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Item 7. Management’s Discussion and Analysis

2023-08-11 compared with 2022-08-12 · 65 added, 87 removed, 288 unchanged (35% of the section changed)

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The following is Management's Discussion and Analysis of significant factors that have affected our financial condition, results of operations and cash flows during the periods included in the accompanying consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash flows in Item 8 under the caption "Financial Statements and Supplementary Data." When reviewing the discussion and analysis set forth below, please note that a significant number of SKUs (Stock Keeping Units) we sell in any given year were not sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used comparative metrics analyzing sales, such as changes in product mix and volume.

Our fiscal 2022 consolidated sales were $3.8 billion, an increase of $574.8 million or 17.8% compared to the prior year, with the acquisitions of Advanced Control Solutions (ACS), Gibson Engineering (Gibson) and R.R.

Floody Company (Floody) increasing sales by $34.1 million or 1.1% and favorable foreign currency translation of $2.4 million increasing sales by 0.1%.

Our fiscal 2023 consolidated sales were $4.4 billion, an increase of $602.1 million or 15.8% compared to the prior year, with the acquisitions of R.R.

Floody Company (Floody), Automation, Inc.

and Advanced Motion Systems, Inc.

(AMS) increasing sales by $20.0 million or 0.5% and unfavorable foreign currency translation of $16.3 million decreasing sales by 0.4%.

Gross profit margin increased to 29.2% for fiscal 2023 from 29.0% for fiscal 2022.

Operating margin increased to 10.7% in fiscal 2023 from 9.4% in fiscal 2022.

Our earnings per share was $6.58 in fiscal 2022 versus $3.68 in fiscal year 2021.

Fiscal 2021 results included a $49.5 million pre-tax non-cash charge related to the impairment of certain intangible, lease, and fixed assets, as well as non-routine costs of $7.8 million pre-tax, which were the result of weaker economic conditions and business alignment initiatives across a portion of the Service Center Based Distribution segment operations exposed to oil and gas end markets.

Total non-routine costs of $7.8 million pre-tax included a $7.4 million inventory reserve charge recorded within cost of sales, and $0.4 million related to severance and facility consolidation recorded in selling, distribution and administrative expense.

These charges were offset in the prior year by non-routine income of $2.6 million.

On a net basis, the fiscal 2021 non-routine items unfavorably impacted operating income by $54.7 million, net income by $41.7 million, and earnings per share by $1.06 per share.

Our diluted earnings per share was $8.84 in fiscal 2023 versus $6.58 in fiscal 2022.

Shareholders’ equity was $1,458.4 million at June 30, 2023 compared to $1,149.4 million at June 30, 2022.

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When manufacturing plants are running at a high rate of capacity, they tend to wear out machinery and require replacement parts.

The MCU (total industry) and IP indices increased since June 2021 correlating with an overall increase in the economy in the same period.

The MCU (total industry) and IP indices decreased since June 2022 correlating with an overall decrease in the economy in the same period.

The ISM PMI registered 46.0 in June 2023, a decrease from the June 2022 revised reading of 53.1.

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Net Income 7.9 % 6.8 % 34.7 %

Sales in fiscal 2022 were $3.8 billion, which was $574.8 million or 17.8% above the prior year, with sales from acquisitions adding $34.1 million or 1.1% and favorable foreign currency translation accounting for an increase of $2.4 million or 0.1%.

Sales in fiscal 2023 were $4.4 billion, which was $602.1 million or 15.8% above the prior year, with sales from acquisitions adding $20.0 million or 0.5% and unfavorable foreign currency translation accounting for a decrease of $16.3 million or 0.4%.

There were 252.5 selling days in both fiscal 2023 and 2022.

Excluding the impact of businesses acquired and foreign currency translation, sales were up $538.3 million or 16.6% during the year, driven by an increase from operations reflecting positive growth across core end markets, including heavy industrial verticals, as well as ongoing pricing actions and our internal growth initiatives.

Excluding the impact of businesses acquired and foreign currency translation, sales were up $598.4 million or 15.7% during the year, driven by an increase from operations reflecting resilient underlying demand across both segments, structural and secular tailwinds across legacy and new markets, and support from company-specific growth opportunities.

The following table shows changes in sales by reportable segment.

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Service Center Based Distribution $ 2,966.8 $ 2,565.6 $ 401.2 $ — $ (16.3) $ 417.5

Fluid Power & Flow Control 1,245.1 1,036.4 208.7 34.1 — 174.6

Engineered Solutions 1,446.0 1,245.1 200.9 20.0 — 180.9

Total $ 4,412.8 $ 3,810.7 $ 602.1 $ 20.0 $ (16.3) $ 598.4

Sales in our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $401.2 million, or 15.6%.

Favorable foreign currency translation increased sales by $2.4 million or 0.1%.

Excluding the impact of businesses acquired and the impact of foreign currency translation, sales increased $363.7 million or 16.5% during the year, driven by an increase from operations due to benefits from break-fix MRO activity, sales process initiatives, as well as incremental growth from heavy industry verticals, with the strongest growth from the metals, machinery, aggregates, mining, pulp & paper, rubber & plastics, energy, and lumber & wood end markets.

Sales in our Fluid Power & Flow Control segment increased $208.7 million or 20.1%.

Acquisitions within this segment, primarily Gibson and Floody, increased sales $34.1 million or 3.3%.

Excluding the impact of businesses acquired, sales increased $174.6 million or 16.8%, driven by an increase from operations due to ongoing demand strength across technology verticals and automation, as well as end market growth across the metals, chemicals, refining, utilities, pulp & paper and mining end-markets, partially offset by supply chain bottlenecks.

Unfavorable foreign currency translation decreased sales by $16.3 million or 0.6%.

Excluding the impact of foreign currency translation, sales increased $417.5 million or 16.2% during the year, driven by an increase from operations due to ongoing benefits from market position, sales process initiatives, solid growth across national strategic accounts, as well as benefits from cross-selling actions.

Sales in our Engineered Solutions segment increased $200.9 million or 16.1%.

Acquisitions within this segment, primarily Automation, Inc., increased sales $20.0 million or 1.6%.

Excluding the impact of businesses acquired, sales increased $180.9 million or 14.5%, reflecting positive underlying segment demand and driven by expanding technical and engineering capabilities, diverse end-market mix, and cross-selling initiatives, partially offset by slower order activity across the technology sector and ongoing supply chain constraints.

The following table shows changes in sales by geographical area.

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Excluding the impact of businesses acquired, U.S.

sales were up $482.8 million or 17.4%, driven by an increase from operations.

Sales from our Canadian operations increased $36.2 million or 14.2%, while favorable foreign currency translation increased Canadian sales by $2.8 million or 1.1%.

sales were up $540.6 million or 16.4%.

Sales from our Canadian operations increased $24.0 million or 8.2%.

Unfavorable foreign currency translation decreased Canadian sales by $16.0 million or 5.5%.

Excluding the impact of foreign currency translation, Canadian sales were up $40.0 million or 13.7%.

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Unfavorable foreign currency translation decreased other countries sales by $0.3 million or 0.1%.

Excluding the impact of foreign currency translation, other countries sales were up $22.1 million or 11.2% compared to the prior year, driven by an increase from operations, primarily a $13.9 million increase in Mexican sales due to increased industrial activity, primarily related to steel operations.

Excluding the impact of foreign currency translation, other countries sales were up $17.8 million or 8.1% compared to the prior year, driven by an increase from operations, primarily an $11.5 million increase in Mexican sales due to increased industrial activity, mainly related to the automotive industry.

Our gross profit margin increased to 29.2% in fiscal 2023 compared to 29.0% in fiscal 2022.

Gross profit margin expanded year over year and sequentially primarily reflecting broad-based execution across the business and countermeasures in response to ongoing inflation and supply chain dynamics.

This was offset by 72 basis points due to a $27.3 million increase in LIFO expense year over year.

Gross profit margin expanded year over year primarily reflecting broad-based execution across the business and countermeasures in response to ongoing inflation and supply chain dynamics.

The gross profit margin for the current year was negatively impacted by 18 basis points due to a $7.7 million increase in LIFO expense over the prior year.

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

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SD&A increased $64.7 million or 8.6% during fiscal 2023 compared to the prior year, and as a percentage of sales decreased to 18.4% in fiscal 2023 compared to 19.7% in fiscal 2022.

Changes in foreign currency exchange rates had the effect of increasing SD&A by $0.5 million or 0.1% compared to the prior year.

Changes in foreign currency exchange rates had the effect of decreasing SD&A by $4.3 million or 0.6% compared to the prior year.

SD&A from businesses acquired added $6.4 million or 0.9%, including $0.9 million of intangibles amortization related to acquisitions.

Excluding the impact of businesses acquired and the unfavorable impact from foreign currency translation, SD&A increased $62.6 million or 8.3% during fiscal 2023 compared to fiscal 2022.

The Company incurred $0.4 million of non-routine expenses related to severance and closed facilities during fiscal 2021.

Excluding the impact of acquisitions and severance, total compensation increased $50.3 million during fiscal 2022, primarily due to cost reduction actions taken by the Company in fiscal 2021 in response to the COVID-19 pandemic, including headcount reductions, temporary furloughs and pay reductions, and suspension of the 401(k) plan company match.

Also, excluding the impact of acquisitions, travel & entertainment and fleet expenses increased $9.0 million during 2022, primarily due to reduced travel activity related to COVID-19 in the prior year.

All other expenses within SD&A were down $0.2 million.

During fiscal 2021, the Company determined that an impairment existed in two of its three asset groups within the Service Center Based Distribution segment that have significant exposure to oil and gas end markets as the asset

groups' carrying values exceeded the sum of the undiscounted cash flows.

The fair values of the long-lived assets were determined using the income approach, and the analyses resulted in the measurement of an intangible asset impairment loss of $45.0 million, as the fair value of the intangible assets was determined to be zero.

The analyses of these asset groups also resulted in a fixed asset impairment loss and leased asset impairment loss of $2.0 million and $2.5 million, respectively, which were recorded in fiscal 2021.

Combined, the non-cash impairment charges decreased net income by $37.8 million and earnings per share by $0.96 per share for fiscal 2021.

Operating income increased $152.4 million, or 74.2%, to $357.9 million during fiscal 2022 from $205.5 million during fiscal 2021, and as a percentage of sales, increased to 9.4% from 6.3%, primarily due to gross profit margin expansion and control of SD&A expense in fiscal 2022, in addition to the $49.5 million non-cash impairment charges recorded in fiscal 2021.

Operating income, before impairment charges, as a percentage of sales for the Service Center Based Distribution segment increased to 11.8% in fiscal 2022 from 10.2% in fiscal 2021.

Operating income as a percentage of sales for the Fluid Power & Flow Control segment increased to 12.6% in fiscal 2022 from 11.8% in fiscal 2021.

Excluding the impact of acquisitions, total compensation increased $47.3 million during fiscal 2023, as a result of annual calendar year merit increases and an increase in employee incentive compensation correlating with the improved company performance.

Also, excluding the impact of acquisitions, travel & entertainment and fleet expenses increased $4.7 million during 2023, primarily driven by higher fuel costs and the return of travel activity in the current year after travel constraints in the prior year due to COVID-19.

Additionally, excluding the impact of acquisitions, occupancy costs increased $5.3 million during 2023, primarily driven by increased building lease costs.

All other expenses within SD&A were up $5.3 million.

Operating income increased $115.3 million, or 32.2%, to $473.2 million during fiscal 2023 from $357.9 million during fiscal 2022, and as a percentage of sales, increased to 10.7% from 9.4%, primarily due to gross profit margin expansion, volume leverage, and control of SD&A expense in fiscal 2023.

Operating income, as a percentage of sales for the Service Center Based Distribution segment increased to 12.6% in fiscal 2023 from 11.8% in fiscal 2022.

Operating income as a percentage of sales for the Engineered Solutions segment increased to 14.1% in fiscal 2023 from 12.6% in fiscal 2022.

Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments.

The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.

Other expense (income), net, represents certain non-operating items of income and expense, and was $1.8 million of expense in fiscal 2022 compared to $2.2 million of income in fiscal 2021.

Current year expense primarily consists of unrealized loss on investments held by non-qualified deferred compensation trusts of $2.6 million and other expense of $0.6 million, offset by life insurance income of $1.4 million.

Fiscal 2021 income consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $4.0 million and other income of $0.3 million offset by foreign currency transaction losses of $2.1 million.

Other expense (income), net, represents certain non-operating items of income and expense, and was $1.7 million of expense in fiscal 2023 compared to $1.8 million of expense in fiscal 2022.

Current year expense primarily consists of foreign currency transaction losses of $3.3 million and other periodic post-employment costs of $1.5 million, offset by unrealized gains on investments held by non-qualified deferred compensation trusts of $2.2 million, life insurance income of $0.7 million and other income of $0.2 million.

Fiscal 2022 expense consisted primarily of unrealized loss on investments held by non-qualified deferred compensation trusts of $2.6 million and other periodic post-employment costs of $0.6 million, offset by life insurance income of $1.4 million.

The effective income tax rate was 22.9% for fiscal 2023 compared to 21.9% for fiscal 2022.

The increase in the effective tax rate is due to changes in compensation-related deductions and uncertain tax positions in fiscal 2022 compared to the prior year.

The increase in the effective tax rate is due to changes in compensation-related deductions in fiscal 2023 compared to the prior year.

As a result of the factors discussed above, net income for fiscal 2023 increased $89.3 million from the prior year.

Net income per share was $6.58 per share for fiscal 2022 compared to $3.68 per share for fiscal 2021.

We had a total of 568 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore at June 30, 2022 and June 30, 2021.

Diluted net income per share was $8.84 per share for fiscal 2023 compared to $6.58 per share for fiscal 2022.

At June 30, 2023, we had approximately 580 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore at June 30, 2023, versus 568 June 30, 2022.

The approximate number of Company employees was 6,200 at June 30, 2023 and 6,100 at June 30, 2022.

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At June 30, 2023 we had total debt obligations outstanding of $622.2 million compared to $689.5 million at June 30, 2022.

Management expects that our existing cash, cash equivalents, funds available under our debt facilities, and cash provided from operations, will be sufficient to finance normal working capital needs in each of the countries we operate in, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock.

Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company’s credit standing and financial strength.

Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations, will be sufficient to finance normal working capital needs in each of the countries in which we operate, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock.

Management also believes that additional long-term debt and line of credit financing could be obtained if necessary based on the Company’s credit standing and financial strength.

The Company’s working capital at June 30, 2023 was $1,106.5 million compared to $859.9 million at June 30, 2022.

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Exchange Rate Effect 3,317 (2,154)

(Decrease) Increase in Cash and Cash Equivalents $ (73,271) $ (10,806)

The decrease in cash provided by operating activities during fiscal 2022 is driven by changes in working capital for the year offset by increased operating results.

Increase (Decrease) in Cash and Cash Equivalents $ 159,562 $ (73,271)

The increase in cash provided by operating activities during fiscal 2023 is driven by changes in working capital for the year and by increased operating results.

Changes in cash flows between years related to working capital were driven by (amounts in thousands):

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Accounts payable $ (15,915)

Net cash used in investing activities in fiscal 2022 included $7.0 million used for the acquisition of Floody, $14.8 million in cash payments for loans on company-owned life insurance and $18.1 million used for capital expenditures.

Net cash used in investing activities in fiscal 2021 included $30.2 million used for the acquisitions of ACS and Gibson and $15.9 million for capital expenditures.

Net cash used in financing activities increased from the prior year period primarily due to a change in net debt activity, as there was $139.9 million of net debt payments in fiscal 2022 compared to $105.9 million of net debt payments in 2021.

Further uses of cash in 2022 were $51.8 million for dividend payments, $8.1 million used to pay taxes for shares withheld, and $13.8 million used to repurchase 148,658 shares of treasury stock.

Net cash used in investing activities in fiscal 2023 included $35.8 million used for the acquisitions of Automation, Inc.

and AMS and $26.5 million used for capital expenditures.

Net cash used in investing activities in fiscal 2022 included $7.0 million used for the acquisition of Floody, $14.8 million million in cash payments for loans on company-owned life insurance and $18.1 million used for capital expenditures.

Net cash used in financing activities decreased from the prior year period primarily due to a change in net debt activity, as there was $67.2 million of net debt payments in fiscal 2023 compared to $139.9 million of net debt payments in 2022.

Further uses of cash in 2023 were $53.4 million for dividend payments and $12.9 million used to pay taxes for shares withheld.

Further uses of cash in 2022 were $51.8 million for dividend payments, $8.1 million used to pay taxes for shares withheld, and $13.8 million used to repurchase 148,658 shares of treasury stock.

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At June 30, 2023, we had authorization to purchase an additional 1,500,000 shares.

On August 9, 2022 the Board of Directors authorized the repurchase of 1.5 million shares of the Company's stock.

The Company repurchased 148,658 shares in fiscal 2022 at an average price per share of $92.72.

In fiscal 2021, we repurchased 400,000 shares of the Company's common stock at an average price per share of $100.22 and in fiscal 2020, no shares were repurchased.

In fiscal 2023, we purchased 8,000 shares of the Company's common stock at an average price per share of $89.46.

In fiscal 2022, we repurchased 148,658 shares of the Company's common stock at an average price per share of $92.72.

In fiscal 2021,we repurchased 400,000 shares of the Company's common stock at an average price per share of $100.22.

Borrowing Arrangements

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Revolving credit facility $ 383,592 $ 410,592

Term Loan — 550,250

Trade receivable securitization facility 188,300 188,300

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$ 622,096 $ 689,324

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 $900.0 million unsecured revolving credit facility and an uncommitted accordion feature which allows the Company to request an increase in the borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500.0 million.

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 $0.2 million to secure certain insurance obligations, totaled $489.2 million 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 $98.2 million to extinguish the term loan balance outstanding under the previous credit facility of $540.5 million.

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 $0.2 million to secure certain insurance obligations, totaled $249.8 million at June 30, 2021.

The interest rate on the term loan was 1.88% as of June 30, 2021.

The Company paid $2.0 million 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, $0.1 million 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 $0.5 million 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.

In December 2021, the Company entered into a new revolving credit facility with a group of banks to refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes.

The revolving credit facility provides a $900.0 million unsecured revolving credit facility and an uncommitted accordion feature which allows the Company to request an increase in the borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500.0 million.

In May 2023, the Company and the administrative agent entered into an amendment to the credit facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR.

Borrowings under this agreement bear interest, at the Company's election, at either the base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or SOFR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio.

Unused lines under this facility, net of outstanding letters of credit of $0.2 million to secure certain insurance obligations, totaled $516.2 million and $489.2 million at June 30, 2023 and June 30, 2022, respectively, and were available to fund future acquisitions or other capital and operating requirements.

The interest rate on the revolving credit facility was 6.11% and 2.81% as of June 30, 2023 and June 30, 2022, respectively.

Additionally, the Company had letters of credit outstanding not associated with the revolving credit agreement, in the amount of $4.0 million and $4.7 million as of June 30, 2023 and June 30, 2022, respectively, in order to secure certain insurance obligations.

In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021.

On March 26, 2021, the Company amended the AR Securitization Facility to expand the eligible receivables, which increased the maximum availability to $250.0 million and increased the 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 $250.0 million of funding available under the AR Securitization Facility.

In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”).

On March 26, 2021, the Company amended the AR Securitization Facility to expand the eligible receivables, which increased the maximum availability to $250.0 million and increased the fees on the AR Securitization Facility to 0.98% per year.

times, we may not be able to fully access the $250.0 million of funding available under the AR Securitization Facility.

The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the U.S.

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The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs.

Borrowings under this facility carry variable interest rates tied to LIBOR.

In May 2023, the Company entered into an amendment to the AR Securitization facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR, therefore borrowings under this facility carry variable interest rates tied to SOFR.

The interest rate on the AR Securitization Facility as of June 30, 2023 and June 30, 2022 was 6.16% and 2.60%, respectively.

The new termination date of the AR Securitization Facility is March 26, 2024.

At June 30, 2022 and June 30, 2021, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $90.0 million.

The Company classified the AR Securitization Facility as long-term debt as it has the ability and intent to extend or refinance this amount on a long-term basis.

On August 4, 2023, the Company amended the AR Securitization Facility and extended the term to August 4, 2026.

At June 30, 2023 and June 30, 2022, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $50.0 million and $90.0 million, respectively.

Fees on this facility range from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end.

The "Series C" notes carried a fixed interest rate of 3.19%, and the re maining balance of $40.0 million was paid in July 2022.

The remaining principal balance on the "Series C" notes of the $40.0 million was paid in July 2022 .

The "Series D" notes have a remaining principal amount of $25.0 million, carry a fixed interest rate of 3.21%, and are due in October 2023.

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On an overall basis, our provision for losses from uncollected receivables represents 0.13% of our sales for the year ended June 30, 2023, compared to 0.08% of sales for the year ended June 30, 2022.

The decrease primarily relates to provisions recorded in the prior year for customer credit deterioration and bankruptcies primarily in the U.S.

and Mexican operations of the Service Center Based Distribution segment.

The increase primarily relates to provisions recorded in the current year for customer credit deterioration and bankruptcies primarily in the Service Center Based Distribution segment.

Historically, this percentage is around 0.10% to 0.15%.

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$ 816,770 $ 83,830 $ 106,996 $ 606,698 $ 13,346 $ 5,900

(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations and net payments under the terms of the interest rate swap.

(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations net of receipts under the terms of the interest rate swap.

Rates in effect as of June 30, 2023 are used for variable rate debt.

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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.

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 in the prior year, the Company determined during the second quarter of fiscal 2021 that certain carrying values may not be recoverable.

The Company determined that an impairment existed in two of the three asset groups as the asset groups' carrying values exceeded the sum of the undiscounted cash flows.

The fair values of the long-lived assets were then determined using the income approach, and the analyses resulted in the measurement of an intangible asset impairment loss of $45.0 million, which was recorded in the 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, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates.

Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth.

A number of benchmarks from independent industry and other economic publications were also used.

The analyses of these asset groups also resulted in a fixed asset impairment loss and leased asset impairment loss of $2.0 million and $2.5 million, respectively, which were recorded in the second quarter of fiscal 2021.

Sustained significant softness in certain end market concentrations could result in impairment of certain intangible assets in future periods.

We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

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If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired.

If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be

recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

Goodwill on our consolidated financial statements relates to both the Service Center Based Distribution segment and the Fluid Power & Flow Control segment.

If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

Goodwill on our consolidated financial statements relates to both the Service Center Based Distribution segment and the Engineered Solutions segment.

The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2023.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis