| | Year Ended June 30, As a % of Net Sales | | Change in Sales in fiscal 20182020 were $3.1$3.2 billion, which was $479.5$227.0 million or 18.5% above6.5% below the prior year, with sales from acquisitions accounting for $264.7adding $80.7 million or 10.2% of the increase,2.3% and favorableunfavorable foreign currency translation accounting for an increasea decrease of $16.0$10.5 million or 0.6%0.3%. There were 253.5 selling days in fiscal 2020 and 251.5 selling days in fiscal 2018 and 252.5 selling days in fiscal 2017.2019. Excluding the impact of businesses acquired and the impact of foreign currency translation, sales were up $198.8down $297.2 million or 7.7%8.5% during the year, of which 5.9% isdriven by a 9.4% decrease from operations due to weak demand across key end markets, further impacted by the economic slowdown resulting from the Service Center Based Distribution segment and 2.1% is from the Fluid Power & Flow Control segment,COVID-19 pandemic, offset by a 0.3% decreasean increase of 0.9% due to one lesstwo additional sales day.days.
The following table shows changes in sales by reportable segment. | | | Amounts in millions | | Amount of change due to | | Amount of change due to | | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Year ended June 30, | Sales Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Sales by Reportable Segment | 2018 |
| 2017 |
| 2020 |
| 2019 |
| | Service Center Based Distribution | $ | 2,346.4 |
| $ | 2,180.4 |
| $ | 166.0 |
| $ | 3.6 |
| $ | 16.0 |
| $ | 146.4 |
| $ | 2,242.0 |
| $ | 2,452.9 |
| $ | (210.9 | ) | $ | 23.8 |
| $ | (10.5 | ) | $ | (224.2 | ) | | Fluid Power & Flow Control | 726.9 |
| 413.4 |
| 313.5 |
| 261.1 |
| — |
| 52.4 |
| 1,003.7 |
| 1,019.8 |
| (16.1 | ) | 56.9 |
| — |
| (73.0 | ) | | Total | $ | 3,073.3 |
| $ | 2,593.8 |
| $ | 479.5 |
| $ | 264.7 |
| $ | 16.0 |
| $ | 198.8 |
| $ | 3,245.7 |
| $ | 3,472.7 |
| $ | (227.0 | ) | $ | 80.7 |
| $ | (10.5 | ) | $ | (297.2 | ) |
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $166.0decreased $210.9 million, or 7.6%8.6%. Acquisitions within this segment increased sales by $3.6$23.8 million or 0.2%1.0%, and favorableunfavorable foreign currency translation increaseddecreased sales by $16.0$10.5 million or 0.7%0.4%. Excluding the impact of businesses acquired and the impact of foreign currency translation, sales increased $146.4decreased $224.2 million or 6.7%,9.2% during the year, driven by a 10.0% decrease from operations due to weak demand across key end markets, offset by an increase of 7.0% from operations, offset by a 0.3% decrease0.8% due to one lesstwo additional sales day.days. Sales of our Fluid Power & Flow Control segment increased $313.5decreased $16.1 million or 75.8%1.6%. Acquisitions within this segment, primarily Olympus, increased sales $261.1$56.9 million or 63.2%5.6%. Excluding the impact of businesses acquired, sales increased $52.4decreased $73.0 million or 12.7%7.2%, driven by an increase of 13.1%a 8.0% decrease from operations, offset by a 0.4% decreasean 0.8% increase due to one lesstwo additional sales day.days. The decrease from operations is primarily due to slower demand in our flow control operations and weaker activity across our industrial OEM customer base.
The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore. | | | Amounts in millions | | Amount of change due to | | Amount of change due to | | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Year ended June 30, | Sales Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Sales by Geographic Area | 2018 |
| 2017 |
| 2020 |
| 2019 |
| | United States | $ | 2,615.1 |
| $ | 2,182.6 |
| $ | 432.5 |
| $ | 261.1 |
| $ | — |
| $ | 171.4 |
| $ | 2,819.4 |
| $ | 3,016.7 |
| $ | (197.3 | ) | $ | 80.7 |
| $ | — |
| $ | (278.0 | ) | | Canada | 273.6 |
| 252.0 |
| 21.6 |
| — |
| 11.3 |
| 10.3 |
| 248.6 |
| 271.3 |
| (22.7 | ) | — |
| (2.7 | ) | (20.0 | ) | | Other countries | 184.6 |
| 159.2 |
| 25.4 |
| 3.6 |
| 4.7 |
| 17.1 |
| 177.7 |
| 184.7 |
| (7.0 | ) | — |
| (7.8 | ) | 0.8 |
| | Total | $ | 3,073.3 |
| $ | 2,593.8 |
| $ | 479.5 |
| $ | 264.7 |
| $ | 16.0 |
| $ | 198.8 |
| $ | 3,245.7 |
| $ | 3,472.7 |
| $ | (227.0 | ) | $ | 80.7 |
| $ | (10.5 | ) | $ | (297.2 | ) |
Sales in our U.S. operations increased $432.5decreased $197.3 million or 19.8%6.5%, with acquisitions adding $261.1$80.7 million or 12.0%2.7%. Excluding the impact of businesses acquired, U.S. sales were up $171.4down $278.0 million or 7.8%9.2%, driven by a decrease of which 8.2% is growth10.0% from operations, offset by a 0.4% decreasean increase of 0.8% due to one lesstwo additional sales day.days. Sales from our Canadian operations increased $21.6decreased $22.7 million or 8.6%8.4%, and favorableunfavorable foreign currency translation increaseddecreased Canadian sales by $11.3$2.7 million or 4.5%1.0%. Excluding the impact of foreign currency translation, Canadian sales were up $10.3down $20.0 million or 4.1%7.4%, driven by a decrease of which 3.7% is growth8.2% from operations, and the remaining 0.4%offset by an increase isof 0.8% due to onetwo additional sales day.days. Consolidated sales from our other country operations increased $25.4decreased $7.0 million or 16.0%3.8% compared to the prior year. Acquisitions added sales of $3.6 million or 2.3% and favorableUnfavorable foreign currency translation increaseddecreased other country sales by $4.7$7.8 million or 2.9%4.2%. Excluding the impact of businesses acquired and the impact of foreign currency translation, other country sales were up $17.1$0.8 million or 10.8%0.4% compared to the prior year, driven by an increase from operations of 11.0%,1.2% due to additional sales days, offset by a 0.8% decrease of 0.2% due to one less sales day in Australia, New Zealand, and Singapore. The sales product mix for fiscal 2018 was 67.9% industrial products and 32.1% fluid power/flow control products compared to 71.5% and 28.5%, respectively, in the prior year.from operations.
Our gross profit margin increaseddecreased to 28.8%28.9% in fiscal 20182020 compared to 28.4%29.0% in fiscal 2017 due to the acquisition of FCX, which favorably impacted the2019. The gross profit margin was negatively affected by 3812 basis points in fiscal 2018.for $3.9 million of non-routine expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for certain locations that were closed during the year within the U.S. operations of the Service Center Based Distribution segment.
The following table shows the changes in SD&A. | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | SD&A Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | | 2018 |
| 2017 |
| | SD&A | $ | 658.2 |
| $ | 562.3 |
| $ | 95.9 |
| $ | 74.7 |
| $ | 3.9 |
| $ | 17.3 |
|
Selling,selling, distribution, and administrative expense (SD&A) . | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | SD&A Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | | 2020 |
| 2019 |
| | SD&A | $ | 717.7 |
| $ | 742.2 |
| $ | (24.5 | ) | $ | 20.8 |
| $ | (2.5 | ) | $ | (42.8 | ) |
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, facility related expenses and expenses incurred within acquiring businesses. SD&A increased $95.9decreased $24.5 million or 17.0%3.3% during fiscal 20182020 compared to the prior year, and as a percentpercentage of sales decreasedincreased to 22.1% in fiscal 2020 compared to 21.4% from 21.7% in fiscal 2017.2019. Changes in foreign currency exchange rates had the effect of increasingdecreasing SD&A by $3.9$2.5 million or 0.7%0.3% compared to the prior year. SD&A from businesses acquired added $74.7$20.8 million or 13.3% of SD&A expenses,2.8%, including $6.1 million of one-time costs and $9.6$1.9 million of intangibles amortization related to the FCX acquisition.acquisitions. Excluding the impact of businesses acquired and the unfavorablefavorable impact from foreign currency translation, SD&A increased $17.3decreased $42.8 million or 3.0%5.8% during fiscal 20182020 compared to fiscal 2017.2019. The Company incurred $5.1 million of non-routine expenses related to severance and facility consolidation primarily within the U.S. Operations of the Service Center Based Distribution segment during fiscal 2020, compared to $1.6 million of restructuring expenses incurred in fiscal 2019. Excluding the impact of acquisitions, total compensation increased $20.1excluding severance decreased $39.8 million during fiscal 2018 compared2020, primarily due to cost reduction actions taken by the Company in response to the prior fiscal year as a resultCOVID-19 pandemic, including headcount reductions, temporary furloughs and pay reductions, and suspension of merit increases and improved Company performance.the 401(k) company match. All other expenses within SD&A were down $2.8$6.5 million. During the quarter ended March 31, 2020, the Company performed its annual goodwill impairment test. As a result of this test, the Company recorded a $131.0 million non-cash goodwill impairment charge related to the Company's FCX operations in the Fluid Power & Flow Control segment, primarily due to the overall decline in the industrial economy, specifically slower demand in FCX's end markets. The non-cash goodwill impairment charge decreased net income by $118.8 million and earnings per share by $3.04 per share for fiscal 2020. In fiscal 2019, the Company recognized a non-cash impairment charge of $31.6 million for intangible assets related to the Company's Canadian operations within the Service Center Based Distribution segment, which decreased net income by $23.1 million and earnings per share by $0.59 per share for fiscal 2019. Operating income increased $50.4decreased $144.8 million, or 28.8%61.9%, to $225.8$89.0 million during fiscal 20182020 from $175.4$233.8 million during fiscal 2017,2019, and as a percentpercentage of sales, increaseddecreased to 7.3%2.7% from 6.8% due to growth from operations and6.7%, primarily as a result of the acquisition of FCX.goodwill impairment expense recorded during the current year. Operating income, before intangible impairment charges, as a percentage of sales for the Service Center Based Distribution segment increaseddecreased to 5.8%9.4% in fiscal 20182020 from 5.3%10.4% in fiscal 2017.2019. Operating income, before goodwill impairment charges, as a percentage of sales for the Fluid Power & Flow Control segment increaseddecreased to 11.4%10.9% in fiscal 20182020 from 11.3%11.0% in fiscal 2017. These increases are due to the positive leveraging impact from the increase in sales in the current year.
2019.
Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense. Other (income) expense,income, net, represents certain non-operating items of income and expense. Thisexpense, and was $2.4$2.8 million of income in fiscal 20182020 compared to $0.1$0.9 million of income in fiscal 2017.2019. Current year income primarily consists of life insurance income of $1.6 million, unrealized gains on investments held by non-qualified deferredcompensation trusts of $0.8$0.5 million and foreign currency transaction gains of $0.2$2.5 million, offset by net other periodic post-employment costsexpense of $0.2 million. Fiscal 20172019 income consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.2$0.7 million and life insurance income of $0.5 million, offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.2 million, and life insurance expense of $0.1$0.3 million. The effective income tax rate was 30.8%56.5% for fiscal 20182020 compared to 19.8%26.0% for fiscal 2017.2019. The fiscal 2018increase in the effective tax rate was favorably impacted by the enactment of the Tax Cuts and Jobs Act (the "Act") in December 2017, which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. This resulted in a blended statutory rate for the Company for fiscal 2018 of 28.06%. Overall, the Act resulted in a net tax benefit of $5.8 million for fiscal 2018. The corporate income tax rate change had a favorable impactis primarily due to the Company of $12.1 million,FCX goodwill impairment charge, which was offset by income tax expense of $3.9 million accounting for the one-time transition tax related to the Company's undistributed foreign earnings and expense of $2.4 million related to the re-measurement of deferred tax balances. The fiscal 2017 effective tax rate was favorably impacted by a $22.2 million net tax benefit, pertaining to a worthless stock tax deduction which decreasedincreased the effective tax rate by 13.3%.31.4% during fiscal 2020. The tax benefit was net ofCompany also recorded a $1.0 million valuation allowance applicabletax benefit related to the related state deferred income tax asset. This deduction was based onCARES Act during the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes. The fiscal 2017 effective tax rate wascurrent year, which favorably impacted furtherthe rate by $2.4 million of net excess tax benefits, resulting from stock-based compensation awards vesting and exercises, that were recognized as a reduction of income tax expense and decreased the effective income tax rate for1.8% in fiscal 2017 by 1.4%.2020. We expect our income tax rate for fiscal 20192021 to be in the range of 24.0%23.0% to 26.0%25.0%. As a result of the factors addresseddiscussed above, net income for fiscal 2018 increased $7.72020 decreased $120.0 million from the prior year. Net income per share was $3.61$0.62 per share for fiscal 20182020 compared to $3.40$3.68 per share for fiscal 2017.2019. Current year
results were favorablynegatively impacted by organic growth, as well as$3.04 per share for the goodwill impairment and $0.18 per share for non-routine expenses, offset by a favorable impact of $0.03 per share for the CARES Act tax benefit. The prior year results included positive impacts on earnings per share of $0.15$0.48 per share related tofor acquisitions, $0.37 per share for tax reform, and $0.05 per share related to the results of FCX, offset by a negative$0.69 per share unfavorable impact from the intangible impairment, which includes the impact of $0.13recording the $3.8 million valuation allowance in the third quarter of fiscal 2019, and a $0.04 per share for one-time costs related to the acquisition of FCX. The prior year results include a positiveunfavorable impact on earnings per share of $0.56 per share related to the tax benefit recorded for the worthless stock deduction. Net income per share was favorably impacted by lower weighted average common shares outstanding infrom restructuring charges during fiscal 2018 as a result of our share repurchase program.2019. At June 30, 2018,2020, we had a total of 610580 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore, versus 552600 at June 30, 2017.2019. The approximate number of Company employees was 6,6346,200 at June 30, 20182020 and 5,5546,650 at June 30, 2017. YEAR ENDED JUNE 30, 2017 vs. 2016
The following table is included to aid in review of Applied’s statements of consolidated income.
| | | | | | | | | | | | Year Ended June 30, As a % of Net Sales | | Change in $'s Versus Prior Period |
| | | 2017 |
| | 2016 |
| | % Change |
| | Net Sales | 100.0 | % | | 100.0 | % | | 2.9 | % | | Gross Profit Margin | 28.4 | % | | 28.1 | % | | 4.3 | % | | Selling, Distribution & Administrative | 21.7 | % | | 22.0 | % | | 1.7 | % | | Operating Income | 6.8 | % | | 3.6 | % | | 95.3 | % | | Net Income | 5.2 | % | | 1.2 | % | | 352.8 | % |
Sales in fiscal 2017 were $2.6 billion, which was $74.3 million or 2.9% above fiscal 2016, with sales from acquisitions accounting for $31.1 million or 1.2% of the increase, offset by a decrease due to unfavorable foreign currency translation of $1.1 million or 0.1%. There were 252.5 selling days in fiscal 2017 and 253.5 selling days in
fiscal 2016. Excluding the impact of businesses acquired and prior to the impact of foreign currency translation, sales were up $44.3 million or 1.8% during fiscal 2017, driven by an increase of 1.6% from our traditional core operations in addition to an increase of 0.6% from our upstream oil and gas-focused subsidiaries, offset by a 0.4% decrease due to one less sales day.
The following table shows changes in sales by reportable segment. | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Sales by Reportable Segment | 2017 |
| 2016 |
| | Service Center Based Distribution | $ | 2,180.4 |
| $ | 2,150.5 |
| $ | 29.9 |
| $ | 19.8 |
| $ | (1.1 | ) | $ | 11.2 |
| | Fluid Power & Flow Control | 413.4 |
| 369.0 |
| 44.4 |
| 11.3 |
| — |
| 33.1 |
| | Total | $ | 2,593.8 |
| $ | 2,519.5 |
| $ | 74.3 |
| $ | 31.1 |
| $ | (1.1 | ) | $ | 44.3 |
|
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $29.9 million, or 1.4%. Acquisitions within this segment increased sales by $19.8 million or 0.9%, while unfavorable foreign currency translation decreased sales by $1.1 million or 0.1%. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales increased $11.2 million or 0.6%, driven by an increase of 0.7% from our upstream oil and gas-focused subsidiaries and an increase of 0.3% from within our traditional core operations, offset by a 0.4% decrease due to one less sales day.
Sales of our Fluid Power & Flow Control segment increased $44.4 million or 12.0%. Acquisitions within this segment increased sales $11.3 million or 3.1%. Excluding the impact of businesses acquired, sales increased $33.1 million or 8.9%, driven by an increase from operations, primarily in the U.S., of 9.3%, offset by a decrease of 0.4% due to one less sales day.
The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Sales by Geographic Area | 2017 |
| 2016 |
| | United States | $ | 2,182.6 |
| $ | 2,117.5 |
| $ | 65.1 |
| $ | 25.1 |
| $ | — |
| $ | 40.0 |
| | Canada | 252.0 |
| 257.8 |
| (5.8 | ) | 6.0 |
| (0.2 | ) | (11.6 | ) | | Other countries | 159.2 |
| 144.2 |
| 15.0 |
| — |
| (0.9 | ) | 15.9 |
| | Total | $ | 2,593.8 |
| $ | 2,519.5 |
| $ | 74.3 |
| $ | 31.1 |
| $ | (1.1 | ) | $ | 44.3 |
|
Sales in our U.S. operations increased $65.1 million or 3.1%, with acquisitions adding $25.1 million or 1.2%. Excluding the impact of businesses acquired, U.S. sales were up $40.0 million or 1.9%, of which 1.4% was from our traditional core operations and 0.9% was from our upstream oil and gas-focused subsidiaries, offset by a 0.4% decrease due to one less sales day. Sales from our Canadian operations decreased $5.8 million or 2.2%, with unfavorable foreign currency translation decreasing Canadian sales by $0.2 million or 0.1%. Acquisitions added $6.0 million, or 2.3%. Excluding the impact of businesses acquired and unfavorable foreign currency translation impact, Canadian sales were down $11.6 million or 4.4%, of which 2.0% related to the upstream oil and gas-focused subsidiaries, 2.0% was from the traditional core operations, and the remaining 0.4% decrease due to one less sales day. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, increased $15.0 million or 10.4% compared to fiscal 2016. Unfavorable foreign currency translation decreased other country sales by $0.9 million or 0.7%. Prior to the impact of currency translation, other country sales were up $15.9 million or 11.1% compared to the fiscal 2016, driven by an increase from operations of 13.0%, primarily in Australia and Singapore, offset by a decrease of 1.9% due to fewer sales days.
The sales product mix for fiscal 2017 was 71.5% industrial products and 28.5% fluid power products compared to 72.9% industrial and 27.1% fluid power in fiscal 2016.
Our gross profit margin increased to 28.4% in fiscal 2017 compared to 28.1% in fiscal 2016. The increase was primarily due to recording a more favorable impact from LIFO layer liquidations which increased gross profit by $9.4 million in fiscal 2017 and $2.1 million in fiscal 2016, offset by a $4.8 million increase in scrap expense in fiscal 2017 compared to fiscal 2016. Further, the gross profit margin for fiscal 2016 was negatively impacted by $3.6 million of
restructuring expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for the upstream oil and gas-focused operations.
The following table shows the changes in SD&A. | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | SD&A Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | | 2017 |
| 2016 |
| | SD&A | $ | 562.3 |
| $ | 552.8 |
| $ | 9.5 |
| $ | 8.2 |
| $ | 0.1 |
| $ | 1.2 |
|
Selling, distribution and administrative expenses (SD&A) consist 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, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $9.5 million or 1.7% during fiscal 2017 compared to fiscal 2016, and as a percent of sales decreased to 21.7% from 21.9% in fiscal 2016. Changes in foreign currency exchange rates had the effect of increasing SD&A by $0.1 million or less than 0.1% compared to fiscal 2016. Additional SD&A from businesses acquired in fiscal 2017 added $8.2 million or 1.5% of SD&A expenses including $1.0 million associated with intangibles amortization. Excluding the impact of businesses acquired and the unfavorable impact from foreign currency translation, SD&A increased $1.2 million or 0.2% during fiscal 2017 compared to fiscal 2016. Excluding the impact of acquisitions, total compensation increased $12.9 million during fiscal 2017 compared to fiscal 2016 as a result of merit increases, improved Company performance, and increased costs related to health care claims. These increases were offset by severance expense and other restructuring charges related to consolidating facilities of $5.2 million of SD&A included in fiscal 2016 that did not reoccur during fiscal 2017. Also, excluding the impact of acquisitions, bad debt expense decreased $2.3 million during fiscal 2017 compared to fiscal 2016, due to improvement in aged receivables. Further, the Company recorded a gain of $1.6 million in fiscal 2017 related to the sale of five buildings during the year. All other expenses within SD&A were down $2.6 million.
During the third quarter of fiscal 2016, the Company performed its annual goodwill impairment test. As a result of this test, the Company determined that all of the goodwill associated with the Australia/New Zealand Service Center Based Distribution reporting unit was impaired as of January 1, 2016. This impairment was the result of the decline in the mining and extraction industries in Australia and the resulting reduced customer spending due to a decline in demand throughout Asia. Further, due to a sustained decline in oil prices and reduced customer spending in Canada, the Company determined that a portion of the goodwill associated with the Canada Service Center Based Distribution reporting unit was also impaired as of January 1, 2016. Accordingly, the Company recognized a combined non-cash impairment charge of $64.8 million for goodwill during fiscal 2016, which decreased net income by $63.8 million and earnings per share by $1.62. Changes in future results, assumptions, and estimates used in calculating the goodwill impairment test could result in additional impairment charges in future periods.
Operating income increased $85.6 million, or 95.3%, to $175.4 million during fiscal 2017 from $89.8 million during fiscal 2016, and as a percent of sales, increased to 6.8% from 3.6%. These increases were primarily due to the Company recognizing a non-cash goodwill impairment charge of $64.8 million and restructuring charges of $8.8 million during fiscal 2016 that did not reoccur during fiscal 2017, as well as higher sales volume in fiscal 2017.
Operating income as a percentage of sales for the Service Center Based Distribution segment was 5.3% in fiscal 2017 and fiscal 2016, before the goodwill impairment charge.
Operating income as a percentage of sales for the Fluid Power & Flow Control segment increased to 11.3% in fiscal 2017 from 10.1% in fiscal 2016. This increase was due to the positive leveraging impact from the increase in sales, primarily from our U.S. operations in this segment, in fiscal 2017.
Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.
Other (income) expense, net, represents certain non-operating items of income and expense. This was $0.1 million of income in fiscal 2017 compared to $2.0 million of expense in fiscal 2016. Fiscal 2017 income primarily consists of unrealized gains on investments held by non-qualified deferredcompensation trusts of $1.2 million, offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.2 million, and life
insurance expense of $0.1 million. Fiscal 2016 expense consisted primarily of foreign currency transaction losses of $1.0 million and net other periodic post-employment costs of $1.0 million.
The effective income tax rate was 19.8% for fiscal 2017 compared to 62.6% for fiscal 2016. The fiscal 2017 effective tax rate was favorably impacted by a $22.2 million net tax benefit pertaining to a worthless stock tax deduction, which decreased the effective tax rate by 13.3%. The tax benefit was net of a $1.0 million valuation allowance applicable to the related state deferred income tax asset. This deduction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes. The fiscal 2016 effective tax rate was unfavorably impacted due to the recording of $64.8 million of goodwill impairment during fiscal 2016, of which $61.3 million was not tax deductible. The goodwill impairment increased the effective tax rate for fiscal 2016 by 27.1%. The remaining decrease in the effective tax rate was primarily due to the adoption of ASU 2016-09 in the first quarter of fiscal 2017, which requires excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises to be recognized in the income statement. During fiscal 2017, $2.4 million of net excess tax benefits were recognized as a reduction of income tax expense, which decreased the effective income tax rate for fiscal 2017 by 1.4%. All undistributed earnings of our foreign subsidiaries were considered to be permanently reinvested at June 30, 2017 and 2016.
As a result of the factors addressed above, net income for fiscal 2017 increased $104.3 million from fiscal 2016. Net income per share was $3.40 per share for fiscal 2017 compared to $0.75 for fiscal 2016. Fiscal 2017 results included a positive impact on earnings per share of $0.56 per share related to the tax benefit recorded for the worthless stock deduction. Fiscal 2016 results included negative impacts on earnings per share of $1.62 per share for goodwill impairment charges and $0.16 per share for restructuring charges. Net income per share was favorably impacted by lower weighted average common shares outstanding in fiscal 2017 as a result of our share repurchase program.
At June 30, 2017, we had a total of 552 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore, versus 559 at June 30, 2016.
The number of Company employees was 5,554 at June 30, 2017 and 5,569 at June 30, 2016.2019.
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 June 30, 20182020 we had total debt obligations outstanding of $966.1$935.3 million compared to $292.0$959.8 million at June 30, 2017.2019. Management expects that our existing cash, cash equivalents, funds available under the revolving credit and uncommitted shelf facilities,facility, and cash provided from operations, will be sufficient to finance normal working capital needs in each of the countries we operate in, 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 June 30, 20182020 was $625.5$733.7 million compared to $572.8$724.3 million at June 30, 2017.2019. The current ratio was 2.42.7 to 1 at both June 30, 20182020 and 2.8 to 1 at June 30, 2017.2019. Net Cash Flows The following table is included to aid in review of Applied’s statements of consolidated cash flows; all amounts
are in thousands. | | | | Year Ended June 30, | Year Ended June 30, | | | 2018 |
| | 2017 |
| | 2016 |
| 2020 |
| | 2019 |
| | Net Cash Provided by (Used in): | | | | | | | | | | Operating Activities | $ | 147,304 |
| | $ | 164,619 |
| | $ | 162,014 |
| $ | 296,714 |
| | $ | 180,601 |
| | Investing Activities | (797,906 | ) | | (16,894 | ) | | (75,031 | ) | (55,404 | ) | | (55,102 | ) | | Financing Activities | 600,284 |
| | (103,349 | ) | | (93,007 | ) | (78,238 | ) | | (71,539 | ) | | Exchange Rate Effect | (589 | ) | | 820 |
| | (3,585 | ) | (2,740 | ) | | 109 |
| | Increase (Decrease) in Cash and Cash Equivalents | $ | (50,907 | ) | | $ | 45,196 |
| | $ | (9,609 | ) | | | Increase in Cash and Cash Equivalents | | $ | 160,332 |
| | $ | 54,069 |
|
The decreaseincrease in cash provided by operating activities during fiscal 20182020 is primarily due to increaseddriven by operating results and the changes in working capital levels to support increased sales compared tofor the prior year periods. The decrease in cash was further impacted byyear:
increased interest payments, and the payment of $7.1 million of one-time costs, both related to the FCX acquisition. These decreases were partially offset by improved operating results, including the impact of the FCX acquisition. | | | | | | Decrease in accounts receivable | $ | 65,972 |
| | Decrease in inventory | $ | 73,618 |
| | Decrease in accounts payable | $ | (24,068 | ) |
Net cash used in investing activities in fiscal 20182020 included $775.7$37.2 million used for the acquisitionsacquisition of FCXOlympus and DICOFASA, and $23.2$20.1 million used for capital expenditures. Net cash used in investing activities in fiscal 20172019 included $17.0 million for capital expenditures and $2.8 million used for acquisitions. These were offset by $2.9 million of proceeds received from the sale of five buildings during fiscal 2017. Net cash used in investing activities in fiscal 2016 included $13.1 million for capital expenditures and $62.5 million used for acquisitions. Net cash provided by financing activities in fiscal 2018 included $780.0 million of cash from borrowings under the new credit facility and $19.5 million of net borrowings under the revolving credit facility, offset by $125.4 million of long-term debt repayments. Further uses of cash were $45.9 million for dividend payments, $22.8 million used to repurchase 393,300 shares of treasury stock, and $3.3$37.5 million used for the paymentacquisitions of debt issuance costs.FPS, MilRoc and Woodward, and $19.0 million for capital expenditures.
Net cash used in financing activities in fiscal 2017 included $3.4$49.6 million and $161.7 million of long-term debt repayments in 2020 and $33.02019, respectively, offset by $25.0 million of net repaymentscash borrowings under a unsecured shelf facility agreement with Prudential Investment Management in 2020 and $175.0 million of cash borrowings from the revolving credit facility.trade receivable securitization facility in 2019. Further uses of cash in 2020 were $44.6$48.9 million for dividend payments, $8.2$2.6 million used to repurchase 162,500pay taxes for shares of treasury stock, $11.3withheld, and $2.4 million used for acquisition holdback payments. Further uses of cash in 2019 were $47.3 million for dividend payments, and$11.2 million used to repurchase 192,082 shares of treasury stock, $3.5 million used to pay taxes for shares withheld. Net cash used in financing activities in fiscal 2016 included $98.7 million of long-term debt repaymentswithheld, and $19.0 million of net repayments under the revolving credit facility, offset by $125.0 million of cash from borrowings under the credit facility. Further uses of cash were $43.3 million for dividend payments, $37.5$2.6 million used to repurchase 951,100 shares of treasury stock, and $18.9 million offor acquisition holdback payments.
The increase in dividends over the last three fiscal yearsyear is the result of regular increases in our dividend payout rates. We paid dividends of $1.18, $1.14,$1.26 and $1.10$1.22 per share in fiscal 2018, 20172020 and 2016,2019, respectively.
Capital Expenditures We expect capital expenditures for fiscal 20192021 to be in the $26.0$15.0 million to $28.0$20.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for fiscal 20192021 is expected to be in the range of $21.0$22.5 million to $22.0$23.5 million. ERP Project
In fiscal 2011 Applied commenced its ERP (SAP) project to transform the Company's technology platforms
and enhance its business information and technology systems for future growth. We first deployed our solution in our Western Canadian operating locations and our traditional U.S. Service Center Based Distribution businesses, excluding recent acquisitions. In fiscal 2014, the Company initiated the conversion to SAP of its related financial and accounting systems, including the receivables, payables, treasury, inventory, fixed assets, general ledger and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation process/system, were transitioned to SAP during fiscal 2015. At the beginning of fiscal 2016 the Company converted to a new consolidation process and system. During the fourth quarter of fiscal 2017, operations in Eastern Canada transitioned onto SAP, and the majority of the Company's upstream oil and gas-focused operations transitioned onto SAP during fiscal 2018. The Company will continue to evaluate and consider an appropriate deployment schedule for other operations not on SAP.
Share Repurchases The Board of Directors has authorized the repurchase of shares of the Company’s stock. These purchases may
be made in open market and negotiated transactions, from time to time, depending upon market conditions.
At June 30, 2018,2020, we had authorization to purchase an additional 1,056,700864,618 shares. The Company did not repurchase shares in fiscal 2020. In fiscal 2018, 20172019 and 2016,2018, we repurchased 393,300, 162,500,192,082 and 951,100393,300 shares of the Company’s common stock, respectively, at an average price per share of $57.92, $50.72, $58.10,and $39.39,$57.92, respectively. Borrowing Arrangements A summary of long-term debt, including the current portion, follows; all amounts are in thousands: | | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | Unsecured credit facility | $ | 589,250 |
| | $ | 613,625 |
| | Trade receivable securitization facility | 175,000 |
| | 175,000 |
| | Series C notes | 120,000 |
| | 120,000 |
| | Series D Notes | 25,000 |
| | 50,000 |
| | Series E Notes | 25,000 |
| | — |
| | Other | 1,026 |
| | 1,204 |
| | Total debt | $ | 935,276 |
| | $ | 959,829 |
| | Less: unamortized debt issuance costs | 1,487 |
| | 1,943 |
| | | $ | 933,789 |
| | $ | 957,886 |
|
In January 2018, in conjunction with the acquisition of FCX, 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. At June 30, 2018, theThe Company had $775.1 millionno amount outstanding under the term loanrevolver as of June 30, 2020 and $19.5 million outstanding under the revolver.June 30, 2019. Unused lines under this facility, net of outstanding letters of credit of $3.6$1.9 million and $3.2 million, respectively, to secure certain insurance obligations, totaled $226.9$248.1 million and $246.8 million at June 30, 2018,2020 and June 30, 2019, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.94% and 4.19% as of June 30, 2020 and June 30, 2019, respectively.
In August 2018, was 4.13%.
the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021. The weighted averagemaximum 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 amount outstanding under the revolving credit facilityAR Securitization Facility as of June 30, 20182020 and June 30, 2019 was 3.93%.1.07% and 3.33%, respectively. At June 30, 2017, the Company had $120.3 million outstanding under the term loan in the previous credit facility agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017. No amount was outstanding under the revolver as of June 30, 2017. Unused lines under this facility, net of outstanding letters of credit of $2.4 million to secure certain insurance obligations, totaled $247.6 million at June 30, 2017. Additionally, the Company had letters of credit outstanding with a separate bank, not associated with either revolving credit agreement, in the amount of $2.7 million as of June 30, 20182020 and June 30, 2017, respectively, in order to secure certain insurance obligations.
At June 30, 2018 and June 30, 2017,2019, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 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 have a principal amount of $120.0 million, and carry a fixed interest rate of 3.19%, and are due in equal principal payments in July 2020, 2021, and 2022. A $40.0 million principal payment was made on the "Series C" notes in July 2020. The "Series D" notes have a principal amount of $50.0 million and carry a fixed interest rate of 3.21%. A $25.0 million principal payment was made on the "Series D" notes during fiscal 2020, and the remaining principal balance of $25.0 million
is due in October 2023. In October 2019, the Company amended its unsecured shelf facility agreement with Prudential Investment Management to authorize the issuance of "Series E" notes, which have a principal amount of $25.0 million, carry a fixed interest rate of 3.08%, and are due in equal principalOctober 2024. The Company entered into an interest rate swap which mitigates variability in forecasted interest payments in October 2019 and 2023. As of June 30, 2018, $50.0 million in additional financing was available under this facility. In 2014, the Company assumed $2.4on $431.0 million of debt as a part of the headquarters facility acquisition. The 1.50% fixed interestCompany’s U.S. dollar-denominated unsecured variable rate debt. For more information, see note is held by7, Derivatives, to the State of Ohio Development Services Agency, maturingconsolidated financial statements, included in May 2024. At June 30, 2018Item 8 under the caption “Financial Statements and 2017, $1.4 million and $1.7 million was outstanding, respectively.Supplementary Data.”
The new credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2018,2020, the most restrictive of these covenants required that the Company have net indebtedness less than 4.253.75 times consolidated income before interest, taxes, depreciation and amortization.amortization (as defined). At June 30, 2018,2020, the Company's net indebtedness was less than 3.03.1 times consolidated income before interest, taxes, depreciation and amortization.amortization (as defined). The Company was in compliance with all financial covenants at June 30, 2018.2020. Accounts Receivable Analysis The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable (all dollar amounts are in thousands): | | | June 30, | 2018 |
| | 2017 |
| 2020 |
| | 2019 |
| | Accounts receivable, gross | $ | 562,377 |
| | $ | 400,559 |
| $ | 463,659 |
| | $ | 551,400 |
| | Allowance for doubtful accounts | 13,566 |
| | 9,628 |
| 13,661 |
| | 10,498 |
| | Accounts receivable, net | $ | 548,811 |
| | $ | 390,931 |
| $ | 449,998 |
| | $ | 540,902 |
| | Allowance for doubtful accounts, % of gross receivables | 2.4 | % | | 2.4 | % | 2.9 | % | | 1.9 | % | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| 2020 |
| | 2019 |
| | Provision for losses on accounts receivable | $ | 2,803 |
| | $ | 2,071 |
| $ | 14,055 |
| | $ | 4,058 |
| | Provision as a % of net sales | 0.09 | % | | 0.08 | % | 0.43 | % | | 0.12 | % |
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 55.055.9 at June 30, 20182020 versus 51.655.2 at June 30, 2017. The inclusion of FCX had no impact on the Company's DSO at June 30, 2018. Accounts receivable increased 40.4% this year, of which 20.7% is accounts receivable for FCX. The remaining increase is due to an increase in sales excluding FCX for the twelve months ended June 30, 2018.2019. Approximately 2.4%4.6% of our accounts receivable balances are more than 90 days past due at June 30, 20182020 compared to 1.7%3.0% at June 30, 2017. This increase primarily relates to our U.S. Service Center Based Distribution businesses.2019. On an overall basis, our provision for losses from uncollected receivables represents 0.09%0.43% of our sales in the year ended June 30, 2018.2020, compared to 0.12% of sales for the year ended June 30, 2019. This 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 uncollected receivables 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. As activities slowed in the second half of fiscal 2020, the Company took actions to reduce its overall inventory, which resulted in a net decrease in inventory of $58.4 million. 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 uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the period ended June 30, 20182020 was 4.03.8 versus 3.74.2 at June 30, 2017.2019. We believe our inventory turnover ratio in fiscal 20192021 will be slightly better than our fiscal 20182020 levels.
CONTRACTUAL OBLIGATIONS The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 20182020 (in thousands): | | | | Total |
| | Period Less Than 1 yr |
| | Period 2-3 yrs |
| | Period 4-5 yrs |
| | Period Over 5 yrs |
| | Other |
| Total |
| | Period Less Than 1 yr |
| | Period 2-3 yrs |
| | Period 4-5 yrs |
| | Period Over 5 yrs |
| | Other |
| | Operating leases | $ | 111,400 |
| | $ | 38,100 |
| | $ | 45,300 |
| | $ | 17,000 |
| | $ | 11,000 |
| | — |
| $ | 104,165 |
| | $ | 29,979 |
| | $ | 39,328 |
| | $ | 19,540 |
| | $ | 15,318 |
| | — |
| | Planned funding of post-retirement obligations | 16,300 |
| | 3,500 |
| | 4,400 |
| | 1,800 |
| | 6,600 |
| | — |
| 10,000 |
| | 900 |
| | 1,800 |
| | 500 |
| | 6,800 |
| | — |
| | Unrecognized income tax benefit liabilities, including interest and penalties | 4,700 |
| | — |
| | — |
| | — |
| | — |
| | 4,700 |
| 6,000 |
| | — |
| | — |
| | — |
| | — |
| | 6,000 |
| | Long-term debt obligations | 966,100 |
| | 19,700 |
| | 128,900 |
| | 792,300 |
| | 25,200 |
| | — |
| 935,276 |
| | 79,181 |
| | 805,744 |
| | 50,351 |
| | — |
| | — |
| | Interest on long-term debt obligations (1) | 84,300 |
| | 18,300 |
| | 40,800 |
| | 25,000 |
| | 200 |
| | — |
| 40,100 |
| | 17,000 |
| | 21,900 |
| | 1,200 |
| | — |
| | — |
| | Acquisition holdback payments | 3,365 |
| | 2,592 |
| | 698 |
| | — |
| | 75 |
| | — |
| 4,086 |
| | 2,563 |
| | 1,448 |
| | 75 |
| | — |
| | — |
| | Total Contractual Cash Obligations | $ | 1,186,165 |
| | $ | 82,192 |
| | $ | 220,098 |
| | $ | 836,100 |
| | $ | 43,075 |
| | $ | 4,700 |
| $ | 1,099,627 |
| | $ | 129,623 |
| | $ | 870,220 |
| | $ | 71,666 |
| | $ | 22,118 |
| | $ | 6,000 |
|
(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations. Rates in effect as of June 30, 20182020 are used for variable rate debt. Purchase orders for inventory and other goods and services are not included in our estimates as we are unable to aggregate the amount of such purchase orders that represent enforceable and legally binding agreements specifying all significant terms. The previous table includes the gross liability for unrecognized income tax benefits including interest and penalties in the “Other” column as the Company is unable to make a reasonable estimate regarding the timing of cash settlements, if any, with the respective taxing authorities. CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. The Business and Accounting Policies note to the consolidated financial statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. LIFO Inventory Valuation and Methodology Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories, and the average cost method for foreign inventories. We adopted the link chain dollar value LIFO method for accounting for U.S. inventories in fiscal 1974. Approximately 16.8%17.3% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $139.2$155.5 million as reflected in our consolidated balance sheet at June 30, 2018.2020. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. See the Inventories note to the
consolidated financial statements in Item 8 under the caption "Financial Statements and Supplementary Data,"
for further information.
Allowances for Slow-Moving and Obsolete Inventories We evaluate the recoverability of our slow-moving and inactive inventories at least quarterly. We estimate the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. Our ability to recover our cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. A significant portion of the products we hold in inventory have long shelf lives, are not highly susceptible to obsolescence and are eligible for return under various supplier return programs.obsolescence. As of June 30, 20182020 and 2017,2019, the Company's reserve for slow-moving or obsolete inventories was $38.1$42.9 million and $28.8$41.1 million, respectively, recorded in inventories in the consolidated balance sheets. The increase is primarily due to a $6.8 million reserve related to the inventory acquired with FCX.
Allowances for Doubtful Accounts We evaluate the collectibility of trade accounts receivable based on a combination of factors. Initially, we estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of certain customers and industries estimated to be a greater credit risk, trends within the entire customer pool and changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Accounts are written off against the allowance when it becomes evident that collection will not occur. As of June 30, 20182020 and 2017,2019, our allowance for doubtful accounts was 2.4%2.9% and 1.9% of gross receivables.receivables, respectively. Our provision for losses on accounts receivable was $2.8$14.1 million, $2.1$4.1 million and $4.3$2.8 million in fiscal 2018, 20172020, 2019 and 2016,2018, respectively. Goodwill and Intangibles Goodwill is recognized as the amount by which the costThe purchase price of an acquired entity exceedscompany is allocated between intangible assets and the net amount assigned totangible assets of the acquired and liabilities assumed.business with the residual of the purchase price recorded as goodwill. Goodwill for acquired businesses is accounted for using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. As part of acquisition accounting, we also recognize acquired identifiable intangible assets such as customer relationships, vendor relationships, trade names, and non-competition agreements apart from goodwill. Finite-lived identifiable intangibles are evaluated for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model.
We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price. Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a one-step approach. The fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Goodwill on our consolidated financial statements relates to both the Service Center Based Distribution segment and the Fluid Power & Flow Control segment. The Company has sixeight reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2018.2020. The Company concluded that allseven of the reporting units’ fair value exceeded their carrying amounts by at least 30%10% as of January 1, 2018. However, for one of our2020. Specifically, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The Canada and Mexico reporting units withhave goodwill balances of approximately $28.0$27.2 million if we doand $5.2 million, respectively, as of June 30, 2020. The carrying value of the final reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131.0 million. The non-cash impairment charge was the result of the overall decline in the industrial economy, specifically slower demand in FCX's end markets. This led to reduced spending by customers and reduced revenue expectations. As of June 30, 2020, the Company's goodwill balance was $540.6 million, of which $309.0 million relates to the FCX reporting unit. If the Company does not achieve our forecasted sales growth and margin improvements goodwill could be further impaired.
The fair values of the reporting units in accordance with the goodwill impairment test were determined using the Incomeincome and Marketmarket approaches. The Incomeincome 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.factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margins, and discount rates. The Marketmarket approach utilizes an analysis of comparable publicly traded companies.companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA) and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key Level 3 based assumptions 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. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values.
Income Taxes Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. As of June 30, 2018,2020, the Company had recognized $56.1$38.1 million of net deferred tax liabilities. Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets on a jurisdiction by jurisdiction basis. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future taxable income levels.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT This Form 10-K, including 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, or changes in supplier distribution programs;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; the volatility of our stock price and the resulting impact on our consolidated financial statements; 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, and international trade, such as recent tariffsdata privacy and proposed tariffs on imports;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 our Form 10-K, as well as other of our filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates.
We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. As of June 30, 2018, we did not have any outstanding derivative instruments. Foreign Currency Exchange Rate Risk Because we operate throughout North America, Australia and New Zealand and approximately 14.9%13.1% of our fiscal year 20182020 net sales were generated outside the United States, foreign currency exchange rates can impact our financial position, results of operations and competitive position. The financial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive income (loss)loss as reported in the statements of consolidated comprehensive income. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the statements of consolidated income as a component of other (income) expense,income, net. Applied does not currently hedge the net investments in our foreign operations. During the course of the fiscal year, the Canadian, Mexican, Australian and New Zealand currency exchange rates decreased in relation to the U.S. dollar by 2.0%4.0%, 9.2%17.1%, 4.1%,1.8% and 7.4%4.0%, respectively. In the twelve months ended June 30, 2018,2020, we experienced net foreign currency translation losses totaling $8.9$18.5 million, which were included in other comprehensive income (loss).loss. We utilize a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in foreign currency rates. AExcluding the non-cash goodwill impairment charge recorded in fiscal 2020, a 10% strengthening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 20182020 would have resulted in a $0.9$1.3 million decrease in net income for the year ended June 30, 2018. A2020. Excluding the non-cash goodwill impairment charge recorded in fiscal 2020, a 10% weakening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 20182020 would have resulted in a $0.9$1.3 million increase in net income for the year ended June 30, 2018.2020. InterestInterest Rate Risk
Our primary exposure to interest rate risk results from our outstanding debt obligations with variable interest rates. The levels of fees and interest charged on our various debt facilities are based upon leverage levels and market interest rates. The Company uses interest rate swap instruments to mitigate variability in forcasted interest rates. Our variable interest rate debt facilities outstanding include our five-year credit facility, which provides for a revolving credit facility with a capacity of up to $250.0 million in borrowings and $19.5 millionwith no balance outstanding at June 30, 2018, and2020, a $780.0 million term loan, of which $775.1$589.3 million was outstanding at June 30, 2018.2020, and a $175.0 million trade receivable securitization facility, all of which was outstanding at June 30, 2020. In January 2019, the Company entered into an interest rate swap on $463.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. The notional amount of the interest rate swap was $431.0 million as of June 30, 2020. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. Fixed interest rate debt facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $1.4$1.0 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $431.7$782.0 million during fiscal 2018.2020. The impact of a hypothetical 1.0% increase in the interest rates on our average variable interest rate bank borrowings (not considering the impact of our interest rate swap) would have resulted in a $4.3$7.8 million increase in interest expense. Due to the interest rate swap, the impact of a hypothetical 1.0% increase in the variable interest rate would have reduced net cash interest paid by $4.3 million. Changes in market interest rates would also impact interest rates on these facilities. For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and note 5notes 6 and 7 to the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Shareholders of Applied Industrial Technologies, Inc.
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 20182020 and 2017,2019, the related statements of consolidated income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2018,2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018,2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2018,2020, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 17, 201814, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective July 1, 2019, the Company adopted the FASB’s new standard related to leases using the optional transition method, which required application of the new guidance to only those leases that existed at the date of adoption. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill - FCX and Canada Reporting Units - Refer to Note 5 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the income and market approaches. The determination of the fair value using the income approach 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. The determination of the fair value using the market approach requires management to make significant estimates and assumptions related to the forecasts of future revenues, EBITDA and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The goodwill balance was
$540.6 million as of June 30, 2020, of which $309.0 million related to the FCX reporting unit and $27.2 million related to the Canada reporting unit. The fair value of the FCX reporting unit did not exceed its carrying value as of the measurement date and, therefore, an impairment charge of $131.0 million was recognized in 2020. The fair value of the Canada reporting unit exceeded its carrying value by 12% as of the measurement date and, therefore, no impairment was recognized.
Given the nature of the FCX and Canada reporting units’ operations, the sensitivity of the business to changes in the economy, the reporting unit’s historical performance as compared to projections, and the difference between its fair value and the carrying value, auditing management’s judgments regarding forecasts of future revenues and EBITDA, as well as selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates for the FCX and Canada reporting units, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the forecasts of future revenues and EBITDA (“forecasts”), and the selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates (“market multiples”) for the FCX and Canada reporting units included the following, among others: We tested the effectiveness of controls over management’s goodwill impairment evaluation, such as controls related to management’s forecasts and the selection of the discount rate and market multiples used. We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in industry reports for the various industries the reporting units operate within. With the assistance of our fair value specialists, we evaluated the discount rate, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rate selected by management. With the assistance of our fair value specialists, we evaluated the market multiples by evaluating the selected comparable publicly traded companies and the adjustments made for differences in growth prospects and risk profiles between the reporting units and the comparable publicly traded companies. We tested the underlying source information and mathematical accuracy of the calculations. With the assistance of our fair value specialists, we evaluated the fair value of the reporting units based upon reconciling the fair values of the reporting units to the market capitalization of the Company.
/s/ Deloitte & Touche LLP Cleveland, Ohio
August 14, 2020
August 17, 2018
We have served as the Company's auditor since 1966.
STATEMENTS OF CONSOLIDATED INCOME (In thousands, except per share amounts)
| | | | | | | | | | | | | | | Year Ended June 30, | | 2018 |
| | 2017 |
| | 2016 |
| | Net Sales | | $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
| | Cost of Sales | | 2,189,279 |
| | 1,856,051 |
| | 1,812,006 |
| | Gross Profit | | 883,995 |
| | 737,695 |
| | 707,422 |
| | Selling, Distribution and Administrative, including depreciation | | 658,168 |
| | 562,309 |
| | 552,846 |
| | Goodwill Impairment | | — |
| | — |
| | 64,794 |
| | Operating Income | | 225,827 |
| | 175,386 |
| | 89,782 |
| | Interest Expense | | 24,142 |
| | 8,831 |
| | 9,004 |
| | Interest Income | | (657 | ) | | (290 | ) | | (241 | ) | | Other (Income) Expense, net | | (2,376 | ) | | (121 | ) | | 2,041 |
| | Income Before Income Taxes | | 204,718 |
| | 166,966 |
| | 78,978 |
| | Income Tax Expense | | 63,093 |
| | 33,056 |
| | 49,401 |
| | Net Income | | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| | Net Income Per Share — Basic | | $ | 3.65 |
| | $ | 3.43 |
| | $ | 0.75 |
| | Net Income Per Share — Diluted | | $ | 3.61 |
| | $ | 3.40 |
| | $ | 0.75 |
|
| | | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| | Net sales | | $ | 3,245,652 |
| | $ | 3,472,739 |
| | $ | 3,073,274 |
| | Cost of sales | | 2,307,916 |
| | 2,465,116 |
| | 2,189,279 |
| | Gross profit | | 937,736 |
| | 1,007,623 |
| | 883,995 |
| | Selling, distribution and administrative expense, including depreciation | | 717,747 |
| | 742,241 |
| | 658,168 |
| | Goodwill and intangible impairment | | 131,000 |
| | 31,594 |
| | — |
| | Operating income | | 88,989 |
| | 233,788 |
| | 225,827 |
| | Interest expense | | 37,264 |
| | 40,788 |
| | 24,142 |
| | Interest income | | (729 | ) | | (600 | ) | | (657 | ) | | Other income, net | | (2,782 | ) | | (881 | ) | | (2,376 | ) | | Income before income taxes | | 55,236 |
| | 194,481 |
| | 204,718 |
| | Income tax expense | | 31,194 |
| | 50,488 |
| | 63,093 |
| | Net income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| | Net income per share — basic | | $ | 0.62 |
| | $ | 3.72 |
| | $ | 3.65 |
| | Net income per share — diluted | | $ | 0.62 |
| | $ | 3.68 |
| | $ | 3.61 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (In thousands)
| | | | | | | | | | | | | | | Year Ended June 30, | | 2018 |
| | 2017 |
| | 2016 |
| | Net income per the statements of consolidated income | | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| | | | | | | | | | Other comprehensive (loss) income, before tax: | | | | | | | | Foreign currency translation adjustments | | (8,875 | ) | | 2,238 |
| | (24,441 | ) | | Post-employment benefits: | | | | | | | | Actuarial gain (loss) on re-measurement | | 709 |
| | 2,038 |
| | (1,998 | ) | | Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs | | (73 | ) | | 506 |
| | 518 |
| | Unrealized gain (loss) on investment securities available for sale | | 37 |
| | 91 |
| | (52 | ) | | Total other comprehensive (loss) income, before tax | | (8,202 | ) | | 4,873 |
| | (25,973 | ) | | Income tax expense (benefit) related to items of other comprehensive income (loss) | | 319 |
| | 1,029 |
| | (598 | ) | | Other comprehensive (loss) income, net of tax | | (8,521 | ) | | 3,844 |
| | (25,375 | ) | | Comprehensive income | | $ | 133,104 |
| | $ | 137,754 |
| | $ | 4,202 |
|
| | | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| | Net income per the statements of consolidated income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| | | | | | | | | | Other comprehensive (loss) income, before tax: | | | | | | | | Foreign currency translation adjustments | | (18,499 | ) | | 2,021 |
| | (8,875 | ) | | Post-employment benefits: | | | | | | | | Actuarial (loss) gain on re-measurement | | (2,192 | ) | | (372 | ) | | 709 |
| | Reclassification of actuarial (gains) losses and prior service cost into other income, net and included in net periodic pension costs | | (66 | ) | | (306 | ) | | (73 | ) | | Unrealized gain on investment securities available for sale | | — |
| | — |
| | 37 |
| | Cumulative effect of adopting accounting standard | | — |
| | (50 | ) | | — |
| | Unrealized loss on cash flow hedge | | (16,615 | ) | | (14,446 | ) | | — |
| | Reclassification of interest from cash flow hedge into interest expense | | 4,638 |
| | 244 |
| | — |
| | Total other comprehensive loss, before tax | | (32,734 | ) | | (12,909 | ) | | (8,202 | ) | | Income tax (benefit) expense related to items of other comprehensive loss | | (3,190 | ) | | (3,246 | ) | | 319 |
| | Other comprehensive loss, net of tax | | (29,544 | ) | | (9,663 | ) | | (8,521 | ) | | Comprehensive (loss) income | | $ | (5,502 | ) | | $ | 134,330 |
| | $ | 133,104 |
|
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (In thousands)
| | | June 30, | | 2018 |
| | 2017 |
| | 2020 |
| | 2019 |
| | Assets | | | | | | | | | | Current assets | | | | | | | | | | Cash and cash equivalents | | $ | 54,150 |
| | $ | 105,057 |
| | $ | 268,551 |
| | $ | 108,219 |
| | Accounts receivable, less allowances of $13,566 and $9,628 | | 548,811 |
| | 390,931 |
| | | Accounts receivable, net | | | 449,998 |
| | 540,902 |
| | Inventories | | 422,069 |
| | 345,145 |
| | 389,150 |
| | 447,555 |
| | Other current assets | | 32,990 |
| | 41,409 |
| | 52,070 |
| | 51,462 |
| | Total current assets | | 1,058,020 |
| | 882,542 |
| | 1,159,769 |
| | 1,148,138 |
| | Property — at cost | | | | | | | | | | Land | | 14,411 |
| | 14,250 |
| | 14,339 |
| | 14,452 |
| | Buildings | | 104,419 |
| | 97,529 |
| | 104,396 |
| | 101,338 |
| | Equipment, including computers and software | | 177,813 |
| | 162,432 |
| | 195,220 |
| | 189,579 |
| | Total property — at cost | | 296,643 |
| | 274,211 |
| | 313,955 |
| | 305,369 |
| | Less accumulated depreciation | | 175,300 |
| | 166,143 |
| | 192,054 |
| | 181,066 |
| | Property — net | | 121,343 |
| | 108,068 |
| | 121,901 |
| | 124,303 |
| | Operating lease assets, net | | | 90,636 |
| | — |
| | Identifiable intangibles, net | | 435,947 |
| | 163,562 |
| | 343,215 |
| | 368,866 |
| | Goodwill | | 646,643 |
| | 206,135 |
| | 540,594 |
| | 661,991 |
| | Other assets | | 23,788 |
| | 27,288 |
| | 27,436 |
| | 28,399 |
| | Total Assets | | $ | 2,285,741 |
| | $ | 1,387,595 |
| | $ | 2,283,551 |
| | $ | 2,331,697 |
| | Liabilities | | | | | | | | | | Current liabilities | | | | | | | | | | Accounts payable | | $ | 256,886 |
| | $ | 180,614 |
| | $ | 186,270 |
| | $ | 237,289 |
| | Current portion of long-term debt | | 19,183 |
| | 4,814 |
| | 78,646 |
| | 49,036 |
| | Compensation and related benefits | | 73,370 |
| | 58,785 |
| | 61,887 |
| | 67,978 |
| | Other current liabilities | | 83,112 |
| | 65,540 |
| | 99,280 |
| | 69,491 |
| | Total current liabilities | | 432,551 |
| | 309,753 |
| | 426,083 |
| | 423,794 |
| | Long-term debt | | 944,522 |
| | 286,769 |
| | 855,143 |
| | 908,850 |
| | Post-employment benefits | | 11,985 |
| | 16,715 |
| | | Other liabilities | | 81,720 |
| | 29,102 |
| | 158,783 |
| | 102,019 |
| | Total Liabilities | | 1,470,778 |
| | 642,339 |
| | 1,440,009 |
| | 1,434,663 |
| | Shareholders’ Equity | | | | | | | | | | Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding | | — |
| | — |
| | — |
| | — |
| Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,703 and 39,041 shares outstanding, respectively | | 10,000 |
| | 10,000 |
| | Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,710 and 38,597 shares outstanding, respectively | | | 10,000 |
| | 10,000 |
| | Additional paid-in capital | | 169,383 |
| | 164,655 |
| | 176,492 |
| | 172,931 |
| | Retained earnings | | 1,129,678 |
| | 1,033,751 |
| | 1,200,570 |
| | 1,229,148 |
| | Treasury shares — at cost (15,510 and 15,172 shares), respectively | | (403,875 | ) | | (381,448 | ) | | | Treasury shares — at cost (15,503 and 15,616 shares), respectively | | | (414,090 | ) | | (415,159 | ) | | Accumulated other comprehensive loss | | (90,223 | ) | | (81,702 | ) | | (129,430 | ) | | (99,886 | ) | | Total Shareholders’ Equity | | 814,963 |
| | 745,256 |
| | 843,542 |
| | 897,034 |
| | Total Liabilities and Shareholders’ Equity | | $ | 2,285,741 |
| | $ | 1,387,595 |
| | $ | 2,283,551 |
| | $ | 2,331,697 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands) | | | Year Ended June 30, | | 2018 |
| | 2017 |
| | 2016 |
| | 2020 |
| | 2019 |
| | 2018 |
| | Cash Flows from Operating Activities | | | | | | | | | | | | | | Net income | | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | Goodwill impairment | | — |
| | — |
| | 64,794 |
| | | Goodwill & Intangible impairment | | | 131,000 |
| | 31,594 |
| | — |
| | Depreciation and amortization of property | | 17,798 |
| | 15,306 |
| | 15,966 |
| | 21,196 |
| | 20,236 |
| | 17,798 |
| | Amortization of intangibles | | 32,065 |
| | 24,371 |
| | 25,580 |
| | 41,553 |
| | 41,883 |
| | 32,065 |
| | Amortization of stock appreciation rights and options | | 1,961 |
| | 1,891 |
| | 1,543 |
| | 2,954 |
| | 2,437 |
| | 1,961 |
| | Deferred income taxes | | 1,615 |
| | (2,852 | ) | | (6,581 | ) | | (13,292 | ) | | 2,368 |
| | 1,615 |
| | Provision for losses on accounts receivable | | 2,803 |
| | 2,071 |
| | 4,303 |
| | 14,055 |
| | 4,058 |
| | 2,803 |
| | Unrealized foreign exchange transaction (gains) losses | | (667 | ) | | (333 | ) | | 61 |
| | (1,357 | ) | | 238 |
| | (667 | ) | | Other share-based compensation expense | | 4,666 |
| | 3,629 |
| | 2,524 |
| | 4,000 |
| | 4,474 |
| | 4,666 |
| | (Gain) loss on sale of property | | (335 | ) | | (1,541 | ) | | 337 |
| | | Other | | — |
| | 103 |
| | — |
| | | Gain on sale of property | | | (1,157 | ) | | (459 | ) | | (335 | ) | | Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | | | | | | Accounts receivable | | (83,103 | ) | | (42,267 | ) | | 26,414 |
| | 74,437 |
| | 8,465 |
| | (83,103 | ) | | Inventories | | (33,436 | ) | | (3,624 | ) | | 25,081 |
| | 57,028 |
| | (16,590 | ) | | (33,436 | ) | | Other operating assets | | 6,947 |
| | (6,162 | ) | | 2,964 |
| | (5,268 | ) | | (7,738 | ) | | 6,947 |
| | Accounts payable | | 50,345 |
| | 32,076 |
| | (28,644 | ) | | (53,856 | ) | | (29,788 | ) | | 50,345 |
| | Other operating liabilities | | 5,020 |
| | 8,041 |
| | (1,905 | ) | | 1,379 |
| | (24,570 | ) | | 5,020 |
| | Cash provided by Operating Activities | | 147,304 |
| | 164,619 |
| | 162,014 |
| | 296,714 |
| | 180,601 |
| | 147,304 |
| | Cash Flows from Investing Activities | | | | | | | | | | | | | | Property purchases | | (23,230 | ) | | (17,045 | ) | | (13,130 | ) | | | Capital expenditures | | | (20,115 | ) | | (18,970 | ) | | (23,230 | ) | | Proceeds from property sales | | 978 |
| | 2,924 |
| | 603 |
| | 1,948 |
| | 1,003 |
| | 978 |
| | Cash paid for acquisition of businesses, net of cash acquired | | (775,654 | ) | | (2,773 | ) | | (62,504 | ) | | (37,237 | ) | | (37,526 | ) | | (775,654 | ) | | Other | | | — |
| | 391 |
| | — |
| | Cash used in Investing Activities | | (797,906 | ) | | (16,894 | ) | | (75,031 | ) | | (55,404 | ) | | (55,102 | ) | | (797,906 | ) | | Cash Flows from Financing Activities | | | | | | | | | | | | | | Net borrowings (repayments) under revolving credit facility, classified as long term | | 19,500 |
| | (33,000 | ) | | (19,000 | ) | | | Net (repayments) borrowings under revolving credit facility | | | — |
| | (19,500 | ) | | 19,500 |
| | Borrowings under long-term debt facilities | | 780,000 |
| | — |
| | 125,000 |
| | 25,000 |
| | 175,000 |
| | 780,000 |
| | Long-term debt repayments | | (125,420 | ) | | (3,353 | ) | | (98,662 | ) | | (49,553 | ) | | (161,738 | ) | | (125,420 | ) | | Debt issuance costs | | (3,298 | ) | | — |
| | (719 | ) | | | Payment of debt issuance costs | | | (95 | ) | | (775 | ) | | (3,298 | ) | | Purchases of treasury shares | | (22,778 | ) | | (8,242 | ) | | (37,465 | ) | | — |
| | (11,158 | ) | | (22,778 | ) | | Dividends paid | | (45,858 | ) | | (44,619 | ) | | (43,330 | ) | | (48,873 | ) | | (47,266 | ) | | (45,858 | ) | | Excess tax benefits from share-based compensation | | — |
| | — |
| | 208 |
| | | Acquisition holdback payments | | (319 | ) | | (11,307 | ) | | (18,913 | ) | | (2,440 | ) | | (2,610 | ) | | (319 | ) | | Exercise of stock appreciation rights and options | | 102 |
| | 656 |
| | 896 |
| | 330 |
| | — |
| | 102 |
| | Taxes paid for shares withheld | | (1,645 | ) | | (3,484 | ) | | (1,022 | ) | | (2,607 | ) | | (3,492 | ) | | (1,645 | ) | | Cash provided by (used in) Financing Activities | | 600,284 |
| | (103,349 | ) | | (93,007 | ) | | | Cash (used in) provided by Financing Activities | | | (78,238 | ) | | (71,539 | ) | | 600,284 |
| | Effect of exchange rate changes on cash | | (589 | ) | | 820 |
| | (3,585 | ) | | (2,740 | ) | | 109 |
| | (589 | ) | | (Decrease) increase in cash and cash equivalents | | (50,907 | ) | | 45,196 |
| | (9,609 | ) | | | Increase (decrease) in cash and cash equivalents | | | 160,332 |
| | 54,069 |
| | (50,907 | ) | | Cash and cash equivalents at beginning of year | | 105,057 |
| | 59,861 |
| | 69,470 |
| | 108,219 |
| | 54,150 |
| | 105,057 |
| | Cash and Cash Equivalents at End of Year | | $ | 54,150 |
| | $ | 105,057 |
| | $ | 59,861 |
| | $ | 268,551 |
| | $ | 108,219 |
| | $ | 54,150 |
| | | | | | | | | | | | | | | | Supplemental Cash Flow Information | | | | | | | | | | | | | | Cash paid during the year for: | | | | | | | | | | | | | | Income taxes | | 41,724 |
| | 38,772 |
| | 54,749 |
| | 41,162 |
| | 54,294 |
| | 41,724 |
| | Interest | | 25,560 |
| | 8,561 |
| | 9,497 |
| | 36,648 |
| | 40,142 |
| | 25,560 |
|
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands)
| | | For the Years Ended June 30, 2018, 2017 and 2016 | | Shares of Common Stock Outstanding |
| | Common Stock |
| | Additional Paid-In Capital |
| |
Retained Earnings |
| | Treasury Shares- at Cost |
| | Accumulated Other Comprehensive Income (Loss) |
| | Total Shareholders' Equity |
| | | Balance at July 1, 2015 | | 39,905 |
| | $ | 10,000 |
| | $ | 160,072 |
| | $ | 969,548 |
| | $ | (338,121 | ) | | $ | (60,171 | ) | | $ | 741,328 |
| | | Net income | | | | | | | | 29,577 |
| | | | | | 29,577 |
| | | Other comprehensive income (loss) | | | | | | | | | | | | (25,375 | ) | | (25,375 | ) | | | Cash dividends — $1.10 per share | | | | | | | | (54,266 | ) | | | | | | (54,266 | ) | | | Purchases of common stock for treasury | | (951 | ) | | | | | | | | (37,465 | ) | | | | (37,465 | ) | | | Treasury shares issued for: | | | | | | | | | | | | | |
| | | Exercise of stock appreciation rights and options | | 64 |
| | | | (391 | ) | | | | 1,000 |
| | | | 609 |
| | | Performance share awards | | 8 |
| |
| | (308 | ) | |
| | 116 |
| |
| | (192 | ) | | | Restricted stock units | | 15 |
| | | | (530 | ) | | | | 232 |
| | | | (298 | ) | | | Compensation expense — stock appreciation rights and options | |
| | | | 1,543 |
| | | |
| | | | 1,543 |
| | | Other share-based compensation expense | | | | | | 2,524 |
| | | | | | | | 2,524 |
| | | Other | | 16 |
| | | | (381 | ) | | (38 | ) | | 350 |
| | | | (69 | ) | | | Balance at June 30, 2016 | | 39,057 |
| | 10,000 |
| | 162,529 |
| | 944,821 |
| | (373,888 | ) | | (85,546 | ) | | 657,916 |
| | | Net income | | | | | | | | 133,910 |
| | | | | | 133,910 |
| | | Other comprehensive income (loss) | | | | | | | | | | | | 3,844 |
| | 3,844 |
| | | Cash dividends — $1.14 per share | | | | | | | | (45,005 | ) | | | | | | (45,005 | ) | | | Purchases of common stock for treasury | | (163 | ) | | | | | | | | (8,242 | ) | | | | (8,242 | ) | | | Treasury shares issued for: | | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 111 |
| | | | (2,218 | ) | | | | 105 |
| | | | (2,113 | ) | | | Performance share awards | | 10 |
| | | | (360 | ) | | | | 126 |
| | | | (234 | ) | | | Restricted stock units | | 15 |
| | | | (624 | ) | | | | 227 |
| | | | (397 | ) | | | Compensation expense — stock appreciation rights and options | | | | | | 1,891 |
| | | | | | | | 1,891 |
| | | Other share-based compensation expense | | | | | | 3,629 |
| | | | | | | | 3,629 |
| | | Other | | 11 |
| | | | (192 | ) | | 25 |
| | 224 |
| | | | 57 |
| | | For the Years Ended June 30, 2020, 2019 and 2018 | | | Shares of Common Stock Outstanding |
| | Common Stock |
| | Additional Paid-In Capital |
| |
Retained Earnings |
| | Treasury Shares- at Cost |
| | Accumulated Other Comprehensive Loss |
| | Total Shareholders' Equity |
| | Balance at June 30, 2017 | | 39,041 |
| | 10,000 |
| | 164,655 |
| | 1,033,751 |
| | (381,448 | ) | | (81,702 | ) | | 745,256 |
| | 39,041 |
| | $ | 10,000 |
| | $ | 164,655 |
| | $ | 1,033,751 |
| | $ | (381,448 | ) | | $ | (81,702 | ) | | $ | 745,256 |
| | Net income | | | | | | | | 141,625 |
| | | | | | 141,625 |
| | | | | | | | 141,625 |
| | | | | | 141,625 |
| | Other comprehensive income (loss) | | | | | | | | | | | | (8,050 | ) | | (8,050 | ) | | | | | | | | | | | | (8,050 | ) | | (8,050 | ) | | Reclassifications of certain income tax effects from accumulated other comprehensive loss | | | | | | | | 471 |
| | | | (471 | ) | | — |
| | | | | | | | 471 |
| | | | (471 | ) | | — |
| | Cash dividends — $1.18 per share | |
| | | | | | (46,162 | ) | | | | | | (46,162 | ) | | | | | | | | (46,162 | ) | | | | | | (46,162 | ) | | Purchases of common stock for treasury | | (393 | ) | | | |
| | | | (22,778 | ) | | | | (22,778 | ) | | (393 | ) | | | | | | | | (22,778 | ) | | | | (22,778 | ) | | Treasury shares issued for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 19 |
| | | | (482 | ) | | | | 84 |
| | | | (398 | ) | | 19 |
| | | | (482 | ) | | | | 84 |
| | | | (398 | ) | | Performance share awards | | 5 |
| | | | (273 | ) | | | | (24 | ) | | | | (297 | ) | | 5 |
| | | | (273 | ) | | | | (24 | ) | | | | (297 | ) | | Restricted stock units | | 15 |
| | | | (740 | ) | | | | (56 | ) | | | | (796 | ) | | 15 |
| | | | (740 | ) | | | | (56 | ) | | | | (796 | ) | | Compensation expense — stock appreciation rights and options | | | | | | 1,961 |
| | | | | | | | 1,961 |
| | | | | | 1,961 |
| | | | | | | | 1,961 |
| | Other share-based compensation expense | | | | | | 4,666 |
| | | | | | | | 4,666 |
| | | | | | 4,666 |
| | | | | | | | 4,666 |
| | Other | | 16 |
| | | | (404 | ) | | (7 | ) | | 347 |
| | | | (64 | ) | | 16 |
| | | | (404 | ) | | (7 | ) | | 347 |
| | | | (64 | ) | | Balance at June 30, 2018 | | 38,703 |
| | $ | 10,000 |
| | $ | 169,383 |
| | $ | 1,129,678 |
| | $ | (403,875 | ) | | $ | (90,223 | ) | | $ | 814,963 |
| | 38,703 |
| | 10,000 |
| | 169,383 |
| | 1,129,678 |
| | (403,875 | ) | | (90,223 | ) | | 814,963 |
| | Net income | | | | | | | | | 143,993 |
| | | | | | 143,993 |
| | Other comprehensive income (loss) | | | | | | | | | | | | | (9,663 | ) | | (9,663 | ) | | Cumulative effect of adopting accounting standards | | | | | | | | | 3,056 |
| | | | | | 3,056 |
| | Cash dividends — $1.22 per share | | | | | | | | | (47,621 | ) | | | | | | (47,621 | ) | | Purchases of common stock for treasury | | | (192 | ) | | | | | | | | (11,158 | ) | | | | (11,158 | ) | | Treasury shares issued for: | | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | | 30 |
| | | | (1,069 | ) | | | | (59 | ) | | | | (1,128 | ) | | Performance share awards | | | 18 |
| | | | (844 | ) | | | | (301 | ) | | | | (1,145 | ) | | Restricted stock units | | | 23 |
| | | | (1,057 | ) | | | | (120 | ) | | | | (1,177 | ) | | Compensation expense — stock appreciation rights and options | | | | | | | 2,437 |
| | | | | | | | 2,437 |
| | Other share-based compensation expense | | | | | | | 4,474 |
| | | | | | | | 4,474 |
| | Other | | | 15 |
| | | | (393 | ) | | 42 |
| | 354 |
| | | | 3 |
| | Balance at June 30, 2019 | | | 38,597 |
| | 10,000 |
| | 172,931 |
| | 1,229,148 |
| | (415,159 | ) | | (99,886 | ) | | 897,034 |
| | Net income | | | | | | | | | 24,042 |
| | | | | | 24,042 |
| | Other comprehensive income (loss) | | | | | | | | | | | | | (29,544 | ) | | (29,544 | ) | | Cumulative effect of adopting accounting standards | | | | | | | | | (3,275 | ) | | | | | | (3,275 | ) | | Cash dividends — $1.26 per share | | | | | | | | | (49,305 | ) | | | | | | (49,305 | ) | | Treasury shares issued for: | | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | | 43 |
| | | | (730 | ) | | | | 71 |
| | | | (659 | ) | | Performance share awards | | | 36 |
| | | | (1,540 | ) | | | | 362 |
| | | | (1,178 | ) | | Restricted stock units | | | 17 |
| | | | (671 | ) | | | | 213 |
| | | | (458 | ) | | Compensation expense — stock appreciation rights and options | | | | | | | 2,954 |
| | | | | | | | 2,954 |
| | Other share-based compensation expense | | | | | | | 4,000 |
| | | | | | | | 4,000 |
| | Other | | | 17 |
| | | | (452 | ) | | (40 | ) | | 423 |
| | | | (69 | ) | | Balance at June 30, 2020 | | | 38,710 |
| | $ | 10,000 |
| | $ | 176,492 |
| | $ | 1,200,570 |
| | $ | (414,090 | ) | | $ | (129,430 | ) | | $ | 843,542 |
|
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES Business Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is a leading value-added distributor and technical solutions provider of bearings, power transmission products, engineeredindustrial motion, fluid power, components and systems, specialty flow control, solutions,automation technologies, and other industrial supplies, serving Maintenancerelated maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve MRO (Maintenance, Repair & Operations (MRO)Operations) and OriginalOEM (Original Equipment Manufacturer (OEM) customersManufacturer) end users in virtually every industry. In addition, Applied provides engineering, design and systems integration forall industrial fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, fluid power, and flow control shop services. Applied also offers storeroom services and inventory management solutionsmarkets through our multi-channel capabilities that provide added value to its customers.choice, convenience, and expertise. Although the Company does not generally manufacture the products it sells, it does assemble and repair certain products and systems. Consolidation The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Foreign Currency The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive (loss) incomeloss in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other (income) expense,income, net. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. Marketable Securities The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other (income) expense,income, net in the statements of consolidated income. Concentration of Credit Risk The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and Singapore. As such, the Company does not believe that a significant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While the Company monitors the creditworthiness of these institutions, a crisis in the financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand.
Accounts Receivable
Accounts receivable are stated at their estimated net realizable value and consist of amounts billed or billable and currently due from customers. The Company maintains an allowance for doubtful accounts, which reflects management’s best estimate of probable losses based on an analysis of customer accounts, known troubled accounts, historical experience with write-offs, and other currently available evidence. Allowances for Doubtful Accounts The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be
greater credit risks, trends within the entire customer pool, and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. The allowance for doubtful accounts was $13,661 and $10,498 at June 30, 2020 and June 30, 2019, respectively. Inventories Inventories are valued at the average cost, method, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S. inventories in fiscal 1974. At June 30, 2018,2020, approximately 16.8%17.3% of the Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. The Company evaluates the recoverability of its slow moving and inactive inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence, and, in certain instances, can be eligible for return under supplier return programs. Supplier Purchasing Programs The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s fiscal year end or the supplier’s year end; however, program length and ending dates can vary. Incentives are received in the form of cash or credits against purchases upon attainment of specified purchase volumes and are received either monthly, quarterly or annually. The incentives are generally a specified percentage of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases expected during the life of the program. Supplier programs are analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon program completion, differences between estimates and actual incentives subsequently received have not been material. Benefits under these supplier purchasing programs are recognized under the Company’s inventory accounting methods as a reduction of cost of sales when the inventories representing these purchases are recorded as cost of sales. Accrued incentives expected to be settled as a credit against future purchases are reported on the consolidated balance sheets as an offset to amounts due to the related supplier. Property and Related Depreciation and Amortization Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and is included in selling, distribution and administrative expensesexpense in the accompanying statements of consolidated income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease if a shorter period, and equipment is depreciated over three to ten years. The Company capitalizes internal use software development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use. Amortization of software begins when it is ready for its intended use, and is computed on a straight-line basis over the estimated useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the asset group's recorded value cannot be recovered from undiscounted future cash flows. Impairment losses, if any, would be measured based upon the difference between the carrying amount of an asset group and theits fair value of the assets.value.
Goodwill and Intangible Assets Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in conditions indicate an evaluation should be completed. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. The Company utilizes discounted cash flow modelsthe income and market multiples for comparable businessesapproaches to determine the fair value of reporting units. Evaluating impairment requires significant judgment by management, including estimated future operating results, estimated future cash flows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While the Company uses available information to prepare the estimates and evaluations, actual results could differ significantly. The Company recognizes acquired identifiable intangible assets such as customer relationships, trade names, vendor relationships, and non-competition agreements apart from goodwill. Customer relationship identifiable intangibles are amortized using the sum-of-the-years-digits method or the expected cash flow method over estimated useful lives consistent with assumptions used in the determination of their value. Amortization of all other finite-lived identifiable intangible assets is computed using the straight-line method over the estimated period of benefit. Amortization of identifiable intangible assets is included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model. Identifiable intangible assets with indefinite lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed. The Company does not currently have any indefinite-lived identifiable intangible assets. Self-Insurance Liabilities The Company maintains business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. The Company accrues estimated losses including those incurred but not reported using actuarial calculations, models and assumptions based on historical loss experience. The Company also maintains a self-insured health benefits plan which provides medical benefits to U.S. based employees electing coverage under the plan. The Company estimates its reserve for all unpaid medical claims, including those incurred but not reported, based on historical experience, adjusted as necessary based upon management’s reasoned judgment. Revenue Recognition SalesThe Company primarily sells purchased products distributed through its network of service centers and recognizes revenue at a point in time when control of the product transfers to the customer, typically upon shipment from an Applied facility or directly from a supplier. For products that ship directly from suppliers to customers, Applied acts as the principal in the transaction and recognizes revenue on a gross basis. Revenue recognized over time is not significant. Revenue is measured as the amount of consideration expected to be received in exchange for the products and services provided, net of allowances for product returns, variable consideration, and any taxes collected from customers that will be remitted to governmental authorities. Shipping and handling costs are recognized in net sales when there is evidence of an arrangement, the sales price is fixed, collectibility is reasonably assured and the product’s title and risk of loss is transferred to the customer. Typically, these conditionsthey are met when the product is shippedbilled to the customer. The Company chargeshas elected to account for shipping and handling feesactivities as fulfillment costs. There are no significant costs associated with obtaining customer contracts.
Payment terms with customers vary by the type and location of the customer and the products or services offered. The Company does not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when products are shippedthe Company transfers a promised good or deliveredservice to a customer and includes such amountswhen the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant. The Company’s products are generally sold with a right of return and may include variable consideration in net sales. The Company reports its sales netthe form of actual salesincentives, discounts, credits or rebates. Product returns and the amount of reserves established for anticipated sales returnsare estimated based on historical return rates. Sales tax collected from customers is excluded from net salesThe returns reserve was $9,883 and $7,265 at June 30, 2020 and June 30, 2019, respectively. The Company estimates and recognizes variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to a customer. The Company records variable consideration as an adjustment to the transaction price in the accompanying statementsperiod it
is incurred. The realization of consolidated income.variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant. Shipping and Handling Costs The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and administrative expense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expensesexpense were approximately $19,320, $20,060$19,620, $24,090 and $21,480$19,320 for the fiscal years ended June 30, 2018, 20172020, 2019 and 2016,2018, respectively. Income Taxes Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. Uncertain tax positions meeting a more-likely-than-not recognition threshold are recognized in accordance with Accounting Standards Codification ("ASC")(ASC) Topic 740 - Income Taxes.Taxes. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes.
Share-Based Compensation Share-based compensation represents the cost related to share-based awards granted to employees under the 2019 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, or the 2007 Long-Term Performance Plan. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service period. Non-qualified stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and have ten-year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on the closing market price of Company common stock on the grant date. Treasury Shares Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital. Recently Adopted Accounting GuidanceDerivatives
ChangeThe Company records all derivatives on the balance sheet at fair value. The accounting for changes in Accounting Principle - Net Periodicthe fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and Post-retirementapply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Retirement Savings Plan Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company’s expense for matching of employees’ 401(k) contributions was $5,959, $7,711 and $6,551 during 2020, 2019 and 2018, respectively.
Deferred Compensation Plans The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock. Post-employment Benefit CostsPlans In March 2017,The Company provides the FASB issued itsfollowing post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded:
Supplemental Executive Retirement Benefits Plan The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final standard on improvingaverage earnings) and entry into the presentation ofSupplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011. The Company recorded net periodic pensionbenefit costs associated with the SERP of $317, $414, and postretirement benefit costs. This standard, issued as ASU 2017-07, requires that an employer report$679 in fiscal 2020, 2019, and 2018, respectively. The Company expects to make payments of approximately $800 under the service cost component forSERP in each of fiscal 2021, 2022 and 2023. Key Executive Restoration Plan In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $189, $400, and $359 of expense associated with this plan in fiscal 2020, 2019, and 2018, respectively. Qualified Defined Benefit Retirement Plan The Company has a qualified defined benefit plans and postretirement plansretirement plan that provides benefits to certain hourly employees at retirement. These employees did not participate in the same line itemRetirement Savings Plan. The benefits are based on length of service and date of retirement. The plan accruals were frozen as of April 16, 2018, and employees are permitted to participate in the income statement as other compensationRetirement Savings Plan, following that date. The Company recorded net periodic (benefits) costs arising from services renderedassociated with this plan of $(116), $(34), and $149 in fiscal 2020, 2019, and 2018, respectively Retiree Health Care Benefits The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees duringat no cost to the period.individual. The Company recorded net periodic benefits associated with these plans of $257, $418, and $452 in fiscal 2020, 2019, and 2018, respectively. The Company has determined that the related disclosures under ASC Topic 715 - Compensation, Retirement Benefits, for these post-employment benefit plans are not material to the consolidated financial statements. Leases The Company leases facilities for certain service centers, warehouses, distribution centers and office space. The Company also leases office equipment and vehicles. All leases are classified as operating. The Company’s leases expire at various dates through 2031, with terms ranging from 1 year to 15 years. Many of the Company’s real estate leases contain renewal provisions to extend lease terms up to 5 years. The exercise of renewal options is solely at the Company’s discretion. The Company’s lease agreements do not contain material variable lease payments, residual value guarantees or restrictive covenants. The Company does not recognize right-of-use assets or lease liabilities for short-term leases with initial terms of 12 months or less. Leased vehicles comprise the majority of the Company’s short-term leases. All other leases are recorded on the balance sheet with right-of-use assets representing the right to use the underlying asset for the lease term and lease liabilities representing lease payment obligations. The Company’s leases do not provide implicit rates; therefore the Company uses its incremental borrowing rate as the discount rate for measuring lease liabilities. Non-lease components of net benefit cost are required to be presented in the income statementaccounted for separately from lease components. The Company’s operating lease expense is recognized on a straight-line basis over the service cost componentlease term and outside a subtotal of income from operations. This update is effective for annual financial statement periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. The Company early adopted ASU 2017-07 in the first quarter of fiscal 2018. The impact of the adoption of this guidance resulted in the reclassification of the other components of net benefit cost from selling, distribution, and administrative expense to other (income) expense, net in the statements of consolidated income, resulting in an increase to operating income. There is no impact to income before income taxes, net income, or net income per share. Therefore, $143, $155, and $113 of service costs are includedrecorded in selling, distribution and administrative expense and $245, $796, and $981 of net other periodic post-employment costs are included in other (income) expense, net inon the statements of consolidated income for the years ended June 30, 2018, and 2017, and 2016, respectively. The Company used a practical expedient where the amounts disclosed in our Benefit Plans footnote for the prior year comparative periods were the basis for the estimation for applying the retrospective presentation requirements.income. Accumulated Other Comprehensive Income
In January 2018, the FASB issued its final standard on reporting comprehensive income. The standard, issued as ASU 2018-02, allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company early adopted ASU 2018-02 in the fourth quarter of fiscal 2018 using the at the beginning of the period of adoption method. The impact of adoption was a reclassification of $471 from accumulated other comprehensive loss to retained earnings.
Change in Accounting Principle - Simplifying the test for Goodwill Impairment
In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment. This standard, issued as ASU 2017-04, eliminates step 2 from the goodwill impairment test and instead requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted ASU 2017-04 in the fourth quarter of fiscal 2018 and will apply this guidance prospectively to its annual and interim goodwill impairment tests.
Recently IssuedAdopted Accounting Guidance Reference Rate Reform In May 2014,March 2020, the FASB issued its final standard on the recognitionfacilitation of revenue from contracts with customers. Thethe effects of reference rate reform on financial reporting. This standard, issued as ASU 2014-09, outlines2020-04, provides optional guidance for a single comprehensive model for entitieslimited period of time to useease the potential burden in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including
industry specific guidance. The core principle of this model is that "an entity recognizes revenue to depict(or recognizing the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services." In August 2015, the FASB issued ASU 2015-14 to delay the effective date of ASU 2014-09 by one year. In accordance with the delay, theeffects of) reference rate reform on financial reporting. This update is effective for financial statement periods beginning afteras of March 12, 2020 through December 15, 2017 and may be adopted either retrospectively or on a modified retrospective basis. Early adoption is permitted, but not before financial statement periods beginning after December 15, 2016. In March 2016 the FASB issued ASU 2016-08 and ASU 2016-10, and in May 2016 the FASB issued ASU 2016-12, which clarify the guidance in ASU 2014-09 but do not change the core principle of the revenue recognition model.31, 2022. The Company has evaluated the provisions ofadopted the new standard and isguidance as it became effective in the process of assessing its impact on financial statements, information systems, business processes, and financial statement disclosures. We have substantially completed an analysis of revenue streams at each of the business units and are evaluating the impact the new standard will have on revenue recognition. The Company primarily sells purchased products and recognizes revenue at point of sale or delivery and the majority of its revenue will continue to be recognized at a point in time under the new standard. A small percentage of revenue will be recognized using an over time revenue recognition model. The new standard will be adopted in the firstthird quarter of fiscal 2019 using the modified retrospective method2020. The adoption of adoption, and the Company will recognize the cumulative effect of initially applying the new standard as an adjustment to opening retained earnings as of July 1, 2018. The standard isthis guidance did not expected to have a material impact on the Company's consolidated financial statements except for expanded disclosures on revenue in order to comply with the new guidance. The Company will continue to evaluate the impacts of the adoption of the standard and these assessments are subject to change.or related disclosures.
Leases In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, and codified into ASC Topic 842, Leases, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. The core principle of this update is that a "lessee should recognize the assets and liabilities that arise from leases." This update is effective for annual financial statement periods beginning after December 15, 2018, with earlier application permitted. In July 2018, the FASB issued ASU 2018-10 which clarifies the guidance in ASU 2016-02 and ASU 2018-11 which provides entities with an additional transition method option for adopting the new standard. In December 2018 and January 2019, the FASB issued ASU 2018-20 and ASU 2019-01, respectively, which further clarify the guidance. The Company has established a cross-functional teamadopted the new guidance effective July 1, 2019 using the optional transition method, which required application of the new guidance to evaluateonly those leases that existed at the date of adoption. The Company elected the “package of practical expedients,” which permitted the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and has begun implementinginitial direct costs. Adoption of the new standard resulted in the recognition of right-of-use (ROU) assets and lease administration software.liabilities of $83,533 and $89,778, respectively, on July 1, 2019. The Company is still determiningdifference between the financial impact that thisROU assets and lease liabilities related primarily to the impairment of certain leases in Canada and the United States. In addition, the adoption resulted in an adjustment to opening retained earnings of $3,275, net of tax, on July 1, 2019 primarily due to the impairment of the leases. The standard update will have on its consolidated financial statements, but anticipates it willdid not have a material impact on its assets and liabilities due to the additionCompany’s statements of right-of-use assets and lease liabilities to the consolidated balance sheet. The Company will continue to evaluate the impacts of the adoption of the standard and these assessments are subject to change.income or cash flows. In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.Cash Flows
In August 2016, the FASB issued its final standard on the classification of certain cash receipts and cash payments within the statement of cash flows. This standard, issued as ASU 2016-15, makes a number of changes meant to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2018, with early adoption permitted. The Company has not yet determinedadopted the impactnew guidance in the first quarter of fiscal 2020. The adoption of this pronouncementguidance did not have a material impact on itsthe Company's financial statements andor related disclosures. Recently Issued Accounting Guidance In OctoberJune 2016, the FASB issued its final standard on the income tax consequencesmeasurement of intra-entity transfers of assets other than inventory.credit losses on financial instruments. This standard, issued as ASU 2016-16,2016-13, requires that an entity recognize the income tax consequencesmeasure impairment of an intra-entity transfer of an asset othercertain financial instruments, including trade receivables, based on expected losses rather than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory.incurred losses. This update is effective for annual and interim financial statement periods beginning after December 15, 2017,2019, with early adoption permitted.permitted for financial statement periods beginning after December 15, 2018. In November 2018, April 2019, May 2019, November 2019, and February 2020, the FASB issued ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11 and ASU 2020-02, respectively, which clarify the guidance in ASU 2016-13. The Company will adopt this standard when it becomes effective inhas not yet determined the first quarterimpact of fiscal 2019, and it is not expected to have a material impactthese pronouncements on the Company’sits financial statements and related disclosures. In May 2017,December 2019, the FASB issued its final standard on scope of modification accounting.simplifying the accounting for income taxes. This standard, issued as 2017-09, providesASU 2019-12, makes a number of changes meant to add or clarify guidance about which change to the terms or conditions of a share-based payment award require an entity to apply modification accounting.on accounting for income taxes. This update is effective for annual and interim financial statement periods beginning after December 15, 2017,2021, with early adoption permitted.permitted in any interim period for which financial statements have not yet been filed. The Company has not yet determined the impact of this pronouncementthese pronouncements on its financial statements and related disclosures.
NOTE 2: REVENUE RECOGNITION Disaggregation of Revenues The following tables present the Company's net sales by reportable segment and by geographic areas based on the location of the facility shipping the product for the years ended June 30, 2020, 2019 and 2018. Other countries consist of Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | | Year Ended June 30, 2020 | | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| | Geographic Areas: | | | | | United States | $ | 1,833,275 |
| $ | 986,125 |
| $ | 2,819,400 |
| | Canada | 248,610 |
| — |
| 248,610 |
| | Other countries | 160,064 |
| 17,578 |
| 177,642 |
| | Total | $ | 2,241,949 |
| $ | 1,003,703 |
| $ | 3,245,652 |
|
| | | | | | | | | | | | | Year Ended June 30, 2019 | | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| | Geographic Areas: | | | | | United States | $ | 2,009,479 |
| $ | 1,007,280 |
| $ | 3,016,759 |
| | Canada | 271,305 |
| — |
| 271,305 |
| | Other countries | 172,121 |
| 12,554 |
| 184,675 |
| | Total | $ | 2,452,905 |
| $ | 1,019,834 |
| $ | 3,472,739 |
|
| | | | | | | | | | | | | Year Ended June 30, 2018 | | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| | Geographic Areas: | | | | | United States | $ | 1,903,388 |
| $ | 711,653 |
| $ | 2,615,041 |
| | Canada | 273,622 |
| — |
| 273,622 |
| | Other countries | 169,408 |
| 15,203 |
| 184,611 |
| | Total | $ | 2,346,418 |
| $ | 726,856 |
| $ | 3,073,274 |
|
The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the years ended June 30, 2020 and 2019: | | | | | | | | | | | | Year Ended June 30, 2020 | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | General Industry | 35.0 | % | | 41.2 | % | | 36.8 | % | | Industrial Machinery | 9.7 | % | | 24.4 | % | | 14.3 | % | | Metals | 11.1 | % | | 7.2 | % | | 9.9 | % | | Food | 12.2 | % | | 3.1 | % | | 9.4 | % | | Forest Products | 9.3 | % | | 3.7 | % | | 7.6 | % | | Chem/Petrochem | 3.3 | % | | 13.4 | % | | 6.4 | % | | Oil & Gas | 7.5 | % | | 1.6 | % | | 5.7 | % | | Cement & Aggregate | 7.3 | % | | 1.0 | % | | 5.4 | % | | Transportation | 4.6 | % | | 4.4 | % | | 4.5 | % | | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | Year Ended June 30, 2019 | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | General Industry | 33.7 | % | | 43.0 | % | | 36.3 | % | | Industrial Machinery | 10.4 | % | | 21.8 | % | | 13.8 | % | | Metals | 12.6 | % | | 9.4 | % | | 11.6 | % | | Food | 10.6 | % | | 2.7 | % | | 8.3 | % | | Forest Products | 8.0 | % | | 3.1 | % | | 6.6 | % | | Chem/Petrochem | 3.1 | % | | 13.8 | % | | 6.3 | % | | Oil & Gas | 10.1 | % | | 2.1 | % | | 7.8 | % | | Cement & Aggregate | 6.7 | % | | 1.0 | % | | 5.0 | % | | Transportation | 4.8 | % | | 3.1 | % | | 4.3 | % | | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
The following tables present the Company’s percentage of revenue by reportable segment and product line for the years ended June 30, 2020 and 2019: | | | | | | | | | | | | Year Ended June 30, 2020 | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Power Transmission | 35.4 | % | | 9.5 | % | | 27.4 | % | | Fluid Power | 13.4 | % | | 39.0 | % | | 21.3 | % | | General Maintenance; Hose Products | 24.6 | % | | 11.7 | % | | 20.6 | % | | Bearings, Linear & Seals | 26.6 | % | | 0.3 | % | | 18.5 | % | | Specialty Flow Control | — | % | | 39.5 | % | | 12.2 | % | | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | Year Ended June 30, 2019 | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Power Transmission | 33.9 | % | | 1.6 | % | | 24.4 | % | | Fluid Power | 13.5 | % | | 39.4 | % | | 21.1 | % | | General Maintenance; Hose Products | 25.1 | % | | 5.3 | % | | 19.3 | % | | Bearings, Linear & Seals | 27.5 | % | | 0.3 | % | | 19.5 | % | | Specialty Flow Control | — | % | | 53.4 | % | | 15.7 | % | | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
Contract Assets The Company’s contract assets consist of un-billed amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer. Activity related to contract assets, which are included in other current assets on the consolidated balance sheet, is as follows: | | | | | | | | | | | | | | | June 30, 2020 |
| June 30, 2019 |
| $ Change |
| % Change |
| | Contract assets | $ | 8,435 |
| $ | 8,920 |
| $ | (485 | ) | (5.4 | )% |
The difference between the opening and closing balances of the Company's contract assets primarily results from the timing difference between the Company's performance and when the customer is billed.
NOTE 2:3: BUSINESS COMBINATIONS The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition. Fiscal 2020 Acquisitions On August 21, 2019, the Company acquired 100% of the outstanding shares of Olympus Controls (Olympus), a Portland, Oregon automation solutions provider - including design, assembly, integration, and distribution - of motion control, machine vision, and robotic technologies. Olympus is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $36,642, net tangible assets acquired were $9,540, and intangible assets including goodwill was $27,102 based upon estimated fair values at the acquisition date. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2019 Acquisitions On March 4, 2019, the Company acquired substantially all of the net assets of MilRoc Distribution (MilRoc) and Woodward Steel (Woodward). MilRoc is an Oklahoma based distributor of oilfield specific products, namely pumps and valves, as well as equipment repair services and industrial parts to the oil & gas industry. Woodward is an Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc and Woodward are both included in the Service Center Based Distribution segment. The purchase price for the acquisition was $35,000, net tangible assets acquired were $17,788, and intangible assets including goodwill was $17,212 based upon estimated fair values at the acquisition date. The purchase price includes acquisition holdback payments of $4,375, of which $1,666 was paid during the year ended June 30, 2020. The remaining balance of $2,709 is included in other current liabilities and other liabilities on the consolidated balance sheet as of June 30, 2020, and which will be paid on the second and third anniversaries of the acquisition date with interest at a fixed rate of 2.0% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. On November 2, 2018, the Company acquired substantially all of the net assets of Fluid Power Sales, Inc. (FPS), a Baldwinsville, New York based manufacturer and distributor of fluid power components, specializing in the engineering and fabrication of manifolds and power units. FPS is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $8,066, net tangible assets acquired were $4,151, and goodwill was $3,915 based upon estimated fair values at the acquisition date. The purchase price includes acquisition holdback payments of $1,200, of which $600 was paid during the year-end June 30, 2020. The remaining balance of $600 is included in other current liabilities on the consolidated balance sheet as of June 30, 2020, and will be paid on the second anniversary of the acquisition date with interest at a fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. FCX Acquisition On January 31, 2018, the Company completed the acquisition of 100% of the outstanding shares of FCX Performance, Inc. ("FCX")(FCX), a Columbus, Ohio based distributor of specialty process flow control products and services. The total consideration transferred for the acquisition was $781,781, which was financed by cash-on-hand and a new credit facility comprised of a $780,000 Term Loan A and a $250,000 revolver, effective with the transaction closing. See note 56 Debt. As a distributor of highly engineered valves, instruments, pumps and lifecycle services to MRO and OEM customers across diverse industrial and process end markets, this business will beis included in the Fluid Power & Flow Control Segment.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of FCX based on their preliminary estimated fair values at the acquisition date, which are subject to adjustment. date. | | | | | | | FCX Acquisition |
| | | 2018 |
| | Cash | $ | 11,141 |
| | Accounts receivable | 80,836 |
| | Inventories | 44,669 |
| | Other current assets | 1,753 |
| | Property | 8,282 |
| | Identifiable intangible assets | 305,420 |
| | Goodwill | 440,012 |
| | Other assets | 775 |
| | Total assets acquired | $ | 892,888 |
| | Accounts payable and accrued liabilities | 54,035 |
| | Other liabilities | 2,677 |
| | Deferred tax liabilities | 54,395 |
| | Net assets acquired | $ | 781,781 |
| | | | | Purchase price | $ | 784,281 |
| | Reconciliation of fair value transferred: | | | Working Capital Adjustments | (2,500 | ) | | Total Consideration | $ | 781,781 |
|
The purchase accounting will be finalized within one year fromchange in the carrying amount of goodwill for FCX since the acquisition date.is as follows: | | | | | | | FCX Acquisition |
| | | 2018 |
| | Cash | $ | 11,141 |
| | Accounts receivable | 80,836 |
| | Inventories | 47,325 |
| | Other current assets | 1,657 |
| | Property | 8,282 |
| | Identifiable intangible assets | 305,420 |
| | Goodwill | 439,164 |
| | Other assets | 775 |
| | Total assets acquired | $ | 894,600 |
| | Accounts payable and accrued liabilities | 54,518 |
| | Other liabilities | 2,677 |
| | Deferred tax liabilities | 55,624 |
| | Net assets acquired | $ | 781,781 |
| | | | | Purchase price | $ | 784,281 |
| | Reconciliation of fair value transferred: | | | Working Capital Adjustments | (2,500 | ) | | Total Consideration | $ | 781,781 |
|
| | | | | | Balance at 1/31/2018 | $ | 440,012 |
| | Impairment | 131,000 |
| | Balance at 6/30/2020 | $ | 309,012 |
|
Goodwill acquired of $160,814 is expected to be$161,452 was deductible for income tax purposes.purposes at the time of the acquisition. Subsequent to the goodwill impairment recorded during the year ended June 30, 2020, $112,922 remains deductible for income tax purposes as of June 30, 2020. Net sales, operating income and net income from the FCX acquisition included in the Company’s results since January 31, 2018, the date of the acquisition, are as follows: | | | | | | | | | | | | | 2020 (1) |
| 2019 |
| January 31, 2018 to June 30, 2018 |
| | Net sales | $ | 490,743 |
| $ | 549,833 |
| $ | 249,752 |
| | Operating income | (97,300 | ) | 38,186 |
| 16,845 |
| | Net income | (91,739 | ) | 28,075 |
| 8,758 |
|
| | | | | | | January 31, 2018 to June 30, 2018 |
| | Net sales | $ | 249,752 |
| | Operating income | 16,845 |
| | Net income | 8,758 |
|
| | | (1) | There was a $131,000 goodwill impairment charge during the year ended June 30, 2020. See note 5, Goodwill and Intangibles, for further information. |
The companyCompany incurred $2,849 in third-party costs during 2018 pertaining to the acquisition of FCX, which are included in selling, distribution and administration expense in the statements of consolidated income for fiscal 2018.
The following unaudited pro forma consolidated results of operations have been prepared as if the FCX acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2017: | | | | | | | | | Pro forma, year ended June 30: | 2018 |
| 2017 |
| | Net sales | $ | 3,330,430 |
| $ | 2,943,583 |
| | Operating income | 234,603 |
| 196,194 |
| | Net income | 158,181 |
| 126,270 |
| | Diluted net income per share | $ | 4.03 |
| $ | 3.20 |
|
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect additional amortization that would have been recorded assuming the fair value adjustments to identified intangible assets had been applied as of July 1, 2016. In addition, pro forma adjustments have been made for the interest expense that would have been incurred as a result of the indebtedness used to finance the acquisitions. The pro forma net income amounts also incorporate an adjustment to the recorded income tax expense for the income tax effect of the pro forma adjustments described above. These pro forma results of operations do not include any anticipated synergies or other effects of the planned integration of FCX; accordingly, such pro forma adjustments do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred as of the date indicated or that may result in the future.
Other Fiscal 2018 Acquisition On July 3, 2017, the Company acquired 100% of the outstanding stock of Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a distributor of accessories and components for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment. The purchase price for the acquisition was $5,920, net tangible assets acquired were $3,395, and goodwill was $2,525
$2,525 based upon estimated fair values at the acquisition date. The purchase price includes $906 of acquisition holdback payments.payments, of which $201 and $219 was paid during fiscal year 2020 and 2019, respectively. Due to changes in foreign currency exchange rates, the remaining balance of $842$356 is included in other current liabilities and other liabilities on the consolidated balance sheetssheet as of June 30, 2018,2020, which will be paid on the first three anniversariesthird anniversary of the acquisition date with interest at a fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2017 Acquisition
On March 3, 2017, the Company acquired substantially all of the net assets of Sentinel Fluid Controls ("Sentinel"), a distributor of hydraulic and lubrication components, systems and solutions operating from four locations. Sentinel is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $3,755, net tangible assets acquired were $3,130, and goodwill was $625 based upon estimated fair values at the acquisition date. The purchase price included $982 of acquisition holdback payments, of which $328 and $175 were paid during fiscal years 2018 and 2017, respectively. The remaining balance of $479 is included in other current liabilities and other liabilities on the consolidated balance sheets, which will be paid plus interest at various times in the future. The Company funded the amount paid for the acquisition at closing using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
Fiscal 2016 Acquisitions
On June 14, 2016, the Company acquired 100% of the outstanding stock of Seals Unlimited ("Seals"), a distributor of sealing, fastener, and hose products located in Burlington, Ontario. On January 4, 2016, the Company acquired substantially all of the net assets of HUB Industrial Supply ("HUB"), a distributor of consumable industrial products operating from three locations - Lake City, FL, Indianapolis, IN, and Las Vegas, NV. On August 3, 2015, the Company acquired substantially all of the net assets of Atlantic Fasteners Co., Inc. ("Atlantic Fasteners"), a distributor of C-Class consumables including industrial fasteners and related industrial supplies located in Agawam, MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. On October 1, 2015, the Company acquired substantially all of the net assets of S.G. Morris Co. ("SGM"). SGM, headquartered in Cleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania and West Virginia and is included in the Fluid Power & Flow Control segment. The total combined consideration for these acquisitions was approximately $65,900, net tangible assets acquired were $22,700, and intangibles including goodwill were $43,200 based upon estimated fair values at the acquisition dates. The total combined consideration includes $3,300 of acquisition holdback payments, of which $1,250 was paid during fiscal year 2017. The remaining balance of $2,050 is included in other current liabilities on the consolidated balance sheets, which will be paid plus interest in October 2018. The Company funded the amounts paid for the acquisitions at closing using
available cash and borrowings under the revolving credit facility at variable interest rates. The acquisition prices and the results of operations for the acquired entities are not material in relation to the Company's consolidated financial statements.
Holdback Liabilities for Acquisitions Acquisition holdback payments of approximately $2,592, $283, $415$2,563, $1,448 and $75 will be made in fiscal 2019, 2020, 2021, 2022 and 2024, respectively. The related liabilities for these payments are recorded in the consolidated balance sheets in other current liabilities for the amounts due in fiscal year 20192021 and other liabilities for the amounts due in fiscal years 2020 through2022 and 2024. NOTE 3:4: INVENTORIES Inventories consist of the following: | | | | | | | | | | | June 30, | | 2020 |
| | 2019 |
| | U.S. inventories at average cost | | $ | 431,866 |
| | $ | 473,949 |
| | Foreign inventories at average cost | | 112,795 |
| | 125,260 |
| | | | 544,661 |
| | 599,209 |
| | Less: Excess of average cost over LIFO cost for U.S. inventories | | 155,511 |
| | 151,654 |
| | Inventories on consolidated balance sheets | | $ | 389,150 |
| | $ | 447,555 |
|
| | | | | | | | | | | June 30, | | 2018 |
| | 2017 |
| | U.S. inventories at average cost | | $ | 443,521 |
| | $ | 373,984 |
| | Foreign inventories at average cost | | 117,711 |
| | 108,734 |
| | | | 561,232 |
| | 482,718 |
| | Less: Excess of average cost over LIFO cost for U.S. inventories | | 139,163 |
| | 137,573 |
| | Inventories on consolidated balance sheets | | $ | 422,069 |
| | $ | 345,145 |
|
The overall impact of LIFO layer liquidations increased gross profit by $579, $9,414, and $2,100 in fiscal 2018, fiscal 2017, and fiscal 2016, respectively. In fiscal 2017, reductions in U.S. inventories, primarily in the bearings pool which included the scrapping of approximately $6,000 of product, resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years.
NOTE 4:5: GOODWILL AND INTANGIBLES The changes in the carrying amount of goodwill for both the Service Center Based Distribution segment and the Fluid Power & Flow Control segment for the years ended June 30, 20182020 and 20172019 are as follows: | | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Balance at July 1, 2018 | $ | 203,084 |
| | $ | 443,559 |
| | $ | 646,643 |
| | Goodwill acquired during the year | 9,943 |
| | 4,798 |
| | 14,741 |
| | Other, primarily currency translation | 607 |
| | — |
| | 607 |
| | Balance at June 30, 2019 | 213,634 |
| | 448,357 |
| | 661,991 |
| | Goodwill adjusted/acquired during the year | (3,393 | ) | | 14,667 |
| | 11,274 |
| | Impairment | — |
| | (131,000 | ) | | (131,000 | ) | | Other, primarily currency translation | (1,671 | ) | | — |
| | (1,671 | ) | | Balance at June 30, 2020 | $ | 208,570 |
| | $ | 332,024 |
| | $ | 540,594 |
|
| | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Balance at July 1, 2016 | $ | 198,486 |
| | $ | 4,214 |
| | $ | 202,700 |
| | Goodwill added during the year | 3,220 |
| | 625 |
| | 3,845 |
| | Other, primarily currency translation | 34 |
| | (444 | ) | | (410 | ) | | Balance at June 30, 2017 | 201,740 |
| | 4,395 |
| | 206,135 |
| | Goodwill added during the year | 2,525 |
| | 439,164 |
| | 441,689 |
| | Other, primarily currency translation | (1,181 | ) | | — |
| | (1,181 | ) | | Balance at June 30, 2018 | $ | 203,084 |
| | $ | 443,559 |
| | $ | 646,643 |
|
During the first quarter of fiscal 2017,2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the HUBMilRoc/Woodward acquisition. The fair values of the customer relationships, trade name, and trade namesother intangible assets were decreasedincreased by $2,636$1,524, $1,809, and $584,$60, respectively, with a corresponding total decrease to goodwill of $3,393. The changes to the preliminary estimated fair values resulted in an increase to amortization expense of $303 during the year ended June 30, 2020, which is recorded in selling, distribution, and administrative expense on the statements of consolidated income. During the second quarter of fiscal 2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the Olympus acquisition. The trade name and other intangible assets were increased by $4,260 and $980, respectively, with a corresponding decrease to the customer relationship intangible asset of $5,504 and an increase to goodwill of $3,220.$264. The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of $156$24 during fiscal 2017,the year ended June 30, 2020, which is recorded in selling, distribution, and administrative expense inon the statements of consolidated income. On July 1, 2016, the Company enacted a change in its management reporting structure which changed the composition of the Canada service center reporting unit. This triggering event required the Company to perform an interim goodwill impairment test for the Canada service center reporting unit. The Company performed step one of the goodwill impairment test for the Canada service center reporting unit as of July 1, 2016 and determined that the reporting unit had excess fair value of approximately $8,000 or 5% when compared to its carrying amount of approximately $163,000.
In conjunction with this management change, $2,628 of goodwill was reallocated from the Canada service center reporting unit to the U.S. service center reporting unit based on the relative fair value as of July 1, 2016.
The Company has six (6)eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2018.2020. The Company concluded that allseven (7) of the reporting units’ fair valuevalues exceeded their carrying amounts
by at least 30%10% as of January 1, 2018. 2020. Specifically, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The Canada
and Mexico reporting units have goodwill balances of $27,186 and $5,185, respectively, as of June 30, 2020. The carrying value of the final reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131,000. The non-cash impairment charge is the result of the overall decline in the industrial economy, specifically slower demand in FCX's end markets. This has led to reduced spending by customers and reduced revenue expectations. The remaining goodwill for the FCX reporting unit as of June 30, 2020 is $309,012. Because the carrying value of the FCX reporting unit approximated fair value of the reporting unit after the impairment was recorded, a future decline in the estimated cash flows could result in an additional impairment loss. A future decline in the estimated cash flows could result from a significant or extended decline in various end markets. The fair values of the reporting units in accordance with the goodwill impairment test were determined using the Incomeincome and Marketmarket approaches. The Incomeincome 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.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. The Marketmarket approach utilizes an analysis of comparable publicly traded companies. The Company had seven (7) reporting units for which an annual goodwill impairment assessment was performed ascompanies and requires management to make significant estimates and assumptions related to the forecasts of January 1, 2016. The Company concludedfuture revenues, EBITDA, and multiples that five (5) of the reporting units’ fair value substantially exceeded their carrying amounts. The carrying value for two (2) reporting units (Canada service centerare applied to management’s forecasted revenues and Australia/New Zealand service center) exceeded the fair value, indicating there may be goodwill impairment. The fair values of the reporting units in accordance with step one of the goodwill impairment test were determined using the Income and Market approaches.
Step two of the goodwill impairment test compares the fair value of the reporting unit goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as in a business combination. The fair value of the reporting unit from step one is allocated to all of the assets and liabilities of the reporting unit, including unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
Step two of the goodwill impairment test for the Canada service center reporting unit was completed in the third quarter of fiscal 2016. The analysis resulted in a goodwill impairment of $56,022 for the Canada service center reporting unit. The non-cash impairment charge was the result of the overall decline in the industrial economy in Canada coupled with the substantial and sustained decline in the oil and gas sector during calendar year 2015. This led to reduced spending by customers and reduced revenue expectations. The uncertainty regarding the oil and gas industries and overall industrial economy in Canada also led the reporting unit to reduce expectations.
Step two of the goodwill impairment test for the Australia/New Zealand reporting unit was completed in the third quarter of fiscal 2016. The analysis concluded that all of the Australia/New Zealand reporting unit’s goodwill was impaired, and therefore the Company recorded a non-cash impairment expense of $8,772 in the third quarter of fiscal 2016. The impairment charge was primarily the result of the decline in the mining and extraction industries in Australia, reduced spending by customers, and the effects of reduced revenue expectations.EBITDA estimates.
The techniques used in the Company's impairment teststest have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement dates.date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key Levelassumptions (Level 3 based assumptionsin 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. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the Company’s reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends; and (ii) inability to achieve the sales targeted by our strategic growth initiatives. At June 30, 20182020 and 2017,2019, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segmentsegment. At June 30, 2020 and 2019, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $167,605 and $36,605, respectively, related to the Fluid Power & Flow Control segment.
The Company's identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following: | | | June 30, 2018 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| | | June 30, 2020 | | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| | Finite-Lived Intangibles: | | | | | | | | | | | | Customer relationships | $ | 465,691 |
| | $ | 125,009 |
| | $ | 340,682 |
| $ | 426,017 |
| | $ | 162,965 |
| | $ | 263,052 |
| | Trade names | 112,939 |
| | 22,454 |
| | 90,485 |
| 111,453 |
| | 34,815 |
| | 76,638 |
| | Vendor relationships | 11,425 |
| | 7,382 |
| | 4,043 |
| 11,329 |
| | 8,934 |
| | 2,395 |
| | Non-competition agreements | 2,761 |
| | 2,024 |
| | 737 |
| | | Other | | 2,078 |
| | 948 |
| | 1,130 |
| | Total Intangibles | $ | 592,816 |
| | $ | 156,869 |
| | $ | 435,947 |
| $ | 550,877 |
| | $ | 207,662 |
| | $ | 343,215 |
|
| | | | | | | | | | | | | | June 30, 2019 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| | Finite-Lived Intangibles: | | | | | | | Customer relationships | $ | 422,367 |
| | $ | 135,879 |
| | $ | 286,488 |
| | Trade names | 105,946 |
| | 27,232 |
| | 78,714 |
| | Vendor relationships | 11,367 |
| | 8,156 |
| | 3,211 |
| | Other | 2,702 |
| | 2,249 |
| | 453 |
| | Total Intangibles | $ | 542,382 |
| | $ | 173,516 |
| | $ | 368,866 |
|
| | | | | | | | | | | | | | June 30, 2017 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| | Finite-Lived Intangibles: | | | | | | | Customer relationships | $ | 235,009 |
| | $ | 102,414 |
| | $ | 132,595 |
| | Trade names | 43,873 |
| | 19,295 |
| | 24,578 |
| | Vendor relationships | 14,152 |
| | 9,141 |
| | 5,011 |
| | Non-competition agreements | 3,788 |
| | 2,410 |
| | 1,378 |
| | Total Intangibles | $ | 296,822 |
| | $ | 133,260 |
| | $ | 163,562 |
|
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off. During 2018,fiscal 2020, the Company acquired identifiable intangible assets with a preliminaryan acquisition cost allocation and weighted-average life as follows: | | | | | | | | | Acquisition Cost Allocation |
| | Weighted-Average Life | | Customer relationships | $ | 7,160 |
| | 20.0 | | Trade names | 4,260 |
| | 15.0 | | Other | 980 |
| | 6.8 | | Total Intangibles Acquired | $ | 12,400 |
| | 17.2 |
| | | | | | | | | Acquisition Cost Allocation |
| | Weighted-Average Life | | Customer relationships | $ | 234,370 |
| | 20.0 years | | Trade names | 71,050 |
| | 15.0 years | | Total Intangibles Acquired | $ | 305,420 |
| | 18.8 years |
management also assessed the long-lived intangible assets related to the Reliance asset group in Canada for impairment during the third quarter of fiscal 2019. The Reliance asset group is located in western Canada and primarily serves customers in the upstream oil and gas industry. The asset group carrying value exceeded the sum of the undiscounted cash flows, indicating impairment. The fair value of the asset group was then determined using the income approach, using Level 3 assumptions in the fair value hierarchy, and the analysis resulted in the measurement of a full impairment loss of $31,594, which was recorded in the third quarter of fiscal 2019. Sustained significant softness in certain end market concentrations could result in impairment of certain intangible assets in future periods. Amortization of identifiable intangibles totaled $32,065, $24,371$41,553, $41,883 and $25,580$32,065 in fiscal 2018, 20172020, 2019 and 2016,2018, respectively, and is included in selling, distribution and administrative expensesexpense in the statements of consolidated income. Future amortization expense based on the Company’s identifiable intangible assets as of June 30, 20182020 is estimated to be $44,000 for 2019, $42,500 for 2020, $40,200$38,300 for 2021, $37,800$36,100 for 2022, $34,000 for 2023, $29,800 for 2024 and $35,300$26,300 for 2023.2025.
NOTE 5:6: DEBT A summary of long-term debt, including the current portion, follows: | | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | Unsecured credit facility | $ | 589,250 |
| | $ | 613,625 |
| | Trade receivable securitization facility | 175,000 |
| | 175,000 |
| | Series C Notes | 120,000 |
| | 120,000 |
| | Series D Notes | 25,000 |
| | 50,000 |
| | Series E Notes | 25,000 |
| | — |
| | Other | 1,026 |
| | 1,204 |
| | Total debt | $ | 935,276 |
| | $ | 959,829 |
| | Less: unamortized debt issuance costs | 1,487 |
| | 1,943 |
| | | $ | 933,789 |
| | $ | 957,886 |
|
Revolving Credit Facility & Term Loan In January 2018, in conjunction with the acquisition of FCX, 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 $780,000 unsecured term loan and a $250,000 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. At June 30, 2018, theThe Company had $775,125no amount outstanding under the term loanrevolver as of June 30, 2020 and $19,500 outstanding under the revolver.June 30, 2019. Unused lines under this facility, net of outstanding letters of credit of $3,625$1,873 and $3,215, respectively, to secure certain insurance obligations, totaled $226,875$248,127 and $246,785 at June 30, 2018,2020 and June 30, 2019, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.94% and 4.19% as of June 30, 2018 was 4.13%. The weighted average interest rate on the amount outstanding under the revolving credit facility as of2020 and June 30, 2018 was 3.93%. The new credit facility replaced the Company's previous credit facility agreement. At June 30, 2017, the Company had $120,313 outstanding under the term loan in the previous credit facility agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017. No amount was outstanding under the revolver as of June 30, 2017. Unused lines under this facility, net of outstanding letters of credit of $2,441 to secure certain insurance obligations, totaled $247,559 at June 30, 2017.2019, respectively.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with eitherthe revolving credit agreement, in the amount of $4,475 and $2,698 as of June 30, 20182020 and June 30, 2017,2019, 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 $175,000. 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 $175,000 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 as of June 30, 2020 and June 30, 2019 was 1.07% and 3.33%, respectively. Other Long-Term Borrowings At June 30, 20182020 and June 30, 2017,2019, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170,000. Fees on this facility range from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end. The "Series C" notes have a principal amount of $120,000, and carry a fixed interest rate of 3.19%, and are due in equal principal payments in July 2020, 2021, and 2022. A $40,000 principal payment was made on the "Series C" notes in July 2020. The "Series D" notes have a principal amount of $50,000 and carry a fixed interest rate of 3.21%. A $25,000 principal payment was made on the "Series D" notes during fiscal 2020, and the remaining principal balance of $25,000 is due in October 2023. In October 2019, the Company amended its unsecured shelf facility agreement with Prudential Investment management to authorize the issuance of "Series E" notes, which have a principal amount of $25,000, carry a fixed interest rate of 3.08%, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2018, $50,000 in additional financing was available under this facility.
2024.
In 2014, the Company assumed $2,359 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, maturing in May 2024. At June 30, 2018 and 2017, $1,438 and $1,669 was outstanding, respectively. Unamortized debt issue costs of $551 and $105 are included as a reduction of current portion of long-term debt on the consolidated balance sheets as of June 30, 2018 and June 30, 2017, respectively. Unamortized debt issue costs of $1,807 and $294 are included as a reduction of long-term debt on the consolidated balance sheets as of June 30, 2018 and June 30, 2017, respectively.
The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing arrangements for each of the next five years: | | | | | | Fiscal Year | Aggregate Maturity |
| | 2021 | $ | 79,181 |
| | 2022 | 259,120 |
| | 2023 | 546,624 |
| | 2024 | 25,351 |
| | 2025 | 25,000 |
|
| | | | | | Fiscal Year | Aggregate Maturity |
| | 2019 | $ | 19,734 |
| | 2020 | 49,613 |
| | 2021 | 79,241 |
| | 2022 | 84,120 |
| | 2023 | 708,124 |
| | Thereafter | 25,231 |
|
Covenants The new credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2018,2020, the most restrictive of these covenants required that the Company have net indebtedness less than 4.253.75 times consolidated income before interest, taxes, depreciation and amortization.amortization (as defined). At June 30, 2018,2020, the Company's net indebtedness was less than 3.03.1 times consolidated income before interest, taxes, depreciation and amortization.amortization (as defined). The Company was in compliance with all financial covenants at June 30, 2018.2020. NOTE 7: DERIVATIVES Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. In January 2019, the Company entered into an interest rate swap to mitigate variability in forecasted interest payments on $463,000 of the Company’s U.S. dollar-denominated unsecured variable rate debt. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. The interest rate swap converts $431,000 of variable rate debt to a rate of 4.36% as of June 30, 2020 and as of June 30, 2019 converted $463,000 of variable rate debt to a rate of 4.36%. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $26,179 and $14,202 as of June 30, 2020 and June 30, 2019, respectively, which is included in other current liabilities and other liabilities in the consolidated balance sheet. Realized losses related to the interest rate cash flow hedge were not material in the years ended June 30, 2020 or 2019. NOTE 6:8: FAIR VALUE MEASUREMENTS Marketable securities measured at fair value at June 30, 20182020 and June 30, 20172019 totaled $10,318$12,259 and $10,481,$11,246, respectively. The majority of these marketable securities are held in a rabbi trust for a non-qualified deferred
compensation plan. The marketable securities are included in other assets on the consolidated balance sheets and their fair values were valued using quoted market prices (Level 1 in the fair value hierarchy). As of June 30, 2018,2020, the carrying value of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximates fair value (Level 2 in the fair value hierarchy). The revolving credit facility and the term loan contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).
NOTE 7:9: INCOME TAXES Income Before Income Taxes The components of income before income taxes are as follows: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | U.S. | $ | 36,161 |
| | $ | 204,462 |
| | $ | 186,874 |
| | Foreign | 19,075 |
| | (9,981 | ) | | 17,844 |
| | Income before income taxes | $ | 55,236 |
| | $ | 194,481 |
| | $ | 204,718 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | U.S. | $ | 186,874 |
| | $ | 154,472 |
| | $ | 139,960 |
| | Foreign | 17,844 |
| | 12,494 |
| | (60,982 | ) | | Income before income taxes | $ | 204,718 |
| | $ | 166,966 |
| | $ | 78,978 |
|
Provision The provision (benefit) for income taxes consists of: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Current: | | | | | | | Federal | $ | 31,149 |
| | $ | 34,437 |
| | $ | 48,131 |
| | State and local | 7,580 |
| | 7,965 |
| | 8,038 |
| | Foreign | 5,757 |
| | 5,718 |
| | 5,309 |
| | Total current | 44,486 |
| | 48,120 |
| | 61,478 |
| | Deferred: | | | | | | | Federal | (8,594 | ) | | 6,265 |
| | 5,955 |
| | State and local | (3,098 | ) | | 1,947 |
| | (586 | ) | | Foreign | (1,600 | ) | | (5,844 | ) | | (3,754 | ) | | Total deferred | (13,292 | ) | | 2,368 |
| | 1,615 |
| | Total | $ | 31,194 |
| | $ | 50,488 |
| | $ | 63,093 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Current: | | | | | | | Federal | $ | 48,131 |
| | $ | 26,456 |
| | $ | 45,226 |
| | State and local | 8,038 |
| | 4,692 |
| | 6,349 |
| | Foreign | 5,309 |
| | 4,760 |
| | 4,407 |
| | Total current | 61,478 |
| | 35,908 |
| | 55,982 |
| | Deferred: | | | | | | | Federal | 5,955 |
| | 852 |
| | 397 |
| | State and local | (586 | ) | | 535 |
| | (30 | ) | | Foreign | (3,754 | ) | | (4,239 | ) | | (6,948 | ) | | Total deferred | 1,615 |
| | (2,852 | ) | | (6,581 | ) | | Total | $ | 63,093 |
| | $ | 33,056 |
| | $ | 49,401 |
|
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to U.S. tax law. The Act reducesreduced the U.S. federal corporate income tax rate from 35% to 21%, requiresrequired companies to pay a one-time transition tax on certain un-remittedunremitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminateseliminated U.S. federal income tax on dividends from foreign subsidiaries, and createscreated new taxes on certain foreign-sourced earnings. During fiscal 2018, the Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate from 35% to 21%. The rate change was administratively effective as of the beginning of ourthe Company's fiscal year,2018, resulting in the Company using a blended statutory rate for the annual periodfiscal 2018 of 28.06%. The corporate income tax rate change had a favorable impact to the Company of $12,113 for fiscal 2018. The SEC staff issued SAB 118, which providesprovided guidance on accounting for the tax effects of the Act for which the accounting under ASC 740 iswas incomplete. To the extent that a company's accounting for certain income tax effects of the Act iswas incomplete but it iswas able to determine a reasonable estimate, it mustwas required to record a provisional estimate in the financial statements. If a company cannotcould not determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act. Accordingly, as As of June 30, 2018 we have not completed our accounting for the tax effects of the Act. For fiscal 2018, we recognized a provisional tax liability of $3,877 related to the one-time transition tax on certain un-remitted earnings of foreign subsidiaries, which is payable over eight years. We also re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. The Company recorded a provisional amount of $2,414 of additional deferred income tax expense related to the re-measurement of our deferred tax balance. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Overall, considering the decrease in the corporate income tax rate and the expense related to the transition tax and deferred tax re-measurement, the Act resulted in a net tax benefit of $5,822 for fiscal 2018, which is included as a component of income tax expense in the statements of consolidated income.
During the fourth quarter of fiscal 2017,2019, the Company recorded a net tax benefitexpense of $22,246 pertaining to a worthless stock deduction. The tax benefit of this deduction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes reduced by $1,019 of tax provided for a valuation allowance applicable$5,802 related to the related stateone time transition tax and re-measurement of deferred income tax asset.balances.
The exercise of non-qualified stock appreciation rights and options during fiscal 2018, 2017 and 2016 resulted in $419, $1,921 and $212, respectively, of income tax benefits to the Company derived from the difference between the market and option price of the shares at the date of exercise and the fair value of the options on the grant date. Vesting of stock awards and other stock compensation in fiscal 2018, 2017 and 2016 resulted in $430, $482 and $(4), respectively, of incremental income tax benefits (expense) over the amounts previously reported for financial reporting purposes. Due to the adoption of ASU 2016-09 in fiscal 2017, the tax benefits for fiscal 2018 and 2017 were recorded in income tax expense in the statements of consolidated income, while the fiscal 2016 tax expense was recorded in additional paid-in capital.
Effective Tax Rates The following reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate: | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Statutory income tax rate | 21.0 | % | | 21.0 | % | | 28.1 | % | | Effects of: | | | | | | | State and local taxes | 6.4 |
| | 4.4 |
| | 3.1 |
| | U.S. federal tax reform | — |
| | (0.3 | ) | | 3.1 |
| | CARES Act NOL carryback | (1.8 | ) | | — |
| | — |
| | Goodwill impairment | 31.4 |
| | — |
| | — |
| | Stock compensation | (1.3 | ) | | (0.5 | ) | | (0.4 | ) | | GILTI/FDII | 3.6 |
| | 0.7 |
| | — |
| | R & D credit | (1.2 | ) | | (0.4 | ) | | (0.3 | ) | | U.S. tax on foreign income, net | (3.1 | ) | | 0.5 |
| | — |
| | Impact of foreign operations | 1.6 |
| | (0.6 | ) | | 0.7 |
| | Non-deductibles | 1.2 |
| | 0.6 |
| | 0.3 |
| | Interest deduction | (4.0 | ) | | (1.2 | ) | | (1.6 | ) | | Deductible dividend | (0.6 | ) | | (0.2 | ) | | (1.3 | ) | | Valuation allowance | 2.6 |
| | 2.9 |
| | (0.3 | ) | | Other, net | 0.7 |
| | (0.9 | ) | | (0.6 | ) | | Effective income tax rate | 56.5 | % | | 26.0 | % | | 30.8 | % |
| | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Statutory income tax rate | 28.1 | % | | 35.0 | % | | 35.0 | % | | Effects of: | | | | | | | State and local taxes | 3.1 |
| | 2.8 |
| | 5.2 |
| | U.S. federal tax reform | 3.1 |
| | — |
| | — |
| | Worthless stock deduction | — |
| | (13.9 | ) | | — |
| | Stock compensation | (0.4 | ) | | (1.4 | ) | | — |
| | Goodwill impairment | — |
| | — |
| | 27.1 |
| | Impact of foreign operations | (1.3 | ) | | (2.3 | ) | | (3.0 | ) | | Deductible dividend | (0.3 | ) | | (0.4 | ) | | (0.9 | ) | | Valuation allowance | (0.9 | ) | | 0.3 |
| | 0.5 |
| | Other, net | (0.6 | ) | | (0.3 | ) | | (1.3 | ) | | Effective income tax rate | 30.8 | % | | 19.8 | % | | 62.6 | % |
Consolidated Balance Sheets Significant components of the Company’s deferred tax assets and liabilities are as follows: | | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | Deferred tax assets: | | | | | Compensation liabilities not currently deductible | $ | 17,252 |
| | $ | 17,401 |
| | Other expenses and reserves not currently deductible | 15,272 |
| | 13,050 |
| | Goodwill and intangibles | — |
| | 2,398 |
| | Leases | 24,016 |
| | — |
| | Net operating loss carryforwards | 8,859 |
| | 8,466 |
| | Hedging instrument | 6,406 |
| | 3,498 |
| | Other | 757 |
| | 1,173 |
| | Total deferred tax assets | 72,562 |
| | 45,986 |
| | Less: Valuation allowance | (7,494 | ) | | (5,597 | ) | | Deferred tax assets, net of valuation allowance | 65,068 |
| | 40,389 |
| | Deferred tax liabilities: | | | | | Inventories | (8,284 | ) | | (8,600 | ) | | Goodwill and intangibles | (58,506 | ) | | (75,504 | ) | | Leases | (23,407 | ) | | — |
| | Depreciation and differences in property bases | (13,018 | ) | | (10,777 | ) | | Total deferred tax liabilities | (103,215 | ) | | (94,881 | ) | | Net deferred tax liabilities | $ | (38,147 | ) | | $ | (54,492 | ) | | Net deferred tax liabilities are classified as follows: | | | | | Other assets | $ | 4,749 |
| | $ | 3,859 |
| | Other liabilities | (42,896 | ) | | (58,351 | ) | | Net deferred tax liabilities | $ | (38,147 | ) | | $ | (54,492 | ) |
| | | | | | | | | | June 30, | 2018 |
| | 2017 |
| | Deferred tax assets: | | | | | Compensation liabilities not currently deductible | $ | 19,334 |
| | $ | 26,873 |
| | Other expenses and reserves not currently deductible | 13,169 |
| | 11,601 |
| | Goodwill and intangibles | 3,197 |
| | 5,661 |
| | Foreign tax credit (expiring in years 2025-2026) | 413 |
| | 709 |
| | Net operating loss carryforwards (expiring in years 2023-2038) | 11,315 |
| | 5,729 |
| | Other | 199 |
| | 119 |
| | Total deferred tax assets | 47,627 |
| | 50,692 |
| | Less: Valuation allowance | (38 | ) | | (1,831 | ) | | Deferred tax assets, net of valuation allowance | 47,589 |
| | 48,861 |
| | Deferred tax liabilities: | | | | | Inventories | (8,196 | ) | | (7,447 | ) | | Goodwill and intangibles | (86,176 | ) | | (30,482 | ) | | Depreciation and differences in property bases | (9,294 | ) | | (10,122 | ) | | Total deferred tax liabilities | (103,666 | ) | | (48,051 | ) | | Net deferred tax (liabilities) assets | $ | (56,077 | ) | | $ | 810 |
| | Net deferred tax (liabilities) assets are classified as follows: | | | | | Other assets | $ | 2,103 |
| | $ | 8,985 |
| | Other liabilities | (58,180 | ) | | (8,175 | ) | | Net deferred tax (liabilities) assets | $ | (56,077 | ) | | $ | 810 |
|
2019, the Company had state net operating loss carryforwards, the tax benefit of which is approximately $1,177 and $2,098 respectively, which will expire at various dates beginning in 2027. Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets. The remaining net deferred tax asset is the amount
management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory tax rates and future income levels. During the year ended June 30, 2020, the Company recorded a valuation allowance of $2,124 related to certain deferred tax assets in Canada due to the uncertainty in realizing these net deferred tax assets. As a result of the Act, the Company’s net unremitted foreign earnings of $77,374 have been subject to U.S. taxation. As of June 30, 2018, all such2020, the Company had accumulated undistributed earnings of non-U.S. subsidiaries are considered permanently reinvested. Therefore, no taxes have been provided that would result from the remittanceof approximately $114,070. The vast majority of such earnings. The net amount ofearnings have previously been subjected to the unrecognizedone-time transition tax liabilityor the Global Intangible Low Taxed Income ("GILTI") inclusion implemented by the Act. Therefore, any additional taxes due with respect to such earnings or the distributionexcess of these earnings is estimatedthe amount for financial reporting over the tax basis of our foreign investments would generally be limited to be approximately $1,986.foreign withholding and state income taxes. In addition, we expect foreign tax credits would be available to either offset or partially reduce the tax cost in the event of a distribution. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.
Unrecognized Income Tax Benefits The Company and its subsidiaries file income tax returns in U.S. federal, various state, local and foreign jurisdictions. The following table sets forth the changes in the amount of unrecognized tax benefits for the years ended June 30, 2018, 20172020 and 2016:2019: | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | Unrecognized Income Tax Benefits at beginning of the year | $ | 4,979 |
| | $ | 3,988 |
| | Current year tax positions | 105 |
| | 105 |
| | Prior year tax positions | 177 |
| | 1,151 |
| | Expirations of statutes of limitations | (306 | ) | | (265 | ) | | Unrecognized Income Tax Benefits at end of year | $ | 4,955 |
| | $ | 4,979 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Unrecognized Income Tax Benefits at beginning of the year | $ | 3,533 |
| | $ | 2,915 |
| | $ | 2,604 |
| | Current year tax positions | 143 |
| | 574 |
| | 539 |
| | Prior year tax positions | 636 |
| | 259 |
| | — |
| | Expirations of statutes of limitations | (324 | ) | | (189 | ) | | (132 | ) | | Settlements | — |
| | (26 | ) | | (96 | ) | | Unrecognized Income Tax Benefits at end of year | $ | 3,988 |
| | $ | 3,533 |
| | $ | 2,915 |
|
IncludedThe Company recognizes interest and penalties related to uncertain tax positions in the balance of unrecognizedprovision for income tax benefits at June 30, 2018, 2017taxes. During 2020 and 2016 are $3,725, $3,323 and $2,691, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
During 2018, 2017 and 2016,2019, the Company recognized $(110) $256and $163 and $127$161 of (benefit) expense, respectively, for interest and penalties related to unrecognized income tax benefits in its statements of consolidated income. The Company had a liability for penalties and interest of $677$1,094 and $787$838 as of June 30, 20182020 and 2017,2019, respectively. The Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next twelve months. Included in the balance of unrecognized income tax benefits at June 30, 2020 and 2019 are $4,708 and $4,701, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
The Company is subject to U.S. federal income tax examinations for the tax years 20152017 through 20182020 and to state and local income tax examinations for the tax years 20122014 through 2018.2020. In addition, the Company is subject to foreign income tax examinations for the tax years 20112013 through 2018.2020. The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment of cash is not expected within one year.year, or as a reduction of a deferred tax asset.
NOTE 8:10: SHAREHOLDERS’ EQUITY Treasury Shares At June 30, 2018, 5962020, 128 shares of the Company’s common stock held as treasury shares were restricted as collateral under escrow arrangements relating to change in control and director and officer indemnification agreements. Accumulated Other Comprehensive Income (Loss)Loss Changes in the accumulated other comprehensive income (loss)loss for the years ended June 30, 2018, 2017,2020, 2019, and 2016,2018, are comprised of the following amounts, shown net of taxes: | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment |
| | Unrealized gain (loss) on securities available for sale |
| | Post-employment benefits |
| | Cash flow hedge |
| | Total accumulated other comprehensive loss |
| | Balance at July 1, 2017 | $ | (79,447 | ) | | $ | 21 |
| | $ | (2,276 | ) | | $ | — |
| | $ | (81,702 | ) | | Other comprehensive (loss) income | (8,549 | ) | | 20 |
| | 524 |
| | — |
| | (8,005 | ) | | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (45 | ) | | — |
| | (45 | ) | | Amounts reclassified for certain income tax effects to retained earnings | 22 |
| | 9 |
| | (502 | ) | | — |
| | (471 | ) | | Net current-period other comprehensive (loss) income | (8,527 | ) | | 29 |
| | (23 | ) | | — |
| | (8,521 | ) | | Balance at June 30, 2018 | (87,974 | ) | | 50 |
| | (2,299 | ) | | — |
| | (90,223 | ) | | Other comprehensive income (loss) | 1,644 |
| | — |
| | (327 | ) | | (10,887 | ) | | (9,570 | ) | | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (226 | ) | | 183 |
| | (43 | ) | | Cumulative effect of adopting accounting standards | — |
| | (50 | ) | | — |
| | — |
| | (50 | ) | | Net current-period other comprehensive income (loss) | 1,644 |
| | (50 | ) | | (553 | ) | | (10,704 | ) | | (9,663 | ) | | Balance at June 30, 2019 | (86,330 | ) | | — |
| | (2,852 | ) | | (10,704 | ) | | (99,886 | ) | | Other comprehensive loss | (18,764 | ) | | — |
| | (1,662 | ) | | (12,572 | ) | | (32,998 | ) | | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (50 | ) | | 3,504 |
| | 3,454 |
| | Net current-period other comprehensive loss | (18,764 | ) | | — |
| | (1,712 | ) | | (9,068 | ) | | (29,544 | ) | | Balance at June 30, 2020 | $ | (105,094 | ) | | $ | — |
| | $ | (4,564 | ) | | $ | (19,772 | ) | | $ | (129,430 | ) |
| | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment |
| | Unrealized (loss) gain on securities available for sale |
| | Post-employment benefits |
| | Total accumulated other comprehensive (loss) income |
| | Balance at July 1, 2015 | $ | (57,244 | ) | | $ | (4 | ) | | $ | (2,923 | ) | | $ | (60,171 | ) | | Other comprehensive loss | (24,441 | ) | | (34 | ) | | (1,215 | ) | | (25,690 | ) | | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 315 |
| | 315 |
| | Net current-period other comprehensive loss | (24,441 | ) | | (34 | ) | | (900 | ) | | (25,375 | ) | | Balance at June 30, 2016 | (81,685 | ) | | (38 | ) | | (3,823 | ) | | (85,546 | ) | | Other comprehensive income | 2,238 |
| | 59 |
| | 1,239 |
| | 3,536 |
| | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 308 |
| | 308 |
| | Net current-period other comprehensive income | 2,238 |
| | 59 |
| | 1,547 |
| | 3,844 |
| | Balance at June 30, 2017 | (79,447 | ) | | 21 |
| | (2,276 | ) | | (81,702 | ) | | Other comprehensive (loss) income | (8,549 | ) | | 20 |
| | 524 |
| | (8,005 | ) | | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | (45 | ) | | (45 | ) | | Amounts reclassified for certain income tax effects to retained earnings | 22 |
| | 9 |
| | (502 | ) | | (471 | ) | | Net current-period other comprehensive (loss) income | (8,527 | ) | | 29 |
| | (23 | ) | | (8,521 | ) | | Balance at June 30, 2018 | $ | (87,974 | ) | | $ | 50 |
| | $ | (2,299 | ) | | $ | (90,223 | ) |
Other Comprehensive Income (Loss)Loss Details of other comprehensive income (loss)loss are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2020 | | 2019 | | 2018 | | | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax (Benefit) Expense |
| | Net Amount |
| | Foreign currency translation adjustments | $ | (18,499 | ) | | $ | 265 |
| | $ | (18,764 | ) | | $ | 2,021 |
| | $ | 377 |
| | $ | 1,644 |
| | $ | (8,875 | ) | | $ | (326 | ) | | $ | (8,549 | ) | | Post-employment benefits: | | | | | | | | | | | | | | | | | | | Actuarial (loss) gain on re-measurement | (2,192 | ) | | (530 | ) | | (1,662 | ) | | (372 | ) | | (45 | ) | | (327 | ) | | 709 |
| | 185 |
| | 524 |
| | Reclassification of actuarial gains and prior service cost into other income, net and included in net periodic pension costs | (66 | ) | | (16 | ) | | (50 | ) | | (306 | ) | | (80 | ) | | (226 | ) | | (73 | ) | | (28 | ) | | (45 | ) | | Unrealized gain on investment securities available for sale | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 37 |
| | 17 |
| | 20 |
| | Unrealized loss on cash flow hedge | (16,615 | ) | | (4,043 | ) | | (12,572 | ) | | (14,446 | ) | | (3,559 | ) | | (10,887 | ) | | — |
| | — |
| | — |
| | Reclassification of interest from cash flow hedge into interest expense | 4,638 |
| | 1,134 |
| | 3,504 |
| | 244 |
| | 61 |
| | 183 |
| | — |
| | — |
| | — |
| | Cumulative effect of adopting accounting standard | — |
| | — |
| | — |
| | (50 | ) | | — |
| | (50 | ) | | — |
| | — |
| | — |
| | Reclassification of certain income tax effects to retained earnings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 471 |
| | (471 | ) | | Other comprehensive loss | $ | (32,734 | ) | | $ | (3,190 | ) | | $ | (29,544 | ) | | $ | (12,909 | ) | | $ | (3,246 | ) | | $ | (9,663 | ) | | $ | (8,202 | ) | | $ | 319 |
| | $ | (8,521 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2018 | | 2017 | | 2016 | | | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax (Benefit) Expense |
| | Net Amount |
| | Foreign currency translation adjustments | $ | (8,875 | ) | | $ | (326 | ) | | $ | (8,549 | ) | | $ | 2,238 |
| | $ | — |
| | $ | 2,238 |
| | $ | (24,441 | ) | | $ | — |
| | $ | (24,441 | ) | | Post-employment benefits: | | | | | | | | | | | | | | | | | | | Actuarial gain (loss) on re-measurement | 709 |
| | 185 |
| | 524 |
| | 2,038 |
| | 799 |
| | 1,239 |
| | (1,998 | ) | | (783 | ) | | (1,215 | ) | | Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs | (73 | ) | | (28 | ) | | (45 | ) | | 506 |
| | 198 |
| | 308 |
| | 518 |
| | 203 |
| | 315 |
| | Unrealized gain (loss) on investment securities available for sale | 37 |
| | 17 |
| | 20 |
| | 91 |
| | 32 |
| | 59 |
| | (52 | ) | | (18 | ) | | (34 | ) | | Reclassification of certain income tax effects to retained earnings | — |
| | 471 |
| | (471 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Other comprehensive (loss) income | $ | (8,202 | ) | | $ | 319 |
| | $ | (8,521 | ) | | $ | 4,873 |
| | $ | 1,029 |
| | $ | 3,844 |
| | $ | (25,973 | ) | | $ | (598 | ) | | $ | (25,375 | ) |
Net Income Per Share Basic net income per share is based on the weighted-average number of common shares outstanding. Diluted net income per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing net income per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include Restricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury stock method and the two-class method. For the years presented there were no material differences in the net income per share amounts calculated using the two methods. Accordingly, the treasury stock method is disclosed below. The following table presents amounts used in computing net income per share and the effect on the weighted-average number of shares of dilutive potential common shares: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Net Income | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| | Average Shares Outstanding: | | | | | | | Weighted-average common shares outstanding for basic computation | 38,658 |
| | 38,670 |
| | 38,752 |
| | Dilutive effect of potential common shares | 341 |
| | 490 |
| | 529 |
| | Weighted-average common shares outstanding for dilutive computation | 38,999 |
| | 39,160 |
| | 39,281 |
| | Net Income Per Share — Basic | $ | 0.62 |
| | $ | 3.72 |
| | $ | 3.65 |
| | Net Income Per Share — Diluted | $ | 0.62 |
| | $ | 3.68 |
| | $ | 3.61 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Net Income | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| | Average Shares Outstanding: | | | | | | | Weighted-average common shares outstanding for basic computation | 38,752 |
| | 39,013 |
| | 39,254 |
| | Dilutive effect of potential common shares | 529 |
| | 391 |
| | 212 |
| | Weighted-average common shares outstanding for dilutive computation | 39,281 |
| | 39,404 |
| | 39,466 |
| | Net Income Per Share — Basic | $ | 3.65 |
| | $ | 3.43 |
| | $ | 0.75 |
| | Net Income Per Share — Diluted | $ | 3.61 |
| | $ | 3.40 |
| | $ | 0.75 |
|
Stock appreciation rights and optionsawards relating to 66, 141726, 226 and 77566 shares of common stock were outstanding at June 30, 2018, 20172020, 2019 and 2016,2018, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.
NOTE 9:11: SHARE-BASED COMPENSATION Share-Based Incentive Plans Following approval by the Company's shareholders in October 2015,2019, the 2019 Long-Term Performance Plan (the "2019 Plan") replaced the 2015 Long-Term Performance Plan (the "2015 Plan") replaced the 2011 Long-Term Performance Plan. The 20152019 Plan, which expires in 2020,2024, provides for granting of SARs, stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or, in the case of director awards, the Corporate Governance Committee of the Board of Directors (together referred to as the Committee) may determine to officers, other key employees and members of the Board of Directors. Grants are generally made at regularly scheduled committee meetings. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | SARs and options | $ | 2,954 |
| | $ | 2,440 |
| | $ | 1,961 |
| | Performance shares | 854 |
| | 2,082 |
| | 2,006 |
| | Restricted stock and RSUs | 3,146 |
| | 2,391 |
| | 2,660 |
| | Total compensation costs under award programs | $ | 6,954 |
| | $ | 6,913 |
| | $ | 6,627 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | SARs and options | $ | 1,961 |
| | $ | 1,891 |
| | $ | 1,543 |
| | Performance shares | 2,006 |
| | 1,331 |
| | 446 |
| | Restricted stock and RSUs | 2,660 |
| | 2,298 |
| | 2,078 |
| | Total compensation costs under award programs | $ | 6,627 |
| | $ | 5,520 |
| | $ | 4,067 |
|
Such amounts are included in selling, distribution and administrative expense in the accompanying statements of consolidated income. The total income tax benefit recognized in the statements of consolidated income for share-based compensation plans was $1,923, $4,848$2,189, $2,709 and $1,595$1,923 for fiscal years 2018, 20172020, 2019 and 2016,2018, respectively. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with shares. The aggregate unrecognized compensation cost for share-based award programs with the potential to be paid at June 30, 2018 are2020 is summarized in the table below: | | | | | | | | June 30, | 2020 |
| | Average Expected Period of Expected Recognition (Years) | | SARs and options | $ | 4,113 |
| | 2.2 | | Performance shares | 4,580 |
| | 1.8 | | Restricted stock and RSUs | 3,028 |
| | 2.1 | | Total unrecognized compensation costs under award programs | $ | 11,721 |
| | 2.0 |
| | | | | | | | June 30, | 2018 |
| | Average Expected Period of Expected Recognition (Years) | | SARs and options | $ | 3,729 |
| | 2.5 | | Performance shares | 3,282 |
| | 1.7 | | Restricted stock and RSUs | 2,173 |
| | 1.9 | | Total unrecognized compensation costs under award programs | $ | 9,184 |
| | 2.1 |
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.12.0 years. The aggregate number of shares of common stock which may be awarded under the 20152019 Plan is 2,500;2,250; shares available for future grants at June 30, 20182020 were 1,655.2,221. Stock Appreciation Rights and Stock Options The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2020, 2019
and 2018 2017
and 2016 are: | | | | | | | | | | | | 2020 |
| | 2019 |
| | 2018 |
| | Expected life, in years | 6.2 |
| | 6.0 |
| | 6.0 |
| | Risk free interest rate | 1.6 | % | | 2.8 | % | | 2.1 | % | | Dividend yield | 2.3 | % | | 1.8 | % | | 2.5 | % | | Volatility | 23.7 | % | | 22.5 | % | | 24.3 | % | | Per share fair value of SARs granted during the year | $10.12 | | $16.15 | | $11.25 |
| | | | | | | | | | | | 2018 |
| | 2017 |
| | 2016 |
| | Expected life, in years | 6.0 |
| | 4.8 |
| | 4.4 |
| | Risk free interest rate | 2.1 | % | | 1.2 | % | | 1.3 | % | | Dividend yield | 2.5 | % | | 2.5 | % | | 2.5 | % | | Volatility | 24.3 | % | | 24.1 | % | | 26.0 | % | | Per share fair value of SARs and stock options granted during the year | $11.25 | | $7.97 | | $6.79 |
The expected life is based upon historical exercise experience of the officers, other key employees and members of the Board of Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds with remaining terms equal to the expected life of the SARs and stock options. The assumed dividend yield has been estimated based upon the Company’s historical results and expectations for changes in dividends
and stock prices. The volatility assumption is calculated based upon historical daily price observations of the Company’s common stock for a period equal to the expected life.
SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be settled by the holder with cash or by tendering Company common stock. A summary of SARs and stock options activity is presented below: | | | | | | | | | | Shares |
| | Weighted-Average Exercise Price |
| | Year Ended June 30, 2020 | | | (Shares in thousands) | | | Outstanding, beginning of year | 1,479 |
| | $ | 49.42 |
| | Granted | 296 |
| | 54.20 |
| | Exercised | (139 | ) | | 39.06 |
| | Forfeited | (16 | ) | | 60.64 |
| | Outstanding, end of year | 1,620 |
| | $ | 51.07 |
| | Exercisable at end of year | 996 |
| | $ | 46.10 |
| | Expected to vest at end of year | 1,607 |
| | $ | 51.01 |
|
| | | | | | | | | | Shares |
| | Weighted-Average Exercise Price |
| | Year Ended June 30, 2018 | | | (Shares in thousands) | | | Outstanding, beginning of year | 1,218 |
| | $ | 42.26 |
| | Granted | 286 |
| | 58.40 |
| | Exercised | (58 | ) | | 37.55 |
| | Forfeited | (45 | ) | | 55.64 |
| | Outstanding, end of year | 1,401 |
| | $ | 45.32 |
| | Exercisable at end of year | 789 |
| | $ | 41.08 |
| | Expected to vest at end of year | 1,379 |
| | $ | 45.22 |
|
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and expected to vest at June 30, 20182020 were 6.6, 5.3,6.0, 4.7, and 6.66.0 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and expected to vest at June 30, 20182020 were $34,869 $22,927,$20,862 $16,795, and $34,440,$20,780, respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2020, 2019, and 2018 2017,was $3,460, $3,363, and 2016 was $1,765, $8,396, and $2,422, respectively. The total fair value of shares vested during fiscal 2020, 2019, and 2018 2017,was $2,285, $1,846, and 2016 was $2,149, $1,788, and $1,291, respectively. Performance Shares Performance shares are paid in shares of Applied stock at the end of a three-year period provided the Company achieves goals established by the committee.Committee. The number of Applied shares payable will vary depending on the level of the goals achieved. A summary of nonvestednon-vested performance shares activity at June 30, 20182020 is presented below: | | | | | | | | | | Shares |
| | Weighted-Average Grant-Date
Fair Value |
| | Year Ended June 30, 2020 | | | (Shares in thousands) | | | Non-vested, beginning of year | 97 |
| | $ | 50.88 |
| | Awarded | 17 |
| | 52.86 |
| | Vested | (58 | ) | | 47.87 |
| | Non-vested, end of year | 56 |
| | $ | 54.62 |
|
| | | | | | | | | | Shares |
| | Weighted-Average Grant-Date
Fair Value |
| | Year Ended June 30, 2018 | | | (Shares in thousands) | | | Nonvested, beginning of year | 52 |
| | $ | 43.99 |
| | Awarded | 51 |
| | 47.13 |
| | Vested | (10 | ) | | 48.76 |
| | Nonvested, end of year | 93 |
| | $ | 45.16 |
|
The Committee set three one-year goals for each of the 2018, 20172020, 2019, and 20162018 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. For the outstanding grants as of June 30, 2018,2020, the maximum number of shares whichthat could be earned in future periods was 67.79.
Restricted Stock and Restricted Stock Units Restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective shares, but are restricted from selling or transferring the shares prior to vesting. Restricted stock awards vest over periods of one to four years. RSUs are grants valued in shares of Applied stock, but shares are not issued until the grants vest three to fourfive years from the award date, assuming continued employment with Applied. Applied primarily pays dividend equivalents on RSUs on a current basis.basis, however dividend equivalents on RSU grants under the 2019 Plan will be paid upon vesting. A summary of the status of the Company’s non-vested restricted stock and RSUs at June 30, 20182020 is presented below: | | | | | | | | | | Shares |
| | Weighted-Average Grant-Date
Fair Value |
| | Year Ended June 30, 2020 | | | (Share amounts in thousands) | | | Non-vested, beginning of year | 89 |
| | $ | 59.93 |
| | Granted | 81 |
| | 56.74 |
| | Vested | (40 | ) | | 53.60 |
| | Non-vested, end of year | 130 |
| | $ | 59.91 |
|
| | | | | | | | | | Shares |
| | Weighted-Average Grant-Date
Fair Value |
| | Year Ended June 30, 2018 | | | (Share amounts in thousands) | | | Nonvested, beginning of year | 116 |
| | $ | 46.91 |
| | Granted | 53 |
| | 62.62 |
| | Forfeitures | (10 | ) | | 54.96 |
| | Vested | (43 | ) | | 52.58 |
| | Nonvested, end of year | 116 |
| | $ | 51.27 |
|
NOTE 10: BENEFIT PLANS12: LEASES Retirement Savings Plan
Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company’s operating lease expense for matching of employees’ 401(k) contributions was $6,551, $6,677is recognized on a straight-line basis over the lease term and $2,535 during 2018, 2017 and 2016, respectively.
Deferred Compensation Plans
The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.
Post-employment Benefit Plans
The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded:
Supplemental Executive Retirement Benefits Plan
The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011.
Key Executive Restoration Plan
In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualified deferred compensation plan, to replace the SERP. The Companyis recorded $359, $289, and $268 of expense associated with this plan in fiscal 2018, 2017, and 2016, respectively.
Qualified Defined Benefit Retirement Plan
The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly employees at retirement. These employees do not participate in the Retirement Savings Plan. The benefits are based on length of service and date of retirement. The plan accruals were frozen as of April 16, 2018 and employees are now permitted to participate in the Retirement Savings Plan subsequent to April 16, 2018.
Salary Continuation Benefits
The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits through fiscal 2020.
Retiree Health Care Benefits
The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of
coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees at no cost to the individual.
The Company uses a June 30 measurement date for all plans.
The following table sets forth the changes in benefit obligations and plan assets during the year and the funded status for the post-employment plans at June 30:
| | | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | | | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| | Change in benefit obligation: | | | | | | | | | Benefit obligation at beginning of the year | $ | 24,411 |
| | $ | 26,605 |
| | $ | 1,684 |
| | $ | 2,235 |
| | Service cost | 124 |
| | 126 |
| | 19 |
| | 29 |
| | Interest cost | 729 |
| | 687 |
| | 52 |
| | 63 |
| | Plan participants’ contributions | — |
| | — |
| | 68 |
| | 69 |
| | Benefits paid | (3,181 | ) | | (1,562 | ) | | (223 | ) | | (237 | ) | | Amendments | — |
| | — |
| | — |
| | (245 | ) | | Actuarial gain during year | (549 | ) | | (1,445 | ) | | (109 | ) | | (230 | ) | | Benefit obligation at end of year | $ | 21,534 |
| | $ | 24,411 |
| | $ | 1,491 |
| | $ | 1,684 |
| | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | $ | 6,530 |
| | $ | 6,737 |
| | $ | — |
| | $ | — |
| | Actual gain on plan assets | 516 |
| | 578 |
| | — |
| | — |
| | Employer contributions | 3,837 |
| | 776 |
| | 155 |
| | 168 |
| | Plan participants’ contributions | — |
| | — |
| | 68 |
| | 69 |
| | Benefits paid | (3,181 | ) | | (1,561 | ) | | (223 | ) | | (237 | ) | | Fair value of plan assets at end of year | $ | 7,702 |
| | $ | 6,530 |
| | $ | — |
| | $ | — |
| | Funded status at end of year | $ | (13,832 | ) | | $ | (17,881 | ) | | $ | (1,491 | ) | | $ | (1,684 | ) |
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive loss for the post-employment plans were as follows:
| | | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | | June 30, | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Other current liabilities | $ | 3,298 |
| | $ | 2,814 |
| | $ | 220 |
| | $ | 220 |
| | Post-employment benefits | 10,534 |
| | 15,067 |
| | 1,271 |
| | 1,464 |
| | Net amount recognized | $ | 13,832 |
| | $ | 17,881 |
| | $ | 1,491 |
| | $ | 1,684 |
| | Amounts recognized in accumulated other comprehensive loss: | | | | | | | | | Net actuarial (loss) gain | $ | (4,781 | ) | | $ | (5,798 | ) | | $ | 1,121 |
| | $ | 1,167 |
| | Prior service cost | — |
| | (35 | ) | | 554 |
| | 922 |
| | Total amounts recognized in accumulated other comprehensive loss | $ | (4,781 | ) | | $ | (5,833 | ) | | $ | 1,675 |
| | $ | 2,089 |
|
The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets:
| | | | | | | | | | | Pension Benefits | | June 30, | 2018 |
| | 2017 |
| | Projected benefit obligations | $ | 21,534 |
| | $ | 24,411 |
| | Accumulated benefit obligations | 21,534 |
| | 24,411 |
| | Fair value of plan assets | 7,702 |
| | 6,530 |
|
The net periodic costs (benefits) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | 2018 |
| | 2017 |
| | 2016 |
| | Service cost | $ | 124 |
| | $ | 126 |
| | $ | 91 |
| | $ | 19 |
| | $ | 29 |
| | $ | 22 |
| | Interest cost | 729 |
| | 687 |
| | 879 |
| | 52 |
| | 63 |
| | 75 |
| | Expected return on plan assets | (472 | ) | | (460 | ) | | (491 | ) | | — |
| | — |
| | — |
| | Recognized net actuarial loss (gain) | 424 |
| | 872 |
| | 913 |
| | (154 | ) | | (181 | ) | | (210 | ) | | Amortization of prior service cost | 27 |
| | 86 |
| | 86 |
| | (369 | ) | | (271 | ) | | (271 | ) | | Recognition of prior service cost upon plan curtailment | 8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Net periodic cost (benefits) | $ | 840 |
| | $ | 1,311 |
| | $ | 1,478 |
| | $ | (452 | ) | | $ | (360 | ) | | $ | (384 | ) |
In accordance with the Company's adoption of ASU 2017-07, the Company reports the service cost component of the net periodic post-employment costs in the same line item in the income statement as other compensation costs arising from services rendered by the employees during the period. The other components of net periodic post-employment costs are presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Therefore, $143, $155, and $113 of service costs are included in selling, distribution and administrative expense and $245, $796, and $981 of net other periodic post-employment costs are included in other (income) expense, net inon the statements of consolidated incomeincome. Operating lease costs and short-term lease costs were $33,152 and $10,581 for the yearsyear ended June 30, 2018, 2017, and 2016,2020, respectively.
The estimated net actuarial loss for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $185. The estimated net actuarial gain and income from prior service cost for the retiree health care benefits that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $121 and $369, respectively.
Assumptions
A discount rate is used to determine the present value of future payments. In general, the Company’s liability increases as the discount rate decreases and decreases as the discount rate increases. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the Citigroup Pension Discount Yield Curve and the Findley Discount Curve. During fiscal 2015, the Society of Actuaries released a series of updated mortality tables resulting from recent studies measuring mortality rates for various groups of individuals. As of June 30, 2015, the Company adopted these mortality tables, which reflect improved trends in longevity and have the effect of increasing the estimate of benefits to be received by plan participants.
The weighted-average actuarial assumptions used to determine benefit obligations and net periodic benefit cost for the plans were as follows:
| | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | | June 30, | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| | Assumptions used to determine benefit obligations at year end: | | | | | | | | | Discount rate | 3.5 | % | | 2.8 | % | | 3.8 | % | | 3.3 | % | | Assumptions used to determine net periodic benefit cost: | | | | | | | | | Discount rate | 2.8 | % | | 2.3 | % | | 3.3 | % | | 2.9 | % | | Expected return on plan assets | 7.0 | % | | 7.0 | % | | N/A |
| | N/A |
|
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 7.0% as of June 30, 2018 and 2017, respectively, decreasing to 5.0% by 2027.
A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 2018 and for the year then ended:
| | | | | | | | | | | One-Percentage Point | | | | Increase | | Decrease | | Effect on total service and interest cost components of periodic expense | $ | 9 |
| | $ | (8 | ) | | Effect on post-retirement benefit obligation | 152 |
| | (130 | ) |
Plan Assets
The fair value of each major class of plan assets for the Company’s Qualified Defined Benefit Retirement Plan is valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair values and target allocation as of June 30:
| | | | | | | | | | | | | Target Allocation | | Fair Value | | | | | 2018 |
| | 2017 |
| | Asset Class: | | | | | | | Equity* securities (Level 1) | 40 – 70% | | $ | 6,226 |
| | $ | 3,880 |
| | Debt securities (Level 2) | 20 – 50% | | 1,337 |
| | 2,538 |
| | Other (Level 1) | 0 – 20% | | 139 |
| | 112 |
| | Total | 100% | | $ | 7,702 |
| | $ | 6,530 |
|
* Equity securities do not include any Company common stock.
The Company has established an investment policy and regularly monitors the performance of the assets of the trust maintained in conjunction with the Qualified Defined Benefit Retirement Plan. The strategy implemented by the trustee of the Qualified Defined Benefit Retirement Plan is to achieve long-term objectives and invest the pension assets in accordance with ERISA and fiduciary standards. The long-term primary objectives are to provide for a reasonable amount of long-term capital, without undue exposure to risk; to protect the Qualified Defined Benefit Retirement Plan assets from erosion of purchasing power; and to provide investment results that meet or exceed the actuarially assumed long-term rate of return. The expected long-term rate of return on assets assumption was developed by considering the historical returns and the future expectations for returns of each asset class as well as the target asset allocation of the pension portfolio.
Cash Flows
Employer Contributions
The Company expects to contribute $3,300 to its pension benefit plans and $130 to its retiree health care benefit plans in fiscal 2019. Contributions do not equal estimated future benefit payments as certain payments are made from plan assets.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as applicable, are expected to be paid in each of the next five years and in the aggregate for the subsequent five years:
| | | | | | | | | | During Fiscal Years | Pension Benefits |
| | Retiree Health Care Benefits |
| | 2019 | $ | 3,700 |
| | $ | 130 |
| | 2020 | 3,800 |
| | 120 |
| | 2021 | 1,300 |
| | 110 |
| | 2022 | 1,300 |
| | 110 |
| | 2023 | 1,400 |
| | 100 |
| | 2024 through 2028 | 5,200 |
| | 530 |
|
NOTE 11: LEASES
The Company leases many service center and distribution center facilities, vehicles and equipment under non-cancelable lease agreements accounted for as operating leases. The minimum annual rental commitments under non-cancelable operating leases as of June 30, 2018 are as follows:
| | | | | | During Fiscal Years | | | 2019 | $ | 38,100 |
| | 2020 | 27,500 |
| | 2021 | 17,800 |
| | 2022 | 11,200 |
| | 2023 | 5,800 |
| | Thereafter | 11,000 |
| | Total minimum lease payments | $ | 111,400 |
|
Rental expense incurred for operating leases principally fromunder ASC Topic 840, Leases, was $45,000 for the year ended June 30, 2019. Variable lease costs and sublease income were not material. Information related to operating leases is as follows: | | | | | | | June 30, | | 2020 |
| | Operating lease assets, net | | $ | 90,636 |
| | | | | | Operating lease liabilities | | | | Other current liabilities | | $ | 27,231 |
| | Other liabilities | | 67,926 |
| | Total operating lease liabilities | | $ | 95,157 |
|
| | | | | | June 30, | | 2020 |
| | Weighted average remaining lease term (years) | | 3.6 |
| | Weighted average incremental borrowing rate | | 3.45 | % |
| | | | | | | Year Ended June 30, | | 2020 |
| | Cash paid for operating leases | | $ | 34,642 |
| | Right of use assets obtained in exchange for new operating lease liabilities | | $ | 39,136 |
|
The table below summarizes the aggregate maturities of liabilities pertaining to operating leases with terms greater than one year for real property, vehicles and computer equipment was $41,000each of the next five years: | | | | | | Fiscal Year | Maturity of Operating Lease Liabilities |
| | 2021 | $ | 29,979 |
| | 2022 | 22,900 |
| | 2023 | 16,428 |
| | 2024 | 12,842 |
| | 2025 | 6,698 |
| | Thereafter | 15,318 |
| | Total lease payments | 104,165 |
| | Less interest | 9,008 |
| | Present value of lease liabilities | $ | 95,157 |
|
The table below summarizes the future minimum annual rental commitments for operating leases accounted for in 2018, $35,900 in 2017 and $37,300 in 2016, and was classified within selling, distribution and administrative expenses in the statementsaccordance with ASC Topic 840, Leases, as of consolidated income.June 30, 2019: | | | | | | Fiscal Year | Operating Leases |
| | 2020 | $ | 33,707 |
| | 2021 | 23,407 |
| | 2022 | 16,420 |
| | 2023 | 10,653 |
| | 2024 | 7,838 |
| | Thereafter | 12,135 |
| | Total minimum lease payments | $ | 104,160 |
|
The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $2,500 in 2020 and $2,400 $2,400,in both 2019 and $3,800 and in 2018, 2017, and 2016, respectively. NOTE 12:13: SEGMENT AND GEOGRAPHIC INFORMATION Effective July 1, 2017, the Company completed a number of changes to its organizational structure that resulted in a change in how the Company manages its businesses, allocates resources and measures performance. As a result, the Company has revised its reportable segments to reflect how management currently reviews financial information and makes operating decisions. All Canadian and Mexican subsidiaries are now grouped under the Service Center Based Distribution segment. All prior-period amounts have been adjusted to reflect the reportable segment change.
The Company's reportable segments are: Service Center Based Distribution and Fluid Power & Flow Control. These reportable segments contain the Company's various operating segments which have been aggregated based upon similar economic and operating characteristics. The Service Center Based Distribution segment provides customersoperates through local service centers and distribution centers with solutions to theira focus on providing products and services addressing the maintenance and repair of motion control infrastructure and original equipment manufacturing needs through the distribution ofproduction equipment. Products primarily include industrial products including bearings, power transmission components, fluid power components and systems, industrial rubber products,motors, belting, drives, couplings, pumps, linear motion products, tools, safety products,hydraulic and pneumatic components, filtration supplies, and hoses, as well as other industrialrelated supplies for general operational needs of customers’ machinery and maintenance supplies.equipment. The Fluid Power & Flow Control segment distributes engineeredincludes our operations that specialize in distributing, engineering, designing, integrating, and repairing hydraulic and pneumatic fluid power componentstechnologies, and specialtyengineered flow control solutionsproducts and operates shops that assemble fluid power systems and components, performs equipment repair, and offers technical advice to customers.services. The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power & Flow Control segment to the Service Center Based Distribution segment of $29,582, $28,677, and $25,556, $22,719,in 2020, 2019, and $20,261, in 2018, 2017, and 2016, respectively, have been eliminated in the following table.
Segment Financial Information | | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Year Ended June 30, 2020 | | | | | | | Net sales | $ | 2,241,949 |
| | $ | 1,003,703 |
| | $ | 3,245,652 |
| | Operating income for reportable segments | 211,667 |
| | 109,847 |
| | 321,514 |
| | Assets used in the business | 1,314,011 |
| | 969,540 |
| | 2,283,551 |
| | Depreciation and amortization of property | 17,133 |
| | 4,063 |
| | 21,196 |
| | Capital expenditures | 17,063 |
| | 3,052 |
| | 20,115 |
| | Year Ended June 30, 2019 | | | | | | | Net sales | $ | 2,452,905 |
| | $ | 1,019,834 |
| | $ | 3,472,739 |
| | Operating income for reportable segments | 254,954 |
| | 112,117 |
| | 367,071 |
| | Assets used in the business | 1,265,093 |
| | 1,066,604 |
| | 2,331,697 |
| | Depreciation and amortization of property | 15,982 |
| | 4,254 |
| | 20,236 |
| | Capital expenditures | 16,475 |
| | 2,495 |
| | 18,970 |
| | Year Ended June 30, 2018 | | | | | | | Net sales | $ | 2,346,418 |
| | $ | 726,856 |
| | $ | 3,073,274 |
| | Operating income for reportable segments | 238,322 |
| | 83,175 |
| | 321,497 |
| | Assets used in the business | 1,198,296 |
| | 1,087,445 |
| | 2,285,741 |
| | Depreciation and amortization of property | 15,336 |
| | 2,462 |
| | 17,798 |
| | Capital expenditures | 18,492 |
| | 4,738 |
| | 23,230 |
|
| | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Year Ended June 30, 2018 | | | | | | | Net sales | $ | 2,346,418 |
| | $ | 726,856 |
| | $ | 3,073,274 |
| | Operating income for reportable segments | 136,718 |
| | 83,194 |
| | 219,912 |
| | Assets used in the business | 1,198,296 |
| | 1,087,445 |
| | 2,285,741 |
| | Depreciation and amortization of property | 15,336 |
| | 2,462 |
| | 17,798 |
| | Capital expenditures | 18,492 |
| | 4,738 |
| | 23,230 |
| | Year Ended June 30, 2017 | | | | | | | Net sales | $ | 2,180,358 |
| | $ | 413,388 |
| | $ | 2,593,746 |
| | Operating income for reportable segments | 115,794 |
| | 46,569 |
| | 162,363 |
| | Assets used in the business | 1,187,054 |
| | 200,541 |
| | 1,387,595 |
| | Depreciation and amortization of property | 14,375 |
| | 931 |
| | 15,306 |
| | Capital expenditures | 14,566 |
| | 2,479 |
| | 17,045 |
| | Year Ended June 30, 2016 | | | | | | | Net sales | $ | 2,150,478 |
| | $ | 368,950 |
| | $ | 2,519,428 |
| | Operating income for reportable segments | 113,111 |
| | 37,174 |
| | 150,285 |
| | Assets used in the business | 1,132,222 |
| | 179,803 |
| | 1,312,025 |
| | Depreciation and amortization of property | 15,049 |
| | 917 |
| | 15,966 |
| | Capital expenditures | 12,500 |
| | 630 |
| | 13,130 |
|
ERP related assets are included in assets used in the business and capital expenditures within the Service Center Based Distribution segment. Within the geographic disclosures, these assets are included in the United States. Expenses associated with the ERP are included in the Corporate and other income, net, line in the reconciliation of operating income for reportable segments to the consolidated income before income taxes table below.
A reconciliation of operating income for reportable segments to the consolidated income before incometaxes
is as follows: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Operating income for reportable segments | $ | 321,514 |
| | $ | 367,071 |
| | $ | 321,497 |
| | Adjustments for: | | | | | | | Intangible amortization — Service Center Based Distribution | 12,385 |
| | 13,639 |
| | 17,375 |
| | Intangible amortization — Fluid Power & Flow Control | 29,168 |
| | 28,244 |
| | 14,690 |
| | Intangible Impairment — Service Center Based Distribution | — |
| | 31,594 |
| | — |
| | Goodwill Impairment — Fluid Power & Flow Control | 131,000 |
| | — |
| | — |
| | Corporate and other expense, net | 59,972 |
| | 59,806 |
| | 63,605 |
| | Total operating income | 88,989 |
| | 233,788 |
| | 225,827 |
| | Interest expense, net | 36,535 |
| | 40,188 |
| | 23,485 |
| | Other income, net | (2,782 | ) | | (881 | ) | | (2,376 | ) | | Income before income taxes | $ | 55,236 |
| | $ | 194,481 |
| | $ | 204,718 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Operating income for reportable segments | $ | 219,912 |
| | $ | 162,363 |
| | $ | 150,285 |
| | Adjustments for: | | | | | | | Intangible amortization — Service Center Based Distribution | 17,375 |
| | 18,954 |
| | 19,913 |
| | Intangible amortization — Fluid Power & Flow Control | 14,690 |
| | 5,417 |
| | 5,667 |
| | Goodwill Impairment — Service Center Based Distribution | — |
| | — |
| | 64,794 |
| | Corporate and other income, net | (37,980 | ) | | (37,394 | ) | | (29,871 | ) | | Total operating income | 225,827 |
| | 175,386 |
| | 89,782 |
| | Interest expense, net | 23,485 |
| | 8,541 |
| | 8,763 |
| | Other (income) expense, net | (2,376 | ) | | (121 | ) | | 2,041 |
| | Income before income taxes | $ | 204,718 |
| | $ | 166,966 |
| | $ | 78,978 |
|
Fluctuations in corporate and other income,expense, net, are due to changes in corporate expenses, as well as in the amounts and levels of certain supplier support benefits and expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items. Product Category
Net sales by product category are as follows:
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Industrial | $ | 2,085,571 |
| | $ | 1,855,437 |
| | $ | 1,836,484 |
| | Fluid power & flow control | 987,703 |
| | 738,309 |
| | 682,944 |
| | Net sales | $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
|
The fluid power & flow control product category includes sales of hydraulic, pneumatic, lubrication, filtration, and flow control components and systems, and repair services through the Company’s Fluid Power & Flow Control segment as well as the Service Center Based Distribution segment.
Geographic Information Net sales are presented in geographic areas based on the location of the facility shipping the product. Long-lived assets are based on physical locations and are comprised of the net book value of property, intangible assets and intangibleright of use assets. Information by geographic area is as follows:
| | | | | | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Long-Lived Assets: | | | | | | | United States | $ | 523,739 |
| | $ | 474,910 |
| | $ | 501,373 |
| | Canada | 23,865 |
| | 13,291 |
| | 50,261 |
| | Other Countries | 8,148 |
| | 4,968 |
| | 5,656 |
| | Total | $ | 555,752 |
| | $ | 493,169 |
| | $ | 557,290 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Net Sales: | | | | | | | United States | $ | 2,615,041 |
| | $ | 2,182,552 |
| | $ | 2,117,485 |
| | Canada | 273,622 |
| | 251,999 |
| | 257,797 |
| | Other Countries | 184,611 |
| | 159,195 |
| | 144,146 |
| | Total | $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
|
| | | | | | | | | | | | | | June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Long-Lived Assets: | | | | | | | United States | $ | 501,373 |
| | $ | 207,126 |
| | $ | 225,538 |
| | Canada | 50,261 |
| | 57,947 |
| | 66,304 |
| | Other Countries | 5,656 |
| | 6,558 |
| | 7,163 |
| | Total | $ | 557,290 |
| | $ | 271,631 |
| | $ | 299,005 |
|
Other countries consist of Mexico, Australia, New Zealand, and Singapore.
NOTE 13:14: COMMITMENTS AND CONTINGENCIES The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company believes the likelihood is remotedoes not expect that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. NOTE 14:15: OTHER (INCOME) EXPENSE,INCOME, NET Other (income) expense,income, net, consists of the following: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (458 | ) | | $ | (689 | ) | | $ | (785 | ) | | Foreign currency transaction (gains) losses | (2,463 | ) | | 334 |
| | (210 | ) | | Net other periodic post-employment (benefits) costs | (120 | ) | | (85 | ) | | 245 |
| | Life insurance expense (income), net | 233 |
| | (479 | ) | | (1,628 | ) | | Other, net | 26 |
| | 38 |
| | 2 |
| | Total other income, net | $ | (2,782 | ) | | $ | (881 | ) | | $ | (2,376 | ) |
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (785 | ) | | $ | (1,188 | ) | | $ | (87 | ) | | Foreign currency transaction (gains) losses | (210 | ) | | 209 |
| | 1,039 |
| | Net other periodic post-employment costs | 245 |
| | 796 |
| | 981 |
| | Life insurance (income) expense, net | (1,628 | ) | | 107 |
| | 108 |
| | Other, net | 2 |
| | (45 | ) | | — |
| | Total other (income) expense, net | $ | (2,376 | ) | | $ | (121 | ) | | $ | 2,041 |
|
NOTE 16: SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to June 30, 2020 through the date the financial statements were issued.
QUARTERLY OPERATING RESULTS (In thousands, except per share amounts) (UNAUDITED) | | | | | | | | | | | | Per Common Share | | | | | | | | | Per Common Share | | | Net Sales |
| | Gross Profit |
| | Operating Income |
| | Net Income |
| | Net Income |
| | Cash Dividend |
| Net Sales |
| | Gross Profit |
| | Operating Income (loss) |
| | Net Income (loss) |
| | Net Income (loss) |
| | Cash Dividend |
| | 2018 | | | | | | | | | | | | | | 2020 | | | | | | | | | | | | | | First Quarter | $ | 680,701 |
| | $ | 192,424 |
| | $ | 51,837 |
| | $ | 33,721 |
| | $ | 0.86 |
| | $ | 0.29 |
| $ | 856,404 |
| | $ | 251,460 |
| | $ | 61,166 |
| | $ | 38,799 |
| | $ | 1.00 |
| | $ | 0.31 |
| | Second Quarter | 667,187 |
| | 188,360 |
| | 46,715 |
| | 30,950 |
| | 0.79 |
| | 0.29 |
| 833,375 |
| | 241,234 |
| | 58,745 |
| | 38,031 |
| | 0.97 |
| | 0.31 |
| | Third Quarter | 827,665 |
| | 239,524 |
| | 56,444 |
| | 36,592 |
| | 0.93 |
| | 0.30 |
| 830,797 |
| | 236,752 |
| | (77,950 | ) | | (82,777 | ) | | (2.14 | ) | | 0.32 |
| | Fourth Quarter | 897,721 |
| | 263,687 |
| | 70,831 |
| | 40,362 |
| | 1.03 |
| | 0.30 |
| 725,076 |
| | 208,290 |
| | 47,028 |
| | 29,989 |
| | 0.77 |
| | 0.32 |
| | | $ | 3,073,274 |
| | $ | 883,995 |
| | $ | 225,827 |
| | $ | 141,625 |
| | $ | 3.61 |
| | $ | 1.18 |
| $ | 3,245,652 |
| | $ | 937,736 |
| | $ | 88,989 |
| | $ | 24,042 |
| | $ | 0.62 |
| | $ | 1.26 |
| | 2017 | | | | | | | | | | | | | | 2019 | | | | | | | | | | | | | | First Quarter | $ | 624,848 |
| | $ | 178,330 |
| | $ | 43,218 |
| | $ | 27,371 |
| | $ | 0.70 |
| | $ | 0.28 |
| $ | 864,515 |
| | $ | 251,853 |
| | $ | 66,339 |
| | $ | 48,938 |
| | $ | 1.24 |
| | $ | 0.30 |
| | Second Quarter | 608,123 |
| | 172,456 |
| | 37,656 |
| | 24,085 |
| | 0.61 |
| | 0.28 |
| 840,038 |
| | 242,860 |
| | 60,965 |
| | 38,717 |
| | 0.99 |
| | 0.30 |
| | Third Quarter | 679,304 |
| | 190,802 |
| | 45,467 |
| | 29,494 |
| | 0.75 |
| | 0.29 |
| 885,443 |
| | 255,559 |
| | 34,509 |
| | 16,535 |
| | 0.42 |
| | 0.31 |
| | Fourth Quarter | 681,471 |
| | 196,107 |
| | 48,249 |
| | 52,960 |
| | 1.34 |
| | 0.29 |
| 882,743 |
| | 257,351 |
| | 71,975 |
| | 39,803 |
| | 1.02 |
| | 0.31 |
| | | $ | 2,593,746 |
| | $ | 737,695 |
| | $ | 174,590 |
| | $ | 133,910 |
| | $ | 3.40 |
| | $ | 1.14 |
| $ | 3,472,739 |
| | $ | 1,007,623 |
| | $ | 233,788 |
| | $ | 143,993 |
| | $ | 3.68 |
| | $ | 1.22 |
| | 2016 | | | | | | | | | | | | | | First Quarter | $ | 641,904 |
| | $ | 181,012 |
| | $ | 41,026 |
| | $ | 24,291 |
| | $ | 0.61 |
| | $ | 0.27 |
| | | Second Quarter | 610,346 |
| | 173,167 |
| | 38,362 |
| | 23,947 |
| | 0.61 |
| | 0.27 |
| | | Third Quarter | 633,172 |
| | 174,793 |
| | (33,032 | ) | | (44,728 | ) | | (1.14 | ) | | 0.28 |
| | | Fourth Quarter | 634,006 |
| | 178,450 |
| | 42,445 |
| | 26,067 |
| | 0.66 |
| | 0.28 |
| | | | $ | 2,519,428 |
| | $ | 707,422 |
| | $ | 88,801 |
| | $ | 29,577 |
| | $ | 0.75 |
| | $ | 1.10 |
| |
On August 10, 2018,7, 2020, there were 4,3073,742 shareholders of record including 2,9142,522 shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company’s common stock is listed on the New York Stock Exchange. The closing price on August 10, 20187, 2020 was $72.20$67.26 per share. The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the number of weighted shares outstanding and the effects of rounding for each period. Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are primarily made based on periodic physical inventory and the effect of year-end inventory quantities on LIFO costs. Fiscal 20182020 The decline in net sales in the third and fourth quarters of fiscal 2020 is due to slowness in key end markets largely attributable to the impact of the COVID-19 pandemic. During the secondfirst quarter of fiscal 2018,2020, the Tax Cuts and Jobs Act (the "Act") was enactedCompany adopted ASC 842 – accounting for leases. Adoption of the new standard resulted in the U.S., making significant changesrecognition of right-of-use assets and lease liabilities of $83.5 million and $89.8 million, respectively, on July 1, 2019. In addition, the adoption resulted in an adjustment to U.S.opening retained earnings of approximately $3.3 million, net of tax, law. Theon July 1, 2019. During the first quarter of fiscal 2020, the Company revised its estimated annual effective tax rate to reflectacquired 100% of the changeoutstanding shares of Olympus Controls, a Portland, Oregon based full-service provider of innovative technologies and complete engineered solutions for original equipment manufacturers, machine builders, integrators, and end users. Olympus Controls is included in the federal statutory rate to a blended statutory rateFluid Power & Flow Control segment. The purchase price for the annual period of 28.1%. The corporate income tax rate change had a favorable impact to the Company of $12.1 million for fiscal 2018. Further, we recognized provisional amounts for the one-time transition tax of $3.9 million and for the re-measurement of the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse of $2.4acquisition was $36.6 million. Overall, the Act resulted in a net tax benefit of $5.8 million for fiscal 2018, which is included as a component of income tax expense in the statements of consolidated income. During the third quarter of fiscal 2018,2020, the Company completedrecognized a non-cash goodwill impairment charge of $131.0 million related to the acquisition of all of the outstanding sharesoperations of FCX Performance, Inc. (FCX), a Columbus, Ohio based distributor of specialty process flow control products and services. At the time of closing, FCX operated 68 locations with approximately 1,000 employees. The total consideration transferred for the acquisition was approximately $782 million, which was financed by cash-on-hand and a new credit facility comprised of a $780 million Term Loan A and $250 million revolver (the Credit Facility), effective with the transaction closing. This Credit Facility was used to finance the transaction, as well as to repay within the Company's existing term loan outstanding prior to the acquisition date. Fiscal 2017
During the fourth quarter of fiscal 2017, the Company recorded a tax benefit pertaining to a worthless stock tax deduction of $22.2 million, or $0.56 per share. This deduction is based on the write-off of its investment in one of its Canadian subsidiaries for U.S. tax purposes.
In fiscal 2017 reductions in U.S. inventories in the bearings pool resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. A portion of these reductions resulted from the scrapping of $6.0 million of bearings inventory which resulted in a similar amount of scrap expense being recognized in the fourth quarter of fiscal 2017. The overall impact of the fiscal 2017 LIFO layer liquidations increased gross profit by $9.4 million in the fourth quarter of fiscal 2017. The net benefit of the bearings products LIFO layer liquidation benefit, less the bearing product scrap expense was $3.4 million.
Fiscal 2016Fluid Power & Flow Control segment.
During the third quarter of fiscal 2016,2020, the Company recorded goodwill impairment of $64.8 millionincurred certain non-routine charges primarily related to the Canada and Australia/New Zealand service center reporting units withinits U.S. operations in the Service Center Based Distribution reportable segment. After taxes,Total non-routine charges reduced gross profit by $3.9 million, increased the impairment had a negative impact on earnings of $63.8operating loss by $6.0 million, and reduced earnings per shareincreased the quarter net loss by $1.62 per share.$3.6 million. Fiscal 2019 During the third quarter of fiscal 2016,2019, the Company acquired substantially all of the net assets of MilRoc Distribution and Woodward Steel for a purchase price of $35.0 million. MilRoc Distribution is an Oklahoma based distributor of oilfield specific products, namely pumps and valves, as well as equipment repair services and industrial trailer parts to the oil & gas industry. Woodward Steel is a Woodward, Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc Distribution and Woodward steel are both included in the Service Center Based Distribution segment.
During the third quarter of fiscal 2019, the Company incurred certain restructuring charges. During the third quarter, a reserve of $3.6 million was recorded within cost of sales for potential non-salable, non-returnable and excess inventory due to declining demand, primarily for Canada oil and gas operations. SD&A included expenses of $5.2 million during the fiscal year related to severance and facility consolidations,charges primarily for oil and& gas operations. Total restructuring charges reduced gross profit for the yearquarter by $3.6$0.7 million and operating income by $8.8 million, net income by $6.2 million and earnings per share by $0.16.$2.3 million. During the fourththird quarter of fiscal 2016,2019, the Company realized LIFO layer liquidation benefitsperformed an impairment analysis for certain long-lived intangible assets related to the Company's upstream oil & gas operations in Canada as a result of $2.1 million from certain inventory quantity levels decreasing.the continued decline in the oil & gas industry in Western Canada. As a result of this test, the Company determined that the net book values of these long-lived intangible assets were impaired and recognized a non-cash impairment charge of $31.6 million. The Company also recorded a valuation allowance against its Canadian deferred tax assets of $3.8 million. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures On January 31, 2018, the Company completed the acquisition of FCX Performance, Inc ("FCX"). As permitted by SEC guidance, the scope of management’s evaluation of internal control over financing reporting as of June 30, 2018 did not include the internal control over financial reporting of FCX. However, we are extending our oversight and monitoring processes that support our internal control over financial reporting to include FCX's operations.
The Company's management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective. Management's Report on Internal Control over Financial Reporting The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President & Chief Executive Officer and the Vice President - Chief Financial Officer & Treasurer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s Management and Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of inherent limitations, internal control over financial reporting can provide only reasonable, not absolute, assurance with respect to the preparation and presentation of the consolidated financial statements and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2018.2020. This evaluation was based on the criteria set forth in the framework "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management determined that the Company’s internal control over financial reporting was effective as of June 30, 2018. The Company acquired FCX Performance Inc. ("FCX") on January 31, 2018. Management has excluded FCX from its assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2018. FCX represents approximately 39.5% and 8.1% of total assets and net sales, respectively, of the consolidated financial statement amounts as of and for the year ended June 30, 2018.2020.
The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein. | | | | | /s/ Neil A. Schrimsher | | /s/ David K. Wells | | President & Chief Executive Officer | | Vice President - Chief Financial Officer & Treasurer |
August 17, 2018
14, 2020
Report
Changes in Internal Control Over Financial Reporting There have not been any changes in internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. As a result of Independent Registered Public Accounting Firmthe COVID-19 pandemic, a significant portion of our workforce began working remotely in March 2020. These changes to the working environment did not have a material effect on our internal controls over financial reporting during the most recent quarter. We are continually monitoring and assessing the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc.
Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2018,2020, of the Company and our report dated August 17, 2018,14, 2020, expressed an unqualified opinion on those consolidated financial statements. As described in Management’s Report on Internal Controls Over Financial Reporting, management excluded from its assessmentstatements and included an explanatory paragraph regarding the internal control over financial reporting at FCX Performance Inc. ("FCX"), which was acquired on January 31, 2018 and whose financial statements constitute 39.5% of total assets and 8.1% of net salesCompany's adoption of the consolidated financial statements as of and for the year ended June 30, 2018. Accordingly, our audit did not include the internal control over financial reporting at FCX.FASB's new standard related to leases.
Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls OverControl over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Cleveland, Ohio August 17, 2018
Changes in Internal Control Over Financial Reporting
There have not been any changes in internal control over financial reporting during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this Item as to Applied's directors is incorporated by reference to Applied's proxy statement relating to the annual meeting of shareholders to be held October 30, 2018,27, 2020, under the caption “Item 1 - Election of Directors.” The information required by this Item as to Applied's executive officers has been furnished in this report in Part I, after Item 4, under the caption “Executive Officers of the Registrant.“Information about our Executive Officers.” The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to Applied's proxy statement, under the caption “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance.”Reports." Applied has a code of ethics, named the Code of Business Ethics, that applies to our employees, including our principal executive officer, principal financial officer, and principal accounting officer. The Code of Business Ethics is posted via hyperlink at the investor relations area of our www.applied.com website. In addition, amendments to and waivers from the Code of Business Ethics will be disclosed promptly at the same location. Information regarding the composition of Applied’s audit committee and the identification of audit committee financial experts serving on the audit committee is incorporated by reference to Applied's proxy statement, under the caption “Corporate Governance.”
ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 30, 2018,27, 2020, under the captions “Executive Compensation” and “Compensation Committee Report.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Applied's shareholders have approved the following equity compensation plans: the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2019 Long-Term Performance Plan, the Deferred Compensation Plan (no active employees participate in the plan), and the Deferred Compensation Plan for Non-Employee Directors.Directors (two active directors participate in the plan). All of these plans are currently in effect. The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied as of June 30, 2018.2020. | | | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | Equity compensation plans approved by security holders | 1,378,637 |
| | $45.22 | | * | 1,606,961 |
| | $51.01 | | * | Equity compensation plans not approved by security holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | Total | 1,378,637 |
| | $45.22 |
| * | 1,606,961 |
| | $51.01 |
| * |
| | | * | The 20152019 Long-Term Performance Plan was adopted in October 2019 to replace the 2015 Long-Term Performance Plan and, similarly, the 2015 Long-Term Performance Plan replaced the 2011 Long-Term Performance Plan, and the 2011 Long-Term Performance Plan was adopted to replacewhich itself had replaced the 2007 Long-Term Performance Plan. Stock options, and stock appreciation rights, and other awards remain outstanding under each of the 2007, 2011, and 20112015 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 20152019 Long-Term Performance Plan at June 30, 20182020 was 1,665,033.2,221,129. |
Information concerning the security ownership of certain beneficial owners and management is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 30, 2018,27, 2020, under the caption “Holdings of Major Shareholders, Officers, and Directors.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 30, 2018,27, 2020, under the caption “Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 30, 2018,27, 2020, under the caption “Item 3 - Ratification of Auditors.”
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE. (a)1. Financial Statements. The following consolidated financial statements, notes thereto, the reports of independent registered public accounting firm, and supplemental data are included in Item 8 of this report: | | | | | • | Report of Independent Registered Public Accounting Firm | | | | | | • | Statements of Consolidated Income for the Years Ended June 30, 2018, 2017,2020, 2019, and 20162018 | | | | | | • | Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2018, 2017,2020, 2019, and 20162018 | | | | | | • | Consolidated Balance Sheets at June 30, 20182020 and 20172019 | | | | | | • | Statements of Consolidated Cash Flows for the Years Ended June 30, 2018, 2017,2020, 2019, and 20162018 | | | | | | • | Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2018, 2017,2020, 2019, and 20162018 | | | | | | • | Notes to Consolidated Financial Statements for the Years Ended June 30, 2018, 2017,2020, 2019, and 20162018 | | | | | | • | Supplementary Data: | | | | | | | • | Quarterly Operating Results |
(a)2. Financial Statement Schedule. The following schedule is included in this Part IV, and is found in this report at the page indicated: | | | | | | Page No. | | | | | | | Schedule II - Valuation and Qualifying Accounts: Pg. 7072 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto. (a)3. Exhibits. | | | | * Asterisk indicates an executive compensation plan or arrangement. | | Exhibit No. | Description | | | | | 3.1 | | | | | | 3.2 | | | | | | 4.1 | | | | | | 4.2 | Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 27, 1996, as amended through June 29, 2018,October 30, 2019, between Applied Industrial Technologies, Inc. and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), conformedand certain of its affiliates (filed as Exhibit 10.1 to show all amendments.Applied’s Form 8-K filed November 5, 2019, SEC File No. 1-2299, and incorporated here by reference). | | | | | 4.3 | Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K filed July 2, 2014, SEC File No. 1-2299, and incorporated here by reference). | | | |
| | | | 4.4 | Request for Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 4.5 to Applied's Form 10-Q for the quarter ended September 30, 2014, SEC File No. 1-2299, and incorporated here by reference). | | | | | 4.5 | | | | | 4.6 | Receivables Financing Agreement dated as of August 31, 2018 among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.1 to the Company's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference). | | | | 4.7 | | | | | | *10.1 | A written description of Applied's director compensation program is incorporated by reference to Applied’s proxy statement for the annual meeting of shareholders to be held October 30, 201827, 2020 under the caption “Director Compensation.” | | | | | *10.2 | | | | | | *10.3 | | | | | | *10.4 | | | | | | *10.5 | | | | | | *10.6 | | | | | | *10.7 | | | | | | *10.8 | | | | | | *10.9 | | | | | | *10.10 | | | | | *10.11 | | | | | *10.1110.12 | | | | | *10.1210.13 | | | | | *10.1310.14 | | | | | *10.1410.15 | | | | | *10.1510.16 | | | | | *10.1610.17 | | | | |
| | | *10.1910.20 | | | | | *10.2010.21 | | | | | *10.2110.22 | | | | *10.22 | | | | *10.23 | | | | *10.24 | | | | | *10.2510.23 | | | | | *10.2610.24 | | | | | *10.2710.25 | | | | | *10.2810.26 | | | | | *10.2910.27 | | | | | *10.3010.28 | | | | | *10.3110.29 | | | | | *10.3210.30 | | | | | *10.3310.31 | | | | | *10.3410.32 | | | | | *10.3510.33 | | | | 10.36 | Agreement and Plan of Merger by and among Applied Industrial Technologies, Inc., Fortress Merger Sub Holding LLC, Fortress Merger Sub LP, FCX Group Holdings, LP, FCX Group GP, LLC, and Harvest Partners, LP (filed as Exhibit 10.1 to Applied's Form 8-K filed January 9, 2018, SEC File No. 1-2299, and incorporated here by reference). | | | | | 21 | | | | | | 23 | | | | | | 24 | | | | | | 31 | | | | | | 32 | | | | | 95 | | | | | 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | |
| | | | | 101.INS | XBRL Instance Document | | | | 101.SCH | XBRL Taxonomy Extension Schema Document | | | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Applied will furnish a copy of any exhibit described above and not contained herein upon payment of a specified reasonable fee, which shall be limited to Applied's reasonable expenses in furnishing the exhibit. Certain instruments with respect to long-term debt have not been filed as exhibits because the total amount of securities authorized under any one of the instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each such instrument.
ITEM 16. FORM 1O-K10-K SUMMARY.
Not applicable.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2018, 2017,2020, 2019, AND 20162018 (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | | DESCRIPTION | | Balance at Beginning of Period |
| | Additions Charged to Cost and Expenses |
| | Additions (Deductions) Charged to Other Accounts |
| | | Deductions from Reserve |
| | | Balance at End of Period |
| | Year Ended June 30, 2020 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 10,498 |
| | $ | 14,055 |
| | $ | — |
| | | $ | 10,892 |
| (C) | | $ | 13,661 |
| | Returns reserve | | 7,265 |
| | — |
| | 2,618 |
| (B) | | — |
| | | 9,883 |
| | | | $ | 17,763 |
| | $ | 14,055 |
| | $ | 2,618 |
| | | $ | 10,892 |
| | | $ | 23,544 |
| | Year Ended June 30, 2019 | | |
| | |
| | |
| | | |
| | | |
| | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | | Accounts receivable: | |
|
| |
|
| |
|
| | |
|
| | |
|
| | Allowance for doubtful accounts | | $ | 10,964 |
| | $ | 4,058 |
| | $ | — |
| | | $ | 4,524 |
| (C) | | $ | 10,498 |
| | Returns reserve | | 2,602 |
| | 738 |
| | 3,925 |
| (B) | | — |
| | | 7,265 |
| | | | $ | 13,566 |
| | $ | 4,796 |
| | $ | 3,925 |
| | | $ | 4,524 |
| | | $ | 17,763 |
| | Year Ended June 30, 2018 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 8,056 |
| | $ | 2,803 |
| | $ | 3,548 |
| (A) | | $ | 3,443 |
| (C) | | $ | 10,964 |
| | Returns reserve | | 1,572 |
| | — |
| | 1,030 |
| (A) | | — |
| | | 2,602 |
| | | | $ | 9,628 |
| | $ | 2,803 |
| | $ | 4,578 |
| | | $ | 3,443 |
| | | $ | 13,566 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | | DESCRIPTION | | Balance at Beginning of Period |
| | Additions Charged to Cost and Expenses |
| | Additions (Deductions) Charged to Other Accounts |
| | | Deductions from Reserve |
| | | Balance at End of Period |
| | Year Ended June 30, 2018 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 9,628 |
| | $ | 2,803 |
| | $ | 4,578 |
| (A) | | $ | 3,443 |
| (B) | | $ | 13,566 |
| | Year Ended June 30, 2017 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 11,034 |
| | $ | 2,071 |
| | $ | (133 | ) | (A) | | $ | 3,344 |
| (B) | | $ | 9,628 |
| | Year Ended June 30, 2016 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 10,621 |
| | $ | 4,303 |
| | $ | (46 | ) | (A) | | $ | 3,844 |
| (B) | | $ | 11,034 |
|
| | | (A) | Amounts in the year ending June 30, 2018 represent reserves recorded through purchase accounting for acquisitions made during the year of $3,549$3,548 and for the return of merchandise by customers of $1,029. Amounts in prior fiscal years represent reserves for the return of merchandise by customers.$1,030. |
| | | (B) | Amounts in the year ending June 30, 2020 and 2019 represent reserves recorded for the return of merchandise by customers. The Company adopted ASC 606 - Revenue from Contracts with Customers effective July 1, 2018 which requires the Company's sales returns reserve to be established at the gross sales value with an asset established for the value of the expected product to be returned. |
| | | (C) | Amounts represent uncollectible accounts charged off. |
SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED INDUSTRIAL TECHNOLOGIES, INC. | | | | | /s/ Neil A. Schrimsher | | /s/ David K. Wells | Neil A. Schrimsher President & Chief Executive Officer | | David K. Wells Vice President-Chief Financial Officer & Treasurer | | | | | | /s/ Christopher Macey | | | Christopher Macey
Corporate Controller (Principal Accounting Officer) | | |
Date: August 17, 201814, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. | | | | | * | | * | PeterMadhuri A. Dorsman,Andrews, Director | | L. Thomas Hiltz,Peter A. Dorsman, Director | | | | | | * | | * | Edith Kelly-Green,Mary Dean Hall, Director | | Dan P. Komnenovich, Director | | | | | | * | | * | | Robert J. Pagano, Jr., Director | | Vincent K. Petrella, Director | | | | | | * | | /s/ Neil A. Schrimsher | | Joe A. Raver, Director | | Neil A. Schrimsher, President & Chief Executive Officer and Director | | | | | | * | | *
| Dr. Jerry Sue Thornton, Director | | Peter C. Wallace, Director and Chairman |
| | | | |
|
| | | /s/ Fred D. Bauer | | Fred D. Bauer, as attorney in fact | | for persons indicated by “*” |
Date: August 17, 201814, 2020
s Versus Prior Period |
| Year Ended June 30, As a % of Net Sales | | Change in Sales in fiscal 20182020 were $3.1$3.2 billion, which was $479.5$227.0 million or 18.5% above6.5% below the prior year, with sales from acquisitions accounting for $264.7adding $80.7 million or 10.2% of the increase,2.3% and favorableunfavorable foreign currency translation accounting for an increasea decrease of $16.0$10.5 million or 0.6%0.3%. There were 253.5 selling days in fiscal 2020 and 251.5 selling days in fiscal 2018 and 252.5 selling days in fiscal 2017.2019. Excluding the impact of businesses acquired and the impact of foreign currency translation, sales were up $198.8down $297.2 million or 7.7%8.5% during the year, of which 5.9% isdriven by a 9.4% decrease from operations due to weak demand across key end markets, further impacted by the economic slowdown resulting from the Service Center Based Distribution segment and 2.1% is from the Fluid Power & Flow Control segment,COVID-19 pandemic, offset by a 0.3% decreasean increase of 0.9% due to one lesstwo additional sales day.days.
The following table shows changes in sales by reportable segment. | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Sales by Reportable Segment | 2018 |
| 2017 |
| | Service Center Based Distribution | $ | 2,346.4 |
| $ | 2,180.4 |
| $ | 166.0 |
| $ | 3.6 |
| $ | 16.0 |
| $ | 146.4 |
| | Fluid Power & Flow Control | 726.9 |
| 413.4 |
| 313.5 |
| 261.1 |
| — |
| 52.4 |
| | Total | $ | 3,073.3 |
| $ | 2,593.8 |
| $ | 479.5 |
| $ | 264.7 |
| $ | 16.0 |
| $ | 198.8 |
|
| | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | Sales Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Sales by Reportable Segment | 2020 |
| 2019 |
| | Service Center Based Distribution | $ | 2,242.0 |
| $ | 2,452.9 |
| $ | (210.9 | ) | $ | 23.8 |
| $ | (10.5 | ) | $ | (224.2 | ) | | Fluid Power & Flow Control | 1,003.7 |
| 1,019.8 |
| (16.1 | ) | 56.9 |
| — |
| (73.0 | ) | | Total | $ | 3,245.7 |
| $ | 3,472.7 |
| $ | (227.0 | ) | $ | 80.7 |
| $ | (10.5 | ) | $ | (297.2 | ) |
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $166.0decreased $210.9 million, or 7.6%8.6%. Acquisitions within this segment increased sales by $3.6$23.8 million or 0.2%1.0%, and favorableunfavorable foreign currency translation increaseddecreased sales by $16.0$10.5 million or 0.7%0.4%. Excluding the impact of businesses acquired and the impact of foreign currency translation, sales increased $146.4decreased $224.2 million or 6.7%,9.2% during the year, driven by a 10.0% decrease from operations due to weak demand across key end markets, offset by an increase of 7.0% from operations, offset by a 0.3% decrease0.8% due to one lesstwo additional sales day.days. Sales of our Fluid Power & Flow Control segment increased $313.5decreased $16.1 million or 75.8%1.6%. Acquisitions within this segment, primarily Olympus, increased sales $261.1$56.9 million or 63.2%5.6%. Excluding the impact of businesses acquired, sales increased $52.4decreased $73.0 million or 12.7%7.2%, driven by an increase of 13.1%a 8.0% decrease from operations, offset by a 0.4% decreasean 0.8% increase due to one lesstwo additional sales day.days. The decrease from operations is primarily due to slower demand in our flow control operations and weaker activity across our industrial OEM customer base.
The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Sales by Geographic Area | 2018 |
| 2017 |
| | United States | $ | 2,615.1 |
| $ | 2,182.6 |
| $ | 432.5 |
| $ | 261.1 |
| $ | — |
| $ | 171.4 |
| | Canada | 273.6 |
| 252.0 |
| 21.6 |
| — |
| 11.3 |
| 10.3 |
| | Other countries | 184.6 |
| 159.2 |
| 25.4 |
| 3.6 |
| 4.7 |
| 17.1 |
| | Total | $ | 3,073.3 |
| $ | 2,593.8 |
| $ | 479.5 |
| $ | 264.7 |
| $ | 16.0 |
| $ | 198.8 |
|
| | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | Sales Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Sales by Geographic Area | 2020 |
| 2019 |
| | United States | $ | 2,819.4 |
| $ | 3,016.7 |
| $ | (197.3 | ) | $ | 80.7 |
| $ | — |
| $ | (278.0 | ) | | Canada | 248.6 |
| 271.3 |
| (22.7 | ) | — |
| (2.7 | ) | (20.0 | ) | | Other countries | 177.7 |
| 184.7 |
| (7.0 | ) | — |
| (7.8 | ) | 0.8 |
| | Total | $ | 3,245.7 |
| $ | 3,472.7 |
| $ | (227.0 | ) | $ | 80.7 |
| $ | (10.5 | ) | $ | (297.2 | ) |
Sales in our U.S. operations increased $432.5decreased $197.3 million or 19.8%6.5%, with acquisitions adding $261.1$80.7 million or 12.0%2.7%. Excluding the impact of businesses acquired, U.S. sales were up $171.4down $278.0 million or 7.8%9.2%, driven by a decrease of which 8.2% is growth10.0% from operations, offset by a 0.4% decreasean increase of 0.8% due to one lesstwo additional sales day.days. Sales from our Canadian operations increased $21.6decreased $22.7 million or 8.6%8.4%, and favorableunfavorable foreign currency translation increaseddecreased Canadian sales by $11.3$2.7 million or 4.5%1.0%. Excluding the impact of foreign currency translation, Canadian sales were up $10.3down $20.0 million or 4.1%7.4%, driven by a decrease of which 3.7% is growth8.2% from operations, and the remaining 0.4%offset by an increase isof 0.8% due to onetwo additional sales day.days. Consolidated sales from our other country operations increased $25.4decreased $7.0 million or 16.0%3.8% compared to the prior year. Acquisitions added sales of $3.6 million or 2.3% and favorableUnfavorable foreign currency translation increaseddecreased other country sales by $4.7$7.8 million or 2.9%4.2%. Excluding the impact of businesses acquired and the impact of foreign currency translation, other country sales were up $17.1$0.8 million or 10.8%0.4% compared to the prior year, driven by an increase from operations of 11.0%,1.2% due to additional sales days, offset by a 0.8% decrease of 0.2% due to one less sales day in Australia, New Zealand, and Singapore. The sales product mix for fiscal 2018 was 67.9% industrial products and 32.1% fluid power/flow control products compared to 71.5% and 28.5%, respectively, in the prior year.from operations.
Our gross profit margin increaseddecreased to 28.8%28.9% in fiscal 20182020 compared to 28.4%29.0% in fiscal 2017 due to the acquisition of FCX, which favorably impacted the2019. The gross profit margin was negatively affected by 3812 basis points in fiscal 2018.for $3.9 million of non-routine expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for certain locations that were closed during the year within the U.S. operations of the Service Center Based Distribution segment.
The following table shows the changes in SD&A. | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | SD&A Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | | 2018 |
| 2017 |
| | SD&A | $ | 658.2 |
| $ | 562.3 |
| $ | 95.9 |
| $ | 74.7 |
| $ | 3.9 |
| $ | 17.3 |
|
Selling,selling, distribution, and administrative expense (SD&A) . | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | SD&A Decrease |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | | 2020 |
| 2019 |
| | SD&A | $ | 717.7 |
| $ | 742.2 |
| $ | (24.5 | ) | $ | 20.8 |
| $ | (2.5 | ) | $ | (42.8 | ) |
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, facility related expenses and expenses incurred within acquiring businesses. SD&A increased $95.9decreased $24.5 million or 17.0%3.3% during fiscal 20182020 compared to the prior year, and as a percentpercentage of sales decreasedincreased to 22.1% in fiscal 2020 compared to 21.4% from 21.7% in fiscal 2017.2019. Changes in foreign currency exchange rates had the effect of increasingdecreasing SD&A by $3.9$2.5 million or 0.7%0.3% compared to the prior year. SD&A from businesses acquired added $74.7$20.8 million or 13.3% of SD&A expenses,2.8%, including $6.1 million of one-time costs and $9.6$1.9 million of intangibles amortization related to the FCX acquisition.acquisitions. Excluding the impact of businesses acquired and the unfavorablefavorable impact from foreign currency translation, SD&A increased $17.3decreased $42.8 million or 3.0%5.8% during fiscal 20182020 compared to fiscal 2017.2019. The Company incurred $5.1 million of non-routine expenses related to severance and facility consolidation primarily within the U.S. Operations of the Service Center Based Distribution segment during fiscal 2020, compared to $1.6 million of restructuring expenses incurred in fiscal 2019. Excluding the impact of acquisitions, total compensation increased $20.1excluding severance decreased $39.8 million during fiscal 2018 compared2020, primarily due to cost reduction actions taken by the Company in response to the prior fiscal year as a resultCOVID-19 pandemic, including headcount reductions, temporary furloughs and pay reductions, and suspension of merit increases and improved Company performance.the 401(k) company match. All other expenses within SD&A were down $2.8$6.5 million. During the quarter ended March 31, 2020, the Company performed its annual goodwill impairment test. As a result of this test, the Company recorded a $131.0 million non-cash goodwill impairment charge related to the Company's FCX operations in the Fluid Power & Flow Control segment, primarily due to the overall decline in the industrial economy, specifically slower demand in FCX's end markets. The non-cash goodwill impairment charge decreased net income by $118.8 million and earnings per share by $3.04 per share for fiscal 2020. In fiscal 2019, the Company recognized a non-cash impairment charge of $31.6 million for intangible assets related to the Company's Canadian operations within the Service Center Based Distribution segment, which decreased net income by $23.1 million and earnings per share by $0.59 per share for fiscal 2019. Operating income increased $50.4decreased $144.8 million, or 28.8%61.9%, to $225.8$89.0 million during fiscal 20182020 from $175.4$233.8 million during fiscal 2017,2019, and as a percentpercentage of sales, increaseddecreased to 7.3%2.7% from 6.8% due to growth from operations and6.7%, primarily as a result of the acquisition of FCX.goodwill impairment expense recorded during the current year. Operating income, before intangible impairment charges, as a percentage of sales for the Service Center Based Distribution segment increaseddecreased to 5.8%9.4% in fiscal 20182020 from 5.3%10.4% in fiscal 2017.2019. Operating income, before goodwill impairment charges, as a percentage of sales for the Fluid Power & Flow Control segment increaseddecreased to 11.4%10.9% in fiscal 20182020 from 11.3%11.0% in fiscal 2017. These increases are due to the positive leveraging impact from the increase in sales in the current year.
2019.
Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense. Other (income) expense,income, net, represents certain non-operating items of income and expense. Thisexpense, and was $2.4$2.8 million of income in fiscal 20182020 compared to $0.1$0.9 million of income in fiscal 2017.2019. Current year income primarily consists of life insurance income of $1.6 million, unrealized gains on investments held by non-qualified deferredcompensation trusts of $0.8$0.5 million and foreign currency transaction gains of $0.2$2.5 million, offset by net other periodic post-employment costsexpense of $0.2 million. Fiscal 20172019 income consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.2$0.7 million and life insurance income of $0.5 million, offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.2 million, and life insurance expense of $0.1$0.3 million. The effective income tax rate was 30.8%56.5% for fiscal 20182020 compared to 19.8%26.0% for fiscal 2017.2019. The fiscal 2018increase in the effective tax rate was favorably impacted by the enactment of the Tax Cuts and Jobs Act (the "Act") in December 2017, which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. This resulted in a blended statutory rate for the Company for fiscal 2018 of 28.06%. Overall, the Act resulted in a net tax benefit of $5.8 million for fiscal 2018. The corporate income tax rate change had a favorable impactis primarily due to the Company of $12.1 million,FCX goodwill impairment charge, which was offset by income tax expense of $3.9 million accounting for the one-time transition tax related to the Company's undistributed foreign earnings and expense of $2.4 million related to the re-measurement of deferred tax balances. The fiscal 2017 effective tax rate was favorably impacted by a $22.2 million net tax benefit, pertaining to a worthless stock tax deduction which decreasedincreased the effective tax rate by 13.3%.31.4% during fiscal 2020. The tax benefit was net ofCompany also recorded a $1.0 million valuation allowance applicabletax benefit related to the related state deferred income tax asset. This deduction was based onCARES Act during the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes. The fiscal 2017 effective tax rate wascurrent year, which favorably impacted furtherthe rate by $2.4 million of net excess tax benefits, resulting from stock-based compensation awards vesting and exercises, that were recognized as a reduction of income tax expense and decreased the effective income tax rate for1.8% in fiscal 2017 by 1.4%.2020. We expect our income tax rate for fiscal 20192021 to be in the range of 24.0%23.0% to 26.0%25.0%. As a result of the factors addresseddiscussed above, net income for fiscal 2018 increased $7.72020 decreased $120.0 million from the prior year. Net income per share was $3.61$0.62 per share for fiscal 20182020 compared to $3.40$3.68 per share for fiscal 2017.2019. Current year
results were favorablynegatively impacted by organic growth, as well as$3.04 per share for the goodwill impairment and $0.18 per share for non-routine expenses, offset by a favorable impact of $0.03 per share for the CARES Act tax benefit. The prior year results included positive impacts on earnings per share of $0.15$0.48 per share related tofor acquisitions, $0.37 per share for tax reform, and $0.05 per share related to the results of FCX, offset by a negative$0.69 per share unfavorable impact from the intangible impairment, which includes the impact of $0.13recording the $3.8 million valuation allowance in the third quarter of fiscal 2019, and a $0.04 per share for one-time costs related to the acquisition of FCX. The prior year results include a positiveunfavorable impact on earnings per share of $0.56 per share related to the tax benefit recorded for the worthless stock deduction. Net income per share was favorably impacted by lower weighted average common shares outstanding infrom restructuring charges during fiscal 2018 as a result of our share repurchase program.2019. At June 30, 2018,2020, we had a total of 610580 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore, versus 552600 at June 30, 2017.2019. The approximate number of Company employees was 6,6346,200 at June 30, 20182020 and 5,5546,650 at June 30, 2017. YEAR ENDED JUNE 30, 2017 vs. 2016
The following table is included to aid in review of Applied’s statements of consolidated income.
| | | | | | | | | | | | Year Ended June 30, As a % of Net Sales | | Change in $'s Versus Prior Period |
| | | 2017 |
| | 2016 |
| | % Change |
| | Net Sales | 100.0 | % | | 100.0 | % | | 2.9 | % | | Gross Profit Margin | 28.4 | % | | 28.1 | % | | 4.3 | % | | Selling, Distribution & Administrative | 21.7 | % | | 22.0 | % | | 1.7 | % | | Operating Income | 6.8 | % | | 3.6 | % | | 95.3 | % | | Net Income | 5.2 | % | | 1.2 | % | | 352.8 | % |
Sales in fiscal 2017 were $2.6 billion, which was $74.3 million or 2.9% above fiscal 2016, with sales from acquisitions accounting for $31.1 million or 1.2% of the increase, offset by a decrease due to unfavorable foreign currency translation of $1.1 million or 0.1%. There were 252.5 selling days in fiscal 2017 and 253.5 selling days in
fiscal 2016. Excluding the impact of businesses acquired and prior to the impact of foreign currency translation, sales were up $44.3 million or 1.8% during fiscal 2017, driven by an increase of 1.6% from our traditional core operations in addition to an increase of 0.6% from our upstream oil and gas-focused subsidiaries, offset by a 0.4% decrease due to one less sales day.
The following table shows changes in sales by reportable segment. | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Sales by Reportable Segment | 2017 |
| 2016 |
| | Service Center Based Distribution | $ | 2,180.4 |
| $ | 2,150.5 |
| $ | 29.9 |
| $ | 19.8 |
| $ | (1.1 | ) | $ | 11.2 |
| | Fluid Power & Flow Control | 413.4 |
| 369.0 |
| 44.4 |
| 11.3 |
| — |
| 33.1 |
| | Total | $ | 2,593.8 |
| $ | 2,519.5 |
| $ | 74.3 |
| $ | 31.1 |
| $ | (1.1 | ) | $ | 44.3 |
|
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $29.9 million, or 1.4%. Acquisitions within this segment increased sales by $19.8 million or 0.9%, while unfavorable foreign currency translation decreased sales by $1.1 million or 0.1%. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales increased $11.2 million or 0.6%, driven by an increase of 0.7% from our upstream oil and gas-focused subsidiaries and an increase of 0.3% from within our traditional core operations, offset by a 0.4% decrease due to one less sales day.
Sales of our Fluid Power & Flow Control segment increased $44.4 million or 12.0%. Acquisitions within this segment increased sales $11.3 million or 3.1%. Excluding the impact of businesses acquired, sales increased $33.1 million or 8.9%, driven by an increase from operations, primarily in the U.S., of 9.3%, offset by a decrease of 0.4% due to one less sales day.
The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | Sales by Geographic Area | 2017 |
| 2016 |
| | United States | $ | 2,182.6 |
| $ | 2,117.5 |
| $ | 65.1 |
| $ | 25.1 |
| $ | — |
| $ | 40.0 |
| | Canada | 252.0 |
| 257.8 |
| (5.8 | ) | 6.0 |
| (0.2 | ) | (11.6 | ) | | Other countries | 159.2 |
| 144.2 |
| 15.0 |
| — |
| (0.9 | ) | 15.9 |
| | Total | $ | 2,593.8 |
| $ | 2,519.5 |
| $ | 74.3 |
| $ | 31.1 |
| $ | (1.1 | ) | $ | 44.3 |
|
Sales in our U.S. operations increased $65.1 million or 3.1%, with acquisitions adding $25.1 million or 1.2%. Excluding the impact of businesses acquired, U.S. sales were up $40.0 million or 1.9%, of which 1.4% was from our traditional core operations and 0.9% was from our upstream oil and gas-focused subsidiaries, offset by a 0.4% decrease due to one less sales day. Sales from our Canadian operations decreased $5.8 million or 2.2%, with unfavorable foreign currency translation decreasing Canadian sales by $0.2 million or 0.1%. Acquisitions added $6.0 million, or 2.3%. Excluding the impact of businesses acquired and unfavorable foreign currency translation impact, Canadian sales were down $11.6 million or 4.4%, of which 2.0% related to the upstream oil and gas-focused subsidiaries, 2.0% was from the traditional core operations, and the remaining 0.4% decrease due to one less sales day. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, increased $15.0 million or 10.4% compared to fiscal 2016. Unfavorable foreign currency translation decreased other country sales by $0.9 million or 0.7%. Prior to the impact of currency translation, other country sales were up $15.9 million or 11.1% compared to the fiscal 2016, driven by an increase from operations of 13.0%, primarily in Australia and Singapore, offset by a decrease of 1.9% due to fewer sales days.
The sales product mix for fiscal 2017 was 71.5% industrial products and 28.5% fluid power products compared to 72.9% industrial and 27.1% fluid power in fiscal 2016.
Our gross profit margin increased to 28.4% in fiscal 2017 compared to 28.1% in fiscal 2016. The increase was primarily due to recording a more favorable impact from LIFO layer liquidations which increased gross profit by $9.4 million in fiscal 2017 and $2.1 million in fiscal 2016, offset by a $4.8 million increase in scrap expense in fiscal 2017 compared to fiscal 2016. Further, the gross profit margin for fiscal 2016 was negatively impacted by $3.6 million of
restructuring expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for the upstream oil and gas-focused operations.
The following table shows the changes in SD&A. | | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | | Year ended June 30, | SD&A Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | | 2017 |
| 2016 |
| | SD&A | $ | 562.3 |
| $ | 552.8 |
| $ | 9.5 |
| $ | 8.2 |
| $ | 0.1 |
| $ | 1.2 |
|
Selling, distribution and administrative expenses (SD&A) consist 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, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $9.5 million or 1.7% during fiscal 2017 compared to fiscal 2016, and as a percent of sales decreased to 21.7% from 21.9% in fiscal 2016. Changes in foreign currency exchange rates had the effect of increasing SD&A by $0.1 million or less than 0.1% compared to fiscal 2016. Additional SD&A from businesses acquired in fiscal 2017 added $8.2 million or 1.5% of SD&A expenses including $1.0 million associated with intangibles amortization. Excluding the impact of businesses acquired and the unfavorable impact from foreign currency translation, SD&A increased $1.2 million or 0.2% during fiscal 2017 compared to fiscal 2016. Excluding the impact of acquisitions, total compensation increased $12.9 million during fiscal 2017 compared to fiscal 2016 as a result of merit increases, improved Company performance, and increased costs related to health care claims. These increases were offset by severance expense and other restructuring charges related to consolidating facilities of $5.2 million of SD&A included in fiscal 2016 that did not reoccur during fiscal 2017. Also, excluding the impact of acquisitions, bad debt expense decreased $2.3 million during fiscal 2017 compared to fiscal 2016, due to improvement in aged receivables. Further, the Company recorded a gain of $1.6 million in fiscal 2017 related to the sale of five buildings during the year. All other expenses within SD&A were down $2.6 million.
During the third quarter of fiscal 2016, the Company performed its annual goodwill impairment test. As a result of this test, the Company determined that all of the goodwill associated with the Australia/New Zealand Service Center Based Distribution reporting unit was impaired as of January 1, 2016. This impairment was the result of the decline in the mining and extraction industries in Australia and the resulting reduced customer spending due to a decline in demand throughout Asia. Further, due to a sustained decline in oil prices and reduced customer spending in Canada, the Company determined that a portion of the goodwill associated with the Canada Service Center Based Distribution reporting unit was also impaired as of January 1, 2016. Accordingly, the Company recognized a combined non-cash impairment charge of $64.8 million for goodwill during fiscal 2016, which decreased net income by $63.8 million and earnings per share by $1.62. Changes in future results, assumptions, and estimates used in calculating the goodwill impairment test could result in additional impairment charges in future periods.
Operating income increased $85.6 million, or 95.3%, to $175.4 million during fiscal 2017 from $89.8 million during fiscal 2016, and as a percent of sales, increased to 6.8% from 3.6%. These increases were primarily due to the Company recognizing a non-cash goodwill impairment charge of $64.8 million and restructuring charges of $8.8 million during fiscal 2016 that did not reoccur during fiscal 2017, as well as higher sales volume in fiscal 2017.
Operating income as a percentage of sales for the Service Center Based Distribution segment was 5.3% in fiscal 2017 and fiscal 2016, before the goodwill impairment charge.
Operating income as a percentage of sales for the Fluid Power & Flow Control segment increased to 11.3% in fiscal 2017 from 10.1% in fiscal 2016. This increase was due to the positive leveraging impact from the increase in sales, primarily from our U.S. operations in this segment, in fiscal 2017.
Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.
Other (income) expense, net, represents certain non-operating items of income and expense. This was $0.1 million of income in fiscal 2017 compared to $2.0 million of expense in fiscal 2016. Fiscal 2017 income primarily consists of unrealized gains on investments held by non-qualified deferredcompensation trusts of $1.2 million, offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.2 million, and life
insurance expense of $0.1 million. Fiscal 2016 expense consisted primarily of foreign currency transaction losses of $1.0 million and net other periodic post-employment costs of $1.0 million.
The effective income tax rate was 19.8% for fiscal 2017 compared to 62.6% for fiscal 2016. The fiscal 2017 effective tax rate was favorably impacted by a $22.2 million net tax benefit pertaining to a worthless stock tax deduction, which decreased the effective tax rate by 13.3%. The tax benefit was net of a $1.0 million valuation allowance applicable to the related state deferred income tax asset. This deduction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes. The fiscal 2016 effective tax rate was unfavorably impacted due to the recording of $64.8 million of goodwill impairment during fiscal 2016, of which $61.3 million was not tax deductible. The goodwill impairment increased the effective tax rate for fiscal 2016 by 27.1%. The remaining decrease in the effective tax rate was primarily due to the adoption of ASU 2016-09 in the first quarter of fiscal 2017, which requires excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises to be recognized in the income statement. During fiscal 2017, $2.4 million of net excess tax benefits were recognized as a reduction of income tax expense, which decreased the effective income tax rate for fiscal 2017 by 1.4%. All undistributed earnings of our foreign subsidiaries were considered to be permanently reinvested at June 30, 2017 and 2016.
As a result of the factors addressed above, net income for fiscal 2017 increased $104.3 million from fiscal 2016. Net income per share was $3.40 per share for fiscal 2017 compared to $0.75 for fiscal 2016. Fiscal 2017 results included a positive impact on earnings per share of $0.56 per share related to the tax benefit recorded for the worthless stock deduction. Fiscal 2016 results included negative impacts on earnings per share of $1.62 per share for goodwill impairment charges and $0.16 per share for restructuring charges. Net income per share was favorably impacted by lower weighted average common shares outstanding in fiscal 2017 as a result of our share repurchase program.
At June 30, 2017, we had a total of 552 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore, versus 559 at June 30, 2016.
The number of Company employees was 5,554 at June 30, 2017 and 5,569 at June 30, 2016.2019.
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 June 30, 20182020 we had total debt obligations outstanding of $966.1$935.3 million compared to $292.0$959.8 million at June 30, 2017.2019. Management expects that our existing cash, cash equivalents, funds available under the revolving credit and uncommitted shelf facilities,facility, and cash provided from operations, will be sufficient to finance normal working capital needs in each of the countries we operate in, 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 June 30, 20182020 was $625.5$733.7 million compared to $572.8$724.3 million at June 30, 2017.2019. The current ratio was 2.42.7 to 1 at both June 30, 20182020 and 2.8 to 1 at June 30, 2017.2019. Net Cash Flows The following table is included to aid in review of Applied’s statements of consolidated cash flows; all amounts
are in thousands. | | | | | | | | | | | | | | | Year Ended June 30, | | | 2018 |
| | 2017 |
| | 2016 |
| | Net Cash Provided by (Used in): | | | | | | | Operating Activities | $ | 147,304 |
| | $ | 164,619 |
| | $ | 162,014 |
| | Investing Activities | (797,906 | ) | | (16,894 | ) | | (75,031 | ) | | Financing Activities | 600,284 |
| | (103,349 | ) | | (93,007 | ) | | Exchange Rate Effect | (589 | ) | | 820 |
| | (3,585 | ) | | Increase (Decrease) in Cash and Cash Equivalents | $ | (50,907 | ) | | $ | 45,196 |
| | $ | (9,609 | ) |
| | | | | | | | | | | Year Ended June 30, | | | 2020 |
| | 2019 |
| | Net Cash Provided by (Used in): | | | | | Operating Activities | $ | 296,714 |
| | $ | 180,601 |
| | Investing Activities | (55,404 | ) | | (55,102 | ) | | Financing Activities | (78,238 | ) | | (71,539 | ) | | Exchange Rate Effect | (2,740 | ) | | 109 |
| | Increase in Cash and Cash Equivalents | $ | 160,332 |
| | $ | 54,069 |
|
The decreaseincrease in cash provided by operating activities during fiscal 20182020 is primarily due to increaseddriven by operating results and the changes in working capital levels to support increased sales compared tofor the prior year periods. The decrease in cash was further impacted byyear:
increased interest payments, and the payment of $7.1 million of one-time costs, both related to the FCX acquisition. These decreases were partially offset by improved operating results, including the impact of the FCX acquisition. | | | | | | Decrease in accounts receivable | $ | 65,972 |
| | Decrease in inventory | $ | 73,618 |
| | Decrease in accounts payable | $ | (24,068 | ) |
Net cash used in investing activities in fiscal 20182020 included $775.7$37.2 million used for the acquisitionsacquisition of FCXOlympus and DICOFASA, and $23.2$20.1 million used for capital expenditures. Net cash used in investing activities in fiscal 20172019 included $17.0 million for capital expenditures and $2.8 million used for acquisitions. These were offset by $2.9 million of proceeds received from the sale of five buildings during fiscal 2017. Net cash used in investing activities in fiscal 2016 included $13.1 million for capital expenditures and $62.5 million used for acquisitions. Net cash provided by financing activities in fiscal 2018 included $780.0 million of cash from borrowings under the new credit facility and $19.5 million of net borrowings under the revolving credit facility, offset by $125.4 million of long-term debt repayments. Further uses of cash were $45.9 million for dividend payments, $22.8 million used to repurchase 393,300 shares of treasury stock, and $3.3$37.5 million used for the paymentacquisitions of debt issuance costs.FPS, MilRoc and Woodward, and $19.0 million for capital expenditures.
Net cash used in financing activities in fiscal 2017 included $3.4$49.6 million and $161.7 million of long-term debt repayments in 2020 and $33.02019, respectively, offset by $25.0 million of net repaymentscash borrowings under a unsecured shelf facility agreement with Prudential Investment Management in 2020 and $175.0 million of cash borrowings from the revolving credit facility.trade receivable securitization facility in 2019. Further uses of cash in 2020 were $44.6$48.9 million for dividend payments, $8.2$2.6 million used to repurchase 162,500pay taxes for shares of treasury stock, $11.3withheld, and $2.4 million used for acquisition holdback payments. Further uses of cash in 2019 were $47.3 million for dividend payments, and$11.2 million used to repurchase 192,082 shares of treasury stock, $3.5 million used to pay taxes for shares withheld. Net cash used in financing activities in fiscal 2016 included $98.7 million of long-term debt repaymentswithheld, and $19.0 million of net repayments under the revolving credit facility, offset by $125.0 million of cash from borrowings under the credit facility. Further uses of cash were $43.3 million for dividend payments, $37.5$2.6 million used to repurchase 951,100 shares of treasury stock, and $18.9 million offor acquisition holdback payments.
The increase in dividends over the last three fiscal yearsyear is the result of regular increases in our dividend payout rates. We paid dividends of $1.18, $1.14,$1.26 and $1.10$1.22 per share in fiscal 2018, 20172020 and 2016,2019, respectively.
Capital Expenditures We expect capital expenditures for fiscal 20192021 to be in the $26.0$15.0 million to $28.0$20.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for fiscal 20192021 is expected to be in the range of $21.0$22.5 million to $22.0$23.5 million. ERP Project
In fiscal 2011 Applied commenced its ERP (SAP) project to transform the Company's technology platforms
and enhance its business information and technology systems for future growth. We first deployed our solution in our Western Canadian operating locations and our traditional U.S. Service Center Based Distribution businesses, excluding recent acquisitions. In fiscal 2014, the Company initiated the conversion to SAP of its related financial and accounting systems, including the receivables, payables, treasury, inventory, fixed assets, general ledger and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation process/system, were transitioned to SAP during fiscal 2015. At the beginning of fiscal 2016 the Company converted to a new consolidation process and system. During the fourth quarter of fiscal 2017, operations in Eastern Canada transitioned onto SAP, and the majority of the Company's upstream oil and gas-focused operations transitioned onto SAP during fiscal 2018. The Company will continue to evaluate and consider an appropriate deployment schedule for other operations not on SAP.
Share Repurchases The Board of Directors has authorized the repurchase of shares of the Company’s stock. These purchases may
be made in open market and negotiated transactions, from time to time, depending upon market conditions.
At June 30, 2018,2020, we had authorization to purchase an additional 1,056,700864,618 shares. The Company did not repurchase shares in fiscal 2020. In fiscal 2018, 20172019 and 2016,2018, we repurchased 393,300, 162,500,192,082 and 951,100393,300 shares of the Company’s common stock, respectively, at an average price per share of $57.92, $50.72, $58.10,and $39.39,$57.92, respectively. Borrowing Arrangements A summary of long-term debt, including the current portion, follows; all amounts are in thousands: | | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | Unsecured credit facility | $ | 589,250 |
| | $ | 613,625 |
| | Trade receivable securitization facility | 175,000 |
| | 175,000 |
| | Series C notes | 120,000 |
| | 120,000 |
| | Series D Notes | 25,000 |
| | 50,000 |
| | Series E Notes | 25,000 |
| | — |
| | Other | 1,026 |
| | 1,204 |
| | Total debt | $ | 935,276 |
| | $ | 959,829 |
| | Less: unamortized debt issuance costs | 1,487 |
| | 1,943 |
| | | $ | 933,789 |
| | $ | 957,886 |
|
In January 2018, in conjunction with the acquisition of FCX, 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. At June 30, 2018, theThe Company had $775.1 millionno amount outstanding under the term loanrevolver as of June 30, 2020 and $19.5 million outstanding under the revolver.June 30, 2019. Unused lines under this facility, net of outstanding letters of credit of $3.6$1.9 million and $3.2 million, respectively, to secure certain insurance obligations, totaled $226.9$248.1 million and $246.8 million at June 30, 2018,2020 and June 30, 2019, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.94% and 4.19% as of June 30, 2020 and June 30, 2019, respectively.
In August 2018, was 4.13%.
the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021. The weighted averagemaximum 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 amount outstanding under the revolving credit facilityAR Securitization Facility as of June 30, 20182020 and June 30, 2019 was 3.93%.1.07% and 3.33%, respectively. At June 30, 2017, the Company had $120.3 million outstanding under the term loan in the previous credit facility agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017. No amount was outstanding under the revolver as of June 30, 2017. Unused lines under this facility, net of outstanding letters of credit of $2.4 million to secure certain insurance obligations, totaled $247.6 million at June 30, 2017. Additionally, the Company had letters of credit outstanding with a separate bank, not associated with either revolving credit agreement, in the amount of $2.7 million as of June 30, 20182020 and June 30, 2017, respectively, in order to secure certain insurance obligations.
At June 30, 2018 and June 30, 2017,2019, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 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 have a principal amount of $120.0 million, and carry a fixed interest rate of 3.19%, and are due in equal principal payments in July 2020, 2021, and 2022. A $40.0 million principal payment was made on the "Series C" notes in July 2020. The "Series D" notes have a principal amount of $50.0 million and carry a fixed interest rate of 3.21%. A $25.0 million principal payment was made on the "Series D" notes during fiscal 2020, and the remaining principal balance of $25.0 million
is due in October 2023. In October 2019, the Company amended its unsecured shelf facility agreement with Prudential Investment Management to authorize the issuance of "Series E" notes, which have a principal amount of $25.0 million, carry a fixed interest rate of 3.08%, and are due in equal principalOctober 2024. The Company entered into an interest rate swap which mitigates variability in forecasted interest payments in October 2019 and 2023. As of June 30, 2018, $50.0 million in additional financing was available under this facility. In 2014, the Company assumed $2.4on $431.0 million of debt as a part of the headquarters facility acquisition. The 1.50% fixed interestCompany’s U.S. dollar-denominated unsecured variable rate debt. For more information, see note is held by7, Derivatives, to the State of Ohio Development Services Agency, maturingconsolidated financial statements, included in May 2024. At June 30, 2018Item 8 under the caption “Financial Statements and 2017, $1.4 million and $1.7 million was outstanding, respectively.Supplementary Data.”
The new credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2018,2020, the most restrictive of these covenants required that the Company have net indebtedness less than 4.253.75 times consolidated income before interest, taxes, depreciation and amortization.amortization (as defined). At June 30, 2018,2020, the Company's net indebtedness was less than 3.03.1 times consolidated income before interest, taxes, depreciation and amortization.amortization (as defined). The Company was in compliance with all financial covenants at June 30, 2018.2020. Accounts Receivable Analysis The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable (all dollar amounts are in thousands): | | | | | | | | | | June 30, | 2018 |
| | 2017 |
| | Accounts receivable, gross | $ | 562,377 |
| | $ | 400,559 |
| | Allowance for doubtful accounts | 13,566 |
| | 9,628 |
| | Accounts receivable, net | $ | 548,811 |
| | $ | 390,931 |
| | Allowance for doubtful accounts, % of gross receivables | 2.4 | % | | 2.4 | % | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | Provision for losses on accounts receivable | $ | 2,803 |
| | $ | 2,071 |
| | Provision as a % of net sales | 0.09 | % | | 0.08 | % |
| | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | Accounts receivable, gross | $ | 463,659 |
| | $ | 551,400 |
| | Allowance for doubtful accounts | 13,661 |
| | 10,498 |
| | Accounts receivable, net | $ | 449,998 |
| | $ | 540,902 |
| | Allowance for doubtful accounts, % of gross receivables | 2.9 | % | | 1.9 | % | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | Provision for losses on accounts receivable | $ | 14,055 |
| | $ | 4,058 |
| | Provision as a % of net sales | 0.43 | % | | 0.12 | % |
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 55.055.9 at June 30, 20182020 versus 51.655.2 at June 30, 2017. The inclusion of FCX had no impact on the Company's DSO at June 30, 2018. Accounts receivable increased 40.4% this year, of which 20.7% is accounts receivable for FCX. The remaining increase is due to an increase in sales excluding FCX for the twelve months ended June 30, 2018.2019. Approximately 2.4%4.6% of our accounts receivable balances are more than 90 days past due at June 30, 20182020 compared to 1.7%3.0% at June 30, 2017. This increase primarily relates to our U.S. Service Center Based Distribution businesses.2019. On an overall basis, our provision for losses from uncollected receivables represents 0.09%0.43% of our sales in the year ended June 30, 2018.2020, compared to 0.12% of sales for the year ended June 30, 2019. This 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 uncollected receivables 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. As activities slowed in the second half of fiscal 2020, the Company took actions to reduce its overall inventory, which resulted in a net decrease in inventory of $58.4 million. 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 uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the period ended June 30, 20182020 was 4.03.8 versus 3.74.2 at June 30, 2017.2019. We believe our inventory turnover ratio in fiscal 20192021 will be slightly better than our fiscal 20182020 levels.
CONTRACTUAL OBLIGATIONS The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 20182020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | Total |
| | Period Less Than 1 yr |
| | Period 2-3 yrs |
| | Period 4-5 yrs |
| | Period Over 5 yrs |
| | Other |
| | Operating leases | $ | 111,400 |
| | $ | 38,100 |
| | $ | 45,300 |
| | $ | 17,000 |
| | $ | 11,000 |
| | — |
| | Planned funding of post-retirement obligations | 16,300 |
| | 3,500 |
| | 4,400 |
| | 1,800 |
| | 6,600 |
| | — |
| | Unrecognized income tax benefit liabilities, including interest and penalties | 4,700 |
| | — |
| | — |
| | — |
| | — |
| | 4,700 |
| | Long-term debt obligations | 966,100 |
| | 19,700 |
| | 128,900 |
| | 792,300 |
| | 25,200 |
| | — |
| | Interest on long-term debt obligations (1) | 84,300 |
| | 18,300 |
| | 40,800 |
| | 25,000 |
| | 200 |
| | — |
| | Acquisition holdback payments | 3,365 |
| | 2,592 |
| | 698 |
| | — |
| | 75 |
| | — |
| | Total Contractual Cash Obligations | $ | 1,186,165 |
| | $ | 82,192 |
| | $ | 220,098 |
| | $ | 836,100 |
| | $ | 43,075 |
| | $ | 4,700 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | Total |
| | Period Less Than 1 yr |
| | Period 2-3 yrs |
| | Period 4-5 yrs |
| | Period Over 5 yrs |
| | Other |
| | Operating leases | $ | 104,165 |
| | $ | 29,979 |
| | $ | 39,328 |
| | $ | 19,540 |
| | $ | 15,318 |
| | — |
| | Planned funding of post-retirement obligations | 10,000 |
| | 900 |
| | 1,800 |
| | 500 |
| | 6,800 |
| | — |
| | Unrecognized income tax benefit liabilities, including interest and penalties | 6,000 |
| | — |
| | — |
| | — |
| | — |
| | 6,000 |
| | Long-term debt obligations | 935,276 |
| | 79,181 |
| | 805,744 |
| | 50,351 |
| | — |
| | — |
| | Interest on long-term debt obligations (1) | 40,100 |
| | 17,000 |
| | 21,900 |
| | 1,200 |
| | — |
| | — |
| | Acquisition holdback payments | 4,086 |
| | 2,563 |
| | 1,448 |
| | 75 |
| | — |
| | — |
| | Total Contractual Cash Obligations | $ | 1,099,627 |
| | $ | 129,623 |
| | $ | 870,220 |
| | $ | 71,666 |
| | $ | 22,118 |
| | $ | 6,000 |
|
(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations. Rates in effect as of June 30, 20182020 are used for variable rate debt. Purchase orders for inventory and other goods and services are not included in our estimates as we are unable to aggregate the amount of such purchase orders that represent enforceable and legally binding agreements specifying all significant terms. The previous table includes the gross liability for unrecognized income tax benefits including interest and penalties in the “Other” column as the Company is unable to make a reasonable estimate regarding the timing of cash settlements, if any, with the respective taxing authorities. CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. The Business and Accounting Policies note to the consolidated financial statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. LIFO Inventory Valuation and Methodology Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories, and the average cost method for foreign inventories. We adopted the link chain dollar value LIFO method for accounting for U.S. inventories in fiscal 1974. Approximately 16.8%17.3% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $139.2$155.5 million as reflected in our consolidated balance sheet at June 30, 2018.2020. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. See the Inventories note to the
consolidated financial statements in Item 8 under the caption "Financial Statements and Supplementary Data,"
for further information.
Allowances for Slow-Moving and Obsolete Inventories We evaluate the recoverability of our slow-moving and inactive inventories at least quarterly. We estimate the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. Our ability to recover our cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. A significant portion of the products we hold in inventory have long shelf lives, are not highly susceptible to obsolescence and are eligible for return under various supplier return programs.obsolescence. As of June 30, 20182020 and 2017,2019, the Company's reserve for slow-moving or obsolete inventories was $38.1$42.9 million and $28.8$41.1 million, respectively, recorded in inventories in the consolidated balance sheets. The increase is primarily due to a $6.8 million reserve related to the inventory acquired with FCX.
Allowances for Doubtful Accounts We evaluate the collectibility of trade accounts receivable based on a combination of factors. Initially, we estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of certain customers and industries estimated to be a greater credit risk, trends within the entire customer pool and changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Accounts are written off against the allowance when it becomes evident that collection will not occur. As of June 30, 20182020 and 2017,2019, our allowance for doubtful accounts was 2.4%2.9% and 1.9% of gross receivables.receivables, respectively. Our provision for losses on accounts receivable was $2.8$14.1 million, $2.1$4.1 million and $4.3$2.8 million in fiscal 2018, 20172020, 2019 and 2016,2018, respectively. Goodwill and Intangibles Goodwill is recognized as the amount by which the costThe purchase price of an acquired entity exceedscompany is allocated between intangible assets and the net amount assigned totangible assets of the acquired and liabilities assumed.business with the residual of the purchase price recorded as goodwill. Goodwill for acquired businesses is accounted for using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. As part of acquisition accounting, we also recognize acquired identifiable intangible assets such as customer relationships, vendor relationships, trade names, and non-competition agreements apart from goodwill. Finite-lived identifiable intangibles are evaluated for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model.
We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price. Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a one-step approach. The fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Goodwill on our consolidated financial statements relates to both the Service Center Based Distribution segment and the Fluid Power & Flow Control segment. The Company has sixeight reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2018.2020. The Company concluded that allseven of the reporting units’ fair value exceeded their carrying amounts by at least 30%10% as of January 1, 2018. However, for one of our2020. Specifically, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The Canada and Mexico reporting units withhave goodwill balances of approximately $28.0$27.2 million if we doand $5.2 million, respectively, as of June 30, 2020. The carrying value of the final reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131.0 million. The non-cash impairment charge was the result of the overall decline in the industrial economy, specifically slower demand in FCX's end markets. This led to reduced spending by customers and reduced revenue expectations. As of June 30, 2020, the Company's goodwill balance was $540.6 million, of which $309.0 million relates to the FCX reporting unit. If the Company does not achieve our forecasted sales growth and margin improvements goodwill could be further impaired.
The fair values of the reporting units in accordance with the goodwill impairment test were determined using the Incomeincome and Marketmarket approaches. The Incomeincome 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.factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margins, and discount rates. The Marketmarket approach utilizes an analysis of comparable publicly traded companies.companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA) and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key Level 3 based assumptions 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. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values.
Income Taxes Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. As of June 30, 2018,2020, the Company had recognized $56.1$38.1 million of net deferred tax liabilities. Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets on a jurisdiction by jurisdiction basis. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future taxable income levels.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT This Form 10-K, including 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, or changes in supplier distribution programs;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; the volatility of our stock price and the resulting impact on our consolidated financial statements; 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, and international trade, such as recent tariffsdata privacy and proposed tariffs on imports;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 our Form 10-K, as well as other of our filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates.
We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. As of June 30, 2018, we did not have any outstanding derivative instruments. Foreign Currency Exchange Rate Risk Because we operate throughout North America, Australia and New Zealand and approximately 14.9%13.1% of our fiscal year 20182020 net sales were generated outside the United States, foreign currency exchange rates can impact our financial position, results of operations and competitive position. The financial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive income (loss)loss as reported in the statements of consolidated comprehensive income. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the statements of consolidated income as a component of other (income) expense,income, net. Applied does not currently hedge the net investments in our foreign operations. During the course of the fiscal year, the Canadian, Mexican, Australian and New Zealand currency exchange rates decreased in relation to the U.S. dollar by 2.0%4.0%, 9.2%17.1%, 4.1%,1.8% and 7.4%4.0%, respectively. In the twelve months ended June 30, 2018,2020, we experienced net foreign currency translation losses totaling $8.9$18.5 million, which were included in other comprehensive income (loss).loss. We utilize a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in foreign currency rates. AExcluding the non-cash goodwill impairment charge recorded in fiscal 2020, a 10% strengthening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 20182020 would have resulted in a $0.9$1.3 million decrease in net income for the year ended June 30, 2018. A2020. Excluding the non-cash goodwill impairment charge recorded in fiscal 2020, a 10% weakening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 20182020 would have resulted in a $0.9$1.3 million increase in net income for the year ended June 30, 2018.2020. InterestInterest Rate Risk
Our primary exposure to interest rate risk results from our outstanding debt obligations with variable interest rates. The levels of fees and interest charged on our various debt facilities are based upon leverage levels and market interest rates. The Company uses interest rate swap instruments to mitigate variability in forcasted interest rates. Our variable interest rate debt facilities outstanding include our five-year credit facility, which provides for a revolving credit facility with a capacity of up to $250.0 million in borrowings and $19.5 millionwith no balance outstanding at June 30, 2018, and2020, a $780.0 million term loan, of which $775.1$589.3 million was outstanding at June 30, 2018.2020, and a $175.0 million trade receivable securitization facility, all of which was outstanding at June 30, 2020. In January 2019, the Company entered into an interest rate swap on $463.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. The notional amount of the interest rate swap was $431.0 million as of June 30, 2020. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. Fixed interest rate debt facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $1.4$1.0 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $431.7$782.0 million during fiscal 2018.2020. The impact of a hypothetical 1.0% increase in the interest rates on our average variable interest rate bank borrowings (not considering the impact of our interest rate swap) would have resulted in a $4.3$7.8 million increase in interest expense. Due to the interest rate swap, the impact of a hypothetical 1.0% increase in the variable interest rate would have reduced net cash interest paid by $4.3 million. Changes in market interest rates would also impact interest rates on these facilities. For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and note 5notes 6 and 7 to the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Shareholders of Applied Industrial Technologies, Inc.
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 20182020 and 2017,2019, the related statements of consolidated income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2018,2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018,2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2018,2020, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 17, 201814, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective July 1, 2019, the Company adopted the FASB’s new standard related to leases using the optional transition method, which required application of the new guidance to only those leases that existed at the date of adoption. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill - FCX and Canada Reporting Units - Refer to Note 5 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the income and market approaches. The determination of the fair value using the income approach 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. The determination of the fair value using the market approach requires management to make significant estimates and assumptions related to the forecasts of future revenues, EBITDA and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The goodwill balance was
$540.6 million as of June 30, 2020, of which $309.0 million related to the FCX reporting unit and $27.2 million related to the Canada reporting unit. The fair value of the FCX reporting unit did not exceed its carrying value as of the measurement date and, therefore, an impairment charge of $131.0 million was recognized in 2020. The fair value of the Canada reporting unit exceeded its carrying value by 12% as of the measurement date and, therefore, no impairment was recognized.
Given the nature of the FCX and Canada reporting units’ operations, the sensitivity of the business to changes in the economy, the reporting unit’s historical performance as compared to projections, and the difference between its fair value and the carrying value, auditing management’s judgments regarding forecasts of future revenues and EBITDA, as well as selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates for the FCX and Canada reporting units, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the forecasts of future revenues and EBITDA (“forecasts”), and the selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates (“market multiples”) for the FCX and Canada reporting units included the following, among others: We tested the effectiveness of controls over management’s goodwill impairment evaluation, such as controls related to management’s forecasts and the selection of the discount rate and market multiples used. We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in industry reports for the various industries the reporting units operate within. With the assistance of our fair value specialists, we evaluated the discount rate, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rate selected by management. With the assistance of our fair value specialists, we evaluated the market multiples by evaluating the selected comparable publicly traded companies and the adjustments made for differences in growth prospects and risk profiles between the reporting units and the comparable publicly traded companies. We tested the underlying source information and mathematical accuracy of the calculations. With the assistance of our fair value specialists, we evaluated the fair value of the reporting units based upon reconciling the fair values of the reporting units to the market capitalization of the Company.
/s/ Deloitte & Touche LLP Cleveland, Ohio
August 14, 2020
August 17, 2018
We have served as the Company's auditor since 1966.
STATEMENTS OF CONSOLIDATED INCOME (In thousands, except per share amounts)
| | | | | | | | | | | | | | | Year Ended June 30, | | 2018 |
| | 2017 |
| | 2016 |
| | Net Sales | | $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
| | Cost of Sales | | 2,189,279 |
| | 1,856,051 |
| | 1,812,006 |
| | Gross Profit | | 883,995 |
| | 737,695 |
| | 707,422 |
| | Selling, Distribution and Administrative, including depreciation | | 658,168 |
| | 562,309 |
| | 552,846 |
| | Goodwill Impairment | | — |
| | — |
| | 64,794 |
| | Operating Income | | 225,827 |
| | 175,386 |
| | 89,782 |
| | Interest Expense | | 24,142 |
| | 8,831 |
| | 9,004 |
| | Interest Income | | (657 | ) | | (290 | ) | | (241 | ) | | Other (Income) Expense, net | | (2,376 | ) | | (121 | ) | | 2,041 |
| | Income Before Income Taxes | | 204,718 |
| | 166,966 |
| | 78,978 |
| | Income Tax Expense | | 63,093 |
| | 33,056 |
| | 49,401 |
| | Net Income | | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| | Net Income Per Share — Basic | | $ | 3.65 |
| | $ | 3.43 |
| | $ | 0.75 |
| | Net Income Per Share — Diluted | | $ | 3.61 |
| | $ | 3.40 |
| | $ | 0.75 |
|
| | | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| | Net sales | | $ | 3,245,652 |
| | $ | 3,472,739 |
| | $ | 3,073,274 |
| | Cost of sales | | 2,307,916 |
| | 2,465,116 |
| | 2,189,279 |
| | Gross profit | | 937,736 |
| | 1,007,623 |
| | 883,995 |
| | Selling, distribution and administrative expense, including depreciation | | 717,747 |
| | 742,241 |
| | 658,168 |
| | Goodwill and intangible impairment | | 131,000 |
| | 31,594 |
| | — |
| | Operating income | | 88,989 |
| | 233,788 |
| | 225,827 |
| | Interest expense | | 37,264 |
| | 40,788 |
| | 24,142 |
| | Interest income | | (729 | ) | | (600 | ) | | (657 | ) | | Other income, net | | (2,782 | ) | | (881 | ) | | (2,376 | ) | | Income before income taxes | | 55,236 |
| | 194,481 |
| | 204,718 |
| | Income tax expense | | 31,194 |
| | 50,488 |
| | 63,093 |
| | Net income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| | Net income per share — basic | | $ | 0.62 |
| | $ | 3.72 |
| | $ | 3.65 |
| | Net income per share — diluted | | $ | 0.62 |
| | $ | 3.68 |
| | $ | 3.61 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (In thousands)
| | | | | | | | | | | | | | | Year Ended June 30, | | 2018 |
| | 2017 |
| | 2016 |
| | Net income per the statements of consolidated income | | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| | | | | | | | | | Other comprehensive (loss) income, before tax: | | | | | | | | Foreign currency translation adjustments | | (8,875 | ) | | 2,238 |
| | (24,441 | ) | | Post-employment benefits: | | | | | | | | Actuarial gain (loss) on re-measurement | | 709 |
| | 2,038 |
| | (1,998 | ) | | Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs | | (73 | ) | | 506 |
| | 518 |
| | Unrealized gain (loss) on investment securities available for sale | | 37 |
| | 91 |
| | (52 | ) | | Total other comprehensive (loss) income, before tax | | (8,202 | ) | | 4,873 |
| | (25,973 | ) | | Income tax expense (benefit) related to items of other comprehensive income (loss) | | 319 |
| | 1,029 |
| | (598 | ) | | Other comprehensive (loss) income, net of tax | | (8,521 | ) | | 3,844 |
| | (25,375 | ) | | Comprehensive income | | $ | 133,104 |
| | $ | 137,754 |
| | $ | 4,202 |
|
| | | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| | Net income per the statements of consolidated income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| | | | | | | | | | Other comprehensive (loss) income, before tax: | | | | | | | | Foreign currency translation adjustments | | (18,499 | ) | | 2,021 |
| | (8,875 | ) | | Post-employment benefits: | | | | | | | | Actuarial (loss) gain on re-measurement | | (2,192 | ) | | (372 | ) | | 709 |
| | Reclassification of actuarial (gains) losses and prior service cost into other income, net and included in net periodic pension costs | | (66 | ) | | (306 | ) | | (73 | ) | | Unrealized gain on investment securities available for sale | | — |
| | — |
| | 37 |
| | Cumulative effect of adopting accounting standard | | — |
| | (50 | ) | | — |
| | Unrealized loss on cash flow hedge | | (16,615 | ) | | (14,446 | ) | | — |
| | Reclassification of interest from cash flow hedge into interest expense | | 4,638 |
| | 244 |
| | — |
| | Total other comprehensive loss, before tax | | (32,734 | ) | | (12,909 | ) | | (8,202 | ) | | Income tax (benefit) expense related to items of other comprehensive loss | | (3,190 | ) | | (3,246 | ) | | 319 |
| | Other comprehensive loss, net of tax | | (29,544 | ) | | (9,663 | ) | | (8,521 | ) | | Comprehensive (loss) income | | $ | (5,502 | ) | | $ | 134,330 |
| | $ | 133,104 |
|
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (In thousands)
| | | | | | | | | | | June 30, | | 2018 |
| | 2017 |
| | Assets | | | | | | Current assets | | | | | | Cash and cash equivalents | | $ | 54,150 |
| | $ | 105,057 |
| | Accounts receivable, less allowances of $13,566 and $9,628 | | 548,811 |
| | 390,931 |
| | Inventories | | 422,069 |
| | 345,145 |
| | Other current assets | | 32,990 |
| | 41,409 |
| | Total current assets | | 1,058,020 |
| | 882,542 |
| | Property — at cost | | | | | | Land | | 14,411 |
| | 14,250 |
| | Buildings | | 104,419 |
| | 97,529 |
| | Equipment, including computers and software | | 177,813 |
| | 162,432 |
| | Total property — at cost | | 296,643 |
| | 274,211 |
| | Less accumulated depreciation | | 175,300 |
| | 166,143 |
| | Property — net | | 121,343 |
| | 108,068 |
| | Identifiable intangibles, net | | 435,947 |
| | 163,562 |
| | Goodwill | | 646,643 |
| | 206,135 |
| | Other assets | | 23,788 |
| | 27,288 |
| | Total Assets | | $ | 2,285,741 |
| | $ | 1,387,595 |
| | Liabilities | | | | | | Current liabilities | | | | | | Accounts payable | | $ | 256,886 |
| | $ | 180,614 |
| | Current portion of long-term debt | | 19,183 |
| | 4,814 |
| | Compensation and related benefits | | 73,370 |
| | 58,785 |
| | Other current liabilities | | 83,112 |
| | 65,540 |
| | Total current liabilities | | 432,551 |
| | 309,753 |
| | Long-term debt | | 944,522 |
| | 286,769 |
| | Post-employment benefits | | 11,985 |
| | 16,715 |
| | Other liabilities | | 81,720 |
| | 29,102 |
| | Total Liabilities | | 1,470,778 |
| | 642,339 |
| | Shareholders’ Equity | | | | | | Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding | | — |
| | — |
| Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,703 and 39,041 shares outstanding, respectively | | 10,000 |
| | 10,000 |
| | Additional paid-in capital | | 169,383 |
| | 164,655 |
| | Retained earnings | | 1,129,678 |
| | 1,033,751 |
| | Treasury shares — at cost (15,510 and 15,172 shares), respectively | | (403,875 | ) | | (381,448 | ) | | Accumulated other comprehensive loss | | (90,223 | ) | | (81,702 | ) | | Total Shareholders’ Equity | | 814,963 |
| | 745,256 |
| | Total Liabilities and Shareholders’ Equity | | $ | 2,285,741 |
| | $ | 1,387,595 |
|
| | | | | | | | | | | June 30, | | 2020 |
| | 2019 |
| | Assets | | | | | | Current assets | | | | | | Cash and cash equivalents | | $ | 268,551 |
| | $ | 108,219 |
| | Accounts receivable, net | | 449,998 |
| | 540,902 |
| | Inventories | | 389,150 |
| | 447,555 |
| | Other current assets | | 52,070 |
| | 51,462 |
| | Total current assets | | 1,159,769 |
| | 1,148,138 |
| | Property — at cost | | | | | | Land | | 14,339 |
| | 14,452 |
| | Buildings | | 104,396 |
| | 101,338 |
| | Equipment, including computers and software | | 195,220 |
| | 189,579 |
| | Total property — at cost | | 313,955 |
| | 305,369 |
| | Less accumulated depreciation | | 192,054 |
| | 181,066 |
| | Property — net | | 121,901 |
| | 124,303 |
| | Operating lease assets, net | | 90,636 |
| | — |
| | Identifiable intangibles, net | | 343,215 |
| | 368,866 |
| | Goodwill | | 540,594 |
| | 661,991 |
| | Other assets | | 27,436 |
| | 28,399 |
| | Total Assets | | $ | 2,283,551 |
| | $ | 2,331,697 |
| | Liabilities | | | | | | Current liabilities | | | | | | Accounts payable | | $ | 186,270 |
| | $ | 237,289 |
| | Current portion of long-term debt | | 78,646 |
| | 49,036 |
| | Compensation and related benefits | | 61,887 |
| | 67,978 |
| | Other current liabilities | | 99,280 |
| | 69,491 |
| | Total current liabilities | | 426,083 |
| | 423,794 |
| | Long-term debt | | 855,143 |
| | 908,850 |
| | Other liabilities | | 158,783 |
| | 102,019 |
| | Total Liabilities | | 1,440,009 |
| | 1,434,663 |
| | Shareholders’ Equity | | | | | | Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding | | — |
| | — |
| Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,710 and 38,597 shares outstanding, respectively | | 10,000 |
| | 10,000 |
| | Additional paid-in capital | | 176,492 |
| | 172,931 |
| | Retained earnings | | 1,200,570 |
| | 1,229,148 |
| | Treasury shares — at cost (15,503 and 15,616 shares), respectively | | (414,090 | ) | | (415,159 | ) | | Accumulated other comprehensive loss | | (129,430 | ) | | (99,886 | ) | | Total Shareholders’ Equity | | 843,542 |
| | 897,034 |
| | Total Liabilities and Shareholders’ Equity | | $ | 2,283,551 |
| | $ | 2,331,697 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands) | | | | | | | | | | | | | | | Year Ended June 30, | | 2018 |
| | 2017 |
| | 2016 |
| | Cash Flows from Operating Activities | | | | | | | | Net income | | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | Goodwill impairment | | — |
| | — |
| | 64,794 |
| | Depreciation and amortization of property | | 17,798 |
| | 15,306 |
| | 15,966 |
| | Amortization of intangibles | | 32,065 |
| | 24,371 |
| | 25,580 |
| | Amortization of stock appreciation rights and options | | 1,961 |
| | 1,891 |
| | 1,543 |
| | Deferred income taxes | | 1,615 |
| | (2,852 | ) | | (6,581 | ) | | Provision for losses on accounts receivable | | 2,803 |
| | 2,071 |
| | 4,303 |
| | Unrealized foreign exchange transaction (gains) losses | | (667 | ) | | (333 | ) | | 61 |
| | Other share-based compensation expense | | 4,666 |
| | 3,629 |
| | 2,524 |
| | (Gain) loss on sale of property | | (335 | ) | | (1,541 | ) | | 337 |
| | Other | | — |
| | 103 |
| | — |
| | Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | Accounts receivable | | (83,103 | ) | | (42,267 | ) | | 26,414 |
| | Inventories | | (33,436 | ) | | (3,624 | ) | | 25,081 |
| | Other operating assets | | 6,947 |
| | (6,162 | ) | | 2,964 |
| | Accounts payable | | 50,345 |
| | 32,076 |
| | (28,644 | ) | | Other operating liabilities | | 5,020 |
| | 8,041 |
| | (1,905 | ) | | Cash provided by Operating Activities | | 147,304 |
| | 164,619 |
| | 162,014 |
| | Cash Flows from Investing Activities | | | | | | | | Property purchases | | (23,230 | ) | | (17,045 | ) | | (13,130 | ) | | Proceeds from property sales | | 978 |
| | 2,924 |
| | 603 |
| | Cash paid for acquisition of businesses, net of cash acquired | | (775,654 | ) | | (2,773 | ) | | (62,504 | ) | | Cash used in Investing Activities | | (797,906 | ) | | (16,894 | ) | | (75,031 | ) | | Cash Flows from Financing Activities | | | | | | | | Net borrowings (repayments) under revolving credit facility, classified as long term | | 19,500 |
| | (33,000 | ) | | (19,000 | ) | | Borrowings under long-term debt facilities | | 780,000 |
| | — |
| | 125,000 |
| | Long-term debt repayments | | (125,420 | ) | | (3,353 | ) | | (98,662 | ) | | Debt issuance costs | | (3,298 | ) | | — |
| | (719 | ) | | Purchases of treasury shares | | (22,778 | ) | | (8,242 | ) | | (37,465 | ) | | Dividends paid | | (45,858 | ) | | (44,619 | ) | | (43,330 | ) | | Excess tax benefits from share-based compensation | | — |
| | — |
| | 208 |
| | Acquisition holdback payments | | (319 | ) | | (11,307 | ) | | (18,913 | ) | | Exercise of stock appreciation rights and options | | 102 |
| | 656 |
| | 896 |
| | Taxes paid for shares withheld | | (1,645 | ) | | (3,484 | ) | | (1,022 | ) | | Cash provided by (used in) Financing Activities | | 600,284 |
| | (103,349 | ) | | (93,007 | ) | | Effect of exchange rate changes on cash | | (589 | ) | | 820 |
| | (3,585 | ) | | (Decrease) increase in cash and cash equivalents | | (50,907 | ) | | 45,196 |
| | (9,609 | ) | | Cash and cash equivalents at beginning of year | | 105,057 |
| | 59,861 |
| | 69,470 |
| | Cash and Cash Equivalents at End of Year | | $ | 54,150 |
| | $ | 105,057 |
| | $ | 59,861 |
| | | | | | | | | | Supplemental Cash Flow Information | | | | | | | | Cash paid during the year for: | | | | | | | | Income taxes | | 41,724 |
| | 38,772 |
| | 54,749 |
| | Interest | | 25,560 |
| | 8,561 |
| | 9,497 |
|
| | | | | | | | | | | | | | | Year Ended June 30, | | 2020 |
| | 2019 |
| | 2018 |
| | Cash Flows from Operating Activities | | | | | | | | Net income | | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | Goodwill & Intangible impairment | | 131,000 |
| | 31,594 |
| | — |
| | Depreciation and amortization of property | | 21,196 |
| | 20,236 |
| | 17,798 |
| | Amortization of intangibles | | 41,553 |
| | 41,883 |
| | 32,065 |
| | Amortization of stock appreciation rights and options | | 2,954 |
| | 2,437 |
| | 1,961 |
| | Deferred income taxes | | (13,292 | ) | | 2,368 |
| | 1,615 |
| | Provision for losses on accounts receivable | | 14,055 |
| | 4,058 |
| | 2,803 |
| | Unrealized foreign exchange transaction (gains) losses | | (1,357 | ) | | 238 |
| | (667 | ) | | Other share-based compensation expense | | 4,000 |
| | 4,474 |
| | 4,666 |
| | Gain on sale of property | | (1,157 | ) | | (459 | ) | | (335 | ) | | Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | Accounts receivable | | 74,437 |
| | 8,465 |
| | (83,103 | ) | | Inventories | | 57,028 |
| | (16,590 | ) | | (33,436 | ) | | Other operating assets | | (5,268 | ) | | (7,738 | ) | | 6,947 |
| | Accounts payable | | (53,856 | ) | | (29,788 | ) | | 50,345 |
| | Other operating liabilities | | 1,379 |
| | (24,570 | ) | | 5,020 |
| | Cash provided by Operating Activities | | 296,714 |
| | 180,601 |
| | 147,304 |
| | Cash Flows from Investing Activities | | | | | | | | Capital expenditures | | (20,115 | ) | | (18,970 | ) | | (23,230 | ) | | Proceeds from property sales | | 1,948 |
| | 1,003 |
| | 978 |
| | Cash paid for acquisition of businesses, net of cash acquired | | (37,237 | ) | | (37,526 | ) | | (775,654 | ) | | Other | | — |
| | 391 |
| | — |
| | Cash used in Investing Activities | | (55,404 | ) | | (55,102 | ) | | (797,906 | ) | | Cash Flows from Financing Activities | | | | | | | | Net (repayments) borrowings under revolving credit facility | | — |
| | (19,500 | ) | | 19,500 |
| | Borrowings under long-term debt facilities | | 25,000 |
| | 175,000 |
| | 780,000 |
| | Long-term debt repayments | | (49,553 | ) | | (161,738 | ) | | (125,420 | ) | | Payment of debt issuance costs | | (95 | ) | | (775 | ) | | (3,298 | ) | | Purchases of treasury shares | | — |
| | (11,158 | ) | | (22,778 | ) | | Dividends paid | | (48,873 | ) | | (47,266 | ) | | (45,858 | ) | | Acquisition holdback payments | | (2,440 | ) | | (2,610 | ) | | (319 | ) | | Exercise of stock appreciation rights and options | | 330 |
| | — |
| | 102 |
| | Taxes paid for shares withheld | | (2,607 | ) | | (3,492 | ) | | (1,645 | ) | | Cash (used in) provided by Financing Activities | | (78,238 | ) | | (71,539 | ) | | 600,284 |
| | Effect of exchange rate changes on cash | | (2,740 | ) | | 109 |
| | (589 | ) | | Increase (decrease) in cash and cash equivalents | | 160,332 |
| | 54,069 |
| | (50,907 | ) | | Cash and cash equivalents at beginning of year | | 108,219 |
| | 54,150 |
| | 105,057 |
| | Cash and Cash Equivalents at End of Year | | $ | 268,551 |
| | $ | 108,219 |
| | $ | 54,150 |
| | | | | | | | | | Supplemental Cash Flow Information | | | | | | | | Cash paid during the year for: | | | | | | | | Income taxes | | 41,162 |
| | 54,294 |
| | 41,724 |
| | Interest | | 36,648 |
| | 40,142 |
| | 25,560 |
|
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended June 30, 2018, 2017 and 2016 | | Shares of Common Stock Outstanding |
| | Common Stock |
| | Additional Paid-In Capital |
| |
Retained Earnings |
| | Treasury Shares- at Cost |
| | Accumulated Other Comprehensive Income (Loss) |
| | Total Shareholders' Equity |
| | Balance at July 1, 2015 | | 39,905 |
| | $ | 10,000 |
| | $ | 160,072 |
| | $ | 969,548 |
| | $ | (338,121 | ) | | $ | (60,171 | ) | | $ | 741,328 |
| | Net income | | | | | | | | 29,577 |
| | | | | | 29,577 |
| | Other comprehensive income (loss) | | | | | | | | | | | | (25,375 | ) | | (25,375 | ) | | Cash dividends — $1.10 per share | | | | | | | | (54,266 | ) | | | | | | (54,266 | ) | | Purchases of common stock for treasury | | (951 | ) | | | | | | | | (37,465 | ) | | | | (37,465 | ) | | Treasury shares issued for: | | | | | | | | | | | | | |
| | Exercise of stock appreciation rights and options | | 64 |
| | | | (391 | ) | | | | 1,000 |
| | | | 609 |
| | Performance share awards | | 8 |
| |
| | (308 | ) | |
| | 116 |
| |
| | (192 | ) | | Restricted stock units | | 15 |
| | | | (530 | ) | | | | 232 |
| | | | (298 | ) | | Compensation expense — stock appreciation rights and options | |
| | | | 1,543 |
| | | |
| | | | 1,543 |
| | Other share-based compensation expense | | | | | | 2,524 |
| | | | | | | | 2,524 |
| | Other | | 16 |
| | | | (381 | ) | | (38 | ) | | 350 |
| | | | (69 | ) | | Balance at June 30, 2016 | | 39,057 |
| | 10,000 |
| | 162,529 |
| | 944,821 |
| | (373,888 | ) | | (85,546 | ) | | 657,916 |
| | Net income | | | | | | | | 133,910 |
| | | | | | 133,910 |
| | Other comprehensive income (loss) | | | | | | | | | | | | 3,844 |
| | 3,844 |
| | Cash dividends — $1.14 per share | | | | | | | | (45,005 | ) | | | | | | (45,005 | ) | | Purchases of common stock for treasury | | (163 | ) | | | | | | | | (8,242 | ) | | | | (8,242 | ) | | Treasury shares issued for: | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 111 |
| | | | (2,218 | ) | | | | 105 |
| | | | (2,113 | ) | | Performance share awards | | 10 |
| | | | (360 | ) | | | | 126 |
| | | | (234 | ) | | Restricted stock units | | 15 |
| | | | (624 | ) | | | | 227 |
| | | | (397 | ) | | Compensation expense — stock appreciation rights and options | | | | | | 1,891 |
| | | | | | | | 1,891 |
| | Other share-based compensation expense | | | | | | 3,629 |
| | | | | | | | 3,629 |
| | Other | | 11 |
| | | | (192 | ) | | 25 |
| | 224 |
| | | | 57 |
| | Balance at June 30, 2017 | | 39,041 |
| | 10,000 |
| | 164,655 |
| | 1,033,751 |
| | (381,448 | ) | | (81,702 | ) | | 745,256 |
| | Net income | | | | | | | | 141,625 |
| | | | | | 141,625 |
| | Other comprehensive income (loss) | | | | | | | | | | | | (8,050 | ) | | (8,050 | ) | | Reclassifications of certain income tax effects from accumulated other comprehensive loss | | | | | | | | 471 |
| | | | (471 | ) | | — |
| | Cash dividends — $1.18 per share | |
| | | | | | (46,162 | ) | | | | | | (46,162 | ) | | Purchases of common stock for treasury | | (393 | ) | | | |
| | | | (22,778 | ) | | | | (22,778 | ) | | Treasury shares issued for: | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 19 |
| | | | (482 | ) | | | | 84 |
| | | | (398 | ) | | Performance share awards | | 5 |
| | | | (273 | ) | | | | (24 | ) | | | | (297 | ) | | Restricted stock units | | 15 |
| | | | (740 | ) | | | | (56 | ) | | | | (796 | ) | | Compensation expense — stock appreciation rights and options | | | | | | 1,961 |
| | | | | | | | 1,961 |
| | Other share-based compensation expense | | | | | | 4,666 |
| | | | | | | | 4,666 |
| | Other | | 16 |
| | | | (404 | ) | | (7 | ) | | 347 |
| | | | (64 | ) | | Balance at June 30, 2018 | | 38,703 |
| | $ | 10,000 |
| | $ | 169,383 |
| | $ | 1,129,678 |
| | $ | (403,875 | ) | | $ | (90,223 | ) | | $ | 814,963 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended June 30, 2020, 2019 and 2018 | | Shares of Common Stock Outstanding |
| | Common Stock |
| | Additional Paid-In Capital |
| |
Retained Earnings |
| | Treasury Shares- at Cost |
| | Accumulated Other Comprehensive Loss |
| | Total Shareholders' Equity |
| | Balance at June 30, 2017 | | 39,041 |
| | $ | 10,000 |
| | $ | 164,655 |
| | $ | 1,033,751 |
| | $ | (381,448 | ) | | $ | (81,702 | ) | | $ | 745,256 |
| | Net income | | | | | | | | 141,625 |
| | | | | | 141,625 |
| | Other comprehensive income (loss) | | | | | | | | | | | | (8,050 | ) | | (8,050 | ) | | Reclassifications of certain income tax effects from accumulated other comprehensive loss | | | | | | | | 471 |
| | | | (471 | ) | | — |
| | Cash dividends — $1.18 per share | | | | | | | | (46,162 | ) | | | | | | (46,162 | ) | | Purchases of common stock for treasury | | (393 | ) | | | | | | | | (22,778 | ) | | | | (22,778 | ) | | Treasury shares issued for: | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 19 |
| | | | (482 | ) | | | | 84 |
| | | | (398 | ) | | Performance share awards | | 5 |
| | | | (273 | ) | | | | (24 | ) | | | | (297 | ) | | Restricted stock units | | 15 |
| | | | (740 | ) | | | | (56 | ) | | | | (796 | ) | | Compensation expense — stock appreciation rights and options | | | | | | 1,961 |
| | | | | | | | 1,961 |
| | Other share-based compensation expense | | | | | | 4,666 |
| | | | | | | | 4,666 |
| | Other | | 16 |
| | | | (404 | ) | | (7 | ) | | 347 |
| | | | (64 | ) | | Balance at June 30, 2018 | | 38,703 |
| | 10,000 |
| | 169,383 |
| | 1,129,678 |
| | (403,875 | ) | | (90,223 | ) | | 814,963 |
| | Net income | | | | | | | | 143,993 |
| | | | | | 143,993 |
| | Other comprehensive income (loss) | | | | | | | | | | | | (9,663 | ) | | (9,663 | ) | | Cumulative effect of adopting accounting standards | | | | | | | | 3,056 |
| | | | | | 3,056 |
| | Cash dividends — $1.22 per share | | | | | | | | (47,621 | ) | | | | | | (47,621 | ) | | Purchases of common stock for treasury | | (192 | ) | | | | | | | | (11,158 | ) | | | | (11,158 | ) | | Treasury shares issued for: | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 30 |
| | | | (1,069 | ) | | | | (59 | ) | | | | (1,128 | ) | | Performance share awards | | 18 |
| | | | (844 | ) | | | | (301 | ) | | | | (1,145 | ) | | Restricted stock units | | 23 |
| | | | (1,057 | ) | | | | (120 | ) | | | | (1,177 | ) | | Compensation expense — stock appreciation rights and options | | | | | | 2,437 |
| | | | | | | | 2,437 |
| | Other share-based compensation expense | | | | | | 4,474 |
| | | | | | | | 4,474 |
| | Other | | 15 |
| | | | (393 | ) | | 42 |
| | 354 |
| | | | 3 |
| | Balance at June 30, 2019 | | 38,597 |
| | 10,000 |
| | 172,931 |
| | 1,229,148 |
| | (415,159 | ) | | (99,886 | ) | | 897,034 |
| | Net income | | | | | | | | 24,042 |
| | | | | | 24,042 |
| | Other comprehensive income (loss) | | | | | | | | | | | | (29,544 | ) | | (29,544 | ) | | Cumulative effect of adopting accounting standards | | | | | | | | (3,275 | ) | | | | | | (3,275 | ) | | Cash dividends — $1.26 per share | | | | | | | | (49,305 | ) | | | | | | (49,305 | ) | | Treasury shares issued for: | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 43 |
| | | | (730 | ) | | | | 71 |
| | | | (659 | ) | | Performance share awards | | 36 |
| | | | (1,540 | ) | | | | 362 |
| | | | (1,178 | ) | | Restricted stock units | | 17 |
| | | | (671 | ) | | | | 213 |
| | | | (458 | ) | | Compensation expense — stock appreciation rights and options | | | | | | 2,954 |
| | | | | | | | 2,954 |
| | Other share-based compensation expense | | | | | | 4,000 |
| | | | | | | | 4,000 |
| | Other | | 17 |
| | | | (452 | ) | | (40 | ) | | 423 |
| | | | (69 | ) | | Balance at June 30, 2020 | | 38,710 |
| | $ | 10,000 |
| | $ | 176,492 |
| | $ | 1,200,570 |
| | $ | (414,090 | ) | | $ | (129,430 | ) | | $ | 843,542 |
|
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES Business Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is a leading value-added distributor and technical solutions provider of bearings, power transmission products, engineeredindustrial motion, fluid power, components and systems, specialty flow control, solutions,automation technologies, and other industrial supplies, serving Maintenancerelated maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve MRO (Maintenance, Repair & Operations (MRO)Operations) and OriginalOEM (Original Equipment Manufacturer (OEM) customersManufacturer) end users in virtually every industry. In addition, Applied provides engineering, design and systems integration forall industrial fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, fluid power, and flow control shop services. Applied also offers storeroom services and inventory management solutionsmarkets through our multi-channel capabilities that provide added value to its customers.choice, convenience, and expertise. Although the Company does not generally manufacture the products it sells, it does assemble and repair certain products and systems. Consolidation The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Foreign Currency The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive (loss) incomeloss in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other (income) expense,income, net. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. Marketable Securities The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other (income) expense,income, net in the statements of consolidated income. Concentration of Credit Risk The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and Singapore. As such, the Company does not believe that a significant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While the Company monitors the creditworthiness of these institutions, a crisis in the financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand.
Accounts Receivable
Accounts receivable are stated at their estimated net realizable value and consist of amounts billed or billable and currently due from customers. The Company maintains an allowance for doubtful accounts, which reflects management’s best estimate of probable losses based on an analysis of customer accounts, known troubled accounts, historical experience with write-offs, and other currently available evidence. Allowances for Doubtful Accounts The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be
greater credit risks, trends within the entire customer pool, and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. The allowance for doubtful accounts was $13,661 and $10,498 at June 30, 2020 and June 30, 2019, respectively. Inventories Inventories are valued at the average cost, method, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S. inventories in fiscal 1974. At June 30, 2018,2020, approximately 16.8%17.3% of the Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. The Company evaluates the recoverability of its slow moving and inactive inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence, and, in certain instances, can be eligible for return under supplier return programs. Supplier Purchasing Programs The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s fiscal year end or the supplier’s year end; however, program length and ending dates can vary. Incentives are received in the form of cash or credits against purchases upon attainment of specified purchase volumes and are received either monthly, quarterly or annually. The incentives are generally a specified percentage of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases expected during the life of the program. Supplier programs are analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon program completion, differences between estimates and actual incentives subsequently received have not been material. Benefits under these supplier purchasing programs are recognized under the Company’s inventory accounting methods as a reduction of cost of sales when the inventories representing these purchases are recorded as cost of sales. Accrued incentives expected to be settled as a credit against future purchases are reported on the consolidated balance sheets as an offset to amounts due to the related supplier. Property and Related Depreciation and Amortization Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and is included in selling, distribution and administrative expensesexpense in the accompanying statements of consolidated income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease if a shorter period, and equipment is depreciated over three to ten years. The Company capitalizes internal use software development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use. Amortization of software begins when it is ready for its intended use, and is computed on a straight-line basis over the estimated useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the asset group's recorded value cannot be recovered from undiscounted future cash flows. Impairment losses, if any, would be measured based upon the difference between the carrying amount of an asset group and theits fair value of the assets.value.
Goodwill and Intangible Assets Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in conditions indicate an evaluation should be completed. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. The Company utilizes discounted cash flow modelsthe income and market multiples for comparable businessesapproaches to determine the fair value of reporting units. Evaluating impairment requires significant judgment by management, including estimated future operating results, estimated future cash flows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While the Company uses available information to prepare the estimates and evaluations, actual results could differ significantly. The Company recognizes acquired identifiable intangible assets such as customer relationships, trade names, vendor relationships, and non-competition agreements apart from goodwill. Customer relationship identifiable intangibles are amortized using the sum-of-the-years-digits method or the expected cash flow method over estimated useful lives consistent with assumptions used in the determination of their value. Amortization of all other finite-lived identifiable intangible assets is computed using the straight-line method over the estimated period of benefit. Amortization of identifiable intangible assets is included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model. Identifiable intangible assets with indefinite lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed. The Company does not currently have any indefinite-lived identifiable intangible assets. Self-Insurance Liabilities The Company maintains business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. The Company accrues estimated losses including those incurred but not reported using actuarial calculations, models and assumptions based on historical loss experience. The Company also maintains a self-insured health benefits plan which provides medical benefits to U.S. based employees electing coverage under the plan. The Company estimates its reserve for all unpaid medical claims, including those incurred but not reported, based on historical experience, adjusted as necessary based upon management’s reasoned judgment. Revenue Recognition SalesThe Company primarily sells purchased products distributed through its network of service centers and recognizes revenue at a point in time when control of the product transfers to the customer, typically upon shipment from an Applied facility or directly from a supplier. For products that ship directly from suppliers to customers, Applied acts as the principal in the transaction and recognizes revenue on a gross basis. Revenue recognized over time is not significant. Revenue is measured as the amount of consideration expected to be received in exchange for the products and services provided, net of allowances for product returns, variable consideration, and any taxes collected from customers that will be remitted to governmental authorities. Shipping and handling costs are recognized in net sales when there is evidence of an arrangement, the sales price is fixed, collectibility is reasonably assured and the product’s title and risk of loss is transferred to the customer. Typically, these conditionsthey are met when the product is shippedbilled to the customer. The Company chargeshas elected to account for shipping and handling feesactivities as fulfillment costs. There are no significant costs associated with obtaining customer contracts.
Payment terms with customers vary by the type and location of the customer and the products or services offered. The Company does not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when products are shippedthe Company transfers a promised good or deliveredservice to a customer and includes such amountswhen the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant. The Company’s products are generally sold with a right of return and may include variable consideration in net sales. The Company reports its sales netthe form of actual salesincentives, discounts, credits or rebates. Product returns and the amount of reserves established for anticipated sales returnsare estimated based on historical return rates. Sales tax collected from customers is excluded from net salesThe returns reserve was $9,883 and $7,265 at June 30, 2020 and June 30, 2019, respectively. The Company estimates and recognizes variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to a customer. The Company records variable consideration as an adjustment to the transaction price in the accompanying statementsperiod it
is incurred. The realization of consolidated income.variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant. Shipping and Handling Costs The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and administrative expense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expensesexpense were approximately $19,320, $20,060$19,620, $24,090 and $21,480$19,320 for the fiscal years ended June 30, 2018, 20172020, 2019 and 2016,2018, respectively. Income Taxes Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. Uncertain tax positions meeting a more-likely-than-not recognition threshold are recognized in accordance with Accounting Standards Codification ("ASC")(ASC) Topic 740 - Income Taxes.Taxes. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes.
Share-Based Compensation Share-based compensation represents the cost related to share-based awards granted to employees under the 2019 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, or the 2007 Long-Term Performance Plan. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service period. Non-qualified stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and have ten-year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on the closing market price of Company common stock on the grant date. Treasury Shares Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital. Recently Adopted Accounting GuidanceDerivatives
ChangeThe Company records all derivatives on the balance sheet at fair value. The accounting for changes in Accounting Principle - Net Periodicthe fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and Post-retirementapply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Retirement Savings Plan Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company’s expense for matching of employees’ 401(k) contributions was $5,959, $7,711 and $6,551 during 2020, 2019 and 2018, respectively.
Deferred Compensation Plans The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock. Post-employment Benefit CostsPlans In March 2017,The Company provides the FASB issued itsfollowing post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded:
Supplemental Executive Retirement Benefits Plan The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final standard on improvingaverage earnings) and entry into the presentation ofSupplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011. The Company recorded net periodic pensionbenefit costs associated with the SERP of $317, $414, and postretirement benefit costs. This standard, issued as ASU 2017-07, requires that an employer report$679 in fiscal 2020, 2019, and 2018, respectively. The Company expects to make payments of approximately $800 under the service cost component forSERP in each of fiscal 2021, 2022 and 2023. Key Executive Restoration Plan In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $189, $400, and $359 of expense associated with this plan in fiscal 2020, 2019, and 2018, respectively. Qualified Defined Benefit Retirement Plan The Company has a qualified defined benefit plans and postretirement plansretirement plan that provides benefits to certain hourly employees at retirement. These employees did not participate in the same line itemRetirement Savings Plan. The benefits are based on length of service and date of retirement. The plan accruals were frozen as of April 16, 2018, and employees are permitted to participate in the income statement as other compensationRetirement Savings Plan, following that date. The Company recorded net periodic (benefits) costs arising from services renderedassociated with this plan of $(116), $(34), and $149 in fiscal 2020, 2019, and 2018, respectively Retiree Health Care Benefits The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees duringat no cost to the period.individual. The Company recorded net periodic benefits associated with these plans of $257, $418, and $452 in fiscal 2020, 2019, and 2018, respectively. The Company has determined that the related disclosures under ASC Topic 715 - Compensation, Retirement Benefits, for these post-employment benefit plans are not material to the consolidated financial statements. Leases The Company leases facilities for certain service centers, warehouses, distribution centers and office space. The Company also leases office equipment and vehicles. All leases are classified as operating. The Company’s leases expire at various dates through 2031, with terms ranging from 1 year to 15 years. Many of the Company’s real estate leases contain renewal provisions to extend lease terms up to 5 years. The exercise of renewal options is solely at the Company’s discretion. The Company’s lease agreements do not contain material variable lease payments, residual value guarantees or restrictive covenants. The Company does not recognize right-of-use assets or lease liabilities for short-term leases with initial terms of 12 months or less. Leased vehicles comprise the majority of the Company’s short-term leases. All other leases are recorded on the balance sheet with right-of-use assets representing the right to use the underlying asset for the lease term and lease liabilities representing lease payment obligations. The Company’s leases do not provide implicit rates; therefore the Company uses its incremental borrowing rate as the discount rate for measuring lease liabilities. Non-lease components of net benefit cost are required to be presented in the income statementaccounted for separately from lease components. The Company’s operating lease expense is recognized on a straight-line basis over the service cost componentlease term and outside a subtotal of income from operations. This update is effective for annual financial statement periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. The Company early adopted ASU 2017-07 in the first quarter of fiscal 2018. The impact of the adoption of this guidance resulted in the reclassification of the other components of net benefit cost from selling, distribution, and administrative expense to other (income) expense, net in the statements of consolidated income, resulting in an increase to operating income. There is no impact to income before income taxes, net income, or net income per share. Therefore, $143, $155, and $113 of service costs are includedrecorded in selling, distribution and administrative expense and $245, $796, and $981 of net other periodic post-employment costs are included in other (income) expense, net inon the statements of consolidated income for the years ended June 30, 2018, and 2017, and 2016, respectively. The Company used a practical expedient where the amounts disclosed in our Benefit Plans footnote for the prior year comparative periods were the basis for the estimation for applying the retrospective presentation requirements.income. Accumulated Other Comprehensive Income
In January 2018, the FASB issued its final standard on reporting comprehensive income. The standard, issued as ASU 2018-02, allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company early adopted ASU 2018-02 in the fourth quarter of fiscal 2018 using the at the beginning of the period of adoption method. The impact of adoption was a reclassification of $471 from accumulated other comprehensive loss to retained earnings.
Change in Accounting Principle - Simplifying the test for Goodwill Impairment
In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment. This standard, issued as ASU 2017-04, eliminates step 2 from the goodwill impairment test and instead requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted ASU 2017-04 in the fourth quarter of fiscal 2018 and will apply this guidance prospectively to its annual and interim goodwill impairment tests.
Recently IssuedAdopted Accounting Guidance Reference Rate Reform In May 2014,March 2020, the FASB issued its final standard on the recognitionfacilitation of revenue from contracts with customers. Thethe effects of reference rate reform on financial reporting. This standard, issued as ASU 2014-09, outlines2020-04, provides optional guidance for a single comprehensive model for entitieslimited period of time to useease the potential burden in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including
industry specific guidance. The core principle of this model is that "an entity recognizes revenue to depict(or recognizing the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services." In August 2015, the FASB issued ASU 2015-14 to delay the effective date of ASU 2014-09 by one year. In accordance with the delay, theeffects of) reference rate reform on financial reporting. This update is effective for financial statement periods beginning afteras of March 12, 2020 through December 15, 2017 and may be adopted either retrospectively or on a modified retrospective basis. Early adoption is permitted, but not before financial statement periods beginning after December 15, 2016. In March 2016 the FASB issued ASU 2016-08 and ASU 2016-10, and in May 2016 the FASB issued ASU 2016-12, which clarify the guidance in ASU 2014-09 but do not change the core principle of the revenue recognition model.31, 2022. The Company has evaluated the provisions ofadopted the new standard and isguidance as it became effective in the process of assessing its impact on financial statements, information systems, business processes, and financial statement disclosures. We have substantially completed an analysis of revenue streams at each of the business units and are evaluating the impact the new standard will have on revenue recognition. The Company primarily sells purchased products and recognizes revenue at point of sale or delivery and the majority of its revenue will continue to be recognized at a point in time under the new standard. A small percentage of revenue will be recognized using an over time revenue recognition model. The new standard will be adopted in the firstthird quarter of fiscal 2019 using the modified retrospective method2020. The adoption of adoption, and the Company will recognize the cumulative effect of initially applying the new standard as an adjustment to opening retained earnings as of July 1, 2018. The standard isthis guidance did not expected to have a material impact on the Company's consolidated financial statements except for expanded disclosures on revenue in order to comply with the new guidance. The Company will continue to evaluate the impacts of the adoption of the standard and these assessments are subject to change.or related disclosures.
Leases In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, and codified into ASC Topic 842, Leases, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. The core principle of this update is that a "lessee should recognize the assets and liabilities that arise from leases." This update is effective for annual financial statement periods beginning after December 15, 2018, with earlier application permitted. In July 2018, the FASB issued ASU 2018-10 which clarifies the guidance in ASU 2016-02 and ASU 2018-11 which provides entities with an additional transition method option for adopting the new standard. In December 2018 and January 2019, the FASB issued ASU 2018-20 and ASU 2019-01, respectively, which further clarify the guidance. The Company has established a cross-functional teamadopted the new guidance effective July 1, 2019 using the optional transition method, which required application of the new guidance to evaluateonly those leases that existed at the date of adoption. The Company elected the “package of practical expedients,” which permitted the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and has begun implementinginitial direct costs. Adoption of the new standard resulted in the recognition of right-of-use (ROU) assets and lease administration software.liabilities of $83,533 and $89,778, respectively, on July 1, 2019. The Company is still determiningdifference between the financial impact that thisROU assets and lease liabilities related primarily to the impairment of certain leases in Canada and the United States. In addition, the adoption resulted in an adjustment to opening retained earnings of $3,275, net of tax, on July 1, 2019 primarily due to the impairment of the leases. The standard update will have on its consolidated financial statements, but anticipates it willdid not have a material impact on its assets and liabilities due to the additionCompany’s statements of right-of-use assets and lease liabilities to the consolidated balance sheet. The Company will continue to evaluate the impacts of the adoption of the standard and these assessments are subject to change.income or cash flows. In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.Cash Flows
In August 2016, the FASB issued its final standard on the classification of certain cash receipts and cash payments within the statement of cash flows. This standard, issued as ASU 2016-15, makes a number of changes meant to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2018, with early adoption permitted. The Company has not yet determinedadopted the impactnew guidance in the first quarter of fiscal 2020. The adoption of this pronouncementguidance did not have a material impact on itsthe Company's financial statements andor related disclosures. Recently Issued Accounting Guidance In OctoberJune 2016, the FASB issued its final standard on the income tax consequencesmeasurement of intra-entity transfers of assets other than inventory.credit losses on financial instruments. This standard, issued as ASU 2016-16,2016-13, requires that an entity recognize the income tax consequencesmeasure impairment of an intra-entity transfer of an asset othercertain financial instruments, including trade receivables, based on expected losses rather than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory.incurred losses. This update is effective for annual and interim financial statement periods beginning after December 15, 2017,2019, with early adoption permitted.permitted for financial statement periods beginning after December 15, 2018. In November 2018, April 2019, May 2019, November 2019, and February 2020, the FASB issued ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11 and ASU 2020-02, respectively, which clarify the guidance in ASU 2016-13. The Company will adopt this standard when it becomes effective inhas not yet determined the first quarterimpact of fiscal 2019, and it is not expected to have a material impactthese pronouncements on the Company’sits financial statements and related disclosures. In May 2017,December 2019, the FASB issued its final standard on scope of modification accounting.simplifying the accounting for income taxes. This standard, issued as 2017-09, providesASU 2019-12, makes a number of changes meant to add or clarify guidance about which change to the terms or conditions of a share-based payment award require an entity to apply modification accounting.on accounting for income taxes. This update is effective for annual and interim financial statement periods beginning after December 15, 2017,2021, with early adoption permitted.permitted in any interim period for which financial statements have not yet been filed. The Company has not yet determined the impact of this pronouncementthese pronouncements on its financial statements and related disclosures.
NOTE 2: REVENUE RECOGNITION Disaggregation of Revenues The following tables present the Company's net sales by reportable segment and by geographic areas based on the location of the facility shipping the product for the years ended June 30, 2020, 2019 and 2018. Other countries consist of Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | | Year Ended June 30, 2020 | | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| | Geographic Areas: | | | | | United States | $ | 1,833,275 |
| $ | 986,125 |
| $ | 2,819,400 |
| | Canada | 248,610 |
| — |
| 248,610 |
| | Other countries | 160,064 |
| 17,578 |
| 177,642 |
| | Total | $ | 2,241,949 |
| $ | 1,003,703 |
| $ | 3,245,652 |
|
| | | | | | | | | | | | | Year Ended June 30, 2019 | | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| | Geographic Areas: | | | | | United States | $ | 2,009,479 |
| $ | 1,007,280 |
| $ | 3,016,759 |
| | Canada | 271,305 |
| — |
| 271,305 |
| | Other countries | 172,121 |
| 12,554 |
| 184,675 |
| | Total | $ | 2,452,905 |
| $ | 1,019,834 |
| $ | 3,472,739 |
|
| | | | | | | | | | | | | Year Ended June 30, 2018 | | | Service Center Based Distribution |
| Fluid Power & Flow Control |
| Total |
| | Geographic Areas: | | | | | United States | $ | 1,903,388 |
| $ | 711,653 |
| $ | 2,615,041 |
| | Canada | 273,622 |
| — |
| 273,622 |
| | Other countries | 169,408 |
| 15,203 |
| 184,611 |
| | Total | $ | 2,346,418 |
| $ | 726,856 |
| $ | 3,073,274 |
|
The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the years ended June 30, 2020 and 2019: | | | | | | | | | | | | Year Ended June 30, 2020 | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | General Industry | 35.0 | % | | 41.2 | % | | 36.8 | % | | Industrial Machinery | 9.7 | % | | 24.4 | % | | 14.3 | % | | Metals | 11.1 | % | | 7.2 | % | | 9.9 | % | | Food | 12.2 | % | | 3.1 | % | | 9.4 | % | | Forest Products | 9.3 | % | | 3.7 | % | | 7.6 | % | | Chem/Petrochem | 3.3 | % | | 13.4 | % | | 6.4 | % | | Oil & Gas | 7.5 | % | | 1.6 | % | | 5.7 | % | | Cement & Aggregate | 7.3 | % | | 1.0 | % | | 5.4 | % | | Transportation | 4.6 | % | | 4.4 | % | | 4.5 | % | | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | Year Ended June 30, 2019 | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | General Industry | 33.7 | % | | 43.0 | % | | 36.3 | % | | Industrial Machinery | 10.4 | % | | 21.8 | % | | 13.8 | % | | Metals | 12.6 | % | | 9.4 | % | | 11.6 | % | | Food | 10.6 | % | | 2.7 | % | | 8.3 | % | | Forest Products | 8.0 | % | | 3.1 | % | | 6.6 | % | | Chem/Petrochem | 3.1 | % | | 13.8 | % | | 6.3 | % | | Oil & Gas | 10.1 | % | | 2.1 | % | | 7.8 | % | | Cement & Aggregate | 6.7 | % | | 1.0 | % | | 5.0 | % | | Transportation | 4.8 | % | | 3.1 | % | | 4.3 | % | | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
The following tables present the Company’s percentage of revenue by reportable segment and product line for the years ended June 30, 2020 and 2019: | | | | | | | | | | | | Year Ended June 30, 2020 | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Power Transmission | 35.4 | % | | 9.5 | % | | 27.4 | % | | Fluid Power | 13.4 | % | | 39.0 | % | | 21.3 | % | | General Maintenance; Hose Products | 24.6 | % | | 11.7 | % | | 20.6 | % | | Bearings, Linear & Seals | 26.6 | % | | 0.3 | % | | 18.5 | % | | Specialty Flow Control | — | % | | 39.5 | % | | 12.2 | % | | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | Year Ended June 30, 2019 | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Power Transmission | 33.9 | % | | 1.6 | % | | 24.4 | % | | Fluid Power | 13.5 | % | | 39.4 | % | | 21.1 | % | | General Maintenance; Hose Products | 25.1 | % | | 5.3 | % | | 19.3 | % | | Bearings, Linear & Seals | 27.5 | % | | 0.3 | % | | 19.5 | % | | Specialty Flow Control | — | % | | 53.4 | % | | 15.7 | % | | Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
Contract Assets The Company’s contract assets consist of un-billed amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer. Activity related to contract assets, which are included in other current assets on the consolidated balance sheet, is as follows: | | | | | | | | | | | | | | | June 30, 2020 |
| June 30, 2019 |
| $ Change |
| % Change |
| | Contract assets | $ | 8,435 |
| $ | 8,920 |
| $ | (485 | ) | (5.4 | )% |
The difference between the opening and closing balances of the Company's contract assets primarily results from the timing difference between the Company's performance and when the customer is billed.
NOTE 2:3: BUSINESS COMBINATIONS The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition. Fiscal 2020 Acquisitions On August 21, 2019, the Company acquired 100% of the outstanding shares of Olympus Controls (Olympus), a Portland, Oregon automation solutions provider - including design, assembly, integration, and distribution - of motion control, machine vision, and robotic technologies. Olympus is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $36,642, net tangible assets acquired were $9,540, and intangible assets including goodwill was $27,102 based upon estimated fair values at the acquisition date. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2019 Acquisitions On March 4, 2019, the Company acquired substantially all of the net assets of MilRoc Distribution (MilRoc) and Woodward Steel (Woodward). MilRoc is an Oklahoma based distributor of oilfield specific products, namely pumps and valves, as well as equipment repair services and industrial parts to the oil & gas industry. Woodward is an Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc and Woodward are both included in the Service Center Based Distribution segment. The purchase price for the acquisition was $35,000, net tangible assets acquired were $17,788, and intangible assets including goodwill was $17,212 based upon estimated fair values at the acquisition date. The purchase price includes acquisition holdback payments of $4,375, of which $1,666 was paid during the year ended June 30, 2020. The remaining balance of $2,709 is included in other current liabilities and other liabilities on the consolidated balance sheet as of June 30, 2020, and which will be paid on the second and third anniversaries of the acquisition date with interest at a fixed rate of 2.0% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. On November 2, 2018, the Company acquired substantially all of the net assets of Fluid Power Sales, Inc. (FPS), a Baldwinsville, New York based manufacturer and distributor of fluid power components, specializing in the engineering and fabrication of manifolds and power units. FPS is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $8,066, net tangible assets acquired were $4,151, and goodwill was $3,915 based upon estimated fair values at the acquisition date. The purchase price includes acquisition holdback payments of $1,200, of which $600 was paid during the year-end June 30, 2020. The remaining balance of $600 is included in other current liabilities on the consolidated balance sheet as of June 30, 2020, and will be paid on the second anniversary of the acquisition date with interest at a fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. FCX Acquisition On January 31, 2018, the Company completed the acquisition of 100% of the outstanding shares of FCX Performance, Inc. ("FCX")(FCX), a Columbus, Ohio based distributor of specialty process flow control products and services. The total consideration transferred for the acquisition was $781,781, which was financed by cash-on-hand and a new credit facility comprised of a $780,000 Term Loan A and a $250,000 revolver, effective with the transaction closing. See note 56 Debt. As a distributor of highly engineered valves, instruments, pumps and lifecycle services to MRO and OEM customers across diverse industrial and process end markets, this business will beis included in the Fluid Power & Flow Control Segment.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of FCX based on their preliminary estimated fair values at the acquisition date, which are subject to adjustment. date. | | | | | | | FCX Acquisition |
| | | 2018 |
| | Cash | $ | 11,141 |
| | Accounts receivable | 80,836 |
| | Inventories | 44,669 |
| | Other current assets | 1,753 |
| | Property | 8,282 |
| | Identifiable intangible assets | 305,420 |
| | Goodwill | 440,012 |
| | Other assets | 775 |
| | Total assets acquired | $ | 892,888 |
| | Accounts payable and accrued liabilities | 54,035 |
| | Other liabilities | 2,677 |
| | Deferred tax liabilities | 54,395 |
| | Net assets acquired | $ | 781,781 |
| | | | | Purchase price | $ | 784,281 |
| | Reconciliation of fair value transferred: | | | Working Capital Adjustments | (2,500 | ) | | Total Consideration | $ | 781,781 |
|
The purchase accounting will be finalized within one year fromchange in the carrying amount of goodwill for FCX since the acquisition date.is as follows: | | | | | | | FCX Acquisition |
| | | 2018 |
| | Cash | $ | 11,141 |
| | Accounts receivable | 80,836 |
| | Inventories | 47,325 |
| | Other current assets | 1,657 |
| | Property | 8,282 |
| | Identifiable intangible assets | 305,420 |
| | Goodwill | 439,164 |
| | Other assets | 775 |
| | Total assets acquired | $ | 894,600 |
| | Accounts payable and accrued liabilities | 54,518 |
| | Other liabilities | 2,677 |
| | Deferred tax liabilities | 55,624 |
| | Net assets acquired | $ | 781,781 |
| | | | | Purchase price | $ | 784,281 |
| | Reconciliation of fair value transferred: | | | Working Capital Adjustments | (2,500 | ) | | Total Consideration | $ | 781,781 |
|
| | | | | | Balance at 1/31/2018 | $ | 440,012 |
| | Impairment | 131,000 |
| | Balance at 6/30/2020 | $ | 309,012 |
|
Goodwill acquired of $160,814 is expected to be$161,452 was deductible for income tax purposes.purposes at the time of the acquisition. Subsequent to the goodwill impairment recorded during the year ended June 30, 2020, $112,922 remains deductible for income tax purposes as of June 30, 2020. Net sales, operating income and net income from the FCX acquisition included in the Company’s results since January 31, 2018, the date of the acquisition, are as follows: | | | | | | | | | | | | | 2020 (1) |
| 2019 |
| January 31, 2018 to June 30, 2018 |
| | Net sales | $ | 490,743 |
| $ | 549,833 |
| $ | 249,752 |
| | Operating income | (97,300 | ) | 38,186 |
| 16,845 |
| | Net income | (91,739 | ) | 28,075 |
| 8,758 |
|
| | | | | | | January 31, 2018 to June 30, 2018 |
| | Net sales | $ | 249,752 |
| | Operating income | 16,845 |
| | Net income | 8,758 |
|
| | | (1) | There was a $131,000 goodwill impairment charge during the year ended June 30, 2020. See note 5, Goodwill and Intangibles, for further information. |
The companyCompany incurred $2,849 in third-party costs during 2018 pertaining to the acquisition of FCX, which are included in selling, distribution and administration expense in the statements of consolidated income for fiscal 2018.
The following unaudited pro forma consolidated results of operations have been prepared as if the FCX acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2017: | | | | | | | | | Pro forma, year ended June 30: | 2018 |
| 2017 |
| | Net sales | $ | 3,330,430 |
| $ | 2,943,583 |
| | Operating income | 234,603 |
| 196,194 |
| | Net income | 158,181 |
| 126,270 |
| | Diluted net income per share | $ | 4.03 |
| $ | 3.20 |
|
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect additional amortization that would have been recorded assuming the fair value adjustments to identified intangible assets had been applied as of July 1, 2016. In addition, pro forma adjustments have been made for the interest expense that would have been incurred as a result of the indebtedness used to finance the acquisitions. The pro forma net income amounts also incorporate an adjustment to the recorded income tax expense for the income tax effect of the pro forma adjustments described above. These pro forma results of operations do not include any anticipated synergies or other effects of the planned integration of FCX; accordingly, such pro forma adjustments do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred as of the date indicated or that may result in the future.
Other Fiscal 2018 Acquisition On July 3, 2017, the Company acquired 100% of the outstanding stock of Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a distributor of accessories and components for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment. The purchase price for the acquisition was $5,920, net tangible assets acquired were $3,395, and goodwill was $2,525
$2,525 based upon estimated fair values at the acquisition date. The purchase price includes $906 of acquisition holdback payments.payments, of which $201 and $219 was paid during fiscal year 2020 and 2019, respectively. Due to changes in foreign currency exchange rates, the remaining balance of $842$356 is included in other current liabilities and other liabilities on the consolidated balance sheetssheet as of June 30, 2018,2020, which will be paid on the first three anniversariesthird anniversary of the acquisition date with interest at a fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2017 Acquisition
On March 3, 2017, the Company acquired substantially all of the net assets of Sentinel Fluid Controls ("Sentinel"), a distributor of hydraulic and lubrication components, systems and solutions operating from four locations. Sentinel is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $3,755, net tangible assets acquired were $3,130, and goodwill was $625 based upon estimated fair values at the acquisition date. The purchase price included $982 of acquisition holdback payments, of which $328 and $175 were paid during fiscal years 2018 and 2017, respectively. The remaining balance of $479 is included in other current liabilities and other liabilities on the consolidated balance sheets, which will be paid plus interest at various times in the future. The Company funded the amount paid for the acquisition at closing using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
Fiscal 2016 Acquisitions
On June 14, 2016, the Company acquired 100% of the outstanding stock of Seals Unlimited ("Seals"), a distributor of sealing, fastener, and hose products located in Burlington, Ontario. On January 4, 2016, the Company acquired substantially all of the net assets of HUB Industrial Supply ("HUB"), a distributor of consumable industrial products operating from three locations - Lake City, FL, Indianapolis, IN, and Las Vegas, NV. On August 3, 2015, the Company acquired substantially all of the net assets of Atlantic Fasteners Co., Inc. ("Atlantic Fasteners"), a distributor of C-Class consumables including industrial fasteners and related industrial supplies located in Agawam, MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. On October 1, 2015, the Company acquired substantially all of the net assets of S.G. Morris Co. ("SGM"). SGM, headquartered in Cleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania and West Virginia and is included in the Fluid Power & Flow Control segment. The total combined consideration for these acquisitions was approximately $65,900, net tangible assets acquired were $22,700, and intangibles including goodwill were $43,200 based upon estimated fair values at the acquisition dates. The total combined consideration includes $3,300 of acquisition holdback payments, of which $1,250 was paid during fiscal year 2017. The remaining balance of $2,050 is included in other current liabilities on the consolidated balance sheets, which will be paid plus interest in October 2018. The Company funded the amounts paid for the acquisitions at closing using
available cash and borrowings under the revolving credit facility at variable interest rates. The acquisition prices and the results of operations for the acquired entities are not material in relation to the Company's consolidated financial statements.
Holdback Liabilities for Acquisitions Acquisition holdback payments of approximately $2,592, $283, $415$2,563, $1,448 and $75 will be made in fiscal 2019, 2020, 2021, 2022 and 2024, respectively. The related liabilities for these payments are recorded in the consolidated balance sheets in other current liabilities for the amounts due in fiscal year 20192021 and other liabilities for the amounts due in fiscal years 2020 through2022 and 2024. NOTE 3:4: INVENTORIES Inventories consist of the following: | | | | | | | | | | | June 30, | | 2020 |
| | 2019 |
| | U.S. inventories at average cost | | $ | 431,866 |
| | $ | 473,949 |
| | Foreign inventories at average cost | | 112,795 |
| | 125,260 |
| | | | 544,661 |
| | 599,209 |
| | Less: Excess of average cost over LIFO cost for U.S. inventories | | 155,511 |
| | 151,654 |
| | Inventories on consolidated balance sheets | | $ | 389,150 |
| | $ | 447,555 |
|
| | | | | | | | | | | June 30, | | 2018 |
| | 2017 |
| | U.S. inventories at average cost | | $ | 443,521 |
| | $ | 373,984 |
| | Foreign inventories at average cost | | 117,711 |
| | 108,734 |
| | | | 561,232 |
| | 482,718 |
| | Less: Excess of average cost over LIFO cost for U.S. inventories | | 139,163 |
| | 137,573 |
| | Inventories on consolidated balance sheets | | $ | 422,069 |
| | $ | 345,145 |
|
The overall impact of LIFO layer liquidations increased gross profit by $579, $9,414, and $2,100 in fiscal 2018, fiscal 2017, and fiscal 2016, respectively. In fiscal 2017, reductions in U.S. inventories, primarily in the bearings pool which included the scrapping of approximately $6,000 of product, resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years.
NOTE 4:5: GOODWILL AND INTANGIBLES The changes in the carrying amount of goodwill for both the Service Center Based Distribution segment and the Fluid Power & Flow Control segment for the years ended June 30, 20182020 and 20172019 are as follows: | | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Balance at July 1, 2018 | $ | 203,084 |
| | $ | 443,559 |
| | $ | 646,643 |
| | Goodwill acquired during the year | 9,943 |
| | 4,798 |
| | 14,741 |
| | Other, primarily currency translation | 607 |
| | — |
| | 607 |
| | Balance at June 30, 2019 | 213,634 |
| | 448,357 |
| | 661,991 |
| | Goodwill adjusted/acquired during the year | (3,393 | ) | | 14,667 |
| | 11,274 |
| | Impairment | — |
| | (131,000 | ) | | (131,000 | ) | | Other, primarily currency translation | (1,671 | ) | | — |
| | (1,671 | ) | | Balance at June 30, 2020 | $ | 208,570 |
| | $ | 332,024 |
| | $ | 540,594 |
|
| | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Balance at July 1, 2016 | $ | 198,486 |
| | $ | 4,214 |
| | $ | 202,700 |
| | Goodwill added during the year | 3,220 |
| | 625 |
| | 3,845 |
| | Other, primarily currency translation | 34 |
| | (444 | ) | | (410 | ) | | Balance at June 30, 2017 | 201,740 |
| | 4,395 |
| | 206,135 |
| | Goodwill added during the year | 2,525 |
| | 439,164 |
| | 441,689 |
| | Other, primarily currency translation | (1,181 | ) | | — |
| | (1,181 | ) | | Balance at June 30, 2018 | $ | 203,084 |
| | $ | 443,559 |
| | $ | 646,643 |
|
During the first quarter of fiscal 2017,2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the HUBMilRoc/Woodward acquisition. The fair values of the customer relationships, trade name, and trade namesother intangible assets were decreasedincreased by $2,636$1,524, $1,809, and $584,$60, respectively, with a corresponding total decrease to goodwill of $3,393. The changes to the preliminary estimated fair values resulted in an increase to amortization expense of $303 during the year ended June 30, 2020, which is recorded in selling, distribution, and administrative expense on the statements of consolidated income. During the second quarter of fiscal 2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the Olympus acquisition. The trade name and other intangible assets were increased by $4,260 and $980, respectively, with a corresponding decrease to the customer relationship intangible asset of $5,504 and an increase to goodwill of $3,220.$264. The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of $156$24 during fiscal 2017,the year ended June 30, 2020, which is recorded in selling, distribution, and administrative expense inon the statements of consolidated income. On July 1, 2016, the Company enacted a change in its management reporting structure which changed the composition of the Canada service center reporting unit. This triggering event required the Company to perform an interim goodwill impairment test for the Canada service center reporting unit. The Company performed step one of the goodwill impairment test for the Canada service center reporting unit as of July 1, 2016 and determined that the reporting unit had excess fair value of approximately $8,000 or 5% when compared to its carrying amount of approximately $163,000.
In conjunction with this management change, $2,628 of goodwill was reallocated from the Canada service center reporting unit to the U.S. service center reporting unit based on the relative fair value as of July 1, 2016.
The Company has six (6)eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2018.2020. The Company concluded that allseven (7) of the reporting units’ fair valuevalues exceeded their carrying amounts
by at least 30%10% as of January 1, 2018. 2020. Specifically, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The Canada
and Mexico reporting units have goodwill balances of $27,186 and $5,185, respectively, as of June 30, 2020. The carrying value of the final reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131,000. The non-cash impairment charge is the result of the overall decline in the industrial economy, specifically slower demand in FCX's end markets. This has led to reduced spending by customers and reduced revenue expectations. The remaining goodwill for the FCX reporting unit as of June 30, 2020 is $309,012. Because the carrying value of the FCX reporting unit approximated fair value of the reporting unit after the impairment was recorded, a future decline in the estimated cash flows could result in an additional impairment loss. A future decline in the estimated cash flows could result from a significant or extended decline in various end markets. The fair values of the reporting units in accordance with the goodwill impairment test were determined using the Incomeincome and Marketmarket approaches. The Incomeincome 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.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. The Marketmarket approach utilizes an analysis of comparable publicly traded companies. The Company had seven (7) reporting units for which an annual goodwill impairment assessment was performed ascompanies and requires management to make significant estimates and assumptions related to the forecasts of January 1, 2016. The Company concludedfuture revenues, EBITDA, and multiples that five (5) of the reporting units’ fair value substantially exceeded their carrying amounts. The carrying value for two (2) reporting units (Canada service centerare applied to management’s forecasted revenues and Australia/New Zealand service center) exceeded the fair value, indicating there may be goodwill impairment. The fair values of the reporting units in accordance with step one of the goodwill impairment test were determined using the Income and Market approaches.
Step two of the goodwill impairment test compares the fair value of the reporting unit goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as in a business combination. The fair value of the reporting unit from step one is allocated to all of the assets and liabilities of the reporting unit, including unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
Step two of the goodwill impairment test for the Canada service center reporting unit was completed in the third quarter of fiscal 2016. The analysis resulted in a goodwill impairment of $56,022 for the Canada service center reporting unit. The non-cash impairment charge was the result of the overall decline in the industrial economy in Canada coupled with the substantial and sustained decline in the oil and gas sector during calendar year 2015. This led to reduced spending by customers and reduced revenue expectations. The uncertainty regarding the oil and gas industries and overall industrial economy in Canada also led the reporting unit to reduce expectations.
Step two of the goodwill impairment test for the Australia/New Zealand reporting unit was completed in the third quarter of fiscal 2016. The analysis concluded that all of the Australia/New Zealand reporting unit’s goodwill was impaired, and therefore the Company recorded a non-cash impairment expense of $8,772 in the third quarter of fiscal 2016. The impairment charge was primarily the result of the decline in the mining and extraction industries in Australia, reduced spending by customers, and the effects of reduced revenue expectations.EBITDA estimates.
The techniques used in the Company's impairment teststest have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement dates.date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key Levelassumptions (Level 3 based assumptionsin 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. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the Company’s reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends; and (ii) inability to achieve the sales targeted by our strategic growth initiatives. At June 30, 20182020 and 2017,2019, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segmentsegment. At June 30, 2020 and 2019, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $167,605 and $36,605, respectively, related to the Fluid Power & Flow Control segment.
The Company's identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following: | | | | | | | | | | | | | | June 30, 2018 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| | Finite-Lived Intangibles: | | | | | | | Customer relationships | $ | 465,691 |
| | $ | 125,009 |
| | $ | 340,682 |
| | Trade names | 112,939 |
| | 22,454 |
| | 90,485 |
| | Vendor relationships | 11,425 |
| | 7,382 |
| | 4,043 |
| | Non-competition agreements | 2,761 |
| | 2,024 |
| | 737 |
| | Total Intangibles | $ | 592,816 |
| | $ | 156,869 |
| | $ | 435,947 |
|
| | | | | | | | | | | | | | June 30, 2020 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| | Finite-Lived Intangibles: | | | | | | | Customer relationships | $ | 426,017 |
| | $ | 162,965 |
| | $ | 263,052 |
| | Trade names | 111,453 |
| | 34,815 |
| | 76,638 |
| | Vendor relationships | 11,329 |
| | 8,934 |
| | 2,395 |
| | Other | 2,078 |
| | 948 |
| | 1,130 |
| | Total Intangibles | $ | 550,877 |
| | $ | 207,662 |
| | $ | 343,215 |
|
| | | | | | | | | | | | | | June 30, 2019 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| | Finite-Lived Intangibles: | | | | | | | Customer relationships | $ | 422,367 |
| | $ | 135,879 |
| | $ | 286,488 |
| | Trade names | 105,946 |
| | 27,232 |
| | 78,714 |
| | Vendor relationships | 11,367 |
| | 8,156 |
| | 3,211 |
| | Other | 2,702 |
| | 2,249 |
| | 453 |
| | Total Intangibles | $ | 542,382 |
| | $ | 173,516 |
| | $ | 368,866 |
|
| | | | | | | | | | | | | | June 30, 2017 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| | Finite-Lived Intangibles: | | | | | | | Customer relationships | $ | 235,009 |
| | $ | 102,414 |
| | $ | 132,595 |
| | Trade names | 43,873 |
| | 19,295 |
| | 24,578 |
| | Vendor relationships | 14,152 |
| | 9,141 |
| | 5,011 |
| | Non-competition agreements | 3,788 |
| | 2,410 |
| | 1,378 |
| | Total Intangibles | $ | 296,822 |
| | $ | 133,260 |
| | $ | 163,562 |
|
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off. During 2018,fiscal 2020, the Company acquired identifiable intangible assets with a preliminaryan acquisition cost allocation and weighted-average life as follows: | | | | | | | | | Acquisition Cost Allocation |
| | Weighted-Average Life | | Customer relationships | $ | 7,160 |
| | 20.0 | | Trade names | 4,260 |
| | 15.0 | | Other | 980 |
| | 6.8 | | Total Intangibles Acquired | $ | 12,400 |
| | 17.2 |
| | | | | | | | | Acquisition Cost Allocation |
| | Weighted-Average Life | | Customer relationships | $ | 234,370 |
| | 20.0 years | | Trade names | 71,050 |
| | 15.0 years | | Total Intangibles Acquired | $ | 305,420 |
| | 18.8 years |
management also assessed the long-lived intangible assets related to the Reliance asset group in Canada for impairment during the third quarter of fiscal 2019. The Reliance asset group is located in western Canada and primarily serves customers in the upstream oil and gas industry. The asset group carrying value exceeded the sum of the undiscounted cash flows, indicating impairment. The fair value of the asset group was then determined using the income approach, using Level 3 assumptions in the fair value hierarchy, and the analysis resulted in the measurement of a full impairment loss of $31,594, which was recorded in the third quarter of fiscal 2019. Sustained significant softness in certain end market concentrations could result in impairment of certain intangible assets in future periods. Amortization of identifiable intangibles totaled $32,065, $24,371$41,553, $41,883 and $25,580$32,065 in fiscal 2018, 20172020, 2019 and 2016,2018, respectively, and is included in selling, distribution and administrative expensesexpense in the statements of consolidated income. Future amortization expense based on the Company’s identifiable intangible assets as of June 30, 20182020 is estimated to be $44,000 for 2019, $42,500 for 2020, $40,200$38,300 for 2021, $37,800$36,100 for 2022, $34,000 for 2023, $29,800 for 2024 and $35,300$26,300 for 2023.2025.
NOTE 5:6: DEBT A summary of long-term debt, including the current portion, follows: | | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | Unsecured credit facility | $ | 589,250 |
| | $ | 613,625 |
| | Trade receivable securitization facility | 175,000 |
| | 175,000 |
| | Series C Notes | 120,000 |
| | 120,000 |
| | Series D Notes | 25,000 |
| | 50,000 |
| | Series E Notes | 25,000 |
| | — |
| | Other | 1,026 |
| | 1,204 |
| | Total debt | $ | 935,276 |
| | $ | 959,829 |
| | Less: unamortized debt issuance costs | 1,487 |
| | 1,943 |
| | | $ | 933,789 |
| | $ | 957,886 |
|
Revolving Credit Facility & Term Loan In January 2018, in conjunction with the acquisition of FCX, 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 $780,000 unsecured term loan and a $250,000 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. At June 30, 2018, theThe Company had $775,125no amount outstanding under the term loanrevolver as of June 30, 2020 and $19,500 outstanding under the revolver.June 30, 2019. Unused lines under this facility, net of outstanding letters of credit of $3,625$1,873 and $3,215, respectively, to secure certain insurance obligations, totaled $226,875$248,127 and $246,785 at June 30, 2018,2020 and June 30, 2019, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.94% and 4.19% as of June 30, 2018 was 4.13%. The weighted average interest rate on the amount outstanding under the revolving credit facility as of2020 and June 30, 2018 was 3.93%. The new credit facility replaced the Company's previous credit facility agreement. At June 30, 2017, the Company had $120,313 outstanding under the term loan in the previous credit facility agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017. No amount was outstanding under the revolver as of June 30, 2017. Unused lines under this facility, net of outstanding letters of credit of $2,441 to secure certain insurance obligations, totaled $247,559 at June 30, 2017.2019, respectively.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with eitherthe revolving credit agreement, in the amount of $4,475 and $2,698 as of June 30, 20182020 and June 30, 2017,2019, 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 $175,000. 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 $175,000 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 as of June 30, 2020 and June 30, 2019 was 1.07% and 3.33%, respectively. Other Long-Term Borrowings At June 30, 20182020 and June 30, 2017,2019, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170,000. Fees on this facility range from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end. The "Series C" notes have a principal amount of $120,000, and carry a fixed interest rate of 3.19%, and are due in equal principal payments in July 2020, 2021, and 2022. A $40,000 principal payment was made on the "Series C" notes in July 2020. The "Series D" notes have a principal amount of $50,000 and carry a fixed interest rate of 3.21%. A $25,000 principal payment was made on the "Series D" notes during fiscal 2020, and the remaining principal balance of $25,000 is due in October 2023. In October 2019, the Company amended its unsecured shelf facility agreement with Prudential Investment management to authorize the issuance of "Series E" notes, which have a principal amount of $25,000, carry a fixed interest rate of 3.08%, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2018, $50,000 in additional financing was available under this facility.
2024.
In 2014, the Company assumed $2,359 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, maturing in May 2024. At June 30, 2018 and 2017, $1,438 and $1,669 was outstanding, respectively. Unamortized debt issue costs of $551 and $105 are included as a reduction of current portion of long-term debt on the consolidated balance sheets as of June 30, 2018 and June 30, 2017, respectively. Unamortized debt issue costs of $1,807 and $294 are included as a reduction of long-term debt on the consolidated balance sheets as of June 30, 2018 and June 30, 2017, respectively.
The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing arrangements for each of the next five years: | | | | | | Fiscal Year | Aggregate Maturity |
| | 2021 | $ | 79,181 |
| | 2022 | 259,120 |
| | 2023 | 546,624 |
| | 2024 | 25,351 |
| | 2025 | 25,000 |
|
| | | | | | Fiscal Year | Aggregate Maturity |
| | 2019 | $ | 19,734 |
| | 2020 | 49,613 |
| | 2021 | 79,241 |
| | 2022 | 84,120 |
| | 2023 | 708,124 |
| | Thereafter | 25,231 |
|
Covenants The new credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2018,2020, the most restrictive of these covenants required that the Company have net indebtedness less than 4.253.75 times consolidated income before interest, taxes, depreciation and amortization.amortization (as defined). At June 30, 2018,2020, the Company's net indebtedness was less than 3.03.1 times consolidated income before interest, taxes, depreciation and amortization.amortization (as defined). The Company was in compliance with all financial covenants at June 30, 2018.2020. NOTE 7: DERIVATIVES Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. In January 2019, the Company entered into an interest rate swap to mitigate variability in forecasted interest payments on $463,000 of the Company’s U.S. dollar-denominated unsecured variable rate debt. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. The interest rate swap converts $431,000 of variable rate debt to a rate of 4.36% as of June 30, 2020 and as of June 30, 2019 converted $463,000 of variable rate debt to a rate of 4.36%. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $26,179 and $14,202 as of June 30, 2020 and June 30, 2019, respectively, which is included in other current liabilities and other liabilities in the consolidated balance sheet. Realized losses related to the interest rate cash flow hedge were not material in the years ended June 30, 2020 or 2019. NOTE 6:8: FAIR VALUE MEASUREMENTS Marketable securities measured at fair value at June 30, 20182020 and June 30, 20172019 totaled $10,318$12,259 and $10,481,$11,246, respectively. The majority of these marketable securities are held in a rabbi trust for a non-qualified deferred
compensation plan. The marketable securities are included in other assets on the consolidated balance sheets and their fair values were valued using quoted market prices (Level 1 in the fair value hierarchy). As of June 30, 2018,2020, the carrying value of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximates fair value (Level 2 in the fair value hierarchy). The revolving credit facility and the term loan contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).
NOTE 7:9: INCOME TAXES Income Before Income Taxes The components of income before income taxes are as follows: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | U.S. | $ | 36,161 |
| | $ | 204,462 |
| | $ | 186,874 |
| | Foreign | 19,075 |
| | (9,981 | ) | | 17,844 |
| | Income before income taxes | $ | 55,236 |
| | $ | 194,481 |
| | $ | 204,718 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | U.S. | $ | 186,874 |
| | $ | 154,472 |
| | $ | 139,960 |
| | Foreign | 17,844 |
| | 12,494 |
| | (60,982 | ) | | Income before income taxes | $ | 204,718 |
| | $ | 166,966 |
| | $ | 78,978 |
|
Provision The provision (benefit) for income taxes consists of: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Current: | | | | | | | Federal | $ | 31,149 |
| | $ | 34,437 |
| | $ | 48,131 |
| | State and local | 7,580 |
| | 7,965 |
| | 8,038 |
| | Foreign | 5,757 |
| | 5,718 |
| | 5,309 |
| | Total current | 44,486 |
| | 48,120 |
| | 61,478 |
| | Deferred: | | | | | | | Federal | (8,594 | ) | | 6,265 |
| | 5,955 |
| | State and local | (3,098 | ) | | 1,947 |
| | (586 | ) | | Foreign | (1,600 | ) | | (5,844 | ) | | (3,754 | ) | | Total deferred | (13,292 | ) | | 2,368 |
| | 1,615 |
| | Total | $ | 31,194 |
| | $ | 50,488 |
| | $ | 63,093 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Current: | | | | | | | Federal | $ | 48,131 |
| | $ | 26,456 |
| | $ | 45,226 |
| | State and local | 8,038 |
| | 4,692 |
| | 6,349 |
| | Foreign | 5,309 |
| | 4,760 |
| | 4,407 |
| | Total current | 61,478 |
| | 35,908 |
| | 55,982 |
| | Deferred: | | | | | | | Federal | 5,955 |
| | 852 |
| | 397 |
| | State and local | (586 | ) | | 535 |
| | (30 | ) | | Foreign | (3,754 | ) | | (4,239 | ) | | (6,948 | ) | | Total deferred | 1,615 |
| | (2,852 | ) | | (6,581 | ) | | Total | $ | 63,093 |
| | $ | 33,056 |
| | $ | 49,401 |
|
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to U.S. tax law. The Act reducesreduced the U.S. federal corporate income tax rate from 35% to 21%, requiresrequired companies to pay a one-time transition tax on certain un-remittedunremitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminateseliminated U.S. federal income tax on dividends from foreign subsidiaries, and createscreated new taxes on certain foreign-sourced earnings. During fiscal 2018, the Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate from 35% to 21%. The rate change was administratively effective as of the beginning of ourthe Company's fiscal year,2018, resulting in the Company using a blended statutory rate for the annual periodfiscal 2018 of 28.06%. The corporate income tax rate change had a favorable impact to the Company of $12,113 for fiscal 2018. The SEC staff issued SAB 118, which providesprovided guidance on accounting for the tax effects of the Act for which the accounting under ASC 740 iswas incomplete. To the extent that a company's accounting for certain income tax effects of the Act iswas incomplete but it iswas able to determine a reasonable estimate, it mustwas required to record a provisional estimate in the financial statements. If a company cannotcould not determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act. Accordingly, as As of June 30, 2018 we have not completed our accounting for the tax effects of the Act. For fiscal 2018, we recognized a provisional tax liability of $3,877 related to the one-time transition tax on certain un-remitted earnings of foreign subsidiaries, which is payable over eight years. We also re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. The Company recorded a provisional amount of $2,414 of additional deferred income tax expense related to the re-measurement of our deferred tax balance. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Overall, considering the decrease in the corporate income tax rate and the expense related to the transition tax and deferred tax re-measurement, the Act resulted in a net tax benefit of $5,822 for fiscal 2018, which is included as a component of income tax expense in the statements of consolidated income.
During the fourth quarter of fiscal 2017,2019, the Company recorded a net tax benefitexpense of $22,246 pertaining to a worthless stock deduction. The tax benefit of this deduction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes reduced by $1,019 of tax provided for a valuation allowance applicable$5,802 related to the related stateone time transition tax and re-measurement of deferred income tax asset.balances.
The exercise of non-qualified stock appreciation rights and options during fiscal 2018, 2017 and 2016 resulted in $419, $1,921 and $212, respectively, of income tax benefits to the Company derived from the difference between the market and option price of the shares at the date of exercise and the fair value of the options on the grant date. Vesting of stock awards and other stock compensation in fiscal 2018, 2017 and 2016 resulted in $430, $482 and $(4), respectively, of incremental income tax benefits (expense) over the amounts previously reported for financial reporting purposes. Due to the adoption of ASU 2016-09 in fiscal 2017, the tax benefits for fiscal 2018 and 2017 were recorded in income tax expense in the statements of consolidated income, while the fiscal 2016 tax expense was recorded in additional paid-in capital.
Effective Tax Rates The following reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate: | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Statutory income tax rate | 21.0 | % | | 21.0 | % | | 28.1 | % | | Effects of: | | | | | | | State and local taxes | 6.4 |
| | 4.4 |
| | 3.1 |
| | U.S. federal tax reform | — |
| | (0.3 | ) | | 3.1 |
| | CARES Act NOL carryback | (1.8 | ) | | — |
| | — |
| | Goodwill impairment | 31.4 |
| | — |
| | — |
| | Stock compensation | (1.3 | ) | | (0.5 | ) | | (0.4 | ) | | GILTI/FDII | 3.6 |
| | 0.7 |
| | — |
| | R & D credit | (1.2 | ) | | (0.4 | ) | | (0.3 | ) | | U.S. tax on foreign income, net | (3.1 | ) | | 0.5 |
| | — |
| | Impact of foreign operations | 1.6 |
| | (0.6 | ) | | 0.7 |
| | Non-deductibles | 1.2 |
| | 0.6 |
| | 0.3 |
| | Interest deduction | (4.0 | ) | | (1.2 | ) | | (1.6 | ) | | Deductible dividend | (0.6 | ) | | (0.2 | ) | | (1.3 | ) | | Valuation allowance | 2.6 |
| | 2.9 |
| | (0.3 | ) | | Other, net | 0.7 |
| | (0.9 | ) | | (0.6 | ) | | Effective income tax rate | 56.5 | % | | 26.0 | % | | 30.8 | % |
| | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Statutory income tax rate | 28.1 | % | | 35.0 | % | | 35.0 | % | | Effects of: | | | | | | | State and local taxes | 3.1 |
| | 2.8 |
| | 5.2 |
| | U.S. federal tax reform | 3.1 |
| | — |
| | — |
| | Worthless stock deduction | — |
| | (13.9 | ) | | — |
| | Stock compensation | (0.4 | ) | | (1.4 | ) | | — |
| | Goodwill impairment | — |
| | — |
| | 27.1 |
| | Impact of foreign operations | (1.3 | ) | | (2.3 | ) | | (3.0 | ) | | Deductible dividend | (0.3 | ) | | (0.4 | ) | | (0.9 | ) | | Valuation allowance | (0.9 | ) | | 0.3 |
| | 0.5 |
| | Other, net | (0.6 | ) | | (0.3 | ) | | (1.3 | ) | | Effective income tax rate | 30.8 | % | | 19.8 | % | | 62.6 | % |
Consolidated Balance Sheets Significant components of the Company’s deferred tax assets and liabilities are as follows: | | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | Deferred tax assets: | | | | | Compensation liabilities not currently deductible | $ | 17,252 |
| | $ | 17,401 |
| | Other expenses and reserves not currently deductible | 15,272 |
| | 13,050 |
| | Goodwill and intangibles | — |
| | 2,398 |
| | Leases | 24,016 |
| | — |
| | Net operating loss carryforwards | 8,859 |
| | 8,466 |
| | Hedging instrument | 6,406 |
| | 3,498 |
| | Other | 757 |
| | 1,173 |
| | Total deferred tax assets | 72,562 |
| | 45,986 |
| | Less: Valuation allowance | (7,494 | ) | | (5,597 | ) | | Deferred tax assets, net of valuation allowance | 65,068 |
| | 40,389 |
| | Deferred tax liabilities: | | | | | Inventories | (8,284 | ) | | (8,600 | ) | | Goodwill and intangibles | (58,506 | ) | | (75,504 | ) | | Leases | (23,407 | ) | | — |
| | Depreciation and differences in property bases | (13,018 | ) | | (10,777 | ) | | Total deferred tax liabilities | (103,215 | ) | | (94,881 | ) | | Net deferred tax liabilities | $ | (38,147 | ) | | $ | (54,492 | ) | | Net deferred tax liabilities are classified as follows: | | | | | Other assets | $ | 4,749 |
| | $ | 3,859 |
| | Other liabilities | (42,896 | ) | | (58,351 | ) | | Net deferred tax liabilities | $ | (38,147 | ) | | $ | (54,492 | ) |
| | | | | | | | | | June 30, | 2018 |
| | 2017 |
| | Deferred tax assets: | | | | | Compensation liabilities not currently deductible | $ | 19,334 |
| | $ | 26,873 |
| | Other expenses and reserves not currently deductible | 13,169 |
| | 11,601 |
| | Goodwill and intangibles | 3,197 |
| | 5,661 |
| | Foreign tax credit (expiring in years 2025-2026) | 413 |
| | 709 |
| | Net operating loss carryforwards (expiring in years 2023-2038) | 11,315 |
| | 5,729 |
| | Other | 199 |
| | 119 |
| | Total deferred tax assets | 47,627 |
| | 50,692 |
| | Less: Valuation allowance | (38 | ) | | (1,831 | ) | | Deferred tax assets, net of valuation allowance | 47,589 |
| | 48,861 |
| | Deferred tax liabilities: | | | | | Inventories | (8,196 | ) | | (7,447 | ) | | Goodwill and intangibles | (86,176 | ) | | (30,482 | ) | | Depreciation and differences in property bases | (9,294 | ) | | (10,122 | ) | | Total deferred tax liabilities | (103,666 | ) | | (48,051 | ) | | Net deferred tax (liabilities) assets | $ | (56,077 | ) | | $ | 810 |
| | Net deferred tax (liabilities) assets are classified as follows: | | | | | Other assets | $ | 2,103 |
| | $ | 8,985 |
| | Other liabilities | (58,180 | ) | | (8,175 | ) | | Net deferred tax (liabilities) assets | $ | (56,077 | ) | | $ | 810 |
|
2019, the Company had state net operating loss carryforwards, the tax benefit of which is approximately $1,177 and $2,098 respectively, which will expire at various dates beginning in 2027. Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets. The remaining net deferred tax asset is the amount
management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory tax rates and future income levels. During the year ended June 30, 2020, the Company recorded a valuation allowance of $2,124 related to certain deferred tax assets in Canada due to the uncertainty in realizing these net deferred tax assets. As a result of the Act, the Company’s net unremitted foreign earnings of $77,374 have been subject to U.S. taxation. As of June 30, 2018, all such2020, the Company had accumulated undistributed earnings of non-U.S. subsidiaries are considered permanently reinvested. Therefore, no taxes have been provided that would result from the remittanceof approximately $114,070. The vast majority of such earnings. The net amount ofearnings have previously been subjected to the unrecognizedone-time transition tax liabilityor the Global Intangible Low Taxed Income ("GILTI") inclusion implemented by the Act. Therefore, any additional taxes due with respect to such earnings or the distributionexcess of these earnings is estimatedthe amount for financial reporting over the tax basis of our foreign investments would generally be limited to be approximately $1,986.foreign withholding and state income taxes. In addition, we expect foreign tax credits would be available to either offset or partially reduce the tax cost in the event of a distribution. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.
Unrecognized Income Tax Benefits The Company and its subsidiaries file income tax returns in U.S. federal, various state, local and foreign jurisdictions. The following table sets forth the changes in the amount of unrecognized tax benefits for the years ended June 30, 2018, 20172020 and 2016:2019: | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | Unrecognized Income Tax Benefits at beginning of the year | $ | 4,979 |
| | $ | 3,988 |
| | Current year tax positions | 105 |
| | 105 |
| | Prior year tax positions | 177 |
| | 1,151 |
| | Expirations of statutes of limitations | (306 | ) | | (265 | ) | | Unrecognized Income Tax Benefits at end of year | $ | 4,955 |
| | $ | 4,979 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Unrecognized Income Tax Benefits at beginning of the year | $ | 3,533 |
| | $ | 2,915 |
| | $ | 2,604 |
| | Current year tax positions | 143 |
| | 574 |
| | 539 |
| | Prior year tax positions | 636 |
| | 259 |
| | — |
| | Expirations of statutes of limitations | (324 | ) | | (189 | ) | | (132 | ) | | Settlements | — |
| | (26 | ) | | (96 | ) | | Unrecognized Income Tax Benefits at end of year | $ | 3,988 |
| | $ | 3,533 |
| | $ | 2,915 |
|
IncludedThe Company recognizes interest and penalties related to uncertain tax positions in the balance of unrecognizedprovision for income tax benefits at June 30, 2018, 2017taxes. During 2020 and 2016 are $3,725, $3,323 and $2,691, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
During 2018, 2017 and 2016,2019, the Company recognized $(110) $256and $163 and $127$161 of (benefit) expense, respectively, for interest and penalties related to unrecognized income tax benefits in its statements of consolidated income. The Company had a liability for penalties and interest of $677$1,094 and $787$838 as of June 30, 20182020 and 2017,2019, respectively. The Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next twelve months. Included in the balance of unrecognized income tax benefits at June 30, 2020 and 2019 are $4,708 and $4,701, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
The Company is subject to U.S. federal income tax examinations for the tax years 20152017 through 20182020 and to state and local income tax examinations for the tax years 20122014 through 2018.2020. In addition, the Company is subject to foreign income tax examinations for the tax years 20112013 through 2018.2020. The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment of cash is not expected within one year.year, or as a reduction of a deferred tax asset.
NOTE 8:10: SHAREHOLDERS’ EQUITY Treasury Shares At June 30, 2018, 5962020, 128 shares of the Company’s common stock held as treasury shares were restricted as collateral under escrow arrangements relating to change in control and director and officer indemnification agreements. Accumulated Other Comprehensive Income (Loss)Loss Changes in the accumulated other comprehensive income (loss)loss for the years ended June 30, 2018, 2017,2020, 2019, and 2016,2018, are comprised of the following amounts, shown net of taxes: | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment |
| | Unrealized gain (loss) on securities available for sale |
| | Post-employment benefits |
| | Cash flow hedge |
| | Total accumulated other comprehensive loss |
| | Balance at July 1, 2017 | $ | (79,447 | ) | | $ | 21 |
| | $ | (2,276 | ) | | $ | — |
| | $ | (81,702 | ) | | Other comprehensive (loss) income | (8,549 | ) | | 20 |
| | 524 |
| | — |
| | (8,005 | ) | | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (45 | ) | | — |
| | (45 | ) | | Amounts reclassified for certain income tax effects to retained earnings | 22 |
| | 9 |
| | (502 | ) | | — |
| | (471 | ) | | Net current-period other comprehensive (loss) income | (8,527 | ) | | 29 |
| | (23 | ) | | — |
| | (8,521 | ) | | Balance at June 30, 2018 | (87,974 | ) | | 50 |
| | (2,299 | ) | | — |
| | (90,223 | ) | | Other comprehensive income (loss) | 1,644 |
| | — |
| | (327 | ) | | (10,887 | ) | | (9,570 | ) | | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (226 | ) | | 183 |
| | (43 | ) | | Cumulative effect of adopting accounting standards | — |
| | (50 | ) | | — |
| | — |
| | (50 | ) | | Net current-period other comprehensive income (loss) | 1,644 |
| | (50 | ) | | (553 | ) | | (10,704 | ) | | (9,663 | ) | | Balance at June 30, 2019 | (86,330 | ) | | — |
| | (2,852 | ) | | (10,704 | ) | | (99,886 | ) | | Other comprehensive loss | (18,764 | ) | | — |
| | (1,662 | ) | | (12,572 | ) | | (32,998 | ) | | Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | (50 | ) | | 3,504 |
| | 3,454 |
| | Net current-period other comprehensive loss | (18,764 | ) | | — |
| | (1,712 | ) | | (9,068 | ) | | (29,544 | ) | | Balance at June 30, 2020 | $ | (105,094 | ) | | $ | — |
| | $ | (4,564 | ) | | $ | (19,772 | ) | | $ | (129,430 | ) |
| | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment |
| | Unrealized (loss) gain on securities available for sale |
| | Post-employment benefits |
| | Total accumulated other comprehensive (loss) income |
| | Balance at July 1, 2015 | $ | (57,244 | ) | | $ | (4 | ) | | $ | (2,923 | ) | | $ | (60,171 | ) | | Other comprehensive loss | (24,441 | ) | | (34 | ) | | (1,215 | ) | | (25,690 | ) | | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 315 |
| | 315 |
| | Net current-period other comprehensive loss | (24,441 | ) | | (34 | ) | | (900 | ) | | (25,375 | ) | | Balance at June 30, 2016 | (81,685 | ) | | (38 | ) | | (3,823 | ) | | (85,546 | ) | | Other comprehensive income | 2,238 |
| | 59 |
| | 1,239 |
| | 3,536 |
| | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 308 |
| | 308 |
| | Net current-period other comprehensive income | 2,238 |
| | 59 |
| | 1,547 |
| | 3,844 |
| | Balance at June 30, 2017 | (79,447 | ) | | 21 |
| | (2,276 | ) | | (81,702 | ) | | Other comprehensive (loss) income | (8,549 | ) | | 20 |
| | 524 |
| | (8,005 | ) | | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | (45 | ) | | (45 | ) | | Amounts reclassified for certain income tax effects to retained earnings | 22 |
| | 9 |
| | (502 | ) | | (471 | ) | | Net current-period other comprehensive (loss) income | (8,527 | ) | | 29 |
| | (23 | ) | | (8,521 | ) | | Balance at June 30, 2018 | $ | (87,974 | ) | | $ | 50 |
| | $ | (2,299 | ) | | $ | (90,223 | ) |
Other Comprehensive Income (Loss)Loss Details of other comprehensive income (loss)loss are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2020 | | 2019 | | 2018 | | | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax (Benefit) Expense |
| | Net Amount |
| | Foreign currency translation adjustments | $ | (18,499 | ) | | $ | 265 |
| | $ | (18,764 | ) | | $ | 2,021 |
| | $ | 377 |
| | $ | 1,644 |
| | $ | (8,875 | ) | | $ | (326 | ) | | $ | (8,549 | ) | | Post-employment benefits: | | | | | | | | | | | | | | | | | | | Actuarial (loss) gain on re-measurement | (2,192 | ) | | (530 | ) | | (1,662 | ) | | (372 | ) | | (45 | ) | | (327 | ) | | 709 |
| | 185 |
| | 524 |
| | Reclassification of actuarial gains and prior service cost into other income, net and included in net periodic pension costs | (66 | ) | | (16 | ) | | (50 | ) | | (306 | ) | | (80 | ) | | (226 | ) | | (73 | ) | | (28 | ) | | (45 | ) | | Unrealized gain on investment securities available for sale | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 37 |
| | 17 |
| | 20 |
| | Unrealized loss on cash flow hedge | (16,615 | ) | | (4,043 | ) | | (12,572 | ) | | (14,446 | ) | | (3,559 | ) | | (10,887 | ) | | — |
| | — |
| | — |
| | Reclassification of interest from cash flow hedge into interest expense | 4,638 |
| | 1,134 |
| | 3,504 |
| | 244 |
| | 61 |
| | 183 |
| | — |
| | — |
| | — |
| | Cumulative effect of adopting accounting standard | — |
| | — |
| | — |
| | (50 | ) | | — |
| | (50 | ) | | — |
| | — |
| | — |
| | Reclassification of certain income tax effects to retained earnings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 471 |
| | (471 | ) | | Other comprehensive loss | $ | (32,734 | ) | | $ | (3,190 | ) | | $ | (29,544 | ) | | $ | (12,909 | ) | | $ | (3,246 | ) | | $ | (9,663 | ) | | $ | (8,202 | ) | | $ | 319 |
| | $ | (8,521 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2018 | | 2017 | | 2016 | | | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax (Benefit) Expense |
| | Net Amount |
| | Foreign currency translation adjustments | $ | (8,875 | ) | | $ | (326 | ) | | $ | (8,549 | ) | | $ | 2,238 |
| | $ | — |
| | $ | 2,238 |
| | $ | (24,441 | ) | | $ | — |
| | $ | (24,441 | ) | | Post-employment benefits: | | | | | | | | | | | | | | | | | | | Actuarial gain (loss) on re-measurement | 709 |
| | 185 |
| | 524 |
| | 2,038 |
| | 799 |
| | 1,239 |
| | (1,998 | ) | | (783 | ) | | (1,215 | ) | | Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs | (73 | ) | | (28 | ) | | (45 | ) | | 506 |
| | 198 |
| | 308 |
| | 518 |
| | 203 |
| | 315 |
| | Unrealized gain (loss) on investment securities available for sale | 37 |
| | 17 |
| | 20 |
| | 91 |
| | 32 |
| | 59 |
| | (52 | ) | | (18 | ) | | (34 | ) | | Reclassification of certain income tax effects to retained earnings | — |
| | 471 |
| | (471 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Other comprehensive (loss) income | $ | (8,202 | ) | | $ | 319 |
| | $ | (8,521 | ) | | $ | 4,873 |
| | $ | 1,029 |
| | $ | 3,844 |
| | $ | (25,973 | ) | | $ | (598 | ) | | $ | (25,375 | ) |
Net Income Per Share Basic net income per share is based on the weighted-average number of common shares outstanding. Diluted net income per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing net income per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include Restricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury stock method and the two-class method. For the years presented there were no material differences in the net income per share amounts calculated using the two methods. Accordingly, the treasury stock method is disclosed below. The following table presents amounts used in computing net income per share and the effect on the weighted-average number of shares of dilutive potential common shares: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Net Income | $ | 24,042 |
| | $ | 143,993 |
| | $ | 141,625 |
| | Average Shares Outstanding: | | | | | | | Weighted-average common shares outstanding for basic computation | 38,658 |
| | 38,670 |
| | 38,752 |
| | Dilutive effect of potential common shares | 341 |
| | 490 |
| | 529 |
| | Weighted-average common shares outstanding for dilutive computation | 38,999 |
| | 39,160 |
| | 39,281 |
| | Net Income Per Share — Basic | $ | 0.62 |
| | $ | 3.72 |
| | $ | 3.65 |
| | Net Income Per Share — Diluted | $ | 0.62 |
| | $ | 3.68 |
| | $ | 3.61 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Net Income | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| | Average Shares Outstanding: | | | | | | | Weighted-average common shares outstanding for basic computation | 38,752 |
| | 39,013 |
| | 39,254 |
| | Dilutive effect of potential common shares | 529 |
| | 391 |
| | 212 |
| | Weighted-average common shares outstanding for dilutive computation | 39,281 |
| | 39,404 |
| | 39,466 |
| | Net Income Per Share — Basic | $ | 3.65 |
| | $ | 3.43 |
| | $ | 0.75 |
| | Net Income Per Share — Diluted | $ | 3.61 |
| | $ | 3.40 |
| | $ | 0.75 |
|
Stock appreciation rights and optionsawards relating to 66, 141726, 226 and 77566 shares of common stock were outstanding at June 30, 2018, 20172020, 2019 and 2016,2018, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.
NOTE 9:11: SHARE-BASED COMPENSATION Share-Based Incentive Plans Following approval by the Company's shareholders in October 2015,2019, the 2019 Long-Term Performance Plan (the "2019 Plan") replaced the 2015 Long-Term Performance Plan (the "2015 Plan") replaced the 2011 Long-Term Performance Plan. The 20152019 Plan, which expires in 2020,2024, provides for granting of SARs, stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or, in the case of director awards, the Corporate Governance Committee of the Board of Directors (together referred to as the Committee) may determine to officers, other key employees and members of the Board of Directors. Grants are generally made at regularly scheduled committee meetings. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | SARs and options | $ | 2,954 |
| | $ | 2,440 |
| | $ | 1,961 |
| | Performance shares | 854 |
| | 2,082 |
| | 2,006 |
| | Restricted stock and RSUs | 3,146 |
| | 2,391 |
| | 2,660 |
| | Total compensation costs under award programs | $ | 6,954 |
| | $ | 6,913 |
| | $ | 6,627 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | SARs and options | $ | 1,961 |
| | $ | 1,891 |
| | $ | 1,543 |
| | Performance shares | 2,006 |
| | 1,331 |
| | 446 |
| | Restricted stock and RSUs | 2,660 |
| | 2,298 |
| | 2,078 |
| | Total compensation costs under award programs | $ | 6,627 |
| | $ | 5,520 |
| | $ | 4,067 |
|
Such amounts are included in selling, distribution and administrative expense in the accompanying statements of consolidated income. The total income tax benefit recognized in the statements of consolidated income for share-based compensation plans was $1,923, $4,848$2,189, $2,709 and $1,595$1,923 for fiscal years 2018, 20172020, 2019 and 2016,2018, respectively. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with shares. The aggregate unrecognized compensation cost for share-based award programs with the potential to be paid at June 30, 2018 are2020 is summarized in the table below: | | | | | | | | June 30, | 2020 |
| | Average Expected Period of Expected Recognition (Years) | | SARs and options | $ | 4,113 |
| | 2.2 | | Performance shares | 4,580 |
| | 1.8 | | Restricted stock and RSUs | 3,028 |
| | 2.1 | | Total unrecognized compensation costs under award programs | $ | 11,721 |
| | 2.0 |
| | | | | | | | June 30, | 2018 |
| | Average Expected Period of Expected Recognition (Years) | | SARs and options | $ | 3,729 |
| | 2.5 | | Performance shares | 3,282 |
| | 1.7 | | Restricted stock and RSUs | 2,173 |
| | 1.9 | | Total unrecognized compensation costs under award programs | $ | 9,184 |
| | 2.1 |
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.12.0 years. The aggregate number of shares of common stock which may be awarded under the 20152019 Plan is 2,500;2,250; shares available for future grants at June 30, 20182020 were 1,655.2,221. Stock Appreciation Rights and Stock Options The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2020, 2019
and 2018 2017
and 2016 are: | | | | | | | | | | | | 2020 |
| | 2019 |
| | 2018 |
| | Expected life, in years | 6.2 |
| | 6.0 |
| | 6.0 |
| | Risk free interest rate | 1.6 | % | | 2.8 | % | | 2.1 | % | | Dividend yield | 2.3 | % | | 1.8 | % | | 2.5 | % | | Volatility | 23.7 | % | | 22.5 | % | | 24.3 | % | | Per share fair value of SARs granted during the year | $10.12 | | $16.15 | | $11.25 |
| | | | | | | | | | | | 2018 |
| | 2017 |
| | 2016 |
| | Expected life, in years | 6.0 |
| | 4.8 |
| | 4.4 |
| | Risk free interest rate | 2.1 | % | | 1.2 | % | | 1.3 | % | | Dividend yield | 2.5 | % | | 2.5 | % | | 2.5 | % | | Volatility | 24.3 | % | | 24.1 | % | | 26.0 | % | | Per share fair value of SARs and stock options granted during the year | $11.25 | | $7.97 | | $6.79 |
The expected life is based upon historical exercise experience of the officers, other key employees and members of the Board of Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds with remaining terms equal to the expected life of the SARs and stock options. The assumed dividend yield has been estimated based upon the Company’s historical results and expectations for changes in dividends
and stock prices. The volatility assumption is calculated based upon historical daily price observations of the Company’s common stock for a period equal to the expected life.
SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be settled by the holder with cash or by tendering Company common stock. A summary of SARs and stock options activity is presented below: | | | | | | | | | | Shares |
| | Weighted-Average Exercise Price |
| | Year Ended June 30, 2020 | | | (Shares in thousands) | | | Outstanding, beginning of year | 1,479 |
| | $ | 49.42 |
| | Granted | 296 |
| | 54.20 |
| | Exercised | (139 | ) | | 39.06 |
| | Forfeited | (16 | ) | | 60.64 |
| | Outstanding, end of year | 1,620 |
| | $ | 51.07 |
| | Exercisable at end of year | 996 |
| | $ | 46.10 |
| | Expected to vest at end of year | 1,607 |
| | $ | 51.01 |
|
| | | | | | | | | | Shares |
| | Weighted-Average Exercise Price |
| | Year Ended June 30, 2018 | | | (Shares in thousands) | | | Outstanding, beginning of year | 1,218 |
| | $ | 42.26 |
| | Granted | 286 |
| | 58.40 |
| | Exercised | (58 | ) | | 37.55 |
| | Forfeited | (45 | ) | | 55.64 |
| | Outstanding, end of year | 1,401 |
| | $ | 45.32 |
| | Exercisable at end of year | 789 |
| | $ | 41.08 |
| | Expected to vest at end of year | 1,379 |
| | $ | 45.22 |
|
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and expected to vest at June 30, 20182020 were 6.6, 5.3,6.0, 4.7, and 6.66.0 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and expected to vest at June 30, 20182020 were $34,869 $22,927,$20,862 $16,795, and $34,440,$20,780, respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2020, 2019, and 2018 2017,was $3,460, $3,363, and 2016 was $1,765, $8,396, and $2,422, respectively. The total fair value of shares vested during fiscal 2020, 2019, and 2018 2017,was $2,285, $1,846, and 2016 was $2,149, $1,788, and $1,291, respectively. Performance Shares Performance shares are paid in shares of Applied stock at the end of a three-year period provided the Company achieves goals established by the committee.Committee. The number of Applied shares payable will vary depending on the level of the goals achieved. A summary of nonvestednon-vested performance shares activity at June 30, 20182020 is presented below: | | | | | | | | | | Shares |
| | Weighted-Average Grant-Date
Fair Value |
| | Year Ended June 30, 2020 | | | (Shares in thousands) | | | Non-vested, beginning of year | 97 |
| | $ | 50.88 |
| | Awarded | 17 |
| | 52.86 |
| | Vested | (58 | ) | | 47.87 |
| | Non-vested, end of year | 56 |
| | $ | 54.62 |
|
| | | | | | | | | | Shares |
| | Weighted-Average Grant-Date
Fair Value |
| | Year Ended June 30, 2018 | | | (Shares in thousands) | | | Nonvested, beginning of year | 52 |
| | $ | 43.99 |
| | Awarded | 51 |
| | 47.13 |
| | Vested | (10 | ) | | 48.76 |
| | Nonvested, end of year | 93 |
| | $ | 45.16 |
|
The Committee set three one-year goals for each of the 2018, 20172020, 2019, and 20162018 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. For the outstanding grants as of June 30, 2018,2020, the maximum number of shares whichthat could be earned in future periods was 67.79.
Restricted Stock and Restricted Stock Units Restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective shares, but are restricted from selling or transferring the shares prior to vesting. Restricted stock awards vest over periods of one to four years. RSUs are grants valued in shares of Applied stock, but shares are not issued until the grants vest three to fourfive years from the award date, assuming continued employment with Applied. Applied primarily pays dividend equivalents on RSUs on a current basis.basis, however dividend equivalents on RSU grants under the 2019 Plan will be paid upon vesting. A summary of the status of the Company’s non-vested restricted stock and RSUs at June 30, 20182020 is presented below: | | | | | | | | | | Shares |
| | Weighted-Average Grant-Date
Fair Value |
| | Year Ended June 30, 2020 | | | (Share amounts in thousands) | | | Non-vested, beginning of year | 89 |
| | $ | 59.93 |
| | Granted | 81 |
| | 56.74 |
| | Vested | (40 | ) | | 53.60 |
| | Non-vested, end of year | 130 |
| | $ | 59.91 |
|
| | | | | | | | | | Shares |
| | Weighted-Average Grant-Date
Fair Value |
| | Year Ended June 30, 2018 | | | (Share amounts in thousands) | | | Nonvested, beginning of year | 116 |
| | $ | 46.91 |
| | Granted | 53 |
| | 62.62 |
| | Forfeitures | (10 | ) | | 54.96 |
| | Vested | (43 | ) | | 52.58 |
| | Nonvested, end of year | 116 |
| | $ | 51.27 |
|
NOTE 10: BENEFIT PLANS12: LEASES Retirement Savings Plan
Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company’s operating lease expense for matching of employees’ 401(k) contributions was $6,551, $6,677is recognized on a straight-line basis over the lease term and $2,535 during 2018, 2017 and 2016, respectively.
Deferred Compensation Plans
The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.
Post-employment Benefit Plans
The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded:
Supplemental Executive Retirement Benefits Plan
The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011.
Key Executive Restoration Plan
In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualified deferred compensation plan, to replace the SERP. The Companyis recorded $359, $289, and $268 of expense associated with this plan in fiscal 2018, 2017, and 2016, respectively.
Qualified Defined Benefit Retirement Plan
The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly employees at retirement. These employees do not participate in the Retirement Savings Plan. The benefits are based on length of service and date of retirement. The plan accruals were frozen as of April 16, 2018 and employees are now permitted to participate in the Retirement Savings Plan subsequent to April 16, 2018.
Salary Continuation Benefits
The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits through fiscal 2020.
Retiree Health Care Benefits
The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of
coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees at no cost to the individual.
The Company uses a June 30 measurement date for all plans.
The following table sets forth the changes in benefit obligations and plan assets during the year and the funded status for the post-employment plans at June 30:
| | | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | | | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| | Change in benefit obligation: | | | | | | | | | Benefit obligation at beginning of the year | $ | 24,411 |
| | $ | 26,605 |
| | $ | 1,684 |
| | $ | 2,235 |
| | Service cost | 124 |
| | 126 |
| | 19 |
| | 29 |
| | Interest cost | 729 |
| | 687 |
| | 52 |
| | 63 |
| | Plan participants’ contributions | — |
| | — |
| | 68 |
| | 69 |
| | Benefits paid | (3,181 | ) | | (1,562 | ) | | (223 | ) | | (237 | ) | | Amendments | — |
| | — |
| | — |
| | (245 | ) | | Actuarial gain during year | (549 | ) | | (1,445 | ) | | (109 | ) | | (230 | ) | | Benefit obligation at end of year | $ | 21,534 |
| | $ | 24,411 |
| | $ | 1,491 |
| | $ | 1,684 |
| | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | $ | 6,530 |
| | $ | 6,737 |
| | $ | — |
| | $ | — |
| | Actual gain on plan assets | 516 |
| | 578 |
| | — |
| | — |
| | Employer contributions | 3,837 |
| | 776 |
| | 155 |
| | 168 |
| | Plan participants’ contributions | — |
| | — |
| | 68 |
| | 69 |
| | Benefits paid | (3,181 | ) | | (1,561 | ) | | (223 | ) | | (237 | ) | | Fair value of plan assets at end of year | $ | 7,702 |
| | $ | 6,530 |
| | $ | — |
| | $ | — |
| | Funded status at end of year | $ | (13,832 | ) | | $ | (17,881 | ) | | $ | (1,491 | ) | | $ | (1,684 | ) |
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive loss for the post-employment plans were as follows:
| | | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | | June 30, | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Other current liabilities | $ | 3,298 |
| | $ | 2,814 |
| | $ | 220 |
| | $ | 220 |
| | Post-employment benefits | 10,534 |
| | 15,067 |
| | 1,271 |
| | 1,464 |
| | Net amount recognized | $ | 13,832 |
| | $ | 17,881 |
| | $ | 1,491 |
| | $ | 1,684 |
| | Amounts recognized in accumulated other comprehensive loss: | | | | | | | | | Net actuarial (loss) gain | $ | (4,781 | ) | | $ | (5,798 | ) | | $ | 1,121 |
| | $ | 1,167 |
| | Prior service cost | — |
| | (35 | ) | | 554 |
| | 922 |
| | Total amounts recognized in accumulated other comprehensive loss | $ | (4,781 | ) | | $ | (5,833 | ) | | $ | 1,675 |
| | $ | 2,089 |
|
The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets:
| | | | | | | | | | | Pension Benefits | | June 30, | 2018 |
| | 2017 |
| | Projected benefit obligations | $ | 21,534 |
| | $ | 24,411 |
| | Accumulated benefit obligations | 21,534 |
| | 24,411 |
| | Fair value of plan assets | 7,702 |
| | 6,530 |
|
The net periodic costs (benefits) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | 2018 |
| | 2017 |
| | 2016 |
| | Service cost | $ | 124 |
| | $ | 126 |
| | $ | 91 |
| | $ | 19 |
| | $ | 29 |
| | $ | 22 |
| | Interest cost | 729 |
| | 687 |
| | 879 |
| | 52 |
| | 63 |
| | 75 |
| | Expected return on plan assets | (472 | ) | | (460 | ) | | (491 | ) | | — |
| | — |
| | — |
| | Recognized net actuarial loss (gain) | 424 |
| | 872 |
| | 913 |
| | (154 | ) | | (181 | ) | | (210 | ) | | Amortization of prior service cost | 27 |
| | 86 |
| | 86 |
| | (369 | ) | | (271 | ) | | (271 | ) | | Recognition of prior service cost upon plan curtailment | 8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Net periodic cost (benefits) | $ | 840 |
| | $ | 1,311 |
| | $ | 1,478 |
| | $ | (452 | ) | | $ | (360 | ) | | $ | (384 | ) |
In accordance with the Company's adoption of ASU 2017-07, the Company reports the service cost component of the net periodic post-employment costs in the same line item in the income statement as other compensation costs arising from services rendered by the employees during the period. The other components of net periodic post-employment costs are presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Therefore, $143, $155, and $113 of service costs are included in selling, distribution and administrative expense and $245, $796, and $981 of net other periodic post-employment costs are included in other (income) expense, net inon the statements of consolidated incomeincome. Operating lease costs and short-term lease costs were $33,152 and $10,581 for the yearsyear ended June 30, 2018, 2017, and 2016,2020, respectively.
The estimated net actuarial loss for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $185. The estimated net actuarial gain and income from prior service cost for the retiree health care benefits that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $121 and $369, respectively.
Assumptions
A discount rate is used to determine the present value of future payments. In general, the Company’s liability increases as the discount rate decreases and decreases as the discount rate increases. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the Citigroup Pension Discount Yield Curve and the Findley Discount Curve. During fiscal 2015, the Society of Actuaries released a series of updated mortality tables resulting from recent studies measuring mortality rates for various groups of individuals. As of June 30, 2015, the Company adopted these mortality tables, which reflect improved trends in longevity and have the effect of increasing the estimate of benefits to be received by plan participants.
The weighted-average actuarial assumptions used to determine benefit obligations and net periodic benefit cost for the plans were as follows:
| | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | | June 30, | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| | Assumptions used to determine benefit obligations at year end: | | | | | | | | | Discount rate | 3.5 | % | | 2.8 | % | | 3.8 | % | | 3.3 | % | | Assumptions used to determine net periodic benefit cost: | | | | | | | | | Discount rate | 2.8 | % | | 2.3 | % | | 3.3 | % | | 2.9 | % | | Expected return on plan assets | 7.0 | % | | 7.0 | % | | N/A |
| | N/A |
|
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 7.0% as of June 30, 2018 and 2017, respectively, decreasing to 5.0% by 2027.
A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 2018 and for the year then ended:
| | | | | | | | | | | One-Percentage Point | | | | Increase | | Decrease | | Effect on total service and interest cost components of periodic expense | $ | 9 |
| | $ | (8 | ) | | Effect on post-retirement benefit obligation | 152 |
| | (130 | ) |
Plan Assets
The fair value of each major class of plan assets for the Company’s Qualified Defined Benefit Retirement Plan is valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair values and target allocation as of June 30:
| | | | | | | | | | | | | Target Allocation | | Fair Value | | | | | 2018 |
| | 2017 |
| | Asset Class: | | | | | | | Equity* securities (Level 1) | 40 – 70% | | $ | 6,226 |
| | $ | 3,880 |
| | Debt securities (Level 2) | 20 – 50% | | 1,337 |
| | 2,538 |
| | Other (Level 1) | 0 – 20% | | 139 |
| | 112 |
| | Total | 100% | | $ | 7,702 |
| | $ | 6,530 |
|
* Equity securities do not include any Company common stock.
The Company has established an investment policy and regularly monitors the performance of the assets of the trust maintained in conjunction with the Qualified Defined Benefit Retirement Plan. The strategy implemented by the trustee of the Qualified Defined Benefit Retirement Plan is to achieve long-term objectives and invest the pension assets in accordance with ERISA and fiduciary standards. The long-term primary objectives are to provide for a reasonable amount of long-term capital, without undue exposure to risk; to protect the Qualified Defined Benefit Retirement Plan assets from erosion of purchasing power; and to provide investment results that meet or exceed the actuarially assumed long-term rate of return. The expected long-term rate of return on assets assumption was developed by considering the historical returns and the future expectations for returns of each asset class as well as the target asset allocation of the pension portfolio.
Cash Flows
Employer Contributions
The Company expects to contribute $3,300 to its pension benefit plans and $130 to its retiree health care benefit plans in fiscal 2019. Contributions do not equal estimated future benefit payments as certain payments are made from plan assets.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as applicable, are expected to be paid in each of the next five years and in the aggregate for the subsequent five years:
| | | | | | | | | | During Fiscal Years | Pension Benefits |
| | Retiree Health Care Benefits |
| | 2019 | $ | 3,700 |
| | $ | 130 |
| | 2020 | 3,800 |
| | 120 |
| | 2021 | 1,300 |
| | 110 |
| | 2022 | 1,300 |
| | 110 |
| | 2023 | 1,400 |
| | 100 |
| | 2024 through 2028 | 5,200 |
| | 530 |
|
NOTE 11: LEASES
The Company leases many service center and distribution center facilities, vehicles and equipment under non-cancelable lease agreements accounted for as operating leases. The minimum annual rental commitments under non-cancelable operating leases as of June 30, 2018 are as follows:
| | | | | | During Fiscal Years | | | 2019 | $ | 38,100 |
| | 2020 | 27,500 |
| | 2021 | 17,800 |
| | 2022 | 11,200 |
| | 2023 | 5,800 |
| | Thereafter | 11,000 |
| | Total minimum lease payments | $ | 111,400 |
|
Rental expense incurred for operating leases principally fromunder ASC Topic 840, Leases, was $45,000 for the year ended June 30, 2019. Variable lease costs and sublease income were not material. Information related to operating leases is as follows: | | | | | | | June 30, | | 2020 |
| | Operating lease assets, net | | $ | 90,636 |
| | | | | | Operating lease liabilities | | | | Other current liabilities | | $ | 27,231 |
| | Other liabilities | | 67,926 |
| | Total operating lease liabilities | | $ | 95,157 |
|
| | | | | | June 30, | | 2020 |
| | Weighted average remaining lease term (years) | | 3.6 |
| | Weighted average incremental borrowing rate | | 3.45 | % |
| | | | | | | Year Ended June 30, | | 2020 |
| | Cash paid for operating leases | | $ | 34,642 |
| | Right of use assets obtained in exchange for new operating lease liabilities | | $ | 39,136 |
|
The table below summarizes the aggregate maturities of liabilities pertaining to operating leases with terms greater than one year for real property, vehicles and computer equipment was $41,000each of the next five years: | | | | | | Fiscal Year | Maturity of Operating Lease Liabilities |
| | 2021 | $ | 29,979 |
| | 2022 | 22,900 |
| | 2023 | 16,428 |
| | 2024 | 12,842 |
| | 2025 | 6,698 |
| | Thereafter | 15,318 |
| | Total lease payments | 104,165 |
| | Less interest | 9,008 |
| | Present value of lease liabilities | $ | 95,157 |
|
The table below summarizes the future minimum annual rental commitments for operating leases accounted for in 2018, $35,900 in 2017 and $37,300 in 2016, and was classified within selling, distribution and administrative expenses in the statementsaccordance with ASC Topic 840, Leases, as of consolidated income.June 30, 2019: | | | | | | Fiscal Year | Operating Leases |
| | 2020 | $ | 33,707 |
| | 2021 | 23,407 |
| | 2022 | 16,420 |
| | 2023 | 10,653 |
| | 2024 | 7,838 |
| | Thereafter | 12,135 |
| | Total minimum lease payments | $ | 104,160 |
|
The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $2,500 in 2020 and $2,400 $2,400,in both 2019 and $3,800 and in 2018, 2017, and 2016, respectively. NOTE 12:13: SEGMENT AND GEOGRAPHIC INFORMATION Effective July 1, 2017, the Company completed a number of changes to its organizational structure that resulted in a change in how the Company manages its businesses, allocates resources and measures performance. As a result, the Company has revised its reportable segments to reflect how management currently reviews financial information and makes operating decisions. All Canadian and Mexican subsidiaries are now grouped under the Service Center Based Distribution segment. All prior-period amounts have been adjusted to reflect the reportable segment change.
The Company's reportable segments are: Service Center Based Distribution and Fluid Power & Flow Control. These reportable segments contain the Company's various operating segments which have been aggregated based upon similar economic and operating characteristics. The Service Center Based Distribution segment provides customersoperates through local service centers and distribution centers with solutions to theira focus on providing products and services addressing the maintenance and repair of motion control infrastructure and original equipment manufacturing needs through the distribution ofproduction equipment. Products primarily include industrial products including bearings, power transmission components, fluid power components and systems, industrial rubber products,motors, belting, drives, couplings, pumps, linear motion products, tools, safety products,hydraulic and pneumatic components, filtration supplies, and hoses, as well as other industrialrelated supplies for general operational needs of customers’ machinery and maintenance supplies.equipment. The Fluid Power & Flow Control segment distributes engineeredincludes our operations that specialize in distributing, engineering, designing, integrating, and repairing hydraulic and pneumatic fluid power componentstechnologies, and specialtyengineered flow control solutionsproducts and operates shops that assemble fluid power systems and components, performs equipment repair, and offers technical advice to customers.services. The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power & Flow Control segment to the Service Center Based Distribution segment of $29,582, $28,677, and $25,556, $22,719,in 2020, 2019, and $20,261, in 2018, 2017, and 2016, respectively, have been eliminated in the following table.
Segment Financial Information | | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Year Ended June 30, 2020 | | | | | | | Net sales | $ | 2,241,949 |
| | $ | 1,003,703 |
| | $ | 3,245,652 |
| | Operating income for reportable segments | 211,667 |
| | 109,847 |
| | 321,514 |
| | Assets used in the business | 1,314,011 |
| | 969,540 |
| | 2,283,551 |
| | Depreciation and amortization of property | 17,133 |
| | 4,063 |
| | 21,196 |
| | Capital expenditures | 17,063 |
| | 3,052 |
| | 20,115 |
| | Year Ended June 30, 2019 | | | | | | | Net sales | $ | 2,452,905 |
| | $ | 1,019,834 |
| | $ | 3,472,739 |
| | Operating income for reportable segments | 254,954 |
| | 112,117 |
| | 367,071 |
| | Assets used in the business | 1,265,093 |
| | 1,066,604 |
| | 2,331,697 |
| | Depreciation and amortization of property | 15,982 |
| | 4,254 |
| | 20,236 |
| | Capital expenditures | 16,475 |
| | 2,495 |
| | 18,970 |
| | Year Ended June 30, 2018 | | | | | | | Net sales | $ | 2,346,418 |
| | $ | 726,856 |
| | $ | 3,073,274 |
| | Operating income for reportable segments | 238,322 |
| | 83,175 |
| | 321,497 |
| | Assets used in the business | 1,198,296 |
| | 1,087,445 |
| | 2,285,741 |
| | Depreciation and amortization of property | 15,336 |
| | 2,462 |
| | 17,798 |
| | Capital expenditures | 18,492 |
| | 4,738 |
| | 23,230 |
|
| | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| | Year Ended June 30, 2018 | | | | | | | Net sales | $ | 2,346,418 |
| | $ | 726,856 |
| | $ | 3,073,274 |
| | Operating income for reportable segments | 136,718 |
| | 83,194 |
| | 219,912 |
| | Assets used in the business | 1,198,296 |
| | 1,087,445 |
| | 2,285,741 |
| | Depreciation and amortization of property | 15,336 |
| | 2,462 |
| | 17,798 |
| | Capital expenditures | 18,492 |
| | 4,738 |
| | 23,230 |
| | Year Ended June 30, 2017 | | | | | | | Net sales | $ | 2,180,358 |
| | $ | 413,388 |
| | $ | 2,593,746 |
| | Operating income for reportable segments | 115,794 |
| | 46,569 |
| | 162,363 |
| | Assets used in the business | 1,187,054 |
| | 200,541 |
| | 1,387,595 |
| | Depreciation and amortization of property | 14,375 |
| | 931 |
| | 15,306 |
| | Capital expenditures | 14,566 |
| | 2,479 |
| | 17,045 |
| | Year Ended June 30, 2016 | | | | | | | Net sales | $ | 2,150,478 |
| | $ | 368,950 |
| | $ | 2,519,428 |
| | Operating income for reportable segments | 113,111 |
| | 37,174 |
| | 150,285 |
| | Assets used in the business | 1,132,222 |
| | 179,803 |
| | 1,312,025 |
| | Depreciation and amortization of property | 15,049 |
| | 917 |
| | 15,966 |
| | Capital expenditures | 12,500 |
| | 630 |
| | 13,130 |
|
ERP related assets are included in assets used in the business and capital expenditures within the Service Center Based Distribution segment. Within the geographic disclosures, these assets are included in the United States. Expenses associated with the ERP are included in the Corporate and other income, net, line in the reconciliation of operating income for reportable segments to the consolidated income before income taxes table below.
A reconciliation of operating income for reportable segments to the consolidated income before incometaxes
is as follows: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Operating income for reportable segments | $ | 321,514 |
| | $ | 367,071 |
| | $ | 321,497 |
| | Adjustments for: | | | | | | | Intangible amortization — Service Center Based Distribution | 12,385 |
| | 13,639 |
| | 17,375 |
| | Intangible amortization — Fluid Power & Flow Control | 29,168 |
| | 28,244 |
| | 14,690 |
| | Intangible Impairment — Service Center Based Distribution | — |
| | 31,594 |
| | — |
| | Goodwill Impairment — Fluid Power & Flow Control | 131,000 |
| | — |
| | — |
| | Corporate and other expense, net | 59,972 |
| | 59,806 |
| | 63,605 |
| | Total operating income | 88,989 |
| | 233,788 |
| | 225,827 |
| | Interest expense, net | 36,535 |
| | 40,188 |
| | 23,485 |
| | Other income, net | (2,782 | ) | | (881 | ) | | (2,376 | ) | | Income before income taxes | $ | 55,236 |
| | $ | 194,481 |
| | $ | 204,718 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Operating income for reportable segments | $ | 219,912 |
| | $ | 162,363 |
| | $ | 150,285 |
| | Adjustments for: | | | | | | | Intangible amortization — Service Center Based Distribution | 17,375 |
| | 18,954 |
| | 19,913 |
| | Intangible amortization — Fluid Power & Flow Control | 14,690 |
| | 5,417 |
| | 5,667 |
| | Goodwill Impairment — Service Center Based Distribution | — |
| | — |
| | 64,794 |
| | Corporate and other income, net | (37,980 | ) | | (37,394 | ) | | (29,871 | ) | | Total operating income | 225,827 |
| | 175,386 |
| | 89,782 |
| | Interest expense, net | 23,485 |
| | 8,541 |
| | 8,763 |
| | Other (income) expense, net | (2,376 | ) | | (121 | ) | | 2,041 |
| | Income before income taxes | $ | 204,718 |
| | $ | 166,966 |
| | $ | 78,978 |
|
Fluctuations in corporate and other income,expense, net, are due to changes in corporate expenses, as well as in the amounts and levels of certain supplier support benefits and expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items. Product Category
Net sales by product category are as follows:
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Industrial | $ | 2,085,571 |
| | $ | 1,855,437 |
| | $ | 1,836,484 |
| | Fluid power & flow control | 987,703 |
| | 738,309 |
| | 682,944 |
| | Net sales | $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
|
The fluid power & flow control product category includes sales of hydraulic, pneumatic, lubrication, filtration, and flow control components and systems, and repair services through the Company’s Fluid Power & Flow Control segment as well as the Service Center Based Distribution segment.
Geographic Information Net sales are presented in geographic areas based on the location of the facility shipping the product. Long-lived assets are based on physical locations and are comprised of the net book value of property, intangible assets and intangibleright of use assets. Information by geographic area is as follows:
| | | | | | | | | | | | | | June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Long-Lived Assets: | | | | | | | United States | $ | 523,739 |
| | $ | 474,910 |
| | $ | 501,373 |
| | Canada | 23,865 |
| | 13,291 |
| | 50,261 |
| | Other Countries | 8,148 |
| | 4,968 |
| | 5,656 |
| | Total | $ | 555,752 |
| | $ | 493,169 |
| | $ | 557,290 |
|
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Net Sales: | | | | | | | United States | $ | 2,615,041 |
| | $ | 2,182,552 |
| | $ | 2,117,485 |
| | Canada | 273,622 |
| | 251,999 |
| | 257,797 |
| | Other Countries | 184,611 |
| | 159,195 |
| | 144,146 |
| | Total | $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
|
| | | | | | | | | | | | | | June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Long-Lived Assets: | | | | | | | United States | $ | 501,373 |
| | $ | 207,126 |
| | $ | 225,538 |
| | Canada | 50,261 |
| | 57,947 |
| | 66,304 |
| | Other Countries | 5,656 |
| | 6,558 |
| | 7,163 |
| | Total | $ | 557,290 |
| | $ | 271,631 |
| | $ | 299,005 |
|
Other countries consist of Mexico, Australia, New Zealand, and Singapore.
NOTE 13:14: COMMITMENTS AND CONTINGENCIES The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company believes the likelihood is remotedoes not expect that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. NOTE 14:15: OTHER (INCOME) EXPENSE,INCOME, NET Other (income) expense,income, net, consists of the following: | | | | | | | | | | | | | | Year Ended June 30, | 2020 |
| | 2019 |
| | 2018 |
| | Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (458 | ) | | $ | (689 | ) | | $ | (785 | ) | | Foreign currency transaction (gains) losses | (2,463 | ) | | 334 |
| | (210 | ) | | Net other periodic post-employment (benefits) costs | (120 | ) | | (85 | ) | | 245 |
| | Life insurance expense (income), net | 233 |
| | (479 | ) | | (1,628 | ) | | Other, net | 26 |
| | 38 |
| | 2 |
| | Total other income, net | $ | (2,782 | ) | | $ | (881 | ) | | $ | (2,376 | ) |
| | | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (785 | ) | | $ | (1,188 | ) | | $ | (87 | ) | | Foreign currency transaction (gains) losses | (210 | ) | | 209 |
| | 1,039 |
| | Net other periodic post-employment costs | 245 |
| | 796 |
| | 981 |
| | Life insurance (income) expense, net | (1,628 | ) | | 107 |
| | 108 |
| | Other, net | 2 |
| | (45 | ) | | — |
| | Total other (income) expense, net | $ | (2,376 | ) | | $ | (121 | ) | | $ | 2,041 |
|
NOTE 16: SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to June 30, 2020 through the date the financial statements were issued.
QUARTERLY OPERATING RESULTS (In thousands, except per share amounts) (UNAUDITED) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Per Common Share | | | Net Sales |
| | Gross Profit |
| | Operating Income |
| | Net Income |
| | Net Income |
| | Cash Dividend |
| | 2018 | | | | | | | | | | | | | First Quarter | $ | 680,701 |
| | $ | 192,424 |
| | $ | 51,837 |
| | $ | 33,721 |
| | $ | 0.86 |
| | $ | 0.29 |
| | Second Quarter | 667,187 |
| | 188,360 |
| | 46,715 |
| | 30,950 |
| | 0.79 |
| | 0.29 |
| | Third Quarter | 827,665 |
| | 239,524 |
| | 56,444 |
| | 36,592 |
| | 0.93 |
| | 0.30 |
| | Fourth Quarter | 897,721 |
| | 263,687 |
| | 70,831 |
| | 40,362 |
| | 1.03 |
| | 0.30 |
| | | $ | 3,073,274 |
| | $ | 883,995 |
| | $ | 225,827 |
| | $ | 141,625 |
| | $ | 3.61 |
| | $ | 1.18 |
| | 2017 | | | | | | | | | | | | | First Quarter | $ | 624,848 |
| | $ | 178,330 |
| | $ | 43,218 |
| | $ | 27,371 |
| | $ | 0.70 |
| | $ | 0.28 |
| | Second Quarter | 608,123 |
| | 172,456 |
| | 37,656 |
| | 24,085 |
| | 0.61 |
| | 0.28 |
| | Third Quarter | 679,304 |
| | 190,802 |
| | 45,467 |
| | 29,494 |
| | 0.75 |
| | 0.29 |
| | Fourth Quarter | 681,471 |
| | 196,107 |
| | 48,249 |
| | 52,960 |
| | 1.34 |
| | 0.29 |
| | | $ | 2,593,746 |
| | $ | 737,695 |
| | $ | 174,590 |
| | $ | 133,910 |
| | $ | 3.40 |
| | $ | 1.14 |
| | 2016 | | | | | | | | | | | | | First Quarter | $ | 641,904 |
| | $ | 181,012 |
| | $ | 41,026 |
| | $ | 24,291 |
| | $ | 0.61 |
| | $ | 0.27 |
| | Second Quarter | 610,346 |
| | 173,167 |
| | 38,362 |
| | 23,947 |
| | 0.61 |
| | 0.27 |
| | Third Quarter | 633,172 |
| | 174,793 |
| | (33,032 | ) | | (44,728 | ) | | (1.14 | ) | | 0.28 |
| | Fourth Quarter | 634,006 |
| | 178,450 |
| | 42,445 |
| | 26,067 |
| | 0.66 |
| | 0.28 |
| | | $ | 2,519,428 |
| | $ | 707,422 |
| | $ | 88,801 |
| | $ | 29,577 |
| | $ | 0.75 |
| | $ | 1.10 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Per Common Share | | | Net Sales |
| | Gross Profit |
| | Operating Income (loss) |
| | Net Income (loss) |
| | Net Income (loss) |
| | Cash Dividend |
| | 2020 | | | | | | | | | | | | | First Quarter | $ | 856,404 |
| | $ | 251,460 |
| | $ | 61,166 |
| | $ | 38,799 |
| | $ | 1.00 |
| | $ | 0.31 |
| | Second Quarter | 833,375 |
| | 241,234 |
| | 58,745 |
| | 38,031 |
| | 0.97 |
| | 0.31 |
| | Third Quarter | 830,797 |
| | 236,752 |
| | (77,950 | ) | | (82,777 | ) | | (2.14 | ) | | 0.32 |
| | Fourth Quarter | 725,076 |
| | 208,290 |
| | 47,028 |
| | 29,989 |
| | 0.77 |
| | 0.32 |
| | | $ | 3,245,652 |
| | $ | 937,736 |
| | $ | 88,989 |
| | $ | 24,042 |
| | $ | 0.62 |
| | $ | 1.26 |
| | 2019 | | | | | | | | | | | | | First Quarter | $ | 864,515 |
| | $ | 251,853 |
| | $ | 66,339 |
| | $ | 48,938 |
| | $ | 1.24 |
| | $ | 0.30 |
| | Second Quarter | 840,038 |
| | 242,860 |
| | 60,965 |
| | 38,717 |
| | 0.99 |
| | 0.30 |
| | Third Quarter | 885,443 |
| | 255,559 |
| | 34,509 |
| | 16,535 |
| | 0.42 |
| | 0.31 |
| | Fourth Quarter | 882,743 |
| | 257,351 |
| | 71,975 |
| | 39,803 |
| | 1.02 |
| | 0.31 |
| | | $ | 3,472,739 |
| | $ | 1,007,623 |
| | $ | 233,788 |
| | $ | 143,993 |
| | $ | 3.68 |
| | $ | 1.22 |
|
On August 10, 2018,7, 2020, there were 4,3073,742 shareholders of record including 2,9142,522 shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company’s common stock is listed on the New York Stock Exchange. The closing price on August 10, 20187, 2020 was $72.20$67.26 per share. The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the number of weighted shares outstanding and the effects of rounding for each period. Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are primarily made based on periodic physical inventory and the effect of year-end inventory quantities on LIFO costs. Fiscal 20182020 The decline in net sales in the third and fourth quarters of fiscal 2020 is due to slowness in key end markets largely attributable to the impact of the COVID-19 pandemic. During the secondfirst quarter of fiscal 2018,2020, the Tax Cuts and Jobs Act (the "Act") was enactedCompany adopted ASC 842 – accounting for leases. Adoption of the new standard resulted in the U.S., making significant changesrecognition of right-of-use assets and lease liabilities of $83.5 million and $89.8 million, respectively, on July 1, 2019. In addition, the adoption resulted in an adjustment to U.S.opening retained earnings of approximately $3.3 million, net of tax, law. Theon July 1, 2019. During the first quarter of fiscal 2020, the Company revised its estimated annual effective tax rate to reflectacquired 100% of the changeoutstanding shares of Olympus Controls, a Portland, Oregon based full-service provider of innovative technologies and complete engineered solutions for original equipment manufacturers, machine builders, integrators, and end users. Olympus Controls is included in the federal statutory rate to a blended statutory rateFluid Power & Flow Control segment. The purchase price for the annual period of 28.1%. The corporate income tax rate change had a favorable impact to the Company of $12.1 million for fiscal 2018. Further, we recognized provisional amounts for the one-time transition tax of $3.9 million and for the re-measurement of the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse of $2.4acquisition was $36.6 million. Overall, the Act resulted in a net tax benefit of $5.8 million for fiscal 2018, which is included as a component of income tax expense in the statements of consolidated income. During the third quarter of fiscal 2018,2020, the Company completedrecognized a non-cash goodwill impairment charge of $131.0 million related to the acquisition of all of the outstanding sharesoperations of FCX Performance, Inc. (FCX), a Columbus, Ohio based distributor of specialty process flow control products and services. At the time of closing, FCX operated 68 locations with approximately 1,000 employees. The total consideration transferred for the acquisition was approximately $782 million, which was financed by cash-on-hand and a new credit facility comprised of a $780 million Term Loan A and $250 million revolver (the Credit Facility), effective with the transaction closing. This Credit Facility was used to finance the transaction, as well as to repay within the Company's existing term loan outstanding prior to the acquisition date. Fiscal 2017
During the fourth quarter of fiscal 2017, the Company recorded a tax benefit pertaining to a worthless stock tax deduction of $22.2 million, or $0.56 per share. This deduction is based on the write-off of its investment in one of its Canadian subsidiaries for U.S. tax purposes.
In fiscal 2017 reductions in U.S. inventories in the bearings pool resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. A portion of these reductions resulted from the scrapping of $6.0 million of bearings inventory which resulted in a similar amount of scrap expense being recognized in the fourth quarter of fiscal 2017. The overall impact of the fiscal 2017 LIFO layer liquidations increased gross profit by $9.4 million in the fourth quarter of fiscal 2017. The net benefit of the bearings products LIFO layer liquidation benefit, less the bearing product scrap expense was $3.4 million.
Fiscal 2016Fluid Power & Flow Control segment.
During the third quarter of fiscal 2016,2020, the Company recorded goodwill impairment of $64.8 millionincurred certain non-routine charges primarily related to the Canada and Australia/New Zealand service center reporting units withinits U.S. operations in the Service Center Based Distribution reportable segment. After taxes,Total non-routine charges reduced gross profit by $3.9 million, increased the impairment had a negative impact on earnings of $63.8operating loss by $6.0 million, and reduced earnings per shareincreased the quarter net loss by $1.62 per share.$3.6 million. Fiscal 2019 During the third quarter of fiscal 2016,2019, the Company acquired substantially all of the net assets of MilRoc Distribution and Woodward Steel for a purchase price of $35.0 million. MilRoc Distribution is an Oklahoma based distributor of oilfield specific products, namely pumps and valves, as well as equipment repair services and industrial trailer parts to the oil & gas industry. Woodward Steel is a Woodward, Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc Distribution and Woodward steel are both included in the Service Center Based Distribution segment.
During the third quarter of fiscal 2019, the Company incurred certain restructuring charges. During the third quarter, a reserve of $3.6 million was recorded within cost of sales for potential non-salable, non-returnable and excess inventory due to declining demand, primarily for Canada oil and gas operations. SD&A included expenses of $5.2 million during the fiscal year related to severance and facility consolidations,charges primarily for oil and& gas operations. Total restructuring charges reduced gross profit for the yearquarter by $3.6$0.7 million and operating income by $8.8 million, net income by $6.2 million and earnings per share by $0.16.$2.3 million. During the fourththird quarter of fiscal 2016,2019, the Company realized LIFO layer liquidation benefitsperformed an impairment analysis for certain long-lived intangible assets related to the Company's upstream oil & gas operations in Canada as a result of $2.1 million from certain inventory quantity levels decreasing.the continued decline in the oil & gas industry in Western Canada. As a result of this test, the Company determined that the net book values of these long-lived intangible assets were impaired and recognized a non-cash impairment charge of $31.6 million. The Company also recorded a valuation allowance against its Canadian deferred tax assets of $3.8 million. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures On January 31, 2018, the Company completed the acquisition of FCX Performance, Inc ("FCX"). As permitted by SEC guidance, the scope of management’s evaluation of internal control over financing reporting as of June 30, 2018 did not include the internal control over financial reporting of FCX. However, we are extending our oversight and monitoring processes that support our internal control over financial reporting to include FCX's operations.
The Company's management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective. Management's Report on Internal Control over Financial Reporting The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President & Chief Executive Officer and the Vice President - Chief Financial Officer & Treasurer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s Management and Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of inherent limitations, internal control over financial reporting can provide only reasonable, not absolute, assurance with respect to the preparation and presentation of the consolidated financial statements and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2018.2020. This evaluation was based on the criteria set forth in the framework "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management determined that the Company’s internal control over financial reporting was effective as of June 30, 2018. The Company acquired FCX Performance Inc. ("FCX") on January 31, 2018. Management has excluded FCX from its assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2018. FCX represents approximately 39.5% and 8.1% of total assets and net sales, respectively, of the consolidated financial statement amounts as of and for the year ended June 30, 2018.2020.
The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein. | | | | | /s/ Neil A. Schrimsher | | /s/ David K. Wells | | President & Chief Executive Officer | | Vice President - Chief Financial Officer & Treasurer |
August 17, 2018
14, 2020
Report
Changes in Internal Control Over Financial Reporting There have not been any changes in internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. As a result of Independent Registered Public Accounting Firmthe COVID-19 pandemic, a significant portion of our workforce began working remotely in March 2020. These changes to the working environment did not have a material effect on our internal controls over financial reporting during the most recent quarter. We are continually monitoring and assessing the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc.
Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2018,2020, of the Company and our report dated August 17, 2018,14, 2020, expressed an unqualified opinion on those consolidated financial statements. As described in Management’s Report on Internal Controls Over Financial Reporting, management excluded from its assessmentstatements and included an explanatory paragraph regarding the internal control over financial reporting at FCX Performance Inc. ("FCX"), which was acquired on January 31, 2018 and whose financial statements constitute 39.5% of total assets and 8.1% of net salesCompany's adoption of the consolidated financial statements as of and for the year ended June 30, 2018. Accordingly, our audit did not include the internal control over financial reporting at FCX.FASB's new standard related to leases.
Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls OverControl over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Cleveland, Ohio August 17, 2018
Changes in Internal Control Over Financial Reporting
There have not been any changes in internal control over financial reporting during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this Item as to Applied's directors is incorporated by reference to Applied's proxy statement relating to the annual meeting of shareholders to be held October 30, 2018,27, 2020, under the caption “Item 1 - Election of Directors.” The information required by this Item as to Applied's executive officers has been furnished in this report in Part I, after Item 4, under the caption “Executive Officers of the Registrant.“Information about our Executive Officers.” The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to Applied's proxy statement, under the caption “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance.”Reports." Applied has a code of ethics, named the Code of Business Ethics, that applies to our employees, including our principal executive officer, principal financial officer, and principal accounting officer. The Code of Business Ethics is posted via hyperlink at the investor relations area of our www.applied.com website. In addition, amendments to and waivers from the Code of Business Ethics will be disclosed promptly at the same location. Information regarding the composition of Applied’s audit committee and the identification of audit committee financial experts serving on the audit committee is incorporated by reference to Applied's proxy statement, under the caption “Corporate Governance.”
ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 30, 2018,27, 2020, under the captions “Executive Compensation” and “Compensation Committee Report.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Applied's shareholders have approved the following equity compensation plans: the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2019 Long-Term Performance Plan, the Deferred Compensation Plan (no active employees participate in the plan), and the Deferred Compensation Plan for Non-Employee Directors.Directors (two active directors participate in the plan). All of these plans are currently in effect. The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied as of June 30, 2018.2020. | | | | | | | | | | | | | | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | Equity compensation plans approved by security holders | 1,378,637 |
| | | $45.22 | | * | Equity compensation plans not approved by security holders | — |
| | | — |
| | | — |
| | | Total | 1,378,637 |
| | | $45.22 |
| * |
| | | | | | | | | | | | | | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | Equity compensation plans approved by security holders | 1,606,961 |
| | | $51.01 | | * | Equity compensation plans not approved by security holders | — |
| | | — |
| | | — |
| | | Total | 1,606,961 |
| | | $51.01 |
| * |
| | | * | The 20152019 Long-Term Performance Plan was adopted in October 2019 to replace the 2015 Long-Term Performance Plan and, similarly, the 2015 Long-Term Performance Plan replaced the 2011 Long-Term Performance Plan, and the 2011 Long-Term Performance Plan was adopted to replacewhich itself had replaced the 2007 Long-Term Performance Plan. Stock options, and stock appreciation rights, and other awards remain outstanding under each of the 2007, 2011, and 20112015 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 20152019 Long-Term Performance Plan at June 30, 20182020 was 1,665,033.2,221,129. |
Information concerning the security ownership of certain beneficial owners and management is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 30, 2018,27, 2020, under the caption “Holdings of Major Shareholders, Officers, and Directors.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 30, 2018,27, 2020, under the caption “Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 30, 2018,27, 2020, under the caption “Item 3 - Ratification of Auditors.”
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE. (a)1. Financial Statements. The following consolidated financial statements, notes thereto, the reports of independent registered public accounting firm, and supplemental data are included in Item 8 of this report: | | | | | • | Report of Independent Registered Public Accounting Firm | | | | | | • | Statements of Consolidated Income for the Years Ended June 30, 2018, 2017,2020, 2019, and 20162018 | | | | | | • | Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2018, 2017,2020, 2019, and 20162018 | | | | | | • | Consolidated Balance Sheets at June 30, 20182020 and 20172019 | | | | | | • | Statements of Consolidated Cash Flows for the Years Ended June 30, 2018, 2017,2020, 2019, and 20162018 | | | | | | • | Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2018, 2017,2020, 2019, and 20162018 | | | | | | • | Notes to Consolidated Financial Statements for the Years Ended June 30, 2018, 2017,2020, 2019, and 20162018 | | | | | | • | Supplementary Data: | | | | | | | • | Quarterly Operating Results |
(a)2. Financial Statement Schedule. The following schedule is included in this Part IV, and is found in this report at the page indicated: | | | | | | Page No. | | | | | | | Schedule II - Valuation and Qualifying Accounts: Pg. 7072 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto. (a)3. Exhibits. | | | | * Asterisk indicates an executive compensation plan or arrangement. | | Exhibit No. | Description | | | | | 3.1 | | | | | | 3.2 | | | | | | 4.1 | | | | | | 4.2 | Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 27, 1996, as amended through June 29, 2018,October 30, 2019, between Applied Industrial Technologies, Inc. and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), conformedand certain of its affiliates (filed as Exhibit 10.1 to show all amendments.Applied’s Form 8-K filed November 5, 2019, SEC File No. 1-2299, and incorporated here by reference). | | | | | 4.3 | Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K filed July 2, 2014, SEC File No. 1-2299, and incorporated here by reference). | | | |
| | | | 4.4 | Request for Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 4.5 to Applied's Form 10-Q for the quarter ended September 30, 2014, SEC File No. 1-2299, and incorporated here by reference). | | | | | 4.5 | | | | | 4.6 | Receivables Financing Agreement dated as of August 31, 2018 among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.1 to the Company's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference). | | | | 4.7 | | | | | | *10.1 | A written description of Applied's director compensation program is incorporated by reference to Applied’s proxy statement for the annual meeting of shareholders to be held October 30, 201827, 2020 under the caption “Director Compensation.” | | | | | *10.2 | | | | | | *10.3 | | | | | | *10.4 | | | | | | *10.5 | | | | | | *10.6 | | | | | | *10.7 | | | | | | *10.8 | | | | | | *10.9 | | | | | | *10.10 | | | | | *10.11 | | | | | *10.1110.12 | | | | | *10.1210.13 | | | | | *10.1310.14 | | | | | *10.1410.15 | | | | | *10.1510.16 | | | | | *10.1610.17 | | | | |
| | | *10.1910.20 | | | | | *10.2010.21 | | | | | *10.2110.22 | | | | *10.22 | | | | *10.23 | | | | *10.24 | | | | | *10.2510.23 | | | | | *10.2610.24 | | | | | *10.2710.25 | | | | | *10.2810.26 | | | | | *10.2910.27 | | | | | *10.3010.28 | | | | | *10.3110.29 | | | | | *10.3210.30 | | | | | *10.3310.31 | | | | | *10.3410.32 | | | | | *10.3510.33 | | | | 10.36 | Agreement and Plan of Merger by and among Applied Industrial Technologies, Inc., Fortress Merger Sub Holding LLC, Fortress Merger Sub LP, FCX Group Holdings, LP, FCX Group GP, LLC, and Harvest Partners, LP (filed as Exhibit 10.1 to Applied's Form 8-K filed January 9, 2018, SEC File No. 1-2299, and incorporated here by reference). | | | | | 21 | | | | | | 23 | | | | | | 24 | | | | | | 31 | | | | | | 32 | | | | | 95 | | | | | 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | |
| | | | | 101.INS | XBRL Instance Document | | | | 101.SCH | XBRL Taxonomy Extension Schema Document | | | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Applied will furnish a copy of any exhibit described above and not contained herein upon payment of a specified reasonable fee, which shall be limited to Applied's reasonable expenses in furnishing the exhibit. Certain instruments with respect to long-term debt have not been filed as exhibits because the total amount of securities authorized under any one of the instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each such instrument.
ITEM 16. FORM 1O-K10-K SUMMARY.
Not applicable.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2018, 2017,2020, 2019, AND 20162018 (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | | DESCRIPTION | | Balance at Beginning of Period |
| | Additions Charged to Cost and Expenses |
| | Additions (Deductions) Charged to Other Accounts |
| | | Deductions from Reserve |
| | | Balance at End of Period |
| | Year Ended June 30, 2020 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 10,498 |
| | $ | 14,055 |
| | $ | — |
| | | $ | 10,892 |
| (C) | | $ | 13,661 |
| | Returns reserve | | 7,265 |
| | — |
| | 2,618 |
| (B) | | — |
| | | 9,883 |
| | | | $ | 17,763 |
| | $ | 14,055 |
| | $ | 2,618 |
| | | $ | 10,892 |
| | | $ | 23,544 |
| | Year Ended June 30, 2019 | | |
| | |
| | |
| | | |
| | | |
| | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | | Accounts receivable: | |
|
| |
|
| |
|
| | |
|
| | |
|
| | Allowance for doubtful accounts | | $ | 10,964 |
| | $ | 4,058 |
| | $ | — |
| | | $ | 4,524 |
| (C) | | $ | 10,498 |
| | Returns reserve | | 2,602 |
| | 738 |
| | 3,925 |
| (B) | | — |
| | | 7,265 |
| | | | $ | 13,566 |
| | $ | 4,796 |
| | $ | 3,925 |
| | | $ | 4,524 |
| | | $ | 17,763 |
| | Year Ended June 30, 2018 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — | | | | | | | | | | | | | | Accounts receivable: | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 8,056 |
| | $ | 2,803 |
| | $ | 3,548 |
| (A) | | $ | 3,443 |
| (C) | | $ | 10,964 |
| | Returns reserve | | 1,572 |
| | — |
| | 1,030 |
| (A) | | — |
| | | 2,602 |
| | | | $ | 9,628 |
| | $ | 2,803 |
| | $ | 4,578 |
| | | $ | 3,443 |
| | | $ | 13,566 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | | DESCRIPTION | | Balance at Beginning of Period |
| | Additions Charged to Cost and Expenses |
| | Additions (Deductions) Charged to Other Accounts |
| | | Deductions from Reserve |
| | | Balance at End of Period |
| | Year Ended June 30, 2018 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 9,628 |
| | $ | 2,803 |
| | $ | 4,578 |
| (A) | | $ | 3,443 |
| (B) | | $ | 13,566 |
| | Year Ended June 30, 2017 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 11,034 |
| | $ | 2,071 |
| | $ | (133 | ) | (A) | | $ | 3,344 |
| (B) | | $ | 9,628 |
| | Year Ended June 30, 2016 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 10,621 |
| | $ | 4,303 |
| | $ | (46 | ) | (A) | | $ | 3,844 |
| (B) | | $ | 11,034 |
|
| | | (A) | Amounts in the year ending June 30, 2018 represent reserves recorded through purchase accounting for acquisitions made during the year of $3,549$3,548 and for the return of merchandise by customers of $1,029. Amounts in prior fiscal years represent reserves for the return of merchandise by customers.$1,030. |
| | | (B) | Amounts in the year ending June 30, 2020 and 2019 represent reserves recorded for the return of merchandise by customers. The Company adopted ASC 606 - Revenue from Contracts with Customers effective July 1, 2018 which requires the Company's sales returns reserve to be established at the gross sales value with an asset established for the value of the expected product to be returned. |
| | | (C) | Amounts represent uncollectible accounts charged off. |
SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED INDUSTRIAL TECHNOLOGIES, INC. | | | | | /s/ Neil A. Schrimsher | | /s/ David K. Wells | Neil A. Schrimsher President & Chief Executive Officer | | David K. Wells Vice President-Chief Financial Officer & Treasurer | | | | | | /s/ Christopher Macey | | | Christopher Macey
Corporate Controller (Principal Accounting Officer) | | |
Date: August 17, 201814, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. | | | | | * | | * | PeterMadhuri A. Dorsman,Andrews, Director | | L. Thomas Hiltz,Peter A. Dorsman, Director | | | | | | * | | * | Edith Kelly-Green,Mary Dean Hall, Director | | Dan P. Komnenovich, Director | | | | | | * | | * | | Robert J. Pagano, Jr., Director | | Vincent K. Petrella, Director | | | | | | * | | /s/ Neil A. Schrimsher | | Joe A. Raver, Director | | Neil A. Schrimsher, President & Chief Executive Officer and Director | | | | | | * | | *
| Dr. Jerry Sue Thornton, Director | | Peter C. Wallace, Director and Chairman |
| | | | |
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| | | /s/ Fred D. Bauer | | Fred D. Bauer, as attorney in fact | | for persons indicated by “*” |
Date: August 17, 201814, 2020
s Versus Prior Period |
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