UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~__________________________________________~~ FORM 10-Q

~~FORM 10-Q~~

~~__________________________________________~~(Mark One)

~~[X]~~



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended MARCH 31, ~~2019~~2020

~~[ ]~~



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission ~~File Number~~ file number 1-2299

~~___________________________________________~~

APPLIED INDUSTRIAL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

~~___________________________________________~~



Ohio			34-0117420
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification Number)

One Applied Plaza	Cleveland	Ohio	44115
(Address of principal executive offices)			(Zip Code)

~~Registrant’s~~(216) 426-4000

Registrant's telephone number, including area ~~code: (216) 426-4000~~code

~~(Former name, former address and former fiscal year, if changed since last report)~~

~~__________________________________________~~

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, without par value	AIT	New York Stock Exchange

Indicate by check mark whether the ~~registrant~~registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),; and (2) has been subject to such filing requirements for the past 90 days. Yes ~~[X]~~x No ~~[ ]~~o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ~~[X]~~x No ~~[ ]~~o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting ~~company, or an emerging growth~~ company. See the definitions of “large accelerated filer,” “accelerated ~~filer,”~~filer” and “smaller reporting ~~company,” and "emerging growth company"~~company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer		~~[X]~~	x	Accelerated filer	o
Non-accelerated filer	~~[ ]~~o	Smaller reporting company	☐

~~Non-accelerated filer~~		~~[ ]~~		~~Smaller reporting company~~		~~[ ]~~

Emerging growth company		~~[ ]~~				☐

~~Table of Contents~~

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ~~[ ]~~

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ~~Exchange~~ Act). Yes ☐ No ☒

~~Yes [ ] No [X]~~

There were ~~38,593,360~~38,707,000 (no par value) shares of common stock outstanding on April ~~19, 2019.~~17, 2020.

~~Table of Contents~~

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX



			Page No.
Part I:	FINANCIAL INFORMATION

	Item 1:	Financial Statements
		Condensed Statements of Consolidated ~~Income-Three~~Income - Three and Nine Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	2
		Condensed Statements of Consolidated Comprehensive ~~Income-Three~~Income - Three and Nine Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	3
		Condensed Consolidated Balance ~~Sheets-March~~Sheets - March 31, ~~2019~~2020 and June 30, ~~2018~~2019	4
		Condensed Statements of Consolidated Cash ~~Flows-Nine~~Flows - Nine Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	5
		Condensed Statements of Shareholders' Equity - Three and Nine Months Ended March 31, 2020 and 2019	6
		Notes to Condensed Consolidated Financial Statements	8
		~~Report of Independent Registered Public Accounting Firm~~	27
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2823
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk	3833
	Item 4:	Controls and Procedures	3934

Part II:	OTHER INFORMATION

	Item 1:	Legal Proceedings	4035
	Item 1A:	Risk Factors	35
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	4035
	Item 4:4.	Mine Safety Disclosures	4036
	Item 6:	Exhibits	4137
Signatures			4238


PART I:	FINANCIAL INFORMATION


ITEM I:	FINANCIAL STATEMENTS

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	March 31,						March 31,						March 31,						March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Net sales	$	885,443		$	827,665		$	2,589,996		$	2,175,553		$	830,797		$	885,443		$	2,520,576		$	2,589,996
Cost of sales	629,884			588,141			1,839,724			1,555,245			594,045			629,884			1,791,130			1,839,724
Gross profit	255,559			239,524			750,272			620,308			236,752			255,559			729,446			750,272
Selling, distribution and administrative expense, including depreciation	189,456			183,080			556,865			465,312			183,702			189,456			556,485			556,865
Intangible impairment	31,594			—			31,594			—
Operating income	34,509			56,444			161,813			154,996
Goodwill & intangible impairment													131,000			31,594			131,000			31,594
Operating (loss) income													(77,950		)	34,509			41,961			161,813
Interest expense, net	9,947			8,216			30,001			12,521			8,805			9,947			28,447			30,001
Other income, net	(1,256		)	(1,291		)	(549		)	(2,022		)	(1,428		)	(1,256		)	(1,643		)	(549		)
Income before income taxes	25,818			49,519			132,361			144,497
Income tax expense	9,283			12,927			28,171			43,234
Net income	$	16,535		$	36,592		$	104,190		$	101,263
Net income per share - basic	$	0.43		$	0.95		$	2.69		$	2.61
Net income per share - diluted	$	0.42		$	0.93		$	2.66		$	2.58
(Loss) income before income taxes													(85,327		)	25,818			15,157			132,361
Income tax (benefit) expense													(2,550		)	9,283			21,104			28,171
Net (loss) income													$	(82,777	)	$	16,535		$	(5,947	)	$	104,190
Net (loss) income per share - basic													$	(2.14	)	$	0.43		$	(0.15	)	$	2.69
Net (loss) income per share - diluted													$	(2.14	)	$	0.42		$	(0.15	)	$	2.66
Weighted average common shares outstanding for basic computation	38,643			38,674			38,701			38,775			38,682			38,643			38,647			38,701
Dilutive effect of potential common shares	396			612			521			497			—			396			—			521
Weighted average common shares outstanding for diluted computation	39,039			39,286			39,222			39,272			38,682			39,039			38,647			39,222

See notes to condensed consolidated financial statements.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

Three Months Ended Nine Months Ended
March 31, March 31,

2019 2018 2019 2018
Net income per the condensed statements of consolidated income $ 16,535
$ 36,592
$ 104,190
$ 101,263

Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments 2,945
(353 ) (1,611 ) 1,775
Post-employment benefits:
Reclassification of net actuarial gains and prior service cost into other income, net and included in net periodic pension costs (77 ) (19 ) (230 ) (55 )
Unrealized (loss) gain on investment securities available for sale —
(3 ) —
39
Cumulative effect of adopting accounting standard —
—
(50 )
—
Unrealized loss on cash flow hedge (6,941 ) —
(6,941 ) —
Reclassification of interest from cash flow hedge into interest expense 85
—
85
—
Total of other comprehensive (loss) income, before tax (3,988 ) (375 ) (8,747 ) 1,759
Income tax (benefit) expense related to items of other comprehensive (loss) income (1,626 ) 11
(1,976 ) 57
Other comprehensive (loss) income, net of tax (2,362 ) (386 ) (6,771 ) 1,702
Comprehensive income, net of tax $ 14,173
$ 36,206
$ 97,419
$ 102,965



	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2020			2019			2020			2019
Net (loss) income per the condensed statements of consolidated income	$	(82,777	)	$	16,535		$	(5,947	)	$	104,190

Other comprehensive loss, before tax:
Foreign currency translation adjustments	(28,767		)	2,945			(27,356		)	(1,611		)
Post-employment benefits:
Reclassification of net actuarial gains and prior service cost into other income, net and included in net periodic pension costs	(17		)	(77		)	(50		)	(230		)
Cumulative effect of adopting accounting standard	—			—			—			(50		)
Unrealized loss on cash flow hedge	(13,891		)	(6,941		)	(14,249		)	(6,941		)
Reclassification of interest from cash flow hedge into interest expense	1,017			85			2,350			85
Total other comprehensive loss, before tax	(41,658		)	(3,988		)	(39,305		)	(8,747		)
Income tax benefit related to items of other comprehensive loss	(3,711		)	(1,626		)	(3,684		)	(1,976		)
Other comprehensive loss, net of tax	(37,947		)	(2,362		)	(35,621		)	(6,771		)
Comprehensive (loss) income, net of tax	$	(120,724	)	$	14,173		$	(41,568	)	$	97,419

See notes to condensed consolidated financial statements.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)


	March 31, 2019			June 30, 2018			March 31, 2020			June 30, 2019
ASSETS
Current assets
Cash and cash equivalents	$	47,367		$	54,150		$	165,464		$	108,219
Accounts receivable, less allowances of $13,055 and $13,566	574,468			548,811
Accounts receivable, net							524,081			540,902
Inventories	454,555			422,069			421,201			447,555
Other current assets	49,380			32,990			51,773			51,462
Total current assets	1,125,770			1,058,020			1,162,519			1,148,138
Property, less accumulated depreciation of $177,383 and $175,300	123,240			121,343
Property, less accumulated depreciation of $187,292 and $181,066							123,770			124,303
Operating lease assets, net							86,617			—
Identifiable intangibles, net	378,844			435,947			352,864			368,866
Goodwill	661,195			646,643			539,495			661,991
Other assets	33,761			23,788			24,264			28,399
TOTAL ASSETS	$	2,322,810		$	2,285,741		$	2,289,529		$	2,331,697
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	240,339		$	256,886		$	214,253		$	237,289
Current portion of long term debt	44,163			19,183
Current portion of long-term debt							78,642			49,036
Compensation and related benefits	69,324			73,370			69,051			67,978
Other current liabilities	62,731			83,112			85,915			69,491
Total current liabilities	416,557			432,551			447,861			423,794
Long-term debt	937,536			944,522			864,758			908,850
Post-employment benefits	8,372			11,985
Other liabilities	77,497			81,720			146,350			102,019
TOTAL LIABILITIES	1,439,962			1,470,778			1,458,969			1,434,663
Shareholders’ Equity
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; 38,593 and 38,703 outstanding, respectively	10,000			10,000
Common stock—no par value; 80,000 shares authorized; 54,213 shares issued							10,000			10,000
Additional paid-in capital	171,734			169,383			174,830			172,931
Retained Earnings	1,213,314			1,129,678
Treasury shares—at cost (15,620 and 15,510 shares, respectively)	(415,206		)	(403,875		)
Retained earnings							1,195,411			1,229,148
Treasury shares—at cost (15,506 and 15,616 shares, respectively)							(414,174		)	(415,159		)
Accumulated other comprehensive loss	(96,994		)	(90,223		)	(135,507		)	(99,886		)
TOTAL SHAREHOLDERS’ EQUITY	882,848			814,963			830,560			897,034
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,322,810		$	2,285,741		$	2,289,529		$	2,331,697

See notes to condensed consolidated financial statements.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended						Nine Months Ended
	March 31,						March 31,
	2019			2018			2020			2019
Cash Flows from Operating Activities
Net income	$	104,190		$	101,263
Net (loss) income							$	(5,947	)	$	104,190
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property	15,045			12,721			15,997			15,045
Amortization of intangibles	31,823			21,326			31,671			31,823
Intangible impairment	31,594			—
Unrealized foreign exchange transactions gain	40			(440		)
Goodwill & intangible impairment							131,000			31,594
Unrealized foreign exchange transactions (gain) loss							(2,635		)	40
Amortization of stock options and appreciation rights	1,831			1,479			2,217			1,831
Gain on sale of property	(258		)	(246		)	(1,274		)	(258		)
Other share-based compensation expense	3,716			3,481			2,046			3,716
Changes in operating assets and liabilities, net of acquisitions	(106,367		)	(91,642		)	1,406			(106,367		)
Other, net	(4,448		)	(64		)	(4,857		)	(4,448		)
Net Cash provided by Operating Activities	77,166			47,878			169,624			77,166
Cash Flows from Investing Activities
Acquisition of businesses, net of cash acquired	(37,526		)	(778,149		)	(37,237		)	(37,526		)
Property purchases	(11,711		)	(17,898		)	(16,223		)	(11,711		)
Proceeds from property sales	649			714			1,809			649
Other	391			—			—			391
Net Cash used in Investing Activities	(48,197		)	(795,333		)	(51,651		)	(48,197		)
Cash Flows from Financing Activities
Net (repayments) borrowings under revolving credit facility	(500		)	87,500
Net repayments under revolving credit facility							—			(500		)
Long-term debt borrowings	175,000			780,000			25,000			175,000
Long-term debt repayments	(156,803		)	(120,488		)	(39,803		)	(156,803		)
Payment of debt issuance costs	(775		)	(3,298		)	(22		)	(775		)
Purchases of treasury shares	(11,158		)	(22,778		)	—			(11,158		)
Dividends paid	(35,254		)	(34,190		)	(36,420		)	(35,254		)
Acquisition holdback payments	(2,609		)	(318		)	(2,440		)	(2,609		)
Exercise of stock options and appreciation rights	—			5			330			—
Taxes paid for shares withheld for equity awards	(3,371		)	(1,498		)	(2,604		)	(3,371		)
Net Cash (used in) provided by Financing Activities	(35,470		)	684,935
Net Cash used in Financing Activities							(55,959		)	(35,470		)
Effect of Exchange Rate Changes on Cash	(282		)	986			(4,769		)	(282		)
Decrease in Cash and Cash Equivalents	(6,783		)	(61,534		)
Increase (decrease) in Cash and Cash Equivalents							57,245			(6,783		)
Cash and Cash Equivalents at Beginning of Period	54,150			105,057			108,219			54,150
Cash and Cash Equivalents at End of Period	$	47,367		$	43,523		$	165,464		$	47,367

See notes to condensed consolidated financial statements.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands)


For the Period Ended March 31, 2019	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, 2018	38,703		$	10,000	$	169,383		$	1,129,678		$	(403,875	)	$	(90,223	)	$	814,963
For the Period Ended March 31, 2020																				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, 2019																				38,597	$	10,000	$	172,931		$	1,229,148		$	(415,159	)	$	(99,886	)	$	897,034
Net income								48,938									48,938									38,799									38,799
Other comprehensive income (loss)														5,347			5,347
Other comprehensive loss																																(5,247		)	(5,247		)
Cumulative effect of adopting accounting standards								3,056									3,056									(3,275		)							(3,275		)
Cash dividends — $0.30 per share								(13		)							(13		)
Cash dividends — $0.31 per share																										(20		)							(20		)
Treasury shares issued for:
Exercise of stock appreciation rights and options	17				(855		)				(210		)				(1,065		)	5			(177		)				61						(116		)
Performance share awards	18				(844		)				(301		)				(1,145		)	36			(1,540		)				362						(1,178		)
Restricted stock units	16				(760		)				(198		)				(958		)	16			(631		)				200						(431		)
Compensation expense — stock appreciation rights and options					651												651						773												773
Other share-based compensation expense					1,043												1,043						919												919
Other								24			(35		)				(11		)	2			(52		)	(4		)	23						(33		)
Balance at September 30, 2018	38,754		10,000		168,618			1,181,683			(404,619		)	(84,876		)	870,806
Balance at September 30, 2019																				38,656	$	10,000	$	172,223		$	1,264,648		$	(414,513	)	$	(105,133	)	$	927,225
Net income								38,717									38,717									38,031									38,031
Other comprehensive income (loss)														(9,756		)	(9,756		)
Cash dividends — $0.30 per share								(11,651		)							(11,651		)
Exercise of stock appreciation rights and options					(7		)				1						(6		)
Restricted stock units	3				(140		)				31						(109		)
Compensation expense — stock appreciation rights and options					606												606
Other share-based compensation expense					1,308												1,308
Other								(1		)	1						—
Balance at December 31, 2018	38,757		10,000		170,385			1,208,748			(404,586		)	(94,632		)	889,915
Net income								16,535									16,535
Other comprehensive income (loss)														(2,362		)	(2,362		)
Other comprehensive income																																7,573			7,573
Cash dividends — $0.31 per share								(11,979		)							(11,979		)							(12,017		)							(12,017		)
Purchases of common stock for treasury	(192	)									(11,158		)				(11,158		)
Treasury shares issued for:
Exercise of stock appreciation rights and options	13				(197		)				149						(48		)	22			(185		)				(47		)				(232		)
Compensation expense — stock appreciation rights and options					574												574						721												721
Other share-based compensation expense					1,365												1,365						918												918
Other	15				(393		)	10			389						6			—			—			23			(1		)				22
Balance at March 31, 2019	38,593		$	10,000	$	171,734		$	1,213,314		$	(415,206	)	$	(96,994	)	$	882,848
Balance at December 31, 2019																				38,678	$	10,000	$	173,677		$	1,290,685		$	(414,561	)	$	(97,560	)	$	962,241
Net loss																										(82,777		)							(82,777		)
Other comprehensive loss																																(37,947		)	(37,947		)
Cash dividends — $0.32 per share																										(12,423		)							(12,423		)
Treasury shares issued for:
Exercise of stock appreciation rights and options																				14			(378		)				(16		)				(394		)
Compensation expense — stock appreciation rights and options																							723												723
Other share-based compensation expense																							209												209
Other																				15			599			(74		)	403						928
Balance at March 31, 2020																				38,707	$	10,000	$	174,830		$	1,195,411		$	(414,174	)	$	(135,507	)	$	830,560

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands)


For the Period Ended March 31, 2018	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, 2017	39,041		$	10,000	$	164,655		$	1,033,751		$	(381,448	)	$	(81,702	)	$	745,256
For the Period Ended March 31, 2019																				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, 2018																				38,703		$	10,000	$	169,383		$	1,129,678		$	(403,875	)	$	(90,223	)	$	814,963
Net income								33,721									33,721										48,938									48,938
Other comprehensive income (loss)														8,152			8,152
Cash dividends — $0.29 per share								(2		)							(2		)
Purchases of common stock for treasury	(248	)									(13,761		)				(13,761		)
Other comprehensive income																																	5,347			5,347
Cumulative effect of adopting accounting standards																											3,056									3,056
Cash dividends — $0.30 per share																											(13		)							(13		)
Treasury shares issued for:
Exercise of stock appreciation rights and options	1				(80		)				14						(66		)	17				(855		)				(210		)				(1,065		)
Performance share awards	5				(273		)				(24		)				(297		)	18				(844		)				(301		)				(1,145		)
Restricted stock units	13				(616		)				(57		)				(673		)	16				(760		)				(198		)				(958		)
Compensation expense — stock appreciation rights and options					577												577							651												651
Other share-based compensation expense					778												778							1,043												1,043
Other	2				(43		)	3			23						(17		)								24			(35		)				(11		)
Balance at September 30, 2017	38,814		10,000		164,998			1,067,473			(395,253		)	(73,550		)	773,668
Balance at September 30, 2018																				38,754		$	10,000	$	168,618		$	1,181,683		$	(404,619	)	$	(84,876	)	$	870,806
Net income								30,950									30,950										38,717									38,717
Other comprehensive income (loss)														(6,064		)	(6,064		)
Cash dividends — $0.29 per share								(11,246		)							(11,246		)
Purchases of common stock for treasury	(145	)									(9,017		)				(9,017		)
Other comprehensive loss																																	(9,756		)	(9,756		)
Cash dividends — $0.30 per share																											(11,651		)							(11,651		)
Treasury shares issued for:
Exercise of stock appreciation rights and options	3				(171		)				(26		)				(197		)					(7		)				1						(6		)
Restricted stock units	2				(54		)				8						(46		)	3				(140		)				31						(109		)
Compensation expense — stock appreciation rights and options					436												436							606												606
Other share-based compensation expense					799												799							1,308												1,308
Other								(21		)							(21		)								(1		)	1						—
Balance at December 31, 2017	38,674		10,000		166,008			1,087,156			(404,288		)	(79,614		)	779,262
Balance at December 31, 2018																				38,757		$	10,000	$	170,385		$	1,208,748		$	(404,586	)	$	(94,632	)	$	889,915
Net income								36,592									36,592										16,535									16,535
Other comprehensive income (loss)														(386		)	(386		)
Cash dividends — $0.30 per share								(11,637		)							(11,637		)
Other comprehensive loss																																	(2,362		)	(2,362		)
Cash dividends — $0.31 per share																											(11,979		)							(11,979		)
Purchases of common stock for treasury																				(192	)									(11,158		)				(11,158		)
Treasury shares issued for:
Exercise of stock appreciation rights and options	8				(169		)				(18		)				(187		)	13				(197		)				149						(48		)
Restricted stock units											(3		)				(3		)
Compensation expense — stock appreciation rights and options					466												466							574												574
Other share-based compensation expense					1,904												1,904							1,365												1,365
Other	14				(361		)	25			353						17			15				(393		)	10			389						6
Balance at March 31, 2018	38,696		$	10,000	$	167,848		$	1,112,136		$	(403,956	)	$	(80,000	)	$	806,028
Balance at March 31, 2019																				38,593		$	10,000	$	171,734		$	1,213,314		$	(415,206	)	$	(96,994	)	$	882,848

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

~~Table of Contents~~

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts) (Unaudited)~~

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position of Applied Industrial Technologies, Inc. (the “Company”, or “Applied”) as of March 31, ~~2019,~~2020, and the results of its operations and its cash flows for the nine month periods ended March 31, ~~2019~~2020 and ~~2018,~~2019, have been included. The condensed consolidated balance sheet as of June 30, ~~2018~~2019 has been derived from the audited consolidated financial statements at that date. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, ~~2018.~~2019.

Operating results for the nine month period ended March 31, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, ~~2019~~.

2020.

Inventory

The Company uses the LIFO method of valuing U.S. inventories. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory determination.

~~Derivatives~~

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the 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 apply 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.

Recently Adopted Accounting Guidance

~~Revenue from Contracts with Customers~~Reference Rate Reform

In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"). The standard outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers. The core principle of this model is that "an entity recognizes revenue to depict 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." Subsequent to the issuance of ASU 2014-09, the FASB issued ASU 2015-14, ASU 2016-08, ASU 2016-10, and ASU 2016-12, which clarify the guidance in ASU 2014-09 but do not change the core principle of the revenue recognition model, and have been collectively codified into ASC 606. The provisions of ASC 606 are effective for interim and annual periods beginning after December 15, 2017. On July 1, 2018, the Company adopted ASC 606 using the modified retrospective method. As a result, the Company applied ASC 606 only to contracts that were not completed as of July 1, 2018. The adoption of ASC 606 resulted in a net increase to opening retained earnings of approximately $3,429, net of tax, on July 1, 2018. See Note 2, Revenue Recognition, for further information on the impacts of these standard updates.

~~Table of Contents~~

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts) (Unaudited)~~

~~Income Tax Consequences of Intra-entity Transfer of Assets other than Inventory~~

~~In October 2016,~~March 2020, the FASB issued its final standard on the ~~income tax consequences~~facilitation of ~~intra-entity transfers~~the effects of ~~assets other than inventory.~~reference rate reform on financial reporting. This standard, issued as ASU ~~2016-16, requires that an entity recognize~~2020-04, provides optional guidance for a limited period of time to ease the ~~income tax consequences of an intra-entity transfer of an asset other than inventory when~~potential burden in accounting for (or recognizing the ~~transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory.~~effects of) reference rate reform on financial reporting. This update is effective ~~for annual and interim financial statement periods beginning after~~as of March 12, 2020 through December ~~15, 2017.~~31, 2022. The Company adopted ~~ASU 2016-16 during~~ the first quarter of fiscal 2019 using the modified retrospective method, and recorded a cumulative-effect adjustment decreasing retained earnings by $424, recording a deferred tax asset of $587 and reversing a prepaid asset of $1,011new guidance as ~~of the beginning of the period. The deferred tax asset is included~~it became effective in ~~other assets on the condensed consolidated balance sheet as of March 31, 2019.~~

~~Targeted Improvements to Accounting for Hedging Activities~~

In August 2017, the FASB issued its final standard on targeted improvements to accounting for hedging activities. This standard, issued as ASU 2017-12, expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instruments and the hedged item in the financial statements. This update is effective for annual and interim financial statement periods beginning after December 15, 2018. The Company early adopted ASU 2017-12 during the third quarter of fiscal ~~2019.~~2020. The adoption of this guidance did not have a material impact on the Company's financial statements or related disclosures.

~~Recently Issued Accounting Guidance~~Leases

In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, 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. ~~The company plans to use this new transition method option upon adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings.~~ 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 team~~adopted the new guidance effective July 1, 2019 using the optional transition method, which required application of the new guidance to ~~evaluate~~only 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 isinitial direct costs. Adoption of the new standard resulted in the ~~process~~recognition of ~~implementing new~~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 determining~~difference between the ~~financial impact that this~~ROU 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 approximately $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 will~~did not have a material impact on ~~its assets and liabilities due to~~ the ~~addition~~Company’s condensed 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 annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. In November 2018, the FASB issued ASU 2018-19 which clarifies the guidance in ASU 2016-13. 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 determined~~adopted the ~~impact~~new guidance in the first quarter of fiscal 2020. The adoption of this ~~pronouncement~~guidance did not have a material impact on ~~its~~the Company's financial statements ~~and~~or related disclosures.

In August 2018, the FASB issued its final standard on the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This standard, issued as ASU 2018-15, aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.

108

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

Recently Issued Accounting Guidance

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 annual and interim financial statement periods beginning after December 15, 2019, with early adoption 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 has not yet determined the impact of these pronouncements on its financial statements and related disclosures.

In December 2019, the FASB issued its final standard on simplifying the accounting for income taxes. This standard, issued as ASU 2019-12, makes a number of changes meant to add or clarify guidance on accounting for income taxes. This update is effective for annual and interim financial statement periods beginning after December 15, 2021, with early adoption permitted in any interim period for which financial statements have not yet been filed. The Company has not yet determined the impact of these pronouncements on its financial statements and related disclosures.

2. REVENUE RECOGNITION

The Company adopted ASC 606 - Revenue from Contracts with Customers using the modified retrospective method effective July 1, 2018. The Company completed an analysis of revenue streams at each of its business units and evaluated the impact of adopting ASC 606 on revenue recognition. The Company primarily sells purchased products and the majority of its revenue is recognized at a point in time. The cumulative effect of initially applying ASC 606 resulted in a net increase to the opening retained earnings balance of $3,429, net of tax, at July 1, 2018. The transition adjustment is comprised of two components. The first component is recognition of revenue from bill and hold arrangements. The second component is recognition of revenue from contracts that meet the criteria to recognize revenue over time as the underlying products have no alternative use and the Company has a right to payment for performance completed to date. Revenue for periods prior to July 1, 2018 has not been adjusted and continues to be reported under ASC Topic 605 - Revenue Recognition.

~~Revenue Recognition~~

The 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 they are billed to the customer. The Company has elected to account for shipping and handling activities 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 the Company transfers a promised good or service to a customer and when 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.

~~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.

~~Variable Consideration~~

The Company’s products are generally sold with a right of return and may include variable consideration in the form of incentives, discounts, credits or rebates. Product returns are estimated based on historical return rates. 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 period it is incurred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant.

~~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. On July 1, 2018, $13,823 of contract assets were recognized as part of the cumulative effect adjustment resulting from the adoption of ASC 606.

~~Activity related to contract assets, which are included in other current assets on the condensed consolidated balance sheet, is as follows:~~

March 31, 2019 July 1, 2018 $ Change % Change
Contract assets $ 8,732
$ 13,823
$ (5,091 ) (36.8 )%

~~Table of Contents~~

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts) (Unaudited)~~

~~The following tables summarize the impacts of ASC 606 on the Company's condensed consolidated financial statements:~~

Three Months Ended March 31, 2019
As Reported Adjustments Balances without adoption of ASC 606
Net sales $ 885,443
$ 569
$ 886,012
Cost of sales 629,884
369
630,253
Gross profit 255,559
200
255,759
Selling, distribution and administrative expense, including depreciation 189,456
57
189,513
Intangible Impairment 31,594
—
31,594
Operating income 34,509
143
34,652
Interest expense, net 9,947
—
9,947
Other income, net (1,256 ) —
(1,256 )
Income before income taxes 25,818
143
25,961
Income tax expense 9,283
37
9,320
Net income $ 16,535
$ 106
$ 16,641

Nine Months Ended March 31, 2019
As Reported Adjustments Balances without adoption of ASC 606
Net sales $ 2,589,996
$ 4,886
$ 2,594,882
Cost of sales 1,839,724
3,472
1,843,196
Gross profit 750,272
1,414
751,686
Selling, distribution and administrative expense, including depreciation 556,865
331
557,196
Intangible Impairment 31,594
—
31,594
Operating income 161,813
1,083
162,896
Interest expense, net 30,001
—
30,001
Other income, net (549 ) —
(549 )
Income before income taxes 132,361
1,083
133,444
Income tax expense 28,171
273
28,444
Net income $ 104,190
$ 810
$ 105,000

~~Table of Contents~~

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts) (Unaudited)~~

As of March 31, 2019
As Reported Adjustments Balances without adoption of ASC 606
Assets
Other current assets $ 49,380
$ (8,732 ) $ 40,648
Inventories 454,555
11,461
466,016
Other assets 33,761
209
33,970

Liabilities

Other current liabilities 62,731
6,649
69,380
Compensation and related benefits 69,324
(402 ) 68,922
Other liabilities 77,497
(692 ) 76,805

Equity
Retained Earnings $ 882,848
$ (2,619 ) $ 880,229

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 three and nine months ended March 31, 2020 and 2019. Other countries consist of Mexico, Australia, New Zealand, and Singapore.



	Three Months Ended March 31,
	2020						2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
Geographic Areas:
United States	$	473,069	$	251,913	$	724,982	$	520,180	$	251,922	$	772,102
Canada	59,912		—		59,912		66,725		—		66,725
Other countries	41,387		4,516		45,903		43,533		3,083		46,616
Total	$	574,368	$	256,429	$	830,797	$	630,438	$	255,005	$	885,443

Three Months Ended March 31,
2019 2018
Service Center Based Distribution Fluid Power & Flow Control Total Service Center Based Distribution Fluid Power & Flow Control Total
Geographic Areas:
United States $ 520,180
$ 251,922
772,102
$ 491,698
$ 222,197
$ 713,895
Canada 66,725
—
66,725
68,112
—
$ 68,112
Other countries 43,533
3,083
46,616
41,404
4,254
$ 45,658
Total $ 630,438
$ 255,005
$ 885,443
$ 601,214
$ 226,451
$ 827,665


	Nine Months Ended March 31,												Nine Months Ended March 31,
	2019						2018						2020						2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
Geographic Areas:
United States	$	1,490,289	$	756,433	2,246,722		$	1,399,513	$	438,958	$	1,838,471	$	1,433,133	$	755,175	$	2,188,308	$	1,490,289	$	756,433	$	2,246,722
Canada	204,401		—		204,401		202,408		—		$	202,408	193,755		—		193,755		204,401		—		204,401
Other countries	129,095		9,778		138,873		123,813		10,861		$	134,674	126,428		12,085		138,513		129,095		9,778		138,873
Total	$	1,823,785	$	766,211	$	2,589,996	$	1,725,734	$	449,819	$	2,175,553	$	1,753,316	$	767,260	$	2,520,576	$	1,823,785	$	766,211	$	2,589,996

139

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the three and nine months ended March 31, 2020 and 2019:



	Three Months Ended March 31,
	2020						2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
General Industry	34.8	%	39.9	%	36.4	%	35.8	%	41.7	%	37.5	%
Industrial Machinery	9.9	%	24.7	%	14.5	%	10.2	%	24.2	%	14.2	%
Metals	11.1	%	6.5	%	9.7	%	12.0	%	8.6	%	11.0	%
Food	12.0	%	3.1	%	9.3	%	10.5	%	2.5	%	8.2	%
Forest Products	9.8	%	5.7	%	8.5	%	7.0	%	3.6	%	6.0	%
Chem/Petrochem	3.3	%	12.8	%	6.2	%	2.8	%	12.8	%	5.7	%
Oil & Gas	7.3	%	1.3	%	5.4	%	10.1	%	2.3	%	7.9	%
Cement & Aggregate	7.2	%	1.3	%	5.4	%	6.9	%	1.0	%	5.2	%
Transportation	4.6	%	4.7	%	4.6	%	4.7	%	3.3	%	4.3	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Three Months Ended March 31, 2019
Service Center Based Distribution Fluid Power & Flow Control Total
General Industry 35.8 % 41.7 % 37.5 %
Industrial Machinery 10.2 % 24.2 % 14.2 %
Metals 12.0 % 8.6 % 11.0 %
Food 10.5 % 2.5 % 8.2 %
Oil & Gas 10.1 % 2.3 % 7.9 %
Chem/Petrochem 2.8 % 12.8 % 5.7 %
Forest Products 7.0 % 3.6 % 6.0 %
Cement & Aggregate 6.9 % 1.0 % 5.2 %
Transportation 4.7 % 3.3 % 4.3 %
Total 100.0 % 100.0 % 100.0 %



	Nine Months Ended March 31,
	2020						2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
General Industry	34.6	%	41.6	%	36.7	%	35.9	%	44.0	%	38.2	%
Industrial Machinery	9.7	%	23.7	%	13.9	%	9.7	%	22.0	%	13.3	%
Metals	11.3	%	7.4	%	10.1	%	12.2	%	8.3	%	11.1	%
Food	11.6	%	2.9	%	9.0	%	10.4	%	2.5	%	8.1	%
Forest Products	9.0	%	3.9	%	7.4	%	7.6	%	3.0	%	6.3	%
Chem/Petrochem	3.2	%	13.3	%	6.3	%	3.1	%	14.1	%	6.3	%
Oil & Gas	8.7	%	1.7	%	6.6	%	10.0	%	2.2	%	7.7	%
Cement & Aggregate	7.2	%	1.1	%	5.4	%	6.5	%	1.0	%	4.9	%
Transportation	4.7	%	4.4	%	4.6	%	4.6	%	2.9	%	4.1	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Nine Months Ended March 31, 2019
Service Center Based Distribution Fluid Power & Flow Control Total
General Industry 35.9 % 44.0 % 38.2 %
Industrial Machinery 9.7 % 22.0 % 13.3 %
Metals 12.2 % 8.3 % 11.1 %
Food 10.4 % 2.5 % 8.1 %
Oil & Gas 10.0 % 2.2 % 7.7 %
Chem/Petrochem 3.1 % 14.1 % 6.3 %
Forest Products 7.6 % 3.0 % 6.3 %
Cement & Aggregate 6.5 % 1.0 % 4.9 %
Transportation 4.6 % 2.9 % 4.1 %
Total 100.0 % 100.0 % 100.0 %

1410

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

The following tables present the Company’s percentage of revenue by reportable segment and product line for the three and nine months ended March 31, 2020 and 2019:


							Three Months Ended March 31,
	Three Months Ended March 31, 2019						2020						2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
Power Transmission	34.5	%	2.3	%	25.2	%	34.8	%	8.5	%	26.6	%	34.5	%	2.3	%	25.2	%
Fluid Power	13.5	%	41.3	%	21.5	%	13.3	%	40.5	%	21.7	%	13.5	%	41.3	%	21.5	%
General Maintenance; Hose Products	24.7	%	4.7	%	18.9	%	24.0	%	12.2	%	20.4	%	24.7	%	4.7	%	18.9	%
Bearings, Linear & Seals	27.3	%	0.4	%	19.6	%	27.9	%	0.3	%	19.4	%	27.3	%	0.4	%	19.6	%
Specialty Flow Control	—	%	51.3	%	14.8	%	—	%	38.5	%	11.9	%	—	%	51.3	%	14.8	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%



	Nine Months Ended March 31,
	2020						2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
Power Transmission	34.7	%	9.9	%	27.2	%	33.8	%	1.7	%	24.3	%
Fluid Power	13.3	%	38.4	%	20.9	%	13.7	%	39.0	%	21.2	%
General Maintenance; Hose Products	25.5	%	11.1	%	21.1	%	26.0	%	5.0	%	19.7	%
Bearings, Linear & Seals	26.5	%	0.3	%	18.6	%	26.5	%	0.3	%	18.8	%
Specialty Flow Control	—	%	40.3	%	12.2	%	—	%	54.0	%	16.0	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Contract Assets

Activity related to contract assets, which are included in other current assets on the condensed consolidated balance sheet, is as follows:

Nine Months Ended March 31, 2019
Service Center Based Distribution Fluid Power & Flow Control Total
Power Transmission 33.8 % 1.7 % 24.3 %
Fluid Power 13.7 % 39.0 % 21.2 %
General Maintenance; Hose Products 26.0 % 5.0 % 19.7 %
Bearings, Linear & Seals 26.5 % 0.3 % 18.8 %
Specialty Flow Control — % 54.0 % 16.0 %
Total 100.0 % 100.0 % 100.0 %



	March 31, 2020		June 30, 2019		$ Change			% Change
Contract assets	$	7,690	$	8,920	$	(1,230	)	(13.8	)%

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.

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)


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 Acquisition

On August 21, 2019, the Company acquired 100% of the outstanding shares of Olympus Controls, a Portland, Oregon automation solutions provider - including design, assembly, integration, and distribution - of motion control, machine vision, and robotic technologies. Olympus Controls 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.~~Steel (Woodward). MilRoc ~~Distribution~~ 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 ~~Steel~~ is an 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. The purchase price for the acquisition was $35,000, net tangible assets acquired were ~~$17,981,~~$17,788, and intangible assets including goodwill was ~~$17,019~~$17,212 based upon ~~preliminary~~ estimated fair values at the acquisition ~~date, which are subject to adjustment.~~date. The purchase price includes acquisition holdback payments of $4,375, of which ~~are~~$1,666 was paid during the nine months ended March 31, 2020. The remaining balance of $2,709 is included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of March 31, ~~2019,~~2020, and ~~which~~ will be paid on the ~~first,~~ 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 ~~$8,100,~~$8,066, net tangible assets acquired were ~~$4,156,~~$4,151, and goodwill was $3,944 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes acquisition holdback payments of $1,200, which is included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of March 31, 2019, and which will be paid on the first and second anniversaries of the acquisition date with interest at a fixed rate of 1.5% per annum. The Company funded

~~Table of Contents~~

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts) (Unaudited)~~

~~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), 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 5 - Debt. As a distributor of engineered valves, instruments, pumps and lifecycle services to MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) customers across diverse industrial and process end markets, this business is 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 estimated fair values at the acquisition date.

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

~~Goodwill acquired of $161,452 is expected to be deductible for income tax purposes.~~

~~Net sales, operating income, and net income from the FCX acquisition included in the Company’s three and nine months ended March 31, 2019 are as follows:~~

Three Months Ended March 31, 2019 Nine Months Ended March 31, 2019
Net sales $ 132,595
$ 417,336
Operating income 6,659
29,117
Net income 5,115
22,798

~~Table of Contents~~

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts) (Unaudited)~~

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 2018:

Three Months Ended March 31, Nine Months Ended March 31,
Pro forma 2018 2018
Net sales $ 866,818
$ 2,432,709
Operating income 62,360
164,302
Net income 40,546
98,391
Diluted net income per share $ 1.03
$ 2.51

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, 2017. 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 Dise~~ño, 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$3,915 based upon estimated fair values at the acquisition date. The purchase price includes ~~$906~~$1,200 of acquisition holdback payments, of which ~~$219~~$600 was paid during the nine months ended March 31, ~~2019. Due to changes in foreign currency exchange rates, the~~2020. The remaining balance ~~is $645, which~~of $600 is included in other current ~~liabilities and other~~ liabilities on the condensed consolidated balance sheet as of March 31, ~~2019,~~2020, and ~~which~~ will be paid on the second ~~and third anniversaries~~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.

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

4. 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 fiscal year ended June 30, ~~2018~~2019 and the nine month period ended March 31, ~~2019~~2020 are as follows:

Service Center Based Distribution Fluid Power & Flow Control Total
Balance at July 1, 2017 $ 201,740
$ 4,395
$ 206,135
Goodwill acquired during the period 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
Goodwill acquired/adjusted during the period 9,872
4,791
14,663
Other, primarily currency translation (111 ) —
(111 )
Balance at March 31, 2019 $ 212,845
$ 448,350
$ 661,195



	Service Center Based Distribution			Fluid Power & Flow Control			Total
Balance at July 1, 2018	$	203,084		$	443,559		$	646,643
Goodwill acquired during the period	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 period	(3,393		)	14,667			11,274
Impairment	—			(131,000		)	(131,000		)
Other, primarily currency translation	(2,770		)	—			(2,770		)
Balance at March 31, 2020	$	207,471		$	332,024		$	539,495

During the first quarter of fiscal 2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the MilRoc/Woodward acquisition. The fair values of the customer relationships, trade name, and non-compete intangible assets were increased by $1,524, $1,809, and $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 nine months ended March 31, 2020, which is recorded in selling, distribution, and administrative expense on the condensed 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 Controls 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 $264. The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of $24 during the nine months ended March 31, 2020, which is recorded in selling, distribution, and administrative expense on the condensed statements of consolidated income.

The Company has ~~seven (7)~~eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, ~~2019.~~2020. The Company concluded that ~~all~~seven (7) of the reporting units’ fair value exceeded their carrying amounts by at least ~~20%~~10% as of January 1, ~~2019.~~ 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 $26,328 and $4,945, respectively, as of March 31, 2020. The carrying value of the final reporting unit, which is comprised of the FCX Performance Inc. (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 March 31, 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

~~Table of Contents~~

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts) (Unaudited)~~

impairment test were determined using the ~~Income~~income and ~~Market~~market approaches. The ~~Income~~income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money ~~factors.~~factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margins, and discount rates. The ~~Market~~market 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 ~~tests~~test 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

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

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. 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; (ii) inability to achieve the sales from our strategic growth initiatives.

At March 31, ~~2019~~2020 and June 30, ~~2018,~~2019, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution ~~segment~~segment. At March 31, 2020 and June 30, 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:


March 31, 2019	Amount		Accumulated Amortization		Net Book Value
March 31, 2020							Amount		Accumulated Amortization		Net Book Value
Finite-Lived Identifiable Intangibles:
Customer relationships	$	422,077	$	127,758	$	294,319	$	425,187	$	154,683	$	270,504
Trade names	105,933		25,417		80,516		111,242		32,666		78,576
Vendor relationships	11,387		7,968		3,419		11,193		8,629		2,564
Non-competition agreements	2,702		2,112		590
Other							2,066		846		1,220
Total Identifiable Intangibles	$	542,099	$	163,255	$	378,844	$	549,688	$	196,824	$	352,864


June 30, 2018	Amount		Accumulated Amortization		Net Book Value
June 30, 2019							Amount		Accumulated Amortization		Net Book Value
Finite-Lived Identifiable Intangibles:
Customer relationships	$	465,691	$	125,009	$	340,682	$	422,367	$	135,879	$	286,488
Trade names	112,939		22,454		90,485		105,946		27,232		78,714
Vendor relationships	11,425		7,382		4,043		11,367		8,156		3,211
Non-competition agreements	2,761		2,024		737
Other							2,702		2,249		453
Total Identifiable Intangibles	$	592,816	$	156,869	$	435,947	$	542,382	$	173,516	$	368,866

Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.

During the nine month period ended March 31, ~~2019,~~2020, the Company acquired identifiable intangible assets with a preliminary 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 $ 5,956
20
Trade names 941
5
Non-competition agreements 250
5
Total Intangibles Acquired $ 7,147
17.5

1814

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

Due to a sustained decline in economic conditions in the upstream oil and gas industry in western Canada, 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, and the analysis resulted in the measurement of a full impairment loss of $31,594, which was recorded in the three months ended March 31, 2019.

Estimated future amortization expense by fiscal year (based on the Company’s identifiable intangible assets as of March 31, ~~2019)~~2020) for the next five years is as follows: ~~$10,200~~$10,000 for the remainder of ~~2019, $39,000 for~~ 2020, ~~$36,900~~$38,200 for 2021, ~~$34,800~~$36,100 for 2022, ~~$32,700~~$33,900 for 2023, $29,700 for 2024 and ~~$28,500~~$26,200 for ~~2024.~~2025.

5. DEBT

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 March 31, ~~2019~~2020 and June 30, ~~2018,~~2019, the Company had ~~$618,500~~$599,000 and ~~$775,125,~~$613,625, respectively, outstanding under the term loan. The interest rate on the term loan as of March 31, ~~2019~~2020 and June 30, ~~2018~~2019 was ~~4.25%~~2.75% and ~~4.13%~~4.19%, respectively. The Company had ~~$19,000 and $19,500~~no amount outstanding under the revolver at March 31, ~~2019 and~~2020 or June 30, ~~2018, respectively.~~2019. Unused lines under this facility, net of outstanding letters of credit of ~~$3,290~~$1,786 and ~~$3,625,~~$3,215, respectively, to secure certain insurance obligations, totaled ~~$227,710~~$248,214 and ~~$226,875~~$246,785 at March 31, ~~2019~~2020 and June 30, ~~2018,~~2019, respectively, and were available to fund future acquisitions or other capital and operating requirements. ~~The weighted average interest rate on the amount outstanding under the revolving credit facility was 4.39% and 3.93% as of March 31, 2019 and June 30, 2018, respectively.~~

Additionally, the Company had letters of credit outstanding with a separate ~~bank,~~banks, not associated with the revolving credit agreement, in the amount of $3,788 and $2,698 as of March 31, ~~2019~~2020 and June 30, ~~2018,~~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 ~~collateralized trade accounts receivable is equal to the borrowed amount outstanding under the AR Securitization Facility and there are no restrictions on cash or other assets. 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. As of March 31, 2020, and June 30, 2019, the Company borrowed $175,000 under the AR Securitization ~~Facility, and the~~Facility. The interest rate on the AR Securitization Facility as of March 31, 2020 and June 30, 2019 was ~~3.39%.~~2.52% and 3.33%, respectively.

Other Long-Term Borrowings

At March 31, ~~2019~~2020 and June 30, ~~2018,~~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. 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 in October 2019, and the remaining principal balance of $25,000 is due in October 2023. On October 30, 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.~~30, 2024.

In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The ~~1.5%~~1.50% fixed interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At March 31, ~~2019~~2020 and June 30, ~~2018, $1,263~~2019, $1,026 and ~~$1,438~~$1,204 was outstanding, respectively.

1915

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

Unamortized debt issue costs of ~~$574~~$598 and ~~$551~~$577 are included as a reduction of current portion of long-term debt on the condensed consolidated balance sheets as of March 31, ~~2019~~2020 and June 30, ~~2018,~~2019, respectively. Unamortized debt issue costs of ~~$1,490~~$1,028 and ~~$1,807~~$1,366 are included as a reduction of long-term debt on the condensed consolidated balance sheets as of March 31, ~~2019~~2020 and June 30, ~~2018,~~2019, respectively.

6. 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 March 31, 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 ~~$6,856~~$26,102 and $14,202 as of March 31, 2020 and June 30, 2019, ~~(Level 2 in the fair value hierarchy),~~respectively, which is included in other current liabilities and other liabilities in the condensed consolidated balance ~~sheet. Losses~~sheet, respectively. Realized losses related to the interest rate cash flow hedge were not material during the ~~three or~~ nine months ended March 31, ~~2019.~~2020.

7. FAIR VALUE MEASUREMENTS

Marketable securities measured at fair value at March 31, ~~2019~~2020 and June 30, ~~2018~~2019 totaled ~~$10,818~~$10,345 and ~~$10,318,~~$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 accompanying condensed consolidated balance sheets and their fair values were determined using quoted market prices (Level 1 in the fair value hierarchy).

As of March 31, ~~2019~~2020 and June 30, ~~2018,~~2019, the carrying values of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximated fair value (Level 2 in the fair value hierarchy).

The revolving credit facility, the term loan and the AR Securitization Facility contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).

2016

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

8. ~~INCOME TAXES~~

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 reduced the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on certain un-remitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminated U.S. federal income tax on dividends from foreign subsidiaries, and created new taxes on certain foreign-sourced earnings. During the nine months ended March 31, 2019, the Company's estimated annual effective tax rate reflects the change in the federal statutory rate from 35% to 21%.

As of March 31, 2019, we have completed our accounting for the tax effects of the Act. In 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, if elected. The Company has paid the liability in full and no election was made on the Company's federal tax return to defer the payments over eight years. During fiscal 2019, the Company recorded adjustments totaling $3,448 to reduce the tax liability related to the one-time transition tax. We also recorded a net tax benefit of $619 to increase the foreign tax credit related to the transition tax. The new taxes and deductions related to certain foreign-sourced earnings recognized in fiscal 2019 resulted in a net tax benefit of $576. These adjustments were included as components of income tax expense in the condensed statements of consolidated income.

During the three months ended March 31, 2019, the Company recorded a valuation allowance of $3,785 related to certain deferred tax assets in Canada due to the uncertainty in realizing these net deferred tax assets.

9. SHAREHOLDERS' EQUITY

Accumulated Other Comprehensive Loss

Changes in the accumulated other comprehensive loss are comprised of the following amounts, shown net of taxes:

Three Months Ended March 31, 2019
Foreign currency translation adjustment
Post-employment benefits
Cash flow hedge
Total Accumulated other comprehensive (loss) income
Balance at January 1, 2019 $ (92,220 ) $ (2,412 ) $ —
$ (94,632 )
Other comprehensive income (loss) 2,767
—
(5,136 ) (2,369 )
Amounts reclassified from accumulated other comprehensive (loss) income —
(56 ) 63
7
Net current-period other comprehensive income (loss) 2,767
(56 ) (5,073 ) (2,362 )
Balance at March 31, 2019 $ (89,453 ) $ (2,468 ) $ (5,073 ) $ (96,994 )



	Three Months Ended March 31, 2020
	Foreign currency translation adjustment			Post-employment benefits			Cash flow hedge			Total Accumulated other comprehensive (loss) income
Balance at January 1, 2020	$	(84,687	)	$	(2,877	)	$	(9,996	)	$	(97,560	)
Other comprehensive income	(28,257		)	—			(10,440		)	(38,697		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			(13		)	763			750
Net current-period other comprehensive income (loss)	(28,257		)	(13		)	(9,677		)	(37,947		)
Balance at March 31, 2020	$	(112,944	)	$	(2,890	)	$	(19,673	)	$	(135,507	)



	Three Months Ended March 31, 2019
	Foreign currency translation adjustment			Post-employment benefits			Cash flow hedge			Total Accumulated other comprehensive (loss) income
Balance at January 1, 2019	$	(92,220	)	$	(2,412	)	$	—		$	(94,632	)
Other comprehensive income	2,767			—			(5,136		)	(2,369		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			(56		)	63			7
Net current-period other comprehensive loss	2,767			(56		)	(5,073		)	(2,362		)
Balance at March 31, 2019	$	(89,453	)	$	(2,468	)	$	(5,073	)	$	(96,994	)

Three Months Ended March 31, 2018
Foreign currency translation adjustment
Unrealized gain on securities available for sale
Post-employment benefits
Total Accumulated other comprehensive (loss) income
Balance at January 1, 2018 $ (77,355 ) $ 35
$ (2,294 ) $ (79,614 )
Other comprehensive (loss) income (378 ) 6
—
(372 )
Amounts reclassified from accumulated other comprehensive (loss) income —
—
(14 ) (14 )
Net current-period other comprehensive (loss) income (378 ) 6
(14 ) (386 )
Balance at March 31, 2018 $ (77,733 ) $ 41
$ (2,308 ) $ (80,000 )



	Nine Months Ended March 31, 2020
	Foreign currency translation adjustment			Post-employment benefits			Cash flow hedge			Total Accumulated other comprehensive (loss) income
Balance at July 1, 2019	$	(86,330	)	$	(2,852	)	$	(10,704	)	$	(99,886	)
Other comprehensive income (loss)	(26,614		)	—			(10,740		)	(37,354		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			(38		)	1,771			1,733
Net current-period other comprehensive income (loss)	(26,614		)	(38		)	(8,969		)	(35,621		)
Balance at March 31, 2020	$	(112,944	)	$	(2,890	)	$	(19,673	)	$	(135,507	)

2117

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)



	Nine Months Ended March 31, 2019
	Foreign currency translation adjustment			Unrealized gain (loss) on securities available for sale			Post-employment benefits			Cash flow hedge			Total Accumulated other comprehensive (loss) income
Balance at July 1, 2018	$	(87,974	)	$	50		$	(2,299	)	$	—		$	(90,223	)
Other comprehensive loss	(1,479		)	—			—			(5,136		)	(6,615		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			—			(169		)	63			(106		)
Cumulative effect of adopting accounting standard	—			(50		)	—			—			(50		)
Net current-period other comprehensive loss	(1,479		)	(50		)	(169		)	(5,073		)	(6,771		)
Balance at March 31, 2019	$	(89,453	)	$	—		$	(2,468	)	$	(5,073	)	$	(96,994	)

Nine Months Ended March 31, 2018
Foreign currency translation adjustment
Unrealized gain on securities available for sale
Post-employment benefits
Total Accumulated other comprehensive (loss) income
Balance at July 1, 2017 $ (79,447 ) $ 21
$ (2,276 ) $ (81,702 )
Other comprehensive income 1,714
20
—
1,734
Amounts reclassified from accumulated other comprehensive (loss) income —
—
(32 ) (32 )
Net current-period other comprehensive income (loss) 1,714
20
(32 ) 1,702
Balance at March 31, 2018 $ (77,733 ) $ 41
$ (2,308 ) $ (80,000 )

Other Comprehensive ~~(Loss) Income~~Loss

Details of other comprehensive ~~(loss) income~~loss are as follows:


	Three Months Ended March 31,																		Three Months Ended March 31,
	2019									2018									2020									2019
	Pre-Tax Amount			Tax Expense (Benefit)			Net Amount			Pre-Tax Amount			Tax Expense (Benefit)			Net Amount			Pre-Tax Amount			Tax (Benefit) Expense			Net Amount			Pre-Tax Amount			Tax Expense (Benefit)			Net Amount
Foreign currency translation adjustments	$	2,945		$	178		$	2,767		$	(353	)	$	25		$	(378	)	$	(28,767	)	$	(510	)	$	(28,257	)	$	2,945		$	178		$	2,767
Post-employment benefits:
Reclassification of net actuarial gains and prior service cost into other income, net and included in net periodic pension costs	(77		)	(21		)	(56		)	(19		)	(5		)	(14		)	(17		)	(4		)	(13		)	(77		)	(21		)	(56		)
Unrealized loss on cash flow hedge	(6,941		)	(1,805		)	(5,136		)	—			—			—			(13,891		)	(3,451		)	(10,440		)	(6,941		)	(1,805		)	(5,136		)
Reclassification of interest from cash flow hedge into interest expense	85			22			63			—			—			—			1,017			254			763			85			22			63
Unrealized loss on investment securities available for sale	—			—			—			(3		)	(9		)	6
Other comprehensive (loss) income	$	(3,988	)	$	(1,626	)	$	(2,362	)	$	(375	)	$	11		$	(386	)
Other comprehensive loss																			$	(41,658	)	$	(3,711	)	$	(37,947	)	$	(3,988	)	$	(1,626	)	$	(2,362	)



	Nine Months Ended March 31,
	2020									2019
	Pre-Tax Amount			Tax (Benefit) Expense			Net Amount			Pre-Tax Amount			Tax (Benefit) Expense			Net Amount
Foreign currency translation adjustments	$	(27,356	)	$	(742	)	$	(26,614	)	$	(1,611	)	$	(132	)	$	(1,479	)
Post-employment benefits:
Reclassification of net actuarial gains and prior service cost into other income, net and included in net periodic pension costs	(50		)	(12		)	(38		)	(230		)	(61		)	(169		)
Cumulative effect of adopting accounting standard	—			—			—			(50		)	—			(50		)
Unrealized loss on cash flow hedge	(14,249		)	(3,509		)	(10,740		)	(6,941		)	(1,805		)	(5,136		)
Reclassification of interest from cash flow hedge into interest expense	2,350			579			1,771			85			22			63
Other comprehensive loss	$	(39,305	)	$	(3,684	)	$	(35,621	)	$	(8,747	)	$	(1,976	)	$	(6,771	)

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

Nine Months Ended March 31,
2019 2018
Pre-Tax Amount Tax Benefit (Expense) Net Amount Pre-Tax Amount Tax Expense (Benefit) Net Amount
Foreign currency translation adjustments $ (1,611 ) $ (132 ) $ (1,479 ) $ 1,775
$ 61
$ 1,714
Post-employment benefits:
Reclassification of net actuarial gains and prior service cost into other income, net and included in net periodic pension costs (230 ) (61 ) (169 ) (55 ) (23 ) (32 )
Unrealized gain on investment securities available for sale —
—
—
39
19
20
Unrealized loss on cash flow hedge (6,941 ) (1,805 ) (5,136 ) —
—
—
Reclassification of interest from cash flow hedge into interest expense 85
22
63
—
—
—
Cumulative effect of adopting accounting standard (50 ) —
(50 ) —
—
—
Other comprehensive income $ (8,747 ) $ (1,976 ) $ (6,771 ) $ 1,759
$ 57
$ 1,702

Anti-dilutive Common Stock Equivalents

In the three and nine month periods ended March 31, 2019, ~~and 2018, respectively,~~ stock options and stock appreciation rights related to 467 and 67255 shares of common stock, ~~were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive. In the nine month periods ended March 31, 2019 and 2018,~~ respectively, ~~stock options and stock appreciation rights related to 255 and 313 shares of common stock,~~ were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive.


9.	LEASES

~~10. BENEFIT PLANS~~

The ~~following table provides summary disclosures~~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 ~~net periodic post-employment costs recognized~~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 ~~post-employment benefit plans:~~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 are accounted for separately from lease components.

The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, distribution and administrative expense on the condensed statements of consolidated income. Operating lease costs and short-term lease costs were $8,350 and $2,703 for the three months ended March 31, 2020, respectively, and were $25,078 and $8,043 for the nine months ended March 31, 2020, respectively. Variable lease costs and sublease income were not material.

Information related to operating leases is as follows:



	March 31, 2020
Operating lease assets, net	$	86,617

Operating lease liabilities
Other current liabilities	$	28,710
Other liabilities	62,850
Total operating lease liabilities	$	91,560

Pension Benefits
Retiree Health Care
Benefits
Three Months Ended March 31, 2019 2018 2019 2018
Components of net periodic cost:
Service cost $ 11
$ 31
$ 4
$ 5
Interest cost 174
182
13
13
Expected return on plan assets (133 ) (118 ) —
—
Recognized net actuarial loss (gain) 46
106
(30 ) (39 )
Amortization of prior service cost —
7
(92 ) (92 )
Net periodic cost (benefit) $ 98
$ 208
$ (105 ) $ (113 )



	March 31, 2020
Weighted average remaining lease term (years)	4.6
Weighted average incremental borrowing rate	3.40	%



	Three Months Ended March 31, 2020		Nine Months Ended March 31, 2020
Cash paid for operating leases	$	8,902	$	26,186
Right of use assets obtained in exchange for new operating lease liabilities	$	9,464	$	27,909

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

Pension Benefits Retiree Health Care
Benefits
Nine Months Ended March 31, 2019 2018 2019 2018
Components of net periodic cost:
Service cost $ 33
$ 93
$ 12
$ 14
Interest cost 522
549
39
39
Expected return on plan assets (399 ) (355 ) —
—
Recognized net actuarial loss (gain) 138
318
(90 ) (116 )
Amortization of prior service cost —
21
(276 ) (276 )
Net periodic cost (benefit) $ 294
$ 626
$ (315 ) $ (339 )

The ~~Company contributed $3,700~~table below summarizes the aggregate maturities of liabilities pertaining to ~~its pension benefit plans and $165 to its retiree health care plans~~operating leases with terms greater than one year for each of the next five years:



Fiscal Year	Maturity of Operating Lease Liabilities
2020	$	8,310
2021	28,005
2022	21,187
2023	14,899
2024	11,351
Thereafter	14,850
Total lease payments	98,602
Less interest	(7,042		)
Present value of lease liabilities	$	91,560

The table below summarizes the future minimum annual rental commitments for operating leases accounted for in ~~the nine months ended March 31, 2019. Expected contributions for the remainder~~accordance with Accounting Standards Codification Topic 840, Leases, as of ~~fiscal 2019 are $100 for the pension benefit plans to fund scheduled retirement payments and $55 for retiree health care plans.~~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

~~11.~~

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

10. SEGMENT INFORMATION

In the first quarter of fiscal 2019, the Company performed a review of its management reporting structure and implemented changes to align with how the Company measures performance. As a result, the Company has revised its reportable segments to reflect how management currently reviews financial information and makes operating decisions. Certain supplier support benefits are now included within the Service Center Based Distribution segment operating income. Previously, these benefits were included in Corporate and other expense, net. All prior-period amounts have been adjusted to reflect the reportable segment change.

The accounting policies of the Company’s reportable segments are generally the same as those used to prepare the condensed consolidated financial statements. LIFO expense of $1,950 and $3,650 in the three months ended March 31, 2020 and 2019, respectively, and $4,237 and $7,997 in the nine months ended March 31, 2020 and 2019, respectively, is recorded in cost of sales in the condensed statements of income, ~~for the three and nine months ended March 31, 2019, respectively,~~ and is included in operating income for the Service Center Based Distribution segment. ~~The corresponding amounts for the prior year periods were not material to the Company's condensed consolidated financial statements.~~ The Company allocates LIFO expense between the segments in the fourth quarter of its fiscal year. Intercompany sales, primarily from the Fluid Power & Flow Control segment to the Service Center Based Distribution segment, of ~~$7,328~~$7,685 and ~~$6,706,~~$7,328, in the three months ended March 31, ~~2019~~2020 and ~~2018~~2019, respectively, and ~~$21,013~~$22,434 and ~~$18,461~~$21,013 in the nine months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively, have been eliminated in the Segment Financial Information tables below.


Three Months Ended	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
March 31, 2020
Net sales							$	574,368	$	256,429	$	830,797
Operating income for reportable segments							53,014		26,449		79,463
Depreciation and amortization of property							4,373		1,007		5,380
Capital expenditures							3,588		670		4,258

March 31, 2019
Net sales	$	630,438	$	255,005	$	885,443	$	630,438	$	255,005	$	885,443
Operating income for reportable segments	64,763		25,837		90,600		64,763		25,837		90,600
Depreciation and amortization of property	3,969		1,057		5,026		3,969		1,057		5,026
Capital expenditures	4,024		591		4,615		4,024		591		4,615

March 31, 2018
Net sales	$	601,214	$	226,451	$	827,665
Operating income for reportable segments	61,076		26,514		87,590
Depreciation and amortization of property	3,885		828		4,713
Capital expenditures	4,385		2,054		6,439



Nine Months Ended	Service Center Based Distribution		Fluid Power & Flow Control		Total
March 31, 2020
Net sales	$	1,753,316	$	767,260	$	2,520,576
Operating income for reportable segments	167,279		82,755		250,034
Assets used in business	1,310,754		978,775		2,289,529
Depreciation and amortization of property	12,831		3,166		15,997
Capital expenditures	14,022		2,201		16,223

March 31, 2019
Net sales	$	1,823,785	$	766,211	$	2,589,996
Operating income for reportable segments	185,889		85,960		271,849
Assets used in business	1,252,161		1,070,649		2,322,810
Depreciation and amortization of property	11,791		3,254		15,045
Capital expenditures	9,724		1,987		11,711

2421

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

Nine Months Ended Service Center Based Distribution Fluid Power & Flow Control Total
March 31, 2019
Net sales $ 1,823,785
$ 766,211
$ 2,589,996
Operating income for reportable segments 185,889
85,960
271,849
Assets used in business 1,252,161
1,070,649
2,322,810
Depreciation and amortization of property 11,791
3,254
15,045
Capital expenditures 9,724
1,987
11,711

March 31, 2018
Net sales $ 1,725,734
$ 449,819
$ 2,175,553
Operating income for reportable segments 172,965
53,482
226,447
Assets used in business 1,202,593
1,069,730
2,272,323
Depreciation and amortization of property 11,356
1,365
12,721
Capital expenditures 14,754
3,144
17,898

A reconciliation of operating income for reportable segments to the condensed consolidated income before income taxes is as follows:



	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2020			2019			2020			2019
Operating income for reportable segments	$	79,463		$	90,600		$	250,034		$	271,849
Adjustment for:
Intangible amortization—Service Center Based Distribution	3,811			2,794			9,697			10,785
Intangible amortization—Fluid Power & Flow Control	7,291			7,117			21,974			21,038
Intangible impairment—Service Center Based Distribution	—			31,594			—			31,594
Goodwill Impairment—Fluid Power & Flow Control	131,000			—			131,000			—
Corporate and other expense, net	15,311			14,586			45,402			46,619
Total operating (loss) income	(77,950		)	34,509			41,961			161,813
Interest expense, net	8,805			9,947			28,447			30,001
Other income, net	(1,428		)	(1,256		)	(1,643		)	(549		)
(Loss) income before income taxes	$	(85,327	)	$	25,818		$	15,157		$	132,361

Three Months Ended Nine Months Ended
March 31, March 31,
2019 2018 2019 2018
Operating income for reportable segments $ 90,600
$ 87,590
$ 271,849
$ 226,447
Adjustment for:
Intangible amortization—Service Center Based Distribution 2,794
4,311
10,785
13,248
Intangible amortization—Fluid Power & Flow Control 7,117
5,489
21,038
8,078
Intangible Impairment—Service Center Based Distribution 31,594
—
31,594
—
Corporate and other expense, net 14,586
21,346
46,619
50,125
Total operating income 34,509
56,444
161,813
154,996
Interest expense, net 9,947
8,216
30,001
12,521
Other income, net (1,256 ) (1,291 ) (549 ) (2,022 )
Income before income taxes $ 25,818
$ 49,519
$ 132,361
$ 144,497

The change in corporate and other expense, net is due to changes in corporate expenses, as well as in the amounts and levels of certain expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.

~~Table of Contents~~

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts) (Unaudited)~~

~~12.~~11. OTHER INCOME, NET

Other income, net consists of the following:



	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2020			2019			2020			2019
Unrealized loss (gain) on assets held in rabbi trust for a non-qualified deferred compensation plan	$	2,182		$	(1,075	)	$	1,361		$	(238	)
Foreign currency transactions (gain) loss	(3,501		)	63			(3,167		)	97
Net other periodic post-employment benefits	(30		)	(22		)	(90		)	(66		)
Life insurance (income) expense, net	(194		)	(187		)	165			(380		)
Other, net	115			(35		)	88			38
Total other income, net	$	(1,428	)	$	(1,256	)	$	(1,643	)	$	(549	)

Three Months Ended Nine Months Ended
March 31, March 31,
2019 2018 2019 2018
Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan $ (1,075 ) $ —
$ (238 ) $ (784 )
Foreign currency transactions loss 63
130
97
79
Net other periodic post-employment (benefits) costs (22 ) 59
(66 ) 180
Life insurance income, net (187 ) (1,488 ) (380 ) (1,495 )
Other, net (35 ) 8
38
(2 )
Total other income, net $ (1,256 ) $ (1,291 ) $ (549 ) $ (2,022 )

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

The accompanying condensed consolidated financial statements of the Company have been reviewed by the Company’s independent registered public accounting firm, Deloitte & Touche LLP, whose report covering their reviews of the condensed consolidated financial statements follows.

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~To the Board of Directors and Shareholders of~~

~~Applied Industrial Technologies, Inc.~~

~~Cleveland, Ohio~~

~~Results of Review of Interim Financial Information~~

~~We have reviewed the accompanying condensed consolidated balance sheet of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of~~ ~~March 31, 2019, the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended~~ ~~March 31, 2019~~ ~~and~~ ~~2018~~, the condensed consolidated cash flows for the nine-month periods ended March 31, 2019 and 2018, and the condensed consolidated statements of shareholders’ equity for the three-month periods ended September 30, December 31, and March 31, 2019 and 2018, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of June 30, 2018, and the related statements of consolidated income, comprehensive income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated August 17, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

~~Basis for Review Results~~

This interim financial information is the responsibility of the Company's management. 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 reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

~~/s/ Deloitte & Touche LLP~~

~~Cleveland, Ohio~~

~~April 30, 2019~~

2722

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

With approximately ~~6,700~~6,500 employees across North America, Australia, New Zealand, and Singapore, Applied Industrial Technologies (“Applied,” the “Company,” “We,” “Us” or “Our”) is a leading value-added distributor of bearings, power transmission products, engineered fluid power components and systems, specialty flow control solutions, automation technologies, and other industrial supplies, serving MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for 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 solutions that provide added value to its customers. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During the ~~third~~second quarter of fiscal ~~2019~~2020, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore from ~~607~~599 facilities.

The following is Management's Discussion and Analysis of significant factors which have affected our financial condition, results of operations and cash flows during the periods included in the accompanying condensed consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash flows.When reviewing the discussion and analysis set forth below, please note that the majority of SKUs (Stock Keeping Units) we sell in any given period were not necessarily sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used comparative metrics analyzing sales, such as changes in product mix and volume.

Overview

Consolidated sales for the quarter ended March 31, ~~2019increased~~ ~~$57.8~~2020decreased $54.6 million or ~~7.0%~~6.2% compared to the prior year quarter, with acquisitions increasing sales by ~~$51.5~~$17.1 million or ~~6.2%~~1.9% and unfavorable foreign currency translation of ~~$5.7~~$2.0 million decreasing sales by ~~0.7%~~0.2%. ~~Operating~~The Company incurred an operating loss of $78.0 million, or a negative operating margin of 9.4% of sales, during the quarter ended March 31, 2020, compared to operating income of $34.5 million, or operating margin of 3.9% of sales ~~was down from 6.8%~~ for the same quarter in the prior ~~year quarter.~~year. The reduction in operating margin is primarily due to a $131.0 million non-cash goodwill impairment charge recorded during the quarter ended March 31, ~~2019~~2020, related to the goodwill associated with the Company's FCX Performance Inc. (FCX) operations within the Fluid Power & Flow Control segment. The prior year quarter included a non-cash intangible impairment charge totaling $31.6 million related to the long-lived intangible assets associated with the Company's ~~upstream oil and gas~~Canadian operations ~~in Canada~~ within the Service Center Based Distribution segment. The ~~Company also recorded~~quarter ended March 31, 2020 had a ~~valuation allowance against its Canadian deferred tax assets~~net loss of ~~$3.8 million. Therefore,~~$82.8 million compared to net income of $16.5 million ~~decreased 54.8% compared to~~in the prior year quarter. ~~Shareholders' equity was $882.8 million at March 31, 2019, up from the June 30, 2018 level of $815.0 million.~~ The current ratio was ~~2.7~~2.6 to 1 at March 31, ~~2019~~2020 and ~~2.4~~2.7 to 1 at June 30, ~~2018.~~

2019.

During the quarter ended March 31, ~~2019,~~2020, the Company recorded ~~charges~~non-routine expenses of ~~$2.3~~$6.0 million ~~for restructuring activities~~related to consolidating locations and reducing headcount within the Company's U.S. Service Center Based Distribution ~~segment to reduce headcount and consolidate locations, primarily related to the Company's oil and gas operations.~~segment. Of the total, ~~$0.7~~$3.9 million related to inventory reserves for excess and obsolete inventory recorded within cost of sales, and ~~$1.6~~$2.1 million related to severance and facility consolidation recorded within selling, distribution and administrative expense. Also, the Company recorded a $1.0 million tax benefit related to the Coronavirus Aid, Relief, and. Economic Security Act (CARES Act) within income tax (benefit) expense. Total ~~restructuring~~non-routine charges reduced gross profit ~~for~~by $3.9 million, increased the operating loss by $6.0 million, and increased the current quarter net loss by $3.6 million.

During the quarter ~~by $0.7 million, operating income by $2.3 million,~~it became clear that the COVID-19 pandemic was significantly impacting the business. We are classified as critical infrastructure and ~~earnings per share by $0.04.~~

our facilities remain open and operational as they adhere to health and safety policies. We experienced mid-teen year-over-year organic sales declines on a days adjusted basis during March 2020 and high-teen declines month-to-date in April 2020. We are continuing to monitor the impact of the COVID-19 pandemic and continue to take appropriate cost actions. Cost measures implemented to date include reduced discretionary spend, staff realignments, temporary furloughs and pay reductions, suspension of 401(k) company match, and other expense reduction actions.

Applied monitors several economic indices that have been key indicators for industrial economic activity in the United States. These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply Management (ISM). Historically, our performance correlates well with the MCU, which measures productivity and calculates a ratio of actual manufacturing output versus potential full capacity output. When manufacturing plants are running at a high rate of capacity, they tend to wear out machinery and require replacement parts.

The MCU (total industry) and IP indices have increased since June and March 2018. The MCU for March 2019 was 78.8, which is increased from both the June 2018 and March 2018 revised readings of 78.6 and 78.2, respectively. The ISM PMI registered 55.3 in March, up from the December 2018 revised reading of 54.3, and remaining above 50 (its expansionary threshold). The indices for the months during the current quarter were as follows:

Index Reading
Month MCU PMI IP
March 2019 78.8 55.3 105.5
February 2019 79.0 54.2 105.6
January 2019 79.1 56.6 105.9

2823

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The MCU (total industry) and IP indices have declined since June 2019 and December 2019. The MCU for March 2020 was 72.7 which is down from both the December 2019 and June 2019 revised readings of 77.1 and 77.7, respectively. The ISM PMI registered 49.1 in March, up from the December 2019 revised reading of 47.8, but down from June 2019 revised reading of 51.6, and remaining below 50 (its expansionary threshold). The indices for the months during the current quarter were as follows:



	Index Reading
Month	MCU	PMI	IP
March 2020	72.7	49.1	98.3
February 2020	77.0	50.1	104.9
January 2020	76.7	50.9	104.9

The number of Company employees was 6,471 at March 31, 2020, 6,650 at June 30, 2019, and 6,660 at March 31, ~~2019, 6,634 at June 30, 2018, and 6,558 at March 31, 2018.~~2019. The number of operating facilities totaled 599 at March 31, 2020, 600 at June 30, 2019 and 607 at March 31, ~~2019, 610 at June 30, 2018 and 618 at March 31, 2018.~~2019.

Results of Operations

Three months Ended March 31, ~~2019~~2020 and ~~2018~~

2019

The following table is included to aid in review of Applied's condensed statements of consolidated income.

Three Months Ended March 31, Change in $'s Versus Prior Period - % Increase
As a Percent of Net Sales
2019 2018
Net Sales 100.0 % 100.0 % 7.0 %
Gross Profit 28.9 % 28.9 % 6.7 %
Selling, Distribution & Administrative 21.4 % 22.1 % 3.5 %
Operating Income 3.9 % 6.8 % (38.9 )%
Net Income 1.9 % 4.4 % (54.8 )%



	Three Months Ended March 31,					Change in $'s Versus Prior Period - % Decrease
	As a Percent of Net Sales
	2020			2019
Net sales	100.0	%		100.0	%	(6.2	)%
Gross profit	28.5	%		28.9	%	(7.4	)%
Selling, distribution & administrative expense	22.1	%		21.4	%	(3.0	)%
Operating income	(9.4	)%	��	3.9	%	(325.9	)%
Net income	(10.0	)%		1.9	%	(600.6	)%

During the quarter ended March 31, ~~2019,~~2020, sales ~~increased $57.8~~decreased $54.6 million or ~~7.0%~~6.2% compared to the prior year quarter, with sales from acquisitions adding ~~$51.5~~$17.1 million or ~~6.2%~~1.9% and unfavorable foreign currency translation accounting for a decrease of ~~$5.7~~$2.0 million or ~~0.7%~~0.2%. There were 6364 selling days in the quarter ended March 31, ~~2019~~2020 and ~~63.5 selling days~~63 in the quarter ended March 31, ~~2018.~~2019. Excluding the impact of businesses acquired, ~~and foreign currency translation,~~ sales were ~~up $12.0~~down $69.7 million or ~~1.5%~~7.9% during the quarter, driven by a 9.5% decrease from operations due to weak demand across key end markets, offset by an increase of ~~2.3% organic growth from operations, primarily the Service Center Based Distribution segment, offset by a decrease of 0.8%~~1.6% due to one ~~half less~~additional sales day.

The following table shows changes in sales by reportable segment.


							Amount of change due to															Amount of change due to
Sales by Reportable Segment	Three Months Ended March 31,				Sales Increase				Foreign Currency			Organic Change			Three Months Ended March 31,				Sales (Decrease) Increase					Foreign Currency			Organic Change
Sales by Reportable Segment	2019		2018		Sales Increase		Acquisitions		Foreign Currency			Organic Change			2020		2019		Sales (Decrease) Increase			Acquisitions		Foreign Currency			Organic Change
Service Center Based Distribution	$	630.4	$	601.2	$	29.2	$	3.7	$	(5.7	)	$	31.2		$	574.4	$	630.4	$	(56.0	)	$	4.4	$	(2.0	)	$	(58.4	)
Fluid Power & Flow Control	255.0		226.4		28.6		47.8		—			(19.2		)	256.4		255.0		1.4			12.7		—			(11.3		)
Total	$	885.4	$	827.6	$	57.8	$	51.5	$	(5.7	)	$	12.0		$	830.8	$	885.4	$	(54.6	)	$	17.1	$	(2.0	)	$	(69.7	)

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, ~~increased $29.2~~decreased $56.0 million or ~~4.9%~~8.9%. The acquisition within this segment increased sales by ~~$3.7~~$4.4 million or ~~0.6%~~0.7% while unfavorable foreign currency translation decreased sales by ~~$5.7~~$2.0 million or ~~0.9%~~0.3%. Excluding the impact of businesses acquired and foreign currency translation, sales ~~increased $31.2~~decreased $58.4 million or ~~5.2%~~9.3%, driven by a 10.9% decrease from operations due to slower manufacturing activity and customer spending discipline across the Company's primary end markets, offset by an increase of ~~6.0% organic growth from operations which reflects the improvement in the industrial economy and correlates with the increases in the MCU and IP indices, offset by a decrease of 0.8%~~1.6% due to one ~~half less~~additional sales day.

Sales from our Fluid Power & Flow Control segment increased $28.6 million or 12.6%. The acquisitions within this segment increased sales by $47.8 million or 21.1%. Excluding the impact of businesses acquired, sales decreased $19.2 million or 8.5%, due to a 7.5% decrease from operations and a decrease of 1.0% due to one half less sales day. The decrease from operations is primarily due to softness and project delays in our fluid power businesses tied to technology markets, specifically electronic equipment and component manufacturers.

2924

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Sales from our Fluid Power & Flow Control segment increased $1.4 million or 0.6%. The acquisition within this segment increased sales by $12.7 million or 5.0%. Excluding the impact of businesses acquired, sales decreased $11.3 million or 4.4%, driven by a 6.0% decrease from operations, offset by an increase 1.6% due to on additional sales day. 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 geographic area. Other countries includes Mexico, Australia, New Zealand, and Singapore.


								Amount of change due to														Amount of change due to
	Three Months Ended March 31,				Sales Increase (Decrease)					Foreign Currency			Organic Change		Three Months Ended March 31,				Sales Decrease					Foreign Currency			Organic Change
Sales by Geographic Area	2019		2018					Acquisitions							2020		2019					Acquisitions
United States	$	772.1	$	713.9	$	58.2		$	51.5	$	—		$	6.7	$	725.0	$	772.1	$	(47.1	)	$	17.1	$	—		$	(64.2	)
Canada	66.7		68.1		(1.4		)	—		(3.4		)	2.0		59.9		66.7		(6.8		)	—		(0.3		)	(6.5		)
Other countries	46.6		45.6		1.0			—		(2.3		)	3.3		45.9		46.6		(0.7		)	—		(1.7		)	1.0
Total	$	885.4	$	827.6	$	57.8		$	51.5	$	(5.7	)	$	12.0	$	830.8	$	885.4	$	(54.6	)	$	17.1	$	(2.0	)	$	(69.7	)

Sales in our U.S. operations were ~~up $58.2~~down $47.1 million or ~~8.2%~~6.1%, as acquisitions added ~~$51.5~~$17.1 million or ~~7.2%~~2.2%. Excluding the impact of businesses acquired, U.S. sales were ~~up $6.7~~down $64.2 million or ~~1.0%~~8.3%, driven by a decrease of 9.9% from operations, offset by an increase of ~~1.8% organic growth from operations, offset by a decrease of 0.8%~~1.6% due to one ~~half less~~additional sales day. Sales from our Canadian operations decreased ~~$1.4~~$6.8 million or ~~2.0%, and unfavorable~~10.2%. Unfavorable foreign currency translation decreased Canadian sales by ~~$3.4~~$0.3 million or ~~5.0%~~0.5%. Excluding the impact of foreign currency translation, Canadian sales were ~~up $2.0~~down $6.5 million or ~~3.0%~~9.7%, driven by a decrease of 11.3% from operations, offset by an increase of ~~4.5% organic growth from operations, offset by a decrease of 1.5%~~1.6% due to one ~~less~~additional sales day. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, ~~increased $1.0~~decreased $0.7 million or ~~2.1%~~1.5% from the prior year. Unfavorable foreign currency translation decreased other country sales by ~~$2.3~~$1.7 million or ~~5.1%~~3.7%. Excluding the impact of currency translation, other country sales were up ~~$3.3~~$1.0 million, or ~~7.2%~~2.2% during the quarter, driven by an increase of ~~4.6% organic growth from operations in addition to an increase of~~ 2.6% due to ~~three~~one additional sales ~~days~~day, offset by a decrease of 0.4% from operations.

Our gross profit margin was 28.5% in ~~Mexico.~~

~~Our~~the quarter ended March 31, 2020 compared to 28.9% in the prior period. The gross profit margin for the current ~~and prior year's~~ quarter was ~~28.9%. The acquisitions favorably~~negatively impacted ~~the gross profit margin~~ by 2447 basis points ~~during~~for $3.9 million of non-routine expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory within the ~~three months ended March 31, 2019, which was offset by 38 basis points of unfavorable impact from the change in LIFO expense in the current quarter compared to the prior year quarter.~~

U.S. Service Center Based Distribution segment.

The following table shows the changes in selling, distribution and administrative expense (SD&A).

Amount of change due to
Three Months Ended
March 31, SD&A Increase Foreign Currency Organic Change
2019 2018 Acquisitions
SD&A $ 189.5
$ 183.1
$ 6.4
$ 9.5
$ (1.5 ) $ (1.6 )



								Amount of change due to
	Three Months Ended March 31,				SD&A Decrease					Foreign Currency			Organic Change
	2020		2019		SD&A Decrease			Acquisitions		Foreign Currency			Organic Change
SD&A	$	183.7	$	189.5	$	(5.8	)	$	5.1	$	(0.1	)	$	(10.8	)

SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was ~~21.4%~~22.1% of sales in the quarter ended March 31, ~~2019~~2020 compared to ~~22.1%~~21.4% in the prior year quarter. SD&A ~~increased $6.4~~decreased $5.8 million or ~~3.5%~~3.0% compared to the prior year quarter. Changes in foreign currency exchange rates had the effect of decreasing SD&A during the quarter ended March 31, ~~2019~~2020 by ~~$1.5~~$0.1 million ~~or 0.8%~~ compared to the prior year quarter. SD&A from businesses acquired added ~~$9.5~~$5.1 million or ~~5.2%~~2.7% of SD&A expenses, including ~~$1.9~~$0.5 million of intangibles amortization related to ~~the FCX acquisition and net of $5.7 million of one-time acquisition costs related to the acquisition of FCX in the prior year quarter that did not reoccur in the current year.~~acquisitions. Excluding the impact of businesses acquired and the favorable currency translation impact, SD&A decreased ~~$1.6~~$10.8 million or ~~0.9%~~5.7% during the quarter ended March 31, ~~2019~~2020 compared to the prior year quarter. The Company incurred ~~$1.6~~$2.1 million of ~~restructuring~~non-routine expenses related to severance and facility consolidation for the U.S. Service Center Based Distribution segment during the quarter ended March 31, ~~2019.~~2020, compared to $1.6 million of restructuring expenses incurred during the prior year quarter. Excluding the impact of acquisitions, ~~and restructuring,~~ total compensation excluding severance decreased ~~$3.4~~$10.1 million during the quarter ended March 31, ~~2019.~~2020, primarily due to the headcount reductions made by the Company during the first half of fiscal 2020. All other expenses within SD&A were ~~up $0.2~~down $1.2 million.

3025

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

~~long-lived intangible assets were impaired~~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 $3.07 per share for the quarter ended March 31, 2020. In the prior year quarter, the Company recognized a non-cash impairment charge of $31.6 million for intangible assets inrelated to the ~~quarter ended March 31, 2019,~~Company's Canadian operations within the Service Center Based Distribution segment, which decreased net income by $23.1 million and earnings per share by $0.60 per ~~share.~~share for the quarter ended March 31, 2019.

~~Operating~~The Company had an operating loss of $78.0 million during the quarter ended March 31, 2020, which was a decrease of $112.5 million from operating income ~~decreased $21.9~~of $34.5 million ~~or 38.9%, and as a percent of sales decreased to 3.9% from 6.8% during~~in the prior year quarter, primarily ~~as a result~~due to goodwill impairment charges of ~~the impairment expense recorded during the current quarter.~~

$131.0 million.

Operating income, before intangible impairment charges, as a percentage of sales for the Service Center Based Distribution segment ~~increased~~decreased to ~~10.3%~~9.2% in the current year quarter from ~~10.2%~~10.3% in the prior year quarter. Operating income, before goodwill impairment charges, as a percentage of sales for the Fluid Power & Flow Control segment ~~decreased~~increased to ~~10.1%~~10.3% in the current year quarter from ~~11.7%~~10.1% in the prior year quarter.

Other income, net was ~~$1.3~~income of $1.4 million for the quarter, which ~~primarily~~included unrealized losses on investments held by non-qualified deferred compensation trusts of $2.2 million, offset by net favorable foreign currency transaction gains of $3.5 million and $0.1 million of income from other items. During the prior year quarter, other income, net was income of $1.3 million, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $1.1 million, and ~~life insurance income of~~ $0.2 ~~million. During the prior year quarter, other income, net consisted of life insurance income of $1.5 million, offset by $0.1~~ million of ~~net unfavorable foreign currency transaction losses and $0.1 million of net~~income from other ~~periodic post-employment costs.~~

items.

The effective income tax rate was 3.0% for the quarter ended March 31, 2020 compared to 36.0% for the quarter ended March 31, ~~2019 compared to 26.1%~~2019. The goodwill impairment decreased the effective tax rate for the quarter ended March 31, ~~2018.~~2020 by 21.6%. The ~~increase in~~Company also recorded a $1.0 million tax benefit related to the CARES Act during the current year quarter, which favorably impacted the effective tax rate ~~is primarily~~by 1.2% for the quarter ended March 31, 2020. In the prior year quarter, the effective tax rate was increased by 14.7% due to the Company recording a valuation allowance of $3.8 million related to certain deferred tax assets in Canada due to the uncertainty in realizing these net deferred tax assets, which increased the effective tax rate by 14.7%. The remaining decrease in the effective tax rate is primarily due to the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, which reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. The TCJA resulted in a blended statutory rate for the Company for fiscal 2018, which was 28.1% for the quarter ended March 31, 2018. The new taxes and deductions related to certain foreign-sourced earnings recognized in the quarter ended March 31, 2019 resulted in a net tax benefit of $0.2 million. We expect our full year tax rate for fiscal 2019 to be in the 22.0% to 24.0% range.

assets.

As a result of the factors addressed above, the Company incurred a net loss of $82.8 million during the quarter ended March 31, 2020, a decrease of $99.3 million compared to net income ~~decreased $20.1~~of $16.5 million ~~or 54.8% compared to~~in the prior year quarter. Net ~~income~~loss per share was ~~$0.42~~$2.14 per share for the quarter ended March 31, ~~2019,~~2020, compared to ~~$0.93~~net income per share of $0.42 per share in the prior year ~~quarter, a decrease of 54.8%.~~quarter.

Results of Operations

Nine months Ended March 31, ~~2019~~2020 and ~~2018~~

2019

The following table is included to aid in review of Applied's condensed statements of consolidated income.

Nine Months Ended March 31, Change in $'s Versus Prior Period - % Increase
As a Percent of Net Sales
2019 2018
Net Sales 100.0 % 100.0 % 19.1 %
Gross Profit 29.0 % 28.5 % 21.0 %
Selling, Distribution & Administrative 21.5 % 21.4 % 19.7 %
Operating Income 6.2 % 7.1 % 4.4 %
Net Income 4.0 % 4.7 % 2.9 %



	Nine Months Ended March 31,				Change in $'s Versus Prior Period - % Decrease
	As a Percent of Net Sales
	2020		2019
Net sales	100.0	%	100.0	%	(2.7	)%
Gross profit	28.9	%	29.0	%	(2.8	)%
Selling, distribution & administrative expense	22.1	%	21.5	%	(0.1	)%
Operating income	1.7	%	6.2	%	(74.1	)%
Net income	(0.2	)%	4.0	%	(105.7	)%

During the nine months ended March 31, ~~2019,~~2020, sales ~~increased $414.4~~decreased $69.4 million or ~~19.1%~~2.7% compared to the prior year, with sales from acquisitions adding ~~$340.2~~$67.9 million or ~~15.6%~~2.6% and unfavorable foreign currency translation accounting for a decrease of ~~$16.0~~$3.9 million or ~~0.8%~~0.1%. There were 190 selling days in the nine months ended March 31, 2020 and 188 selling days in the nine months ended March 31, ~~2019 and 187.5 selling days in the nine months ended March 31, 2018.~~2019. Excluding the impact of businesses acquired and foreign currency translation, sales were ~~up $90.2~~down $133.4 million or ~~4.3%~~5.2% during the period, driven by a 6.2% decrease from operations, offset by an increase of ~~4.0% organic growth from operations, primarily the Service Center Based Distribution segment, in addition to an increase of 0.3%~~1.0% due to ~~one half~~two additional sales ~~day.~~days.

3126

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following table shows changes in sales by reportable segment.


							Amount of change due to															Amount of change due to
Sales by Reportable Segment	Nine Months Ended March 31,				Sales Increase				Foreign Currency			Organic Change			Nine Months Ended March 31,				Sales (Decrease) Increase					Foreign Currency			Organic Change
Sales by Reportable Segment	2019		2018		Sales Increase		Acquisitions		Foreign Currency			Organic Change			2020		2019		Sales (Decrease) Increase			Acquisitions		Foreign Currency			Organic Change
Service Center Based Distribution	$	1,823.8	$	1,725.8	$	98.0	$	3.7	$	(16.0	)	$	110.3		$	1,753.3	$	1,823.8	$	(70.5	)	$	23.8	$	(3.9	)	$	(90.4	)
Fluid Power & Flow Control	766.2		449.8		316.4		336.5		—			(20.1		)	767.3		766.2		1.1			44.1		—			(43.0		)
Total	$	2,590.0	$	2,175.6	$	414.4	$	340.2	$	(16.0	)	$	90.2		$	2,520.6	$	2,590.0	$	(69.4	)	$	67.9	$	(3.9	)	$	(133.4	)

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, ~~increased $98.0~~decreased $70.5 million or ~~5.7%~~3.9%. The acquisition within this segment increased sales by ~~$3.7~~$23.8 million or ~~0.2%,~~1.3% while unfavorable foreign currency translation decreased sales by ~~$16.0~~$3.9 million or ~~0.9%~~0.2%. Excluding the impact of businesses acquired and foreign currency translation, sales ~~increased $110.3~~decreased $90.4 million or ~~6.4%~~5.0%, driven by a 6.0% decrease from operations due to slower manufacturing activity and customer spending discipline across the Company's primary end markets, offset by an increase of ~~6.1% organic growth from operations which reflects the improvement in the industrial economy and correlates with the increases in the MCU and IP indices, in addition to an increase of 0.3%~~1.0% due to ~~one half~~two additional sales day.

Sales from our Fluid Power & Flow Control segment increased ~~$316.4~~$1.1 million or ~~70.3%~~0.1%. The acquisitions within this segment increased sales by ~~$336.5~~$44.1 million or ~~74.8%~~5.8%. Excluding the impact of businesses acquired, sales decreased ~~$20.1~~$43.0 million or ~~4.5%~~5.7%, due to a ~~5.0%~~6.7% decrease from operations offset by an increase of ~~0.5%~~1.0% due to ~~one half~~two additional sales ~~day.~~days. The decrease from operations is primarily due to ~~softness and project delays~~slower demand in our ~~fluid power businesses tied to technology markets, specifically electronic equipment~~flow control operations and ~~component manufacturers.~~

weaker activity across our industrial OEM customer base.

The following table shows changes in sales by geographic area. Other countries includes Mexico, Australia, New Zealand, and Singapore.


							Amount of change due to														Amount of change due to
	Nine Months Ended March 31,				Sales Increase				Foreign Currency			Organic Change		Nine Months Ended March 31,				Sales Decrease					Foreign Currency			Organic Change
Sales by Geographic Area	2019		2018				Acquisitions							2020		2019					Acquisitions
United States	$	2,246.7	$	1,838.5	$	408.2	$	340.2	$	—		$	68.0	$	2,188.3	$	2,246.7	$	(58.4	)	$	67.9	$	—		$	(126.3	)
Canada	204.4		202.4		2.0		—		(8.6		)	10.6		193.8		204.4		(10.6		)	—		(0.7		)	(9.9		)
Other countries	138.9		134.7		4.2		—		(7.4		)	11.6		138.5		138.9		(0.4		)	—		(3.2		)	2.8
Total	$	2,590.0	$	2,175.6	$	414.4	$	340.2	$	(16.0	)	$	90.2	$	2,520.6	$	2,590.0	$	(69.4	)	$	67.9	$	(3.9	)	$	(133.4	)

Sales in our U.S. operations were ~~up $408.2~~down $58.4 million or ~~22.2%~~2.6%, as acquisitions added ~~$340.2~~$67.9 million or ~~18.5%~~3.0%. Excluding the impact of businesses acquired, U.S. sales were ~~up $68.0~~down $126.3 million or ~~3.7%~~5.6%, driven by a decrease of 6.7% from operations, offset by an increase of ~~3.4% organic growth from operations in addition to an increase of 0.3%~~1.1% due to ~~one half~~two additional sales ~~day.~~days. Sales from our Canadian operations ~~increased $2.0~~decreased $10.6 million or ~~1.0%~~5.2%, and unfavorable foreign currency translation decreased Canadian sales by ~~$8.6~~$0.7 million or ~~4.3%~~0.3%. Excluding the impact of foreign currency translation, Canadian sales were ~~up $10.6~~down $9.9 million or ~~5.3%~~4.9%, driven by a decrease of 6.0% from operations, offset by an increase of ~~5.8% organic growth from operations, offset by a decrease of 0.5%~~1.1% due to ~~one less~~two additional sales ~~day.~~days. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, ~~increased $4.2~~decreased $0.4 million or ~~3.1%~~0.3% from the prior year. Unfavorable foreign currency translation decreased other country sales by ~~$7.4~~$3.2 million or ~~5.5%~~2.3%. Excluding the impact of currency translation, other country sales were up ~~$11.6~~$2.8 million, or ~~8.6%~~2.0% during the ~~period, driven by an increase of 6.9% organic growth from operations in addition~~quarter, due to an increase of ~~1.7% primarily~~1.0% from operations and an increase of 1.0% due to ~~five~~two additional sales ~~days in Mexico.~~

days.

Our gross profit margin ~~for the period~~ was ~~29.0% compared to the prior year period of 28.5%. The acquisitions favorably impacted the gross profit margin by 70 basis points during~~28.9% in the nine months ended March 31, ~~2019, which was offset by 26 basis points of unfavorable impact from the change in LIFO expense in the current period~~2020 compared to 29.0% in the prior year period. The gross profit margin for the current year period was negatively impacted by 15 basis points for $3.9 million of non-routine expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory within the U.S. Service Center Based Distribution segment.

3227

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following table shows the changes in selling, distribution and administrative expense (SD&A).

Amount of change due to
Nine Months Ended
March 31, SD&A Increase Foreign Currency Organic Change
2019 2018 Acquisitions
SD&A $ 556.9
$ 465.3
$ 91.6
$ 83.5
$ (3.8 ) $ 11.9



								Amount of change due to
	Nine Months Ended March 31,				SD&A Decrease					Foreign Currency			Organic Change
	2020		2019		SD&A Decrease			Acquisitions		Foreign Currency			Organic Change
SD&A	$	556.5	$	556.9	$	(0.4	)	$	17.5	$	(0.4	)	$	(17.5	)

SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was ~~21.5%~~22.1% of sales ~~for~~in the nine months ended March 31, ~~2019~~2020 compared to ~~21.4%~~21.5% in the prior year period. SD&A ~~increased $91.6~~decreased $0.4 million or ~~19.7%~~0.1% compared to the prior year period. Changes in foreign currency exchange rates had the effect of decreasing SD&A during the nine months ended March 31, ~~2019~~2020 by ~~$3.8~~$0.4 million or ~~0.8%~~0.1% compared to the prior year period. SD&A from businesses acquired added ~~$83.5~~$17.5 million or ~~18.0%~~3.1% of SD&A expenses, including ~~$13.4~~$1.7 million of intangibles amortization related to ~~the FCX acquisition, and net of $6.1 million of one-time acquisition costs related to the acquisition of FCX in the prior year that did not reoccur in the current year.~~acquisitions. Excluding the impact of businesses acquired and the ~~favorable~~unfavorable currency translation impact, SD&A ~~increased $11.9~~decreased $17.5 million or ~~2.5%~~3.1% during the nine months ended March 31, ~~2019~~2020 compared to the prior year period. The Company incurred ~~$1.6~~$3.6 million of ~~restructuring~~non-routine expenses related to severance and facility consolidation within the U.S. Service Center Based Distribution segment during the nine months ended March 31, ~~2019.~~2020, compared to $1.6 million of restructuring expenses incurred during the the prior year period. Excluding the impact of acquisitions, ~~and restructuring,~~ total compensation ~~increased $5.3~~excluding severance decreased $15.6 million during the nine months ended March 31, ~~2019 compared~~2020, primarily due to the ~~prior year period due to an increase in medical costs along with~~headcount reductions made by the ~~impact of merit increases.~~Company during fiscal 2020. All other expenses within SD&A were ~~up $5.0~~down $3.9 million.

As a result of the continued decline in the oil and gas industry in western Canada the Company performed an impairment analysis for certain long-lived intangible assets related to the Company's Reliance upstream oil and gas operations in Canada duringDuring the nine months ended March 31, ~~2019.~~2020, the Company performed its annual goodwill impairment test. As a result of this test, the Company ~~determined that~~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 ~~book values of these long-lived intangible assets were impaired~~income by $118.8 million and earnings per share by $3.07 million for the nine months ended March 31, 2020. In the prior year period, the Company recognized a non-cash impairment charge of $31.6 million for intangible assets inrelated to the ~~nine months ended March 31, 2019,~~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.~~

share for the nine months ended March 31, 2019.

Operating income ~~increased $6.8~~decreased $119.9 million or ~~4.4%~~74.1%, primarily due to goodwill impairment charges of $131.0 million, and as a percent of sales decreased to ~~6.2%~~1.7% from ~~7.1%~~6.2% during the prior year ~~period, primarily as a result of the impairment expense recorded during the current quarter.~~

period.

Operating income, before impairment charges, as a percentage of sales for the Service Center Based Distribution segment ~~increased~~decreased to ~~10.2%~~9.5% in the current year period from ~~10.0%~~10.2% in the prior ~~year.~~year period. Operating income, before impairment charges, as a percentage of sales for the Fluid Power & Flow Control segment decreased to ~~11.2%~~10.8% in the current year period from ~~11.9%~~11.2% in the prior ~~year.~~

year period.

Other income, net was ~~income of $0.5~~$1.6 million in the nine months ended March 31, ~~2019,~~2020, which ~~primarily~~included net favorable foreign currency transaction gains of $3.2 million, offset by unrealized losses on investments held by non-qualified deferred compensation trusts of $1.4 million and life insurance expense of $0.2 million. During the prior year period, other income, net was income of $0.5 million, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $0.2 million and life insurance income of $0.4 million, offset by $0.1 million of ~~net unfavorable foreign currency transaction losses. During the prior year period,~~expense from other income, net was $2.0 million, which included life insurance income of $1.5 million and unrealized gains on investments held by non-qualified deferred compensation trusts of $0.8 million, offset by net unfavorable foreign currency transaction losses of $0.1 million and $0.2 million of net other periodic post-employment costs.

items.

The effective income tax rate was 139.2% for the nine months ended March 31, 2020 compared to 21.3% for the nine months ended March 31, ~~2019 compared to 29.9%~~2019. The goodwill impairment increased the effective tax rate for the nine months ended March 31, ~~2018.~~2020 by 121.3%. The ~~decrease in~~Company also recorded a $1.0 million tax benefit related to the CARES Act during the current year period, which decreased the effective tax rate is primarily due to the enactment of the TCJA in December 2017, which reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. The TCJA resulted in a blended statutory rate for the Company for fiscal 2018, which was 28.1%by 6.7% for the nine months ended March 31, ~~2018. Adjustments related~~2020. In the prior year period, the effective tax rate was increased by 2.9% due to the transition tax had a favorable impact of $4.1 million, and the new taxes and deductions related to certain foreign-sourced earnings recognized resulted in a net tax benefit of $0.6 million in the nine months ended March 31, 2019. The Company ~~recorded~~recording a valuation allowance of $3.8 million related to certain deferred tax assets in Canada due to the uncertainty in realizing these net deferred tax assets, in addition to recording a $3.5 million favorable adjustment related to the Tax Cuts and Jobs Act in the nine months ended March 31, 2019, which ~~increased~~favorably impacted the effective income tax rate by ~~2.9%~~2.6% in the prior year period.

As a result of the factors addressed above, the Company incurred a net loss of $5.9 million in the nine months ended March 31, 2020, a decrease of $110.1 million compared to net income of $104.2 million in the prior year period. Net loss per share was $0.15 per share for the nine months ended March 31, ~~2019. We expect our full year tax rate for fiscal 2019~~2020, compared to benet income per share of $2.66 per share in the ~~22.0% to 24.0% range.~~prior year period.

3328

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

As a result of the factors addressed above, net income increased $2.9 million or 2.9% compared to the prior year. Net income per share was $2.66 per share for the nine months ended March 31, 2019, compared to $2.58 in the prior year, an increase of 3.1%.

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 March 31, ~~2019~~2020, we had ~~$983.8~~$945.0 million in outstanding borrowings. At June 30, ~~2018,~~2019, we had ~~$966.1~~$959.8 million in outstanding borrowings. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations, will be sufficient to finance normal working capital needs in each of the countries in which we operate, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company's credit standing and financial strength.

The Company's working capital at March 31, ~~2019~~2020 was ~~$709.2~~$714.7 million, compared to ~~$625.5~~$724.3 million at June 30, ~~2018.~~2019. The current ratio was ~~2.7~~2.6 to 1 at March 31, ~~2019~~2020 and ~~2.4~~2.7 to 1 at June 30, ~~2018.~~

2019.

Net Cash Flows

The following table is included to aid in review of Applied's condensed statements of consolidated cash flows; all amounts are in thousands.


	Nine Months Ended March 31,						Nine Months Ended March 31,
Net Cash Provided by (Used in):	2019			2018			2020			2019
Operating Activities	$	77,166		$	47,878		$	169,624		$	77,166
Investing Activities	(48,197		)	(795,333		)	(51,651		)	(48,197		)
Financing Activities	(35,470		)	684,935			(55,959		)	(35,470		)
Exchange Rate Effect	(282		)	986			(4,769		)	(282		)
Decrease in Cash and Cash Equivalents	$	(6,783	)	$	(61,534	)
Increase in Cash and Cash Equivalents							$	57,245		$	(6,783	)

Net cash provided by operating activities was ~~$77.2~~$169.6 million for the nine months ended March 31, ~~2019~~2020 compared to ~~$47.9~~$77.2 million provided by operating activities in the prior period. The increase in cash provided by operating activities during the nine months ended March 31, ~~2019~~2020 is related to ~~improved operating results.~~

working capital improvements.

Net cash used in investing activities during the nine months ended March 31, ~~2019 decreased significantly~~2020 increased from the prior period ~~as $37.5~~primarily due to $16.2 million ~~was~~ used for ~~acquisitions~~purchases of property in the current year period compared to ~~$778.1~~$11.7 million used for acquisitions in the prior year period. Further, there was $6.2 million less spent on property purchases in the current year quarter, primarily due to significant expenditures for building improvements and shop equipment in the prior year period.

Net cash used byin financing activities ~~was $35.5 million for~~during the nine months ended March 31, ~~2019 versus net cash provided by financing activities of $684.9 million in~~2020 increased from the prior ~~year period. The change is~~period primarily due to a ~~decrease~~change in net debt ~~borrowings,~~activity, as there was ~~$17.7~~$14.8 million of net debt ~~borrowings~~payments in the current year period compared to ~~$747.0~~$17.7 million of net debt borrowings in the prior year period. ~~Further,~~This change was offset by $11.2 million of cash ~~was~~ used for the purchase of treasury stock in the prior year period, while no treasury shares were purchased in the current year ~~period compared to $22.8 million used in prior year~~ period.

Share Repurchases

The Board of Directors has authorized the repurchase of shares of the Company's common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. During the ~~three~~nine months ended March 31, 2020, the Company did not acquire any shares of treasury stock on the open market. At March 31, 2020, we had authorization to repurchase 864,618 shares. During the nine months ended March 31, 2019, we acquired 192,082 shares of treasury stock on the open market for $11.2 million. At ~~March 31, 2019, we had authorization to repurchase an additional 864,618 shares. During the nine months ended March 31, 2018, we acquired 393,300 shares of treasury stock on the open market for $22.8 million.~~

~~Table of Contents~~

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION~~

~~AND RESULTS OF OPERATIONS~~

Borrowing Arrangements

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 March 31, ~~2019~~2020 and June 30, ~~2018,~~2019, the Company had ~~$618.5~~$599.0 million and ~~$775.1~~$613.6 million, respectively, outstanding under the term loan. The interest rate on the term loan as of March 31, ~~2019~~2020 and June 30, ~~2018~~2019 was ~~4.25%~~2.75% and ~~4.13%~~4.19%, respectively. The Company had ~~$19.0 million and $19.5 million~~no amount outstanding under the revolver at March 31, ~~2019 and~~2020 or June 30, ~~2018, respectively.~~2019. Unused lines under this facility, net of outstanding letters of credit of ~~$3.3~~$1.8 million and ~~$3.6~~$3.2 million, respectively, to secure certain insurance obligations, totaled ~~$227.7~~$248.2 million and ~~$226.9~~$246.8 million at March 31, ~~2019~~2020 and June 30, ~~2018,~~2019, respectively, and were available to fund future acquisitions or other capital and operating requirements. ~~The weighted average interest rate on the amount outstanding under the revolving credit facility was 4.39% and 3.93% as of March 31, 2019 and June 30, 2018, respectively.~~

Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving credit agreement, in the amount of $3.8 million and $2.7 million as of March 31, ~~2019~~2020 and June 30, ~~2018,~~2019, respectively, in order to secure certain insurance obligations.

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021. The maximum availability under the AR Securitization Facility is $175.0 million. Availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the $175.0 million of funding available under the AR Securitization Facility. The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the Service Center Based Distribution reportable segment’s U.S. operations’ trade accounts receivable. The ~~collateralized trade accounts receivable is equal to the borrowed amount outstanding under the AR Securitization Facility and there are no restrictions on cash or other assets. 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. As of March 31, 2020 and June 30, 2019, the Company borrowed $175.0 million under the AR Securitization ~~Facility, and the~~Facility. The interest rate on the AR Securitization Facility as of March 31, 2020 and June 30, 2019 was ~~3.39%.~~2.52% and 3.33%, respectively.

At March 31, ~~2019~~2020 and June 30, ~~2018,~~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. 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 in October 2019, and the remaining principal is due in October 2023. On October 30, 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 principal payments in~~ October ~~2019 and 2023.~~30, 2024.

In ~~April~~ 2014, the Company assumed $2.4 million of debt as a part of the headquarters facility acquisition. The ~~1.5%~~1.50% fixed interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At March 31, ~~2019~~2020 and June 30, ~~2018, $1.3~~2019, $1.0 million and ~~$1.4~~$1.2 million was outstanding, respectively.

The new credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At March 31, ~~2019,~~2020, the most restrictive of these covenants required that the Company have net indebtedness less than ~~4.25~~3.75 times consolidated income before interest, taxes, depreciation and ~~amortization.~~amortization (as defined). At March 31, ~~2019,~~2020, the Company's net indebtedness was less than 3.0 times consolidated income before interest, taxes, depreciation and ~~amortization.~~amortization (as defined). The Company was in compliance with all financial covenants at March 31, ~~2019.~~

~~Table of Contents~~

~~APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES~~

~~ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION~~

~~AND RESULTS OF OPERATIONS~~

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:


							March 31,			June 30,									March 31,			June 30,
							2019			2018									2020			2019
Accounts receivable, gross	Accounts receivable, gross						$	587,523		$	562,377		Accounts receivable, gross						$	537,361		$	551,400
Allowance for doubtful accounts	Allowance for doubtful accounts						13,055			13,566			Allowance for doubtful accounts						13,280			10,498
Accounts receivable, net	Accounts receivable, net						$	574,468		$	548,811		Accounts receivable, net						$	524,081		$	540,902
Allowance for doubtful accounts, % of gross receivables	Allowance for doubtful accounts, % of gross receivables						2.2		%	2.4		%	Allowance for doubtful accounts, % of gross receivables						2.5		%	1.9		%

	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended March 31,						Nine Months Ended March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Provision for losses on accounts receivable	$	10		$	587		$	2,095		$	1,678		$	5,296		$	10		$	9,988		$	2,095
Provision as a % of net sales	—		%	0.07		%	0.08		%	0.08		%	0.64		%	—		%	0.40		%	0.08		%

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 ~~58.4~~56.8 at March 31, ~~2019~~2020 compared to ~~55.0~~55.2 at June 30, ~~2018.~~

2019.

Approximately ~~3.7%~~4.2% of our accounts receivable balances are more than 90 days past due, ~~a decrease from 4.0%~~compared to 3.0% at June 30, ~~2018.~~2019. On an overall basis, our provision for losses from uncollected receivables represents ~~0.08%~~0.40% of our sales in the nine months ended March 31, 2020, compared to 0.08% of sales for the nine months ended March 31, 2019. The increase primarily relates to provisions recorded in the current year for customer credit deterioration and bankruptcies primarily in the U.S. operations of

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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 ~~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. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis, and believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis. The annualized inventory turnover based on average costs for the period ended March 31, ~~2019~~2020 was ~~4.2~~4.0 compared to ~~4.0~~4.2 at June 30, ~~2018.~~2019. We believe our inventory turnover ratio at the end of the year will be similar or slightly better than the ratio at March 31, ~~2019.~~2020.

3631

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Cautionary Statement Under Private Securities Litigation Reform Act

Management’s Discussion and Analysis contains statements that are forward-looking based on management’s current expectations about the future. Forward-looking statements are often identified by qualifiers, such as “guidance”, “expect”, “believe”, “plan”, “intend”, “will”, “should”, “could”, “would”, “anticipate”, “estimate”, “forecast”, “may”, "optimistic" and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by 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; 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; 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 tariffs and proposed tariffs on imports; and the occurrence of extraordinary events (including prolonged labor disputes, power outages, telecommunication outages, terrorist acts, 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.

In addition, please review the various risk factors relating to the COVID-19 pandemic discussed in Part II, Item 1A of this Form 10-Q. We discuss certain of these matters and other risk factors more fully throughout this Form 10-Q as well as other of our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended June 30, ~~2018.~~2019.

3732

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk, see Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended June 30, ~~2018~~2019.

3833

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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.

Changes in Internal Control Over Financial Reporting

There have not been any changes in internal control over financial reporting during the ~~nine months~~quarter ended March 31, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. As a result of the COVID-19 pandemic, the majority 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.


PART II.	OTHER INFORMATION


ITEM 1.	Legal Proceedings

The Company is a party to pending legal proceedings with respect to various product liability, commercial, and other matters. Although it is not possible to predict the outcome of these proceedings or the range of reasonably possible loss, the Company believes, based on circumstances currently known, that the likelihood is remote that the ultimate resolution of any of these proceedings 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.


ITEM 1A.	Risk Factors

In addition to other information set forth in this report, you should carefully consider the following factor that could materially affect our business, financial condition, or results of operations. The factor below should be read in conjunction with those factors described in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019, which information is incorporated here by reference.

The extent to which the COVID-19 pandemic and measures taken in response thereto continue to impact our results of operations and financial condition will depend on future developments, which are uncertain and cannot be predicted. The COVID-19 pandemic has created significant volatility, uncertainty, and economic disruption. The extent to which the pandemic impacts our results of operations and financial condition will depend on evolving factors that are uncertain and cannot be predicted, including the following: the duration, spread, and severity of the pandemic in the countries in which we operate; responsive measures taken by governmental authorities, businesses, and individuals; the effect on our customers and their demand for our products and services; the effect on our suppliers and disruptions to the global supply chain; our ability to sell and provide our products and services and otherwise operate effectively, including as a result of travel restrictions and associates working from home; disruptions to our operations resulting from associate illness; restrictions or disruptions to, or reduced availability of, transportation; customers’ ability to pay for our services and products; closures of our facilities or those of our customers or suppliers; the impact of reduced customer demand on purchasing incentives we earn from suppliers; and how quickly and to what extent normal economic and operating conditions can resume. The effects of the COVID-19 pandemic have resulted and will result in lost or delayed sales to us, and we have experienced business disruptions as we have modified our business practices (including travel, work locations, and cancellation of physical participation in meetings). In addition, the pandemic’s impact on the economy may affect the proper functioning of financial and capital markets, foreign currency exchange rates, product and energy costs, and interest rates. Even after the pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. The pandemic’s effects could also amplify the other risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, and could materially and adversely affect our business, financial condition, results of operations, and/or stock price.


ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of common stock in the quarter ended March 31, ~~2019~~2020 were as follows:

Period (a) Total Number of Shares (b) Average Price Paid per Share ($) (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1, 2019 to January 31, 2019 90,068 $58.86 90,000 966,700
February 1, 2019 to February 28, 2019 94,317 $57.54 94,317 872,383
March 1, 2019 to March 31, 2019 7,765 $56.00 7,765 864,618
Total 192,150 $58.10 192,082 864,618



Period	(a) Total Number of Shares	(b) Average Price Paid per Share ($)	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1, 2020 to January 31, 2020	0	$0.00	0	864,618
February 1, 2020 to February 29, 2020	0	$0.00	0	864,618
March 1, 2020 to March 31, 2020	0	$0.00	0	864,618
Total	0	$0.00	0	864,618


(1)	~~During the quarter the Company purchased 68 shares in connection with the Deferred Compensation Plan.~~


~~(2)~~	On October 24, 2016, the Board of Directors authorized the repurchase of up to 1.5 million shares of the Company's common stock, replacing the prior authorization. We publicly announced the new authorization on October 26, 2016. Purchases can be made in the open market or in privately negotiated transactions.

The authorization is in effect until all shares are purchased, or the Board revokes or amends the authorization.


ITEM 4.	Mine Safety Disclosures.

Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of the SEC Regulation S-K is included in Exhibit 95 to this quarterly report on Form 10-Q.

ITEM 6. Exhibits



Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit 3(a) to the Company’s Form 10-Q for the quarter ended December 31, 2005, SEC File No. 1-2299, and incorporated here by reference).

3.2		Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to the Company’s Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference).

4.1		Certificate of Merger of Bearings, Inc. (Ohio) (now named Applied Industrial Technologies, Inc.) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to the Company’s Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).

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 and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), ~~conformed to show all amendments~~and certain of its affiliates (filed as Exhibit ~~4.2~~10.1 to the Company's Form ~~10-K for the fiscal year ended June 30, 2018,~~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 Amended and Restated Note Purchase and Private Shelf Agreement, ~~dated November 27, 1996, as amended,~~ between Applied Industrial Technologies, Inc. and ~~Prudential Investment Management,~~PGIM, Inc. (filed as Exhibit 10.1 to the Company'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 Amended and Restated Note Purchase and Private Shelf Agreement ~~dated November 27, 1996, as amended,~~ between Applied Industrial Technologies, Inc. and ~~Prudential Investment Management,~~PGIM, Inc. (filed as Exhibit 4.5 to the Company's Form 10-Q for the quarter ended September 30, 2014, SEC File No. 1-2299, and incorporated here by reference).

4.5		Credit Agreement dated as of January 31, 2018, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 10.1 to the Company's Form 8-K filed February 6, 2018, SEC File No. 1-2299, and incorporated here by reference).

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).

1510.1		~~Independent Registered Public Accounting Firm’s Awareness Letter~~Restricted Stock Award Terms and Conditions (Directors)

31		Rule 13a-14(a)/15d-14(a) certifications

32		Section 1350 certifications

95		Mine safety and health ~~disclosure~~disclosures

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.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

The Company 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 the Company’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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



		APPLIED INDUSTRIAL TECHNOLOGIES, INC.
		(Company)

Date:	~~April 30, 2019~~May 1, 2020	By: /s/ Neil A. Schrimsher
		Neil A. Schrimsher
		President & Chief Executive Officer


Date:	~~April 30, 2019~~May 1, 2020	By: /s/ David K. Wells
		David K. Wells
		Vice President-Chief Financial Officer & Treasurer

4238



	March 31, 2019		July 1, 2018		$ Change			% Change
Contract assets	$	8,732	$	13,823	$	(5,091	)	(36.8	)%



	Three Months Ended March 31, 2019
	As Reported			Adjustments		Balances without adoption of ASC 606
Net sales	$	885,443		$	569	$	886,012
Cost of sales	629,884			369		630,253
Gross profit	255,559			200		255,759
Selling, distribution and administrative expense, including depreciation	189,456			57		189,513
Intangible Impairment	31,594			—		31,594
Operating income	34,509			143		34,652
Interest expense, net	9,947			—		9,947
Other income, net	(1,256		)	—		(1,256		)
Income before income taxes	25,818			143		25,961
Income tax expense	9,283			37		9,320
Net income	$	16,535		$	106	$	16,641



	As of March 31, 2019
	As Reported		Adjustments			Balances without adoption of ASC 606
Assets
Other current assets	$	49,380	$	(8,732	)	$	40,648
Inventories	454,555		11,461			466,016
Other assets	33,761		209			33,970

Liabilities
Other current liabilities	62,731		6,649			69,380
Compensation and related benefits	69,324		(402		)	68,922
Other liabilities	77,497		(692		)	76,805

Equity
Retained Earnings	$	882,848	$	(2,619	)	$	880,229



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



	Three Months Ended March 31,		Nine Months Ended March 31,
Pro forma	2018		2018
Net sales	$	866,818	$	2,432,709
Operating income	62,360		164,302
Net income	40,546		98,391
Diluted net income per share	$	1.03	$	2.51



	Three Months Ended March 31, 2018
	Foreign currency translation adjustment			Unrealized gain on securities available for sale		Post-employment benefits			Total Accumulated other comprehensive (loss) income
Balance at January 1, 2018	$	(77,355	)	$	35	$	(2,294	)	$	(79,614	)
Other comprehensive (loss) income	(378		)	6		—			(372		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			—		(14		)	(14		)
Net current-period other comprehensive (loss) income	(378		)	6		(14		)	(386		)
Balance at March 31, 2018	$	(77,733	)	$	41	$	(2,308	)	$	(80,000	)



	Nine Months Ended March 31, 2018
	Foreign currency translation adjustment			Unrealized gain on securities available for sale		Post-employment benefits			Total Accumulated other comprehensive (loss) income
Balance at July 1, 2017	$	(79,447	)	$	21	$	(2,276	)	$	(81,702	)
Other comprehensive income	1,714			20		—			1,734
Amounts reclassified from accumulated other comprehensive (loss) income	—			—		(32		)	(32		)
Net current-period other comprehensive income (loss)	1,714			20		(32		)	1,702
Balance at March 31, 2018	$	(77,733	)	$	41	$	(2,308	)	$	(80,000	)



	Pension Benefits						Retiree Health Care Benefits
Three Months Ended March 31,	2019			2018			2019			2018
Components of net periodic cost:
Service cost	$	11		$	31		$	4		$	5
Interest cost	174			182			13			13
Expected return on plan assets	(133		)	(118		)	—			—
Recognized net actuarial loss (gain)	46			106			(30		)	(39		)
Amortization of prior service cost	—			7			(92		)	(92		)
Net periodic cost (benefit)	$	98		$	208		$	(105	)	$	(113	)



	Index Reading
Month	MCU	PMI	IP
March 2019	78.8	55.3	105.5
February 2019	79.0	54.2	105.6
January 2019	79.1	56.6	105.9



	Three Months Ended March 31,				Change in $'s Versus Prior Period - % Increase
	As a Percent of Net Sales
	2019		2018
Net Sales	100.0	%	100.0	%	7.0	%
Gross Profit	28.9	%	28.9	%	6.7	%
Selling, Distribution & Administrative	21.4	%	22.1	%	3.5	%
Operating Income	3.9	%	6.8	%	(38.9	)%
Net Income	1.9	%	4.4	%	(54.8	)%



							Amount of change due to
	Three Months Ended March 31,				SD&A Increase				Foreign Currency			Organic Change
	2019		2018		SD&A Increase		Acquisitions		Foreign Currency			Organic Change
SD&A	$	189.5	$	183.1	$	6.4	$	9.5	$	(1.5	)	$	(1.6	)