APPLIED INDUSTRIAL TECHNOLOGIES INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Applied Industrial Technologies, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2022 and 2021, the related statements of consolidated income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2022, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 12, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates . Goodwill - Fluid Power & Flow Control Segment - Refer to Notes 1 and 5 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the income and market approaches. The determination of the fair value using the income approach requires management to make significant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. The determination of the fair value using the market approach requires management to make significant estimates and assumptions related to the forecasts of future revenues, EBITDA and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The goodwill balance was $563.2 million as of June 30, 2022, of which $352.2 million related to reporting units within the Fluid Power & Flow Control segment. The fair value of all reporting units exceeded their carrying value by at least 25% as of the measurement date and, therefore, no impairment was recognized . 29 Table of Contents Given the nature of one of the reporting unit’s operations within the Fluid Power & Flow Control segment, the sensitivity of the reporting unit to changes in the economy, the reporting unit’s historical performance as compared to projections, and the difference between its fair value and the carrying value, auditing management’s judgments regarding forecasts of future revenues and EBITDA, as well as selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates for the reporting unit, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists . How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the forecasts of future revenues and EBITDA (“forecasts”), and the selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates (“market multiples”) for this reporting unit within the Fluid Power & Flow Control segment included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, such as controls related to management’s forecasts and the selection of the discount rate and market multiples used. • We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in industry reports for the various industries the reporting unit operates within. • With the assistance of our fair value specialists, we evaluated the discount rate, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rate selected by management. • With the assistance of our fair value specialists, we evaluated the market multiples by evaluating the selected comparable publicly traded companies and the adjustments made for differences in growth prospects and risk profiles between the reporting unit and the comparable publicly traded companies. We tested the underlying source information and mathematical accuracy of the calculations. • With the assistance of our fair value specialists, we evaluated the fair value of the reporting unit based upon reconciling the fair value of the reporting unit to the market capitalization of the Company. /s/ Deloitte & Touche LLP Cleveland, Ohio August 12, 2022 We have served as the Company's auditor since 1966. 30 Table of Contents STATEMENTS OF CONSOLIDATED INCOME (In thousands, except per share amounts) Year Ended June 30, 2022 2021 2020 Net sales $ 3,810,676 $ 3,235,919 $ 3,245,652 Cost of sales 2,703,760 2,300,395 2,307,916 Gross profit 1,106,916 935,524 937,736 Selling, distribution and administrative expense, including depreciation 749,058 680,542 717,747 Impairment expense — 49,528 131,000 Operating income 357,858 205,454 88,989 Interest expense 26,785 30,807 37,264 Interest income ( 522 ) ( 215 ) ( 729 ) Other expense (income), net 1,805 ( 2,200 ) ( 2,782 ) Income before income taxes 329,790 177,062 55,236 Income tax expense 72,376 32,305 31,194 Net income $ 257,414 $ 144,757 $ 24,042 Net income per share — basic $ 6.69 $ 3.73 $ 0.62 Net income per share — diluted $ 6.58 $ 3.68 $ 0.62 See notes to consolidated financial statements. 31 Table of Contents STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (In thousands) Year Ended June 30, 2022 2021 2020 Net income per the statements of consolidated income $ 257,414 $ 144,757 $ 24,042 Other comprehensive income (loss), before tax: Foreign currency translation adjustments ( 9,862 ) 24,352 ( 18,499 ) Post-employment benefits: Actuarial gain (loss) on re-measurement 2,839 903 ( 2,192 ) Reclassification of actuarial losses (gains) and prior service cost into other expense (income), net and included in net periodic pension costs 300 270 ( 66 ) Unrealized gain (loss) on cash flow hedge 26,204 3,250 ( 16,615 ) Reclassification of interest from cash flow hedge into interest expense 11,361 11,553 4,638 Total other comprehensive income (loss), before tax 30,842 40,328 ( 32,734 ) Income tax expense (benefit) related to items of other comprehensive loss 10,045 3,990 ( 3,190 ) Other comprehensive income (loss), net of tax 20,797 36,338 ( 29,544 ) Comprehensive income (loss) $ 278,211 $ 181,095 $ ( 5,502 ) See notes to consolidated financial statements. 32 Table of Contents CONSOLIDATED BALANCE SHEETS (In thousands) June 30, 2022 2021 Assets Current assets Cash and cash equivalents $ 184,474 $ 257,745 Accounts receivable, net 656,429 516,322 Inventories 449,821 362,547 Other current assets 68,805 59,961 Total current assets 1,359,529 1,196,575 Property — at cost Land 14,319 14,399 Buildings 108,119 107,142 Equipment, including computers and software 204,473 198,374 Total property — at cost 326,911 319,915 Less accumulated depreciation 215,015 204,326 Property — net 111,896 115,589 Operating lease assets, net 108,052 87,111 Identifiable intangibles, net 250,590 279,628 Goodwill 563,205 560,077 Other assets 59,316 32,827 Total Assets $ 2,452,588 $ 2,271,807 Liabilities Current liabilities Accounts payable $ 259,463 $ 208,162 Current portion of long-term debt 40,174 43,525 Compensation and related benefits 91,166 77,657 Other current liabilities 108,824 98,356 Total current liabilities 499,627 427,700 Long-term debt 649,150 784,855 Other liabilities 154,456 126,706 Total Liabilities 1,303,233 1,339,261 Shareholders’ Equity Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding — — Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,499 and 38,516 shares outstanding, respectively 10,000 10,000 Additional paid-in capital 183,822 177,014 Retained earnings 1,499,676 1,294,413 Treasury shares — at cost ( 15,714 and 15,697 shares, respectively) ( 471,848 ) ( 455,789 ) Accumulated other comprehensive loss ( 72,295 ) ( 93,092 ) Total Shareholders’ Equity 1,149,355 932,546 Total Liabilities and Shareholders’ Equity $ 2,452,588 $ 2,271,807 See notes to consolidated financial statements. 33 Table of Contents STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands) Year Ended June 30, 2022 2021 2020 Cash Flows from Operating Activities Net income $ 257,414 $ 144,757 $ 24,042 Adjustments to reconcile net income to net cash provided by operating activities: Impairment Expense — 49,528 131,000 Depreciation and amortization of property 21,676 20,780 21,196 Amortization of intangibles 31,879 34,365 41,553 Amortization of stock appreciation rights and options 3,284 2,526 2,954 Deferred income taxes 15,176 ( 31,080 ) ( 13,292 ) Provision for losses on accounts receivable 3,193 6,540 14,055 Other share-based compensation expense 8,558 6,454 4,000 Other ( 1,752 ) 1,446 ( 2,514 ) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ( 145,519 ) ( 59,119 ) 74,437 Inventories ( 92,425 ) 41,318 57,028 Other operating assets ( 4,982 ) ( 5,262 ) ( 5,268 ) Accounts payable 53,597 10,919 ( 53,856 ) Other operating liabilities 37,471 18,525 1,379 Cash provided by Operating Activities 187,570 241,697 296,714 Cash Flows from Investing Activities Cash paid for acquisition of businesses, net of cash acquired ( 6,964 ) ( 30,230 ) ( 37,237 ) Capital expenditures ( 18,124 ) ( 15,852 ) ( 20,115 ) Proceeds from property sales 1,107 1,152 1,948 Life insurance proceeds 3,158 — — Cash payments for loans on company-owned life insurance ( 14,835 ) — — Cash used in Investing Activities ( 35,658 ) ( 44,930 ) ( 55,404 ) Cash Flows from Financing Activities Net borrowings under revolving credit facility 410,592 — — Borrowings under long-term debt facilities — 26,000 25,000 Long-term debt repayments ( 550,493 ) ( 131,883 ) ( 49,553 ) Interest rate swap settlement payments ( 5,703 ) ( 3,737 ) — Payment of debt issuance costs ( 1,956 ) ( 399 ) ( 95 ) Purchases of treasury shares ( 13,784 ) ( 40,089 ) — Dividends paid ( 51,805 ) ( 50,664 ) ( 48,873 ) Acquisition holdback payments ( 2,361 ) ( 2,345 ) ( 2,440 ) Exercise of stock appreciation rights and options 555 163 330 Taxes paid for shares withheld ( 8,074 ) ( 10,083 ) ( 2,607 ) Cash used in Financing Activities ( 223,029 ) ( 213,037 ) ( 78,238 ) Effect of exchange rate changes on cash ( 2,154 ) 5,464 ( 2,740 ) (Decrease) increase in cash and cash equivalents ( 73,271 ) ( 10,806 ) 160,332 Cash and cash equivalents at beginning of year 257,745 268,551 108,219 Cash and Cash Equivalents at End of Year $ 184,474 $ 257,745 $ 268,551 Supplemental Cash Flow Information Cash paid during the year for: Income taxes $ 53,301 $ 64,394 $ 41,162 Interest $ 20,164 $ 27,492 $ 36,648 See notes to consolidated financial statements. 34 Table of Contents STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands) For the Years Ended June 30, 2022, 2021 and 2020 Shares of Common Stock Outstanding Common Stock Additional Paid-In Capital Retained Earnings Treasury Shares- at Cost Accumulated Other Comprehensive Loss Total Shareholders' Equity Balance at June 30, 2019 38,597 $ 10,000 $ 172,931 $ 1,229,148 $ ( 415,159 ) $ ( 99,886 ) $ 897,034 Net income 24,042 24,042 Other comprehensive income (loss) ( 29,544 ) ( 29,544 ) Cumulative effect of adopting accounting standards ( 3,275 ) ( 3,275 ) Cash dividends — $ 1.26 per share ( 49,305 ) ( 49,305 ) Treasury shares issued for: Exercise of stock appreciation rights and options 43 ( 730 ) 71 ( 659 ) Performance share awards 36 ( 1,540 ) 362 ( 1,178 ) Restricted stock units 17 ( 671 ) 213 ( 458 ) Compensation expense — stock appreciation rights and options 2,954 2,954 Other share-based compensation expense 4,000 4,000 Other 17 ( 452 ) ( 40 ) 423 ( 69 ) Balance at June 30, 2020 38,710 10,000 176,492 1,200,570 ( 414,090 ) ( 129,430 ) 843,542 Net income 144,757 144,757 Other comprehensive income (loss) 36,338 36,338 Cash dividends — $ 1.30 per share ( 50,992 ) ( 50,992 ) Purchases of common stock for treasury ( 400 ) ( 40,089 ) ( 40,089 ) Treasury shares issued for: Exercise of stock appreciation rights and options 152 ( 6,379 ) ( 2,009 ) ( 8,388 ) Performance share awards 22 ( 985 ) ( 20 ) ( 1,005 ) Restricted stock units 19 ( 740 ) 95 ( 645 ) Compensation expense — stock appreciation rights and options 2,526 2,526 Other share-based compensation expense 6,454 6,454 Other 13 ( 354 ) 78 324 48 Balance at June 30, 2021 38,516 10,000 177,014 1,294,413 ( 455,789 ) ( 93,092 ) 932,546 Net income 257,414 257,414 Other comprehensive income (loss) 20,797 20,797 Cash dividends — $ 1.34 per share ( 52,175 ) ( 52,175 ) Purchases of common stock for treasury ( 149 ) ( 13,784 ) ( 13,784 ) Treasury shares issued for: Exercise of stock appreciation rights and options 104 ( 3,945 ) ( 2,132 ) ( 6,077 ) Performance share awards 5 ( 222 ) ( 73 ) ( 295 ) Restricted stock units 12 ( 598 ) ( 138 ) ( 736 ) Compensation expense — stock appreciation rights and options 3,284 3,284 Other share-based compensation expense 8,558 8,558 Other 11 ( 269 ) 24 68 ( 177 ) Balance at June 30, 2022 38,499 $ 10,000 $ 183,822 $ 1,499,676 $ ( 471,848 ) $ ( 72,295 ) $ 1,149,355 See notes to consolidated financial statements. 35 Table of Contents 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 income (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 expense (income), net. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. Marketable Securities The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other expense (income), net in the statements of consolidated income. Concentration of Credit Risk The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and Singapore. As such, the Company does not believe that a significant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While the Company monitors the creditworthiness of these institutions, a crisis in the financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand. Accounts Receivable Accounts receivable are stated at their estimated net realizable value and consist of amounts billed or billable and currently due from customers. Allowances for Doubtful Accounts 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. 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 36 Table of Contents 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 $ 17,522 and $ 16,455 at June 30, 2022 and June 30, 2021, 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, 2022, approximately 15.7 % 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. 37 Table of Contents 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 $ 10,522 and $ 9,772 at June 30, 2022 and June 30, 2021, 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 38 Table of Contents 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 $ 17,890 , $ 15,970 and $ 19,620 for the fiscal years ended June 30, 2022, 2021 and 2020, 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, or the 2011 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 suspended the 401(k) match starting in the fourth quarter of 2020 and restored it in the third quarter of fiscal 2021. The Company’s expense for matching of employees’ 401(k) contributions was $ 9,149 , $ 3,945 and $ 5,959 during 2022, 2021 and 2020, respectively. 39 Table of Contents 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 $ 450 , $ 401 , and $ 317 in fiscal 2022 , 2021 , and 2020, respectively. The Company expects to make payments of approximately $ 800 under the SERP in fiscal 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 $ 514 , $ 334 , and $ 189 of expense associated with this plan in fiscal 2022 , 2021 , and 2020, 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 $ 282 , $ 46 , and $( 116 ) in fiscal 2022 , 2021 , and 2020, 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 $ 123 , $ 161 , and $ 257 in fiscal 2022 , 2021 , and 2020, 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 2032, 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. 40 Table of Contents 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, 2022, 2021 and 2020. Other countries consist of Mexico, Australia, New Zealand, and Singapore. Year Ended June 30, 2022 Service Center Based Distribution Fluid Power & Flow Control Total Geographic Areas: United States $ 2,081,566 $ 1,218,184 $ 3,299,750 Canada 291,530 — 291,530 Other Countries 192,508 26,888 219,396 Total $ 2,565,604 $ 1,245,072 $ 3,810,676 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 The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the years ended June 30, 2022, 2021, and 2020: Year Ended June 30, 2022 Service Center Based Distribution Fluid Power & Flow Control Total General Industry 34.9 % 40.1 % 36.7 % Industrial Machinery 10.3 % 28.3 % 16.2 % Metals 11.2 % 7.4 % 9.9 % Food 12.6 % 2.5 % 9.3 % Forest Products 10.8 % 2.4 % 8.0 % Chem/Petrochem 3.1 % 13.8 % 6.6 % Cement & Aggregate 7.6 % 1.0 % 5.5 % Oil & Gas 5.4 % 1.2 % 4.0 % Transportation 4.1 % 3.3 % 3.8 % Total 100.0 % 100.0 % 100.0 % 41 Table of Contents 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 % Metals 10.5 % 6.8 % 9.3 % Food 13.5 % 2.9 % 10.1 % Forest Products 10.7 % 2.9 % 8.2 % Chem/Petrochem 3.3 % 13.6 % 6.6 % Cement & Aggregate 7.9 % 1.1 % 5.7 % Oil & Gas 3.9 % 1.1 % 3.0 % Transportation 4.6 % 4.8 % 4.7 % 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 % Metals 11.1 % 7.2 % 9.9 % Food 12.2 % 3.1 % 9.4 % Forest Products 9.3 % 3.7 % 7.6 % Chem/Petrochem 3.3 % 13.4 % 6.4 % Cement & Aggregate 7.3 % 1.0 % 5.4 % Oil & Gas 7.5 % 1.6 % 5.7 % Transportation 4.6 % 4.4 % 4.5 % 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, 2022, 2021, and 2020: Year Ended June 30, 2022 Service Center Based Distribution Fluid Power & Flow Control Total Power Transmission 37.1 % 10.6 % 28.4 % Fluid Power 12.8 % 37.2 % 20.8 % General Maintenance; Hose Products 20.9 % 18.9 % 20.3 % Bearings, Linear & Seals 29.2 % 0.4 % 19.8 % Specialty Flow Control — % 32.9 % 10.7 % Total 100.0 % 100.0 % 100.0 % 42 Table of Contents 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 % General Maintenance; Hose Products 20.5 % 16.9 % 19.3 % Bearings, Linear & Seals 29.0 % 0.4 % 19.8 % 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 % General Maintenance; Hose Products 24.6 % 11.7 % 20.6 % Bearings, Linear & Seals 26.6 % 0.3 % 18.5 % Specialty Flow Control — % 39.5 % 12.2 % Total 100.0 % 100.0 % 100.0 % 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, 2022 June 30, 2021 $ Change % Change Contract assets $ 18,050 $ 15,178 $ 2,872 18.9 % 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 2022 Acquisitions On August 18, 2021, the Company acquired substantially all of the net assets of R.R. Floody Company (Floody), a Rockford, Illinois provider of high technology solutions for advanced factory automation. Floody is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $ 8,038 , net tangible assets acquired were $ 1,040 , and intangible assets including goodwill were $ 6,998 based upon estimated fair values at the acquisition date. The purchase price includes $ 1,000 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the consolidated balance sheet as of June 30, 2022, and which will be paid on the first and second anniversaries of the acquisition date with interest at a fixed rate of 2.0 % per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements. Fiscal 2021 Acquisitions On December 31, 2020, the Company acquired 100 % of the outstanding shares of Gibson Engineering (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 $ 15,341 , 43 Table of Contents net tangible assets acquired were $ 955 , and intangible assets including goodwill were $ 14,386 based upon estimated fair values at the acquisition date. The purchase price includes $ 1,904 of acquisition holdback payments, of which $ 935 was paid during the year-ended June 30, 2022. The remaining balance of $ 969 is included in other current liabilities on the consolidated balance sheet as of June 30, 2022, and will be paid on the second anniversary 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 were $ 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. Holdback Liabilities for Acquisitions Acquisition holdback payments of approximately $ 1,469 and $ 500 will be made in fiscal 2023 and 2024, respectively. The related liabilities for these payments are recorded in the consolidated balance sheets in other current liabilities for the amounts due in fiscal year 2023 and other liabilities for the amounts due in fiscal year 2024. NOTE 4: INVENTORIES Inventories consist of the following: June 30, 2022 2021 U.S. inventories at average cost $ 487,555 $ 387,456 Foreign inventories at average cost 141,176 126,945 628,731 514,401 Less: Excess of average cost over LIFO cost for U.S. inventories 178,910 151,854 Inventories on consolidated balance sheets $ 449,821 $ 362,547 The overall impact of LIFO layer liquidations increased gross profit by $ 501 , $ 3,895 , and $ 1,990 in fiscal 2022, fiscal 2021, and fiscal 2020, respectively. 44 Table of Contents 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, 2022 and 2021 are as follows: Service Center Based Distribution Fluid Power & Flow Control Total Balance at July 1, 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 Goodwill acquired during the year — 3,984 3,984 Other, primarily currency translation ( 1,286 ) 430 ( 856 ) Balance at June 30, 2022 $ 211,010 $ 352,195 $ 563,205 The Company has eight ( 8 ) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2022. The Company concluded that all of the reporting units’ fair values exceeded their carrying amounts by at least 25 % as of January 1, 2022. 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, 2022 and 2021, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $ 64,794 related to the Service Center Based Distribution segment and $ 167,605 related to the Fluid Power & Flow Control segment. 45 Table of Contents 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, 2022 Amount Accumulated Amortization Net Book Value Finite-Lived Intangibles: Customer relationships $ 353,836 $ 166,623 $ 187,213 Trade names 105,629 44,637 60,992 Vendor relationships 11,320 10,533 787 Other 2,321 723 1,598 Total Intangibles $ 473,106 $ 222,516 $ 250,590 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 Amounts include the impact of foreign currency translation. Fully amortized amounts are written off. During fiscal 2022, 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 $ 1,884 20.0 Trade names 879 15.0 Other 251 6.5 Total Intangibles Acquired $ 3,014 17.4 Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. The Company has three asset groups that have significant exposure to oil and gas end markets. Due to the 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 $ 31,879 , $ 34,365 and $ 41,553 in fiscal 2022, 2021 and 2020, 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, 2022 is estimated to be $ 30,000 for 2023, $ 26,300 for 2024, $ 24,100 for 2025, $ 22,300 for 2026 and $ 20,600 for 2027. 46 Table of Contents NOTE 6: DEBT A summary of long-term debt, including the current portion, follows: June 30, 2022 2021 Revolving credit facility $ 410,592 $ — Term Loan — 550,250 Trade receivable securitization facility 188,300 188,300 Series C Notes 40,000 40,000 Series D Notes 25,000 25,000 Series E Notes 25,000 25,000 Other 603 846 Total debt $ 689,495 $ 829,396 Less: unamortized debt issuance costs 171 1,016 $ 689,324 $ 828,380 Revolving Credit Facility & Term Loan In December 2021, the Company entered into a new five-year 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. This agreement 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 . 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 LIBOR 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 $ 489,208 at June 30, 2022, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the revolving credit facility was 2.81 % as of June 30, 2022. The new credit facility replaced the Company's previous credit facility agreement. The Company used its initial borrowings on the new revolving credit facility along with cash on hand of $ 98,206 to extinguish the term loan balance outstanding under the previous credit facility of $ 540,500 . The Company had no amount outstanding under the revolver at June 30, 2021. Unused lines under the previous facility, net of outstanding letters of credit of $ 200 to secure certain insurance obligations, totaled $ 249,800 at June 30, 2021. The interest rate on the term loan was 1.88 % as of June 30, 2021. The Company paid $ 1,956 of debt issuance costs related to the new revolving credit facility in the year ended June 30, 2022, which are included in other current assets and other assets on the consolidated balance sheet as of June 30, 2022 and will be amortized over the five-year term of the new credit facility. The Company analyzed the unamortized debt issuance costs related to the previous credit facility under Accounting Standards Codification (ASC) Topic 470 - Debt. As a result of this analysis, $ 118 of unamortized debt issuance costs were expensed and included within interest expense on the statements of consolidated income for the year ended June 30, 2022, and $ 540 of unamortized debt issuance costs were rolled forward into the new credit facility and were reclassified from the current portion of long-term debt and long-term debt into other current assets and other assets on the consolidated balance sheet as of June 30, 2022, and will be amortized over the five-year term of the new credit facility. Additionally, the Company had letters of credit outstanding not associated with the revolving credit agreement, in the amount of $ 4,735 and $ 4,540 as of June 30, 2022 and June 30, 2021, respectively, in order to secure certain insurance obligations. Trade Receivable Securitization Facility In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021. On March 26, 2021, the Company amended the AR Securitization Facility to expand the eligible receivables, which increased the maximum availability to $ 250,000 and increased the 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 47 Table of Contents 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, 2022 and June 30, 2021 was 2.60 % and 1.20 %, respectively. The new termination date of the AR Securitization Facility is March 26, 2024. Unsecured Shelf Facility At June 30, 2022 and June 30, 2021, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $ 90,000 . Fees on this facility range from 0.25 % to 1.25 % per year based on the Company's leverage ratio at each quarter end. The "Series C" notes carry a fixed interest rate of 3.19 %, and the re maining balance of $ 40,000 was paid 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 and matures in November 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 2023 $ 40,247 2024 213,551 2025 25,105 2026 — 2027 410,592 Covenants The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2022, 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, 2022, the Company's net indebtedness was less than 1.3 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at June 30, 2022. 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 48 Table of Contents 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 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 $ 409,000 of variable rate debt to a rate of 2.75 % as of June 30, 2022. The interest rate swap converted $ 420,000 of variable rate debt to a rate of 3.38 % as of June 30, 2021. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $ 17,827 as of June 30, 2022, which is included in other current assets and other assets in the consolidated balance sheet. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $ 14,346 as of June 30, 2021, 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 totaled $ 11,361 and $ 11,553 for the years ended June 30, 2022 and 2021, respectively. NOTE 8: FAIR VALUE MEASUREMENTS Marketable securities measured at fair value at June 30, 2022 and June 30, 2021 totaled $ 15,317 and $ 16,844 , respectively. The majority of these marketable securities are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable securities are included in other assets on the consolidated balance sheets and their fair values were valued using quoted market prices (Level 1 in the fair value hierarchy). As of June 30, 2022, 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 contains variable interest rates and its carrying value approximates 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, 2022 2021 2020 U.S. $ 287,367 $ 152,202 $ 36,161 Foreign 42,423 24,860 19,075 Income before income taxes $ 329,790 $ 177,062 $ 55,236 49 Table of Contents Provision The provision for income taxes consists of: Year Ended June 30, 2022 2021 2020 Current: Federal $ 40,608 $ 46,685 $ 31,149 State and local 10,188 11,035 7,580 Foreign 6,404 5,665 5,757 Total current 57,200 63,385 44,486 Deferred: Federal 12,467 ( 24,168 ) ( 8,594 ) State and local 2,659 ( 4,740 ) ( 3,098 ) Foreign 50 ( 2,172 ) ( 1,600 ) Total deferred 15,176 ( 31,080 ) ( 13,292 ) Total $ 72,376 $ 32,305 $ 31,194 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, 2022 2021 2020 Statutory income tax rate 21.0 % 21.0 % 21.0 % Effects of: State and local taxes 3.3 3.2 6.4 U.S. federal tax reform/CARES Act NOL carryback — — ( 1.8 ) Goodwill impairment — — 31.4 Stock compensation ( 1.5 ) ( 2.5 ) ( 1.3 ) GILTI/FDII 0.2 0.1 3.6 R & D credit ( 0.4 ) ( 1.5 ) ( 1.2 ) U.S. tax on foreign income, net ( 0.4 ) ( 0.5 ) ( 3.1 ) Impact of foreign operations 0.4 — 1.6 Non-deductibles/Deductible dividend 0.2 — 0.6 Interest deduction ( 0.6 ) ( 1.1 ) ( 4.0 ) Valuation allowance ( 0.6 ) 0.1 2.6 Other, net 0.3 ( 0.6 ) 0.7 Effective income tax rate 21.9 % 18.2 % 56.5 % 50 Table of Contents Consolidated Balance Sheets Significant components of the Company’s deferred tax assets and liabilities are as follows: June 30, 2022 2021 Deferred tax assets: Compensation liabilities not currently deductible $ 19,131 $ 17,436 Other expenses and reserves not currently deductible 17,143 18,676 Leases 26,688 23,126 Net operating loss carryforwards 7,371 9,262 Hedging instrument — 2,794 Other 563 799 Total deferred tax assets $ 70,896 $ 72,093 Less: Valuation allowance ( 6,271 ) ( 8,542 ) Deferred tax assets, net of valuation allowance $ 64,625 $ 63,551 Deferred tax liabilities: Inventories $ ( 13,728 ) $ ( 9,215 ) Goodwill and intangibles ( 46,513 ) ( 38,534 ) Leases ( 26,509 ) ( 22,475 ) Hedging instrument ( 6,446 ) — Depreciation and differences in property bases ( 9,760 ) ( 6,214 ) Total deferred tax liabilities ( 102,956 ) ( 76,438 ) Net deferred tax liabilities $ ( 38,331 ) $ ( 12,887 ) Net deferred tax liabilities are classified as follows: Other assets $ 5,677 $ 6,373 Other liabilities ( 44,008 ) ( 19,260 ) Net deferred tax liabilities $ ( 38,331 ) $ ( 12,887 ) As of June 30, 2022 and 2021, the Company had foreign net operating loss carryforwards of approximately $ 32,018 and $ 35,415 , respectively, the tax benefit of which is approximately $ 6,677 and $ 8,445 , respectively. These loss carryforwards will expire at various dates beginning in 2033. Also, as of June 30, 2022 and 2021, the Company had state net operating loss carryforwards, the tax benefit of which is approximately $ 878 and $ 1,034 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. The Company evaluates the realization of its deferred tax assets each quarter throughout the year. D uring the years ended June 30, 2022 and 2021, the Company released a valuation allowance of $ 2,270 and recorded a valuation allowance of $ 267 , respectively, related to certain deferred tax assets in Canada. The total valuation allowance provided against the deferred tax assets in Canada is $ 6,228 and $ 8,498 as of June 30, 2022 and 2021, respectively. As of June 30, 2022, the Company had accumulated undistributed earnings of non-U.S. subsidiaries of approximately $ 146,154 . 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. 51 Table of Contents 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, 2022, 2021, and 2020: Year Ended June 30, 2022 2021 2020 Unrecognized Income Tax Benefits at beginning of the year $ 5,230 $ 4,955 $ 4,979 Current year tax positions 505 285 105 Prior year tax positions ( 83 ) 620 177 Expirations of statutes of limitations ( 726 ) ( 630 ) ( 306 ) Unrecognized Income Tax Benefits at end of year $ 4,926 $ 5,230 $ 4,955 The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. During 2022, 2021, and 2020, the Company recognized $( 362 ), $ 144 , and $ 256 of (income) 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 $ 876 , $ 1,238 , and $ 1,094 as of June 30, 2022, 2021, and 2020, 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, 2022, 2021, and 2020 are $ 4,813 , $ 4,986 , and $ 4,708 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 2019 through 2022 and to state and local income tax examinations for the tax years 2016 through 2022. In addition, the Company is subject to foreign income tax examinations for the tax years 2015 through 2022. 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. 52 Table of Contents NOTE 10: SHAREHOLDERS’ EQUITY Treasury Shares At June 30, 2022, 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, 2022, 2021, and 2020, are comprised of the following amounts, shown net of taxes: Foreign currency translation adjustment Post-employment benefits Cash flow hedge Total accumulated other comprehensive loss Balance at July 1, 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) income ( 9,900 ) 2,142 19,770 12,012 Amounts reclassified from accumulated other comprehensive loss — 228 8,557 8,785 Net current-period other comprehensive (loss) income ( 9,900 ) 2,370 28,327 20,797 Balance at June 30, 2022 $ ( 90,738 ) $ ( 1,303 ) $ 19,746 $ ( 72,295 ) 53 Table of Contents Other Comprehensive Income (Loss) Details of other comprehensive income (loss) are as follows: Year Ended June 30, 2022 2021 2020 Pre-Tax Amount Tax Expense Net Amount Pre-Tax Amount Tax Expense Net Amount Pre-Tax Amount Tax Expense (Benefit) Net Amount Foreign currency translation adjustments $ ( 9,862 ) $ 38 $ ( 9,900 ) $ 24,352 $ 96 $ 24,256 $ ( 18,499 ) $ 265 $ ( 18,764 ) Post-employment benefits: Actuarial gain (loss) on re-measurement 2,839 697 2,142 903 216 687 ( 2,192 ) ( 530 ) ( 1,662 ) Reclassification of actuarial losses (gains) and prior service cost into other expense (income), net and included in net periodic pension costs 300 72 228 270 66 204 ( 66 ) ( 16 ) ( 50 ) Unrealized gain (loss) on cash flow hedge 26,204 6,434 19,770 3,250 770 2,480 ( 16,615 ) ( 4,043 ) ( 12,572 ) Reclassification of interest from cash flow hedge into interest expense 11,361 2,804 8,557 11,553 2,842 8,711 4,638 1,134 3,504 Other comprehensive income (loss) $ 30,842 $ 10,045 $ 20,797 $ 40,328 $ 3,990 $ 36,338 $ ( 32,734 ) $ ( 3,190 ) $ ( 29,544 ) 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, 2022 2021 2020 Net Income $ 257,414 $ 144,757 $ 24,042 Average Shares Outstanding: Weighted-average common shares outstanding for basic computation 38,471 38,758 38,658 Dilutive effect of potential common shares 634 538 341 Weighted-average common shares outstanding for dilutive computation 39,105 39,296 38,999 Net Income Per Share — Basic $ 6.69 $ 3.73 $ 0.62 Net Income Per Share — Diluted $ 6.58 $ 3.68 $ 0.62 Stock awards relating to 106 , 234 and 726 shares of common stock were outstanding at June 30, 2022, 2021 and 2020, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive. 54 Table of Contents NOTE 11: SHARE-BASED COMPENSATION Share-Based Incentive Plans Following approval by the Company's shareholders in October 2019, the 2019 Long-Term Performance Plan (the "2019 Plan") replaced the 2015 Long-Term Performance Plan. The 2019 Plan, which expires in 2024, provides for granting of SARs, stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or, in the case of director awards, the Corporate Governance & Sustainability Committee of the Board of Directors (together referred to as the Committee) may determine to officers, other key employees and members of the Board of Directors. Grants are generally made at regularly scheduled committee meetings. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including SARs, performance shares, restricted stock, and RSUs) are summarized in the table below: Year Ended June 30, 2022 2021 2020 SARs $ 3,284 $ 2,526 $ 2,954 Performance shares 4,549 2,494 854 Restricted stock and RSUs 4,009 3,960 3,146 Total compensation costs under award programs $ 11,842 $ 8,980 $ 6,954 Such amounts are included in selling, distribution and administrative expense in the accompanying statements of consolidated income. The total income tax benefit recognized in the statements of consolidated income for share-based compensation plans was $ 5,105 , $ 6,649 , and $ 2,189 for fiscal years 2022, 2021, and 2020, respectively. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with shares. The aggregate unrecognized compensation cost for share-based award programs with the potential to be paid at June 30, 2022 is summarized in the table below: June 30, 2022 Average Expected Period of Expected Recognition (Years) SARs $ 2,204 2.4 Performance shares 5,531 1.7 Restricted stock and RSUs 4,612 2.2 Total unrecognized compensation costs under award programs $ 12,347 2.0 Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.0 years. The aggregate number of shares of common stock which may be awarded under the 2019 Plan is 2,250 ; shares available for future grants at June 30, 2022 were 1,826 . Stock Appreciation Rights and Stock Options The weighted-average assumptions used for SARs grants issued in fiscal 2022, 2021 and 2020 are: 2022 2021 2020 Expected life, in years 6.4 7.0 6.2 Risk free interest rate 1.0 % 0.5 % 1.6 % Dividend yield 1.5 % 1.9 % 2.3 % Volatility 34.3 % 32.0 % 23.7 % Per share fair value of SARs granted during the year $ 26.18 $ 17.97 $ 10.12 The expected life is based upon historical exercise experience of the officers, other key employees and members of the Board of Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds with remaining terms equal to the expected life of the SARs. The assumed dividend yield has been estimated based upon the Company’s historical results and expectations for changes in dividends and stock prices. The volatility assumption is calculated based upon historical daily price observations of the Company’s common stock for a period equal to the expected life. SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be settled by the holder with cash or by tendering Company common stock. 55 Table of Contents A summary of SARs and stock options activity is presented below : Shares Weighted-Average Exercise Price Year Ended June 30, 2022 (Shares in thousands) Outstanding, beginning of year 1,158 $ 55.70 Granted 109 88.79 Exercised ( 290 ) 47.25 Forfeited ( 12 ) 67.57 Outstanding, end of year 965 $ 61.85 Exercisable at end of year 625 $ 57.53 Expected to vest at end of year 960 $ 61.77 The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and expected to vest at June 30, 2022 were 6.2 , 5.4 , and 6.2 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and expected to vest at June 30, 2022 were $ 33,121 $ 24,144 , and $ 33,029 , respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2022, 2021, and 2020 was $ 17,015 , $ 21,189 , and $ 3,460 , respectively. The total fair value of shares vested during fiscal 2022, 2021, and 2020 was $ 2,341 , $ 2,880 , and $ 2,285 , respectively. Performance Shares Performance shares are paid in shares of Applied stock at the end of a three-year period provided the Company achieves goals established by the Committee. The number of Applied shares payable will vary depending on the level of the goals achieved. A summary of non-vested performance shares activity at June 30, 2022 is presented below: Shares Weighted-Average Grant-Date Fair Value Year Ended June 30, 2022 (Shares in thousands) Non-vested, beginning of year 65 $ 55.64 Awarded 74 61.85 Vested ( 8 ) 71.11 Non-vested, end of year 131 $ 58.27 The Committee set three one-year goals for each of the 2022, 2021, and 2020 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. For the outstanding grants as of June 30, 2022, the maximum number of shares that could be earned in future periods was 78 . 56 Table of Contents Restricted Stock and Restricted Stock Units Under the 2019 Plan, restricted stock award recipients have voting rights with respect to their shares, but are restricted from selling or transferring the shares prior to vesting; dividends are accrued and paid upon vesting. Restricted stock awards vest over periods of one to four years. RSUs are grants valued in shares of Applied stock, but shares are not issued until the grants vest three to five years from the award date, assuming continued employment with Applied; dividend equivalents on RSUs are accrued and paid upon vesting. A summary of the status of the Company’s non-vested restricted stock and RSUs at June 30, 2022 is presented below: Shares Weighted-Average Grant-Date Fair Value Year Ended June 30, 2022 (Share amounts in thousands) Non-vested, beginning of year 177 $ 65.57 Granted 41 91.89 Forfeitures ( 7 ) 73.96 Vested ( 34 ) 76.36 Non-vested, end of year 177 $ 69.23 NOTE 12: LEASES 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. Operating lease costs and short-term lease costs were $ 34,144 and $ 7,501 , respectively, for the year ended June 30, 2022 and $ 31,778 and $ 9,929 ,respectively, for the year ended June 30, 2021. Variable lease costs and sublease income were not material. Information related to operating leases is as follows: June 30, 2022 2021 Operating lease assets, net $ 108,052 $ 87,111 Operating lease liabilities Other current liabilities $ 30,114 $ 27,359 Other liabilities 80,807 64,248 Total operating lease liabilities $ 110,921 $ 91,607 June 30, 2022 2021 Weighted average remaining lease term (years) 5.5 5.6 Weighted average incremental borrowing rate 2.92 % 3.26 % Year Ended June 30, 2022 2021 Cash paid for operating leases $ 35,313 $ 33,695 Right of use assets obtained in exchange for new operating lease liabilities $ 50,743 $ 25,556 57 Table of Contents The table below summarizes the aggregate maturities of liabilities pertaining to operating leases with terms greater than one year for each of the next five years: Fiscal Year Maturity of Operating Lease Liabilities 2023 $ 32,759 2024 27,688 2025 18,826 2026 14,084 2027 9,723 Thereafter 16,754 Total lease payments 119,834 Less interest 8,913 Present value of lease liabilities $ 110,921 The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $ 2,100 in 2022, $ 2,100 in 2021, and $ 2,500 in 2020. NOTE 13: SEGMENT INFORMATION The Company's reportable segments are: Service Center Based Distribution and Fluid Power & Flow Control. These reportable segments contain the Company's various operating segments which have been aggregated based upon similar economic and operating characteristics. The Service Center Based Distribution segment operates through local service centers and distribution centers with a focus on providing products and services addressing the maintenance and repair of motion control infrastructure and production equipment. Products primarily include industrial bearings, motors, belting, drives, couplings, pumps, linear motion products, hydraulic and pneumatic components, filtration supplies, and hoses, as well as other related supplies for general operational needs of customers’ machinery and equipment. The Fluid Power & Flow Control segment includes our operations that specialize in distributing, engineering, designing, integrating, and repairing hydraulic and pneumatic fluid power technologies, and engineered flow control products and services. This segment also includes our operations that focus on advanced automation solutions including machine vision, robotics, motion control, and smart technologies. The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power & Flow Control segment to the Service Center Based Distribution segment of $ 37,163 , $ 31,615 , and $ 29,582 , in 2022, 2021, and 2020, respectively, have been eliminated in the following table. 58 Table of Contents Segment Financial Information Service Center Based Distribution Fluid Power & Flow Control Total Year Ended June 30, 2022 Net sales $ 2,565,604 $ 1,245,072 $ 3,810,676 Operating income for reportable segments 301,881 156,644 458,525 Assets used in the business 1,455,293 997,295 2,452,588 Depreciation and amortization of property 17,509 4,167 21,676 Capital expenditures 14,486 3,638 18,124 Year Ended June 30, 2021 Net sales $ 2,199,533 $ 1,036,386 $ 3,235,919 Operating income for reportable segments 225,206 121,782 346,988 Assets used in the business 1,332,720 939,087 2,271,807 Depreciation and amortization of property 17,155 3,625 20,780 Capital expenditures 13,735 2,117 15,852 Year Ended June 30, 2020 Net sales $ 2,241,949 $ 1,003,703 $ 3,245,652 Operating income for reportable segments 211,667 109,847 321,514 Assets used in the business 1,314,011 969,540 2,283,551 Depreciation and amortization of property 17,133 4,063 21,196 Capital expenditures 17,063 3,052 20,115 A reconciliation of operating income for reportable segments to the consolidated income before income taxes is as follows: Year Ended June 30, 2022 2021 2020 Operating income for reportable segments $ 458,525 $ 346,988 $ 321,514 Adjustments for: Intangible amortization — Service Center Based Distribution 3,435 5,426 12,385 Intangible amortization — Fluid Power & Flow Control 28,444 28,938 29,168 Impairment — Service Center Based Distribution — 49,528 — Impairment — Fluid Power & Flow Control — — 131,000 Corporate and other expense, net 68,788 57,642 59,972 Total operating income 357,858 205,454 88,989 Interest expense, net 26,263 30,592 36,535 Other expense (income), net 1,805 ( 2,200 ) ( 2,782 ) Income before income taxes $ 329,790 $ 177,062 $ 55,236 Fluctuations in corporate and other expense, net, are 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. 59 Table of Contents Geographic Information Long-lived assets are based on physical locations and are comprised of the net book value of property and right of use assets. Information by geographic area is as follows: June 30, 2022 2021 2020 Long-Lived Assets: United States $ 178,522 $ 173,335 $ 185,475 Canada 31,728 21,458 20,575 Other Countries 9,698 7,907 6,487 Total $ 219,948 $ 202,700 $ 212,537 NOTE 14: COMMITMENTS AND CONTINGENCIES The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company does not expect that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. NOTE 15: OTHER EXPENSE (INCOME), NET Other expense (income), net, consists of the following: Year Ended June 30, 2022 2021 2020 Unrealized loss (gain) on assets held in rabbi trust for a non-qualified deferred compensation plan $ 2,612 $ ( 4,048 ) $ ( 458 ) Foreign currency transaction (gains) losses ( 65 ) 2,091 ( 2,463 ) Net other periodic post-employment costs (benefits) 610 283 ( 120 ) Life insurance (income) expense, net ( 1,374 ) ( 296 ) 233 Other, net 22 ( 230 ) 26 Total other expense (income), net $ 1,805 $ ( 2,200 ) $ ( 2,782 ) NOTE 16: SUBSEQUENT EVENTS We have evaluated events and transactions occurring subsequent to June 30, 2022 through the date the financial statements were issued. 60 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.