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 2022, business was conducted inthe United States ,Puerto Rico ,Canada ,Mexico ,Australia ,New Zealand , andSingapore from 569 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, 2021 increased$125.6 million or 16.7% compared to the prior year quarter, with acquisitions increasing sales by$12.1 million or 1.6% and favorable foreign currency translation of$1.9 million increasing sales by 0.3%. The Company had operating income of$78.2 million , or operating margin of 8.9% of sales for the quarter endedDecember 31, 2021 compared to an operating loss of$2.4 million , or negative operating margin of 0.3% of sales for the same quarter in the prior year. The prior year quarter included 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 within the Service Center Based Distribution segment. The quarter endedDecember 31, 2021 had net income of$57.0 million compared to a net loss of$5.3 million in the prior year quarter. The current ratio was 2.9 to 1 atDecember 31, 2021 and 2.8 to 1 atJune 30, 2021 . Applied monitors several economic indices that have been key indicators for industrial economic activity inthe United States . These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published by theFederal Reserve Board and the Purchasing Managers Index (PMI) published by theInstitute for Supply Management (ISM). Historically, our performance correlates well with the MCU, which measures productivity and calculates a ratio of actual manufacturing output versus potential full capacity output. When manufacturing plants are running at a high rate of capacity, they tend to wear out machinery and require replacement parts. The MCU (total industry) and IP indices have increased sinceJune 2021 . The MCU forDecember 2021 was 76.5, which is up from the September and June revised readings of 75.2 and 75.7, respectively. The ISM PMI registered 58.7 in December, down from the September andJune 2021 readings of 61.1 and 60.6, 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 December 2021 76.5 58.7 100.2 November 2021 76.6 61.1 100.5 October 2021 76.1 60.8 99.9 September 2021 75.2 61.1 98.5 June 2021 75.7 60.6 98.2
The number of Company employees was 6,007 at
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended December 31, 2021 and 2020
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 -
2021 2020 % Increase
Net sales 100.0 % 100.0 % 16.7 %
Gross profit 29.4 % 27.9 % 23.0 %
Selling, distribution & administrative expense 20.5 % 21.6 % 10.5 %
Operating income (loss) 8.9 % (0.3) % N/M
Net income (loss) 6.5 % (0.7) % N/M
During the quarter ended December 31, 2021 , sales increased $125.6 million or
16.7% compared to the prior year quarter, with sales from acquisitions adding
$12.1 million or 1.6% and favorable foreign currency translation accounting for
an increase of $1.9 million or 0.3%. There were 61 selling days in the quarter
ended December 31, 2021 and 62 selling days in the quarter ended December 31,
2020 . Excluding the impact of businesses acquired and foreign currency
translation, sales were up $111.6 million or 14.8% during the quarter, driven by
an increase from operations of 16.4% reflecting positive industrial activity,
offset by 1.6% due to one less sales day.
The following table shows changes in sales by reportable segment.
Three Months Ended Amount of change due to
December 31,
Sales by Reportable Segment 2021 2020 Sales Increase Acquisitions Foreign Currency Organic Change Service Center Based Distribution
$ 587.2 $ 515.7 $ 71.5 $ - $ 1.9 $ 69.6 Fluid Power & Flow Control 289.7 235.6 54.1 12.1 - 42.0 Total$ 876.9 $ 751.3 $ 125.6 $ 12.1 $ 1.9$ 111.6 Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased$71.5 million or 13.9%. Favorable foreign currency translation increased sales by$1.9 million or 0.4%. Excluding the impact of foreign currency translation, sales increased$69.6 million or 13.5%, driven by an increase of 15.1% from operations due to benefits from firm break-fix MRO activity, stronger local account growth, sales process initiatives, and a greater recovery across heavy industries, offset by 1.6% due to one less sales day. Sales from ourFluid Power & Flow Control segment increased$54.1 million or 22.9%. Acquisitions within this segment increased sales by$12.1 million or 5.2%. Excluding the impact of businesses acquired, sales increased$41.9 million or 17.7%, driven by an increase of 19.3% from operations due to strong demand within the technology end market, as well as ongoing recovery across off-highway mobile, life sciences, chemical, and industrial industries, offset by 1.6% due to one less sales day. 21
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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 by Geographic Area 2021 2020 Sales Increase Acquisitions Foreign Currency Organic Change
United States $ 756.8 $ 647.8 $ 109.0 $ 12.1 $ - $ 96.9
Canada 66.3 57.8 8.5 - 2.0 6.5
Other countries 53.8 45.7 8.1 - (0.1) 8.2
Total $ 876.9 $ 751.3 $ 125.6 $ 12.1 $ 1.9 $ 111.6
Sales in our U.S. operations were up $109.0 million or 16.8%, as acquisitions
added $12.1 million or 1.9%. Excluding the impact of businesses acquired, U.S.
sales were up $96.9 million or 14.9%, driven by a 16.5% increase in operations,
offset by 1.6% due to one less sales day. Sales from our Canadian operations
increased $8.5 million or 14.6%. Favorable foreign currency translation
increased Canadian sales by $2.0 million or 3.5%. Excluding the impact of
foreign currency translation, Canadian sales increased $6.5 million or 11.1%.
Consolidated sales from our other country operations, which include Mexico ,
Australia , New Zealand , and Singapore , increased $8.1 million or 17.9% from the
prior year. Unfavorable foreign currency translation decreased other country
sales by $0.1 million or 0.1%. Excluding the impact of currency translation,
other country sales were up $8.2 million , or 18.0% during the quarter.
Our gross profit margin was 29.4% in the quarter ended December 31, 2021
compared to 27.9% in the prior year quarter. The increase in gross profit margin
reflects improving demand and ongoing margin initiatives. The gross profit
margin for the prior 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. This change was offset by 44 basis points due to a $3.8
million increase in LIFO expense. 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).
Three Months Ended Amount of change due to
December 31,
2021 2020 SD&A Increase Acquisitions Foreign Currency Organic Change SD&A
$ 179.4 $ 162.4 $ 17.0 $ 2.7 $ 0.5 $ 13.8 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 20.5% of sales in the quarter endedDecember 31, 2021 compared to 21.6% in the prior year quarter. SD&A increased$17.0 million or 10.5% compared to the prior year quarter. Changes in foreign currency exchange rates had the effect of increasing SD&A during the quarter endedDecember 31, 2021 by$0.5 million or 0.3% compared to the prior year quarter. SD&A from businesses acquired added$2.7 million or 1.6% of SD&A expenses, including$0.2 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A increased$13.8 million or 8.6% during the quarter endedDecember 31, 2021 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 endedDecember 31, 2020 . Excluding the impact of acquisitions and severance, total compensation increased$11.5 million during the quarter endedDecember 31, 2021 , primarily due to cost reduction actions taken by the Company in the prior year in response to the COVID-19 pandemic, including headcount reductions, temporary furloughs and pay reductions, and suspension of the 401(k) company match. All of the temporary cost reductions were reinstated in the second half of fiscal 2021. All other expenses within SD&A were up$2.7 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 22
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 operating income of $78.2 million during the quarter ended
December 31, 2021 , compared to an operating loss of $2.4 million in the prior
year quarter, primarily due to the impairment charges of $49.5 million in the
prior year quarter.
Operating income, before impairment, as a percentage of sales for the Service
Center Based Distribution segment increased to 11.5% in the current year quarter
from 8.3% in the prior year quarter. Operating income, as a percentage of sales
for the Fluid Power & Flow Control segment increased to 12.6% in the current
year quarter from 11.3% in the prior year quarter.
Other (income) expense, net was income of $0.9 million for the quarter, which
included unrealized gains on investments held by non-qualified deferred
compensation trusts of $1.0 million and $0.1 million of income from other items,
offset by net unfavorable foreign currency transaction losses of $0.2 million .
During the prior year quarter, other (income) expense, net was expense of $0.1
million , which included net unfavorable foreign currency transaction losses of
$1.8 million , offset by unrealized gains on investments held by non-qualified
deferred compensation trusts of $1.6 million and $0.1 million of income from
other items.
The effective income tax rate was 20.8% for the quarter ended December 31, 2021
compared to 47.5% for the quarter ended December 31, 2020 . The decrease in the
effective tax rate is due to changes in compensation-related deductions and
uncertain tax positions during the quarter ended December 31, 2021 compared to
the prior year quarter.
As a result of the factors addressed above, the Company had net income of $57.0
million during the quarter ended December 31, 2021 , compared to a net loss of
$5.3 million in the prior year quarter. Net income per share was $1.46 per share
for the quarter ended December 31, 2021 compared to net loss per share of $0.14
per share in the prior year quarter.
Results of Operations
Six Months Ended December 31, 2021 and 2020
The following table is included to aid in review of Applied's condensed
statements of consolidated income.
Six Months Ended
December 31, 2021 Change in $'s Versus
As a Percent of Net Sales Prior Period -
2021 2020 % Increase
Net sales 100.0 % 100.0 % 18.0 %
Gross profit 29.0 % 28.4 % 20.6 %
Selling, distribution & administrative expense 20.4 % 21.7 % 10.5 %
Operating income 8.6 % 3.3 % N/M
Net income 6.2 % 2.0 % N/M
During the six months ended December 31, 2021 , sales increased $269.5 million or
18.0% compared to the prior year period, with sales from acquisitions adding
$27.6 million or 1.8% and favorable foreign currency translation accounting for
an increase of $8.0 million or 0.5%. There were 125 selling days in the six
months ended December 31, 2021 and 126 selling days in the six months ended
December 31, 2020 . Excluding the impact of businesses acquired and foreign
currency translation, sales were up $233.9 million or 15.7% during the period,
driven by an increase from operations of 16.5% due to increased demand across
key end markets, offset by 0.8% due to one less sales day.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows changes in sales by reportable segment.
Six Months Ended Amount of change due to
December 31 ,
Sales by Reportable Segment 2021 2020 Sales Increase
Acquisitions Foreign Currency Organic Change
Service Center Based
Distribution $ 1,188.1 $ 1,029.0 $ 159.1 $ - $ 8.0 $ 151.1
Fluid Power & Flow Control 580.5 470.1 110.4 27.6 - 82.8
Total $ 1,768.6 $ 1,499.1 $ 269.5 $ 27.6 $ 8.0 $ 233.9
Sales from our Service Center Based Distribution segment, which operates
primarily in MRO markets, increased $159.1 million or 15.5%. Favorable foreign
currency translation increased sales by $8.0 million or 0.8%. Excluding the
impact of foreign currency translation, sales increased $151.1 million or 14.7%,
driven by an increase of 15.5% from operations due to benefits from firm
break-fix MRO activity, stronger local account growth, sales process
initiatives, and a greater recovery across heavy industries, offset by 0.8% due
to one less sales day.
Sales from our Fluid Power & Flow Control segment increased $110.4 million or
23.5%. Acquisitions within this segment increased sales by $27.6 million or
5.9%. Excluding the impact of businesses acquired, sales increased $82.8 million
or 17.6%, driven by an increase of 18.4% from operations due to strong demand
within the technology end market, as well as ongoing recovery across off-highway
mobile, life sciences, chemical, and industrial industries, offset by 0.8% due
to one less sales day.
The following table shows changes in sales by geographic area. Other countries
includes Mexico , Australia , New Zealand , and Singapore .
Six Months Ended Amount of change due to
December 31,
Sales by Geographic Area 2021 2020 Sales Increase Acquisitions Foreign Currency Organic Change
United States $ 1,521.0 $ 1,291.9 $ 229.1 $ 27.6 $ - $ 201.5
Canada 140.8 114.7 26.1 - 5.4 20.7
Other countries 106.8 92.5 14.3 - 2.6 11.7
Total $ 1,768.6 $ 1,499.1 $ 269.5 $ 27.6 $ 8.0 $ 233.9
Sales in our U.S. operations were up $229.1 million or 17.7%, as acquisitions
added $27.6 million or 2.1%. Excluding the impact of businesses acquired, U.S.
sales were up $201.5 million or 15.6%, driven by a 16.4% increase in operations,
offset by 0.8% due to one less sales day. Sales from our Canadian operations
increased $26.1 million or 22.8%. Favorable foreign currency translation
increased Canadian sales by $5.4 million or 4.7%. Excluding the impact of
foreign currency translation, Canadian sales were up $20.7 million or 18.1%.
Consolidated sales from our other country operations, which include Mexico ,
Australia , New Zealand , and Singapore , increased $14.3 million or 15.4% from the
prior year. Favorable foreign currency translation increased other country sales
by $2.6 million or 2.8%. Excluding the impact of currency translation, other
country sales were up $11.7 million , or 12.6%, during the period.
Our gross profit margin was 29.0% in the six months ended December 31, 2021
compared to 28.4% in the prior year period. The increase in gross profit margin
reflects improving demand and ongoing margin initiatives. The gross profit
margin for the prior year period 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 six months ended December 31, 2020 . This was
offset by 36 basis points due to a $6.3 million increase in LIFO expense over
the prior year period. 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.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows the changes in selling, distribution and administrative expense (SD&A).
Six Months Ended Amount of change due to
December 31,
2021 2020 SD&A Increase Acquisitions Foreign Currency Organic Change
SD&A $ 360.2 $ 325.9 $ 34.3 $ 7.2 $ 2.0 $ 25.1
SD&A consists of associate compensation, benefits and other expenses associated
with selling, purchasing, warehousing, supply chain management and providing
marketing and distribution of the Company's products, as well as costs
associated with a variety of administrative functions such as human resources,
information technology, treasury, accounting, insurance, legal, and facility
related expenses. SD&A was 20.4% of sales in the six months ended December 31,
2021 compared to 21.7% in the prior year period. SD&A increased $34.3 million or
10.5% compared to the prior year period. Changes in foreign currency exchange
rates had the effect of increasing SD&A during the six months ended December 31,
2021 by $2.0 million or 0.6% compared to the prior year period. SD&A from
businesses acquired added $7.2 million or 2.2% of SD&A expenses, including $0.6
million of intangibles amortization related to acquisitions. Excluding the
impact of businesses acquired and the unfavorable currency translation impact,
SD&A increased $25.1 million or 7.7% during the six months ended December 31,
2021 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, 2021 . Excluding the impact of acquisitions and
severance, total compensation increased $29.3 million during the six months
ended December 31, 2021 , primarily due to cost reduction actions taken by the
Company in the prior year in response to the COVID-19 pandemic, including
headcount reductions, temporary furloughs and pay reductions, and suspension of
the 401(k) company match. All of the temporary cost reductions were reinstated
in the second half of fiscal 2021. All other expenses within SD&A were down $3.8
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 increased $102.9 million , and as a percent of sales increased
to 8.6% from 3.3% during the prior year period, primarily due to non-cash
impairment charges of $49.5 million in the prior year period.
Operating income, before impairment, as a percentage of sales for the Service
Center Based Distribution segment increased to 11.1% in the current year period
from 9.0% in the prior year period. Operating income, as a percentage of sales
for the Fluid Power & Flow Control segment increased to 12.3% in the current
year period from 11.2% in the prior year period.
Other (income) expense, net was income of $1.2 million for the six months ended
December 31, 2021 , which included unrealized gains on investments held by
non-qualified deferred compensation trusts of $0.9 million , net favorable
foreign currency transaction gains of $0.4 million , and other income of $0.2
million , offset by other periodic post-employment costs of $0.3 million . During
the prior year period, other (income) expense, net was income of $0.1 million
and 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 other expense of $0.2 million .
The effective income tax rate was 21.2% for the six months ended December 31,
2021 compared to 15.0% for the six months ended December 31, 2020 . The increase
in the effective tax rate is due to changes in compensation-related deductions
and uncertain tax positions during the six months ended December 31, 2021
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.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As a result of the factors addressed above, net income for the six months ended
December 31, 2021 increased $80.5 million compared to the prior year period. Net
income was $2.81 per share for the six months ended December 31, 2021 compared
to $0.75 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. At December 31, 2021 , we
had total debt obligations outstanding of $721.6 million compared to $829.4
million at June 30, 2021 . Management expects that our existing cash, cash
equivalents, funds available under the revolving credit facility, and cash
provided from operations will be sufficient to finance normal working capital
needs in each of the countries in which we operate, payment of dividends,
acquisitions, investments in properties, facilities and equipment, debt service,
and the purchase of additional Company common stock. Management also believes
that additional long-term debt and line of credit financing could be obtained
based on the Company's credit standing and financial strength.
The Company's working capital at December 31, 2021 was $743.8 million , compared
to $768.9 million at June 30, 2021 . The current ratio was 2.9 to 1 at
December 31, 2021 and 2.8 to 1 at June 30, 2021 .
Net Cash Flows
The following table is included to aid in review of Applied's condensed
statements of consolidated cash flows; all amounts are in thousands.
Six Months Ended December 31,
Net Cash Provided by (Used in): 2021 2020
Operating Activities $ 81,264 $ 159,356
Investing Activities (28,877) (39,235)
Financing Activities (153,443) (104,254)
Exchange Rate Effect (1,846) 4,357
(Decrease) Increase in Cash and Cash Equivalents $
(102,902)
The decrease in cash provided by operating activities during the six months endedDecember 31, 2021 is driven by changes in working capital for the period partially offset by increased operating results. Changes in cash flows between periods related to working capital were driven by: Accounts receivable$ (18,495) Inventories$ (78,883) Other operating assets$ (12,594) Net cash used in investing activities during the six months endedDecember 31, 2021 decreased from the prior period primarily due to$7.0 million used for the acquisition ofR.R. Floody in the current year compared to$31.1 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 six months endedDecember 31, 2021 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$72.3 million of debt payments in the prior year period. Further, the Company used$10.1 million of cash for the purchase of treasury shares during the six months endedDecember 31, 2021 , 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 endedDecember 31, 2021 for$3.5 million . During the six months endedDecember 31, 2021 , we acquired 111,658 shares of treasury stock for$10.1 million . During the six months endedDecember 31, 2020 , the Company did not acquire any shares of treasury stock on the open market. AtDecember 31, 2021 , we had authorization to repurchase 352,960 shares. 26
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Borrowing Arrangements
A summary of long-term debt, including the current portion, follows (amounts in
thousands):
December 31, 2021 June 30, 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 725 846
Total debt $ 721,617 $ 829,396
Less: unamortized debt issuance costs 169 1,016
$ 721,448 $ 828,380
Revolving Credit Facility & Term Loan
In December 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 at December 31, 2021 , and were available to fund future acquisitions or
other capital and operating requirements. The interest rate on the revolving
credit facility was 1.2% as of December 31, 2021 .
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 . Unused
lines under the previous facility, net of outstanding letters of credit of $0.2
million to secure certain insurance obligations, totaled $249.8 million at June
30, 2021 , and were available to fund future acquisitions or other capital and
operating requirements. The interest rate on the term loan was 1.88% as of June
30, 2021 .
The Company paid $1.8 million of debt issuance costs related to the new
revolving credit facility in the three months ended December 31, 2021 , which are
included in other current assets and other assets on the condensed consolidated
balance sheet as of December 31, 2021 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 three months ended December 31, 2021 , 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 December 31, 2021 , 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 December 31, 2021 and June 30, 2021 ,
respectively, in order to secure certain insurance obligations.
Trade Receivable Securitization Facility
In August 2018 , the Company established a trade receivable securitization
facility (the "AR Securitization Facility"). On March 26, 2021 , the Company
amended the AR Securitization Facility to expand the eligible receivables, which
increased the maximum availability to $250.0 million and increased the fees on
the AR Securitization Facility to 0.98% per year. Availability is further
subject to changes in the credit ratings of our customers, customer
concentration levels or certain
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
characteristics of the accounts receivable being transferred and, therefore, at
certain times, we may not be able to fully access the $250.0 million of funding
available under the AR Securitization Facility. The AR Securitization Facility
effectively increases the Company's borrowing capacity by collateralizing a
portion of the amount of the U.S. operations' trade accounts receivable. The
Company uses the proceeds from the AR Securitization Facility as an alternative
to other forms of debt, effectively reducing borrowing costs. Borrowings under
this facility carry variable interest rates tied to LIBOR. The interest rate on
the AR Securitization Facility as of December 31, 2021 and June 30, 2021 was
1.07% and 1.20%, respectively. The termination date of the AR Securitization is
March 26, 2024 .
Unsecured Shelf Facility
At December 31, 2021 and June 30, 2021 , the Company had borrowings outstanding
under its unsecured shelf facility agreement with Prudential 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 in July 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 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 .
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 the State of
Ohio Development Services Agency , and matures in May 2024 .
The Company entered into an interest rate swap which mitigates variability in
forecasted interest payments on $409.0 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, 2021 , the most restrictive of these covenants required that the
Company have net indebtedness less than 3.75 times consolidated income before
interest, taxes, depreciation and amortization (as defined). At December 31,
2021 , the Company's net indebtedness was below 1.65 times consolidated income
before interest, taxes, depreciation and amortization (as defined). The Company
was in compliance with all financial covenants at December 31, 2021 .
Accounts Receivable Analysis
The following table is included to aid in analysis of accounts receivable and
the associated provision for losses on accounts receivable:
2021 2021
Accounts receivable, gross $ 536,847 $ 532,777
Allowance for doubtful accounts 16,713 16,455
Accounts receivable, net $ 520,134 $ 516,322
Allowance for doubtful accounts, % of gross receivables 3.1 % 3.1 %
Three Months Ended December 31, Six Months Ended December 31,
2021 2020 2021 2020
Provision for losses on accounts
receivable $ 531 $ 697 $ 1,328 $ 5,795
Provision as a % of net sales 0.06 % 0.09 % 0.08 % 0.39 %
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 53.4 at December 31, 2021 compared to 51.9 at
June 30, 2021 .
As of December 31, 2021 , approximately 4.3% of our accounts receivable balances
are more than 90 days past due, compared to 3.0% at June 30, 2021 . On an overall
basis, our provision for losses on accounts receivable represents 0.06% of our
sales in
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the three months ended December 31, 2021 , compared to 0.09% of sales for the
three months ended December 31, 2020 , and 0.08% of sales for the six months
ended December 31, 2021 compared to 0.39% of sales for the six months ended
December 31, 2020 . The decrease primarily relates to provisions recorded in the
prior 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 4.6 for the period ended December 31, 2021 and 4.3
for the period ended June 30, 2021 . We believe our inventory turnover ratio at
the end of the year will be similar or slightly better than the ratio at
December 31, 2021 .
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Under Private Securities Litigation Reform Act
Management's Discussion and Analysis contains statements that are
forward-looking based on management's current expectations about the future.
Forward-looking statements are often identified by qualifiers, such as
"guidance", "expect", "believe", "plan", "intend", "will", "should", "could",
"would", "anticipate", "estimate", "forecast", "may", "optimistic" and
derivative or similar words or expressions. Similarly, descriptions of
objectives, strategies, plans, or goals are also forward-looking statements.
These statements may discuss, among other things, expected growth, future sales,
future cash flows, future capital expenditures, future performance, and the
anticipation and expectations of the Company and its management as to future
occurrences and trends. The Company intends that the forward-looking statements
be subject to the safe harbors established in the Private Securities Litigation
Reform Act of 1995 and by the Securities and Exchange Commission in its rules,
regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking
statements. All forward-looking statements are based on current expectations
regarding important risk factors, many of which are outside the Company's
control. Accordingly, actual results may differ materially from those expressed
in the forward-looking statements, and the making of those statements should not
be regarded as a representation by the Company or any other person that the
results expressed in the statements will be achieved. In addition, the Company
assumes no obligation publicly to update or revise any forward-looking
statements, whether because of new information or events, or otherwise, except
as may be required by law.
Important risk factors include, but are not limited to, the following: risks
relating to the operations levels of our customers and the economic factors that
affect them; risks relating to the effects of the COVID-19 pandemic; changes in
the prices for products and services relative to the cost of providing them;
reduction in supplier inventory purchase incentives; loss of key supplier
authorizations, lack of product availability (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, public health emergency, earthquakes,
extreme weather events, other natural disasters, fires, floods, and accidents).
Other factors and unanticipated events could also adversely affect our business,
financial condition or results of operations. Risks can also change over time.
Further, the disclosure of a risk should not be interpreted to imply that the
risk has not already materialized.
We discuss certain of these matters and other risk factors more fully throughout
this Form 10-Q as well as other of our filings with the Securities and Exchange
Commission , including our Annual Report on Form 10-K for the year ended June 30,
2021 .
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