NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES
Business
Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is a leading value-added distributor and technical solutions provider of 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. Although the Company does not generally manufacture the products it sells, it does assemble and repair certain products and systems.
Consolidation
The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency
The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive loss in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other income, net.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.
Marketable Securities
The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other income, net in the statements of consolidated income.
Concentration of Credit Risk
The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and Singapore. As such, the Company does not believe that a significant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While the Company monitors the creditworthiness of these institutions, a crisis in the financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand.
Accounts Receivable
Accounts receivable are stated at their estimated net realizable value and consist of amounts billed or billable and currently due from customers. The Company maintains an allowance for doubtful accounts, which reflects management’s best estimate of probable losses based on an analysis of customer accounts, known troubled accounts, historical experience with write-offs, and other currently available evidence.
Allowances for Doubtful Accounts
The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt
experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be greater credit risks, trends within the entire customer pool, and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. The allowance for doubtful accounts was $16,455 and $13,661 at June 30, 2021 and June 30, 2020, respectively.
Inventories
Inventories are valued at average cost, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S. inventories in fiscal 1974. At June 30, 2021, approximately 19.8% of the Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year.
The Company evaluates the recoverability of its slow moving and inactive inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence, and, in certain instances, can be eligible for return under supplier return programs.
Supplier Purchasing Programs
The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s fiscal year end or the supplier’s year end; however, program length and ending dates can vary. Incentives are received in the form of cash or credits against purchases upon attainment of specified purchase volumes and are received either monthly, quarterly or annually. The incentives are generally a specified percentage of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases expected during the life of the program. Supplier programs are analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon program completion, differences between estimates and actual incentives subsequently received have not been material. Benefits under these supplier purchasing programs are recognized under the Company’s inventory accounting methods as a reduction of cost of sales when the inventories representing these purchases are recorded as cost of sales. Accrued incentives expected to be settled as a credit against future purchases are reported on the consolidated balance sheets as an offset to amounts due to the related supplier.
Property and Related Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and is included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease if a shorter period, and equipment is depreciated over three to ten years. The Company capitalizes internal use software development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use. Amortization of software begins when it is ready for its intended use, and is computed on a straight-line basis over the estimated useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the asset group's recorded value cannot be recovered from undiscounted future cash flows. Impairment losses, if any, would be measured based upon the difference between the carrying amount of an asset group and its fair value.
Goodwill and Intangible Assets
Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in conditions indicate an evaluation should be completed. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. The Company utilizes the income and market approaches to determine the fair value of reporting units. Evaluating impairment requires significant judgment by management, including estimated future operating results, estimated future cash flows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While the Company uses available information to prepare the estimates and evaluations, actual results could differ significantly.
The Company recognizes acquired identifiable intangible assets such as customer relationships, trade names, vendor relationships, and non-competition agreements apart from goodwill. Customer relationship identifiable intangibles are amortized using the sum-of-the-years-digits method or the expected cash flow method over estimated useful lives consistent with assumptions used in the determination of their value. Amortization of all other finite-lived identifiable intangible assets is computed using the straight-line method over the estimated period of benefit. Amortization of identifiable intangible assets is included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model. Identifiable intangible assets with indefinite lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed. The Company does not currently have any indefinite-lived identifiable intangible assets.
Self-Insurance Liabilities
The Company maintains business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. The Company accrues estimated losses including those incurred but not reported using actuarial calculations, models and assumptions based on historical loss experience. The Company also maintains a self-insured health benefits plan which provides medical benefits to U.S. based employees electing coverage under the plan. The Company estimates its reserve for all unpaid medical claims, including those incurred but not reported, based on historical experience, adjusted as necessary based upon management’s reasoned judgment.
Revenue Recognition
The Company primarily sells purchased products distributed through its network of service centers and recognizes revenue at a point in time when control of the product transfers to the customer, typically upon shipment from an Applied facility or directly from a supplier. For products that ship directly from suppliers to customers, Applied generally acts as the principal in the transaction and recognizes revenue on a gross basis. Revenue recognized over time is not significant. Revenue is measured as the amount of consideration expected to be received in exchange for the products and services provided, net of allowances for product returns, variable consideration, and any taxes collected from customers that will be remitted to governmental authorities. Shipping and handling costs are recognized in net sales when they are billed to the customer. The Company has elected to account for shipping and handling activities as fulfillment costs. There are no significant costs associated with obtaining customer contracts.
Payment terms with customers vary by the type and location of the customer and the products or services offered. The Company does not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant.
The Company’s products are generally sold with a right of return and may include variable consideration in the form of incentives, discounts, credits or rebates. Product returns are estimated based on historical return rates. The returns reserve was $9,772 and $9,883 at June 30, 2021 and June 30, 2020, respectively.
The Company estimates and recognizes variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to a customer. The Company records variable consideration as an adjustment to the transaction price in the period it
is incurred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant.
Shipping and Handling Costs
The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and administrative expense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expense were approximately $15,970, $19,620 and $24,090 for the fiscal years ended June 30, 2021, 2020 and 2019, respectively.
Income Taxes
Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. Uncertain tax positions meeting a more-likely-than-not recognition threshold are recognized in accordance with Accounting Standards Codification (ASC) Topic 740 - Income Taxes. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes.
Share-Based Compensation
Share-based compensation represents the cost related to share-based awards granted to employees under the 2019 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, or the 2007 Long-Term Performance Plan. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service period. Non-qualified stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and have ten-year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on the closing market price of Company common stock on the grant date.
Treasury Shares
Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital.
Derivatives
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Retirement Savings Plan
Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company’s expense for matching of employees’ 401(k) contributions was $3,945, $5,959 and $7,711 during 2021, 2020 and 2019, respectively.
Deferred Compensation Plans
The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.
Post-employment Benefit Plans
The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded:
Supplemental Executive Retirement Benefits Plan
The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011. The Company recorded net periodic benefit costs associated with the SERP of $401, $317, and $414 in fiscal 2021, 2020, and 2019, respectively. The Company expects to make payments of approximately $800 under the SERP in fiscal 2022 and 2023, and approximately $200 in fiscal 2024.
Key Executive Restoration Plan
In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $334, $189, and $400 of expense associated with this plan in fiscal 2021, 2020, and 2019, respectively.
Qualified Defined Benefit Retirement Plan
The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly employees at retirement. These employees did not participate in the Retirement Savings Plan. The benefits are based on length of service and date of retirement. The plan accruals were frozen as of April 16, 2018, and employees are permitted to participate in the Retirement Savings Plan, following that date. The Company recorded net periodic cost (benefits) associated with this plan of $46, $(116), and $(34) in fiscal 2021, 2020, and 2019, respectively
Retiree Health Care Benefits
The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees at no cost to the individual. The Company recorded net periodic benefits associated with these plans of $161, $257, and $418 in fiscal 2021, 2020, and 2019, respectively.
The Company has determined that the related disclosures under ASC Topic 715 - Compensation, Retirement Benefits, for these post-employment benefit plans are not material to the consolidated financial statements.
Leases
The Company leases facilities for certain service centers, warehouses, distribution centers and office space. The Company also leases office equipment and vehicles. All leases are classified as operating. The Company’s leases expire at various dates through 2031, with terms ranging from 1 year to 15 years. Many of the Company’s real estate leases contain renewal provisions to extend lease terms up to 5 years. The exercise of renewal options is solely at the Company’s discretion. The Company’s lease agreements do not contain material variable lease payments, residual value guarantees or restrictive covenants. The Company does not recognize right-of-use assets or lease liabilities for short-term leases with initial terms of 12 months or less. Leased vehicles comprise the majority of the Company’s short-term leases. All other leases are recorded on the balance sheet with right-of-use assets representing the right to use the underlying asset for the lease term and lease liabilities representing lease payment obligations. The Company’s leases do not provide implicit rates; therefore the Company uses its incremental borrowing rate as the discount rate for measuring lease liabilities. Non-lease components are accounted for separately from lease components. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, distribution and administrative expense on the statements of consolidated income.
Recently Adopted Accounting Guidance
Accounting for current expected credit losses
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. In November 2018, April 2019, May 2019, November 2019, and February 2020, the FASB issued ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11 and ASU 2020-02, respectively, which clarify the guidance in ASU 2016-13. The Company adopted the new guidance in the first quarter of fiscal 2021. The adoption of this guidance did not have a material impact on the Company's financial statements or related disclosures.
Recently Issued Accounting Guidance
In December 2019, the FASB issued its final standard on simplifying the accounting for income taxes. This standard, issued as ASU 2019-12, makes a number of changes meant to add or clarify guidance on accounting for income taxes. This update is effective for annual and interim financial statement periods beginning after December 15, 2020, with early adoption permitted in any interim period for which financial statements have not yet been filed. The Company has determined that this pronouncement will not have a material impact on its financial statements and related disclosures.
NOTE 2: REVENUE RECOGNITION
Disaggregation of Revenues
The following tables present the Company's net sales by reportable segment and by geographic areas based on the location of the facility shipping the product for the years ended June 30, 2021, 2020 and 2019. Other countries consist of Mexico, Australia, New Zealand, and Singapore.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2021
|
|
Service Center Based Distribution
|
Fluid Power & Flow Control
|
Total
|
Geographic Areas:
|
|
|
|
United States
|
$
|
1,768,965
|
|
$
|
1,013,894
|
|
$
|
2,782,859
|
|
Canada
|
255,360
|
|
—
|
|
255,360
|
|
Other countries
|
175,208
|
|
22,492
|
|
197,700
|
|
Total
|
$
|
2,199,533
|
|
$
|
1,036,386
|
|
$
|
3,235,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2020
|
|
Service Center Based Distribution
|
Fluid Power & Flow Control
|
Total
|
Geographic Areas:
|
|
|
|
United States
|
$
|
1,833,275
|
|
$
|
986,125
|
|
$
|
2,819,400
|
|
Canada
|
248,610
|
|
—
|
|
248,610
|
|
Other countries
|
160,064
|
|
17,578
|
|
177,642
|
|
Total
|
$
|
2,241,949
|
|
$
|
1,003,703
|
|
$
|
3,245,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2019
|
|
Service Center Based Distribution
|
Fluid Power & Flow Control
|
Total
|
Geographic Areas:
|
|
|
|
United States
|
$
|
2,009,479
|
|
$
|
1,007,280
|
|
$
|
3,016,759
|
|
Canada
|
271,305
|
|
—
|
|
271,305
|
|
Other countries
|
172,121
|
|
12,554
|
|
184,675
|
|
Total
|
$
|
2,452,905
|
|
$
|
1,019,834
|
|
$
|
3,472,739
|
|
The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the years ended June 30, 2021, 2020, and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2021
|
|
Service Center Based Distribution
|
|
Fluid Power & Flow Control
|
|
Total
|
General Industry
|
35.8
|
%
|
|
40.0
|
%
|
|
37.2
|
%
|
Industrial Machinery
|
9.8
|
%
|
|
26.8
|
%
|
|
15.2
|
%
|
Food
|
13.5
|
%
|
|
2.9
|
%
|
|
10.1
|
%
|
Metals
|
10.5
|
%
|
|
6.8
|
%
|
|
9.3
|
%
|
Forest Products
|
10.7
|
%
|
|
2.9
|
%
|
|
8.2
|
%
|
Chem/Petrochem
|
3.3
|
%
|
|
13.6
|
%
|
|
6.6
|
%
|
Cement & Aggregate
|
7.9
|
%
|
|
1.1
|
%
|
|
5.7
|
%
|
Transportation
|
4.6
|
%
|
|
4.8
|
%
|
|
4.7
|
%
|
Oil & Gas
|
3.9
|
%
|
|
1.1
|
%
|
|
3.0
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2020
|
|
Service Center Based Distribution
|
|
Fluid Power & Flow Control
|
|
Total
|
General Industry
|
35.0
|
%
|
|
41.2
|
%
|
|
36.8
|
%
|
Industrial Machinery
|
9.7
|
%
|
|
24.4
|
%
|
|
14.3
|
%
|
Food
|
12.2
|
%
|
|
3.1
|
%
|
|
9.4
|
%
|
Metals
|
11.1
|
%
|
|
7.2
|
%
|
|
9.9
|
%
|
Forest Products
|
9.3
|
%
|
|
3.7
|
%
|
|
7.6
|
%
|
Chem/Petrochem
|
3.3
|
%
|
|
13.4
|
%
|
|
6.4
|
%
|
Cement & Aggregate
|
7.3
|
%
|
|
1.0
|
%
|
|
5.4
|
%
|
Transportation
|
4.6
|
%
|
|
4.4
|
%
|
|
4.5
|
%
|
Oil & Gas
|
7.5
|
%
|
|
1.6
|
%
|
|
5.7
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2019
|
|
Service Center Based Distribution
|
|
Fluid Power & Flow Control
|
|
Total
|
General Industry
|
33.7
|
%
|
|
43.0
|
%
|
|
36.3
|
%
|
Industrial Machinery
|
10.4
|
%
|
|
21.8
|
%
|
|
13.8
|
%
|
Food
|
10.6
|
%
|
|
2.7
|
%
|
|
8.3
|
%
|
Metals
|
12.6
|
%
|
|
9.4
|
%
|
|
11.6
|
%
|
Forest Products
|
8.0
|
%
|
|
3.1
|
%
|
|
6.6
|
%
|
Chem/Petrochem
|
3.1
|
%
|
|
13.8
|
%
|
|
6.3
|
%
|
Cement & Aggregate
|
6.7
|
%
|
|
1.0
|
%
|
|
5.0
|
%
|
Transportation
|
4.8
|
%
|
|
3.1
|
%
|
|
4.3
|
%
|
Oil & Gas
|
10.1
|
%
|
|
2.1
|
%
|
|
7.8
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
The following tables present the Company’s percentage of revenue by reportable segment and product line for the years ended June 30, 2021, 2020, and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2021
|
|
Service Center Based Distribution
|
|
Fluid Power & Flow Control
|
|
Total
|
Power Transmission
|
37.3
|
%
|
|
7.5
|
%
|
|
27.8
|
%
|
Fluid Power
|
13.2
|
%
|
|
38.0
|
%
|
|
21.2
|
%
|
Bearings, Linear & Seals
|
29.0
|
%
|
|
0.4
|
%
|
|
19.8
|
%
|
General Maintenance; Hose Products
|
20.5
|
%
|
|
16.9
|
%
|
|
19.3
|
%
|
Specialty Flow Control
|
—
|
%
|
|
37.2
|
%
|
|
11.9
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2020
|
|
Service Center Based Distribution
|
|
Fluid Power & Flow Control
|
|
Total
|
Power Transmission
|
35.4
|
%
|
|
9.5
|
%
|
|
27.4
|
%
|
Fluid Power
|
13.4
|
%
|
|
39.0
|
%
|
|
21.3
|
%
|
Bearings, Linear & Seals
|
26.6
|
%
|
|
0.3
|
%
|
|
18.5
|
%
|
General Maintenance; Hose Products
|
24.6
|
%
|
|
11.7
|
%
|
|
20.6
|
%
|
Specialty Flow Control
|
—
|
%
|
|
39.5
|
%
|
|
12.2
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2019
|
|
Service Center Based Distribution
|
|
Fluid Power & Flow Control
|
|
Total
|
Power Transmission
|
33.9
|
%
|
|
1.6
|
%
|
|
24.4
|
%
|
Fluid Power
|
13.5
|
%
|
|
39.4
|
%
|
|
21.1
|
%
|
Bearings, Linear & Seals
|
27.5
|
%
|
|
0.3
|
%
|
|
19.5
|
%
|
General Maintenance; Hose Products
|
25.1
|
%
|
|
5.3
|
%
|
|
19.3
|
%
|
Specialty Flow Control
|
—
|
%
|
|
53.4
|
%
|
|
15.7
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Contract Assets
The Company’s contract assets consist of un-billed amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer.
Activity related to contract assets, which are included in other current assets on the consolidated balance sheet, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
June 30, 2020
|
$ Change
|
% Change
|
Contract assets
|
$
|
15,178
|
|
$
|
8,435
|
|
$
|
6,743
|
|
79.9
|
%
|
The difference between the opening and closing balances of the Company's contract assets primarily results from the timing difference between the Company's performance and when the customer is billed.
NOTE 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 2021 Acquisitions
On December 31, 2020, the Company acquired 100% of the outstanding shares of Gibson Engineering (Gibson), a Norwood, Massachusetts provider of automation products, services, and engineered solutions focused on machine vision, motion control, mobile and collaborative robotic solutions, intelligent sensors, and other related equipment. Gibson is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $15,450, net tangible assets acquired were $1,030, and intangible assets including goodwill were $14,420 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes $1,938 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the consolidated balance sheet as of June 30, 2021, and which will be paid on the first and second anniversaries of the acquisition date with interest at a fixed rate of 1.0% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
On October 5, 2020, the Company acquired substantially all of the net assets of Advanced Control Solutions (ACS), which operates four locations in Georgia, Tennessee and Alabama. ACS is a provider of automation products, services, and engineered solutions focused on machine vision equipment and software, mobile and collaborative robotic solutions, intelligent sensors, logic controllers, and other related equipment. ACS is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $17,867, net tangible assets acquired were $1,210, and intangible assets including goodwill were $16,657 based upon estimated fair values at the acquisition date. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
Fiscal 2020 Acquisitions
On August 21, 2019, the Company acquired 100% of the outstanding shares of Olympus Controls (Olympus), a
Portland, Oregon automation solutions provider - including design, assembly, integration, and distribution - of
motion control, machine vision, and robotic technologies. Olympus is included in the Fluid Power & Flow Control
segment. The purchase price for the acquisition was $36,642, net tangible assets acquired were $9,540, and
intangible assets including goodwill was $27,102 based upon estimated fair values at the acquisition date. The
Company funded this acquisition using available cash. The acquisition price and the results of operations for the
acquired entity are not material in relation to the Company's consolidated financial statements.
Fiscal 2019 Acquisitions
On March 4, 2019, the Company acquired substantially all of the net assets of MilRoc Distribution (MilRoc) and Woodward Steel (Woodward). MilRoc is an Oklahoma based distributor of oilfield specific products, namely pumps and valves, as well as equipment repair services and industrial parts to the oil & gas industry. Woodward is an Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc and Woodward are both included in the Service Center Based Distribution segment. The purchase price for the acquisition was $35,000, net tangible assets acquired were $17,788, and intangible assets including goodwill was $17,212 based upon estimated fair values at the acquisition date. The purchase price includes $4,375 of acquisition holdback payments, of which $1,244 and $1,666 were paid during fiscal 2021 and 2020, respectively. The remaining balance of $1,465 is included in other current liabilities on the consolidated balance sheet as of June 30, 2021, and which will be paid on the third anniversary of the acquisition date with interest at a fixed rate of 2.0% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
On November 2, 2018, the Company acquired substantially all of the net assets of Fluid Power Sales, Inc. (FPS), a Baldwinsville, New York based manufacturer and distributor of fluid power components, specializing in the engineering and fabrication of manifolds and power units. FPS is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $8,066, net tangible assets acquired were $4,151, and goodwill was $3,915 based upon estimated fair values at the acquisition date. The purchase price included $1,200 of acquisition holdback payments, of which $600 was paid during fiscal years 2021 and 2020. 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.
Holdback Liabilities for Acquisitions
Acquisition holdback payments of approximately $2,569 and $969 will be made in fiscal 2022 and 2023, respectively. The related liabilities for these payments are recorded in the consolidated balance sheets in other current liabilities for the amounts due in fiscal year 2022 and other liabilities for the amounts due in fiscal year 2023.
NOTE 4: INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2021
|
|
2020
|
U.S. inventories at average cost
|
|
$
|
387,456
|
|
|
$
|
431,866
|
|
Foreign inventories at average cost
|
|
126,945
|
|
|
112,795
|
|
|
|
514,401
|
|
|
544,661
|
|
Less: Excess of average cost over LIFO cost for U.S. inventories
|
|
151,854
|
|
|
155,511
|
|
Inventories on consolidated balance sheets
|
|
$
|
362,547
|
|
|
$
|
389,150
|
|
The overall impact of LIFO layer liquidations increased gross profit by $3,895, $1,990, and $112 in fiscal 2021, fiscal 2020, and fiscal 2019, respectively.
NOTE 5: GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for both the Service Center Based Distribution segment and the Fluid Power & Flow Control segment for the years ended June 30, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Center Based Distribution
|
|
Fluid Power & Flow Control
|
|
Total
|
Balance at July 1, 2019
|
$
|
213,634
|
|
|
$
|
448,357
|
|
|
$
|
661,991
|
|
Goodwill adjusted/acquired during the year
|
(3,393)
|
|
|
14,667
|
|
|
11,274
|
|
Impairment
|
—
|
|
|
(131,000)
|
|
|
(131,000)
|
|
Other, primarily currency translation
|
(1,671)
|
|
|
—
|
|
|
(1,671)
|
|
Balance at June 30, 2020
|
208,570
|
|
|
332,024
|
|
|
540,594
|
|
Goodwill acquired during the year
|
—
|
|
|
15,757
|
|
|
15,757
|
|
|
|
|
|
|
|
Other, primarily currency translation
|
3,726
|
|
|
—
|
|
|
3,726
|
|
Balance at June 30, 2021
|
$
|
212,296
|
|
|
$
|
347,781
|
|
|
$
|
560,077
|
|
The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2021. The Company concluded that seven (7) of the reporting units’ fair values exceeded their carrying amounts by at least 25% as of January 1, 2021. The fair value of the final reporting unit, which is comprised of the FCX Performance Inc. (FCX) operations, exceeded its carrying value by 14%. The FCX reporting unit has a goodwill balance of $309,012 as of June 30, 2021.
The Company had eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2020. The Company concluded that seven (7) of the reporting units’ fair values exceeded their carrying amounts by at least 10% as of January 1, 2020. Specifically, the Canada reporting unit's fair value exceeded its carrying value by 12%, and the Mexico reporting unit's fair value exceeded its carrying value by 14%. The carrying value of the final reporting unit, which is comprised of the FCX operations, exceeded the fair value, resulting in goodwill impairment of $131,000. The non-cash impairment charge was the result of the overall decline in the industrial economy, specifically slower demand in FCX's end markets, which led to reduced spending by customers and reduced revenue expectations.
The fair values of the reporting units in accordance with the goodwill impairment test were determined using the income and market approaches. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. The market approach utilizes an analysis of comparable publicly traded companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues, EBITDA, and multiples that are applied to management’s forecasted revenues and EBITDA estimates.
The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used.
Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the Company’s reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends; (ii) inability to achieve the sales from our strategic growth initiatives.
At June 30, 2021 and 2020, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment and $167,605 related to the Fluid Power & Flow Control segment.
The Company's identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
Amount
|
|
Accumulated
Amortization
|
|
Net
Book Value
|
Finite-Lived Intangibles:
|
|
|
|
|
|
Customer relationships
|
$
|
353,028
|
|
|
$
|
143,862
|
|
|
$
|
209,166
|
|
Trade names
|
104,780
|
|
|
37,626
|
|
|
67,154
|
|
Vendor relationships
|
11,469
|
|
|
9,859
|
|
|
1,610
|
|
Other
|
2,070
|
|
|
372
|
|
|
1,698
|
|
Total Intangibles
|
$
|
471,347
|
|
|
$
|
191,719
|
|
|
$
|
279,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Amount
|
|
Accumulated
Amortization
|
|
Net
Book Value
|
Finite-Lived Intangibles:
|
|
|
|
|
|
Customer relationships
|
$
|
426,017
|
|
|
$
|
162,965
|
|
|
$
|
263,052
|
|
Trade names
|
111,453
|
|
|
34,815
|
|
|
76,638
|
|
Vendor relationships
|
11,329
|
|
|
8,934
|
|
|
2,395
|
|
Other
|
2,078
|
|
|
948
|
|
|
1,130
|
|
Total Intangibles
|
$
|
550,877
|
|
|
$
|
207,662
|
|
|
$
|
343,215
|
|
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
During fiscal 2021, the Company acquired identifiable intangible assets with an acquisition cost allocation and weighted-average life as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Cost Allocation
|
|
Weighted-Average Life
|
Customer relationships
|
$
|
10,390
|
|
|
20.0
|
Trade names
|
3,840
|
|
|
15.0
|
Other
|
1,090
|
|
|
5.9
|
Total Intangibles Acquired
|
$
|
15,320
|
|
|
17.7
|
Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable.
The Company has three asset groups that have significant exposure to oil and gas end markets. Due to the prolonged economic downturn in these end markets, the Company determined during the second quarter of fiscal 2021 that certain carrying values may not be recoverable. The Company determined that an impairment existed in two of the three asset groups as the asset groups' carrying values exceeded the sum of the undiscounted cash flows. The fair values of the long-lived assets were then determined using the income approach, and the analyses resulted in the measurement of an intangible asset impairment loss of $45,033, which was recorded during the second quarter of fiscal 2021, as the fair value of the intangible assets was determined to be zero. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, EBITDA, and discount rates. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used. The analyses of these asset groups also resulted in a fixed asset impairment loss and leased asset impairment loss of $1,983 and $2,512, respectively, which were recorded during the second quarter of fiscal 2021. Sustained significant softness in certain end market concentrations could result in impairment of certain intangible assets in future periods.
Amortization of identifiable intangibles totaled $34,365, $41,553 and $41,883 in fiscal 2021, 2020 and 2019, respectively, and is included in selling, distribution and administrative expense in the statements of consolidated income. Future amortization expense based on the Company’s identifiable intangible assets as of June 30, 2021 is estimated to be $31,400 for 2022, $29,500 for 2023, $25,800 for 2024, $23,600 for 2025 and $21,900 for 2026.
NOTE 6: DEBT
A summary of long-term debt, including the current portion, follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
2021
|
|
2020
|
Term Loan
|
$
|
550,250
|
|
|
$
|
589,250
|
|
Trade receivable securitization facility
|
188,300
|
|
|
175,000
|
|
Series C Notes
|
40,000
|
|
|
120,000
|
|
Series D Notes
|
25,000
|
|
|
25,000
|
|
Series E Notes
|
25,000
|
|
|
25,000
|
|
Other
|
846
|
|
|
1,026
|
|
Total debt
|
$
|
829,396
|
|
|
$
|
935,276
|
|
Less: unamortized debt issuance costs
|
1,016
|
|
|
1,487
|
|
|
$
|
828,380
|
|
|
$
|
933,789
|
|
Revolving Credit Facility & Term Loan
In January 2018, the Company refinanced its existing credit facility and entered into a new five-year credit facility with a group of banks expiring in January 2023. This agreement provides for a $780,000 unsecured term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range from 0.10% to 0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. The Company had no amount outstanding under the revolver as of June 30, 2021 and June 30, 2020. Unused lines under this facility, net of outstanding letters of credit of $200 and $1,873, respectively, to secure certain insurance obligations, totaled $249,800 and $248,127 at June 30, 2021 and June 30, 2020, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.88% and 1.94% as of June 30, 2021 and June 30, 2020, respectively.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving
credit agreement, in the amount of $4,540 and $4,475 as of June 30, 2021 and June 30, 2020, respectively, in
order to secure certain insurance obligations.
Trade Receivable Securitization Facility
In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021. On March 26, 2021, the Company amended the AR Securitization Facility to expand the eligible receivables, which increased the maximum availability to $250,000 and increased the drawn fees on the AR Securitization Facility to 0.98% per year. Availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the $250,000 of funding available under the AR Securitization Facility. The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the U.S. operations’ trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. Borrowings under this facility carry variable interest rates tied to LIBOR. The interest rate on the AR Securitization Facility as of June 30, 2021 and June 30, 2020 was 1.20% and 1.07%, respectively. The termination date of the AR Securitization is now March 26, 2024.
Unsecured Shelf Facility
At June 30, 2021 and June 30, 2020, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $90,000 and $170,000, 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 C" notes, which had an original principal amount of $120,000, carry a fixed interest rate of 3.19%. During Fiscal 2021, two principal payments of $40,000 each were made on the "Series C" notes and the remaining balance of $40,000 is due in July 2022. The "Series D" notes have a remaining principal amount of $25,000, carry a fixed interest rate of 3.21%, and are due in October 2023. The "Series E" notes have a principal amount of $25,000, carry a fixed interest rate of 3.08%, and are due in October 2024.
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, maturing in May 2024.
The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing arrangements for each of the next five years:
|
|
|
|
|
|
Fiscal Year
|
Aggregate Maturity
|
2022
|
$
|
44,118
|
|
2023
|
546,622
|
|
2024
|
213,551
|
|
2025
|
25,105
|
|
|
|
|
|
Covenants
The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2021, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At June 30, 2021, the Company's net indebtedness was less than 2.5 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at June 30, 2021.
NOTE 7: DERIVATIVES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
In January 2019, the Company entered into an interest rate swap to mitigate variability in forecasted interest payments on $463,000 of the Company’s U.S. dollar-denominated unsecured variable rate debt. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. During the quarter ended December 31, 2020, the Company completed a transaction to amend and extend the interest rate swap agreement which resulted in an extension of the maturity date by an additional three years and a decrease of the weighted average fixed pay rate from 2.61% to 1.63%. The new pay-fixed interest rate swap is considered a hybrid instrument with a financing component and an embedded at-market derivative that was designated as a cash flow hedge. The interest rate swap converts $420,000 of variable rate debt to a rate of 3.38% as of June 30, 2021. The interest rate swap converted $431,000 of variable rate debt to a rate of 4.36% as of June 30, 2020. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $14,346 and $26,179 as of June 30, 2021 and June 30, 2020, respectively, which is included in other current liabilities and other liabilities in the consolidated balance sheet. Amounts reclassified from other comprehensive income (loss), before tax to interest expense, net totaled $11,553 and $4,638 for the years ended June 30, 2021 and 2020, respectively.
NOTE 8: FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at June 30, 2021 and June 30, 2020 totaled $16,844 and $12,259, respectively. The majority of these marketable securities are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable securities are included in other assets on the consolidated balance sheets and their fair values were valued using quoted market prices (Level 1 in the fair value hierarchy).
As of June 30, 2021, the carrying value of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximates fair value (Level 2 in the fair value hierarchy).
The revolving credit facility and the term loan contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).
NOTE 9: INCOME TAXES
Income Before Income Taxes
The components of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
2021
|
|
2020
|
|
2019
|
U.S.
|
$
|
152,202
|
|
|
$
|
36,161
|
|
|
$
|
204,462
|
|
Foreign
|
24,860
|
|
|
19,075
|
|
|
(9,981)
|
|
Income before income taxes
|
$
|
177,062
|
|
|
$
|
55,236
|
|
|
$
|
194,481
|
|
Provision
The provision (benefit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
2021
|
|
2020
|
|
2019
|
Current:
|
|
|
|
|
|
Federal
|
$
|
46,685
|
|
|
$
|
31,149
|
|
|
$
|
34,437
|
|
State and local
|
11,035
|
|
|
7,580
|
|
|
7,965
|
|
Foreign
|
5,665
|
|
|
5,757
|
|
|
5,718
|
|
Total current
|
63,385
|
|
|
44,486
|
|
|
48,120
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(24,168)
|
|
|
(8,594)
|
|
|
6,265
|
|
State and local
|
(4,740)
|
|
|
(3,098)
|
|
|
1,947
|
|
Foreign
|
(2,172)
|
|
|
(1,600)
|
|
|
(5,844)
|
|
Total deferred
|
(31,080)
|
|
|
(13,292)
|
|
|
2,368
|
|
Total
|
$
|
32,305
|
|
|
$
|
31,194
|
|
|
$
|
50,488
|
|
During the third quarter of fiscal 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in the U.S. As a result of the CARES Act, the Company recorded a $1,000 tax benefit related to the carryback of a tax net operating loss incurred in a year in which the U.S. federal corporate income tax rate was 21% to a year in which the U.S. federal corporate income tax rate was higher.
Effective Tax Rates
The following reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
2021
|
|
2020
|
|
2019
|
Statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
Effects of:
|
|
|
|
|
|
State and local taxes
|
3.2
|
|
|
6.4
|
|
|
4.4
|
|
U.S. federal tax reform/CARES Act NOL carryback
|
—
|
|
|
(1.8)
|
|
|
(0.3)
|
|
Goodwill impairment
|
—
|
|
|
31.4
|
|
|
—
|
|
Stock compensation
|
(2.5)
|
|
|
(1.3)
|
|
|
(0.5)
|
|
GILTI/FDII
|
0.1
|
|
|
3.6
|
|
|
0.7
|
|
R & D credit
|
(1.5)
|
|
|
(1.2)
|
|
|
(0.4)
|
|
U.S. tax on foreign income, net
|
(0.5)
|
|
|
(3.1)
|
|
|
0.5
|
|
Impact of foreign operations
|
—
|
|
|
1.6
|
|
|
(0.6)
|
|
Non-deductibles/Deductible dividend
|
—
|
|
|
0.6
|
|
|
0.4
|
|
Interest deduction
|
(1.1)
|
|
|
(4.0)
|
|
|
(1.2)
|
|
Valuation allowance
|
0.1
|
|
|
2.6
|
|
|
2.9
|
|
Other, net
|
(0.6)
|
|
|
0.7
|
|
|
(0.9)
|
|
Effective income tax rate
|
18.2
|
%
|
|
56.5
|
%
|
|
26.0
|
%
|
Consolidated Balance Sheets
Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
2021
|
|
2020
|
Deferred tax assets:
|
|
|
|
Compensation liabilities not currently deductible
|
$
|
17,436
|
|
|
$
|
17,252
|
|
Other expenses and reserves not currently deductible
|
18,676
|
|
|
15,272
|
|
|
|
|
|
Leases
|
23,126
|
|
|
24,016
|
|
|
|
|
|
Net operating loss carryforwards
|
9,262
|
|
|
8,859
|
|
Hedging instrument
|
2,794
|
|
|
6,406
|
|
Other
|
799
|
|
|
757
|
|
Total deferred tax assets
|
$
|
72,093
|
|
|
$
|
72,562
|
|
Less: Valuation allowance
|
(8,542)
|
|
|
(7,494)
|
|
Deferred tax assets, net of valuation allowance
|
$
|
63,551
|
|
|
$
|
65,068
|
|
Deferred tax liabilities:
|
|
|
|
Inventories
|
$
|
(9,215)
|
|
|
$
|
(8,284)
|
|
Goodwill and intangibles
|
(38,534)
|
|
|
(58,506)
|
|
Leases
|
(22,475)
|
|
|
(23,407)
|
|
Depreciation and differences in property bases
|
(6,214)
|
|
|
(13,018)
|
|
Total deferred tax liabilities
|
(76,438)
|
|
|
(103,215)
|
|
Net deferred tax liabilities
|
$
|
(12,887)
|
|
|
$
|
(38,147)
|
|
Net deferred tax liabilities are classified as follows:
|
|
|
|
Other assets
|
$
|
6,373
|
|
|
$
|
4,749
|
|
Other liabilities
|
(19,260)
|
|
|
(42,896)
|
|
Net deferred tax liabilities
|
$
|
(12,887)
|
|
|
$
|
(38,147)
|
|
As of June 30, 2021 and 2020, the Company had foreign net operating loss carryforwards of approximately $35,415 and $29,584, respectively, the tax benefit of which is approximately $8,445 and $7,929, respectively. These loss carryforwards will expire at various dates beginning in 2033. Also, as of June 30, 2021 and 2020, the Company had state net operating loss carryforwards, the tax benefit of which is approximately $1,034 and $1,177 respectively, which will expire at various dates beginning in 2027.
Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory tax rates and future income levels. During the years ended June 30, 2021 and 2020, the Company recorded a valuation allowance of $267 and $2,124, respectively, related to certain deferred tax assets in Canada due to the uncertainty in realizing these net deferred tax assets. The total valuation allowance provided against the deferred tax assets in Canada is $8,498 and $7,450 as of June 30, 2021 and 2020, respectively.
As of June 30, 2021, the Company had accumulated undistributed earnings of non-U.S. subsidiaries of approximately $121,463. The vast majority of such earnings have previously been subjected to the one-time transition tax or the Global Intangible Low Taxed Income ("GILTI") inclusion. Therefore, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign withholding and state income taxes. In addition, we expect foreign tax credits would be available to either offset or partially reduce the tax cost in the event of a distribution. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.
Unrecognized Income Tax Benefits
The Company and its subsidiaries file income tax returns in U.S. federal, various state, local and foreign jurisdictions. The following table sets forth the changes in the amount of unrecognized tax benefits for the years ended June 30, 2021, 2020, and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
2021
|
|
2020
|
|
2019
|
Unrecognized Income Tax Benefits at beginning of the year
|
$
|
4,955
|
|
|
$
|
4,979
|
|
|
$
|
3,988
|
|
Current year tax positions
|
285
|
|
|
105
|
|
|
105
|
|
Prior year tax positions
|
620
|
|
|
177
|
|
|
1,151
|
|
Expirations of statutes of limitations
|
(630)
|
|
|
(306)
|
|
|
(265)
|
|
|
|
|
|
|
|
Unrecognized Income Tax Benefits at end of year
|
$
|
5,230
|
|
|
$
|
4,955
|
|
|
$
|
4,979
|
|
The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. During 2021, 2020, and 2019, the Company recognized $144, $256, and $161 of expense, respectively, for interest and penalties related to unrecognized income tax benefits in its statements of consolidated income. The Company had a liability for penalties and interest of $1,238, $1,094, and $838 as of June 30, 2021, 2020, and 2019, respectively. The Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next twelve months. Included in the balance of unrecognized income tax benefits at June 30, 2021, 2020, and 2019 are $4,986, $4,708, and $4,701 respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
The Company is subject to U.S. federal income tax examinations for the tax years 2018 through 2021 and to state and local income tax examinations for the tax years 2015 through 2021. In addition, the Company is subject to foreign income tax examinations for the tax years 2014 through 2021.
The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment of cash is not expected within one year, or as a reduction of a deferred tax asset.
NOTE 10: SHAREHOLDERS’ EQUITY
Treasury Shares
At June 30, 2021, 128 shares of the Company’s common stock held as treasury shares were restricted as collateral under escrow arrangements relating to change in control and director and officer indemnification agreements.
Accumulated Other Comprehensive Loss
Changes in the accumulated other comprehensive loss for the years ended June 30, 2021, 2020, and 2019, are comprised of the following amounts, shown net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
Unrealized gain (loss) on securities available for sale
|
|
Post-employment benefits
|
|
Cash flow hedge
|
|
Total accumulated other comprehensive loss
|
Balance at July 1, 2018
|
$
|
(87,974)
|
|
|
$
|
50
|
|
|
$
|
(2,299)
|
|
|
$
|
—
|
|
|
$
|
(90,223)
|
|
Other comprehensive income (loss)
|
1,644
|
|
|
—
|
|
|
(327)
|
|
|
(10,887)
|
|
|
(9,570)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
(226)
|
|
|
183
|
|
|
(43)
|
|
Cumulative effect of adopting accounting standards
|
—
|
|
|
(50)
|
|
|
—
|
|
|
—
|
|
|
(50)
|
|
Net current-period other comprehensive income (loss)
|
1,644
|
|
|
(50)
|
|
|
(553)
|
|
|
(10,704)
|
|
|
(9,663)
|
|
Balance at June 30, 2019
|
(86,330)
|
|
|
—
|
|
|
(2,852)
|
|
|
(10,704)
|
|
|
(99,886)
|
|
Other comprehensive loss
|
(18,764)
|
|
|
—
|
|
|
(1,662)
|
|
|
(12,572)
|
|
|
(32,998)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
(50)
|
|
|
3,504
|
|
|
3,454
|
|
Net current-period other comprehensive loss
|
(18,764)
|
|
|
—
|
|
|
(1,712)
|
|
|
(9,068)
|
|
|
(29,544)
|
|
Balance at June 30, 2020
|
(105,094)
|
|
|
—
|
|
|
(4,564)
|
|
|
(19,772)
|
|
|
(129,430)
|
|
Other comprehensive income
|
24,256
|
|
|
—
|
|
|
687
|
|
|
2,480
|
|
|
27,423
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
204
|
|
|
8,711
|
|
|
8,915
|
|
Net current-period other comprehensive income
|
24,256
|
|
|
—
|
|
|
891
|
|
|
11,191
|
|
|
36,338
|
|
Balance at June 30, 2021
|
$
|
(80,838)
|
|
|
$
|
—
|
|
|
$
|
(3,673)
|
|
|
$
|
(8,581)
|
|
|
$
|
(93,092)
|
|
Other Comprehensive Loss
Details of other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
2021
|
|
2020
|
|
2019
|
|
Pre-Tax Amount
|
|
Tax Expense
|
|
Net Amount
|
|
Pre-Tax Amount
|
|
Tax Expense (Benefit)
|
|
Net Amount
|
|
Pre-Tax Amount
|
|
Tax Expense (Benefit)
|
|
Net Amount
|
Foreign currency translation adjustments
|
$
|
24,352
|
|
|
$
|
96
|
|
|
$
|
24,256
|
|
|
$
|
(18,499)
|
|
|
$
|
265
|
|
|
$
|
(18,764)
|
|
|
$
|
2,021
|
|
|
$
|
377
|
|
|
$
|
1,644
|
|
Post-employment benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain (loss) on re-measurement
|
903
|
|
|
216
|
|
|
687
|
|
|
(2,192)
|
|
|
(530)
|
|
|
(1,662)
|
|
|
(372)
|
|
|
(45)
|
|
|
(327)
|
|
Reclassification of actuarial losses (gains) and prior service cost into other income, net and included in net periodic pension costs
|
270
|
|
|
66
|
|
|
204
|
|
|
(66)
|
|
|
(16)
|
|
|
(50)
|
|
|
(306)
|
|
|
(80)
|
|
|
(226)
|
|
Unrealized gain (loss) on cash flow hedge
|
3,250
|
|
|
770
|
|
|
2,480
|
|
|
(16,615)
|
|
|
(4,043)
|
|
|
(12,572)
|
|
|
(14,446)
|
|
|
(3,559)
|
|
|
(10,887)
|
|
Reclassification of interest from cash flow hedge into interest expense
|
11,553
|
|
|
2,842
|
|
|
8,711
|
|
|
4,638
|
|
|
1,134
|
|
|
3,504
|
|
|
244
|
|
|
61
|
|
|
183
|
|
Cumulative effect of adopting accounting standard
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(50)
|
|
|
—
|
|
|
(50)
|
|
Other comprehensive loss
|
$
|
40,328
|
|
|
$
|
3,990
|
|
|
$
|
36,338
|
|
|
$
|
(32,734)
|
|
|
$
|
(3,190)
|
|
|
$
|
(29,544)
|
|
|
$
|
(12,909)
|
|
|
$
|
(3,246)
|
|
|
$
|
(9,663)
|
|
Net Income Per Share
Basic net income per share is based on the weighted-average number of common shares outstanding. Diluted net income per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing net income per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include Restricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury stock method and the two-class method. For the years presented there were no material differences in the net income per share amounts calculated using the two methods. Accordingly, the treasury stock method is disclosed below.
The following table presents amounts used in computing net income per share and the effect on the weighted-average number of shares of dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
2021
|
|
2020
|
|
2019
|
Net Income
|
$
|
144,757
|
|
|
$
|
24,042
|
|
|
$
|
143,993
|
|
Average Shares Outstanding:
|
|
|
|
|
|
Weighted-average common shares outstanding for basic computation
|
38,758
|
|
|
38,658
|
|
|
38,670
|
|
Dilutive effect of potential common shares
|
538
|
|
|
341
|
|
|
490
|
|
Weighted-average common shares outstanding for dilutive computation
|
39,296
|
|
|
38,999
|
|
|
39,160
|
|
Net Income Per Share — Basic
|
$
|
3.73
|
|
|
$
|
0.62
|
|
|
$
|
3.72
|
|
Net Income Per Share — Diluted
|
$
|
3.68
|
|
|
$
|
0.62
|
|
|
$
|
3.68
|
|
Stock awards relating to 234, 726 and 226 shares of common stock were outstanding at June 30, 2021, 2020 and 2019, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.