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 of bearings, power transmission products, engineered fluid power components and systems, specialty flow control solutions, and other industrial supplies, serving Maintenance Repair & Operations (MRO) and Original Equipment Manufacturer (OEM) customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for industrial, fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, fluid power, and flow control shop services. Applied also offers storeroom services and inventory management solutions that provide added value to its customers. Although the Company does not generally manufacture the products it sells, it does assemble and repair certain products and systems.
Consolidation
The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency
The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive (loss) income in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other income, net.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.
Marketable Securities
The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other income, net in the statements of consolidated income.
Concentration of Credit Risk
The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and Singapore. As such, the Company does not believe that a significant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While the Company monitors the creditworthiness of these institutions, a crisis in the financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand.
Accounts Receivable
Accounts receivable are stated at their estimated net realizable value and consist of amounts billed or billable and currently due from customers. The Company maintains an allowance for doubtful accounts, which reflects management’s best estimate of probable losses based on an analysis of customer accounts, known troubled accounts, historical experience with write-offs, and other currently available evidence.
Allowances for Doubtful Accounts
The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be greater credit risks, trends within the entire customer pool, and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. The allowance for doubtful accounts was
$10,498
and
$10,964
at
June 30, 2019
and
June 30, 2018
, 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, 2019
, approximately
15.9%
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 expenses 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 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 and the fair value of the assets.
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. 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 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
$7,265
and
$2,602
at
June 30, 2019
and
June 30, 2018
, respectively. The increase in the reserve is due to the Company's adoption of Accounting Standards Codification (ASC) Topic 606 - Revenue from Contracts with Customers (ASC 606), which required the returns reserve to be established at the gross sales value with an asset established for the value of expected product to be returned.
The Company estimates and recognizes variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to a customer. The Company records variable consideration as an adjustment to the transaction price in the period it is incurred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant.
Shipping and Handling Costs
The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and administrative expense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expenses were approximately
$24,090
,
$19,320
and
$20,060
for the fiscal years ended
June 30, 2019
,
2018
and
2017
, 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 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 2015 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, or the 2007 Long-Term Performance Plan. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service period. Non-qualified stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. SARs and stock option awards generally vest over
four
years of continuous service and have
ten
-year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on the closing market price of Company common stock on the grant date.
Treasury Shares
Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital.
Derivatives
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Recently Adopted Accounting Guidance
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)". The standard outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers. The core principle of this model is that "an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services." Subsequent to the issuance of ASU 2014-09, the FASB issued ASU 2015-14, ASU 2016-08, ASU 2016-10, and ASU 2016-12, which clarify the guidance in ASU 2014-09 but do not change the core principle of the revenue recognition model, and
have been collectively codified into ASC 606. The provisions of ASC 606 are effective for interim and annual periods beginning after December 15, 2017. On July 1, 2018, the Company adopted ASC 606 using the modified retrospective method. As a result, the Company applied ASC 606 only to contracts that were not completed as of July 1, 2018. The adoption of ASC 606 resulted in a net increase to opening retained earnings of approximately
$3,429
, net of tax, on July 1, 2018. See note 2, Revenue Recognition, for further information on the impacts of these standard updates.
Income Tax Consequences of Intra-entity Transfer of Assets other than Inventory
In October 2016, the FASB issued its final standard on the income tax consequences of intra-entity transfers of assets other than inventory. This standard, issued as ASU 2016-16, requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This update is effective for annual and interim financial statement periods beginning after December 15, 2017. The Company adopted ASU 2016-16 during the first quarter of fiscal 2019 using the modified retrospective method, and recorded a cumulative-effect adjustment decreasing retained earnings by
$424
, recording a deferred tax asset of
$587
and reversing a prepaid asset of
$1,011
as of the beginning of the period. The deferred tax asset is included in other assets on the consolidated balance sheet as of
June 30, 2019
.
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued its final standard on targeted improvements to accounting for hedging activities. This standard, issued as ASU 2017-12, expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instruments and the hedged item in the financial statements. This update is effective for annual and interim financial statement periods beginning after December 15, 2018. The Company early adopted ASU 2017-12 during the third quarter of fiscal 2019.
Recently Issued Accounting Guidance
In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. The core principle of this update is that a "lessee should recognize the assets and liabilities that arise from leases." This update is effective for annual financial statement periods beginning after December 15, 2018, with earlier application permitted. In July 2018, the FASB issued ASU 2018-10 which clarifies the guidance in ASU 2016-02, and ASU 2018-11 which provides entities with an additional transition method option for adopting the new standard. The Company plans to use this new transition method option upon adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings. In December 2018 and January 2019, the FASB issued ASU 2018-20 and ASU 2019-01, respectively, which further clarify the guidance. The Company established a cross-functional team to evaluate the new standard and is in the process of implementing new lease administration software. Upon adoption, the Company's right of use assets and corresponding lease liabilities are estimated at approximately
$80,000
to
$105,000
before considering deferred taxes. Applied does not expect a material impact to the Company’s statements of consolidated income, comprehensive income, or cash flows.
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. In November 2018, April 2019, and May 2019 the FASB issued ASU 2018-19, ASU 2019-04, and ASU 2019-05, respectively, which clarify the guidance in ASU 2016-13. The Company has not yet determined the impact of these pronouncements on its financial statements and related disclosures.
In August 2016, the FASB issued its final standard on the classification of certain cash receipts and cash payments within the statement of cash flows. This standard, issued as ASU 2016-15, makes a number of changes meant to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2018, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
In August 2018, the FASB issued its final standard on the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This standard, issued as ASU 2018-15, aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software. This update is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
NOTE 2: REVENUE RECOGNITION
The Company adopted ASC 606 using the modified retrospective method effective July 1, 2018. The Company completed an analysis of revenue streams at each of its business units and evaluated the impact of adopting ASC 606 on revenue recognition. The Company primarily sells purchased products and the majority of its revenue is recognized at a point in time. The cumulative effect of initially applying ASC 606 resulted in a net increase to the opening retained earnings balance of
$3,429
, net of tax, at July 1, 2018. The transition adjustment is comprised of two components. The first component is recognition of revenue from bill and hold arrangements. The second component is recognition of revenue from contracts that meet the criteria to recognize revenue over time as the underlying products have no alternative use and the Company has a right to payment for performance completed to date. Revenue for periods prior to July 1, 2018 has not been adjusted and continues to be reported under ASC Topic 605 - Revenue Recognition.
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. On July 1, 2018,
$13,823
of contract assets were recognized as part of the cumulative effect adjustment resulting from the adoption of ASC 606.
Activity related to contract assets, which are included in other current assets on the consolidated balance sheet, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
July 1, 2018
|
|
$ Change
|
|
% Change
|
|
Contract assets
|
$
|
8,920
|
|
$
|
13,823
|
|
$
|
(4,903
|
)
|
(35.5
|
)%
|
The following tables summarize the impacts of ASC 606 on the Company's consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2019
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balances without adoption of ASC 606
|
|
Net sales
|
|
$
|
3,472,739
|
|
|
$
|
4,675
|
|
|
$
|
3,477,414
|
|
Cost of sales
|
|
2,465,116
|
|
|
3,691
|
|
|
2,468,807
|
|
Gross profit
|
|
1,007,623
|
|
|
984
|
|
|
1,008,607
|
|
Selling, distribution and administrative expense, including depreciation
|
|
742,241
|
|
|
321
|
|
|
742,562
|
|
Intangible Impairment
|
|
31,594
|
|
|
—
|
|
|
31,594
|
|
Operating income
|
|
233,788
|
|
|
663
|
|
|
234,451
|
|
Interest expense, net
|
|
40,188
|
|
|
—
|
|
|
40,188
|
|
Other income, net
|
|
(881
|
)
|
|
—
|
|
|
(881
|
)
|
Income before income taxes
|
|
194,481
|
|
|
663
|
|
|
195,144
|
|
Income tax expense
|
|
50,488
|
|
|
166
|
|
|
50,654
|
|
Net income
|
|
$
|
143,993
|
|
|
$
|
497
|
|
|
$
|
144,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balances without adoption of ASC 606
|
|
Assets
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
540,902
|
|
|
$
|
4,690
|
|
|
$
|
545,592
|
|
Other current assets
|
|
51,462
|
|
|
(8,920
|
)
|
|
42,542
|
|
Inventories
|
|
447,555
|
|
|
6,552
|
|
|
454,107
|
|
Other assets
|
|
28,399
|
|
|
297
|
|
|
28,696
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Other current liabilities
|
|
69,491
|
|
|
6,688
|
|
|
76,179
|
|
Other liabilities
|
|
102,019
|
|
|
(1,116
|
)
|
|
100,903
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Retained Earnings
|
|
$
|
897,034
|
|
|
$
|
(2,932
|
)
|
|
$
|
894,102
|
|
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, 2019
and
2018
. Other countries consist of Mexico, Australia, New Zealand, and Singapore.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2019
|
|
2018
|
|
Service Center Based Distribution
|
|
Fluid Power & Flow Control
|
|
Total
|
|
|
Service Center Based Distribution
|
|
Fluid Power & Flow Control
|
|
Total
|
|
Geographic Areas:
|
|
|
|
|
|
|
|
United States
|
$
|
2,009,479
|
|
$
|
1,007,280
|
|
$
|
3,016,759
|
|
|
$
|
1,903,388
|
|
$
|
711,653
|
|
$
|
2,615,041
|
|
Canada
|
271,305
|
|
—
|
|
271,305
|
|
|
273,622
|
|
—
|
|
273,622
|
|
Other countries
|
172,121
|
|
12,554
|
|
184,675
|
|
|
169,408
|
|
15,203
|
|
184,611
|
|
Total
|
$
|
2,452,905
|
|
$
|
1,019,834
|
|
$
|
3,472,739
|
|
|
$
|
2,346,418
|
|
$
|
726,856
|
|
$
|
3,073,274
|
|
The following table presents the Company’s percentage of revenue by reportable segment and major customer industry for the year ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2019
|
|
Service Center Based Distribution
|
|
|
Fluid Power & Flow Control
|
|
|
Total
|
|
General Industry
|
33.7
|
%
|
|
43.0
|
%
|
|
36.3
|
%
|
Industrial Machinery
|
10.4
|
|
|
21.8
|
|
|
13.8
|
|
Metals
|
12.6
|
|
|
9.4
|
|
|
11.6
|
|
Food
|
10.6
|
|
|
2.7
|
|
|
8.3
|
|
Oil & Gas
|
10.1
|
|
|
2.1
|
|
|
7.8
|
|
Forest Products
|
8.0
|
|
|
3.1
|
|
|
6.6
|
|
Chem/Petrochem
|
3.1
|
|
|
13.8
|
|
|
6.3
|
|
Cement & Aggregate
|
6.7
|
|
|
1.0
|
|
|
5.0
|
|
Transportation
|
4.8
|
|
|
3.1
|
|
|
4.3
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
The following table presents the Company’s percentage of revenue by reportable segment and product line for the year ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2019
|
|
Service Center Based Distribution
|
|
|
Fluid Power & Flow Control
|
|
|
Total
|
|
Power Transmission
|
33.9
|
%
|
|
1.6
|
%
|
|
24.4
|
%
|
Fluid Power
|
13.5
|
|
|
39.4
|
|
|
21.1
|
|
Bearings, Linear & Seals
|
27.5
|
|
|
0.3
|
|
|
19.5
|
|
General Maintenance; Hose Products
|
25.1
|
|
|
5.3
|
|
|
19.3
|
|
Specialty Flow Control
|
—
|
|
|
53.4
|
|
|
15.7
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
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 2019 Acquisitions
On March 4, 2019, the Company acquired substantially all of the net assets of MilRoc Distribution and Woodward Steel. MilRoc Distribution is an Oklahoma based distributor of oilfield specific products, namely pumps and valves, as well as equipment repair services and industrial parts to the oil & gas industry. Woodward Steel is an Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc Distribution and Woodward Steel are both included in the Service Center Based Distribution segment. The purchase price for the acquisition was
$35,000
, net tangible assets acquired were
$17,910
, and intangible assets including goodwill was
$17,090
based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment pending the completion of the fair value analysis. The purchase price includes acquisition holdback payments of
$4,375
, which are included in other current liabilities and other liabilities on the consolidated balance sheet as of
June 30, 2019
, and which will be paid on the first, second, and third 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.
On November 2, 2018, the Company acquired substantially all of the net assets of Fluid Power Sales, Inc. (FPS), a Baldwinsville, New York based manufacturer and distributor of fluid power components, specializing in the engineering and fabrication of manifolds and power units. FPS is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was
$8,100
, net tangible assets acquired were
$4,150
, and goodwill was
$3,950
based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes acquisition holdback payments of
$1,200
, which is included in other current liabilities and other liabilities on the consolidated balance sheet as of
June 30, 2019
, and which will be paid on the first and second anniversaries of the acquisition date with interest at a fixed rate of
1.5%
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.
FCX Acquisition
On January 31, 2018, the Company completed the acquisition of
100%
of the outstanding shares of FCX Performance, Inc. (FCX), a Columbus, Ohio based distributor of specialty process flow control products and services. The total consideration transferred for the acquisition was
$781,781
, which was financed by cash-on-hand and a new credit facility comprised of a
$780,000
Term Loan A and a
$250,000
revolver, effective with the transaction closing. See note 6 Debt. As a distributor of engineered valves, instruments, pumps and lifecycle services to MRO and OEM customers across diverse industrial and process end markets, this business is included in the Fluid Power & Flow Control Segment.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of FCX based on their estimated fair values at the acquisition date.
|
|
|
|
|
|
FCX Acquisition
|
|
|
2018
|
|
Cash
|
$
|
11,141
|
|
Accounts receivable
|
80,836
|
|
Inventories
|
44,669
|
|
Other current assets
|
1,753
|
|
Property
|
8,282
|
|
Identifiable intangible assets
|
305,420
|
|
Goodwill
|
440,012
|
|
Other assets
|
775
|
|
Total assets acquired
|
$
|
892,888
|
|
Accounts payable and accrued liabilities
|
54,035
|
|
Other liabilities
|
2,677
|
|
Deferred tax liabilities
|
54,395
|
|
Net assets acquired
|
$
|
781,781
|
|
|
|
Purchase price
|
$
|
784,281
|
|
Reconciliation of fair value transferred:
|
|
Working Capital Adjustments
|
(2,500
|
)
|
Total Consideration
|
$
|
781,781
|
|
Goodwill acquired of
$161,452
is deductible for income tax purposes.
Net sales, operating income and net income from the FCX acquisition included in the Company’s results since January 31, 2018, the date of the acquisition, are as follows:
|
|
|
|
|
|
|
|
|
2019
|
|
January 31, 2018 to June 30, 2018
|
|
Net sales
|
$
|
549,833
|
|
$
|
249,752
|
|
Operating income
|
38,186
|
|
16,845
|
|
Net income
|
28,075
|
|
8,758
|
|
The Company incurred
$2,849
in third-party costs during
2018
pertaining to the acquisition of FCX, which are included in selling, distribution and administration expense in the statements of consolidated income for fiscal
2018
.
The following unaudited pro forma consolidated results of operations have been prepared as if the FCX acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2017:
|
|
|
|
|
|
|
|
Pro forma, year ended June 30:
|
2018
|
|
2017
|
|
Net sales
|
$
|
3,330,430
|
|
$
|
2,943,583
|
|
Operating income
|
234,603
|
|
196,194
|
|
Net income
|
158,181
|
|
126,270
|
|
Diluted net income per share
|
$
|
4.03
|
|
$
|
3.20
|
|
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect additional amortization that would have been recorded assuming the fair value adjustments to identified intangible assets had been applied as of July 1, 2016. In addition, pro forma adjustments have been made for the interest expense that would have been incurred as a result of the indebtedness used to finance the acquisitions. The pro forma net income amounts also incorporate an adjustment to the recorded income tax expense for the income tax effect of the pro forma adjustments described above. These pro forma results of operations do not include any anticipated synergies or other effects of the planned integration of FCX; accordingly,
such pro forma adjustments do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred as of the date indicated or that may result in the future.
Other Fiscal 2018 Acquisition
On July 3, 2017, the Company acquired
100%
of the outstanding stock of Dise
ñ
os, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a distributor of accessories and components for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment. The purchase price for the acquisition was
$5,920
, net tangible assets acquired were
$3,395
, and goodwill was
$2,525
based upon estimated fair values at the acquisition date. The purchase price includes
$906
of acquisition holdback payments, of which
$219
was paid during fiscal year
2019
. Due to changes in foreign currency exchange rates, the balance of
$646
is included in other current liabilities and other liabilities on the consolidated balance sheets as of
June 30, 2019
, which will be paid on the second and third anniversaries of the acquisition date with interest at a fixed rate of
1.5%
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 2017 Acquisition
On March 3, 2017, the Company acquired substantially all of the net assets of Sentinel Fluid Controls ("Sentinel"), a distributor of hydraulic and lubrication components, systems and solutions operating from four locations. Sentinel is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was
$3,755
, net tangible assets acquired were
$3,130
, and goodwill was
$625
based upon estimated fair values at the acquisition date. The purchase price included
$982
of acquisition holdback payments, of which
$329
,
$328
, and
$175
were paid during fiscal years
2019
,
2018
, and
2017
, respectively. The remaining balance of
$150
is included in other current liabilities and other liabilities on the consolidated balance sheets, which will be paid plus interest at various times in the future. The Company funded the amount paid for the acquisition at closing using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
Holdback Liabilities for Acquisitions
Acquisition holdback payments of approximately
$2,640
,
$2,343
,
$1,313
and
$75
will be made in fiscal 2020, 2021, 2022, 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 2020 and other liabilities for the amounts due in fiscal years 2021 through 2024.
NOTE 4: INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
|
2018
|
|
U.S. inventories at average cost
|
|
$
|
473,949
|
|
|
$
|
443,521
|
|
Foreign inventories at average cost
|
|
125,260
|
|
|
117,711
|
|
|
|
599,209
|
|
|
561,232
|
|
Less: Excess of average cost over LIFO cost for U.S. inventories
|
|
151,654
|
|
|
139,163
|
|
Inventories on consolidated balance sheets
|
|
$
|
447,555
|
|
|
$
|
422,069
|
|
The overall impact of LIFO layer liquidations increased gross profit by
$112
,
$579
, and
$9,414
in fiscal
2019
, fiscal
2018
, and fiscal
2017
, respectively. In fiscal
2017
, reductions in U.S. inventories, primarily in the bearings pool which included the scrapping of approximately
$6,000
of product, resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years.
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, 2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Center Based Distribution
|
|
|
Fluid Power & Flow Control
|
|
|
Total
|
|
Balance at July 1, 2017
|
$
|
201,740
|
|
|
$
|
4,395
|
|
|
$
|
206,135
|
|
Goodwill added during the year
|
2,525
|
|
|
439,164
|
|
|
441,689
|
|
Other, primarily currency translation
|
(1,181
|
)
|
|
—
|
|
|
(1,181
|
)
|
Balance at June 30, 2018
|
203,084
|
|
|
443,559
|
|
|
646,643
|
|
Goodwill added during the year
|
9,943
|
|
|
4,798
|
|
|
14,741
|
|
Other, primarily currency translation
|
607
|
|
|
—
|
|
|
607
|
|
Balance at June 30, 2019
|
$
|
213,634
|
|
|
$
|
448,357
|
|
|
$
|
661,991
|
|
The Company has seven (
7
) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2019. The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts by at least
20%
as of January 1, 2019. Specifically, the Canada reporting unit's fair value exceeded its carrying value by
25%
. The Canada reporting unit has a goodwill balance of
$28,327
as of
June 30, 2019
. 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, operating margins, 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, earnings before interest, taxes, depreciation, and amortization (EBITDA) and multiples that are applied to management’s forecasted revenues and EBITDA estimates.
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.
At
June 30, 2019
and
2018
, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled
$64,794
related to the Service Center Based Distribution segment and
$36,605
related to the Fluid Power & Flow Control segment.
The Company's identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book Value
|
|
Finite-Lived Intangibles:
|
|
|
|
|
|
Customer relationships
|
$
|
422,367
|
|
|
$
|
135,879
|
|
|
$
|
286,488
|
|
Trade names
|
105,946
|
|
|
27,232
|
|
|
78,714
|
|
Vendor relationships
|
11,367
|
|
|
8,156
|
|
|
3,211
|
|
Non-competition agreements
|
2,702
|
|
|
2,249
|
|
|
453
|
|
Total Intangibles
|
$
|
542,382
|
|
|
$
|
173,516
|
|
|
$
|
368,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book Value
|
|
Finite-Lived Intangibles:
|
|
|
|
|
|
Customer relationships
|
$
|
465,691
|
|
|
$
|
125,009
|
|
|
$
|
340,682
|
|
Trade names
|
112,939
|
|
|
22,454
|
|
|
90,485
|
|
Vendor relationships
|
11,425
|
|
|
7,382
|
|
|
4,043
|
|
Non-competition agreements
|
2,761
|
|
|
2,024
|
|
|
737
|
|
Total Intangibles
|
$
|
592,816
|
|
|
$
|
156,869
|
|
|
$
|
435,947
|
|
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
During fiscal
2019
, the Company acquired identifiable intangible assets with a preliminary acquisition cost allocation and weighted-average life as follows:
|
|
|
|
|
|
|
|
Acquisition Cost Allocation
|
|
|
Weighted-Average Life
|
Customer relationships
|
$
|
5,956
|
|
|
20.0
|
Trade names
|
941
|
|
|
5.0
|
Non-competition agreements
|
250
|
|
|
5.0
|
Total Intangibles Acquired
|
$
|
7,147
|
|
|
17.5
|
Due to a sustained decline in economic conditions in the upstream oil and gas industry in western Canada,
management also assessed the long-lived intangible assets related to the Reliance asset group in Canada for
impairment during the third quarter of fiscal 2019. The Reliance asset group is located in western Canada and
primarily serves customers in the upstream oil and gas industry. The asset group carrying value exceeded the sum of
the undiscounted cash flows, indicating impairment. The fair value of the asset group was then determined using the income approach, using Level 3 assumptions in the fair value hierarchy, and the analysis resulted in the measurement of a full impairment loss of
$31,594
, which was recorded in the third quarter of fiscal 2019.
Amortization of identifiable intangibles totaled
$41,883
,
$32,065
and
$24,371
in fiscal
2019
,
2018
and
2017
, respectively, and is included in selling, distribution and administrative expenses in the statements of consolidated income. Future amortization expense based on the Company’s identifiable intangible assets as of
June 30, 2019
is estimated to be
$39,000
for
2020
,
$36,900
for
2021
,
$34,800
for
2022
,
$32,600
for
2023
and
$28,600
for
2024
.
NOTE 6: DEBT
Revolving Credit Facility & Term Loan
In January 2018, in conjunction with the acquisition of FCX, the Company refinanced its existing credit facility and entered into a new five-year credit facility with a group of banks expiring in
January 2023
. This agreement provides for a
$780,000
unsecured term loan and a
$250,000
unsecured revolving credit facility. Fees on this facility range from
0.10%
to
0.20%
per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. At
June 30, 2019
and
June 30, 2018
, the Company had
$613,625
and
$775,125
outstanding under the term loan, respectively. The Company had no amount outstanding under the revolver as of
June 30, 2019
and
$19,500
was outstanding under the revolver as of
June 30, 2018
. Unused lines under this facility, net of outstanding letters of credit of
$3,215
and
$3,625
, respectively, to secure certain insurance obligations, totaled
$246,785
and
$226,875
at
June 30, 2019
and
June 30, 2018
, respectively, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was
4.19%
and
4.13%
as of
June 30, 2019
and
June 30, 2018
, respectively. The weighted average interest rate on the amount outstanding under the revolving credit facility as of
June 30, 2018
was
3.93%
.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving credit agreement, in the amount of
$2,698
as of
June 30, 2019
and
June 30, 2018
, 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
. The maximum availability under the AR Securitization Facility is
$175,000
. 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
$175,000
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 Service Center Based Distribution reportable segment’s U.S. operations’ trade accounts receivable. The collateralized trade accounts receivable is equal to the borrowed amount outstanding under the AR Securitization Facility and there are no restrictions on cash or other assets. 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 and fees on the AR Securitization Facility are
0.90%
per year. As of
June 30, 2019
, the Company borrowed
$175,000
under the AR Securitization Facility, and the interest rate was
3.33%
.
Other Long-Term Borrowings
At
June 30, 2019
and
June 30, 2018
, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of
$170,000
. 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 have a principal amount of
$120,000
and carry a fixed interest rate of
3.19%
, and are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principal amount of
$50,000
, carry a fixed interest rate of
3.21%
, and are due in equal principal payments in October 2019 and 2023.
In 2014, the Company assumed
$2,359
of debt as a part of the headquarters facility acquisition. The
1.50%
fixed interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At
June 30, 2019
and
2018
,
$1,204
and
$1,438
was outstanding, respectively.
Unamortized debt issue costs of
$577
and
$551
are included as a reduction of current portion of long-term debt on the consolidated balance sheets as of
June 30, 2019
and
June 30, 2018
, respectively. Unamortized debt issue costs of
$1,366
and
$1,807
are included as a reduction of long-term debt on the consolidated balance sheets as of
June 30, 2019
and
June 30, 2018
, respectively.
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
|
|
2020
|
$
|
49,613
|
|
2021
|
79,241
|
|
2022
|
259,120
|
|
2023
|
546,624
|
|
2024
|
25,231
|
|
Covenants
The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At
June 30, 2019
, the most restrictive of these covenants required that the Company have net indebtedness less than 4.0 times consolidated income before interest, taxes, depreciation and amortization (as defined). At
June 30, 2019
, the Company's net indebtedness was less than 3.0 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at
June 30, 2019
.
NOTE 7: DERIVATIVES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other
comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
In January 2019, the Company entered into an interest rate swap to mitigate variability in forecasted interest payments on
$463,000
of the Company’s U.S. dollar-denominated unsecured variable rate debt. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. The interest rate swap converts
$463,000
of variable rate debt to a rate of
4.36%
. The fair value of the interest rate cash flow hedge was
$14,202
as of
June 30, 2019
(Level 2 in the fair value hierarchy), which is included in other current liabilities and other liabilities in the consolidated balance sheet. Realized losses related to the interest rate cash flow hedge were not material in fiscal
2019
.
NOTE 8: FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at
June 30, 2019
and
June 30, 2018
totaled
$11,246
and
$10,318
, 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, 2019
, the carrying value of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximates fair value (Level 2 in the fair value hierarchy).
The revolving credit facility and the term loan contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).
NOTE 9: INCOME TAXES
Income Before Income Taxes
The components of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
2019
|
|
|
2018
|
|
|
2017
|
|
U.S.
|
$
|
204,462
|
|
|
$
|
186,874
|
|
|
$
|
154,472
|
|
Foreign
|
(9,981
|
)
|
|
17,844
|
|
|
12,494
|
|
Income before income taxes
|
$
|
194,481
|
|
|
$
|
204,718
|
|
|
$
|
166,966
|
|
Provision
The provision (benefit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
34,437
|
|
|
$
|
48,131
|
|
|
$
|
26,456
|
|
State and local
|
7,965
|
|
|
8,038
|
|
|
4,692
|
|
Foreign
|
5,718
|
|
|
5,309
|
|
|
4,760
|
|
Total current
|
48,120
|
|
|
61,478
|
|
|
35,908
|
|
Deferred:
|
|
|
|
|
|
Federal
|
6,265
|
|
|
5,955
|
|
|
852
|
|
State and local
|
1,947
|
|
|
(586
|
)
|
|
535
|
|
Foreign
|
(5,844
|
)
|
|
(3,754
|
)
|
|
(4,239
|
)
|
Total deferred
|
2,368
|
|
|
1,615
|
|
|
(2,852
|
)
|
Total
|
$
|
50,488
|
|
|
$
|
63,093
|
|
|
$
|
33,056
|
|
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to U.S. tax law. The Act reduced the U.S. federal corporate income tax rate from
35%
to
21%
, required companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminated U.S. federal income tax on dividends from foreign subsidiaries, and created new taxes on certain foreign-sourced earnings. During fiscal 2018, the Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate from
35%
to
21%
. The rate change was administratively effective as of the beginning of the Company's fiscal year, resulting in a blended statutory rate for fiscal 2018 of
28.06%
.
The SEC staff issued SAB 118, which provided guidance on accounting for the tax effects of the Act for which the accounting under ASC 740 was incomplete. To the extent that a company's accounting for certain income tax effects of the Act was incomplete but it was able to determine a reasonable estimate, it was required to record a provisional estimate in the financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act. According to SAB 118, the Company recorded a provisional tax expense of
$3,877
related to the one-time transition tax on certain unremitted earnings of foreign subsidiaries and recorded a provisional tax expense of
$2,414
related to the re-measurement of deferred tax balances in fiscal 2018. During fiscal 2019, the Company completed its accounting of the Act. Accordingly, the Company recorded adjustments in fiscal 2019 totaling
$2,403
to reduce the tax liability related to the one-time transition tax.
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,
|
2019
|
|
|
2018
|
|
|
2017
|
|
Statutory income tax rate
|
21.0
|
%
|
|
28.1
|
%
|
|
35.0
|
%
|
Effects of:
|
|
|
|
|
|
State and local taxes
|
4.4
|
|
|
3.1
|
|
|
2.8
|
|
U.S. federal tax reform
|
(0.3
|
)
|
|
3.1
|
|
|
—
|
|
Worthless stock deduction
|
—
|
|
|
—
|
|
|
(13.9
|
)
|
Stock compensation
|
(0.5
|
)
|
|
(0.4
|
)
|
|
(1.4
|
)
|
GILTI/FDII
|
0.7
|
|
|
—
|
|
|
—
|
|
U.S. tax on foreign income, net
|
0.5
|
|
|
—
|
|
|
—
|
|
Impact of foreign operations
|
(1.8
|
)
|
|
(1.3
|
)
|
|
(2.3
|
)
|
Deductible dividend
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.4
|
)
|
Valuation allowance
|
2.9
|
|
|
(0.9
|
)
|
|
0.3
|
|
Other, net
|
(0.7
|
)
|
|
(0.6
|
)
|
|
(0.3
|
)
|
Effective income tax rate
|
26.0
|
%
|
|
30.8
|
%
|
|
19.8
|
%
|
Consolidated Balance Sheets
Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
June 30,
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
Compensation liabilities not currently deductible
|
$
|
17,401
|
|
|
$
|
19,334
|
|
Other expenses and reserves not currently deductible
|
13,050
|
|
|
13,169
|
|
Goodwill and intangibles
|
2,398
|
|
|
3,197
|
|
Foreign tax credit
|
—
|
|
|
413
|
|
Net operating loss carryforwards
|
8,466
|
|
|
11,315
|
|
Hedging instrument
|
3,498
|
|
|
—
|
|
Other
|
1,173
|
|
|
199
|
|
Total deferred tax assets
|
45,986
|
|
|
47,627
|
|
Less: Valuation allowance
|
(5,597
|
)
|
|
(38
|
)
|
Deferred tax assets, net of valuation allowance
|
40,389
|
|
|
47,589
|
|
Deferred tax liabilities:
|
|
|
|
Inventories
|
(8,600
|
)
|
|
(8,196
|
)
|
Goodwill and intangibles
|
(75,504
|
)
|
|
(86,176
|
)
|
Depreciation and differences in property bases
|
(10,777
|
)
|
|
(9,294
|
)
|
Total deferred tax liabilities
|
(94,881
|
)
|
|
(103,666
|
)
|
Net deferred tax liabilities
|
$
|
(54,492
|
)
|
|
$
|
(56,077
|
)
|
Net deferred tax liabilities are classified as follows:
|
|
|
|
Other assets
|
$
|
3,859
|
|
|
$
|
2,103
|
|
Other liabilities
|
(58,351
|
)
|
|
(58,180
|
)
|
Net deferred tax liabilities
|
$
|
(54,492
|
)
|
|
$
|
(56,077
|
)
|
As of
June 30, 2019
and
2018
, the Company had foreign net operating loss carryforwards of approximately
$27,024
and
$21,668
, respectively, which will expire at various dates beginning in 2033. Also as of
June 30, 2019
and
2018
, the Company had state net operating loss carryforwards, the tax benefit of which is approximately
$2,098
and
$1,549
respectively, which will expire at various dates beginning in 2027.
Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be
impacted by changes to tax laws, statutory tax rates and future income levels. During the year ended
June 30, 2019
, the Company recorded a valuation allowance of
$5,559
related to certain deferred tax assets in Canada due to the uncertainty in realizing these net deferred tax assets.
As of
June 30, 2019
, the Company has accumulated undistributed earnings of non-U.S. subsidiaries of approximately
$107,277
. Because
$95,400
of such earnings have previously been subject to the one-time transition tax required by the Act, 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. The amount of the unrecognized tax liability with respect to the distribution of such earnings is estimated to be approximately
$2,795
. In addition, we expect foreign tax credits would be available to either offset or partially reduce the tax cost in the event of a distribution. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.
Unrecognized Income Tax Benefits
The Company and its subsidiaries file income tax returns in U.S. federal, various state, local and foreign jurisdictions. The following table sets forth the changes in the amount of unrecognized tax benefits for the years ended
June 30, 2019
,
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
2019
|
|
|
2018
|
|
|
2017
|
|
Unrecognized Income Tax Benefits at beginning of the year
|
$
|
3,988
|
|
|
$
|
3,533
|
|
|
$
|
2,915
|
|
Current year tax positions
|
105
|
|
|
143
|
|
|
574
|
|
Prior year tax positions
|
1,151
|
|
|
636
|
|
|
259
|
|
Expirations of statutes of limitations
|
(265
|
)
|
|
(324
|
)
|
|
(189
|
)
|
Settlements
|
—
|
|
|
—
|
|
|
(26
|
)
|
Unrecognized Income Tax Benefits at end of year
|
$
|
4,979
|
|
|
$
|
3,988
|
|
|
$
|
3,533
|
|
Included in the balance of unrecognized income tax benefits at
June 30, 2019
,
2018
, and
2017
are
$4,701
,
$3,725
, and
$3,323
, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
During
2019
,
2018
, and
2017
, the Company recognized
$161
,
$(110)
, and
$163
of expense (benefit), 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
$838
and
$677
as of
June 30, 2019
and
2018
, respectively. The Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next twelve months.
The Company is subject to U.S. federal income tax examinations for the tax years 2016 through 2019 and to state and local income tax examinations for the tax years 2013 through 2019. In addition, the Company is subject to foreign income tax examinations for the tax years 2012 through 2019.
The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment of cash is not expected within one year, or as a reduction of a deferred tax asset.
NOTE 10: SHAREHOLDERS’ EQUITY
Treasury Shares
At
June 30, 2019
,
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 Income (Loss)
Changes in the accumulated other comprehensive income (loss) for the years ended
June 30, 2019
,
2018
, and
2017
, are comprised of the following amounts, shown net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
Unrealized (loss) gain on securities available for sale
|
|
|
Post-employment benefits
|
|
|
Cash flow hedge
|
|
|
Total accumulated other comprehensive (loss) income
|
|
Balance at July 1, 2016
|
$
|
(81,685
|
)
|
|
$
|
(38
|
)
|
|
$
|
(3,823
|
)
|
|
$
|
—
|
|
|
$
|
(85,546
|
)
|
Other comprehensive income
|
2,238
|
|
|
59
|
|
|
1,239
|
|
|
—
|
|
|
3,536
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
308
|
|
|
—
|
|
|
308
|
|
Net current-period other comprehensive income
|
2,238
|
|
|
59
|
|
|
1,547
|
|
|
—
|
|
|
3,844
|
|
Balance at June 30, 2017
|
(79,447
|
)
|
|
21
|
|
|
(2,276
|
)
|
|
—
|
|
|
(81,702
|
)
|
Other comprehensive (loss) income
|
(8,549
|
)
|
|
20
|
|
|
524
|
|
|
—
|
|
|
(8,005
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
(45
|
)
|
|
—
|
|
|
(45
|
)
|
Amounts reclassified for certain income tax effects to retained earnings
|
22
|
|
|
9
|
|
|
(502
|
)
|
|
—
|
|
|
(471
|
)
|
Net current-period other comprehensive (loss) income
|
(8,527
|
)
|
|
29
|
|
|
(23
|
)
|
|
—
|
|
|
(8,521
|
)
|
Balance at June 30, 2018
|
(87,974
|
)
|
|
50
|
|
|
(2,299
|
)
|
|
—
|
|
|
(90,223
|
)
|
Other comprehensive income (loss)
|
1,644
|
|
|
—
|
|
|
(327
|
)
|
|
(10,887
|
)
|
|
(9,570
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
(226
|
)
|
|
183
|
|
|
(43
|
)
|
Cumulative effect of adopting accounting standards
|
—
|
|
|
(50
|
)
|
|
—
|
|
|
—
|
|
|
(50
|
)
|
Net current-period other comprehensive income (loss)
|
1,644
|
|
|
(50
|
)
|
|
(553
|
)
|
|
(10,704
|
)
|
|
(9,663
|
)
|
Balance at June 30, 2019
|
$
|
(86,330
|
)
|
|
$
|
—
|
|
|
$
|
(2,852
|
)
|
|
$
|
(10,704
|
)
|
|
$
|
(99,886
|
)
|
Other Comprehensive (Loss) Income
Details of other comprehensive (loss) income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
2019
|
|
2018
|
|
2017
|
|
Pre-Tax Amount
|
|
|
Tax Expense (Benefit)
|
|
|
Net Amount
|
|
|
Pre-Tax Amount
|
|
|
Tax (Benefit) Expense
|
|
|
Net Amount
|
|
|
Pre-Tax Amount
|
|
|
Tax Expense
|
|
|
Net Amount
|
|
Foreign currency translation adjustments
|
$
|
2,021
|
|
|
$
|
377
|
|
|
$
|
1,644
|
|
|
$
|
(8,875
|
)
|
|
$
|
(326
|
)
|
|
$
|
(8,549
|
)
|
|
$
|
2,238
|
|
|
$
|
—
|
|
|
$
|
2,238
|
|
Post-employment benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (loss) gain on re-measurement
|
(372
|
)
|
|
(45
|
)
|
|
(327
|
)
|
|
709
|
|
|
185
|
|
|
524
|
|
|
2,038
|
|
|
799
|
|
|
1,239
|
|
Reclassification of actuarial (gains) losses and prior service cost into other income, net and included in net periodic pension costs
|
(306
|
)
|
|
(80
|
)
|
|
(226
|
)
|
|
(73
|
)
|
|
(28
|
)
|
|
(45
|
)
|
|
506
|
|
|
198
|
|
|
308
|
|
Unrealized gain on investment securities available for sale
|
—
|
|
|
—
|
|
|
—
|
|
|
37
|
|
|
17
|
|
|
20
|
|
|
91
|
|
|
32
|
|
|
59
|
|
Unrealized loss on cash flow hedge
|
(14,446
|
)
|
|
(3,559
|
)
|
|
(10,887
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reclassification of interest from cash flow hedge into interest expense
|
244
|
|
|
61
|
|
|
183
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cumulative effect of adopting accounting standard
|
(50
|
)
|
|
—
|
|
|
(50
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reclassification of certain income tax effects to retained earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
471
|
|
|
(471
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive (loss) income
|
$
|
(12,909
|
)
|
|
$
|
(3,246
|
)
|
|
$
|
(9,663
|
)
|
|
$
|
(8,202
|
)
|
|
$
|
319
|
|
|
$
|
(8,521
|
)
|
|
$
|
4,873
|
|
|
$
|
1,029
|
|
|
$
|
3,844
|
|
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,
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net Income
|
$
|
143,993
|
|
|
$
|
141,625
|
|
|
$
|
133,910
|
|
Average Shares Outstanding:
|
|
|
|
|
|
Weighted-average common shares outstanding for basic computation
|
38,670
|
|
|
38,752
|
|
|
39,013
|
|
Dilutive effect of potential common shares
|
490
|
|
|
529
|
|
|
391
|
|
Weighted-average common shares outstanding for dilutive computation
|
39,160
|
|
|
39,281
|
|
|
39,404
|
|
Net Income Per Share — Basic
|
$
|
3.72
|
|
|
$
|
3.65
|
|
|
$
|
3.43
|
|
Net Income Per Share — Diluted
|
$
|
3.68
|
|
|
$
|
3.61
|
|
|
$
|
3.40
|
|
Stock awards relating to
226
,
66
and
141
shares of common stock were outstanding at
June 30, 2019
,
2018
and
2017
, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.