,060		288,775
Net Debt	$	887,767	$	934,332	$	849,667	$	854,880	$	820,045	$	777,936	$	665,238	$	600,418	$	572,939
Net Leverage Ratio		2.8		2.8		2.6		2.6		2.5		2.5		2.3		2.1		2.1

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