APPLIED INDUSTRIAL TECHNOLOGIES INC

Previous wording

With more than 6,500 employees across North & Central America, Australia, New Zealand, and Singapore, Applied Industrial Technologies (“Applied,” the “Company,” “we,” “us,” or “our”) is a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, and expertise. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During the first quarter of fiscal 2025, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, Singapore, and Costa Rica from 593 facilities.

Current wording

Applied Industrial Technologies (“Applied,” the “Company,” “We,” “Us” or “Our”) is a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, and expertise. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During the second quarter of fiscal 2025, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, Singapore, and Costa Rica from 624 facilities.

Previous wording

The following is Management's Discussion and Analysis of significant factors which affected our financial condition, results of operations and cash flows during the periods included in the accompanying condensed consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash flows. When reviewing the discussion and analysis set forth below, please note that the SKUs (Stock Keeping Units) we sell in any given period may not necessarily be 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.

Current wording

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

Previous wording

Consolidated sales for the quarter ended September 30, 2024 increased $3.8 million or 0.3% compared to the prior year quarter, with acquisitions increasing sales by $22.0 million or 2.0% and unfavorable foreign currency translation of $3.5 million reducing sales by 0.3%. Operating margin was 10.3% of sales for the quarter ended September 30, 2024 compared to 11.0% of sales for the same quarter in the prior year. Net income of $92.1 million decreased 1.9% compared to the prior year quarter.

Current wording

Consolidated sales for the quarter ended December 31, 2024 decreased $4.2 million or 0.4% compared to the prior year quarter, with acquisitions increasing sales by $19.9 million or 1.9%, and unfavorable foreign currency translation of $5.1 million decreasing sales by 0.5%. The Company had operating income of $120.9 million, or operating margin of 11.3% of sales for the quarter ended December 31, 2024 compared to an operating income of $114.6 million, or operating margin of 10.6% of sales for the same quarter in the prior year. Net income of $93.3 million increased 2.3% compared to the prior year quarter.

Previous wording

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

Current wording

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

Previous wording

The MCU (total industry) and IP indices declined slightly since June 2024. The ISM PMI registered 47.2 in September, down from the June 2024 reading of 48.5. The indices for the months during the current quarter, along with the indices for the prior fiscal year end, were as follows:

Current wording

The MCU and IP indices have increased since September 2024. The MCU for December 2024 was 77.6, which is up from the September reading of 77.5 but down from the June reading 78.2. The ISM PMI registered 49.3 in December, up from the September and June 2024 readings of 47.2 and 48.5, respectively, reflecting the softest pace of contraction in the U.S. manufacturing sector since March 2024. The indices for the months during the current quarter, along with the indices for the prior fiscal year end and prior quarter end, were as follows:

Previous wording

The number of Company employees was 6,549 at September 30, 2024, 6,562 at June 30, 2024, and 6,359 at September 30, 2023. The number of operating facilities totaled 593 at September 30, 2024, 590 at June 30, 2024 and 589 at September 30, 2023.

Current wording

The number of Company employees was 6,916 at December 31, 2024, 6,562 at June 30, 2024, and 6,365 at December 31, 2023. The number of operating facilities totaled 624 at December 31, 2024, 590 at June 30, 2024, and 585 at December 31, 2023.

Previous wording

During the quarter ended September 30, 2024, sales increased $3.8 million or 0.3% compared to the prior year quarter, with sales from acquisitions adding $22.0 million or 2.0% and unfavorable foreign currency translation accounting for a decrease of $3.5 million or 0.3%. There were 64 selling days in the quarter ended September 30, 2024 and 63 selling days in the quarter ended September 30, 2023. Excluding the impact of businesses acquired and foreign currency translation, sales were down $14.7 million or 1.4% during the quarter, driven by a decrease of 3.0% primarily due to lower operating activity in the Engineered Solutions segment although demand improved during the quarter, offset by an increase of 1.6% due to one additional sales day.

Current wording

During the quarter ended December 31, 2024, sales decreased $4.2 million or 0.4% compared to the prior year quarter, with sales from acquisitions adding $19.9 million or 1.9%, and unfavorable foreign currency translation reducing sales by $5.1 million or 0.5%. There were 62 selling days in the quarter ended December 31, 2024 and 61 selling days in the quarter ended December 31, 2023. Excluding the impact of businesses acquired and foreign currency translation, sales were down $19.0 million or 1.8% during the quarter, driven by a decrease of 3.4% primarily due to end market demand remaining subdued with customer plant shutdowns and holiday timing negatively impacting December sales, offset by an increase of 1.6% due to one additional sales day.

Previous wording

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $3.2 million or 0.4%. Acquisitions within this segment increased sales by $5.5 million or 0.7%. Unfavorable foreign currency translation reduced sales by $3.5 million or 0.5%. Excluding the impact of businesses acquired and foreign currency translation, sales increased $1.2 million or 0.2%, driven by an increase of 1.6% due to one additional sales day, offset by a decrease of 1.4% primarily driven by softer MRO spending and capital maintenance projects early in the quarter.

Current wording

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $5.5 million or 0.7%. Acquisitions within this segment increased sales by $2.2 million or 0.3% and unfavorable foreign currency translation decreased sales by $5.1 million or 0.7%. Excluding the impact of businesses acquired and foreign currency translation, sales decreased $2.6 million or 0.3%, driven by a decrease of 1.9% primarily driven by softer MRO spending and capital maintenance projects, as well as the impact from extended customer plant shutdowns and holiday timing, offset by an increase of 1.6% due to additional sales volume from one additional sales day.

Previous wording

Sales in the United States were down $2.1 million or 0.2%, as acquisitions added $10.1 million or 1.0%. Excluding the impact of businesses acquired, U.S. sales were down $12.2 million or 1.2%, driven by a 2.8% decrease from operations, offset by an increase of 1.6% due to one additional sales day. Sales in Canada decreased $3.8 million or 5.1%. Unfavorable foreign currency translation decreased Canadian sales by $1.3 million or 1.6%. Excluding the impact of foreign currency translation, Canadian sales were down $2.5 million or 3.5%, driven by a 5.1% decrease from operations, offset by an increase of 1.6% due to one additional sales day. Sales in other countries increased $9.7 million or 16.0% from the prior year quarter primarily due to acquisitions contributing $11.9 million or 19.7%, offset by unfavorable foreign currency translation of $2.2 million or 3.7%.

Current wording

Sales in our U.S. operations were down $15.2 million or 1.6%, as acquisitions added $7.2 million or 0.8%. Excluding the impact of businesses acquired, U.S. sales were down $22.4 million or 2.4%, driven by a 4.0% decrease from operations due to lower demand, offset by an increase of 1.6% due to one additional sales day. Sales from our Canadian operations increased $0.6 million or 0.8%. Unfavorable foreign currency translation reduced Canadian sales by $2.1 million or 2.7%. Excluding the impact of foreign currency translation, Canadian sales increased $2.7 million or 3.5%, driven by an increase of 1.9% from operations due to higher demand, in addition to an increase of 1.6% due to one additional sales day. Sales in other countries increased $10.4 million or 18.7% from the prior year quarter, primarily due to acquisitions contributing $12.7 million or 23.0% along with an increase from operations of $0.7 million or 1.2%, offset by unfavorable foreign currency translation of $3.0 million or 5.5%.

Previous wording

SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was 19.3% of sales in the quarter ended September 30, 2024 compared to 18.7% in the prior year quarter, an increase of$7.5 million or 3.7% compared to the prior year quarter. SD&A from businesses acquired added $6.6 million or 3.2% of SD&A expenses, including $0.9 million of intangibles amortization related to acquisitions. Changes in foreign currency exchange rates had the effect of decreasing SD&A during the quarter ended September 30, 2024 by $0.7 million or 0.3% compared to the prior year quarter. Excluding the impact of businesses acquired and the favorable currency translation impact, SD&A increased $1.6 million or 0.8% during the quarter ended September 30, 2024 compared to the prior year quarter.

Current wording

SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was 19.3% of sales in the quarter ended December 31, 2024 compared to 18.8% in the prior year quarter, an increase of $4.7 million or 2.3% compared to the prior year quarter. SD&A from businesses acquired added $4.7 million or 2.3% of SD&A expenses, including $0.8 million of intangibles amortization related to acquisitions. Changes in foreign currency exchange rates reduced SD&A during the quarter ended December 31, 2024 by $0.7 million or 0.3% compared to the prior year quarter. Excluding the impact of businesses acquired and the favorable currency translation impact, SD&A increased $0.7 million or 0.3% during the quarter ended December 31, 2024 compared to the prior year quarter.

Previous wording

Operating income decreased $7.5 million or 6.2%, and as a percent of sales decreased to 10.3% from 11.0% during the prior year quarter.

Current wording

Operating income increased $6.3 million or 5.5%, and as a percent of sales increased to 11.3% from 10.6% during the prior year quarter due to expanded gross profit despite softer demand.

Previous wording

Operating income, as a percentage of sales for the Service Center Based Distribution segment decreased to 12.6% in the current year quarter from 13.0% in the prior year quarter. Operating income as a percentage of sales for the Engineered Solutions segment decreased to 13.8% in the current year quarter from 14.2% in the prior year quarter.

Current wording

Operating income, as a percentage of sales for the Service Center Based Distribution segment, increased to 12.8% in the current year quarter from 12.5% in the prior year quarter. Operating income, as a percentage of sales for the Engineered Solutions segment, increased to 15.9% in the current year quarter from 14.7% in the prior year quarter.

Previous wording

The Company had net interest income in the current year quarter of$0.6 million compared to net interest expense of$1.3 millionin the prior year quarter due to reduced debt levels and greater interest income from higher cash balances and investment yields.

Current wording

The Company had net interest income in the current year quarter of $0.9 million compared to net interest expense of $1.9 million in the prior year quarter due to reduced debt levels and greater interest income from higher cash balances and investment yields.

Previous wording

As a result of the factors addressed above, net income for the quarter ended September 30, 2024 decreased $1.8 million or 1.9% compared to the prior year quarter. Diluted net income per share was $2.36 per share for the quarter ended September 30, 2024 compared to $2.39 per share in the prior year quarter, a decrease of 1.3%.

Current wording

As a result of the factors addressed above, net income for the quarter ended December 31, 2024 increased$2.1 million or 2.3% compared to the prior year quarter. Diluted net income per share was $2.39 per share for the quarter ended December 31, 2024 compared to $2.32 per share in the prior year quarter, an increase of 3.0%.

Previous wording

Sales from our Engineered Solutions segment increased $0.6 million or 0.2%. Acquisitions within this segment increased sales by $16.5 million or 4.7%. Excluding the impact of businesses acquired, sales decreased $15.9 million or 4.5%, driven by a decrease of 6.1% due to softer demand across off-highway mobile fluid power OEM customers, and to a lesser extent, softer flow control and automation sales in July and August, offset by an increase of 1.6% due to additional sales volume from one additional sales day.

Current wording

Sales from our Engineered Solutions segment increased $1.8 million or 0.3%. Acquisitions within this segment increased sales by $34.2 million or 4.9%. Excluding the impact of businesses acquired, sales decreased $32.4 million or 4.6%, driven by a decrease of 6.2% reflecting ongoing weakness across off-highway mobile fluid power OEM customers, and to a lesser extent, softer automation sales, offset by an increase of 1.6% due to additional sales volume from two additional sales days.

Previous wording

Our gross profit margin was 29.6% in the quarter ended September 30, 2024 compared to 29.7% in the prior period. Gross profit margin contracted year over year primarily due to the favorable impact of vendor rebates in the prior year, offset by 24 basis points favorable impact in the current year quarter due to a $2.6 million decrease in LIFO expense.

Current wording

Our gross profit margin was 30.1% in the six months ended December 31, 2024 compared to 29.6% in the prior year period. The gross profit margin for the current year period was positi vely impacted by 25 basis points due to a $5.3 million decrease in LIFO expense as compared to the prior year period, in addition to strong channel execution, ongoing margin expansion initiatives, and a favorable impact from the recognition of supplier rebates.

Previous wording

Other (income) expense, net, which represents certain non-operating items of income and expense, was income of $2.3 million in the current year quarter compared to expense of $0.4 million in the prior year quarter. Current quarter income primarily consists of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.2 million, foreign currency transaction gains of $0.9 million, and other income of $0.2 million. Other expense, net in the prior year quarter consisted primarily of unrealized losses on investments held by non-qualified deferred compensation trusts of $0.6 million, offset by $0.2 million of other income.

Current wording

Other income, net was $3.0 million for the six months ended December 31, 2024, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $1.5 million, net favorable foreign currency transaction gains of $1.2 million, and $0.3 million of other income. During the prior year period, other income, net was $2.5 million, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $1.4 million, net favorable foreign currency transaction gains of $0.9 million, and $0.2 million of other income.

Previous wording

The effective income tax rate was 20.7% for the quarter ended September 30, 2024 compared to 21.1% for the quarter ended September 30, 2023. The decrease in the effective tax rate over the prior year is primarily due to an increase in compensation-related deductions during the quarter ended September 30, 2024 compared to the quarter ended September 30, 2023. We expect our full year tax rate for fiscal 2025 to be in the 23.0% to 24.0% range.

Current wording

The effective income tax rate was 22.3% for the six months ended December 31, 2024 compared to 21.1% for the six months ended December 31, 2023. The increase in the effective tax rate is primarily due to the reversal of a tax valuation allowance related to Mexico during the prior year period. We expect our full year tax rate for fiscal 2025 to be in the 23.0% to 24.0% range.

Previous wording

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. We had total debt obligations outstanding of $597.3 million at September 30, 2024 compared to $597.4 million at June 30, 2024. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations will be sufficient to finance normal working capital needs in each of the countries in which we operate, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company's credit standing and financial strength.

Current wording

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At December 31, 2024, we had total debt obligations outstanding of $572.3 million compared to $597.4 million at June 30, 2024. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations will be sufficient to finance normal working capital needs in each of the countries in which we operate, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company's credit standing and financial strength.

Previous wording

The Company's working capital at September 30, 2024 was $1,331.3 million, compared to $1,268.8 million at June 30, 2024. The current ratio was 3.8 to 1 at September 30, 2024 and 3.5 to 1 at June 30, 2024.

Current wording

The Company's working capital at December 31, 2024 was $1,185.3 million, compared to $1,268.8 million at June 30, 2024. The current ratio was 3.8 to 1 at December 31, 2024 and 3.5 to 1 at June 30, 2024.

Previous wording

The increase in cash provided by operating activities during the three months ended September 30, 2024 from the prior period is due to changes in working capital for the period of $61.8 million, driven primarily by (amounts in thousands):

Current wording

The increase in cash provided by operating activities during the six months ended December 31, 2024 from the prior period is due to changes in working capital for the periodof $49.3 million primarily driven by (amounts in thousands):

Previous wording

Net cash used in investing activities during the three months ended September 30, 2024 decreased from the prior period primarily due to $10.5 million used for acquisitions in thecurrent year quarter compared to $21.4 million used for acquisitions in the prior year quarter.

Current wording

Net cash used in investing activities during the six months ended December 31, 2024 increased from the prior period primarily due to $273.1 million used for acquisitions in the the six months ended December 31, 2024 compared to$21.4 million used for acquisitions in the prior year period.

Previous wording

Net cash used in financing activities during the three months ended September 30, 2024 increased from the prior quarter primarily due to $10.0 million used to repurchase 52,000 shares of common stock which were taken into treasury in the current year quarter. No shares were repurchased in the prior year quarter.

Current wording

Net cash used in financing activities during the six months ended December 31, 2024 increased from the prior year period primarily due to $30.1 million of cash used to repurchase 127,376 shares of common stock which were taken into treasury during the six months ended December 31, 2024 compared to $10.7 million used to repurchase 62,947 shares of common stock in the prior year period.

Previous wording

The Board of Directors has authorized the repurchase of shares of the Company's common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. During the three months ended September 30, 2024, the Company acquired 52,000 shares of the Company's common stock on the open market at an average price per share of $191.92. During the three months ended September 30, 2023, the Company did not acquire any shares of the Company's common stock on the open market. At September 30, 2024, we had authorization to repurchase 1,050,000 shares.

Current wording

The Board of Directors has authorized the repurchase of shares of the Company's common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. During the three months ended December 31, 2024, the Company acquired 75,376 shares of the Company's common stock on the open market for $20.0 million. During the six months ended December 31, 2024, the Company acquired 127,376 shares of the Company's common stock on the open market for $30.0 million. During the three and six months ended December 31, 2023, the Company acquired 62,947 shares of the Company's common stock on the open market for $10.7 million. At December 31, 2024, we had authorization to repurchase an additional 974,624 shares.

Previous wording

In December 2021, the Company entered into a 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. 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. 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. Borrowing capacity under this facility, without exercising the accordion feature, totaled$515.8 million and$515.8 million at September 30, 2024 and June 30, 2024, respectively, and are available to fund future acquisitions or other capital and operating requirements. These amounts are net of outstanding letters of credit of$0.2 million at September 30, 2024 and June 30, 2024, to secure certain insurance obligations. The interest rate on the revolving credit facility was 5.75% and 6.24% as of September 30, 2024 and June 30, 2024, respectively.

Current wording

In December 2021, the Company entered into a 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. 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. 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 the Company's net leverage ratio or Secured Overnight Financing Rate (SOFR) plus a margin that ranges from 80 to 155 basis points based on the Company's net leverage ratio. Borrowing capacity under this facility, without exercising the accordion feature, totaled $515.8 million at December 31, 2024 and June 30, 2024, and is available to fund future acquisitions or other capital and operating requirements. This amount is net of outstanding letters of credit of $0.2 million at both December 31, 2024 and June 30, 2024 to secure certain insurance obligations. The interest rate on the revolving credit facility was 5.26% and 6.24% as of December 31, 2024 and June 30, 2024, respectively.

Previous wording

Additionally, the Company had letters of credit outstanding not associated with the revolving credit agreement, in the amount of$5.3 million and$4.0 million as of September 30, 2024 and June 30, 2024, respectively, in order to secure certain insurance obligations.

Current wording

Additionally, the Company had letters of credit outstanding not associated with the revolving credit agreement, in the amount of $5.3 million and $4.0 million as of December 31, 2024 and June 30, 2024, respectively, in order to secure certain insurance obligations.

Previous wording

In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”). The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the U.S. operations’ trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. The AR Securitization Facility's maximum borrowing capacity is$250.0 million, fees on amounts borrowed are 0.90% per year, and the term goes to August 4, 2026. Borrowing capacity is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable portfolio and, therefore, at certain times, we may not be able to fully access the$250.0 million of borrowing capacity available under the AR Securitization Facility. Borrowings under the AR Securitization Facility carry variable interest rates tied to SOFR. The interest rate on the AR Securitization Facility as of September 30, 2024 and June 30, 2024 was 5.85% and 6.35%, respectively.

Current wording

In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”). The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the U.S. operations’ trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. The AR Securitization Facility's maximum borrowing capacity is $250.0 million, fees on the amounts borrowed are 0.90% per year, and the facility terminates on August 4, 2026. Borrowing capacity is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable portfolio and, therefore, at certain times, we may not be able to fully access the $250.0 million of borrowing capacity available under the AR Securitization Facility. Borrowings under the AR Securitization Facility carry variable interest rates tied to SOFR. The interest rate on the AR Securitization Facility as of December 31, 2024 and June 30, 2024 was 5.34% and 6.35%, respectively.

Previous wording

At September 30, 2024 and June 30, 2024, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of$25.0 million. 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 E” notes have a principal amount of$25.0 million, carry a fixed interest rate of 3.08%, and are due on October 30, 2024.

Current wording

At December 31, 2024 the Company had no remaining borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management. Fees on this facility ranged from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end. The “Series E” notes carried a fixed interest rate of 3.08%, and the remaining principal balance of $25.0 million was paid in October 2024.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

In 2019, the Company entered into an interest rate swap which mitigates variability in forecasted interest payments on $384.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. For more information, see note 6, Derivatives, to the consolidated financial statements, included in Item 1 under the caption “Notes to Condensed Consolidated Financial Statements.”

Previous wording

The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At September 30, 2024, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At September 30, 2024, the Company's net indebtedness was less than 0.2 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at September 30, 2024.

Current wording

The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At December 31, 2024, the most restrictive of these covenants required that the Company maintain net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined in these agreements). At December 31, 2024, the Company's net indebtedness was less than 0.6 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at December 31, 2024.

Previous wording

On a consolidated basis, DSO was 56.6 at September 30, 2024 compared to 56.2 at June 30, 2024. As of September 30, 2024, 1.6% of our accounts receivable balances are more than 90 days past due, compared to 1.5% at June 30, 2024. On an overall basis, our provision for losses from uncollected receivables represents 0.10% of our sales in the three months ended September 30, 2024, compared to 0.08% of sales for the three months ended September 30, 2023. The increase primarily relates to recoveries recorded in the prior year primarily in the U.S. operations of the Service Center Based Distribution segment. Historically, this percentage is around 0.10% to 0.15%. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels.

Current wording

As of December 31, 2024, approximately 1.8% of our accounts receivable balances are more than 90 days past due, compared to 1.5% at June 30, 2024. On an overall basis, our provision for losses on accounts receivable represents 0.24% of our sales in the three months ended December 31, 2024, compared to 0.01% of sales for the three months ended December 31, 2023, and 0.17% of sales for the six months ended December 31, 2024 compared to 0.05% of sales for the six months ended December 31, 2023. The increase primarily relates to provisions recorded in the the six months ended December 31, 2024 for customer credit deterioration and bankruptcies primarily in the U.S. operations of the Service Center Based Distribution segment as well as recoveries recorded in the the six months ended December 31, 2023 primarily in the U.S. operations of the Service Center Based Distribution segment. Historically, this percentage is between 0.10% to 0.15%. Management believes the overall receivables aging and provision for losses on accounts receivable are at reasonable levels.

Previous wording

Inventories are valued using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis, and believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis. The annualized inventory turnover based on average costs was 4.3 for both the quarters ended September 30, 2024 and June 30, 2024.

Current wording

Inventories are valued using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis, and believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis. The annualized inventory turnover based on average costs was 4.3 for the periods ended December 31, 2024 and June 30, 2024.