Applied Industrial 10Q 2024 Q2 Quarterly report

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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 DECEMBER 31, 2023


☐			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 ☒ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No o

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

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Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	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 38,669,465 (no par value) shares of common stock outstanding on January 18, 2024.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX

Page
No.

Part I:

FINANCIAL INFORMATION

Item 1:

Financial Statements

Condensed Statements of Consolidated Income - Three and Six Months Ended December 31, 202 3 and 202 2

Condensed Statements of Consolidated Comprehensive Income - Three and Six Months Ended December 31, 202 3 and 202 2

Condensed Consolidated Balance Sheets - December 31, 202 3 and June 30, 20 23

Condensed Statements of Consolidated Cash Flows - Six Months Ended December 31, 202 3 and 202 2

Condensed Statements of Shareholders' Equity - Three and Six Months Ended December 31, 202 3 and 202 2

Notes to Condensed Consolidated Financial Statements

Item 2:

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

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

Item 4:

Controls and Procedures

Part II:

OTHER INFORMATION

Item 1:

Legal Proceedings

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				Six Months Ended
	December 31,				December 31,
	2023		2022		2023		2022
Net sales	$	1,077,153	$	1,060,280	$	2,172,341	$	2,122,685
Cost of sales	760,063		751,775		1,530,169		1,507,397
Gross profit	317,090		308,505		642,172		615,288
Selling, distribution and administrative expense, including depreciation	202,496		195,612		406,898		395,863

Operating income	114,594		112,893		235,274		219,425
Interest expense, net	1,917		6,185		3,237		12,665
Other (income) expense, net	(2,924)		758		(2,493)		1,766
Income before income taxes	115,601		105,950		234,530		204,994
Income tax expense	24,373		25,493		49,476		47,657
Net income	$	91,228	$	80,457	$	185,054	$	157,337
Net income per share - basic	$	2.35	$	2.09	$	4.78	$	4.08
Net income per share - diluted	$	2.32	$	2.05	$	4.71	$	4.02
Weighted average common shares outstanding for basic computation	38,744		38,579		38,722		38,552
Dilutive effect of potential common shares	558		629		585		610
Weighted average common shares outstanding for diluted computation	39,302		39,208		39,307		39,162

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				Six Months Ended
	December 31,				December 31,
	2023		2022		2023		2022
Net income per the condensed statements of consolidated income	$	91,228	$	80,457	$	185,054	$	157,337

Other comprehensive income, before tax:
Foreign currency translation adjustments	9,697		5,929		3,427		(5,508)
Post-employment benefits:
Reclassification of net actuarial losses and prior service cost into other (income) expense, net and included in net periodic pension costs	(30)		10		(60)		18
Termination of pension plan	—		1,031		—		1,031

Unrealized (loss) gain on cash flow hedge	(4,536)		548		(902)		12,858
Reclassification of interest from cash flow hedge into interest expense, net	(4,715)		(715)		(9,353)		81
Total other comprehensive income (loss), before tax	416		6,803		(6,888)		8,480
Income tax (benefit) expense related to items of other comprehensive income	(2,308)		259		(2,538)		3,571
Other comprehensive income (loss), net of tax	2,724		6,544		(4,350)		4,909
Comprehensive income, net of tax	$	93,952	$	87,001	$	180,704	$	162,246

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)


	December 31, 2023		June 30, 2023
ASSETS
Current assets
Cash and cash equivalents	$	412,855	$	344,036
Accounts receivable, net	659,196		708,395
Inventories	520,155		501,184
Other current assets	89,786		93,192
Total current assets	1,681,992		1,646,807
Property, less accumulated depreciation of $238,935 and $229,041	113,706		115,041
Operating lease assets, net	104,517		100,677
Identifiable intangibles, net	227,831		235,549
Goodwill	589,356		578,418
Other assets	65,363		66,840
TOTAL ASSETS	$	2,782,765	$	2,743,332

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	253,739	$	301,685
Current portion of long-term debt	25,159		25,170
Compensation and related benefits	72,929		98,740
Other current liabilities	97,299		114,749
Total current liabilities	449,126		540,344
Long-term debt	571,854		596,926
Other liabilities	153,757		147,625
TOTAL LIABILITIES	1,174,737		1,284,895
Shareholders’ equity
Preferred stock—no par value; 2,500 shares authorized; none issued or outstanding	—		—
Common stock—no par value; 80,000 shares authorized; 54,213 shares issued	10,000		10,000
Additional paid-in capital	188,636		188,646
Retained earnings	1,964,090		1,792,632
Treasury shares—at cost (15,508 and 15,556 shares, respectively)	(495,052)		(477,545)
Accumulated other comprehensive loss	(59,646)		(55,296)
TOTAL SHAREHOLDERS’ EQUITY	1,608,028		1,458,437
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,782,765	$	2,743,332

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)


	Six Months Ended
	December 31,
	2023		2022
Cash Flows from Operating Activities
Net income	$	185,054	$	157,337
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property	11,765		11,033
Amortization of intangibles	14,650		15,519
Provision for losses on accounts receivable	1,026		9,573
Amortization of stock appreciation rights and options	1,710		1,871
Other share-based compensation expense	4,237		4,001
Changes in operating assets and liabilities, net of acquisitions	(47,855)		(111,542)
Other, net	(2,620)		1,031
Net Cash provided by Operating Activities	167,967		88,823
Cash Flows from Investing Activities
Acquisition of businesses, net of cash acquired	(21,440)		(25,516)
Capital expenditures	(9,863)		(12,817)
Proceeds from property sales	471		128

Net Cash used in Investing Activities	(30,832)		(38,205)
Cash Flows from Financing Activities


Long-term debt repayments	(25,125)		(40,123)
Interest rate swap settlement receipts	7,194		2,684

Purchases of treasury shares	(10,677)		(716)
Dividends paid	(27,155)		(26,259)
Acquisition holdback payments	(681)		(1,510)
Exercise of stock appreciation rights and options	127		127
Taxes paid for shares withheld for equity awards	(12,914)		(3,340)
Net Cash used in Financing Activities	(69,231)		(69,137)
Effect of Exchange Rate Changes on Cash	915		(417)
Increase (Decrease) in Cash and Cash Equivalents	68,819		(18,936)
Cash and Cash Equivalents at Beginning of Period	344,036		184,474
Cash and Cash Equivalents at End of Period	$	412,855	$	165,538

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands)


For the Period Ended December 31, 2023	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, 2023	38,657	$	10,000	$	188,646	$	1,792,632	$	(477,545)	$	(55,296)	$	1,458,437
Net income						93,826						93,826
Other comprehensive loss										(7,074)		(7,074)

Cash dividends — $0.35 per share						(23)						(23)

Treasury shares issued for:
Exercise of stock appreciation rights and options	32			(1,681)				(1,912)				(3,593)
Performance share awards	54			(3,072)				(3,487)				(6,559)
Restricted stock units	13			(726)				(910)				(1,636)
Compensation expense — stock appreciation rights and options				844								844
Other share-based compensation expense				1,976								1,976
Other	(1)			(1)		(3)		(78)				(82)
Balance at September 30, 2023	38,755	$	10,000	$	185,986	$	1,886,432	$	(483,932)	$	(62,370)	$	1,536,116
Net income						91,228						91,228
Other comprehensive income										2,724		2,724

Cash dividends — $0.35 per share						(13,607)						(13,607)
Purchases of common stock for treasury	(63)							(10,677)				(10,677)
Treasury shares issued for:
Exercise of stock appreciation rights and options	11			(391)				(335)				(726)

Restricted stock units	1			(86)				(108)				(194)
Compensation expense — stock appreciation rights and options				866								866
Other share-based compensation expense				2,261								2,261
Other	1					37						37
Balance at December 31, 2023	38,705	$	10,000	$	188,636	$	1,964,090	$	(495,052)	$	(59,646)	$	1,608,028

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands)


For the Period Ended December 31, 2022	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, 2022	38,499	$	10,000	$	183,822	$	1,499,676	$	(471,848)	$	(72,295)	$	1,149,355
Net income						76,880						76,880
Other comprehensive loss										(1,635)		(1,635)

Cash dividends — $0.34 per share
Purchases of common stock for treasury	(8)							(716)				(716)
Treasury shares issued for:
Exercise of stock appreciation rights and options	21			(860)				(366)				(1,226)
Performance share awards	23			(1,290)				(758)				(2,048)
Restricted stock units	33			(1,668)				(902)				(2,570)
Compensation expense — stock appreciation rights and options				1,424								1,424
Other share-based compensation expense				1,939								1,939
Other	3			(19)		(5)		61				37
Balance at September 30, 2022	38,571	$	10,000	$	183,348	$	1,576,551	$	(474,529)	$	(73,930)	$	1,221,440
Net income						80,457						80,457
Other comprehensive income										6,544		6,544

Cash dividends — $0.34 per share						(13,175)						(13,175)

Treasury shares issued for:
Exercise of stock appreciation rights and options	28			(1,061)				(878)				(1,939)


Compensation expense — stock appreciation rights and options				447								447
Other share-based compensation expense				2,062								2,062
Other				(1)		41						40
Balance at December 31, 2022	38,599	$	10,000	$	184,795	$	1,643,874	$	(475,407)	$	(67,386)	$	1,295,876

See notes to condensed consolidated financial statements.

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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 December 31, 2023, and the results of its operations and its cash flows for the six month periods ended December 31, 2023 and 2022, have been included. The condensed consolidated balance sheet as of June 30, 2023 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, 2023.

Operating results for the six month period ended December 31, 2023 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, 2024.

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 fiscal 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. LIFO expense of $3,377 and $8,853 in the three months ended December 31, 2023 and 2022, respectively, and $7,968 and $17,913 in the six months ended December 31, 2023 and 2022, respectively, is recorded in cost of sales in the condensed statements of consolidated income.

Recently Issued Accounting Guidance

In December 2023, the FASB issued its final standard to improve income tax disclosures. This standard, issued as ASU 2023-09, requires public business entities to annually disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. This update is effective for annual periods beginning after December 15, 2025. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.

In November 2023, the FASB issued its final standard to improve reportable segment disclosures. This standard, issued as ASU 2023-07, requires enhanced disclosures about significant segment expenses, enhanced interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment, and contains other disclosure requirements. This update is effective for all public entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.

In July 2023, the SEC issued a final rule to require registrants to provide enhanced and standardized disclosures regarding cybersecurity risk management, strategy, governance, and incidents. The final rule establishes new requirements related to material cybersecurity incidents, which would need to be disclosed on Form 8-K within four business days of their being deemed material, and annual disclosures in Form 10-K pertaining to (1) cybersecurity risk management and strategy, (2) management's role in assessing and managing material risks from cybersecurity threats, and (3) the board of directors' oversight of cybersecurity risks. The Form 10-K disclosures are due beginning with annual reports for fiscal years ending on or after December 15, 2023, and the Form 8-K disclosures were due beginning December 18, 2023. The Company will comply with the disclosure requirements set forth in the final rule as each becomes effective.

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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 six months ended December 31, 2023 and 2022. Other countries consist of Mexico, Australia, New Zealand, and Singapore.


	Three Months Ended December 31,
	2023						2022
	Service Center Based Distribution		Engineered Solutions		Total		Service Center Based Distribution		Engineered Solutions		Total
Geographic Areas:
United States	$	602,483	$	342,169	$	944,652	$	581,452	$	347,745	$	929,197
Canada	77,170		—		77,170		74,702		—		74,702
Other countries	49,620		5,711		55,331		49,238		7,143		56,381
Total	$	729,273	$	347,880	$	1,077,153	$	705,392	$	354,888	$	1,060,280


	Six Months Ended December 31,
	2023						2022
	Service Center Based Distribution		Engineered Solutions		Total		Service Center Based Distribution		Engineered Solutions		Total
Geographic Areas:
United States	$	1,219,745	$	684,265	$	1,904,010	$	1,166,332	$	684,354	$	1,850,686
Canada	152,470		—		152,470		154,472		—		154,472
Other countries	103,591		12,270		115,861		102,576		14,951		117,527
Total	$	1,475,806	$	696,535	$	2,172,341	$	1,423,380	$	699,305	$	2,122,685

The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the three and six months ended December 31, 2023 and 2022:


	Three Months Ended December 31,
	2023						2022
	Service Center Based Distribution		Engineered Solutions		Total		Service Center Based Distribution		Engineered Solutions		Total
General Industry	34.5	%	39.6	%	36.0	%	33.4	%	42.3	%	36.3	%
Industrial Machinery	9.0	%	25.0	%	14.2	%	10.3	%	27.4	%	16.0	%
Food	13.7	%	2.5	%	10.1	%	13.1	%	2.2	%	9.4	%
Metals	10.9	%	7.6	%	9.9	%	10.6	%	7.4	%	9.5	%
Forest Products	12.0	%	2.7	%	9.0	%	11.9	%	2.4	%	8.8	%
Chem/Petrochem	2.7	%	15.7	%	6.9	%	3.0	%	12.9	%	6.4	%
Cement & Aggregate	8.2	%	1.4	%	6.0	%	7.9	%	1.3	%	5.7	%
Oil & Gas	5.4	%	1.7	%	4.2	%	6.3	%	1.2	%	4.6	%
Transportation	3.6	%	3.8	%	3.7	%	3.5	%	2.9	%	3.3	%
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)


	Six Months Ended December 31,
	2023						2022
	Service Center Based Distribution		Engineered Solutions		Total		Service Center Based Distribution		Engineered Solutions		Total
General Industry	34.7	%	38.5	%	35.8	%	33.7	%	41.0	%	36.1	%
Industrial Machinery	8.9	%	25.1	%	14.1	%	10.2	%	27.3	%	15.8	%
Food	13.7	%	2.7	%	10.2	%	12.9	%	2.5	%	9.5	%
Metals	10.8	%	7.9	%	9.9	%	10.7	%	7.6	%	9.7	%
Forest Products	12.2	%	3.3	%	9.4	%	11.9	%	2.5	%	8.8	%
Chem/Petrochem	2.7	%	15.9	%	6.9	%	2.9	%	13.4	%	6.3	%
Cement & Aggregate	7.6	%	1.3	%	5.6	%	7.8	%	1.4	%	5.7	%
Oil & Gas	5.7	%	1.6	%	4.4	%	6.3	%	1.3	%	4.7	%
Transportation	3.7	%	3.7	%	3.7	%	3.6	%	3.0	%	3.4	%
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 six months ended December 31, 2023 and 2022:


	Three Months Ended December 31,
	2023						2022
	Service Center Based Distribution		Engineered Solutions		Total		Service Center Based Distribution		Engineered Solutions		Total
Power Transmission	38.4	%	12.4	%	30.0	%	37.5	%	10.1	%	28.4	%
General Maintenance; Hose Products & Other	22.7	%	17.9	%	21.1	%	21.0	%	23.6	%	21.8	%
Fluid Power	13.9	%	35.8	%	21.0	%	13.3	%	34.8	%	20.5	%
Bearings, Linear & Seals	25.0	%	0.4	%	17.1	%	28.2	%	0.5	%	18.9	%
Specialty Flow Control	—	%	33.5	%	10.8	%	—	%	31.0	%	10.4	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%


	Six Months Ended December 31,
	2023						2022
	Service Center Based Distribution		Engineered Solutions		Total		Service Center Based Distribution		Engineered Solutions		Total
Power Transmission	38.0	%	11.3	%	29.4	%	37.5	%	10.1	%	28.5	%
Fluid Power	14.0	%	37.3	%	21.5	%	13.1	%	35.1	%	20.4	%
General Maintenance; Hose Products & Other	22.0	%	16.9	%	20.4	%	21.2	%	19.6	%	20.6	%
Bearings, Linear & Seals	26.0	%	0.5	%	17.8	%	28.2	%	0.4	%	19.0	%
Specialty Flow Control	—	%	34.0	%	10.9	%	—	%	34.8	%	11.5	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Contract Assets

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

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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:


	December 31, 2023		June 30, 2023		$ Change		% Change
Contract assets	$	12,360	$	17,911	$	(5,551)	(31.0)	%

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

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 2024 Acquisitions

On September 1, 2023, the Company acquired substantially all of the net assets of Bearing Distributors, Inc. (BDI), a Columbia, South Carolina based provider of bearings, power transmission, industrial motion, and related service and repair capabilities. BDI is included in the Service Center Based Distribution segment. The purchase price for the acquisition was $18,000, net tangible assets acquired were $4,384, and intangible assets including goodwill were $13,616 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes $1,800 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of December 31, 2023, and which will be paid on the first and second anniversaries of the acquisition date with interest at a fixed rate of 3.0% 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 August 1, 2023, the Company acquired substantially all of the net assets of Cangro Industries, Inc. (Cangro), a Farmingdale, New York based provider of bearings, power transmission, industrial motion, and related service and repair capabilities. Cangro is included in the Service Center Based Distribution segment. The purchase price for the acquisition was $6,219, net tangible assets acquired were $2,175, and intangible assets including goodwill were $4,044 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes $930 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of December 31, 2023, and which will be paid on the first, second, and third 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.

Fiscal 2023 Acquisitions

On March 31, 2023, the Company acquired substantially all of the net assets of Advanced Motion Systems Inc. (AMS), a western New York based provider of automation products, services, and engineered solutions focused on a full range of machine vision, robotics, and motion control products and technologies. AMS is included in the Engineered Solutions segment. The purchase price for the acquisition was $10,118, net tangible assets acquired were $1,768, and intangible assets including goodwill were $8,350 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.

On November 1, 2022, the Company acquired substantially all of the net assets of Automation, Inc., a Minneapolis, Minnesota based provider of automation products, services, and engineered solutions focused on machine vision, collaborative and mobile robotics, motion control, intelligent sensors, pneumatics, and other related products and solutions. Automation, Inc. is included in the Engineered Solutions segment. The purchase price for the acquisition was $25,617, net tangible assets acquired were $3,639, and intangible assets including goodwill were $21,978 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.

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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 Engineered Solutions segment for the fiscal year ended June 30, 2023 and the six month period ended December 31, 2023 are as follows:


	Service Center Based Distribution		Engineered Solutions		Total
Balance at June 30, 2022	$	211,010	$	352,195	$	563,205
Goodwill acquired during the period	—		14,517		14,517

Other, primarily currency translation	221		475		696
Balance at June 30, 2023	$	211,231	$	367,187	$	578,418
Goodwill acquired during the period	9,489		1,249		10,738

Other, primarily currency translation	200		—		200
Balance at December 31, 2023	$	220,920	$	368,436	$	589,356

During the first quarter of fiscal 2024, the Company recorded an adjustment to the preliminary estimated fair value of

intangible assets related to the AMS acquisition. The fair value of the trade name was reduced by $1,249, with a

corresponding increase to goodwill of $1,249. During the second quarter of fiscal 2024, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the BDI acquisition. The fair value of the trade name was reduced by $2,130, and the fair value of the customer relationship was increased by $70, with a corresponding combined increase to goodwill of $2,060.

The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2023. The Company concluded that all of the the reporting units’ fair values exceeded their carrying amounts by at least 20% as of January 1, 2023.

At December 31, 2023 and June 30, 2023, 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 Engineered Solutions segment.

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


December 31, 2023	Amount		Accumulated Amortization		Net Book Value
Finite-Lived Identifiable Intangibles:
Customer relationships	$	372,289	$	200,123	$	172,166
Trade names	85,584		31,942		53,642
Vendor relationships	425		425		—
Other	3,446		1,423		2,023
Total Identifiable Intangibles	$	461,744	$	233,913	$	227,831


June 30, 2023	Amount		Accumulated Amortization		Net Book Value
Finite-Lived Identifiable Intangibles:
Customer relationships	$	364,572	$	188,804	$	175,768
Trade names	108,301		50,823		57,478
Vendor relationships	9,861		9,744		117
Other	3,347		1,161		2,186
Total Identifiable Intangibles	$	486,081	$	250,532	$	235,549

Fully amortized amounts are written off.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

During the six month period ended December 31, 2023, the Company acquired identifiable intangible assets with a preliminary acquisition cost allocation and weighted-average life as follows:


	Acquisition Cost Allocation		Weighted-Average life
Customer relationships	$	7,541	20.0
Trade names	530		3.0
Other	100		5.0
Total Identifiable Intangibles	$	8,171	18.7

Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable.

Estimated future amortization expense by fiscal year (based on the Company’s identifiable intangible assets as of December 31, 2023) for the next five years is as follows: $13,100 for the remainder of 2024, $25,600 for 2025, $23,900 for 2026, $22,000 for 2027, $20,300 for 2028 and $18,900 for 2029.

5. DEBT

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


	December 31, 2023		June 30, 2023
Revolving credit facility	$	383,592	383,592
Trade receivable securitization facility	188,300		188,300
Series D notes	—		25,000
Series E notes	25,000		25,000
Other	231		356
Total debt	$	597,123	$	622,248
Less: unamortized debt issuance costs	110		152
	$	597,013	$	622,096

Revolving Credit Facility & Term Loan

In December 2021, the Company entered into a new revolving credit facility with a group of banks to refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes. The revolving credit facility provides a $900,000 unsecured revolving credit facility and an uncommitted accordion feature which allows the Company to request an increase in the borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500,000. In May 2023, the Company and the administrative agent entered into an amendment to the credit facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR. Borrowings under this agreement bear interest, at the Company's election, at either the base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or SOFR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of $200 to secure certain insurance obligations, totaled $516,208 at December 31, 2023 and June 30, 2023, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the revolving credit facility was 6.26% and 6.11% as of December 31, 2023 and June 30, 2023, respectively.

Additionally, the Company had letters of credit outstanding with separate banks, not associated with the revolving credit agreement, in the amount of $4,046 as of December 31, 2023 and June 30, 2023 in order to secure certain insurance obligations.

Trade Receivable Securitization Facility

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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. In May 2023, the Company entered into an amendment to the AR Securitization Facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR, therefore borrowings under this facility carry variable interest rates tied to SOFR. The interest rate on the AR Securitization Facility as of December 31, 2023 and June 30, 2023 was 6.36% and 6.16%, respectively.

Unsecured Shelf Facility

At December 31, 2023 and June 30, 2023, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $25,000 and $50,000, respectively. 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 D" notes carried a fixed interest rate of 3.21%, and the remaining principal balance of $25,000 was paid 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.

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 November 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 these objectives, 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, net 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 notional amount declines over time. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. 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 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. In May 2023, the Company entered into bilaterial agreements with its swap counterparties to transition its interest rate swap agreements to SOFR, and further decreased the weighted average fixed pay rate to 1.58%. The Company made various Accounting Standards Codification Topic 848 elections related to changes in critical terms of the hedging relationship due to reference rate

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

reform to not result in a dedesignation of the hedging relationship. As of May 31, 2023, the Company's interest rate swap agreement was indexed to SOFR.

The interest rate swap converted $384,000 of variable rate debt to a rate of 2.48% as of December 31, 2023. The interest rate swap converted $384,000 of variable rate debt to a rate of 2.59% as of June 30, 2023. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $18,631 and $27,044 as of December 31, 2023 and June 30, 2023, respectively, which is included in other current assets and other assets in the condensed consolidated balance sheet. Amounts reclassified from other comprehensive income, before tax, to interest expense, net totaled $(4,715) and $(715) for the three months ended December 31, 2023 and 2022, respectively, and $(9,353) and $81 for the six months ended December 31, 2023 and 2022, respectively.

7. FAIR VALUE MEASUREMENTS

Marketable securities measured at fair value at December 31, 2023 and June 30, 2023 totaled $20,893 and $18,637, 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 December 31, 2023 and June 30, 2023, 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 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 December 31, 2023
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at September 30, 2023	$	(89,391)	$	(221)	$	27,242	$	(62,370)
Other comprehensive income (loss)	9,724		—		(3,411)		6,313
Amounts reclassified from accumulated other comprehensive (loss) income	—		(23)		(3,566)		(3,589)

Net current-period other comprehensive income (loss)	9,724		(23)		(6,977)		2,724
Balance at December 31, 2023	$	(79,667)	$	(244)	$	20,265	$	(59,646)


	Three Months Ended December 31, 2022
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at September 30, 2022	$	(102,259)	$	(1,297)	$	29,626	$	(73,930)
Other comprehensive income	5,885		777		414		7,076
Amounts reclassified from accumulated other comprehensive (loss) income	—		7		(539)		(532)
Net current-period other comprehensive income (loss)	5,885		784		(125)		6,544
Balance at December 31, 2022	$	(96,374)	$	(513)	$	29,501	$	(67,386)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Six Months Ended December 31, 2023
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at June 30, 2023	$	(83,099)	$	(197)	$	28,000	$	(55,296)
Other comprehensive income (loss)	3,432		—		(667)		2,765
Amounts reclassified from accumulated other comprehensive (loss) income	—		(47)		(7,068)		(7,115)

Net current-period other comprehensive income (loss)	3,432		(47)		(7,735)		(4,350)
Balance at December 31, 2023	$	(79,667)	$	(244)	$	20,265	$	(59,646)


	Six Months Ended December 31, 2022
	Foreign currency translation adjustment		Post-employment benefits		Cash flow hedge		Total Accumulated other comprehensive (loss) income
Balance at June 30, 2022	$	(90,738)	$	(1,303)	$	19,746	$	(72,295)
Other comprehensive (loss) income	(5,636)		777		9,694		4,835
Amounts reclassified from accumulated other comprehensive (loss) income	—		13		61		74

Net current-period other comprehensive (loss) income	(5,636)		790		9,755		4,909
Balance at December 31, 2022	$	(96,374)	$	(513)	$	29,501	$	(67,386)

Other Comprehensive Income

Details of other comprehensive income are as follows:


	Three Months Ended December 31,
	2023						2022
	Pre-Tax Amount		Tax Benefit		Net Amount		Pre-Tax Amount		Tax Expense (Benefit)		Net Amount
Foreign currency translation adjustments	$	9,697	$	(27)	$	9,724	$	5,929	$	44	$	5,885
Post-employment benefits:
Reclassification of net actuarial losses and prior service cost into other (income) expense, net and included in net periodic pension costs	(30)		(7)		(23)		10		3		7
Termination of pension plan	—		—		—		1,031		254		777
Unrealized (loss) gain on cash flow hedge	(4,536)		(1,125)		(3,411)		548		134		414
Reclassification of interest from cash flow hedge into interest expense, net	(4,715)		(1,149)		(3,566)		(715)		(176)		(539)


Other comprehensive income	$	416	$	(2,308)	$	2,724	$	6,803	$	259	$	6,544

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Six Months Ended December 31,
	2023						2022
	Pre-Tax Amount		Tax Benefit		Net Amount		Pre-Tax Amount		Tax Expense		Net Amount
Foreign currency translation adjustments	$	3,427	$	(5)	$	3,432	$	(5,508)	$	128	$	(5,636)
Post-employment benefits:
Reclassification of net actuarial losses and prior service cost into other (income) expense, net and included in net periodic pension costs	(60)		(13)		(47)		18		5		13
Termination of pension plan	—		—		—		1,031		254		777

Unrealized (loss) gain on cash flow hedge	(902)		(235)		(667)		12,858		3,164		9,694
Reclassification of interest from cash flow hedge into interest expense, net	(9,353)		(2,285)		(7,068)		81		20		61
Other comprehensive (loss) income	$	(6,888)	$	(2,538)	$	(4,350)	$	8,480	$	3,571	$	4,909

Anti-dilutive Common Stock Equivalents

In the three month periods ended December 31, 2023 and 2022, stock options and stock appreciation rights related to 101 and 82 shares of common stock, respectively, were not included in the computation of diluted earnings per share for the period then ended as they were anti-dilutive. In the six month periods ended December 31, 2023 and 2022, stock options and stock appreciation rights related to 103 and 109 shares of common stock, respectively, 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 $3,377 and $8,853 in the three months ended December 31, 2023 and 2022, respectively, and $7,968 and $17,913 in the six months ended December 31, 2023 and 2022, respectively, is recorded in cost of sales in the condensed statements of consolidated income, and is included in operating income for the related reportable segment, as the Company allocates LIFO expense between the segments. Intercompany sales, primarily from the Engineered Solutions segment to the Service Center Based Distribution segment, of $12,457 and $11,695, in the three months ended December 31, 2023 and 2022, respectively, and $24,775 and $22,213 in the six months ended December 31, 2023 and 2022 respectively, have been eliminated in the Segment Financial Information tables below.


Three Months Ended	Service Center Based Distribution		Engineered Solutions		Total
December 31, 2023
Net sales	$	729,273	$	347,880	$	1,077,153
Operating income for reportable segments	91,440		51,167		142,607

Depreciation and amortization of property	4,355		1,693		6,048
Capital expenditures	4,400		1,123		5,523

December 31, 2022
Net sales	$	705,392	$	354,888	$	1,060,280
Operating income for reportable segments	86,484		51,626		138,110

Depreciation and amortization of property	4,474		1,078		5,552
Capital expenditures	4,751		2,512		7,263

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


Six Months Ended	Service Center Based Distribution		Engineered Solutions		Total
December 31, 2023
Net sales	$	1,475,806	$	696,535	$	2,172,341
Operating income for reportable segments	188,321		100,762		289,083
Assets used in business	1,759,794		1,022,971		2,782,765
Depreciation and amortization of property	8,791		2,974		11,765
Capital expenditures	8,034		1,829		9,863

December 31, 2022
Net sales	$	1,423,380	$	699,305	$	2,122,685
Operating income for reportable segments	175,293		97,160		272,453
Assets used in business	1,454,040		1,068,864		2,522,904
Depreciation and amortization of property	8,923		2,110		11,033
Capital expenditures	8,316		4,501		12,817

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


	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2023		2022		2023		2022
Operating income for reportable segments	$	142,607	$	138,110	$	289,083	$	272,453
Adjustment for:
Intangible amortization—Service Center Based Distribution	922		730		1,599		1,488
Intangible amortization—Engineered Solutions	6,335		7,084		13,051		14,031


Corporate and other expense, net	20,756		17,403		39,159		37,509
Total operating income	114,594		112,893		235,274		219,425
Interest expense, net	1,917		6,185		3,237		12,665
Other (income) expense, net	(2,924)		758		(2,493)		1,766
Income before income taxes	$	115,601	$	105,950	$	234,530	$	204,994

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.

10. OTHER (INCOME) EXPENSE, NET

Other (income) expense, net consists of the following:


	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2023		2022		2023		2022
Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan	$	(1,938)	$	(1,065)	$	(1,385)	$	(238)
Foreign currency transactions (gain) loss	(832)		700		(903)		928
Net other periodic post-employment costs	26		1,176		51		1,319
Life insurance income, net	(107)		(104)		(244)		(215)
Other, net	(73)		51		(12)		(28)
Total other (income) expense, net	$	(2,924)	$	758	$	(2,493)	$	1,766

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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 6,300 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 second quarter of fiscal 2024, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore from 585 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 December 31, 2023 increased $16.9 million or 1.6% compared to the prior year quarter, with acquisitions increasing sales by $14.4 million or 1.4% and favorable foreign currency translation of $3.0 million increasing sales by 0.3%. The Company had operating income of $114.6 million, or operating margin of 10.6% of sales for the quarter ended December 31, 2023 compared to an operating income of $112.9 million, or operating margin of 10.6% of sales for the same quarter in the prior year. The quarter ended December 31, 2023 had net income of $91.2 million compared to net income of $80.5 million in the prior year quarter. The current ratio was 3.7 to 1 at December 31, 2023 and 3.0 to 1 at June 30, 2023.

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

The MCU (total industry) and IP indices have decreased since September 2023. The MCU for December 2023 was 78.6, which is down from the September and June revised readings of 79.5 and 78.9, respectively. The ISM PMI registered 47.4 in December, down from the September 2023 reading of 49.0 and up from the June 2023 reading of 46.0. The indices for the months during the current quarter, along with the indices for the prior fiscal year end and prior quarter end, were as follows:


	Index Reading
Month	MCU	PMI	IP
December 2023	78.6	47.4	99.1
November 2023	78.6	46.7	99.0
October 2023	78.7	46.7	98.8
September 2023	79.5	49.0	99.6
June 2023	78.9	46.0	99.1

The number of Company employees was 6,365 at December 31, 2023, 6,223 at June 30, 2023, and 6,157 at December 31, 2022. The number of operating facilities totaled 585 at December 31, 2023, 577 at June 30, 2023, and 567 at December 31, 2022.

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Results of Operations

Three Months Ended December 31, 2023 and 2022

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


	Three Months Ended December 31,				Change in $'s Versus Prior Period - % Increase
	As a Percent of Net Sales
	2023		2022
Net sales	100.0	%	100.0	%	1.6	%
Gross profit	29.4	%	29.1	%	2.8	%
Selling, distribution & administrative expense	18.8	%	18.4	%	3.5	%
Operating income	10.6	%	10.6	%	1.5	%
Net income	8.5	%	7.6	%	13.4	%

During the quarter ended December 31, 2023, sales increased $16.9 million or 1.6% compared to the prior year quarter, with sales from acquisitions adding $14.4 million or 1.4%, and favorable foreign currency translation accounting for a increase of $3.0 million or 0.3%. There were 61 selling days in the quarters ended December 31, 2023 and December 31, 2022. Excluding the impact of businesses acquired and foreign currency translation, sales were down $0.5 million or 0.1% during the quarter, holding relatively steady despite headwinds from the technology sector.

The following table shows changes in sales by reportable segment (amounts in millions).


Sales by Reportable Segment	Three Months Ended December 31,				Sales Increase (Decrease)		Amount of change due to
	Three Months Ended December 31,								Foreign Currency		Organic Change
	2023		2022				Acquisitions		Foreign Currency		Organic Change
Service Center Based Distribution	$	729.3	$	705.4	$	23.9	$	11.0	$	3.0	$	9.9
Engineered Solutions	347.9		354.9		(7.0)		3.4		—		(10.4)
Total	$	1,077.2	$	1,060.3	$	16.9	$	14.4	$	3.0	$	(0.5)

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $23.9 million or 3.4%. Acquisitions within this segment increased sales by $11.0 million or 1.6% and favorable foreign currency translation increased sales by $3.0 million or 0.4%. Excluding the impact of businesses acquired and foreign currency translation, sales increased $9.9 million or 1.4%, due to benefits from sales process initiatives as well as solid growth across national accounts and fluid power MRO in the U.S.

Sales from our Engineered Solutions segment decreased $7.0 million or 2.0%. Acquisitions within this segment increased sales by $3.4 million or 1.0%. Excluding the impact of businesses acquired, sales decreased $10.4 million or 3.0%, driven by reduced activity across the technology sector. The decrease in sales was moderated by sustained growth across core industrial & mobile fluid power, and flow control markets.

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


	Three Months Ended December 31,				Sales Increase (Decrease)		Amount of change due to
	Three Months Ended December 31,								Foreign Currency		Organic Change
Sales by Geographic Area	2023		2022				Acquisitions		Foreign Currency		Organic Change
United States	$	944.7	$	929.2	$	15.5	$	14.4	$	—	$	1.1
Canada	77.2		74.7		2.5		—		(0.1)		2.6
Other countries	55.3		56.4		(1.1)		—		3.1		(4.2)
Total	$	1,077.2	$	1,060.3	$	16.9	$	14.4	$	3.0	$	(0.5)

Sales in our U.S. operations were up $15.5 million or 1.7%, as acquisitions added $14.4 million or 1.6%. Excluding the impact of businesses acquired, U.S. sales were up $1.1 million or 0.1%. Sales from our Canadian operations increased $2.5 million or

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3.3%. Unfavorable foreign currency translation decreased Canadian sales by $0.1 million or 0.2%. Excluding the impact of foreign currency translation, Canadian sales increased $2.6 million or 3.5%. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, decreased $1.1 million or 1.9% from the prior year. Favorable foreign currency translation increased other country sales by $3.1 million or 5.6%. Excluding the impact of currency translation, other country sales were down $4.2 million, or 7.5% during the quarter.

Our gross profit margin was 29.4% in the quarter ended December 31, 2023 compared to 29.1% in the prior year quarter. The gross profit margin for the current year quarter was positively impacted by 51 basis points due to a $5.5 million decrease in LIFO.

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


	Three Months Ended December 31,				SD&A Increase		Amount of change due to
	Three Months Ended December 31,								Foreign Currency		Organic Change
	2023		2022				Acquisitions		Foreign Currency		Organic Change
SD&A	$	202.5	$	195.6	$	6.9	$	4.8	$	0.3	$	1.8

SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was 18.8% of sales in the quarter ended December 31, 2023 compared to 18.4% in the prior year quarter. SD&A increased $6.9 million or 3.5% compared to the prior year quarter. Changes in foreign currency exchange rates had the effect of increasing SD&A during the quarter ended December 31, 2023 by $0.3 million or 0.2% compared to the prior year quarter. SD&A from businesses acquired added $4.1 million or 2.1% of SD&A expenses, including $0.4 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the favorable currency translation impact, SD&A increased $2.5 million or 1.2% during the quarter ended December 31, 2023 compared to the prior year quarter.

Operating income increased $1.7 million, and as a percent of sales, was 10.6% for both the quarter ended December 31, 2023 and the prior year quarter.

Operating income, as a percentage of sales for the Service Center Based Distribution segment increased to 12.5% in the current year quarter from 12.3% in the prior year quarter. Operating income, as a percentage of sales for the Engineered Solutions segment increased to 14.7% in the current year quarter from 14.5% in the prior year quarter.

Interest expense, net decreased $4.3 million from the prior year quarter primarily due to reduced debt levels and greater interest income from higher cash balances and investment yields.

Other (income) expense, net was income of $2.9 million for the current year quarter, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $1.9 million, net favorable foreign currency transaction gains of $0.8 million, and $0.2 million of other income. During the prior year quarter, other (income) expense, net was expense of $0.8 million, which included net other periodic benefit costs primarily related to the termination of the qualified defined benefit retirement plan of $1.2 million and net unfavorable foreign currency transaction losses of $0.7 million, offset by unrealized gains on investments held by non-qualified deferred compensation trusts of $1.1 million.

The effective income tax rate was 21.1% for the quarter ended December 31, 2023 compared to 24.1% for the quarter ended December 31, 2022. The decrease in the effective tax rate is primarily due to the reversal of a tax valuation allowance related to Mexico during the quarter ended December 31, 2023.

As a result of the factors addressed above, net income for the quarter ended December 31, 2023 increased $10.8 million compared to the prior year quarter. Net income per share was $2.32 per share for the quarter ended December 31, 2023 compared to $2.05 per share in the prior year quarter.

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Results of Operations

Six Months Ended December 31, 2023 and 2022

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


	Six Months Ended December 31,				Change in $'s Versus Prior Period - % Increase
	As a Percent of Net Sales
	2023		2022
Net sales	100.0	%	100.0	%	2.3	%
Gross profit	29.6	%	29.0	%	4.4	%
Selling, distribution & administrative expense	18.7	%	18.6	%	2.8	%
Operating income	10.8	%	10.3	%	7.2	%
Net income	8.5	%	7.4	%	17.6	%

During the six months ended December 31, 2023, sales increased $49.7 million or 2.3% compared to the prior year period, with sales from acquisitions adding $26.0 million or 1.2% and favorable foreign currency translation of $5.4 million of increasing sales by 0.3%. There were 124 selling days in the six months ended December 31, 2023 and 125 selling days in the six months ended December 31, 2022. Excluding the impact of businesses acquired and foreign currency translation, sales were up $18.3 million or 0.8% during the period, driven by an increase of 1.6% from operations reflecting support from secular tailwinds and internal sales initiatives, despite headwinds from the technology sector, offset by a 0.8% headwind due to one less sales day.

The following table shows changes in sales by reportable segment (amounts in millions).


Sales by Reportable Segment	Six Months Ended December 31,				Sales Increase (Decrease)		Amount of change due to
	Six Months Ended December 31,								Foreign Currency		Organic Change
	2023		2022				Acquisitions		Foreign Currency		Organic Change
Service Center Based Distribution	$	1,475.8	$	1,423.4	$	52.4	$	14.9	$	5.4	$	32.1
Engineered Solutions	696.5		699.3		(2.7)		11.1		—		(13.8)
Total	$	2,172.3	$	2,122.7	$	49.7	$	26.0	$	5.4	$	18.3

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $52.4 million or 3.7%. Acquisitions within this segment increased sales by $14.9 million or 1.1% and favorable foreign currency translation increased sales by $5.4 million or 0.4%. Excluding the impact of businesses acquired and foreign currency translation, sales increased $32.1 million or 2.2%, driven by an increase of 3.0% from operations due to benefits from sales process initiatives as well as solid growth across national accounts and fluid power MRO in the U.S., offset by a 0.8% headwind due to one less sales day.

Sales from our Engineered Solutions segment decreased $2.7 million or 0.4%. Acquisitions within this segment increased sales by $11.1 million or 1.6%. Excluding the impact of businesses acquired, sales decreased $13.8 million or 2.0%, driven by a decrease of 1.2% from operations primarily as a result of reduced activity across the technology sector, in addition to a decrease of 0.8% due to one less sales day. The decrease in sales was moderated by sustained growth across core industrial & mobile fluid power, and flow control markets.

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AND RESULTS OF OPERATIONS

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


	Six Months Ended December 31,				Sales Increase (Decrease)		Amount of change due to
	Six Months Ended December 31,								Foreign Currency		Organic Change
Sales by Geographic Area	2023		2022				Acquisitions		Foreign Currency		Organic Change
United States	$	1,904.0	$	1,850.7	$	53.3	$	26.0	$	—	$	27.3
Canada	152.5		154.5		(2.0)		—		(2.4)		0.4
Other countries	115.8		117.5		(1.6)		—		7.8		(9.4)
Total	$	2,172.3	$	2,122.7	$	49.7	$	26.0	$	5.4	$	18.3

Sales in our U.S. operations were up $53.3 million or 2.9%, as acquisitions added $26.0 million or 1.4%. Excluding the impact of businesses acquired, U.S. sales were up $27.3 million or 1.5%, driven by an increase of 2.3% from operations offset by 0.8% due to one less sales day. Sales from our Canadian operations decreased $2.0 million or 1.3%. Unfavorable foreign currency translation decreased Canadian sales by $2.4 million or 1.5%. Excluding the impact of foreign currency translation, Canadian sales were up $0.4 million or 0.2%, driven by an increase of 1.0% from operations, offset by 0.8% due to one less sales day. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, decreased $1.6 million or 1.4% from the prior year. Favorable foreign currency translation increased other country sales by $7.8 million or 6.6%. Excluding the impact of currency translation, other country sales were down $9.4 million, or 8.0%, during the period.

Our gross profit margin was 29.6% in the six months ended December 31, 2023 compared to 29.0% in the prior year period. The gross profit margin for the current year period was positively impacted by 46 basis points due to a $9.9 million decrease in LIFO expense.

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


	Six Months Ended December 31,				SD&A Increase		Amount of change due to
	Six Months Ended December 31,								Foreign Currency		Organic Change
	2023		2022				Acquisitions		Foreign Currency		Organic Change
SD&A	$	406.9	$	395.9	$	11.0	$	7.4	$	0.5	$	3.1

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 18.7% of sales in the six months ended December 31, 2023 compared to 18.6% in the prior year period. SD&A increased $11.0 million or 2.8% compared to the prior year period. Changes in foreign currency exchange rates had the effect of increasing SD&A during the six months ended December 31, 2023 by $0.5 million or 0.1% compared to the prior year period. SD&A from businesses acquired added $7.4 million or 1.9% of SD&A expenses, including $0.8 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A increased $3.1 million or 0.8% during the six months ended December 31, 2023 compared to the prior year period.

Operating income increased $15.8 million, and as a percent of sales increased to 10.8% from 10.3% during the prior year period.

Operating income, as a percentage of sales for the Service Center Based Distribution segment increased to 12.8% in the current year period from 12.3% in the prior year period. Operating income, as a percentage of sales for the Engineered Solutions segment increased to 14.5% in the current year period from 13.9% in the prior year period.

Interest expense, net decreased $9.4 million from the prior year period primarily due to reduced debt levels and greater interest income from higher cash balances and investment yields.

Other (income) expense, net was income of $2.5 million for the six months ended December 31, 2023, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $1.4 million, net favorable foreign currency transaction gains of $0.9 million, and $0.2 million of other income. During the prior year period, other (income) expense, net was expense of $1.8 million, which included net other periodic benefit costs primarily related to the termination of

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the qualified defined benefit retirement plan of $1.3 million and net unfavorable foreign currency transaction losses of $0.9 million, offset by unrealized gains on investments held by non-qualified deferred compensation trusts of $0.2 million and $0.2 million of other income.

The effective income tax rate was 21.1% for the six months ended December 31, 2023 compared to 23.2% for the six months ended December 31, 2022. The decrease in the effective tax rate is primarily due to the reversal of a tax valuation allowance related to Mexico during the six months ended December 31, 2023, as well as compensation-related deductions during the six months ended December 31, 2023. We expect our full year tax rate for fiscal 2024 to be in the 23.0% to 24.0% range.

As a result of the factors addressed above, net income for the six months ended December 31, 2023 increased $27.7 million compared to the prior year period. Net income was $4.71 per share for the six months ended December 31, 2023 compared to $4.02 per share in the prior year period.

Trends and Factors Impacting our Business

Our Engineered Solutions reportable segment includes our Automation operations focused on advanced automation technologies and related engineered solutions. We continue to strategically expand this area of our business through both acquisitions and organic investments. The Automation reporting unit has a goodwill balance of $50,640 as of December 31, 2023, as well as customer relationship intangible assets with a combined net book value of $23,476 as of December 31, 2023. As we continue to expand our Automation operations, we have and will continue to make strategic moves and operational decisions that could result in a change of customer and end-market mix to support our growth and profitability in this growing area of our business. This could include reduced business or the termination of certain customer relationships that could decrease expected future cash flows. The timing and extent of these business circumstances and events could negatively impact the estimated fair values of the Automation reporting unit and customer relationship intangible assets and trigger an impairment of certain intangible assets, if the fair values of the reporting unit or intangible assets fall below their carrying values.

Liquidity and Capital Resources

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At December 31, 2023, we had total debt obligations outstanding of $597.1 million compared to $622.2 million at June 30, 2023. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations will be sufficient to finance normal working capital needs in each of the countries in which we operate, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company's credit standing and financial strength.

The Company's working capital at December 31, 2023 was $1,232.9 million, compared to $1,106.5 million at June 30, 2023. The current ratio was 3.7 to 1 at December 31, 2023 and 3.0 to 1 at June 30, 2023.

Net Cash Flows

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


	Six Months Ended December 31,
Net Cash Provided by (Used in):	2023		2022
Operating Activities	$	167,967	$	88,823
Investing Activities	(30,832)		(38,205)
Financing Activities	(69,231)		(69,137)
Exchange Rate Effect	915		(417)
Increase (Decrease) in Cash and Cash Equivalents	$	68,819	$	(18,936)

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The increase in cash provided by operating activities during the six months ended December 31, 2023 is driven by increased operating results and by changes in working capital during the period. Changes in working capital between periods caused a $63.7 million increase in cash provided by operating activities, driven by (amounts in thousands):


	Six Months Ended December 31,
	2023		2022
Accounts Receivable	$	54,428	$	(6,167)
Inventories	(14,540)		(72,295)
Accounts payable	(49,047)		(10,931)

Net cash used in investing activities during the six months ended December 31, 2023 decreased from the prior period primarily due to $21.4 million used for the acquisition of Cangro Industries, Inc. and Bearing Distributors, Inc. in the current year compared to $25.5 million used for the acquisition of Automation, Inc., in the prior year period.

Net cash used in financing activities during the six months ended December 31, 2023 increased from the prior year period primarily due to $10.7 million of cash being used for the purchase of treasury shares during the six months ended December 31, 2023 compared to $0.7 million used in the prior year period and $12.9 million of cash being used for taxes paid for shares withheld for equity awards in the six months ended December 31, 2023 compared to $3.3 million used in the period year period. This was offset by a change in net debt activity, as there were $25.1 million of debt payments in the current year compared to $40.1 million 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. During the three and six months ended December 31, 2023, the Company acquired 62,947 shares of treasury stock on the open market for $10.7 million. During the three months ended December 31, 2022, the Company did not acquire any shares of treasury stock on the open market. During the six months ended December 31, 2022, the Company acquired 8,000 shares of treasury stock for $0.7 million. At December 31, 2023, we had authorization to repurchase 1,437,053 shares.

Borrowing Arrangements

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


	December 31, 2023		June 30, 2023
Revolving credit facility	$	383,592	$	383,592
Trade receivable securitization facility	188,300		188,300
Series D notes	—		25,000
Series E notes	25,000		25,000
Other	231		356
Total debt	$	597,123	$	622,248
Less: unamortized debt issuance costs	110		152
	$	597,013	$	622,096

Revolving Credit Facility & Term Loan

In December 2021, the Company entered into a new revolving credit facility with a group of banks to refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes. The revolving credit facility provides a $900.0 million unsecured revolving credit facility and an uncommitted accordion feature which allows the Company to request an increase in the borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500.0 million. In May 2023, the Company and the administrative agent entered into an amendment to the credit facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR. Borrowings under this agreement bear interest, at the Company's election, at either the base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or SOFR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of $0.2 million to secure certain insurance obligations, totaled $516.2 million at December 31, 2023 and June 30, 2023, and were available to fund future

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acquisitions or other capital and operating requirements. The interest rate on the revolving credit facility was 6.26% and 6.11% as of December 31, 2023 and June 30, 2023, respectively.

Additionally, the Company had letters of credit outstanding with separate banks, not associated with the revolving credit agreement, in the amount of $4.0 million as of December 31, 2023 and June 30, 2023 in order to secure certain insurance obligations.

Trade Receivable Securitization Facility

In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”). On March 26, 2021, the Company amended the AR Securitization Facility to expand the eligible receivables, which increased the maximum availability to $250.0 million and increased the fees on the AR Securitization Facility to 0.98% per year. On August 4, 2023, the Company amended the AR Securitization Facility, extended the term to August 4, 2026, and reduced the drawn fees to 0.90% 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. In May 2023, the Company entered into an amendment to the AR Securitization Facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR, therefore borrowings under this facility carry variable interest rates tied to SOFR. The interest rate on the AR Securitization Facility as of December 31, 2023 and June 30, 2023 was 6.36% and 6.16%, respectively.

Unsecured Shelf Facility

At December 31, 2023 and June 30, 2023, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $25.0 million and $50.0 million, respectively. 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 D" notes carried a fixed interest rate of 3.21%, and the remaining principal balance of $25.0 million was paid in October 2023. The “Series E” notes have a principal amount of $25.0 million, carry a fixed interest rate of 3.08%, and are due in October 2024.

Other Long-Term Borrowing

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

The Company entered into an interest rate swap which mitigates variability in forecasted interest payments on $384.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. For more information, see note 6, Derivatives, to the consolidated financial statements, included in Item 1 under the caption “Notes to Condensed Consolidated Financial Statements.”

The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At December 31, 2023, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At December 31, 2023, the Company's net indebtedness was 0.4 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at December 31, 2023.

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Accounts Receivable Analysis

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


							December 31,			June 30,
							2023			2023
Accounts receivable, gross							$	674,756		$	730,729
Allowance for doubtful accounts							15,560			22,334
Accounts receivable, net							$	659,196		$	708,395
Allowance for doubtful accounts, % of gross receivables							2.3		%	3.1		%

	Three Months Ended December 31,						Six Months Ended December 31,
	2023			2022			2023			2022
Provision for losses on accounts receivable	$	159		$	5,579		$	1,026		$	9,573
Provision as a % of net sales	0.01		%	0.53		%	0.05		%	0.45		%

Accounts receivable are reported at net realizable value and consist of trade receivables from customers. Management monitors accounts receivable by reviewing Days Sales Outstanding (DSO) and the aging of receivables for each of the Company's locations.

On a consolidated basis, DSO was 55.1 at December 31, 2023 and June 30, 2023, respectively.

As of December 31, 2023, approximately 1.9% of our accounts receivable balances are more than 90 days past due, compared to 2.5% at June 30, 2023. On an overall basis, our provision for losses on accounts receivable represents 0.01% of our sales in the three months ended December 31, 2023, compared to 0.53% of sales for the three months ended December 31, 2022, and 0.05% of sales for the six months ended December 31, 2023 compared to 0.45% of sales for the six months ended December 31, 2022. The decrease primarily relates 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, as well as improved collections performance. Historically, this percentage is around 0.10% to 0.15%. Management believes the overall receivables aging and provision for losses on accounts receivable are at reasonable levels.

Inventory Analysis

Inventories are valued using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis, and believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis. The annualized inventory turnover based on average costs was 4.3 for the period ended December 31, 2023 and 4.4 for the period ended June 30, 2023.

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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; continuing risks relating to the effects of the COVID-19 pandemic; inflationary or deflationary trends in the cost of products, energy, labor and other operating costs, and changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability (such as due to supply chain strains), changes in supplier distribution programs, inability of suppliers to perform, and transportation disruptions; 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, labor 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, war, 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, 2023.

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, 2023.

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 December 31, 2023 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 December 31, 2023 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)
October 1, 2023 to October 31, 2023	0	$0.00	0	1,500,000
November 1, 2023 to November 30, 2023	0	$0.00	0	1,500,000
December 1, 2023 to December 31, 2023	62,947	$169.61	62,947	1,437,053
Total	62,947	$169.61	62,947	1,437,053

(1)On August 9, 2022, 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 August 11, 2022. 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

Rule 10b5-1 Trading Plans and Non-Rule 10b5-1 Trading Arrangements

During the quarter ended December 31, 2023, none of the Company’s directors or officers (as defined in Rule 16a-1(f)) adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that (i) was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or (ii) that constituted a “non-Rule 10b5-1 trading arrangement” as defined in Regulation S-K 408(c) of the Securities Exchange Act of 1934, as amended, except as follows:

On November 2, 2023, Neil A. Schrimsher, the Company’s President and Chief Executive Officer, provided his irrevocable consent to contribute, at a later date, 93,750 shares of Company common stock to an exchange fund in exchange for shares of that fund. The exchange fund transaction closed on December 14, 2023, and on that date Mr. Schrimsher’s shares were contributed to the fund at a value of $169.72 per share. The exchange fund transaction constitutes a “non-Rule 10b5-1 trading arrangement.”

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).

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

4.2						Amended and Restated Note Purchase and Private Shelf Agreement dated as of 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 Technologies, Inc. and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), and certain of its affiliates, (filed as Exhibit 4.3 to the Company’s Form 10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.4						Amendment No. 2 to Amended and Restated Note Purchase and Private Shelf Agreement, dated as of December 9, 2021, between Applied and PGIM, Inc., (filed as Exhibit 10.2 to the Company's Form 8-K filed December 14, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.5						Amendment No. 3 to Amended and Restated Note Purchase and Private Shelf Agreement, dated as of October 28, 2022, between Applied and PGIM, Inc. (filed as Exhibit 10.1 to the Company's Form 8-K filed November 1, 2022, SEC File No. 1-2299, as incorporated here by reference).

4.6						Credit Agreement dated as of December 9, 2021, 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 December 14, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.7						First Amendment Agreement, dated as of May 12, 2023, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and the Lenders set forth therein (filed as Exhibit 4.7 to Applied’s Form 10-K for the fiscal year ended June 30, 2023, SEC File No. 1-2299, and incorporated here by reference).

4.8						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).

4.9						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 as Exhibit 10.2 to the Company's Form 8-K filed March 29, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.10						Amendment No. 2 to Receivables Financing Agreement and Reaffirmation of Performance Guaranty, dated as of May 12, 2023, by and among AIT Receivables, LLC, Applied Industrial Technologies, Inc., PNC Bank, National Association, Regions Bank, and PNC Capital Markets LLC (filed as Exhibit 4.10 to Applied’s Form 10-K for the fiscal year ended June 30, 2023, SEC File No. 1-2299, and incorporated here by reference).

4.11						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 Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference).

4.12						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, (filed as Exhibit 4.10 to the Company’s Form 10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.13						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, Inc., as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to the Company's Form 8-K filed March 29, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.14						Amendment No. 3 to Receivables Financing Agreement and Reaffirmation of Performance Guaranty dated as of August 6, 2023 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 Applied’s Form 8-K filed August 9, 2023, SEC File No. 1-2299, and incorporated here by reference).

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4.15						Amendment No. 3 to Purchase and Sale Agreement dated as of August 4, 2023 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 Applied’s Form 8-K filed August 9, 2023, SEC File No. 1-2299, and incorporated here by reference).

10.1						Applied Industrial Technologies, Inc. 2023 Long-Term Performance Plan, as approved by the Shareholders on October 24, 2023 (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended Septemb er 30, 2023, SEC File No. 1-2299, and incorporated here by reference).

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

32						Section 1350 certifications

101						The following financial information from Applied Industrial Technologies Inc.'s Quarterly Report on Form 10-Q for the quarter ended December 31, 2023 formatted in Inline XBRL (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.

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

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.

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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:	January 26, 2024	By: /s/ Neil A. Schrimsher
		Neil A. Schrimsher
		President & Chief Executive Officer


Date:	January 26, 2024	By: /s/ David K. Wells
		David K. Wells
		Vice President-Chief Financial Officer, Treasurer, & Principal Accounting Officer

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Applied Industrial (AIT) 10-Q2024 Q2 Quarterly report

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