UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~MARCH 31,~~SEPTEMBER 30, 2021


☐			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 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)

(216) 426-4000

Registrant's telephone number, including area code

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: (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 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 No o

~~Table of Contents~~

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

Table of Contents


Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	☐
		Emerging growth company	☐

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 Act). Yes ☐ No ☒

There were ~~38,859,387~~38,457,425 (no par value) shares of common stock outstanding on ~~April 16,~~October 15, 2021.

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 ~~and Nine~~ Months Ended ~~March 31,~~September 30, 2021 and 2020

Condensed Statements of Consolidated Comprehensive Income - Three ~~and Nine~~ Months Ended ~~March 31,~~September 30, 2021 and 2020

Condensed Consolidated Balance Sheets - ~~March 31,~~September 30, 2021 and June 30, ~~2020~~2021

Condensed Statements of Consolidated Cash Flows - ~~Nine~~Three Months Ended ~~March 31,~~September 30, 2021 and 2020

Condensed Statements of Shareholders' Equity - Three ~~and Nine~~ Months Ended ~~March 31,~~September 30, 2021 and 2020

Notes to Condensed Consolidated Financial Statements

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2117

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

3124

Item 4:

Controls and Procedures

Part II:

Item 1:

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

Item 5:

Item 6:

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
		March 31,				March 31,					September 30,
		2021		2020		2021		2020			2021		2020
Net sales	Net sales	$	840,937	$	830,797	$	2,340,031	$	2,520,576	Net sales	$	891,681	$	747,807
Cost of sales	Cost of sales	593,712		594,045		1,667,491		1,791,130		Cost of sales	636,341		532,026
Gross profit	Gross profit	247,225		236,752		672,540		729,446		Gross profit	255,340		215,781
Selling, distribution and administrative expense, including depreciation	Selling, distribution and administrative expense, including depreciation	172,758		183,702		498,659		556,485		Selling, distribution and administrative expense, including depreciation	180,726		163,473
Impairment expense		0		131,000		49,528		131,000
Operating income (loss)		74,467		(77,950)		124,353		41,961

Operating income										Operating income	74,614		52,308
Interest expense, net	Interest expense, net	7,608		8,805		22,919		28,447		Interest expense, net	7,390		7,653
Other income, net	Other income, net	(1,657)		(1,428)		(1,746)		(1,643)		Other income, net	(312)		(177)
Income (loss) before income taxes		68,516		(85,327)		103,180		15,157
Income tax expense (benefit)		12,453		(2,550)		17,667		21,104
Net income (loss)		$	56,063	$	(82,777)	$	85,513	$	(5,947)
Net income (loss) per share - basic		$	1.44	$	(2.14)	$	2.21	$	(0.15)
Net income (loss) per share - diluted		$	1.42	$	(2.14)	$	2.18	$	(0.15)
Income before income taxes										Income before income taxes	67,536		44,832
Income tax expense										Income tax expense	14,567		10,048
Net income										Net income	$	52,969	$	34,784
Net income per share - basic										Net income per share - basic	$	1.38	$	0.90
Net income per share - diluted										Net income per share - diluted	$	1.36	$	0.89
Weighted average common shares outstanding for basic computation	Weighted average common shares outstanding for basic computation	38,835		38,682		38,779		38,647		Weighted average common shares outstanding for basic computation	38,502		38,722
Dilutive effect of potential common shares	Dilutive effect of potential common shares	577		0		482		0		Dilutive effect of potential common shares	582		366
Weighted average common shares outstanding for diluted computation	Weighted average common shares outstanding for diluted computation	39,412		38,682		39,261		38,647		Weighted average common shares outstanding for diluted computation	39,084		39,088

See notes to condensed consolidated financial statements.

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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,
2021 2020 2021 2020
Net income (loss) per the condensed statements of consolidated income $ 56,063 $ (82,777) $ 85,513 $ (5,947)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments (496) (28,767) 19,529 (27,356)
Post-employment benefits:
Reclassification of net actuarial losses (gains) and prior service cost into other income, net and included in net periodic pension costs 68 (17) 203 (50)
Unrealized gain (loss) on cash flow hedge 8,758 (13,891) 6,017 (14,249)
Reclassification of interest from cash flow hedge into interest expense 2,992 1,017 8,504 2,350
Total other comprehensive income (loss), before tax 11,322 (41,658) 34,253 (39,305)
Income tax expense (benefit) related to items of other comprehensive income 2,829 (3,711) 3,694 (3,684)
Other comprehensive income (loss), net of tax 8,493 (37,947) 30,559 (35,621)
Comprehensive income (loss), net of tax $ 64,556 $ (120,724) $ 116,072 $ (41,568)


	Three Months Ended
	September 30,
	2021		2020
Net income per the condensed statements of consolidated income	$	52,969	$	34,784

Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments	(7,182)		5,554
Post-employment benefits:
Reclassification of net actuarial losses and prior service cost into other income, net and included in net periodic pension costs	75		68


Unrealized gain (loss) on cash flow hedge	596		(17)
Reclassification of interest from cash flow hedge into interest expense	2,585		2,690
Total other comprehensive (loss) income, before tax	(3,926)		8,295
Income tax expense related to items of other comprehensive (loss) income	805		786
Other comprehensive (loss) income, net of tax	(4,731)		7,509
Comprehensive income, net of tax	$	48,238	$	42,293

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)


		March 31, 2021		June 30, 2020			September 30, 2021		June 30, 2021
ASSETS	ASSETS					ASSETS
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	304,016	$	268,551	Cash and cash equivalents	$	247,313	$	257,745
Accounts receivable, net	Accounts receivable, net	510,080		449,998		Accounts receivable, net	530,824		516,322
Inventories	Inventories	358,237		389,150		Inventories	377,978		362,547
Other current assets	Other current assets	54,023		52,070		Other current assets	54,452		59,961
Total current assets	Total current assets	1,226,356		1,159,769		Total current assets	1,210,567		1,196,575
Property, less accumulated depreciation of $200,039 and $192,054		116,951		121,901
Property, less accumulated depreciation of $208,991 and $204,326						Property, less accumulated depreciation of $208,991 and $204,326	113,813		115,589
Operating lease assets, net	Operating lease assets, net	84,062		90,636		Operating lease assets, net	94,476		87,111
Identifiable intangibles, net	Identifiable intangibles, net	287,686		343,215		Identifiable intangibles, net	274,410		279,628
Goodwill	Goodwill	559,196		540,594		Goodwill	562,791		560,077
Other assets	Other assets	31,137		27,436		Other assets	47,123		32,827
TOTAL ASSETS	TOTAL ASSETS	$	2,305,388	$	2,283,551	TOTAL ASSETS	$	2,303,180	$	2,271,807

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities	Current liabilities					Current liabilities
Accounts payable	Accounts payable	$	217,252	$	186,270	Accounts payable	$	210,987	$	208,162
Current portion of long-term debt	Current portion of long-term debt	78,644		78,646		Current portion of long-term debt	88,401		43,525
Compensation and related benefits	Compensation and related benefits	80,660		61,887		Compensation and related benefits	65,509		77,657
Other current liabilities	Other current liabilities	89,190		99,280		Other current liabilities	101,930		98,356
Total current liabilities	Total current liabilities	465,746		426,083		Total current liabilities	466,827		427,700
Long-term debt	Long-term debt	773,404		855,143		Long-term debt	730,307		784,855
Other liabilities	Other liabilities	131,331		158,783		Other liabilities	129,476		126,706
TOTAL LIABILITIES	TOTAL LIABILITIES	1,370,481		1,440,009		TOTAL LIABILITIES	1,326,610		1,339,261
Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
Preferred stock—no par value; 2,500 shares authorized; none issued or outstanding	Preferred stock—no par value; 2,500 shares authorized; none issued or outstanding	0		0		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	Common stock—no par value; 80,000 shares authorized; 54,213 shares issued	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	Additional paid-in capital	177,231		176,492		Additional paid-in capital	179,574		177,014
Retained earnings	Retained earnings	1,260,761		1,200,570		Retained earnings	1,347,375		1,294,413
Treasury shares—at cost (15,354 and 15,503 shares, respectively)		(414,214)		(414,090)
Treasury shares—at cost (15,756 and 15,697 shares, respectively)						Treasury shares—at cost (15,756 and 15,697 shares, respectively)	(462,556)		(455,789)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(98,871)		(129,430)		Accumulated other comprehensive loss	(97,823)		(93,092)
TOTAL SHAREHOLDERS’ EQUITY	TOTAL SHAREHOLDERS’ EQUITY	934,907		843,542		TOTAL SHAREHOLDERS’ EQUITY	976,570		932,546
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,305,388	$	2,283,551	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,303,180	$	2,271,807

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

(In thousands)


		Nine Months Ended					Three Months Ended
		March 31,					September 30,
		2021		2020			2021		2020
Cash Flows from Operating Activities	Cash Flows from Operating Activities					Cash Flows from Operating Activities
Net income (loss)		$	85,513	$	(5,947)
Net income						Net income	$	52,969	$	34,784
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property	Depreciation and amortization of property	15,641		15,997		Depreciation and amortization of property	5,427		5,352
Amortization of intangibles	Amortization of intangibles	26,238		31,671		Amortization of intangibles	8,121		9,726
Impairment expense		49,528		131,000

Amortization of stock options and appreciation rights	Amortization of stock options and appreciation rights	1,930		2,217		Amortization of stock options and appreciation rights	1,907		693

Other share-based compensation expense	Other share-based compensation expense	4,660		2,046		Other share-based compensation expense	1,563		677
Changes in operating assets and liabilities, net of acquisitions	Changes in operating assets and liabilities, net of acquisitions	33,574		1,406		Changes in operating assets and liabilities, net of acquisitions	(20,404)		24,559
Other, net	Other, net	(13,675)		(8,766)		Other, net	(941)		6,051
Net Cash provided by Operating Activities	Net Cash provided by Operating Activities	203,409		169,624		Net Cash provided by Operating Activities	48,642		81,842
Cash Flows from Investing Activities	Cash Flows from Investing Activities					Cash Flows from Investing Activities
Acquisition of businesses, net of cash acquired		(30,023)		(37,237)
Net cash paid for acquisitions, net of cash acquired						Net cash paid for acquisitions, net of cash acquired	(7,094)		—
Cash payments for loans on company-owned life insurance						Cash payments for loans on company-owned life insurance	(14,835)		—
Capital expenditures	Capital expenditures	(12,177)		(16,223)		Capital expenditures	(3,621)		(3,597)
Proceeds from property sales	Proceeds from property sales	691		1,809		Proceeds from property sales	48		193

Net Cash used in Investing Activities	Net Cash used in Investing Activities	(41,509)		(51,651)		Net Cash used in Investing Activities	(25,502)		(3,404)
Cash Flows from Financing Activities	Cash Flows from Financing Activities					Cash Flows from Financing Activities

Long-term debt borrowings		0		25,000

Long-term debt repayments	Long-term debt repayments	(82,070)		(39,803)		Long-term debt repayments	(9,811)		(62,450)

Purchases of treasury shares						Purchases of treasury shares	(6,537)		—
Interest rate swap settlement payments	Interest rate swap settlement payments	(2,122)		0		Interest rate swap settlement payments	(1,644)		—
Payment of debt issuance costs		(399)		(22)

Dividends paid	Dividends paid	(37,772)		(36,420)		Dividends paid	(12,712)		(12,415)
Acquisition holdback payments	Acquisition holdback payments	(2,344)		(2,440)		Acquisition holdback payments	(135)		(521)
Exercise of stock options and appreciation rights		163		330

Taxes paid for shares withheld for equity awards	Taxes paid for shares withheld for equity awards	(5,990)		(2,604)		Taxes paid for shares withheld for equity awards	(1,141)		(1,797)
Net Cash used in Financing Activities	Net Cash used in Financing Activities	(130,534)		(55,959)		Net Cash used in Financing Activities	(31,980)		(77,183)
Effect of Exchange Rate Changes on Cash	Effect of Exchange Rate Changes on Cash	4,099		(4,769)		Effect of Exchange Rate Changes on Cash	(1,592)		1,254
Increase in Cash and Cash Equivalents		35,465		57,245
(Decrease) Increase in Cash and Cash Equivalents						(Decrease) Increase in Cash and Cash Equivalents	(10,432)		2,509
Cash and Cash Equivalents at Beginning of Period	Cash and Cash Equivalents at Beginning of Period	268,551		108,219		Cash and Cash Equivalents at Beginning of Period	257,745		268,551
Cash and Cash Equivalents at End of Period	Cash and Cash Equivalents at End of Period	$	304,016	$	165,464	Cash and Cash Equivalents at End of Period	$	247,313	$	271,060

See notes to condensed consolidated financial statements.

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands)


For the Period Ended March 31, 2021		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 June 30, 2020		38,710	$	10,000	$	176,492	$	1,200,570	$	(414,090)	$	(129,430)	$	843,542
For the Period Ended September 30, 2021															For the Period Ended September 30, 2021	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 June 30, 2021															Balance at June 30, 2021	38,516	$	10,000	$	177,014	$	1,294,413	$	(455,789)	$	(93,092)	$	932,546
Net income	Net income						34,784						34,784		Net income						52,969						52,969
Other comprehensive income											7,509		7,509
Other comprehensive loss															Other comprehensive loss										(4,731)		(4,731)

Cash dividends — $0.32 per share							(18)						(18)

Cash dividends — $0.33 per share															Cash dividends — $0.33 per share						—						—
Purchases of common stock for treasury															Purchases of common stock for treasury	(77)							(6,537)				(6,537)
Treasury shares issued for:	Treasury shares issued for:														Treasury shares issued for:
Exercise of stock appreciation rights and options	Exercise of stock appreciation rights and options	13			(277)				12				(265)		Exercise of stock appreciation rights and options	3			(116)				8				(108)
Performance share awards	Performance share awards	22			(985)				(20)				(1,005)		Performance share awards	5			(222)				(73)				(295)
Restricted stock units	Restricted stock units	15			(593)				96				(497)		Restricted stock units	12			(572)				(120)				(692)
Compensation expense — stock appreciation rights and options	Compensation expense — stock appreciation rights and options				693								693		Compensation expense — stock appreciation rights and options				1,907								1,907
Other share-based compensation expense	Other share-based compensation expense				677								677		Other share-based compensation expense				1,563								1,563
Other	Other						15		(29)				(14)		Other	(2)					(7)		(45)				(52)
Balance at September 30, 2020		38,760	$	10,000	$	176,007	$	1,235,351	$	(414,031)	$	(121,921)	$	885,406
Net loss							(5,334)						(5,334)
Other comprehensive income											14,557		14,557

Cash dividends — $0.32 per share							(12,483)						(12,483)

Treasury shares issued for:
Exercise of stock appreciation rights and options		71			(3,116)				(496)				(3,612)

Compensation expense — stock appreciation rights and options					635								635
Other share-based compensation expense					1,490								1,490
Other							48		0				48
Balance at December 31, 2020		38,831	$	10,000	$	175,016	$	1,217,582	$	(414,527)	$	(107,364)	$	880,707
Net income							56,063						56,063
Other comprehensive income											8,493		8,493

Cash dividends — $0.33 per share							(12,878)						(12,878)

Treasury shares issued for:
Exercise of stock appreciation rights and options		11			(379)				(40)				(419)

Restricted stock units		4			(147)				(1)				(148)
Compensation expense — stock appreciation rights and options					602								602
Other share-based compensation expense					2,493								2,493
Other		13			(354)		(6)		354				(6)
Balance at March 31, 2021		38,859	$	10,000	$	177,231	$	1,260,761	$	(414,214)	$	(98,871)	$	934,907
Balance at September 30, 2021															Balance at September 30, 2021	38,457	$	10,000	$	179,574	$	1,347,375	$	(462,556)	$	(97,823)	$	976,570


For the Period Ended September 30, 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 June 30, 2020	38,710	$	10,000	$	176,492	$	1,200,570	$	(414,090)	$	(129,430)	$	843,542
Net income						34,784						34,784
Other comprehensive income										7,509		7,509
Cash dividends — $0.32 per share						(18)						(18)

Treasury shares issued for:
Exercise of stock appreciation rights and options	13			(277)				12				(265)
Performance share awards	22			(985)				(20)				(1,005)
Restricted stock units	15			(593)				96				(497)
Compensation expense — stock appreciation rights and options				693								693
Other share-based compensation expense				677								677
Other						15		(29)				(14)
Balance at September 30, 2020	38,760	$	10,000	$	176,007	$	1,235,351	$	(414,031)	$	(121,921)	$	885,406

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

~~CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY~~

~~(Unaudited)~~

~~(In thousands)~~

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 June 30, 2019 38,597 $ 10,000 $ 172,931 $ 1,229,148 $ (415,159) $ (99,886) $ 897,034
Net income 38,799 38,799
Other comprehensive loss (5,247) (5,247)
Cumulative effect of adopting accounting standards (3,275) (3,275)
Cash dividends — $0.31 per share (20) (20)
Treasury shares issued for:
Exercise of stock appreciation rights and options 5 (177) 61 (116)
Performance share awards 36 (1,540) 362 (1,178)
Restricted stock units 16 (631) 200 (431)
Compensation expense — stock appreciation rights and options 773 773
Other share-based compensation expense 919 919
Other 2 (52) (4) 23 (33)
Balance at September 30, 2019 38,656 $ 10,000 $ 172,223 $ 1,264,648 $ (414,513) $ (105,133) $ 927,225
Net income 38,031 38,031
Other comprehensive income 7,573 7,573
Cash dividends — $0.31 per share (12,017) (12,017)
Treasury shares issued for:
Exercise of stock appreciation rights and options 22 (185) (47) (232)
Compensation expense — stock appreciation rights and options 721 721
Other share-based compensation expense 918 918
Other 23 (1) 22
Balance at December 31, 2019 38,678 $ 10,000 $ 173,677 $ 1,290,685 $ (414,561) $ (97,560) $ 962,241
Net income (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

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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,~~September 30, 2021, and the results of its operations and its cash flows for the ~~nine~~three month periods ended ~~March 31,~~September 30, 2021 and 2020, have been included. The condensed consolidated balance sheet as of June 30, ~~2020~~2021 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, ~~2020.~~2021.

Operating results for the ~~nine~~three month period ended ~~March 31,~~September 30, 2021 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, ~~2021.~~2022.

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.

~~Recently Adopted Accounting Guidance~~

~~Accounting for current expected credit losses~~

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 adopted the new guidance in the first quarter of fiscal 2021. The adoption of this guidance did not have a material impact on the Company's financial statements or related disclosures.

~~Recently Issued Accounting Guidance~~

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, 2020, 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 this pronouncement on its financial statements and related disclosures.

~~Table of Contents~~

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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

2. REVENUE RECOGNITION

Disaggregation of Revenues

The following tables present the Company's net sales by reportable segment and by geographic areas based on the location of the facility shipping the product for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2021 and 2020. Other countries consist of Mexico, Australia, New Zealand, and Singapore.


		Three Months Ended March 31,													Three Months Ended September 30,
		2021						2020							2021						2020
		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:	Geographic Areas:													Geographic Areas:
United States	United States	$	461,945	$	262,672	$	724,617	$	473,069	$	251,913	$	724,982	United States	$	479,164	$	285,044	$	764,208	$	415,242	$	228,815	$	644,057
Canada	Canada	66,146		0		66,146		59,912		0		59,912		Canada	74,566		—		74,566		56,896		—		56,896
Other countries	Other countries	44,801		5,373		50,174		41,387		4,516		45,903		Other countries	47,141		5,766		52,907		41,146		5,708		46,854
Total	Total	$	572,892	$	268,045	$	840,937	$	574,368	$	256,429	$	830,797	Total	$	600,871	$	290,810	$	891,681	$	513,284	$	234,523	$	747,807

Nine Months Ended March 31,
2021 2020
Service Center Based Distribution Fluid Power & Flow Control Total Service Center Based Distribution Fluid Power & Flow Control Total
Geographic Areas:
United States $ 1,294,643 $ 721,845 $ 2,016,488 $ 1,433,133 $ 755,175 $ 2,188,308
Canada 180,851 0 180,851 193,755 0 193,755
Other countries 126,372 16,320 142,692 126,428 12,085 138,513
Total $ 1,601,866 $ 738,165 $ 2,340,031 $ 1,753,316 $ 767,260 $ 2,520,576

~~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, 2021 and 2020:~~

Three Months Ended March 31,
2021 2020
Service Center Based Distribution Fluid Power & Flow Control Total Service Center Based Distribution Fluid Power & Flow Control Total
General Industry 35.1 % 41.1 % 37.0 % 34.8 % 39.9 % 36.4 %
Industrial Machinery 10.1 % 26.7 % 15.4 % 9.9 % 24.7 % 14.5 %
Food 13.2 % 2.6 % 9.8 % 12.0 % 3.1 % 9.3 %
Metals 10.9 % 6.9 % 9.6 % 11.1 % 6.5 % 9.7 %
Forest Products 10.9 % 2.7 % 8.3 % 9.8 % 5.7 % 8.5 %
Chem/Petrochem 3.2 % 13.5 % 6.5 % 3.3 % 12.8 % 6.2 %
Cement & Aggregate 8.1 % 1.1 % 5.9 % 7.2 % 1.3 % 5.4 %
Transportation 4.7 % 4.3 % 4.6 % 4.6 % 4.7 % 4.6 %
Oil & Gas 3.8 % 1.1 % 2.9 % 7.3 % 1.3 % 5.4 %
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

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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,
2021 2020
Service Center Based Distribution Fluid Power & Flow Control Total Service Center Based Distribution Fluid Power & Flow Control Total
General Industry 35.6 % 40.1 % 36.9 % 34.6 % 41.6 % 36.7 %
Industrial Machinery 9.6 % 26.6 % 15.0 % 9.7 % 23.7 % 13.9 %
Food 13.8 % 2.9 % 10.3 % 11.6 % 2.9 % 9.0 %
Metals 10.5 % 6.8 % 9.4 % 11.3 % 7.4 % 10.1 %
Forest Products 10.9 % 2.9 % 8.4 % 9.0 % 3.9 % 7.4 %
Chem/Petrochem 3.4 % 13.7 % 6.6 % 3.2 % 13.3 % 6.3 %
Cement & Aggregate 7.8 % 1.1 % 5.7 % 7.2 % 1.1 % 5.4 %
Transportation 4.7 % 4.8 % 4.8 % 4.7 % 4.4 % 4.6 %
Oil & Gas 3.7 % 1.1 % 2.9 % 8.7 % 1.7 % 6.6 %
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the three months ended September 30, 2021 and 2020:


	Three Months Ended September 30,
	2021						2020
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
General Industry	34.6	%	38.9	%	35.9	%	36.0	%	39.4	%	37.0	%
Industrial Machinery	10.3	%	29.0	%	16.4	%	9.4	%	26.7	%	14.9	%
Metals	11.0	%	7.4	%	9.9	%	10.2	%	7.0	%	9.2	%
Food	12.5	%	2.5	%	9.3	%	14.1	%	3.0	%	10.7	%
Forest Products	10.4	%	2.5	%	7.8	%	10.8	%	2.9	%	8.3	%
Chem/Petrochem	3.4	%	13.8	%	6.8	%	3.5	%	13.3	%	6.6	%
Cement & Aggregate	8.5	%	1.1	%	6.1	%	7.7	%	1.1	%	5.6	%
Oil & Gas	5.2	%	1.2	%	3.9	%	3.6	%	1.2	%	2.8	%
Transportation	4.1	%	3.6	%	3.9	%	4.7	%	5.4	%	4.9	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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,~~September 30, 2021 and 2020:

Three Months Ended March 31,
2021 2020
Service Center Based Distribution Fluid Power & Flow Control Total Service Center Based Distribution Fluid Power & Flow Control Total
Power Transmission 37.2 % 7.7 % 27.8 % 34.8 % 8.5 % 26.6 %
Fluid Power 13.4 % 38.3 % 21.3 % 13.3 % 40.5 % 21.7 %
Bearings, Linear & Seals 28.9 % 0.2 % 19.7 % 27.9 % 0.3 % 19.4 %
General Maintenance; Hose Products 20.5 % 18.8 % 20.0 % 24.0 % 12.2 % 20.4 %
Specialty Flow Control 0 % 35.0 % 11.2 % 0 % 38.5 % 11.9 %
Total 100 % 100 % 100 % 100 % 100 % 100 %


		Nine Months Ended March 31,													Three Months Ended September 30,
		2021						2020							2021						2020
		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
Power Transmission	Power Transmission	37.4	%	7.8	%	28.0	%	34.7	%	9.9	%	27.2	%	Power Transmission	37.7	%	10.1	%	28.7	%	37.7	%	7.6	%	28.3	%
Fluid Power	Fluid Power	13.3	%	38.2	%	21.1	%	13.3	%	38.4	%	20.9	%	Fluid Power	12.7	%	37.6	%	20.8	%	13.1	%	39.1	%	21.3	%
General Maintenance; Hose Products														General Maintenance; Hose Products	20.6	%	18.8	%	20.0	%	20.2	%	13.8	%	18.1	%
Bearings, Linear & Seals	Bearings, Linear & Seals	28.9	%	0.4	%	19.9	%	26.5	%	0.3	%	18.6	%	Bearings, Linear & Seals	29.0	%	0.4	%	19.7	%	29.0	%	0.4	%	20.0	%
General Maintenance; Hose Products		20.4	%	16.0	%	19.1	%	25.5	%	11.1	%	21.1	%
Specialty Flow Control	Specialty Flow Control	0	%	37.6	%	11.9	%	0	%	40.3	%	12.2	%	Specialty Flow Control	—	%	33.1	%	10.8	%	—	%	39.1	%	12.3	%
Total	Total	100	%	100	%	100	%	100	%	100	%	100	%	Total	100	%	100	%	100	%	100	%	100	%	100	%

Contract Assets

The Company’s contract assets consist of un-billed amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer.

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


	September 30, 2021		June 30, 2021		$ Change		% Change
Contract assets	$	14,563	$	15,178	$	(615)	(4.1)	%

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.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

March 31, 2021 June 30, 2020 $ Change % Change
Contract assets $ 11,838 $ 8,435 $ 3,403 40.3 %

~~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.~~

3. BUSINESS COMBINATIONS

~~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 2022 Acquisitions

On August 18, 2021, the Company acquired substantially all of the net assets of R.R. Floody Company (Floody), a Rockford, Illinois provider of high technology solutions for advanced factory automation. Floody is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $8,094, net tangible assets acquired were $1,813, and intangible assets including goodwill were $6,281 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes $1,000 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the consolidated balance sheet as of September 30, 2021, and which will be paid on the first and second 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.

Fiscal 2021 Acquisitions

On December 31, 2020, the Company acquired 100% of the outstanding shares of Gibson Engineering Company (Gibson), a Norwood, Massachusetts provider of automation products, services, and engineered solutions focused on machine vision, motion control, mobile and collaborative robotic solutions, intelligent sensors, and other related equipment. Gibson is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $15,450, net tangible assets acquired were ~~$1,099,~~$1,030, and intangible assets including goodwill were ~~$14,351~~$14,420 based upon ~~preliminary~~ estimated fair values at the acquisition ~~date, which are subject to adjustment.~~date. The purchase price includes $1,938 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of ~~March 31,~~September 30, 2021, and which will be paid on the first and second anniversaries of the acquisition date with interest at a fixed rate of 1.0% 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 October 5, 2020, the Company acquired substantially all of the net assets of Advanced Control Solutions (ACS), which operates four locations in Georgia, Tennessee, and Alabama. ACS is a provider of automation products, services, and engineered solutions focused on machine vision equipment and software, mobile and collaborative robotic solutions, intelligent sensors, logic controllers, and other related equipment. ACS is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was ~~$17,888,~~$17,867, net tangible assets acquired were ~~$1,231,~~$1,210, and intangible assets including goodwill were $16,657 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. 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 2020 Acquisition~~

On August 21, 2019, the Company acquired 100% of the outstanding shares of Olympus Controls (Olympus), a Portland, Oregon automation solutions provider - including design, assembly, integration, and distribution - of motion control, machine vision, and robotic technologies. Olympus is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $36,642, net tangible assets acquired were $9,540, and intangible assets including goodwill was $27,102 based upon estimated fair values at the acquisition date. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.

~~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, ~~2020~~2021 and the ~~nine~~three month period ended ~~March 31,~~September 30, 2021 are as follows:


		Service Center Based Distribution		Fluid Power & Flow Control		Total			Service Center Based Distribution		Fluid Power & Flow Control		Total
Balance at June 30, 2019		$	213,634	$	448,357	$	661,991
Goodwill adjusted/acquired during the period		(3,393)		14,667		11,274
Impairment		0		(131,000)		(131,000)
Balance at June 30, 2020								Balance at June 30, 2020	$	208,570	$	332,024	$	540,594
Goodwill acquired during the year								Goodwill acquired during the year	—		15,757		15,757
Other, primarily currency translation	Other, primarily currency translation	(1,671)		0		(1,671)		Other, primarily currency translation	3,726		—		3,726
Balance at June 30, 2020		$	208,570	$	332,024	$	540,594
Balance at June 30, 2021								Balance at June 30, 2021	212,296		347,781		560,077
Goodwill acquired during the period	Goodwill acquired during the period	0		15,688		15,688		Goodwill acquired during the period	—		3,267		3,267

Other, primarily currency translation	Other, primarily currency translation	2,914		0		2,914		Other, primarily currency translation	(1,018)		465		(553)
Balance at March 31, 2021		$	211,484	$	347,712	$	559,196
Balance at September 30, 2021								Balance at September 30, 2021	$	211,278	$	351,513	$	562,791

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2021. The Company concluded that seven (7) of the reporting units’ fair ~~value~~values exceeded their carrying amounts by at least 25% as of January 1, 2021. The fair value of the final reporting unit, which is comprised of the FCX Performance Inc. (FCX) operations, exceeded its carrying value by 14%. The FCX reporting unit has a goodwill balance of $309,012 as of ~~March 31,~~September 30, 2021.

The fair values of the reporting units in accordance with the goodwill impairment test were determined using the income and market approaches. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. The market approach utilizes an analysis of comparable publicly traded companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues, EBITDA, and multiples that are applied to management’s forecasted revenues and EBITDA estimates.

The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used.

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,~~September 30, 2021 and June 30, ~~2020,~~2021, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment and $167,605 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:


September 30, 2021	Amount		Accumulated Amortization		Net Book Value
Finite-Lived Identifiable Intangibles:
Customer relationships	$	354,332	$	149,454	$	204,878
Trade names	105,621		39,349		66,272
Vendor relationships	11,414		10,018		1,396
Other	2,321		457		1,864
Total Identifiable Intangibles	$	473,688	$	199,278	$	274,410

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

~~The Company’s identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:~~


June 30, 2021	Amount		Accumulated Amortization		Net Book Value
Finite-Lived Identifiable Intangibles:
Customer relationships	$	353,028	$	143,862	$	209,166
Trade names	104,780		37,626		67,154
Vendor relationships	11,469		9,859		1,610
Other	2,070		372		1,698
Total Identifiable Intangibles	$	471,347	$	191,719	$	279,628

March 31, 2021 Amount Accumulated
Amortization Net Book
Value
Finite-Lived Identifiable Intangibles:
Customer relationships $ 352,720 $ 137,519 $ 215,201
Trade names 105,065 36,172 68,893
Vendor relationships 11,481 9,666 1,815
Other 2,070 293 1,777
Total Identifiable Intangibles $ 471,336 $ 183,650 $ 287,686

June 30, 2020 Amount Accumulated
Amortization Net Book
Value
Finite-Lived Identifiable Intangibles:
Customer relationships $ 426,017 $ 162,965 $ 263,052
Trade names 111,453 34,815 76,638
Vendor relationships 11,329 8,934 2,395
Other 2,078 948 1,130
Total Identifiable Intangibles $ 550,877 $ 207,662 $ 343,215

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

During the ~~nine~~three month period ended ~~March 31,~~September 30, 2021, the Company acquired identifiable intangible assets with a preliminary acquisition cost allocation and weighted-average life as follows:


		Acquisition Cost Allocation		Weighted-Average life		Acquisition Cost Allocation		Weighted-Average life
Customer relationships	Customer relationships	$	10,390	20.0	Customer relationships	$	1,884	20.0
Trade names	Trade names	3,840		15.0	Trade names	879		15.0
Other	Other	1,090		5.9	Other	251		6.5
Total Identifiable Intangibles	Total Identifiable Intangibles	$	15,320	17.7	Total Identifiable Intangibles	$	3,014	17.4

Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. ~~Sustained significant weakness in certain end market concentrations could result in impairment of certain intangible assets in future periods.~~

The Company has three asset groups that have significant exposure to oil and gas end markets. Due to the prolonged economic downturn in these end markets, the Company determined during the second quarter of fiscal 2021 that certain carrying values may not be recoverable. The Company determined that an impairment existed in two of the three asset groups as the asset groups' carrying values exceeded the sum of the undiscounted cash flows. The fair values of the long-lived assets were then determined using the income approach, and the analyses resulted in the measurement of an intangible asset impairment loss of $45,033, which was recorded in the nine months ended March 31, 2021, as the fair value of the intangible assets was determined to be zero. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used. The analyses of these asset groups also resulted in a fixed asset impairment loss and leased asset impairment loss of $1,983 and $2,512, respectively, which were recorded in the nine months ended March 31, 2021.

Estimated future amortization expense by fiscal year (based on the Company’s identifiable intangible assets as of ~~March 31,~~September 30, 2021) for the next five years is as follows: ~~$8,300~~$23,800 for the remainder of ~~2021, $31,400 for~~ 2022, ~~$29,500~~$30,000 for 2023, ~~$25,800~~$26,300 for 2024, ~~$23,600~~$24,100 for 2025, $22,400 for 2026 and ~~$21,900~~$20,600 for ~~2026.~~

2027.

~~Table of Contents~~

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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

5. DEBT

A summary of long-term debt, including the current portion, follows:

March 31, 2021 June 30, 2020
Term Loan $ 560,000 $ 589,250
Trade receivable securitization facility 162,300 175,000
Series C notes 80,000 120,000
Series D notes 25,000 25,000
Series E notes 25,000 25,000
Other 906 1,026
Total debt $ 853,206 $ 935,276
Less: unamortized debt issuance costs 1,158 1,487
$ 852,048 $ 933,789


	September 30, 2021		June 30, 2021
Term Loan	$	540,500	$	550,250
Trade receivable securitization facility	188,300		188,300
Series C notes	40,000		40,000
Series D notes	25,000		25,000
Series E notes	25,000		25,000
Other	786		846
Total debt	$	819,586	$	829,396
Less: unamortized debt issuance costs	878		1,016
	$	818,708	$	828,380

Revolving Credit Facility & Term Loan

In January 2018, the Company refinanced its existing credit facility and entered into a new five-year credit facility with a group of banks expiring in January 2023. This agreement provides for a $780,000 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. The Company had no amount outstanding under the revolver at ~~March 31,~~September 30, 2021 or June 30, ~~2020.~~2021. Unused lines under this facility, net of outstanding letters of credit of $200 ~~and $1,873, respectively,~~ to secure certain insurance obligations, totaled $249,800 ~~and $248,127~~ at ~~March 31,~~September 30, 2021 and June 30, ~~2020, respectively,~~2021, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.88% as of ~~March 31,~~September 30, 2021 and ~~1.94% as of~~ June 30, ~~2020.~~2021.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Additionally, the Company had letters of credit outstanding with separate banks, not associated with the revolving credit agreement, in the amount of ~~$4,548~~$4,768 and ~~$4,475~~$4,540 as of ~~March 31,~~September 30, 2021 and June 30, ~~2020,~~2021, respectively, in order to secure certain insurance obligations.

Trade Receivable Securitization Facility

In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) ~~with a termination date of August 31, 2021.~~. On March 26, 2021, the Company amended the AR Securitization Facility to expand the eligible receivables, which increased the maximum availability to $250,000 and increased the fees on the AR Securitization Facility to 0.98% per year. Availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the $250,000 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 U.S. operations’ trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. Borrowings under this facility carry variable interest rates tied to LIBOR. The interest rate on the AR Securitization Facility as of ~~March 31,~~September 30, 2021 and June 30, ~~2020~~2021 was ~~1.30%~~1.06% and ~~1.07%~~1.20%, respectively. The termination date of the AR Securitization is ~~now~~ March 26, 2024.

Unsecured Shelf Facility

At ~~March 31,~~September 30, 2021 and June 30, ~~2020,~~2021, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of ~~$130,000 and $170,000, respectively.~~$90,000. 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 ~~which~~ had an original principal amount of $120,000, carry a fixed interest rate of 3.19%~~. A $40,000 principal payment was made on the "Series C" in July 2020,~~, and the remaining principal balance ~~of $80,000~~ is due in ~~equal payments in~~ July ~~2021 and~~ 2022. The "Series D" notes ~~have a remaining~~had an original principal ~~balance~~amount of ~~$25,000,~~$50,000, carry a fixed interest rate of 3.21%, and ~~are~~the remaining principal balance is due in October 2023. The “Series E” notes have a principal amount of $25,000, carry a fixed interest rate of 3.08%, and are due in October 2024.

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Other Long-Term Borrowing

In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% fixed interest rate note is held by the State of Ohio Development Services Agency, and matures in May 2024.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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. During the quarter ended December 31, 2020, the Company completed a transaction to amend and extend the interest rate swap agreement which resulted in an extension of the maturity date by an additional three years and a decrease of the weighted average fixed pay rate from 2.61% to 1.63%. The new pay-fixed interest rate swap is considered a hybrid instrument with a financing component and an embedded at-market derivative that was designated as a cash flow hedge. The interest rate swap ~~converts~~converted $420,000 of variable rate debt to a rate of 3.38% as of ~~March 31, 2021. The interest rate swap converted $431,000 of variable rate debt to a rate of 4.36% as of~~September 30, 2021 and June 30, ~~2020.~~2021. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was ~~$13,157~~$12,671 and ~~$26,179~~$14,346 as of ~~March 31,~~September 30, 2021 and June 30, ~~2020,~~2021, respectively, which is included in other current liabilities and other liabilities in the condensed consolidated balance sheet. Amounts reclassified from other comprehensive (loss) income, ~~(loss),~~ before tax to interest expense, net totaled ~~$2,992~~$2,585 and ~~$1,017~~$2,690 for the three months ended ~~March 31, 2021 and 2020, respectively, and $8,504 and $2,350 for the nine months ended March 31,~~September 30, 2021 and 2020, respectively.

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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

7. FAIR VALUE MEASUREMENTS

Marketable securities measured at fair value at ~~March 31,~~September 30, 2021 and June 30, ~~2020~~2021 totaled ~~$15,729~~$16,880 and ~~$12,259,~~$16,844, 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,~~September 30, 2021 and June 30, ~~2020,~~2021, 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).

8. 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, 2021
Foreign currency translation adjustment Post-employment benefits Cash flow hedge Total Accumulated other comprehensive (loss) income
Balance at December 31, 2020 $ (85,222) $ (4,462) $ (17,680) $ (107,364)
Other comprehensive (loss) income (434) 0 6,615 6,181
Amounts reclassified from accumulated other comprehensive loss 0 52 2,260 2,312
Net current-period other comprehensive (loss) income (434) 52 8,875 8,493
Balance at March 31, 2021 $ (85,656) $ (4,410) $ (8,805) $ (98,871)

Three Months Ended March 31, 2020
Foreign currency translation adjustment Post-employment benefits Cash flow hedge Total Accumulated other comprehensive (loss) income
Balance at December 31, 2019 $ (84,687) $ (2,877) $ (9,996) $ (97,560)
Other comprehensive loss (28,257) 0 (10,440) (38,697)
Amounts reclassified from accumulated other comprehensive loss 0 (13) 763 750
Net current-period other comprehensive loss (28,257) (13) (9,677) (37,947)
Balance at March 31, 2020 $ (112,944) $ (2,890) $ (19,673) $ (135,507)


	Three Months Ended September 30, 2021
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at June 30, 2021	$	(80,838)	$	(3,673)	$	(8,581)	$	(93,092)
Other comprehensive (loss) income	(7,188)		—		450		(6,738)
Amounts reclassified from accumulated other comprehensive (loss) income	—		57		1,950		2,007

Net current-period other comprehensive (loss) income	(7,188)		57		2,400		(4,731)
Balance at September 30, 2021	$	(88,026)	$	(3,616)	$	(6,181)	$	(97,823)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Nine Months Ended March 31, 2021
Foreign currency translation adjustment Post-employment benefits Cash flow hedge Total Accumulated other comprehensive (loss) income
Balance at June 30, 2020 $ (105,094) $ (4,564) $ (19,772) $ (129,430)
Other comprehensive income 19,438 0 4,544 23,982
Amounts reclassified from accumulated other comprehensive loss 0 154 6,423 6,577
Net current-period other comprehensive income 19,438 154 10,967 30,559
Balance at March 31, 2021 $ (85,656) $ (4,410) $ (8,805) $ (98,871)


	Three Months Ended September 30, 2020
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at June 30, 2020	$	(105,094)	$	(4,564)	$	(19,772)	$	(129,430)
Other comprehensive income (loss)	5,439		—		(13)		5,426
Amounts reclassified from accumulated other comprehensive (loss) income	—		51		2,032		2,083
Net current-period other comprehensive income	5,439		51		2,019		7,509
Balance at September 30, 2020	$	(99,655)	$	(4,513)	$	(17,753)	$	(121,921)

Nine Months Ended March 31, 2020
Foreign currency translation adjustment Post-employment benefits Cash flow hedge Total Accumulated other comprehensive (loss) income
Balance at June 30, 2019 $ (86,330) $ (2,852) $ (10,704) $ (99,886)
Other comprehensive loss (26,614) 0 (10,740) (37,354)
Amounts reclassified from accumulated other comprehensive loss 0 (38) 1,771 1,733
Net current-period other comprehensive loss (26,614) (38) (8,969) (35,621)
Balance at March 31, 2020 $ (112,944) $ (2,890) $ (19,673) $ (135,507)

Other Comprehensive (Loss) Income ~~(Loss)~~

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


		Three Months Ended March 31,													Three Months Ended September 30,
		2021						2020							2021						2020
		Pre-Tax Amount		Tax (Benefit) Expense		Net Amount		Pre-Tax Amount		Tax (Benefit) Expense		Net Amount			Pre-Tax Amount		Tax Expense		Net Amount		Pre-Tax Amount		Tax Expense (Benefit)		Net Amount
Foreign currency translation adjustments	Foreign currency translation adjustments	$	(496)	$	(62)	$	(434)	$	(28,767)	$	(510)	$	(28,257)	Foreign currency translation adjustments	$	(7,182)	$	6	$	(7,188)	$	5,554	$	115	$	5,439
Post-employment benefits:	Post-employment benefits:													Post-employment benefits:
Reclassification of net actuarial losses (gains) and prior service cost into other income, net and included in net periodic pension costs		68		16		52		(17)		(4)		(13)
Reclassification of net actuarial losses and prior service cost into other income, net and included in net periodic pension costs														Reclassification of net actuarial losses and prior service cost into other income, net and included in net periodic pension costs	75		18		57		68		17		51
Unrealized gain (loss) on cash flow hedge	Unrealized gain (loss) on cash flow hedge	8,758		2,143		6,615		(13,891)		(3,451)		(10,440)		Unrealized gain (loss) on cash flow hedge	596		146		450		(17)		(4)		(13)
Reclassification of interest from cash flow hedge into interest expense	Reclassification of interest from cash flow hedge into interest expense	2,992		732		2,260		1,017		254		763		Reclassification of interest from cash flow hedge into interest expense	2,585		635		1,950		2,690		658		2,032

Other comprehensive income (loss)		$	11,322	$	2,829	$	8,493	$	(41,658)	$	(3,711)	$	(37,947)
Other comprehensive (loss) income														Other comprehensive (loss) income	$	(3,926)	$	805	$	(4,731)	$	8,295	$	786	$	7,509

Anti-dilutive Common Stock Equivalents

In the three month periods ended September 30, 2021 and September 30, 2020, stock options and stock appreciation rights related to 109 and 578 shares of common stock, respectively, were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Nine Months Ended March 31,
2021 2020
Pre-Tax Amount Tax Expense Net Amount Pre-Tax Amount Tax (Benefit) Expense Net Amount
Foreign currency translation adjustments $ 19,529 $ 91 $ 19,438 $ (27,356) $ (742) $ (26,614)
Post-employment benefits:
Reclassification of net actuarial losses (gains) and prior service cost into other income, net and included in net periodic pension costs 203 49 154 (50) (12) (38)
Unrealized gain (loss) on cash flow hedge 6,017 1,473 4,544 (14,249) (3,509) (10,740)
Reclassification of interest from cash flow hedge into interest expense 8,504 2,081 6,423 2,350 579 1,771
Other comprehensive income (loss) $ 34,253 $ 3,694 $ 30,559 $ (39,305) $ (3,684) $ (35,621)
9. SEGMENT INFORMATION

~~Anti-dilutive Common Stock Equivalents~~

In the nine month period ended March 31, 2021, stock options and stock appreciation rights related to 291 shares of common stock were not included in the computation of diluted earnings per share for the period then ended as they were anti-dilutive.

~~9. SEGMENT INFORMATION~~

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 ~~$781~~$3,571 and ~~$1,950~~$1,133 in the three months ended ~~March 31, 2021 and 2020, respectively, and $2,777 and $4,237 in the nine months ended March 31,~~September 30, 2021 and 2020, respectively, is recorded in cost of sales in the condensed statements of income, and is included in operating income for the ~~Service Center Based Distribution segment. The~~related reportable segment, as the Company allocates LIFO expense between the ~~segments in the fourth quarter of its fiscal year.~~segments. Intercompany sales, primarily from the Fluid Power & Flow Control segment to the Service Center Based Distribution segment, of ~~$8,835~~$8,132 and ~~$7,685,~~$7,496, in the three months ended ~~March 31, 2021 and 2020, and $23,773, respectively, and $22,434 in the nine months ended March 31,~~September 30, 2021 and 2020, respectively, have been eliminated in the Segment Financial Information tables below.

Three Months Ended Service Center Based Distribution Fluid Power & Flow Control Total
March 31, 2021
Net sales $ 572,892 $ 268,045 $ 840,937
Operating income for reportable segments 65,553 30,829 96,382
Depreciation and amortization of property 4,230 850 5,080
Capital expenditures 3,150 578 3,728
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

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~~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, 2021
Net sales $ 1,601,866 $ 738,165 $ 2,340,031
Operating income for reportable segments 158,108 83,337 241,445
Assets used in business 1,385,648 919,740 2,305,388
Depreciation and amortization of property 12,877 2,764 15,641
Capital expenditures 10,680 1,497 12,177
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


Three Months Ended	Service Center Based Distribution		Fluid Power & Flow Control		Total
September 30, 2021
Net sales	$	600,871	$	290,810	$	891,681
Operating income for reportable segments	64,653		34,805		99,458
Assets used in business	1,349,654		953,526		2,303,180
Depreciation and amortization of property	4,379		1,048		5,427
Capital expenditures	3,097		524		3,621

September 30, 2020
Net sales	$	513,284	$	234,523	$	747,807
Operating income for reportable segments	49,901		25,861		75,762
Assets used in business	1,283,031		966,222		2,249,253
Depreciation and amortization of property	4,395		957		5,352
Capital expenditures	3,088		509		3,597

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					Three Months Ended
		March 31,				March 31,					September 30,
		2021		2020		2021		2020			2021		2020
Operating income for reportable segments	Operating income for reportable segments	$	96,382	$	79,463	$	241,445	$	250,034	Operating income for reportable segments	$	99,458	$	75,762
Adjustment for:	Adjustment for:									Adjustment for:
Intangible amortization—Service Center Based Distribution	Intangible amortization—Service Center Based Distribution	944		3,811		4,507		9,697		Intangible amortization—Service Center Based Distribution	892		2,581
Intangible amortization—Fluid Power & Flow Control	Intangible amortization—Fluid Power & Flow Control	7,293		7,291		21,731		21,974		Intangible amortization—Fluid Power & Flow Control	7,229		7,145
Impairment—Service Center Based Distribution		0		0		49,528		0
Goodwill Impairment—Fluid Power & Flow Control		0		131,000		0		131,000

Corporate and other expense, net	Corporate and other expense, net	13,678		15,311		41,326		45,402		Corporate and other expense, net	16,723		13,728
Total operating income (loss)		74,467		(77,950)		124,353		41,961
Total operating income										Total operating income	74,614		52,308
Interest expense, net	Interest expense, net	7,608		8,805		22,919		28,447		Interest expense, net	7,390		7,653
Other income, net	Other income, net	(1,657)		(1,428)		(1,746)		(1,643)		Other income, net	(312)		(177)
Income (loss) before income taxes		$	68,516	$	(85,327)	$	103,180	$	15,157
Income before income taxes										Income before income taxes	$	67,536	$	44,832

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

10. OTHER INCOME, NET

Other income, net consists of the following:


		Three Months Ended				Nine Months Ended					Three Months Ended
		March 31,				March 31,					September 30,
		2021		2020		2021		2020			2021		2020
Unrealized (gain) loss on assets held in rabbi trust for a non-qualified deferred compensation plan		$	(642)	$	2,182	$	(3,104)	$	1,361
Unrealized loss (gain) on assets held in rabbi trust for a non-qualified deferred compensation plan										Unrealized loss (gain) on assets held in rabbi trust for a non-qualified deferred compensation plan	$	91	$	(819)
Foreign currency transactions (gain) loss	Foreign currency transactions (gain) loss	(485)		(3,501)		1,736		(3,167)		Foreign currency transactions (gain) loss	(567)		416
Net other periodic post-employment costs (benefits)		71		(30)		213		(90)
Net other periodic post-employment benefits										Net other periodic post-employment benefits	152		71
Life insurance (income) expense, net	Life insurance (income) expense, net	(543)		(194)		(402)		165		Life insurance (income) expense, net	(41)		177
Other, net	Other, net	(58)		115		(189)		88		Other, net	53		(22)
Total other income, net	Total other income, net	$	(1,657)	$	(1,428)	$	(1,746)	$	(1,643)	Total other income, net	$	(312)	$	(177)

11. SUBSEQUENT EVENTS

We have evaluated events and transactions occurring subsequent to September 30, 2021 through the date the financial statements were issued.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

AND RESULTS OF OPERATIONS

With more than ~~6,000~~5,900 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 and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, and expertise. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During the ~~third~~first quarter of fiscal ~~2021,~~2022, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore from ~~571~~570 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,~~September 30, 2021 increased ~~$10.1~~$143.9 million or ~~1.2%~~19.2% compared to the prior year quarter, with acquisitions increasing sales by ~~$15.2~~$15.4 million or ~~1.8%~~2.1% and favorable foreign currency translation of ~~$5.3~~$6.0 million increasing sales by ~~0.6%~~0.8%. ~~The Company had operating income of $74.5 million, or operating~~Operating margin ~~of 8.9%~~was 8.4% of sales for the quarter ended ~~March 31,~~September 30, 2021 compared to ~~an operating loss of $78.0 million, or negative operating margin of 9.4%~~7.0% of sales for the same quarter in the prior year. The prior year quarter included a $131.0 million non-cash goodwill impairment charge related to the goodwill associated with the Company's FCX Performance Inc. (FCX) operations within the Fluid Power & Flow Control segment. The quarter ended March 31, 2021 had netNet income of ~~$56.1~~$53.0 million increased 52.3% compared to ~~a net loss of $82.8 million in~~ the prior year quarter. The current ratio was 2.6 to 1 at ~~March 31,~~September 30, 2021 and ~~2.7~~2.8 to 1 at June 30, ~~2020.~~

This quarter's results are due to strengthening end-market demand as the industrial economy improves from the challenges faced during the COVID-19 pandemic. While supplier constraints and inflation are increasing, we expanded gross margins and leveraged a leaner cost structure despite the roll back of various temporary cost actions during the fiscal year. While general economic uncertainty remains, underlying sales growth has continued into April with organic sales month to date up approximately 10 percent year over year. We are continuing to monitor the impact of the COVID-19 pandemic; we are classified as critical infrastructure and our facilities remain open and operational as they adhere to health and safety policies. 2021.

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~~index has decreased while the IP ~~indices have~~index has increased since June ~~2020.~~2021. The MCU for ~~March~~September 2021 was ~~74.4,~~75.2, which is down from the ~~December~~June 2021 revised reading of ~~74.7 but~~75.6. The ISM PMI registered 61.1 in September, up from the June ~~2020 revised~~2021 reading of ~~68.9. The ISM PMI registered 64.7 in March, up from the December and June 2020 revised readings of 60.5 and 52.2, respectively.~~60.6. The indices for the months during the current quarter, along with the indices for the prior fiscal year end, were as follows:

Index Reading
Month MCU PMI IP
March 2021 74.4 64.7 102.8
February 2021 73.4 60.8 100.0
January 2021 75.3 58.7 103.9


	Index Reading
Month	MCU	PMI	IP
September 2021	75.2	61.1	98.7
August 2021	76.2	59.9	99.4
July 2021	76.3	59.5	99.8
June 2021	75.6	60.6	98.1

The number of Company employees was ~~6,032~~5,998 at ~~March 31,~~September 30, 2021, ~~6,289~~5,976 at June 30, ~~2020,~~2021, and ~~6,471~~6,141 at ~~March 31,~~September 30, 2020. The number of operating facilities totaled ~~571~~570 at ~~March 31,~~September 30, 2021, ~~584~~568 at June 30, ~~2020~~2021 and ~~599~~583 at ~~March 31,~~September 30, 2020.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

AND RESULTS OF OPERATIONS

Results of Operations

Three Months Ended ~~March 31,~~September 30, 2021 and 2020

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





Net sales	Net sales	100.0	%	100.0	%	1.2	%	Net sales	100.0	%	100.0	%	19.2	%
Gross profit	Gross profit	29.4	%	28.5	%	4.4	%	Gross profit	28.6	%	28.9	%	18.3	%
Selling, distribution & administrative expense	Selling, distribution & administrative expense	20.5	%	22.1	%	(6.0)	%	Selling, distribution & administrative expense	20.3	%	21.9	%	10.6	%
Operating income (loss)		8.9	%	(9.4)	%	N/M
Net income (loss)		6.7	%	(10.0)	%	N/M
Operating income								Operating income	8.4	%	7.0	%	42.6	%
Net income								Net income	5.9	%	4.7	%	52.3	%

During the quarter ended ~~March 31,~~September 30, 2021, sales increased ~~$10.1~~$143.9 million or ~~1.2%~~19.2% compared to the prior year quarter, with sales from acquisitions adding ~~$15.2~~$15.4 million or ~~1.8%~~2.1% and favorable foreign currency translation accounting for an increase of ~~$5.3~~$6.0 million or ~~0.6%~~0.8%. There were ~~63 selling days in the quarter ended March 31, 2021 and~~ 64 selling days in both the ~~quarter~~quarters ended ~~March 31,~~September 30, 2021 and September 30, 2020. Excluding the impact of businesses acquired and foreign currency translation, sales were ~~down $10.4~~up $122.5 million or ~~1.2%~~16.3% during the quarter, ~~driven by a decrease of 1.6%~~ due to ~~one less sales day, offset by a 0.4% increase from operations.~~increased demand across key end markets.

The following table shows changes in sales by reportable segment.


Sales by Reportable Segment	Sales by Reportable Segment	Three Months Ended March 31,				Sales (Decrease) Increase		Amount of change due to						Sales by Reportable Segment	Three Months Ended September 30,				Sales Increase		Amount of change due to
										Foreign Currency		Organic Change											Foreign Currency		Organic Change
		2021		2020				Acquisitions							2021		2020				Acquisitions
Service Center Based Distribution	Service Center Based Distribution	$	572.9	$	574.4	$	(1.5)	$	—	$	5.3	$	(6.8)	Service Center Based Distribution	$	600.9	$	513.3	$	87.6	$	—	$	6.0	$	81.6
Fluid Power & Flow Control	Fluid Power & Flow Control	268.0		256.4		11.6		15.2		—		(3.6)		Fluid Power & Flow Control	290.8		234.5		56.3		15.4		—		40.9
Total	Total	$	840.9	$	830.8	$	10.1	$	15.2	$	5.3	$	(10.4)	Total	$	891.7	$	747.8	$	143.9	$	15.4	$	6.0	$	122.5

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, ~~decreased $1.5~~increased $87.6 million or ~~0.3%~~17.1%. Favorable foreign currency translation increased sales by ~~$5.3~~$6.0 million or ~~0.9%~~1.2%. Excluding the impact of foreign currency translation, sales ~~decreased $6.8~~increased $81.6 million or ~~1.2%~~15.9%, driven by ~~a decrease of 1.6% due to one less sales day, offset by a 0.4%~~an increase from operations ~~reflecting~~due to an ongoing end-market recovery, ~~across industrial end markets~~ as customers are gradually increasing production and facility utilization, driving greater break-fix and maintenance activity. The greatest improvement has been from the food and beverage, aggregates, lumber and wood, pulp and paper, and chemical end markets.well as internal sales process initiatives, partially offset by industry-wide supply chain constraints.

Sales from our Fluid Power & Flow Control segment increased ~~$11.6~~$56.3 million or ~~4.5%~~24.0%. Acquisitions within this segment increased sales by ~~$15.2~~$15.4 million or ~~5.9%~~6.6%. Excluding the impact of businesses acquired, sales ~~decreased $3.6~~increased $40.9 million or ~~1.4%~~17.4%, ~~driven~~driven by ~~a decrease of 1.6% due to one less sales day, offset by a 0.2%~~an increase from operations ~~reflecting stronger~~due to strong demand within the technology end market, as well as a ongoing recovery across ~~technology,~~ off-highway mobile, life sciences, chemical, and ~~chemical end markets.~~industrial industries, partially offset by industry-wide supply chain constraints.

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


	Three Months Ended September 30,				Sales Increase		Amount of change due to
	Three Months Ended September 30,								Foreign Currency		Organic Change
Sales by Geographic Area	2021		2020				Acquisitions		Foreign Currency		Organic Change
United States	$	764.2	$	644.1	$	120.1	$	15.4	$	—	$	104.7
Canada	74.6		56.9		17.7		—		3.3		14.4
Other countries	52.9		46.8		6.1		—		2.7		3.4
Total	$	891.7	$	747.8	$	143.9	$	15.4	$	6.0	$	122.5

Sales in our U.S. operations were up $120.1 million or 18.7%, as acquisitions added $15.4 million or 2.4%. Excluding the impact of businesses acquired, U.S. sales were up $104.7 million or 16.3%. Sales from our Canadian operations increased

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

AND RESULTS OF OPERATIONS

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

Three Months Ended
March 31, Sales (Decrease) Increase Amount of change due to
Foreign Currency Organic Change
Sales by Geographic Area 2021 2020 Acquisitions
United States $ 724.6 $ 725.0 $ (0.4) $ 15.2 $ — $ (15.6)
Canada 66.1 59.9 6.2 — 3.5 2.7
Other countries 50.2 45.9 4.3 — 1.8 2.5
Total $ 840.9 $ 830.8 $ 10.1 $ 15.2 $ 5.3 $ (10.4)

~~Sales in our U.S. operations were down $0.4~~$17.7 million or 0.1%, as acquisitions added $15.2 million or 2.1%. Excluding the impact of businesses acquired, U.S. sales were down $15.6 million or 2.2%, driven by a decrease of 1.6% due to one less sales day, resulting in a 0.6% decrease from operations. Sales from our Canadian operations increased $6.2 million or 10.4%31.1%. Favorable foreign currency translation increased Canadian sales by ~~$3.5~~$3.3 million or ~~5.8%~~5.9%. Excluding the impact of foreign currency translation, Canadian sales ~~increased $2.8~~were up $14.4 million or ~~4.6%, driven by a 6.2% increase from operations, offset by a 1.6% decrease due to one less sales day.~~25.2%. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, increased ~~$4.3~~$6.1 million or ~~9.3%~~12.9% from the prior year. Favorable foreign currency translation increased other country sales by ~~$1.8~~$2.7 million or ~~4.0%~~5.8%. Excluding the impact of currency translation, other country sales were up ~~$2.5~~$3.4 million, or ~~5.3%~~7.1% during the ~~quarter, driven by a 9.3% increase in operations, offset by a 4.0% decrease due to a decrease in sales days.~~quarter.

Our gross profit margin was ~~29.4%~~28.6% in the quarter ended ~~March 31,~~September 30, 2021 compared to ~~28.5%~~28.9% in the prior ~~period. The increase in gross profit margin reflects improving demand and ongoing margin initiatives.~~period. The gross profit margin for the current quarter was ~~positively impacted by a $1.2 million decrease in LIFO expense between quarters. The gross profit margin for the prior year quarter was~~ negatively impacted by 47 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.

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

Three Months Ended
March 31, SD&A Decrease Amount of change due to
Foreign Currency Organic Change
2021 2020 Acquisitions
SD&A $ 172.8 $ 183.7 $ (10.9) $ 4.0 $ 1.7 $ (16.6)

SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was 20.5% of sales in the quarter ended March 31, 2021 compared to 22.1% in the prior year quarter. SD&A decreased $10.9 million or 6.0% compared to the prior year quarter. Changes in foreign currency exchange rates had the effect of increasing SD&A during the quarter ended March 31, 2021 by $1.7 million or 0.9% compared to the prior year quarter. SD&A from businesses acquired added $4.0 million or 2.2% of SD&A expenses, including $0.4 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A decreased $16.6 million or 9.1% during the quarter ended March 31, 2021 compared to the prior year quarter. During the prior quarter ended March 31, 2020, the Company incurred $2.1 million of non-routine expenses related to severance and facility consolidation for the U.S. Service Center Based Distribution segment. Excluding the impact of acquisitions and severance, total compensation decreased $1.0 million during the quarter ended March 31, 2021, primarily due to cost reduction actions taken by the Company in response to the COVID-19 pandemic, including headcount reductions, temporary furloughs and pay reductions, and suspension of the 401(k) company match. All of the temporary actions were restored during the current year quarter. Also, travel & entertainment and fleet expenses decreased $3.9 million during the quarter ended March 31, 2021 primarily due to continued reduced travel activity related to COVID-19. In addition, bad debt expense decreased $5.5 million, primarily due to provisions recorded in the prior year for customer credit deterioration and bankruptcies primarily in the U.S. operations of the Service Center Based Distribution segment, offset by strong cash collections and an improvement in the overall credit profile of the accounts receivable portfolio in the current quarter. Further,

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

~~AND RESULTS OF OPERATIONS~~

excluding the impact of acquisitions, intangible amortization expense decreased $3.2 million during the quarter ended March 31, 2021 primarily due to the intangible impairment recorded during the second quarter of fiscal 2021. All other expenses within SD&A were down $0.9 million.

During the prior year 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.

The Company had operating income of $74.5 million during the quarter ended March 31, 2021, compared to an operating loss of $78.0 million in the prior year quarter, primarily due to non-cash goodwill impairment charges of $131.0 million in the prior year quarter.

Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 11.4% in the current year quarter from 9.2% in the prior year quarter. Operating income, before impairment, as a percentage of sales for the Fluid Power & Flow Control segment increased to 11.5% in the current year quarter from 10.3% in the prior year quarter.

Other income, net was income of $1.7 million for the quarter, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $0.6 million, net favorable foreign currency transaction gains of $0.5 million, and $0.6 million of income from other items. During the prior year quarter, other income, net was income of $1.4 million, which 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.

The effective income tax rate was 18.2% for the quarter ended March 31, 2021 compared to 3.0% for the quarter ended March 31, 2020. The effective income tax rate for the current year quarter was favorably impacted by income tax return to provision adjustments for fiscal 2020, an increase in R&D tax credits claimed, and stock-based compensation deductions. The goodwill impairment charge taken in the quarter ended March 31, 2020 decreased the effective tax rate by 21.6%.

As a result of the factors addressed above, the Company had net income of $56.1 million during the quarter ended March 31, 2021, compared to a net loss of $82.8 million in the prior year quarter. Net income per share was $1.42 per share for the quarter ended March 31, 2021 compared to net loss per share of $2.14 in the prior year quarter.

~~Results of Operations~~

~~Nine Months Ended March 31, 2021 and 2020~~

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

Nine Months Ended
March 31, 2021 Change in $'s Versus Prior Period -
% (Decrease) Increase
As a Percent of Net Sales
2021 2020
Net sales 100.0 % 100.0 % (7.2) %
Gross profit 28.7 % 28.9 % (7.8) %
Selling, distribution & administrative expense 21.3 % 22.1 % (10.4) %
Operating income 5.3 % 1.7 % 196.4 %
Net income 3.7 % (0.2) % N/M

~~During the~~ ~~nine~~ months ended March 31, 2021, sales decreased $180.5 million or 7.2% compared to the prior year period, with sales from acquisitions adding $29.0 million or 1.2% and favorable foreign currency translation accounting for an increase of $3.1 million or 0.1%. There were 189 selling days in the nine months ended March 31, 2021 and 190 selling days in the nine months ended March 31, 2020. Excluding the impact of businesses acquired ~~and foreign currency translation,~~ sales were down $212.6 million or 8.5% during the period, driven by a 8.0% decrease from operations and a 0.5% decrease from one less sales day. The decrease from operations is due to weak demand across key end markets from the impact of the COVID-19 pandemic, although sales have improved as the year progressed.

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

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

~~AND RESULTS OF OPERATIONS~~

~~The following table shows changes in sales by reportable segment.~~

Sales by Reportable Segment Nine Months Ended
March 31, Sales Decrease Amount of change due to
Foreign Currency Organic Change
2021 2020 Acquisitions
Service Center Based Distribution $ 1,601.9 $ 1,753.3 $ (151.4) $ — $ 3.1 $ (154.5)
Fluid Power & Flow Control 738.2 767.3 (29.1) 29.0 — (58.1)
Total $ 2,340.1 $ 2,520.6 $ (180.5) $ 29.0 $ 3.1 $ (212.6)

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $151.4 million or 8.6%. Favorable foreign currency translation increased sales by $3.1 million or 0.2%. Excluding the impact of foreign currency translation, sales decreased $154.5 million or 8.8%, driven by an 8.3% decrease from operations and a 0.5% decrease due to one less sales day. The decrease from operations is reflecting weaker industrial end-market demand from the impact of the COVID-19 pandemic, although sales improved as the year progressed. ~~The greatest improvement has been from the food and beverage, aggregates, lumber and wood, pulp and paper, and chemical end markets.~~

Sales from our Fluid Power & Flow Control segment decreased $29.1 million or 3.8%. Acquisitions within this segment increased sales by $29.0 million or 3.8%. Excluding the impact of businesses acquired, sales decreased $58.1 million or 7.6%, driven by a 7.1% decrease from operations and and a 0.5% decrease due to one less sales day. The decrease from operations is due to ongoing soft demand across process-related end markets, offset by stronger demand across technology, off-highway mobile, life sciences, and chemical end markets, as well as automation-related sales.

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

Nine Months Ended
March 31, Sales (Decrease) Increase Amount of change due to
Foreign Currency Organic Change
Sales by Geographic Area 2021 2020 Acquisitions
United States $ 2,016.5 $ 2,188.3 $ (171.8) $ 29.0 $ — $ (200.8)
Canada 180.9 193.8 (12.9) — 4.0 (16.9)
Other countries 142.7 138.5 4.2 — (0.9) 5.1
Total $ 2,340.1 $ 2,520.6 $ (180.5) $ 29.0 $ 3.1 $ (212.6)

Sales in our U.S. operations were down $171.8 million or 7.9%, as acquisitions added $29.0 million or 1.3%. Excluding the impact of businesses acquired, U.S. sales were down $200.8 million or 9.2%, driven by a decrease from operations of 8.7% and 0.5% from one less sales day. Sales from our Canadian operations decreased $12.9 million or 6.7%. Favorable foreign currency translation increased Canadian sales by $4.0 million or 2.0%. Excluding the impact of foreign currency translation, Canadian sales were down $16.9 million or 8.7%, driven by a decrease from operations of 8.2% and 0.5% from one less sales day. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, increased $4.2 million or 3.0% from the prior year. Unfavorable foreign currency translation decreased other country sales by $0.9 million or 0.6%. Excluding the impact of currency translation, other country sales were up $5.1 million, or 3.6%, during the period, driven by an increase from operations of 5.5% offset by a decrease of 1.9% due to less sales days.

Our gross profit margin was 28.7% in the nine months ended March 31, 2021 compared to 28.9% in the prior year period. The gross profit margin for the nine months ended March 31, 2021 was negatively impacted by 3125 basis points due to ~~$7.4~~a $2.4 million ~~of non-routine costs from ongoing business alignment initiatives and cost actions recorded~~increase in the period. The gross profit margin for the prior 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.

LIFO expense.

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

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

~~AND RESULTS OF OPERATIONS~~

Nine Months Ended
March 31, SD&A Decrease Amount of change due to
Foreign Currency Organic Change
2021 2020 Acquisitions
SD&A $ 498.7 $ 556.5 $ (57.8) $ 7.8 $ 1.3 $ (66.9)


	Three Months Ended September 30,				SD&A Increase		Amount of change due to
	Three Months Ended September 30,								Foreign Currency		Organic Change
	2021		2020				Acquisitions		Foreign Currency		Organic Change
SD&A	$	180.7	$	163.5	$	17.2	$	4.5	$	1.6	$	11.1

SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was ~~21.3%~~20.3% of sales in the ~~nine~~ ~~months~~quarter ended ~~March 31,~~September 30, 2021 compared to ~~22.1%~~21.9% in the prior year ~~period.~~quarter. SD&A ~~decreased $57.8~~increased $17.2 million or ~~10.4%~~10.6% compared to the prior year ~~period.~~quarter. Changes in foreign currency exchange rates had the effect of increasing SD&A during the ~~nine~~ ~~months~~quarter ended ~~March 31,~~September 30, 2021 by ~~$1.3~~$1.6 million or ~~0.2%~~1.0% compared to the prior year ~~period.~~quarter. SD&A from businesses acquired added ~~$7.8~~$4.5 million or ~~1.4%~~2.8% of SD&A expenses, including ~~$0.7~~$0.4 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the unfavorable currency translation ~~impact,~~impact, SD&A ~~decreased $66.9~~increased $11.1 million or ~~12.0%~~6.8% during the ~~nine months~~quarter ended ~~March 31,~~September 30, 2021 compared to the prior year ~~period. The Company incurred $0.4 million of non-routine expenses related to severance and closed facilities during the~~ ~~nine~~ ~~months ended March 31, 2021 compared to $3.6 million of non-routine expenses related to severance and facility consolidation during during the prior period.~~quarter. Excluding the impact of acquisitions, ~~and severance,~~ total compensation ~~decreased $37.8~~increased $17.9 million during the ~~nine~~ ~~months~~quarter ended ~~March 31,~~September 30, 2021, primarily due to cost reduction actions taken by the Company in the prior year in response to the COVID-19 pandemic, including headcount reductions, temporary furloughs and pay reductions, and suspension of the 401(k) company match. All of the temporary cost reductions ~~have been~~were reinstated ~~during~~in the ~~current~~second half of fiscal ~~year. Also, travel & entertainment and fleet expenses decreased $13.7~~2021. The increase was offset by a $4.3 million ~~during the~~ ~~nine~~ ~~months ended March 31, 2021 primarily due to continued reduced travel activity related to COVID-19. In addition,~~decrease in bad debt expense ~~decreased $4.4 million, primarily~~during the quarter ended September 30, 2021 due to provisions recorded in the prior year for customer credit deterioration and bankruptcies primarily in the U.S. and Mexican operations of the Service Center Based Distribution segment, offset by strong cash collections and an improvement in the overall credit profile of the accounts receivable portfolio in the current year. Further, excluding the impact of acquisitions, intangible amortization expense decreased $6.2 million during the nine months ended March 31, 2021 primarily due to the intangible impairment recorded during the period.segment. All other expenses within SD&A were down ~~$1.6~~$2.5 million.

The Company has three asset groups that have significant exposure to oil and gas end markets. Due to the prolonged economic downturn in these end markets, the Company determined during the second quarter of fiscal 2021 that certain carrying values may not be recoverable. The Company determined that an impairment existed in two of the three asset groups as the asset groups' carrying values exceeded the sum of the undiscounted cash flows. The fair values of the long-lived assets were then determined using the income approach, and the analyses resulted in the measurement of an intangible asset impairment loss of $45.0 million, which was recorded in the nine months ended March 31, 2021, as the fair value of the intangible assets was determined to be zero. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used. The analyses of these asset groups also resulted in a fixed asset impairment loss and leased asset impairment loss of $2.0 million and $2.5 million, respectively, which were recorded in the nine months ended March 31, 2021.

As a result of the Company's annual goodwill impairment test in the prior year period, 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 million for the nine months ended March 31, 2020.

Operating income increased ~~$82.4~~$22.3 million or 42.6%, and as a percent of sales increased to ~~5.3%~~8.4% from ~~1.7%~~7.0% during the prior year ~~period, primarily due to non-cash goodwill impairment charges of $131.0 million in the prior year period.~~quarter.

Operating income, ~~before impairment charges,~~ as a percentage of sales for the Service Center Based Distribution segment increased to ~~9.9%~~10.8% in the current year ~~period~~quarter from ~~9.5%~~9.7% in the prior year ~~period.~~quarter. Operating income ~~before impairment charges,~~ as a percentage of sales for the Fluid Power & Flow Control segment increased to ~~11.3%~~12.0% in the current year ~~period~~quarter from ~~10.8%~~11.0% in the prior year ~~period.~~quarter.

Other income, net was income of $0.3 million for the current year quarter, which included favorable foreign currency transaction gains of $0.6 million, offset by net other periodic benefit costs of $0.2 million and $0.1 million of unrealized losses on investments held by non-qualified deferred compensation trusts. During the prior year quarter, other income, net was income of $0.2 million, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $0.8 million, offset by net unfavorable foreign currency transaction losses of $0.4 million and $0.2 million of expense from other items.

The effective income tax rate was 21.6% for the quarter ended September 30, 2021 compared to 22.4% for the quarter ended September 30, 2020. The decrease in the effective tax rate over the prior year is primarily due to discrete adjustments during the quarter ended September 30, 2021. We expect our full year tax rate for fiscal 2022 to be in the 22.0% to 23.0% range.

As a result of the factors addressed above, net income for the quarter ended September 30, 2021 increased $18.2 million or 52.3% compared to the prior year quarter. Net income was $1.36 per share for the quarter ended September 30, 2021 compared to $0.89 per share in the prior year quarter, an increase of 52.8%.

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AND RESULTS OF OPERATIONS

~~Other income, net was income of $1.7 million for the~~ ~~nine months ended~~ March 31, 2021, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $3.1 million and $0.3 million of income from other items, offset by net unfavorable foreign currency transaction losses of $1.7 million. During the prior year period, other income, net was income of $1.6 million and 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 other expense of $0.2 million.

The effective income tax rate was 17.1% for the nine months ended March 31, 2021 compared to 139.2% for the nine months ended March 31, 2020. The effective income tax rate for the current year period was favorably impacted by return to provision adjustments for fiscal 2020, an increase in R&D tax credits claimed, and stock compensation deductions. The goodwill impairment charge in the nine months ended March 31, 2020 increased the effective tax rate by 121.3%. We expect our full year tax rate for fiscal 2021 to be in the 20.0% to 22.0% range.

As a result of the factors addressed above, net income for the nine months ended March 31, 2021 increased $91.5 million compared to the prior year period. Net income was $2.18 per share for the nine months ended March 31, 2021 compared to a net loss of $0.15 per share in the prior year period.

Liquidity and Capital Resources

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At ~~March 31,~~September 30, 2021, we had total debt obligations outstanding of ~~$853.2~~$819.6 million compared to ~~$935.3~~$829.4 million at June 30, ~~2020.~~2021. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations will be sufficient to finance normal working capital needs in each of the countries in which we operate, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company's credit standing and financial strength.

The Company's working capital at ~~March 31,~~September 30, 2021 was ~~$760.6~~$743.7 million, compared to ~~$733.7~~$768.9 million at June 30, ~~2020.~~2021. The current ratio was 2.6 to 1 at ~~March 31,~~September 30, 2021 and ~~2.7~~2.8 to 1 at June 30, ~~2020.~~2021.

Net Cash Flows

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


		Nine Months Ended March 31,					Three Months Ended September 30,
Net Cash Provided by (Used in):	Net Cash Provided by (Used in):	2021		2020		Net Cash Provided by (Used in):	2021		2020
Operating Activities	Operating Activities	$	203,409	$	169,624	Operating Activities	$	48,642	$	81,842
Investing Activities	Investing Activities	(41,509)		(51,651)		Investing Activities	(25,502)		(3,404)
Financing Activities	Financing Activities	(130,534)		(55,959)		Financing Activities	(31,980)		(77,183)
Exchange Rate Effect	Exchange Rate Effect	4,099		(4,769)		Exchange Rate Effect	(1,592)		1,254
Increase in Cash and Cash Equivalents		$	35,465	$	57,245
(Decrease) Increase in Cash and Cash Equivalents						(Decrease) Increase in Cash and Cash Equivalents	$	(10,432)	$	2,509

~~Net cash provided by operating activities was $203.4 million for the nine months ended March 31, 2021 compared to $169.6 million provided by operating activities in the prior period.~~ The ~~increase~~decrease in cash provided by operating activities during the ~~nine~~three months ended ~~March 31,~~September 30, 2021 is driven by changes in working capital for the period offset by increased operating results. Changes in cash flows between periods related to working capital ~~improvements.~~were driven by:


Accounts receivable	$	(16,294)
Inventory	$	(45,237)
Accounts payable	$	10,710

Net cash used in investing activities during the ~~nine~~three months ended ~~March 31,~~September 30, 2021 decreased from the prior period primarily due to ~~$30.0~~$14.8 million used for ~~the acquisitions of Gibson Engineering and Advanced Control Solutions compared to $37.2~~payments for loans on company-owned life insurance as well as $7.1 million used for the acquisition of ~~Olympus Controls~~R.R. Floody in the ~~prior~~current year period.

Net cash used in financing activities during the ~~nine~~three months ended ~~March 31,~~September 30, 2021 ~~increased~~decreased from the prior period primarily due to a change in net debt activity, as there was ~~$82.1~~$9.8 million of debt payments in the current year period compared to ~~$14.8~~$62.5 million of ~~net~~ debt payments in the prior year period.

Share Repurchases

The Board of Directors has authorized the repurchase of shares of the Company's common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. We acquired 76,658 shares of treasury stock on the open market in the three months ended September 30, 2021 for $6.5 million. During the ~~nine~~three months ended ~~March 31, 2021 and~~September 30, 2020, the Company did not acquire any shares of treasury stock on the open market. At ~~March 31,~~September 30, 2021, we had authorization to repurchase ~~864,618~~387,960 shares.

~~Borrowing Arrangements~~

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

AND RESULTS OF OPERATIONS

Borrowing Arrangements

A summary of long-term debt, including the current portion, follows (amounts in thousands):

March 31, 2021 June 30, 2020
Unsecured credit facility $ 560,000 $ 589,250
Trade receivable securitization facility 162,300 175,000
Series C notes 80,000 120,000
Series D notes 25,000 25,000
Series E notes 25,000 25,000
Other 906 1,026
Total debt $ 853,206 $ 935,276
Less: unamortized debt issuance costs 1,158 1,487
$ 852,048 $ 933,789


	September 30, 2021		June 30, 2021
Unsecured credit facility	$	540,500	$	550,250
Trade receivable securitization facility	188,300		188,300
Series C notes	40,000		40,000
Series D notes	25,000		25,000
Series E notes	25,000		25,000
Other	786		846
Total debt	$	819,586	$	829,396
Less: unamortized debt issuance costs	878		1,016
	$	818,708	$	828,380

Revolving Credit Facility & Term Loan

In January 2018, the Company refinanced its existing credit facility and entered into a new five-year credit facility with a group of banks expiring in January 2023. This agreement provides for a $780.0 million unsecured term loan and a $250.0 million unsecured revolving credit facility. Fees on this facility range from 0.10% to 0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. The Company had no amount outstanding under the revolver at ~~March 31,~~September 30, 2021 or June 30, ~~2020.~~2021. Unused lines under this facility, net of outstanding letters of credit of $0.2 million ~~and $1.9 million, respectively,~~ to secure certain insurance obligations, totaled $249.8 million ~~and $248.1 million~~ at ~~March 31,~~September 30, 2021 and June 30, ~~2020, respectively,~~2021, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.88% as of ~~March 31,~~September 30, 2021 and ~~1.94% as of~~ June 30, ~~2020.~~2021.

Additionally, the Company had letters of credit outstanding with separate banks, not associated with the revolving credit agreement, in the amount of $4.8 million and $4.5 million as of ~~March 31,~~September 30, 2021 and June 30, ~~2020,~~2021, respectively, in order to secure certain insurance obligations.

Trade Receivable Securitization Facility

In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) ~~with a termination date of August 31, 2021.~~. On March 26, 2021, the Company amended the AR Securitization Facility to expand the eligible receivables, which increased the maximum availability to $250.0 million and increased the fees on the AR Securitization Facility to 0.98% per year. Availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the $250.0 million of funding available under the AR Securitization Facility. The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the U.S. operations’ trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. Borrowings under this facility carry variable interest rates tied to LIBOR. The interest rate on the AR Securitization Facility as of ~~March 31,~~September 30, 2021 and June 30, ~~2020~~2021 was ~~1.30%~~1.06% and ~~1.07%~~1.20%, respectively. The termination date of the AR Securitization is ~~now~~ March 26, 2024.

Other Long-Term Borrowings

At ~~March 31,~~September 30, 2021 and June 30, ~~2020,~~2021, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of ~~$130.0 million and $170.0 million, respectively.~~$90,000. 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 ~~which~~ had an original principal amount of ~~$120.0 million,~~$120,000, carry a fixed interest rate of 3.19%~~. A $40.0 million principal payment was made on the "Series C" in July 2020,~~, and the remaining principal balance ~~of $80.0 million~~ is due in ~~equal payments in~~ July ~~2021 and~~ 2022. The "Series D" notes ~~have a remaining~~had an original principal ~~balance~~amount of ~~$25.0 million,~~$50,000, carry a fixed interest rate of 3.21%, and ~~are~~the remaining principal balance is due in October 2023. The “Series E” notes have a principal amount of ~~$25.0 million,~~$25,000, carry a fixed interest rate of 3.08%, and are due in October 2024.

In 2014, the Company assumed $2.4 million of debt as a part of the headquarters facility acquisition. The 1.50% fixed interest rate note is held by the State of Ohio Development Services Agency, and matures in May 2024.

The Company entered into an interest rate swap which mitigates variability in forecasted interest payments on $420.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. For more information, see note 6, Derivatives, to the consolidated financial statements, included in Item 1 under the caption “Notes to Condensed Consolidated Financial Statements.”

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

AND RESULTS OF OPERATIONS

~~consolidated financial statements, included in Item 1 under the caption “Notes to Condensed Consolidated Financial Statements.”~~

The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At ~~March 31,~~September 30, 2021, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At ~~March 31,~~September 30, 2021, the Company's net indebtedness was ~~below 2.8~~less than 2.5 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at ~~March 31,~~September 30, 2021.

Accounts Receivable Analysis

The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable:


								March 31,			June 30,				September 30,			June 30,
								2021			2020				2021
Accounts receivable, gross	Accounts receivable, gross							$	526,282		$	463,659		Accounts receivable, gross	$	547,296		$	532,777
Allowance for doubtful accounts	Allowance for doubtful accounts							16,202			13,661			Allowance for doubtful accounts	16,472			16,455
Accounts receivable, net	Accounts receivable, net							$	510,080		$	449,998		Accounts receivable, net	$	530,824		$	516,322
Allowance for doubtful accounts, % of gross receivables	Allowance for doubtful accounts, % of gross receivables							3.1		%	2.9		%	Allowance for doubtful accounts, % of gross receivables	3.0		%	3.1		%

		Three Months Ended March 31,						Nine Months Ended March 31,							Three Months Ended September 30,
		2021			2020			2020			2019				2021			2020
Provision for losses on accounts receivable	Provision for losses on accounts receivable	$	(200)		$	5,296		$	5,595		$	9,988		Provision for losses on accounts receivable	$	798		$	5,098
Provision as a % of net sales	Provision as a % of net sales	(0.02)		%	0.64		%	0.24		%	0.40		%	Provision as a % of net sales	0.09		%	0.68		%

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 ~~54.6~~53.6 at ~~March 31,~~September 30, 2021 compared to ~~55.9~~51.9 at June 30, ~~2020.~~2021.

As of ~~March 31,~~September 30, 2021, approximately ~~3.9%~~3.6% of our accounts receivable balances are more than 90 days past due, compared to ~~4.6%~~3.0% at June 30, ~~2020.~~2021. On an overall basis, our provision for losses ~~on accounts receivable~~from uncollected receivables represents ~~0.02%~~0.09% of our sales in the three months ended ~~March 31,~~September 30, 2021, compared to ~~0.64%~~0.68% of sales for the three months ended ~~March 31, 2020, and 0.24% of sales for the nine months ended March 31, 2021 compared to 0.40% of sales for the nine months ended March 31,~~September 30, 2020. The decrease primarily relates ~~to strong cash collections and an improvement in the overall credit profile of the accounts receivable portfolio in the current year, compared~~ to provisions recorded in the prior year for customer credit deterioration and bankruptcies primarily in the U.S. and Mexican operations of the Service Center Based Distribution segment. Historically, this percentage is around 0.10% to 0.15%. Management believes the overall receivables aging and provision for losses on ~~accounts receivable~~uncollected receivables are at reasonable levels.

Inventory An~~alysis~~Analysis

Inventories are valued using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis, and believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis. The annualized inventory turnover based on average costs ~~was 4.0~~ for the period ended ~~March 31,~~September 30, 2021 ~~and 3.8~~was 4.5 versus 4.3 for the period ended June 30, ~~2020.~~2021. We believe our inventory turnover ratio at the end of the year will be similar or slightly better than the ratio at ~~March 31,~~September 30, 2021.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

AND RESULTS OF OPERATIONS

Cautionary Statement Under Private Securities Litigation Reform Act

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

Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’s control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law.

Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; risks relating to the effects of the COVID-19 pandemic; changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability, changes in supplier distribution programs, inability of suppliers to perform, and transportation disruptions; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems and risks relating to their proper functioning, the security of those systems, and the data stored in or transmitted through them; the impact of economic conditions on the collectability of trade receivables; reduced demand for our products in targeted markets due to reasons including consolidation in customer industries; our ability to retain and attract qualified sales and customer service personnel and other skilled executives, managers and professionals; our ability to identify and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability, timing and nature of new business opportunities including acquisitions, alliances, customer relationships, and supplier authorizations; the incurrence of debt and contingent liabilities in connection with acquisitions; our ability to access capital markets as needed on reasonable terms; disruption of operations at our headquarters or distribution centers; risks and uncertainties associated with our foreign operations, including volatile economic conditions, political instability, cultural and legal differences, and currency exchange fluctuations; the potential for goodwill and intangible asset impairment; changes in

accounting policies and practices; our ability to maintain effective internal control over financial reporting; organizational changes within the Company; risks related to legal proceedings to which we are a party; potentially adverse government regulation, legislation, or policies, both enacted and under consideration, including with respect to federal tax policy, international trade, data privacy and security, and government contracting; and the occurrence of extraordinary events (including prolonged labor disputes, power outages, telecommunication outages, terrorist acts, public health emergency, earthquakes, extreme weather events, other natural disasters, fires, floods, and accidents). Other factors and unanticipated events could also adversely affect our business, financial condition or results of operations. Risks can also change over time. Further, the disclosure of a risk should not be interpreted to imply that the risk has not already materialized.

We discuss certain of these matters and other risk factors more fully throughout this Form 10-Q as well as other of our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended June 30, ~~2020.~~2021.

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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, ~~2020.~~2021.

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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 three months ended ~~March 31,~~September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company is a party to pending legal proceedings with respect to various product liability, commercial, personal injury, employment, and other matters. Although it is not possible to predict the outcome of these proceedings or the range of reasonably possible loss, the Company does not expect, based on circumstances currently known, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of common stock in the quarter ended ~~March 31,~~September 30, 2021 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, 2021 to January 31, 2021 0 $0.00 0 864,618
February 1, 2021 to February 28, 2021 0 $0.00 0 864,618
March 1, 2021 to March 31, 2021 0 $0.00 0 864,618
Total 0 $0.00 0 864,618


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)
July 1, 2021 to July 31, 2021	510	$89.07	0	464,618
August 1, 2021 to August 31, 2021	0	$0.00	0	464,618
September 1, 2021 to September 30, 2021	76,658	$85.27	76,658	387,960
Total	77,168	$85.30	76,658	387,960

(1)During the quarter the Company purchased 510 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 5. Other Information

Jason W. Vasquez, Vice President-Sales & Marketing, U.S. Service Centers, was elected an officer of the Company effective on September 1, 2021.

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).

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4.2						Amended and Restated Note Purchase and Private Shelf Agreement dated as of October 30, 2019, between Applied ~~Industrial Technologies, Inc.~~and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), and certain of its affiliates (filed as Exhibit 10.1 to the Company's Form 8-K filed November 5, 2019, SEC File No. 1-2299, and incorporated here by reference).

4.3						Amendment No. 1 to Amended and Restated Note Purchase and Private Shelf Agreement dated as of March 26, 2021 between Applied Industrial T e ~~chnologies,~~Technologies, Inc. and PGIM, Inc. (formerly known as Prudential Investment ~~Management,~~Management, Inc.), and certain of its ~~affiliates.~~affiliates (filed as Exhibit 4.3 to Applied's Form 10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference).

~~Table of Contents~~

4.4

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, between Applied Industrial Technologies, Inc. and 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).

4.5

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

First Amendment to Credit Agreement dated as of March 26, 2021, among Applied Industrial Technologies, Inc., Key Bank National Association as Agent, and various financial ~~institutions.~~institutions (filed as Exhibit 4.6 to Applied's Form 10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference) .

4.7

Receivables Financing Agreement dated as of August 31, 2018 among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.1 to the Company's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference).

4.8

Amendment No. 1 to Receivables Financing Agreement and Reaffirmation of Performance Guaranty dated as of March 26, 2021 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~~ (filed as Exhibit 10.2 to ~~the Company's~~Applied's Form 8-K filed March 29, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.9

Purchase and Sale Agreement dated as of August 31, 2018 among various entities listed on Schedule I thereto (including Applied Industrial Technologies, Inc.), as originators, Applied Industrial Technologies, Inc., as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to ~~the Company's~~Applied's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference).

4.10

Amendment No. 1 to Purchase and Sale Agreement dated as of November 19, 2018 among Applied Industrial Technologies, Inc. and various of its affiliates, as originators, Applied Industrial Technologies, Inc., as servicer, and AIT Receivables LLC, as ~~buyer.~~buyer (filed as Exhibit 4.10 to Applied's Form 10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.11

Amendment No. 2 to Purchase and Sale Agreement dated as of March 26, 2021, among various entities listed on Schedule 1 thereto (including Applied Industrial Technologies, Inc.), as originators, Applied Industrial Technologies, ~~In.c,~~Inc, as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to ~~the Company's~~Applied's Form 8-K filed March 29, 2021, SEC File No. 1-2299, and incorporated here by reference).

10.1

Schedule of executive officer participants in the Key Executive Restoration Plan, as amended and restated.

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

Section 1350 certifications

~~101.INS~~101

~~XBRL Instance Document -~~The following financial information from Applied Industrial Technologies Inc.'s Quarterly Report on Form 10-Q for the ~~instance document does not appear~~quarter ended September 30, 2021 formatted in ~~the Interactive Data File because its XBRL tags are embedded within the~~ Inline XBRL ~~document~~(Extensible Business Reporting Language) includes: (i) the Condensed Statements of Consolidated Income, (ii) the Condensed Statements of Consolidated Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Statements of Consolidated Cash Flows, (v) the Condensed Statements of Shareholders' Equity, and (vi) the Notes to Condensed Consolidated Financial Statements.

~~101.SCH~~104

Cover Page Interactive Data File (formatted as Inline 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~~and contained in Exhibit 101)

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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.

~~Table of Contents~~

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,~~October 28, 2021	By: /s/ Neil A. Schrimsher
		Neil A. Schrimsher
		President & Chief Executive Officer


Date:	~~April 30,~~October 28, 2021	By: /s/ David K. Wells
		David K. Wells
		Vice President-Chief Financial Officer & Treasurer

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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 June 30, 2019	38,597	$	10,000	$	172,931	$	1,229,148	$	(415,159)	$	(99,886)	$	897,034
Net income						38,799						38,799
Other comprehensive loss										(5,247)		(5,247)
Cumulative effect of adopting accounting standards						(3,275)						(3,275)
Cash dividends — $0.31 per share						(20)						(20)

Treasury shares issued for:
Exercise of stock appreciation rights and options	5			(177)				61				(116)
Performance share awards	36			(1,540)				362				(1,178)
Restricted stock units	16			(631)				200				(431)
Compensation expense — stock appreciation rights and options				773								773
Other share-based compensation expense				919								919
Other	2			(52)		(4)		23				(33)
Balance at September 30, 2019	38,656	$	10,000	$	172,223	$	1,264,648	$	(414,513)	$	(105,133)	$	927,225
Net income						38,031						38,031
Other comprehensive income										7,573		7,573

Cash dividends — $0.31 per share						(12,017)						(12,017)

Treasury shares issued for:
Exercise of stock appreciation rights and options	22			(185)				(47)				(232)


Compensation expense — stock appreciation rights and options				721								721
Other share-based compensation expense				918								918
Other						23		(1)				22
Balance at December 31, 2019	38,678	$	10,000	$	173,677	$	1,290,685	$	(414,561)	$	(97,560)	$	962,241
Net income						(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


	March 31, 2021		June 30, 2020		$ Change		% Change
Contract assets	$	11,838	$	8,435	$	3,403	40.3	%


	Three Months Ended March 31, 2021
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at December 31, 2020	$	(85,222)	$	(4,462)	$	(17,680)	$	(107,364)
Other comprehensive (loss) income	(434)		0		6,615		6,181
Amounts reclassified from accumulated other comprehensive loss	0		52		2,260		2,312

Net current-period other comprehensive (loss) income	(434)		52		8,875		8,493
Balance at March 31, 2021	$	(85,656)	$	(4,410)	$	(8,805)	$	(98,871)


	Three Months Ended March 31, 2020
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at December 31, 2019	$	(84,687)	$	(2,877)	$	(9,996)	$	(97,560)
Other comprehensive loss	(28,257)		0		(10,440)		(38,697)
Amounts reclassified from accumulated other comprehensive loss	0		(13)		763		750
Net current-period other comprehensive loss	(28,257)		(13)		(9,677)		(37,947)
Balance at March 31, 2020	$	(112,944)	$	(2,890)	$	(19,673)	$	(135,507)


	Nine Months Ended March 31, 2021
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at June 30, 2020	$	(105,094)	$	(4,564)	$	(19,772)	$	(129,430)
Other comprehensive income	19,438		0		4,544		23,982
Amounts reclassified from accumulated other comprehensive loss	0		154		6,423		6,577

Net current-period other comprehensive income	19,438		154		10,967		30,559
Balance at March 31, 2021	$	(85,656)	$	(4,410)	$	(8,805)	$	(98,871)


	Nine Months Ended March 31, 2020
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at June 30, 2019	$	(86,330)	$	(2,852)	$	(10,704)	$	(99,886)
Other comprehensive loss	(26,614)		0		(10,740)		(37,354)
Amounts reclassified from accumulated other comprehensive loss	0		(38)		1,771		1,733

Net current-period other comprehensive loss	(26,614)		(38)		(8,969)		(35,621)
Balance at March 31, 2020	$	(112,944)	$	(2,890)	$	(19,673)	$	(135,507)


	Index Reading
Month	MCU	PMI	IP
March 2021	74.4	64.7	102.8
February 2021	73.4	60.8	100.0
January 2021	75.3	58.7	103.9


	Three Months Ended March 31,				SD&A Decrease		Amount of change due to
	Three Months Ended March 31,								Foreign Currency		Organic Change
	2021		2020				Acquisitions		Foreign Currency		Organic Change
SD&A	$	172.8	$	183.7	$	(10.9)	$	4.0	$	1.7	$	(16.6)


	Nine Months Ended March 31, 2021				Change in $'s Versus Prior Period - % (Decrease) Increase
	As a Percent of Net Sales
	2021		2020
Net sales	100.0	%	100.0	%	(7.2)	%
Gross profit	28.7	%	28.9	%	(7.8)	%
Selling, distribution & administrative expense	21.3	%	22.1	%	(10.4)	%
Operating income	5.3	%	1.7	%	196.4	%
Net income	3.7	%	(0.2)	%	N/M


Sales by Reportable Segment	Nine Months Ended March 31,				Sales Decrease		Amount of change due to
	Nine Months Ended March 31,								Foreign Currency		Organic Change
	2021		2020				Acquisitions		Foreign Currency		Organic Change
Service Center Based Distribution	$	1,601.9	$	1,753.3	$	(151.4)	$	—	$	3.1	$	(154.5)
Fluid Power & Flow Control	738.2		767.3		(29.1)		29.0		—		(58.1)
Total	$	2,340.1	$	2,520.6	$	(180.5)	$	29.0	$	3.1	$	(212.6)