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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X]
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017, or

[ ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission file number 1-2299

APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Ohio
34-0117420
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

1 Applied Plaza, Cleveland, Ohio 44115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000.
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
Common Stock, without par value
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. ¨ Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No


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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer X
Accelerated filer __
Non-accelerated filer __
Smaller reporting company __
Emerging growth company __
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter (December 31, 2016): $2,268,644,000.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

Class
Outstanding at August 11, 2017
Common Stock, without par value
39,045,291


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual meeting of shareholders of Applied Industrial Technologies, Inc., to be held October 24, 2017, are incorporated by reference into Parts II, III, and IV of this Form 10-K.


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TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
PART I
 
 
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
 
 
 
 
 
 
PART II
 
 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
 
 
 
PART III
 
 
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
 
 
 
PART IV
 
 
Exhibits and Financial Statement Schedules
 
 
 
 
 
 
 


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CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
This report, including the documents incorporated by reference, contains statements that are forward-looking, based on management's current expectations about the future. Forward-looking statements are often identified by qualifiers such as “guidance,” “expect,” “believe,” “plan,” “intend,” “will,” “should,” “could,” “would,” “anticipate,” “estimate,” “forecast,” “may,” "optimistic" and derivative or similar words or expressions. Similarly, descriptions of our objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of Applied Industrial Technologies, Inc. ("Applied") and its management as to future occurrences and trends. Applied intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations, and releases.
Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside Applied's control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by Applied or another person that the results expressed in the statements will be achieved. In addition, Applied assumes no obligation publicly to update or revise forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law.
Applied believes its primary risk factors include, but are not limited to, those identified in the following sections of this annual report on Form 10-K: “Risk Factors” in Item 1A; “Narrative Description of Business,” in Item 1, section (c); and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. PLEASE READ THOSE DISCLOSURES CAREFULLY.



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PART I
ITEM 1. BUSINESS.
In this annual report on Form 10-K, “Applied” refers to Applied Industrial Technologies, Inc., an Ohio corporation. References to “we,” “us,” “our,” and “the Company” refer to Applied and its subsidiaries.
We are a leading distributor of bearings, power transmission products, fluid power components, and other industrial supplies, operating in North America, Australia, New Zealand, and Singapore. We serve MRO (maintenance, repair, and operations) and OEM (original equipment manufacturing) customers in virtually every industry. In addition, the Company provides engineering, design, and systems integration for industrial and fluid power applications, as well as customized mechanical, fabricated rubber, and fluid power shop services.
We add value for our customers by providing product-related technical application support and solutions to help customers minimize their production downtime, improve machine performance, and reduce overall procurement and maintenance costs.
Applied and its predecessor companies have engaged in this business since 1923. Applied reincorporated in Ohio in 1988.
Our Internet address is www.applied.com . The following documents are available free of charge via hyperlink from the investor relations area of our website:
▪
A pplied's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, together with Section 16 insider beneficial stock ownership reports - these documents are posted as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission
▪
Applied's Code of Business Ethics
▪
Applied's Board of Directors Governance Principles and Practices
▪
Applied's Director Independence Standards
▪
Charters for the Audit, Corporate Governance, and Executive Organization & Compensation Committees of Applied's Board of Directors
The information available via hyperlink from our website is not incorporated into this annual report on Form 10-K.
(a) General Development of Business.
Information regarding developments in our business can be found in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference.
(b) Financial Information about Segments.
We have identified two reportable segments, service center-based distribution and fluid power businesses.
The service center-based distribution segment provides customers with a wide range of industrial products primarily through a network of service centers. The fluid power businesses segment consists of specialized regional companies that distribute hydraulic and pneumatic power components, design and assemble hydraulic and pneumatic power systems, and perform equipment repair. The fluid power businesses primarily sell products and services directly to customers rather than through the service centers.
Segment financial information can be found in note 12 to the consolidated financial statements, included in Item 8 under the caption “Financial Statements and Supplementary Data.” That information is incorporated here by reference.
(c) Narrative Description of Business.
Overview. Our field operating structure is built on two platforms - service center-based distribution and fluid power businesses:
▪
Service Center-Based Distribution. We distribute a wide range of industrial products through service centers across North America, Australia, and New Zealand. Customers primarily purchase our products for scheduled maintenance of their machinery and equipment and for emergency repairs.
The service center-based distribution business accounts for a substantial majority of our field operations and 81.7% of our 2017 sales dollars.

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The service center-based distribution segment includes operations specialized in serving customers in the upstream oil and gas industry; the Applied Maintenance Supplies & Solutions service offering; regional fabricated rubber shops, which modify and repair conveyor belts and make hose assemblies in accordance with customer requirements; and rubber service field crews, which install and repair conveyor belts and rubber linings at customer locations.
▪
Fluid Power Businesses . Our specialized fluid power businesses primarily market products and services to customers within the businesses' geographic regions. In the United States, the businesses also market products and services through our service center network. In addition to distributing hydraulic and pneumatic power components, the businesses design and assemble hydraulic and electro-hydraulic power units and control systems, electronic control systems, pneumatic and electro-pneumatic panels and sub-assemblies, fabricated aluminum assemblies, lubrication systems, hydraulic manifolds, and pump assemblies. They also perform equipment repair and offer technical advice to customers. Customers include firms purchasing for MRO needs, as well as for OEM applications.
Products . We are a leading distributor of products including bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion components, tools, safety products, oilfield supplies, and other industrial and maintenance supplies. Fluid power products include hydraulic, electro-hydraulic, pneumatic, electro-pneumatic, lubrication, and filtration components and systems.
These products are generally supplied to us by manufacturers whom we serve as a non-exclusive distributor. The suppliers also may provide us product training, as well as sales and marketing support. Authorizations to represent particular suppliers and product lines may vary by geographic region, particularly for our fluid power businesses. We believe our supplier relationships are generally good, and many have existed for decades. The disruption of relationships with certain suppliers, or the disruption of their operations, could adversely affect our business.
Our product suppliers typically confine their direct sales activities to large-volume transactions, mainly with large original equipment manufacturers. The suppliers generally do not sell maintenance and repair products directly to the customer, but instead refer the customer to us or another distributor.
Net sales by product category for the most recent three fiscal years is detailed in note 12 to the consolidated financial statements, included in Item 8 under the caption “Financial Statements and Supplementary Data.” That information is incorporated here by reference.
Services . Our employees advise and assist customers in selecting and applying products, and in managing inventory. We consider this advice and assistance to be an integral part of our product sales efforts. Beyond logistical distribution services, we offer product and process solutions involving multiple technologies. These solutions help customers minimize production downtime, improve machine performance, and reduce overall procurement and maintenance costs. By providing high levels of service, product and industry expertise, and technical support, while at the same time offering product breadth and competitive pricing, we believe we develop stronger, longer-lasting, and more profitable customer relationships.
Our service center sales employees include customer sales and service representatives and account managers, as well as product and industry specialists. Customer sales and service representatives receive, process, and expedite customer orders, provide product information, and assist account managers in serving customers. Account managers make onsite calls to customers to provide product information, identify customer requirements, make recommendations, and assist in implementing equipment maintenance and storeroom management programs, as well as automated supplies dispensing systems. Account managers also measure and document the value of the cost savings and increased productivity we help generate. Specialists assist with applications in their areas of expertise.
We maintain product inventory levels at each service center tailored to the local market. These inventories consist of standard items as well as other items specific to local customer demand. Distribution centers replenish service center inventories and also may ship products directly to customers. Having product in stock helps us satisfy customers' immediate needs.
Timely delivery of products is an integral part of our service, particularly when customers require products for emergency repairs. Service centers and distribution centers use the most effective method of transportation available to meet customer needs. These methods include our own delivery vehicles, dedicated third-party transportation providers, as well as surface and air common carrier and courier services. Customers can also pick up items at our service centers.

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Our information systems enhance our customer service. Customers turn to our website at www.applied.com to search for products in a comprehensive electronic catalog, research product attributes, view prices, check inventory levels, place orders, and track order status. We also use electronic data interchange (EDI) and other electronic interfaces with customers' technology platforms and plant maintenance systems.
In addition to our electronic capabilities, we provide customers our paper catalog, a comprehensive purchasing tool and resource guide for industrial and maintenance products (also available in a mobile-friendly digital version).
The Applied Maintenance Supplies & Solutions service offering provides traditional vendor managed inventory (VMI) services, at customer sites, for industrial and maintenance supplies, including fasteners, cutting tools, paints and chemicals, fluid flow, safety, and janitorial products.
In addition to distributing products, we offer shop services in select geographic areas. Our fabricated rubber shops modify and repair conveyor belts and provide hose assemblies (also available at select service centers and distribution centers) in accordance with customer requirements. Field crews install and repair conveyor belts and rubber lining, primarily at customer locations. Among the other services we offer, either performed by us directly or by third party providers, are the rebuilding or assembly of speed reducers, pumps, valves, cylinders, and electric and hydraulic motors, and custom machining.
Our specialized fluid power businesses generally operate independently of the service centers, but as product distributors, share the same focus on customer service. Product and application recommendations, inventory availability, and delivery speed are all important to the businesses' success.
The fluid power businesses distinguish themselves from most component distributors by offering engineering, design, system fabrication, installation, and repair services for fluid power systems. Our capabilities extend to the following specialties: fluid power system integration; manifold design, machining, and assembly; and the integration of hydraulic and pneumatic equipment with electronics for complete machine design.
Each business has account managers with technical knowledge, who handle sophisticated projects, including original equipment manufacturing applications. The businesses also provide technical support to our service centers and their customers.
Markets . We purchase from thousands of product manufacturers and resell the products to thousands of customers in a wide variety of industries, including agriculture and food processing, automotive, chemicals and petrochemicals, fabricated metals, forest products, industrial machinery and equipment, mining, oil and gas, primary metals, transportation, and utilities, as well as to government entities. Customers range from very large businesses, with which we may have multiple-location relationships, to very small ones. We are not significantly dependent on a single customer or group of customers, the loss of which would have a material adverse effect on our business as a whole, and no single customer accounts for more than [3]% of our net sales.
Competition . We consider our business to be highly competitive. In addition, our markets present few economic or technological barriers to entry, contributing to a high fragmentation of market share. Longstanding supplier and customer relationships, geographic coverage, name recognition, and our employees' knowledge and experience do, however, support our competitive position. Competition is based generally on breadth and quality of product and service offerings, product availability, price, ease of product selection and ordering, e-commerce capabilities, catalogs, and having a local presence. In the fluid power businesses, product manufacturer authorizations are often more selective and can be a more significant competitive factor, along with market reputation and product application knowledge.
Our principal competitors are specialist and general line distributors of bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion components, tools, safety products, oilfield supplies, and other industrial and maintenance supplies. These competitors include local, regional, national, and multinational operations, and can include catalog and e-commerce companies. We also compete with original equipment manufacturers and their distributors in the sale of maintenance and replacement components. Some competitors have greater financial resources than we do. The identity and number of our competitors vary throughout the geographic, industry, and product markets we serve.
Although we may be one of the leading distributors in the geographic markets we serve for the primary product categories we provide there, our market share in a given market may be relatively small compared to the portion of the market served by original equipment manufacturers and other distributors.
Backlog Orders and Seasonality. Because of the type of industrial distribution services we provide, backlog orders are not material to our business as a whole, although they are a more important factor for our fluid power businesses. Our business has exhibited minor seasonality - in particular, sales per day during the first half of our

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fiscal year have tended in the past to be slightly lower than during the second half due, in part, to the impact of customer plant shutdowns, summer vacations and holidays.
Patents, Trademarks, Trade Names, and Licenses. Customer recognition of our service marks and trade names, including Applied Industrial Technologies ® , Applied ® , and AIT ® , is an important contributing factor to our sales. Patents and licenses are not of material importance to our business.
Raw Materials and General Business Conditions. Our operations are dependent on general industrial and economic conditions. We would be adversely affected by the unavailability of raw materials to our suppliers, prolonged labor disputes experienced by suppliers or customers, or by events or conditions that have an adverse effect on industrial activity generally in the markets we serve or on key customer industries.
Number of Employees. At June 30, 2017, we had 5,554 employees.
Working Capital. Our working capital position is discussed in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference.
We require substantial working capital related to accounts receivable and inventories. Significant amounts of inventory are carried to meet customers' delivery requirements. We generally require payments for sales on account within 30 days. Returns are not considered to have a material effect on our working capital requirements. We believe these practices are generally consistent among companies in our industry.
Environmental Laws. We believe that compliance with laws regulating the discharge of materials into the environment or otherwise relating to environmental protection will not have a material adverse effect on our capital expenditures, earnings, or competitive position.
(d)  Financial Information about Geographic Areas.
Information regarding our foreign operations, including information about revenues and long-lived assets, is included in note 12 to the consolidated financial statements, included in Item 8 under the caption “Financial Statements and Supplementary Data,” as well as in Item 7A under the caption “Quantitative and Qualitative Disclosures about Market Risk.” That information is incorporated here by reference.
ITEM 1A. RISK FACTORS.
In addition to other information set forth in this report, you should carefully consider the following factors that could materially affect our business, financial condition, or results of operations. The risks described below are not the only risks facing our Company. Certain risks are identified below in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference. Additional risks not currently known to us, risks that could apply broadly to issuers, or risks that we currently deem immaterial, may also impact our business and operations. Risks can also change over time.
Our business depends heavily on the operating levels of our customers and the factors that affect them, including general economic conditions . The markets for the products and services we sell are subject to conditions or events that affect demand for goods and materials that our customers produce. Consequently, demand for our products and services has been and will continue to be influenced by most of the same factors that affect demand for and production of customers' goods and materials.
When customers or prospective customers reduce production levels because of lower demand, increased supply, higher costs, tight credit conditions, unfavorable currency exchange rates, adverse trade policies, foreign competition, other competitive disadvantage, offshoring of production, or other reasons, their need for our products and services diminishes. Selling prices and terms of sale come under pressure, adversely affecting the profitability and the durability of customer relationships, and credit losses may increase. Inventory management becomes more difficult in times of economic uncertainty. Volatile economic and credit conditions also make it more difficult for us, as well as our customers and suppliers, to forecast and plan future business activities.
Our business could be adversely affected if we do not successfully execute our initiatives to grow sales and earnings. We have underway numerous initiatives to grow sales, enhance gross margins, manage costs, and otherwise improve our earnings. If we do not implement these initiatives effectively, or if for other reasons they are unsuccessful, our business could be adversely affected.
Consolidation in our customers' and suppliers' industries could adversely affect our business and financial results . Consolidation continues among our product suppliers and customers. As customers industries consolidate, a greater proportion of our sales could be derived from higher volume contracts, which could adversely impact

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margins. Consolidation among customers can trigger changes in their purchasing strategies, potentially moving large blocks of business among competing distributors and contributing to volatility in our sales and pressure on prices. Similarly, continued consolidation among our suppliers could reduce our ability to negotiate favorable pricing and other commercial terms for our inventory purchases. There can be no assurance we will be able to take advantage of consolidation trends.
Loss of key supplier authorizations, lack of product availability, or changes in distribution programs could adversely affect our sales and earnings . Our business depends on maintaining an immediately available supply of various products to meet customer demand. Many of our relationships with key product suppliers are longstanding, but are terminable by either party. The loss of key supplier authorizations, or a substantial decrease in the availability of their products, could put us at a competitive disadvantage and have a material adverse effect on our business. Supply interruptions could arise from raw materials shortages, inadequate manufacturing capacity or utilization to meet demand, financial problems, trade issues, labor disputes, or weather conditions affecting suppliers' production, transportation disruptions, or other reasons beyond our control.
In addition, as a distributor, we face the risk of key product suppliers changing their relationships with distributors generally, or us in particular, in a manner that adversely impacts us. For example, key suppliers could change the following: the prices we must pay for their products relative to other distributors or relative to competing products; the geographic or product line breadth of distributor authorizations; supplier purchasing incentive or other support programs; or product purchase or stocking expectations.
An increase in competition could decrease sales or earnings . We operate in a highly competitive industry. The industry remains fragmented, but is consolidating. Our principal competitors are specialist and general line distributors of bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion components, tools, safety products, oilfield supplies, and other industrial and maintenance supplies. These competitors include local, regional, national, and multinational operations, and can include catalog and e-commerce companies. Competition is largely focused in the local service area and is generally based on product line breadth, product availability, service capabilities, and price. Existing competitors have, and future competitors may have, greater financial or other resources than we do, broader product or service offerings, greater market presence, or better name recognition. If existing or future competitors seek to gain or to retain market share by aggressive pricing strategies and sales methods, or otherwise through competitive advantage, our sales and profitability could be adversely affected. Our success will also be affected by our ability to continue to provide competitive offerings as customer preferences or demands evolve, for example with respect to our product and services portfolio or our e-commerce and inventory management solutions.
The purchasing incentives we earn from product suppliers can be impacted if we reduce our purchases in response to declining customer demand . Certain of our product suppliers have historically offered to their distributors, including us, incentives for purchasing their products. In addition to market or customer account-specific incentives, certain suppliers pay incentives to the distributor for attaining specific purchase volumes during a program period. In some cases, to earn incentives, we must achieve year-over-year growth in purchases with the supplier. When demand for our products declines, we may be less inclined to add inventory to take advantage of certain incentive programs, thereby potentially adversely impacting our profitability.
Changes in customer or product mix and downward pressure on sales prices could cause our gross profit percentage to fluctuate or decline. Because we serve thousands of customers in many end markets, and offer millions of products, with varying profitability levels, changes in our customer or product mix could cause our gross profit percentage to fluctuate or decline. Downward pressure on sales prices could also cause our gross profit percentage to fluctuate or decline. We can experience downward pressure on sales prices as a result of deflation, pressure from customers to reduce costs, or increased competition.
Our ability to transact business is highly reliant on information systems. A disruption or security breach could materially affect our business, financial condition, or results of operation. We depend on information systems to process customer orders, manage inventory and accounts receivable collections, purchase products, manage accounts payable processes, ship products to customers on a timely basis, maintain cost-effective operations, provide superior service to customers, and compile financial results. A serious, prolonged disruption of our information systems, due to manmade or natural causes, including power or telecommunications outage, or breach in security, could materially impair fundamental business processes and increase expenses, decrease sales, or otherwise reduce earnings.
Because of our reliance on information systems, we may be vulnerable to the growing threat of damage or intrusion from computer viruses or other cyber-attacks on our systems. Despite precautions taken to prevent or mitigate the risks of such incidents, an attack on our systems could not only cause business disruption, but could also result in the

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theft or disclosure of proprietary or confidential information, or a breach of customers, supplier, or employee information. Such an incident could negatively impact our sales, damage our reputation, and cause us to incur unanticipated legal liability and costs.
In recent years, we replaced multiple legacy applications with an SAP software platform, to enhance our business information and transaction systems to support future growth. We continue with and consider additional enterprise resource planning system conversions, on a smaller scale, in discrete business operations. Despite extensive planning, we could experience disruptions related to the implementation because of the projects' complexity. The potential adverse consequences could include delays, loss of information, diminished management reporting capabilities, damage to our ability to process transactions, harm to our control environment, diminished employee productivity and unanticipated increases in costs. Further, our ability to achieve anticipated operational benefits from new platforms is not assured.
Volatility in product and energy costs can affect our profitability. Changes in costs of raw materials and energy can lead product manufacturers to adjust the prices of products we distribute. In addition, a portion of our own distribution costs is comprised of fuel for our sales and delivery vehicles, freight, and utility expenses for our facilities. Our ability to pass along increases in our product and distribution costs to our customers depends on market conditions. Raising our prices could result in decreased sales volume, which could significantly reduce our profitability. While increases in the cost of energy or products could be damaging to us, decreases in those costs, particularly if severe, could also adversely impact us by creating deflation in selling prices, which could cause our gross profit margin to deteriorate. Changes in energy or raw materials costs can also adversely affect customers; for example, declines in oil, gas, and coal prices may negatively impact customers operating in those industries and, consequently, our sales to those customers.
Acquisitions are a key component of our anticipated growth. We may not be able to identify or to complete future acquisitions, to integrate them effectively into our operations, or to realize their anticipated benefits. Many industries we serve are mature. As a result, acquisitions of businesses have been important to our growth. While we wish to continue to acquire businesses, we may not be able to identify and to negotiate suitable acquisitions, to obtain financing for them on satisfactory terms, or otherwise to complete acquisitions. In addition, existing or future competitors, or private equity firms, may increasingly seek to compete with us for acquisitions, which could increase prices and reduce the number of suitable opportunities.
We seek acquisition opportunities that complement and expand our operations. However, substantial costs, delays, or other difficulties related to integrating acquisitions could adversely affect our business or financial results. We could face significant challenges in consolidating functions, integrating information systems, personnel, and operations, and implementing procedures and controls in a timely and efficient manner.
Further, even if we successfully integrate the acquisitions with our operations, we may not be able to realize cost savings, sales, profit levels, or other benefits that we anticipate from these acquisitions, either as to amount or in the time frame we expect. Our ability to realize anticipated benefits may be affected by a number of factors, including the following: our ability to achieve planned operating results, to reduce duplicative expenses and inventory effectively, and to consolidate facilities; economic and market factors; the incurrence of significant integration costs or charges in order to achieve those benefits; our ability to retain key product supplier authorizations, customer relationships, and employees; and our ability to address competitive, distribution, and regulatory challenges arising from entering into new markets, especially those in which we may have limited or no direct experience. In addition, acquisitions could place significant demand on administrative, operational, and financial resources.
Goodwill and other intangible assets recorded as a result of our acquisitions could become impaired. We review long-lived assets, including property, plant and equipment and identifiable amortizing intangible assets, for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Factors which may cause an impairment of long-lived assets include significant changes in the manner of use of these assets, negative industry or market trends, a significant underperformance relative to historical or projected future operating results, or a likely sale or disposal of the asset before the end of its estimated useful life. In 2016 we recorded a $64.8 million non-cash impairment charge for goodwill associated with the service center-based distribution reporting units in Canada, Australia, and New Zealand.
As of June 30, 2017, we had remaining $206.1 million of goodwill and $163.6 million of other intangible assets, net. We assess all existing goodwill at least annually for impairment on a reporting unit basis. The techniques used in our qualitative assessment and goodwill impairment tests incorporate a number of estimates and assumptions that are subject to change. Although we believe these estimates and assumptions are reasonable and reflect market

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conditions forecasted at the assessment date, any changes to these assumptions and estimates due to market conditions or otherwise may lead to an outcome where impairment charges would be required in future periods.
Tight credit markets could impact our ability to obtain financing on reasonable terms or increase the cost of future financing. Although the credit market turmoil of the financial crisis almost a decade ago did not have a significant adverse impact on our liquidity or borrowing costs, the availability of funds tightened and credit spreads on corporate debt increased. If credit market volatility were to return, then obtaining additional or replacement financing could be more difficult and the cost of issuing new debt or replacing a credit facility could be higher than under our current facilities. Tight credit conditions could limit our ability to finance acquisitions on terms acceptable to us.
For more information relating to borrowing and interest rates, see the following sections below: “Liquidity and Capital Resources” in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations;” Item 7A under the caption “Quantitative and Qualitative Disclosures about Market Risk;” and note 5 to the consolidated financial statements, included below in Item 8 under the caption “Financial Statements and Supplementary Data.” That information is incorporated here by reference.
Our ability to maintain effective internal control over financial reporting may be insufficient to allow us to accurately report our financial results or prevent fraud, and this could cause our financial statements to become materially misleading and adversely affect the trading price of our common stock. We require effective internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we cannot provide reasonable assurance with respect to our financial statements and effectively prevent fraud, our financial statements could become materially misleading, which could adversely affect the trading price of our common stock.
If we are not able to maintain the adequacy of our internal control over financial reporting, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business, financial condition and operating results could be harmed. Any material weakness could affect investor confidence in the accuracy and completeness of our financial statements. As a result, our ability to obtain any additional financing, or additional financing on favorable terms, could be materially and adversely affected. This, in turn, could materially and adversely affect our business, financial condition, and the market value of our stock and require us to incur additional costs to improve our internal control systems and procedures. In addition, perceptions of the Company among customers, suppliers, lenders, investors, securities analysts, and others could also be adversely affected.
We cannot assure that any material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control over financial reporting. In addition, although we have been successful historically in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of our financial statements included in our periodic reports filed with the SEC.
Our business depends on our ability to attract, develop, motivate, and retain qualified employees . Our success depends on hiring, developing, motivating, and retaining key employees, including executive, managerial, sales, professional, and other personnel. We may have difficulty identifying and hiring qualified personnel. In addition, we may have difficulty retaining such personnel once hired, and key people may leave and compete against us. With respect to sales and customer service positions in particular, we greatly benefit from having employees who are familiar with the products we sell and their applications, as well as with our customer and supplier relationships. The loss of key employees or our failure to attract and retain other qualified workers could disrupt or adversely affect our business. In addition, our operating results could be adversely affected by increased competition for employees, shortages of qualified workers, higher employee turnover (including through retirement as the workforce ages), or increased employee compensation or benefit costs.
An interruption of operations at our headquarters or distribution centers, or in our means of transporting product, could adversely impact our business. Our business depends on maintaining operating activity at our headquarters and distribution centers, and being able to receive and deliver product in a timely manner. A serious, prolonged interruption due to power or telecommunications outage, terrorist attack, earthquake, extreme weather events, other natural disasters, fire, flood, or other interruption could have a material adverse effect on our business and financial results.

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There is no assurance that we will continue to pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends. The timing, declaration, amount, and payment of dividends to our shareholders fall within the discretion of our Board of Directors and depend on many factors, including our financial condition and results of operations, as well as applicable law and business considerations that our Board of Directors considers relevant. There can be no assurance that we will continue to pay a quarterly dividend.
Additionally, if we cannot generate sufficient cash flow from operations to meet our debt payment obligations, then our ability to pay dividends, if so determined by the Board of Directors, will be impaired and we may be required to attempt to restructure or refinance our debt, raise additional capital, or take other actions such as selling assets, reducing, or delaying capital expenditures, or reducing our dividend. There can be no assurance, however, that any such actions could be effected on satisfactory terms, if at all, or would be permitted by the terms of our debt or our other credit and contractual arrangements.
Our operations outside the United States increase our exposure to global economic and political conditions and currency exchange volatility. Foreign operations contributed 15.9% of our sales in 2017. This presence outside the U.S. increases risks associated with exposure to more volatile economic conditions, political instability, cultural and legal differences in conducting business, (including corrupt practices), economic and trade policy actions, and currency exchange fluctuations.
Our foreign operations' results are reported in the local currency and then translated into U.S. dollars at applicable exchange rates for inclusion in our consolidated financial statements. Fluctuations in currency exchange rates affect our operating results and financial position, as well as the comparability of results between financial periods.
We are subject to litigation and regulatory risk due to the nature of our business, which may have a material adverse effect on our business. From time to time, we are involved in lawsuits or other legal proceedings that arise from our business. These may, for example, relate to product liability claims, commercial disputes, personal injuries, or employment-related matters. In addition, we could face claims over other matters, such as claims arising from our status as a public company or government contractor, or otherwise relating to our compliance with a wide array of laws and regulations to which we are subject. The defense and ultimate outcome of lawsuits or other legal proceedings or inquiries may result in higher operating expenses, which could have a material adverse effect on our business, financial condition, or results of operations.
Our business is subject to risks, some for which we maintain third-party insurance and some for which we self-insure. We may incur losses and be subject to liability claims that could have a material adverse effect on our financial condition, results of operations, or cash flows. We maintain insurance policies that provide limited coverage for some, but not all, of the potential risks and liabilities associated with our business. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insured basis. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. Because of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Even where insurance coverage applies, insurers may contest their obligations to make payments. Our financial condition, results of operations, and cash flows could be materially and adversely affected by losses and liabilities from uninsured or underinsured events, as well as by delays in the payment of insurance proceeds, or the failure by insurers to make payments.
In addition to the risks identified above, other risks to our future performance include, but are not limited to, the following :
▪
changes in customer preferences for products and services of the nature, brands, quality, or cost sold by us;
▪
changes in customer procurement policies and practices;
▪
changes in the market prices for products and services relative to the costs of providing them;
▪
changes in operating expenses;
▪
organizational changes within the Company;
▪
government regulation, legislation, or policies, including with respect to federal tax policy (e.g., affecting tax rates, the LIFO inventory accounting method, or the taxation of foreign-sourced income) and international trade;
▪
the variability and timing of new business opportunities including acquisitions, customer relationships, and supplier authorizations;
▪
the incurrence of debt and contingent liabilities in connection with acquisitions;
▪
volatility of our stock price and the resulting impact on our consolidated financial statements; and

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▪
changes in accounting policies and practices that could impact our financial reporting and increase compliance costs.

ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.

ITEM 2. PROPERTIES.
We believe having a local presence is important to serving our customers, so we maintain service centers and other operations in local markets throughout the countries in which we operate. At June 30, 2017, we owned real properties at 120 locations and leased 401 locations. Certain properties house more than one operation.
The following were our principal owned real properties (each of which has more than 30,000 square feet of floor space) at June 30, 2017:
Location of Principal Owned
Real Property
Type of Facility
Cleveland, Ohio
Corporate headquarters
Lake City, Florida
Offices and warehouse
Atlanta, Georgia
Distribution center and service center
Florence, Kentucky
Distribution center
Highland Heights, Ohio
Fluid power shop
Agawam, Massachusetts
Offices and warehouse
Carlisle, Pennsylvania
Distribution center
Fort Worth, Texas
Distribution center and rubber shop
Clairmont, Alberta
Service center and fluid power shop
Our principal leased real properties (each of which has more than 30,000 square feet of floor space) at June 30, 2017 were:
Location of Principal Leased
Real Property
Type of Facility
Fontana, California
Distribution center, rubber shop, fluid power shop, and service center
Newark, California
Fluid power shop
Denver, Colorado
Rubber shop and service center
Lenexa, Kansas
Fluid power shop
Chanhassen, Minnesota
Fluid power shop
Billings, Montana
Fluid power shop
Elyria, Ohio
Product return center and service center
Parma, Ohio
Offices and warehouse
Portland, Oregon
Distribution center
Houston, Texas
Service center and shop
Kent, Washington
Offices and fluid power shop
Longview, Washington
Service center, rubber shop, and fluid power shop
Appleton, Wisconsin
Offices, service center, and rubber shop
Edmonton, Alberta
Service center and shop
Nisku, Alberta
Offices, service center, and shops
Winnipeg, Manitoba
Distribution center and service center
The properties in Highland Heights, Newark, Lenexa, Chanhassen, Billings and Kent are used in our fluid power businesses segment. The Clairmont, Fontana, and Longview properties are used in both the service center-based

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distribution segment and the fluid power businesses segment. The remaining properties are used in the service center-based distribution segment.
We consider our properties generally sufficient to meet our requirements for office space and inventory stocking.
A service center's size is primarily influenced by the amount and types of inventory the service center requires to meet customers' needs.
When opening new operations, we have tended to lease rather than purchase real property. We do not consider any service center, distribution center, or shop property to be material, because we believe that, if it becomes necessary or desirable to relocate an operation, other suitable property could be found.
In addition to operating locations, we own or lease certain properties which in the aggregate are not material and are either for sale, lease, or sublease to third parties due to a relocation or closing. We also may lease or sublease to others unused portions of buildings.
Additional information regarding our properties can be found in note 11 to the consolidated financial statements, included below in Item 8 under the caption “Financial Statements and Supplementary Data.” That information is incorporated here by reference.
ITEM 3. LEGAL PROCEEDINGS.
Applied and/or one of its subsidiaries is a party to pending legal proceedings with respect to product liability, commercial, personal injury, employment, and other matters. Although it is not possible to predict the outcome of these proceedings or the range of reasonably possible loss, we believe, based on circumstances currently known, that the likelihood is remote that the ultimate resolution of any of these proceedings will have, either individually or in the aggregate, a material adverse effect on Applied's consolidated financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of the SEC Regulation S-K is included in Exhibit 95 to this annual report on Form 10-K.

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EXECUTIVE OFFICERS OF THE REGISTRANT.
Applied's executive officers are elected by the Board of Directors for a term of one year, or until their successors are chosen and qualified, at the Board's organizational meeting held following the annual meeting of shareholders.
The following is a list of the executive officers and a description of their business experience during the past five years. Except as otherwise stated, the positions and offices indicated are with Applied, and the persons were most recently elected to their current positions on October 25, 2016:
Name
Positions and Experience
Age
Neil A. Schrimsher
President since August 2013 and Chief Executive Officer since 2011.
53
Todd A. Barlett
Vice President-Acquisitions and Global Business Development since 2004.
62
Fred D. Bauer
Vice President-General Counsel & Secretary since 2002.
51
Mark O. Eisele
Vice President-Chief Financial Officer & Treasurer since 2004.
60
Warren E. Hoffner
Vice President-General Manager, Fluid Power since 2003. The Board of Directors designated him an executive officer in October 2015.
57
Kurt W. Loring
Vice President-Chief Human Resources Officer since July 2014. Prior to then Mr. Loring was Vice President, Human Resources for the Forged Products segment of Precision Castparts Corporation (formerly NYSE: PCP). The $4.3 billion segment, with greater than 5,000 employees, is a world-leading producer of complex forgings and high-performance nickel-based alloys and super alloys for aerospace, power generation, and general industrial applications.
48



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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .
Applied's common stock, without par value, is listed for trading on the New York Stock Exchange with the ticker symbol “AIT.” Information concerning the quarterly stock dividends for the fiscal years ended June 30, 2017, 2016, and 2015 and the number of shareholders of record as of August 11, 2017 are set forth in Item 8, “Financial Statements and Supplementary Data,” in the “Quarterly Operating Results” table. That information is incorporated here by reference.
Set forth below is market information on Applied's common stock.
 
 
 
 
 
 
      Price Range
 
 
Shares Traded

 
Average Daily Volume

 
High

 
Low

2017
 
 
 
 
 
 
 
 
First Quarter
 
9,924,600

 
155,100

 
$
48.61

 
$
44.03

Second Quarter
 
13,423,500

 
213,100

 
62.65

 
43.50

Third Quarter
 
12,986,200

 
209,500

 
66.65

 
58.80

Fourth Quarter
 
10,868,100

 
172,500

 
69.00

 
57.10

2016
 
 
 
 
 
 
 
 
First Quarter
 
17,146,300

 
267,900

 
$
42.65

 
$
37.15

Second Quarter
 
14,832,500

 
231,800

 
43.54

 
37.00

Third Quarter
 
14,619,200

 
239,700

 
44.24

 
35.55

Fourth Quarter
 
12,583,200

 
196,600

 
47.18

 
42.52

2015
 
 
 
 
 
 
 
 
First Quarter
 
9,932,400

 
155,200

 
$
52.62

 
$
45.54

Second Quarter
 
11,023,400

 
172,200

 
50.00

 
42.92

Third Quarter
 
17,181,400

 
281,700

 
46.05

 
39.76

Fourth Quarter
 
16,892,300

 
268,100

 
45.22

 
39.54

The following table summarizes Applied's repurchases of its common stock in the quarter ended June 30, 2017.
Period
(a) Total Number of Shares (1)

 
(b) Average Price Paid per Share ($)

 
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2)

April 1, 2017 to April 30, 2017
92

 
$64.02
 
—

 
1,450,000

May 1, 2017 to May 31, 2017
—

 
—

 
—

 
1,450,000

June 1, 2017 to June 30, 2017
—

 
—

 
—

 
1,450,000

Total
92

 
$64.02
 
—

 
1,450,000

(1)
During the quarter ended June 30, 2017, Applied purchased 92 shares in connection with an employee deferred compensation program. This purchase is not counted in the authorization in note (2).
(2)
On October 24, 2016, the Board of Directors authorized the repurchase of up to 1.5 million shares of the Company's common stock, replacing the prior authorization. We publicly announced the new authorization on October 26, 2016. Purchases can be made in the open market or in privately negotiated transactions. The authorization is in effect until all shares are purchased, or the Board revokes or amends the authorization.

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ITEM 6. SELECTED FINANCIAL DATA.
This selected financial data should be read in conjunction with Applied's consolidated financial statements and related notes included elsewhere in this annual report as well as the section of the annual report titled Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(In thousands, except per share amounts and statistical data)
 
 
2017
 
2016
 
2015
 
2014
 
2013
Consolidated Operations — Year Ended June 30
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,593,746

 
$
2,519,428

 
$
2,751,561

 
$
2,459,878

 
$
2,462,171

Depreciation and amortization of property
 
15,306

 
15,966

 
16,578

 
13,977

 
12,501

Amortization:
 
 
 
 
 
 
 
 
 
 
Intangible assets
 
24,371

 
25,580

 
25,797

 
14,023

 
13,233

SARs and stock options
 
1,891

 
1,543

 
1,610

 
1,808

 
2,317

Operating income (b)
 
174,590

 
88,801

 
184,619

 
164,358

 
176,399

Net income (a) (b)
 
133,910

 
29,577

 
115,484

 
112,821

 
118,149

Per share data:
 
 
 
 
 
 
 
 
 
 
Net income:
 
 
 
 
 
 
 
 
 
 
Basic
 
3.43

 
0.75

 
2.82

 
2.69

 
2.81

Diluted (a) (b)
 
3.40

 
0.75

 
2.80

 
2.67

 
2.78

Cash dividend
 
1.14

 
1.10

 
1.04

 
0.96

 
0.88

 
 
 
 
 
 
 
 
 
 
 
Year-End Position — June 30
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
572,789

 
$
507,238

 
$
535,938

 
$
545,193

 
$
491,380

Long-term debt (including portion classified as current)
 
291,982

 
328,334

 
320,995

 
170,712

 
—

Total assets
 
1,387,595

 
1,312,025

 
1,432,556

 
1,334,169

 
1,058,706

Shareholders’ equity
 
745,256

 
657,916

 
741,328

 
800,308

 
759,615

 
 
 
 
 
 
 
 
 
 
 
Year-End Statistics — June 30
 
 
 
 
 
 
 
 
 
 
Current ratio
 
2.8

 
2.8

 
2.7

 
2.9

 
3.0

Operating facilities
 
552

 
559

 
565

 
538

 
522

Shareholders of record (c)
 
4,687

 
5,372

 
6,016

 
6,330

 
6,319

Return on assets (a) (b)   (d)
 
10.2
%
 
2.2
%
 
7.9
%
 
10.2
%
 
11.6
%
Return on equity (a) (b) (e)
 
19.1
%
 
4.2
%
 
15.0
%
 
14.5
%
 
16.5
%
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures  (f)
 
$
17,045

 
$
13,130

 
$
14,933

 
$
20,190

 
$
12,214

 
 
 
 
 
 
 
 
 
 
 
Cash Returned to Shareholders During the Year
 
 
 
 
 
 
 
 
 
 
Dividends paid
 
$
44,619

 
$
43,330

 
$
42,663

 
$
40,410

 
$
37,194

Purchases of treasury shares
 
8,242

 
37,465

 
76,515

 
36,732

 
53

Total
 
$
52,861

 
$
80,795

 
$
119,178

 
$
77,142

 
$
37,247

(a)
FY 2017 includes a tax benefit pertaining to a worthless stock tax deduction of $22.2 million, or $0.56 per share. Excluding the worthless stock tax deduction, the fiscal 2017 return on assets would be 8.5% and return on equity would be 16.2%.
(b)
A goodwill impairment charge in fiscal 2016 reduced operating income by $64.8 million, net income by $63.8 million, and diluted earnings per share by $1.62. Excluding the goodwill impairment charge, the fiscal 2016 return on assets would be 6.7% and return on equity would be 12.8%.
(c)
Includes participant-shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan and shareholders in the Company's direct stock purchase program.
(d)
Return on assets is calculated as net income divided by monthly average assets.
(e)
Return on equity is calculated as net income divided by the average shareholders’ equity (beginning of the year plus end of
the year divided by 2).
(f)
Capital expenditures for fiscal 2014 included the purchase of our headquarters facility which used $10.0 million of cash.
Capital expenditures for fiscal 2013 included $5.6 million related to Applied's Enterprise Resource Planning (ERP) system project. See Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” for further description of the ERP project.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
With more than 5,500 employees across North America, Australia, New Zealand, and Singapore, Applied Industrial Technologies (“Applied,” the “Company,” “We,” “Us” or “Our”) is a leading distributor of bearings, power transmission products, fluid power components, and other industrial supplies, serving MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for industrial and fluid power applications, as well as customized mechanical, fabricated rubber and fluid power shop services. Applied also offers storeroom services and inventory management solutions that provide added value to its customers. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. At June 30, 2017, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore from 552 facilities.
The following is Management's Discussion and Analysis of significant factors that have affected our financial condition, results of operations and cash flows during the periods included in the accompanying consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash flows in Item 8 under the caption "Financial Statements and Supplementary Data." When reviewing the discussion and analysis set forth below, please note that the majority of SKUs (Stock Keeping Units) we sell in any given year were not sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used comparative metrics analyzing sales, such as changes in product mix and volume.
Our fiscal 2017 consolidated sales were $2.6 billion , an increase of $74.3 million or 2.9% compared to the prior year, with acquisitions contributing $31.1 million or 1.2% and unfavorable foreign currency translation of $1.1 million decreasing sales by 0.1% . Gross profit margin increased to 28.4% for fiscal 2017 from 28.1% for fiscal 2016 primarily due to the impact of current year LIFO layer liquidations and prior year restructuring charge. Operating margin increased to 6.7% in fiscal 2017 from 3.5% in fiscal 2016 primarily due to a non-cash goodwill impairment charge recorded during fiscal 2016 totaling $64.8 million.
During fiscal 2016, the Company recorded charges of $8.8 million for restructuring activities within the Service Center Based Distribution segment to reduce headcount and consolidate locations. Of the total, $3.6 million related to inventory reserves for excess and obsolete inventory recorded within cost of sales, and $5.2 million related to severance and facility consolidation recorded within selling, distribution and administrative expense.
During the fourth quarter of fiscal 2017 , the Company recorded an income tax benefit of $22.2 million pertaining to a worthless stock deduction based on the write-off of the Company's investment in one of its subsidiaries in Canada for U.S. tax purposes.
Our earnings per share was $3.40 in fiscal 2017 versus $0.75 in fiscal year 2016 . The current year results include a positive impact on earnings per share of $0.56 per share related to the worthless stock deduction. The prior year results include negative impacts on earnings per share of $1.62 per share for the non-cash goodwill impairment charge and $0.16 per share for restructuring charges.
Shareholders’ equity was $745.3 million at June 30, 2017 compared to $657.9 million at June 30, 2016 . Working capital increased $65.6 million from June 30, 2016 to $572.8 million at June 30, 2017 . The current ratio was 2.8 to 1 at June 30, 2017 and June 30, 2016 .
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.

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The MCU (total industry) and IP indices gradually increased during fiscal 2017 correlating with the overall growth in the industrial economy. The ISM PMI registered 57.8 in June 2017, the highest reading in fiscal 2017, and an increase from the June 2016 revised reading of 52.8. A reading above 50 generally indicates expansion. The index readings for the months during the current quarter, along with the revised indices for previous quarter ends, were as follows:
 
Index Reading
Month
MCU
PMI
IP
June 2017
76.6
57.8
103.3
May 2017
76.4
54.9
103.1
April 2017
76.4
54.8
103.5
March 2017
75.8
57.2
102.5
December 2016
76.0
54.5
102.6
September 2016
75.6
51.7
102.0
June 2016
75.8
52.8
102.1
YEAR ENDED JUNE 30, 2017 vs. 2016
The following table is included to aid in review of Applied’s statements of consolidated income.
 
Year Ended June 30,
As a % of Net Sales
 
Change in $'s Versus Prior Period

 
2017

 
2016

 
% Change

Net Sales
100.0
%
 
100.0
%
 
2.9
%
Gross Profit Margin
28.4
%
 
28.1
%
 
4.3
%
Selling, Distribution & Administrative
21.7
%
 
22.0
%
 
1.7
%
Operating Income
6.7
%
 
3.5
%
 
96.6
%
Net Income
5.2
%
 
1.2
%
 
352.8
%
Sales in fiscal 2017 were $2.6 billion , which was $74.3 million or 2.9% above the prior year, with sales from acquisitions accounting for $31.1 million or 1.2% of the increase, offset by a decrease due to unfavorable foreign currency translation of $1.1 million or 0.1% . There were 252.5 selling days in fiscal 2017 and 253.5 selling days in fiscal 2016 . Excluding the impact of businesses acquired and prior to the impact of foreign currency translation, sales were up $44.3 million or 1.8% during the year, driven by an increase of 1.6% from our traditional core operations in addition to an increase of 0.6% from our upstream oil and gas-focused subsidiaries, offset by a 0.4% decrease due to one less sales day.
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $32.9 million , or 1.6% . Acquisitions within this segment increased sales by $19.8 million or 0.9% , while unfavorable foreign currency translation decreased sales by $0.6 million. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales increased $13.7 million or 0.7%, driven by an increase of 0.7% from our upstream oil and gas-focused subsidiaries and an increase of 0.4% from within our traditional core operations, offset by a 0.4% decrease due to one less sales day.
Sales of our Fluid Power Businesses segment, which operates primarily in OEM markets, increased $41.4 million or 9.6% . Acquisitions within this segment increased sales $11.3 million or 2.6% , while unfavorable foreign currency translation decreased sales by $0.5 million or 0.1%. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales increased $30.6 million or 7.1%, driven by an increase from operations, primarily in the U.S., of 7.5%, offset by a decrease of 0.4% due to one less sales day.
Sales in our U.S. operations increased $65.1 million or 3.1% , with acquisitions adding $25.1 million or 1.2% . Excluding the impact of businesses acquired, U.S. sales were up $40.0 million or 1.9%, of which 1.4% is from our traditional core operations and 0.9% is from our upstream oil and gas-focused subsidiaries, offset by a 0.4% decrease due to one less sales day. Sales from our Canadian operations decreased $5.8 million or 2.2% , with unfavorable foreign currency translation decreasing Canadian sales by $0.2 million or 0.1% . Acquisitions added $6.0 million , or 2.3% . Excluding the impact of businesses acquired and unfavorable foreign currency translation

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impact, Canadian sales were down $11.6 million or 4.4%, of which 2.0% is related to the upstream oil and gas-focused subsidiaries, 2.0% is from the traditional core operations, and the remaining 0.4% decrease due to one less sales day. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, increased $15.0 million or 10.4% compared to the prior year. Unfavorable foreign currency translation decreased other country sales by $0.9 million or 0.7% . Prior to the impact of currency translation, other country sales were up $15.9 million or 11.1% compared to the prior year, driven by an increase from operations of 13.0%, primarily in Australia and Singapore, offset by a decrease of 1.9% due to fewer sales days.
The sales product mix for fiscal 2017 was 71.5% industrial products and 28.5% fluid power products compared to 72.9% industrial and 27.1% fluid power in the prior year.
Our gross profit margin increased to 28.4% in fiscal 2017 compared to 28.1% in fiscal 2016 . The increase is primarily due to recording a more favorable impact from LIFO layer liquidations which increased gross profit by $9.4 million in fiscal 2017 and $2.1 million in fiscal 2016 , offset by a $4.8 million increase in scrap expense in fiscal 2017 compared to fiscal 2016 . Further, the gross profit margin for the prior fiscal year was negatively impacted by $3.6 million of restructuring expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for the upstream oil and gas-focused operations.
Selling, distribution and administrative expenses (SD&A) consist 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, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $9.3 million or 1.7% during fiscal 2017 compared to the prior year, and as a percent of sales decreased to 21.7% from 22.0% in fiscal 2016 . Changes in foreign currency exchange rates had the effect of increasing SD&A by $0.1 million or less than 0.1% compared to the prior year. Additional SD&A from businesses acquired in the current year added $8.2 million or 1.5% of SD&A expenses including $1.0 million associated with intangibles amortization. Excluding the impact of businesses acquired and the unfavorable impact from foreign currency translation, SD&A increased $1.0 million or 0.2% during fiscal 2017 compared to fiscal 2016 . Excluding the impact of acquisitions, total compensation increased $12.7 million during fiscal 2017 compared to the prior fiscal year as a result of merit increases, improved Company performance, and increased costs related to health care claims. These increases were offset by severance expense and other restructuring charges related to consolidating facilities of $5.2 million of SD&A included in fiscal 2016 that did not reoccur during fiscal 2017 . Also, excluding the impact of acquisitions, bad debt expense decreased $2.3 million during fiscal 2017 compared to fiscal 2016 , due to improvement in aged receivables. Further, the Company recorded a gain of $1.6 million in fiscal 2017 related to the sale of five buildings during the year. All other expenses within SD&A were down $2.6 million.
During the third quarter of fiscal 2016, the Company performed its annual goodwill impairment test. As a result of this test, the Company determined that all of the goodwill associated with the Australia/New Zealand Service Center Based Distribution reporting unit was impaired as of January 1, 2016. This impairment was the result of the decline in the mining and extraction industries in Australia and the resulting reduced customer spending due to a decline in demand throughout Asia. Further, due to a sustained decline in oil prices and reduced customer spending in Canada, the Company determined that a portion of the goodwill associated with the Canada Service Center Based Distribution reporting unit was also impaired as of January 1, 2016. Accordingly, the Company recognized a combined non-cash impairment charge of $64.8 million for goodwill during fiscal 2016, which decreased net income by $63.8 million and earnings per share by $1.62. Changes in future results, assumptions, and estimates used in calculating the goodwill impairment test could result in additional impairment charges in future periods.
Operating income increased $85.8 million , or 96.6% , to $174.6 million during fiscal 2017 from $88.8 million during fiscal 2016 , and as a percent of sales, increased to 6.7% from 3.5% . These increases are primarily due to the Company recognizing a non-cash goodwill impairment charge of $64.8 million and restructuring charges of $8.8 million during fiscal 2016 that did not reoccur during fiscal 2017, as well as higher sales volume in the current fiscal year.
Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 5.3% in fiscal 2017 from 5.2% , before the goodwill impairment charge, in fiscal 2016 . This increase is primarily attributable to higher sales volume in the current year along with a decline in the business segment's SD&A expense.
Operating income as a percentage of sales for the Fluid Power Businesses segment increased to 10.8% in fiscal 2017 from 9.4% in fiscal 2016 . This increase is due to the positive leveraging impact from the increase in sales, primarily from our U.S. operations in this segment, in the current year.

17
Table of Contents

Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.
Other (income) expense, net, represents certain non-operating items of income and expense. This was $0.9 million of income in fiscal 2017 compared to $1.1 million of expense in fiscal 2016 . Current year income primarily consists of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.2 million offset by foreign currency transaction losses of $0.2 million . Fiscal 2016 expense consisted primarily of foreign currency transaction losses of $1.0 million offset by unrealized gains on investments held by non-qualified deferred compensation trusts of $0.1 million .
The effective income tax rate was 19.8% for fiscal 2017 compared to 62.6% for fiscal 2016 . The fiscal 2017 effective tax rate was favorably impacted by a $22.2 million net tax benefit, pertaining to a worthless stock tax deduction which decreased the effective tax rate by 13.3%. The tax benefit is net of a $1.0 million valuation allowance applicable to the related state deferred income tax asset. This deduction is based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes. The fiscal 2016 effective tax rate was unfavorably impacted due to the recording of $64.8 million of goodwill impairment during fiscal 2016, of which $61.3 million was not tax deductible. The goodwill impairment increased the effective tax rate for fiscal 2016 by 27.1%. The remaining decrease in the effective tax rate is primarily due to the adoption of ASU 2016-09 in the first quarter of fiscal 2017, which requires excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises to be recognized in the income statement. During fiscal 2017, $2.4 million of net excess tax benefits were recognized as a reduction of income tax expense, which decreased the effective income tax rate for fiscal 2017 by 1.4%. All undistributed earnings of our foreign subsidiaries are considered to be permanently reinvested at June 30, 2017 and 2016 .
We expect our income tax rate for fiscal 2018 to be in the range of 34.0% to 35.0%.
As a result of the factors addressed above, net income for fiscal 2017 increased $104.3 million from the prior year. Net income per share was $3.40 per share for fiscal 2017 compared to $0.75 for fiscal 2016 . The current year results include a positive impact on earnings per share of $0.56 per share related to the tax benefit recorded for the worthless stock deduction. The prior year results include negative impacts on earnings per share of $1.62 per share for goodwill impairment charges and $0.16 per share for restructuring charges. Net income per share was favorably impacted by lower weighted average common shares outstanding in fiscal 2017 as a result of our share repurchase program.
At June 30, 2017 , we had a total of 552 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore, versus 559 at June 30, 2016 .
The number of Company employees was 5,554 at June 30, 2017 and 5,569 at June 30, 2016 .
YEAR ENDED JUNE 30, 2016 vs. 2015
The following table is included to aid in review of Applied’s statements of consolidated income.
 
Year Ended June 30,
As a % of Net Sales
 
Change in $'s Versus Prior Period

 
2016

 
2015

 
% Change

Net Sales
100.0
%
 
100.0
%
 
(8.4
)%
Gross Profit Margin
28.1
%
 
28.0
%
 
(8.1
)%
Selling, Distribution & Administrative
22.0
%
 
21.3
%
 
(5.4
)%
Operating Income
3.5
%
 
6.7
%
 
(51.9
)%
Net Income
1.2
%
 
4.2
%
 
(74.4
)%
Sales in fiscal 2016 were $2.52 billion, which was $232.1 million or 8.4% below fiscal 2015, with unfavorable foreign currency translation accounting for $60.1 million or 2.2% of the decrease, offset by sales from acquisitions of $57.1 million or 2.1%. Excluding the impact of businesses acquired and prior to the impact of foreign currency translation, sales were down $229.1 million or 8.3% during fiscal 2016. Of the 8.3% decrease, 5.1% pertains to our upstream oil and gas-focused operations (which experienced sales declines of 50.1% during fiscal 2016) and 3.2% is within our traditional core operations. There were 253.5 selling days in fiscal 2016 and 252.5 selling days in fiscal 2015.

18
Table of Contents

Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $167.7 million, or 7.4%. Acquisitions within this segment increased sales by $38.7 million or 1.7%, while unfavorable foreign currency translation decreased sales by $50.7 million or 2.2%. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales decreased $155.7 million or 6.9%, the majority of which relates to the upstream oil and gas-focused operations, as the traditional core operations had a decrease of only 1.7%.
Sales of our Fluid Power Businesses segment, which operates primarily in OEM markets, decreased $64.4 million or 13.0%. Acquisitions within this segment increased sales $18.4 million or 3.7%, while unfavorable foreign currency translation decreased sales by $9.4 million or 1.9%. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales decreased $73.4 million or 14.8%.
Sales in our U.S. operations were down $120.8 million or 5.4%, while acquisitions added $56.9 million or 2.5%. Excluding the impact of businesses acquired, U.S. sales were down $177.7 million or 7.9%, of which 3.7% is from our upstream oil and gas-focused operations and 4.2% is within our traditional core operations. Sales from our Canadian operations decreased $100.8 million or 28.1%, with unfavorable foreign currency translation decreasing Canadian sales by $33.6 million or 9.4%. Acquisitions added $0.2 million, or less than 1.0%. Prior to the impact of foreign currency translation and excluding businesses acquired, Canadian sales were down $67.4 million or 18.7%, of which 15.4% related to upstream oil and gas operations with the remaining 3.3% decrease from the traditional core operations. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, decreased $10.5 million or 6.8% compared to fiscal 2015. Unfavorable foreign currency translation decreased other country sales by $26.5 million or 17.1%. Prior to the impact of currency translation, other country sales were up $16.0 million or 10.3% compared to fiscal 2015, driven by growth in operations in Mexico.
The sales product mix for fiscal 2016 was 72.9% industrial products and 27.1% fluid power products compared to 73.2% industrial and 26.8% fluid power in fiscal 2015.
Our gross profit margin remained stable at 28.1% in fiscal 2016 and 28.0% in fiscal 2015. The increase is due to the impact of LIFO layer liquidations recorded in fiscal 2016 which increased gross profit by $2.1 million.
Selling, distribution and administrative expenses (SD&A) consist 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, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A decreased $31.4 million or 5.4% during fiscal 2016 compared to fiscal 2015, and as a percent of sales increased to 22.0% from 21.3% in fiscal 2015. Changes in foreign currency exchange rates had the effect of decreasing SD&A by $14.9 million or 2.5% compared to fiscal 2015. Additional SD&A from businesses acquired in fiscal 2016 added $16.0 million or 2.7% of SD&A expenses including $2.1 million associated with intangibles amortization. Further, severance expense and other restructuring charges related to consolidating facilities added $5.2 million or 0.9% of SD&A for fiscal 2016. Excluding the impact of businesses acquired, restructuring expenses, and the favorable currency translation impact, SD&A declined $37.7 million or 6.5% during fiscal 2016 compared to fiscal 2015 as a result of continuous efforts to minimize such expenses. These efforts to minimize expense were led by efforts to control headcount. Excluding the effect of acquisitions, overall headcount was down by over 400 associates from June 30, 2015 to June 30, 2016. Total salaries and wages were down $17.0 million for fiscal 2016 compared to fiscal 2015 while all other expenses within SD&A were down $14.4 million.
During the third quarter of fiscal 2016, the Company performed its annual goodwill impairment test. As a result of this test, the Company determined that all of the goodwill associated with the Australia/New Zealand Service Center Based Distribution reporting unit was impaired as of January 1, 2016. This impairment was the result of the decline in the mining and extraction industries in Australia and the resulting reduced customer spending due to a decline in demand throughout Asia. Further, due to a sustained decline in oil prices and reduced customer spending in Canada, the Company determined that a portion of the goodwill associated with the Canada Service Center Based Distribution reporting unit was also impaired as of January 1, 2016. Accordingly, the Company recognized a combined non-cash impairment charge of $64.8 million for goodwill during fiscal 2016, which decreased net income by $63.8 million and earnings per share by $1.62.
Operating income decreased $95.8 million, or 51.9%, to $88.8 million during fiscal 2016 from $184.6 million during fiscal 2015, and as a percent of sales, decreased to 3.5%, primarily due to the non-cash goodwill impairment charge of $64.8 million. Excluding the goodwill impairment charge, operating income as a percent of sales was 6.1%, down from 6.7% in the prior year primarily due to the $8.8 million of restructuring charges incurred during fiscal 2016 and lower sales volume.

19
Table of Contents

Operating income, before the goodwill impairment charge, as a percentage of sales for the Service Center Based Distribution segment decreased to 5.2% in fiscal 2016 from 6.2% in fiscal 2015. This decrease was primarily attributable to the impact of lower sales and the $8.8 million of restructuring charges recorded to costs of sales and SD&A during fiscal 2016.
Operating income as a percentage of sales for the Fluid Power Businesses segment decreased to 9.4% in fiscal 2016 from 9.8% in fiscal 2015. This decrease was primarily attributable to a decline in sales without a commensurate decline in the business segment's SD&A expenses.
Segment operating income was impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.
Other expense (income), net, represents certain non-operating items of income and expense. This was $1.1 million of expense in fiscal 2016 compared to $0.9 million of expense in fiscal 2015. Fiscal 2016 expense primarily consists of foreign currency transaction losses of $1.0 million offset by unrealized gains on investments held by non-qualified deferred compensation trusts of $0.1 million. Fiscal 2015 expense consisted primarily of foreign currency transaction losses of $1.3 million offset by unrealized gains on investments held by non-qualified deferred compensation trusts of $0.4 million.
The effective income tax rate was 62.6% for fiscal 2016 compared to 34.3% for fiscal 2015. The increase in the effective tax rate was due to the recording of $64.8 million of goodwill impairment during Fiscal 2016, of which $61.3 million was not tax deductible. The goodwill impairment increased the effective tax rate for fiscal 2016 by 27.1%. The remaining increase in the effective tax rate, adjusted for goodwill impairment, was due to state and local taxes and mix of income negatively impacting the rate. All undistributed earnings of our foreign subsidiaries were considered to be permanently reinvested at June 30, 2016 and 2015.
As a result of the factors addressed above, net income for fiscal 2016 decreased $85.9 million or 74.4% from the prior year. Net income per share was $0.75 per share for fiscal 2016 compared to $2.80 for fiscal 2015, a decrease of 73.2%. Fiscal 2016 results include negative impacts on earnings per share of $1.62 per share for goodwill impairment charges and $0.16 per share for restructuring charges. Net income per share was favorably impacted by lower weighted average common shares outstanding in fiscal 2016 as a result of our share repurchase program.
At June 30, 2016, we had a total of 559 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia and New Zealand, versus 565 at June 30, 2015.
The number of Company employees was 5,569 at June 30, 2016 and 5,839 at June 30, 2015.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At June 30, 2017 we had total debt obligations outstanding of $292.0 million compared to $328.3 million at June 30, 2016 . Management expects that our existing cash, cash equivalents, funds available under the revolving credit and uncommitted shelf facilities, and cash provided from operations will be sufficient to finance normal working capital needs in each of the countries we operate in, payment of dividends, acquisitions, investments in properties, facilities and equipment, 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.
The Company holds significant cash and cash equivalent balances outside of the United States of America. The following table shows the Company's total cash as of June 30, 2017 by geographic location; all amounts are in thousands.
Country
Amount

United Sates
$
54,713

Canada
32,041

Other Countries
18,303

Total
$
105,057


20

To the extent cash in foreign countries is distributed to the U.S., it could become subject to U.S. income taxes. Foreign tax credits may be available to offset all or a portion of such taxes. At June 30, 2017 , all foreign earnings are considered permanently reinvested.
The Company’s working capital at June 30, 2017 was $572.8 million compared to $507.2 million million at June 30, 2016 . The current ratio was 2.8 to 1 at June 30, 2017 and at June 30, 2016 .
Net Cash Flows
The following table is included to aid in review of Applied’s statements of consolidated cash flows; all amounts
are in thousands.
 
Year Ended June 30,
 
2017

 
2016

 
2015

Net Cash Provided by (Used in):
 
 
 
 
 
Operating Activities
$
164,619

 
$
162,014

 
$
157,007

Investing Activities
(16,894
)
 
(75,031
)
 
(173,621
)
Financing Activities
(103,349
)
 
(93,007
)
 
22,220

Exchange Rate Effect
820

 
(3,585
)
 
(7,325
)
Increase (Decrease) in Cash and Cash Equivalents
$
45,196

 
$
(9,609
)
 
$
(1,719
)
The increase in cash provided by operating activities during fiscal 2017 is primarily due to improved operating results and cash tax savings from the worthless stock deduction, offset by increases in working capital.
Net cash used in investing activities in fiscal 2017 included $17.0 million for capital expenditures and $2.8 million used for acquisitions. These were offset by $2.9 million of proceeds received from the sale of five buildings during fiscal 2017 . Net cash used in investing activities in fiscal 2016 included $13.1 million for capital expenditures and $62.5 million used for acquisitions. Net cash used in investing activities in fiscal 2015 included $14.9 million for capital expenditures and $160.6 million used for acquisitions.
Net cash used in financing activities in fiscal 2017 included $3.4 million of long-term debt repayments and $33.0 million of net repayments under the revolving credit facility. Further uses of cash were $44.6 million for dividend payments, $8.2 million used to repurchase 162,500 shares of treasury stock, $11.3 million used for acquisition holdback payments, and $3.5 million used to pay taxes for shares withheld.
Net cash used in financing activities in fiscal 2016 included $98.7 million of long-term debt repayments and $19.0 million of net repayments under the revolving credit facility, offset by $125.0 million of cash from borrowings under the new credit facility. Further uses of cash were $43.3 million for dividend payments, $37.5 million used to repurchase 951,100 shares of treasury stock, and $18.9 million of acquisition holdback payments.
Net cash provided by financing activities in fiscal 2015 included $170.0 million from borrowings under long-term debt facilities used for the financing of acquisitions, offset by $17.0 million of net repayments under our revolving credit facility and $2.7 million of long-term debt repayments. Further uses of cash were $42.7 million for dividend payments, $76.5 million used to repurchase 1,740,100 shares of treasury stock, and $7.7 million of acquisition holdback payments.
The increase in dividends over the last three fiscal years is the result of regular increases in our dividend payout rates. We paid dividends of $1.14, $1.10, and $1.04 per share in fiscal 2017 , 2016 and 2015 , respectively.
Capital Expenditures
We expect capital expenditures for fiscal 2018 to be in the $18.0 million to $20.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for fiscal 2018 is expected to be in the range of $15.5 million to $16.5 million.

21

ERP Project
In fiscal 2011 Applied commenced its ERP (SAP) project to transform the Company's technology platforms
and enhance its business information and technology systems for future growth. We first deployed our solution in our Western Canadian operating locations and our traditional U.S. Service Center Based Distribution businesses, excluding recent acquisitions. In fiscal 2014, the Company initiated the conversion to SAP of its related financial and accounting systems, including the receivables, payables, treasury, inventory, fixed assets, general ledger and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation process/system, were transitioned to SAP during fiscal 2015. At the beginning of fiscal 2016 the Company converted to a new consolidation process and system. During the fourth quarter of fiscal 2017, operations in Eastern Canada transitioned onto SAP, and the Company expects that its U.S. upstream oil and gas-focused operations will transition onto SAP during fiscal 2018. The Company will continue to evaluate and consider an appropriate deployment schedule for other operations not on SAP.
Share Repurchases
The Board of Directors has authorized the repurchase of shares of the Company’s stock. These purchases may
be made in open market and negotiated transactions, from time to time, depending upon market conditions.
At June 30, 2017 , we had authorization to purchase an additional 1,450,000 shares.
In fiscal 2017 , 2016 and 2015 , we repurchased 162,500 , 951,100 , and 1,740,100 shares of the Company’s common stock, respectively, at an average price per share of $50.72 , $39.39 , and $43.97 , respectively.
Borrowing Arrangements
In December 2015, the Company entered into a five-year credit facility with a group of banks expiring in December 2020 . This agreement provides for a $125.0 million unsecured term loan and a $250.0 million unsecured revolving credit facility. Fees on this facility range from 0.09% to 0.175% 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, 2017 and June 30, 2016 , the Company had $120.3 million and $123.4 million , respectively, outstanding under the term loan. The Company had no outstanding balance under the revolver as of June 30, 2017 and $33.0 million outstanding under the revolver at June 30, 2016 . Unused lines under this facility, net of outstanding letters of credit of $2.4 million and $2.7 million to secure certain insurance obligations, totaled $247.6 million and $214.3 million at June 30, 2017 and June 30, 2016 , respectively, and are available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 2.25% as of June 30, 2017 and 1.5% as of June 30, 2016 . The weighted-average interest rate on the revolving credit facility outstanding was 1.44% as of June 30, 2016 .
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving credit agreement, in the amount of $2.7 million as of June 30, 2017 and $2.7 million as of June 30, 2016 , in order to secure certain insurance obligations.
In April 2014 the Company assumed $2.4 million of debt as a part of the acquisition of our headquarters facility. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency and matures in May 2024. We had $1.7 million and $1.9 million outstanding under this note at June 30, 2017 and 2016, respectively.
At June 30, 2017 , the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 million . The "Series C" notes have a principal amount of $120.0 million and carry a fixed interest rate of 3.19% ; the principal is due in equal payments in July 2020, 2021, and 2022. The "Series D" notes have a principal amount of $50.0 million and carry a fixed interest rate of 3.21% ; the principal is due in equal payments in October 2019 and 2023. As of June 30, 2017 , $50.0 million in additional financing was available under this facility.
The revolving credit facility and unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2017 , the most restrictive of these covenants required that the Company have net indebtedness less than 3.25 times consolidated income before interest, taxes, depreciation and amortization. At June 30, 2017 , the Company's net indebtedness was less than two times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all covenants at June 30, 2017 .

22

Accounts Receivable Analysis
The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable (all dollar amounts are in thousands):
June 30,
2017

 
2016

Accounts receivable, gross
$
400,559

 
$
358,891

Allowance for doubtful accounts
9,628

 
11,034

Accounts receivable, net
$
390,931

 
$
347,857

Allowance for doubtful accounts, % of gross receivables
2.4
%
 
3.1
%
 
 
 
 
Year Ended June 30,
2017

 
2016

Provision for losses on accounts receivable
$
2,071

 
$
4,303

Provision as a % of net sales
0.08
%
 
0.17
%
Accounts receivable are reported at net realizable value and consist of trade receivables from customers. Management monitors accounts receivable by reviewing Days Sales Outstanding (DSO) and the aging of receivables for each of the Company's locations.
On a consolidated basis, DSO was 51.6 at June 30, 2017 versus 49.4 at June 30, 2016 . Accounts receivable increased 12.4% this year, compared to an increase of 2.9% in sales for the twelve months ended June 30, 2017 . We primarily attribute the increase in DSO to the increase in accounts receivable in our U.S. Service Center Based Distribution businesses due to strong sales in the fourth quarter of fiscal 2017.
Approximately 1.7% of our accounts receivable balances are more than 90 days past due at June 30, 2017 compared to 2.7% at June 30, 2016 . This improvement primarily relates to our U.S. and Canadian Service Center Based Distribution businesses. On an overall basis, our provision for losses from uncollected receivables represents 0.08% of our sales in the year ended June 30, 2017 . Historically, this percentage is around 0.10% to 0.15%. The decrease in the provision as a percentage of sales from fiscal 2016 relates to lower bad debt expense than in the prior fiscal year for our operations focused on upstream oil and gas customers due to the stabilization and beginning of a sales recovery with customers in the energy markets. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels.
Inventory Analysis
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 uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the period ended June 30, 2017 was 3.7 versus 3.6 at June 30, 2016 . We believe our inventory turnover ratio in fiscal 2018 will be slightly better than our fiscal 2017 levels.

23

CONTRACTUAL OBLIGATIONS
The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 2017 (in thousands):
 
Total

 
Period Less
Than 1 yr

 
Period
2-3 yrs

 
Period
4-5 yrs

 
Period
Over 5 yrs

 
Other

Operating leases
$
95,100

 
$
29,000

 
$
38,000

 
$
13,500

 
$
14,600

 
—

Planned funding of post-retirement obligations
18,800

 
3,000

 
6,900

 
1,700

 
7,200

 
—

Unrecognized income tax benefit liabilities, including interest and penalties
4,300

 
 
 
 
 
 
 
 
 
4,300

Long-term debt obligations
291,900

 
4,900

 
39,500

 
182,000

 
65,500

 
—

Interest on long-term debt obligations (1)
30,300

 
8,100

 
15,200

 
6,000

 
1,000

 
—

Acquisition holdback payments
3,206

 
672

 
2,384

 
75

 
75

 
—

Total Contractual Cash Obligations
$
443,606

 
$
45,672

 
$
101,984

 
$
203,275

 
$
88,375

 
$
4,300

(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations. Rates in effect as of June 30, 2017 are used for variable rate debt.
Purchase orders for inventory and other goods and services are not included in our estimates as we are unable to aggregate the amount of such purchase orders that represent enforceable and legally binding agreements specifying all significant terms. The previous table includes the gross liability for unrecognized income tax benefits including interest and penalties in the “Other” column as the Company is unable to make a reasonable estimate regarding the timing of cash settlements, if any, with the respective taxing authorities.
SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to June 30, 2017 through the date the financial statements were issued.
On July 3, 2017, the Company acquired 100% of the outstanding stock of DICOFASA, located in Puebla, Mexico, for a purchase price of approximately $5.9 million . The Company funded this acquisition using available cash. As a distributor of accessories and components for hydraulic systems and lubrication, this business will be included in the Fluid Power Businesses Segment.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. The Business and Accounting Policies note to the consolidated financial statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements.
LIFO Inventory Valuation and Methodology
Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories, and the average cost method for foreign inventories. We adopted the link chain dollar value LIFO method for accounting for U.S. inventories in fiscal 1974. Approximately 22.5% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $137.6 million as reflected in our consolidated balance sheet at June 30, 2017 . 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. See the Inventories note to the
consolidated financial statements in Item 8 under the caption "Financial Statements and Supplementary Data,
for further information.

24

Allowances for Slow-Moving and Obsolete Inventories
We evaluate the recoverability of our slow-moving and inactive inventories at least quarterly. We estimate 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. Our ability to recover our cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. A significant portion of the products we hold in inventory have long shelf lives, are not highly susceptible to obsolescence and are eligible for return under various supplier return programs.
As of June 30, 2017 and 2016 , the Company's reserve for slow-moving or obsolete inventories was $28.8 million and $25.1 million , respectively, recorded in inventories in the consolidated balance sheets. The increase is due to greater levels of slow-moving and inactive inventory within the U.S. and Canadian Service Center Based Distribution businesses.
Allowances for Doubtful Accounts
We evaluate the collectibility of trade accounts receivable based on a combination of factors. Initially, we estimate 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 certain customers and industries estimated to be a greater credit risk, trends within the entire customer pool and changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Accounts are written off against the allowance when it becomes evident that collection will not occur.
As of June 30, 2017 and 2016, our allowance for doubtful accounts was 2.4% and 3.1% of gross receivables, respectively. Our provision for losses on accounts receivable was $2.1 million , $4.3 million and $2.6 million in fiscal 2017 , 2016 and 2015 , respectively.
Goodwill and Intangibles
Goodwill is recognized as the amount by which the cost of an acquired entity exceeds the net amount assigned to assets acquired and liabilities assumed. Goodwill for acquired businesses is accounted for using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. As part of acquisition accounting, we also recognize acquired identifiable intangible assets such as customer relationships, vendor relationships, trade names, and non-competition agreements apart from goodwill. Finite-lived identifiable intangibles are evaluated for impairment when changes in conditions indicate carrying value may not be recoverable.
  
We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price. Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a two-step approach. Step one compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired, and the second step of goodwill impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss (if any). Step two compares the implied fair value of the reporting unit goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, meaning, the reporting unit's fair value is allocated to all the assets and liabilities of the reporting unit (including unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit is the price paid to acquire the reporting unit. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.
 

25

Goodwill on our consolidated financial statements relates to both the Service Center Based Distribution segment and the Fluid Power Businesses segment. The Company has six (6) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2017.  The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts by at least 20% as of January 1, 2017.
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. The Market approach utilizes an analysis of comparable publicly traded companies.
The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date.  The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years.  Key Level 3 based assumptions relate to pricing trends, inventory costs, customer demand, and revenue growth.  A number of benchmarks from independent industry and other economic publications were also used.  Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods.  Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.  Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values.
Income Taxes
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. As of June 30, 2017 , the Company had recognized $0.8 million of net deferred tax assets. 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 on a jurisdiction by jurisdiction basis. 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 rates and future taxable income levels.
Income taxes on undistributed earnings of non-U.S. subsidiaries are not accrued for the portion of such earnings that management considers to be permanently reinvested. At June 30, 2017 , management considered all undistributed earnings of non-U.S. subsidiaries to be permanently reinvested. Undistributed earnings of non-U.S. subsidiaries totaled $92.1 million for which no provision for U.S. income tax had been made.

26

CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
This Form 10-K, including Management’s Discussion and Analysis, contains statements that are forward-looking based on management’s current expectations about the future. Forward-looking statements are often identified by qualifiers, such as “guidance”, “expect”, “believe”, “plan”, “intend”, “will”, “should”, “could”, “would”, “anticipate”, “estimate”, “forecast”, “may”, "optimistic" and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’s control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law.
Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability, or changes in supplier distribution programs; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems; the impact of economic conditions on the collectability of trade receivables; reduced demand for our products in targeted markets due to reasons including consolidation in customer industries; our ability to retain and attract qualified sales and customer service personnel and other skilled executives, managers and professionals; our ability to identify and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability, timing and nature of new business opportunities including acquisitions, alliances, customer relationships, and supplier authorizations; the incurrence of debt and contingent liabilities in connection with acquisitions; our ability to access capital markets as needed on reasonable terms; disruption of operations at our headquarters or distribution centers; risks and uncertainties associated with our foreign operations, including volatile economic conditions, political instability, cultural and legal differences, and currency exchange fluctuations; the potential for goodwill and intangible asset impairment; changes in accounting policies and practices; our ability to maintain effective internal control over financial reporting; organizational changes within the Company; the volatility of our stock price and the resulting impact on our consolidated financial statements; risks related to legal proceedings to which we are a party; adverse government regulation, legislation, or policies, both enacted and under consideration, including with respect to federal tax policy (e.g., affecting tax rates, the use of the LIFO inventory accounting method, or the taxation of foreign-sourced income), and international trade; and the occurrence of extraordinary events (including prolonged labor disputes, power outages, telecommunication outages, terrorist acts, earthquakes, extreme weather events, other natural disasters, fires, floods, and accidents). Other factors and unanticipated events could also adversely affect our business, financial condition or results of operations.
We discuss certain of these matters and other risk factors more fully throughout our Form 10-K, as well as other of our filings with the Securities and Exchange Commission.


27

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates.
We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. As of June 30, 2017 , we did not have any outstanding derivative instruments.
Foreign Currency Exchange Rate Risk
Because we operate throughout North America, Australia and New Zealand and approximately 15.9% of our fiscal year 2017 net sales were generated outside the United States, foreign currency exchange rates can impact our financial position, results of operations and competitive position. The financial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive income (loss) as reported in the statements of consolidated comprehensive income. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the statements of consolidated income as a component of other expense (income), net. Applied does not currently hedge the net investments in our foreign operations.
During the course of the fiscal year, the Mexican, Australian, and New Zealand currency exchange rates increased in relation to the U.S. dollar by 2.9%, 3.3%, and 2.9%, respectively, and the Canadian currency exchange rate decreased in relation to the U.S. dollar by 0.1%. In the twelve months ended June 30, 2017 , we experienced net foreign currency translation gains totaling $2.2 million , which were included in other comprehensive income (loss). We utilize a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in foreign currency rates. A 10% strengthening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2017 would have resulted in a $1.0 million decrease in net income for the year ended June 30, 2017 . A 10% weakening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2017 would have resulted in a $1.0 million increase in net income for the year ended June 30, 2017 .
Int erest Rate Risk
Our primary exposure to interest rate risk results from our outstanding debt obligations with variable interest rates. The levels of fees and interest charged on our various debt facilities are based upon leverage levels and market interest rates.
Our variable interest rate debt facilities outstanding include our five-year credit facility, which provides for a revolving credit facility with a capacity of up to $250.0 million in borrowings and no amount outstanding at June 30, 2017 , and a $125.0 million term loan, of which $120.3 million was outstanding at June 30, 2017 . Fixed interest rate debt facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $1.7 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $148.2 million during fiscal 2017 . The impact of a hypothetical 1.0% increase in the interest rates on our average variable interest rate bank borrowings would have resulted in a $1.5 million increase in interest expense. Changes in market interest rates would also impact interest rates on these facilities.
For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysis of Financial Condition and Results of Operations ” in Item 7 and note 5 to the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business.


28
Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio

We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2017 and 2016 , and the related statements of consolidated income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2017 . Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2017 and 2016 , and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2017 , in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2017 , based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 18, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP
Cleveland, Ohio

August 18, 2017

29

STATEMENTS OF CONSOLIDATED INCOME
(In thousands, except per share amounts)

Year Ended June 30,
 
2017

 
2016

 
2015

Net Sales
 
$
2,593,746

 
$
2,519,428

 
$
2,751,561

Cost of Sales
 
1,856,051

 
1,812,006

 
1,981,747

Gross Profit
 
737,695

 
707,422

 
769,814

Selling, Distribution and Administrative, including depreciation
 
563,105

 
553,827

 
585,195

Goodwill Impairment
 
—

 
64,794

 
—

Operating Income
 
174,590

 
88,801

 
184,619

Interest Expense
 
8,831

 
9,004

 
8,121

Interest Income
 
(290
)
 
(241
)
 
(252
)
Other (Income) Expense, net
 
(917
)
 
1,060

 
879

Income Before Income Taxes
 
166,966

 
78,978

 
175,871

Income Tax Expense
 
33,056

 
49,401

 
60,387

Net Income
 
$
133,910

 
$
29,577

 
$
115,484

Net Income Per Share — Basic
 
$
3.43

 
$
0.75

 
$
2.82

Net Income Per Share — Diluted
 
$
3.40

 
$
0.75

 
$
2.80


See notes to consolidated financial statements.


30
Table of Contents

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In thousands)

Year Ended June 30,
 
2017

 
2016

 
2015

Net income per the statements of consolidated income
 
$
133,910

 
$
29,577

 
$
115,484

 
 
 
 
 
 
 
Other comprehensive income (loss), before tax:
 
 
 
 
 
 
Foreign currency translation adjustments
 
2,238

 
(24,441
)
 
(58,233
)
Postemployment benefits:
 
 
 
 
 
 
  Actuarial gain (loss) on remeasurement
 
2,038

 
(1,998
)
 
(776
)
  Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs
 
506

 
518

 
286

Unrealized gain (loss) on investment securities available for sale
 
91

 
(52
)
 
(38
)
Total other comprehensive income (loss), before tax
 
4,873

 
(25,973
)
 
(58,761
)
Income tax expense (benefit) related to items of other comprehensive income (loss)
 
1,029

 
(598
)
 
(205
)
Other comprehensive income (loss), net of tax
 
3,844

 
(25,375
)
 
(58,556
)
Comprehensive income
 
$
137,754

 
$
4,202

 
$
56,928


See notes to consolidated financial statements.

31
Table of Contents

CONSOLIDATED BALANCE SHEETS
(In thousands)

June 30,
 
2017

 
2016

Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
105,057

 
$
59,861

Accounts receivable, less allowances of $9,628 and $11,034
 
390,931

 
347,857

Inventories
 
345,145

 
338,221

Other current assets
 
41,409

 
35,582

Total current assets
 
882,542

 
781,521

Property — at cost
 
 
 
 
Land
 
14,250

 
14,214

Buildings
 
97,529

 
97,521

Equipment, including computers and software
 
162,432

 
157,496

Total property — at cost
 
274,211

 
269,231

Less accumulated depreciation
 
166,143

 
161,466

Property — net
 
108,068

 
107,765

Identifiable intangibles, net
 
163,562

 
191,240

Goodwill
 
206,135

 
202,700

Deferred tax assets
 
8,985

 
12,277

Other assets
 
18,303

 
16,522

Total Assets
 
$
1,387,595

 
$
1,312,025

Liabilities
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
180,614

 
$
148,543

Current portion of long-term debt
 
4,814

 
3,247

Compensation and related benefits
 
58,785

 
57,187

Other current liabilities
 
65,540

 
65,306

Total current liabilities
 
309,753

 
274,283

Long-term debt
 
286,769

 
324,583

Post-employment benefits
 
16,715

 
21,322

Other liabilities
 
29,102

 
33,921

Total Liabilities
 
642,339

 
654,109

Shareholders’ Equity
 
 
 
 
Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding
 
—

 
—

Common stock — no par value; 80,000 shares authorized; 54,213 shares issued;
39,041 and 39,057 shares outstanding, respectively
 
10,000

 
10,000

Additional paid-in capital
 
164,655

 
162,529

Retained earnings
 
1,033,751

 
944,821

Treasury shares — at cost (15,172 and 15,156 shares), respectively
 
(381,448
)
 
(373,888
)
Accumulated other comprehensive loss
 
(81,702
)
 
(85,546
)
Total Shareholders’ Equity
 
745,256

 
657,916

Total Liabilities and Shareholders’ Equity
 
$
1,387,595

 
$
1,312,025


See notes to consolidated financial statements.

32
Table of Contents

STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
Year Ended June 30,
 
2017

 
2016

 
2015

Cash Flows from Operating Activities
 
 
 
 
 
 
Net income
 
$
133,910

 
$
29,577

 
$
115,484

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Goodwill impairment
 
—

 
64,794

 
—

Depreciation and amortization of property
 
15,306

 
15,966

 
16,578

Amortization of intangibles
 
24,371

 
25,580

 
25,797

Amortization of stock appreciation rights and options
 
1,891

 
1,543

 
1,610

Deferred income taxes
 
(2,852
)
 
(6,581
)
 
(4,961
)
Provision for losses on accounts receivable
 
2,071

 
4,303

 
2,597

Unrealized foreign exchange transaction (gains) losses
 
(333
)
 
61

 
(727
)
Other share-based compensation expense
 
3,629

 
2,524

 
2,851

(Gain) loss on sale of property
 
(1,541
)
 
337

 
(1,291
)
Other
 
103

 
—

 
45

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
 
Accounts receivable
 
(42,267
)
 
26,414

 
13,129

Inventories
 
(3,624
)
 
25,081

 
(15,704
)
Other operating assets
 
(6,162
)
 
2,964

 
797

Accounts payable
 
32,076

 
(28,644
)
 
1,040

Other operating liabilities
 
8,041

 
(1,905
)
 
(238
)
Cash provided by Operating Activities
 
164,619

 
162,014

 
157,007

Cash Flows from Investing Activities
 
 
 
 
 
 
Property purchases
 
(17,045
)
 
(13,130
)
 
(14,933
)
Proceeds from property sales
 
2,924

 
603

 
1,932

Net cash paid for acquisition of businesses, net of cash acquired
 
(2,773
)
 
(62,504
)
 
(160,620
)
Cash used in Investing Activities
 
(16,894
)
 
(75,031
)
 
(173,621
)
Cash Flows from Financing Activities
 
 
 
 
 
 
Net repayments under revolving credit facility, classified as long term
 
(33,000
)
 
(19,000
)
 
(17,000
)
Borrowings under long-term debt facilities
 
—

 
125,000

 
170,000

Long-term debt repayments
 
(3,353
)
 
(98,662
)
 
(2,717
)
Deferred financing costs
 
—

 
(719
)
 
—

Purchases of treasury shares
 
(8,242
)
 
(37,465
)
 
(76,515
)
Dividends paid
 
(44,619
)
 
(43,330
)
 
(42,663
)
Excess tax benefits from share-based compensation
 
—

 
208

 
1,042

Acquisition holdback payments
 
(11,307
)
 
(18,913
)
 
(7,693
)
Exercise of stock appreciation rights and options
 
656

 
896

 
235

Taxes paid for shares withheld
 
(3,484
)
 
(1,022
)
 
(2,469
)
Cash (used in) provided by Financing Activities
 
(103,349
)
 
(93,007
)
 
22,220

Effect of exchange rate changes on cash
 
820

 
(3,585
)
 
(7,325
)
Increase (decrease) in cash and cash equivalents
 
45,196

 
(9,609
)
 
(1,719
)
Cash and cash equivalents at beginning of year
 
59,861

 
69,470

 
71,189

Cash and Cash Equivalents at End of Year
 
$
105,057

 
$
59,861

 
$
69,470

 
 
 
 
 
 
 
Supplemental Cash Flow Information
 
 
 
 
 
 
Cash paid during the year for:
 
 
 
 
 
 
Income taxes
 
$
38,772

 
$
54,749

 
$
69,272

Interest
 
$
8,561

 
$
9,497

 
$
5,851

See notes to consolidated financial statements.

33

STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands)

For the Years Ended June 30, 2017, 2016 and 2015
 
Shares of
Common
Stock
Outstanding

 
Common
Stock

 
Additional
Paid-In
Capital

 

Retained
Earnings

 
Treasury
Shares-
at Cost

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Total
Shareholders'
Equity

Balance at July 1, 2014
 
41,563

 
$
10,000

 
$
156,999

 
$
896,776

 
$
(261,852
)
 
$
(1,615
)
 
$
800,308

Net income
 
 
 
 
 
 
 
115,484

 
 
 
 
 
115,484

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
(58,556
)
 
(58,556
)
Cash dividends — $1.04 per share
 
 
 
 
 
 
 
(42,663
)
 
 
 
 
 
(42,663
)
Purchases of common stock for treasury
 
(1,740
)
 
 
 
 
 
 
 
(76,515
)
 
 
 
(76,515
)
Treasury shares issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 

Exercise of stock appreciation rights and options
 
34

 
 
 
552

 
 
 
415

 
 
 
967

Performance share awards
 
12




(425
)



52




(373
)
Restricted stock units
 
36

 
 
 
(1,312
)
 
 
 
76

 
 
 
(1,236
)
Deferred compensation plans
 
1

 
 
 
24

 
 
 
21

 
 
 
45

Compensation expense — stock appreciation rights and options
 

 
 
 
1,610

 
 
 

 
 
 
1,610

Other share-based compensation expense
 
 
 
 
 
2,851

 
 
 
 
 
 
 
2,851

Other
 
(1
)
 
 
 
(227
)
 
(49
)
 
(318
)
 
 
 
(594
)
Balance at June 30, 2015
 
39,905

 
10,000

 
160,072

 
969,548

 
(338,121
)
 
(60,171
)
 
741,328

Net income
 
 
 
 
 
 
 
29,577

 
 
 
 
 
29,577

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
(25,375
)
 
(25,375
)
Cash dividends — $1.10 per share
 
 
 
 
 
 
 
(54,266
)
 
 
 
 
 
(54,266
)
Purchases of common stock for treasury
 
(951
)
 
 
 
 
 
 
 
(37,465
)
 
 
 
(37,465
)
Treasury shares issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock appreciation rights and options
 
64

 
 
 
(391
)
 
 
 
1,000

 
 
 
609

Performance share awards
 
8

 
 
 
(308
)
 
 
 
116

 
 
 
(192
)
Restricted stock units
 
15

 
 
 
(530
)
 
 
 
232

 
 
 
(298
)
Compensation expense — stock appreciation rights and options
 
 
 
 
 
1,543

 
 
 
 
 
 
 
1,543

Other share-based compensation expense
 
 
 
 
 
2,524

 
 
 
 
 
 
 
2,524

Other
 
16

 
 
 
(381
)
 
(38
)
 
350

 
 
 
(69
)
Balance at June 30, 2016
 
39,057

 
10,000

 
162,529

 
944,821

 
(373,888
)
 
(85,546
)
 
657,916

Net income
 
 
 
 
 
 
 
133,910

 
 
 
 
 
133,910

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
3,844

 
3,844

Cash dividends — $1.14 per share
 

 
 
 
 
 
(45,005
)
 
 
 
 
 
(45,005
)
Purchases of common stock for treasury
 
(163
)
 
 
 

 
 
 
(8,242
)
 
 
 
(8,242
)
Treasury shares issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock appreciation rights and options
 
111

 
 
 
(2,218
)
 
 
 
105

 
 
 
(2,113
)
Performance share awards
 
10

 
 
 
(360
)
 
 
 
126

 
 
 
(234
)
Restricted stock units
 
15

 
 
 
(624
)
 
 
 
227

 
 
 
(397
)
Compensation expense — stock appreciation rights and options
 
 
 
 
 
1,891

 
 
 
 
 
 
 
1,891

Other share-based compensation expense
 
 
 
 
 
3,629

 
 
 
 
 
 
 
3,629

Other
 
11

 
 
 
(192
)
 
25

 
224

 
 
 
57

Balance at June 30, 2017
 
39,041

 
$
10,000

 
$
164,655

 
$
1,033,751

 
$
(381,448
)
 
$
(81,702
)
 
$
745,256


See notes to consolidated financial statements.

34

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 distributor of bearings, power transmission products, fluid power components, 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 and fluid power applications, as well as customized mechanical, fabricated rubber and fluid power 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 income (loss) in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other (income) expense, 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 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) expense, 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 Applied 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.

35

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.
Inventories
Inventories are valued at the average cost method, 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, 2017 , approximately 22.5% 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 sheet 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.

36

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 discounted cash flow models and market multiples for comparable businesses 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 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 expenses 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
Sales are recognized when there is evidence of an arrangement, the sales price is fixed, collectibility is reasonably assured and the product’s title and risk of loss is transferred to the customer. Typically, these conditions are met when the product is shipped to the customer. The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net sales. The Company reports its sales net of actual sales returns and the amount of reserves established for anticipated sales returns based on historical rates. Sales tax collected from customers is excluded from net sales in the accompanying statements of consolidated income.
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 expenses in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expenses were approximately $20,060 , $21,480 and $24,430 for the fiscal years ended June 30, 2017 , 2016 and 2015 , 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 the Income Taxes topic of the ASC (Accounting Standards Codification). The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes.

37

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.
Changes in Accounting Principle
Share-based Payment Awards
In March 2016, the FASB issued its final standard on simplifying the accounting for share-based payment awards. This standard, issued as ASU 2016-09, simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification on the statement of cash flows, and accounting for forfeitures. This update is effective for annual and interim financial statement periods beginning after December 15, 2016, with early adoption permitted. The Company early adopted ASU 2016-09 in the first quarter of fiscal 2017.

The new standard requires prospective recognition of excess tax benefits and deficiencies resulting from share-based compensation awards vesting and exercises be recognized in the income statement. Previously, these amounts were recognized in additional paid-in capital. Net excess tax benefits of $2,403 for the year ended June 30, 2017 , were recognized as a reduction of income tax expense. In addition, ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from the assumed future proceeds in the calculation of diluted shares, resulting in an insignificant increase in diluted weighted average shares outstanding for year ended June 30, 2017 , which did not have a material impact on earnings per share.

The Company has elected to continue to estimate the number of share-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.

The standard requires that excess tax benefits from share-based compensation awards be reported as operating activities in the consolidated statements of cash flows. Previously, these cash flows were included in financing activities. We have elected to apply this change on a prospective basis, resulting in an increase in net cash provided by operating activities and net cash used in financing activities of $2,403 for the year ended June 30, 2017 .

ASU 2016-09 requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statements of cash flows. Previously, these cash flows were included in operating activities. This change was required to be applied on a retrospective basis. As such, the consolidated statements of cash flows for the prior periods were revised. This change resulted in an increase in net cash provided by operating activities and in net cash used in financing activities of $1,022 and $2,469 for the years ended June 30, 2016 and 2015 , respectively.

Debt Issue Costs
In April 2015, the FASB issued its final standard on simplifying the presentation of debt issue costs. This standard, issued as ASU 2015-03, requires that all costs incurred to issue debt be presented in the balance sheet as a direct reduction from the carrying value of the debt, rather than as an asset. This update is effective for annual financial statement periods beginning after December 15, 2015, and interim periods within those fiscal years. As required, the Company adopted ASU 2015-03 in the first quarter of fiscal 2017 and has applied the new standard retrospectively. The retrospective adoption of ASU 2015-03 resulted in the reclassification as of June 30, 2016 of

38

unamortized debt issue costs of $105 from other current assets to a reduction of current portion of long-term debt and $399 from other assets to a reduction of long-term debt on the Company's consolidated balance sheets.

Measurement-period Adjustments for Business Combinations
In September 2015, the FASB issued its final standard on simplifying the accounting for measurement-period adjustments for business combinations. This standard, issued as ASU 2015-16, requires that an entity that is the acquirer in a business combination that identifies adjustments to provisional amounts during the measurement period to recognize those adjustments in the reporting period in which the amounts are determined. This update further requires that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The update is effective for annual and interim financial statement periods beginning after December 15, 2015, and is applied prospectively to adjustments to provisional amounts that occur after the effective date of this update, with early adoption permitted. The Company adopted ASU 2015-16 in the first quarter of fiscal 2017. The adoption of this update did not have a material impact on the financial statements of the Company.
New Accounting Pronouncements
In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers.
The standard, issued as ASU 2014-09, outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. 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." In August 2015, the FASB issued ASU 2015-14 to delay the effective date of ASU 2014-09 by one year. In accordance with the delay, the update is effective for financial statement periods beginning after December 15, 2017 and may be adopted either retrospectively or on a modified retrospective basis. Early adoption is permitted, but not before financial statement periods beginning after December 15, 2016. In March 2016 the FASB issued ASU 2016-08 and ASU 2016-10, and in May 2016 the FASB issued ASU 2016-12, which clarify the guidance in ASU 2014-09 but do not change the core principle of the revenue recognition model. The Company has evaluated the provisions of the new standard and is in the process of assessing its impact on financial statements, information systems, business processes, and financial statement disclosures. We are completing an analysis of revenue streams at each of the business units and are evaluating the impact the new standard may have on revenue recognition. The Company primarily sells purchased products and recognizes revenue at point of sale or delivery and this is not expected to change under the new standard. Preliminarily, the Company plans to use the modified retrospective method of adoption, and based on initial reviews, the standard is not expected to have a material impact on the Company's consolidated financial statements. We do anticipate expanded disclosures on revenue in order to comply with the new ASU. The Company will continue to evaluate the impacts of the adoption of the standard and the preliminary assessments are subject to change.
In July 2015, the FASB issued its final standard on simplifying the measurement of inventory. This standard, issued as ASU 2015-11, specifies that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new standard does not apply to inventory that is measured using LIFO; therefore, it is not applicable to the Company's U.S. inventory values, but does apply to the Company's foreign inventories which are valued using the average cost method. The update is effective for financial statement periods beginning after December 15, 2016, with earlier application permitted. The Company will adopt this standard when it becomes effective in the first quarter of fiscal 2018, and it is not expected to have a material impact on the Company's financial statements and related disclosures.
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 financial statement periods beginning after December 15, 2018, with earlier application permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
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

39

statement periods beginning after December 15, 2018. The Company has not yet determined the impact of this pronouncement 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 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, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment. This standard, issued as ASU 2017-04, eliminates step 2 from the goodwill impairment test and instead requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. Upon adoption, the Company will apply this guidance prospectively to its annual and interim goodwill impairment tests and disclose the change in accounting principle.
In March 2017, the FASB issued its final standard on improving the presentation of net periodic pension and postretirement benefit costs. This standard, issued as ASU 2017-07, requires that an employer report the service cost component for defined benefit plans and postretirement plans in the same line item in the income statement as other compensation costs arising from services rendered by the employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This update is effective for annual financial statement periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. The Company has decided to early adopt this standard as of the beginning of fiscal 2018, and will apply the guidance retrospectively to all periods presented. The impact of the adoption of this guidance will result in the reclassification of the other components of net benefit cost from selling, distribution, and administrative expense to other (income) expense, net in the statements of consolidated income, resulting in an increase to operating income. There is no impact to income before income taxes or net income, so therefore no impact to net income per share. The amounts reclassified would result in an increase in operating income of $796 , $981 and $782 for the years ended June 30, 2017 , June 30, 2016 and June 30, 2015 , respectively.
In May 2017, the FASB issued its final standard on scope of modification accounting. This standard, issued as 2017-09, provides guidance about which change to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This update is effective for annual and interim financial statement periods beginning after December 15, 2017, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.


40

NOTE 2: 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 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 - Toledo, OH, New Berlin, WI, Valparaiso, IN, and Indianapolis, IN. Sentinel is included in the Fluid Power Businesses 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 includes $982 of acquisition holdback payments, of which $175 was paid during the year ended June 30, 2017 . The remaining balance of $807 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.
Fiscal 2016 Acquisitions
On June 14, 2016, the Company acquired 100% of the outstanding stock of Seals Unlimited ("Seals"), a distributor of sealing, fastener, and hose products located in Burlington, Ontario. On January 4, 2016, the Company acquired substantially all of the net assets of HUB Industrial Supply ("HUB"), a distributor of consumable industrial products operating from three locations - Lake City, FL, Indianapolis, IN, and Las Vegas, NV. On August 3, 2015, the Company acquired substantially all of the net assets of Atlantic Fasteners Co., Inc. ("Atlantic Fasteners"), a distributor of C-Class consumables including industrial fasteners and related industrial supplies located in Agawam, MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. On October 1, 2015, the Company acquired substantially all of the net assets of S.G. Morris Co. ("SGM"). SGM, headquartered in Cleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania and West Virginia and is included in the Fluid Power Businesses segment. The total combined consideration for these acquisitions was approximately $65,900 , net tangible assets acquired were $22,700 , and intangibles including goodwill were $43,200 based upon estimated fair values at the acquisition dates. The total combined consideration includes $3,300 of acquisition holdback payments, of which $1,250 was paid during the year ended June 30, 2017 . The remaining balance of $2,050 is included in other liabilities on the consolidated balance sheets, which will be paid plus interest in October 2018. The Company funded the amounts paid for the acquisitions at closing using available cash and borrowings under the revolving credit facility at variable interest rates. The acquisition prices and the results of operations for the acquired entities are not material in relation to the Company's consolidated financial statements.
Knox Acquisition
On July 1, 2014, the Company acquired 100% of the outstanding stock of Knox Oil Field Supply Inc. (“Knox”), headquartered in San Angelo, Texas, for total consideration of $132,000 , including cash paid of $118,000 at closing. The primary reason for the acquisition of Knox was to complement and expand the Company’s capabilities to serve the upstream oil and gas industry in the United States. As a distributor of oilfield supplies and related services, this business is included in the Service Center Based Distribution Segment. The Company funded the acquisition by drawing $120,000 from the previously uncommitted shelf facility with Prudential Investment Management at a fixed interest rate of 3.19% with an average seven year life. The remaining $14,000 purchase price was to be paid as acquisition holdback payments in three payments with interest at a fixed rate of 1.50% per annum; $7,100 was paid during fiscal 2016, and $7,200 was paid during fiscal 2017, extinguishing the liability.


41

The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of Knox based on their estimated fair values at the acquisition date:
 
Knox Acquisition

 
2015

Accounts receivable
$
19,100

Inventories
18,800

Property
3,900

Identifiable intangible assets
58,500

Goodwill
63,200

Total assets acquired
163,500

Accounts payable and accrued liabilities
7,200

Deferred income taxes
24,300

Net assets acquired
$
132,000

 
 
Purchase price
$
132,800

Reconciliation of fair value transferred:
 
Working Capital Adjustments
(800
)
Total Consideration
$
132,000

None of the goodwill acquired is expected to be deductible for income tax purposes. The goodwill recognized was attributable primarily to expected synergies and other benefits that the Company believed would result from the acquisition of Knox.
Other Fiscal 2015 Acquisitions
Other acquisitions during fiscal 2015 included the acquisition of substantially all of the net assets of Rodamientos y Derivados del Norte S.A. de C.V., a Mexican distributor of bearings and power transmission products and related products, and Great Southern Bearings / Northam Bearings, a Western Australia distributor of bearings and power transmission products on July 1, 2014 as well as Ira Pump and Supply Inc., a Texas distributor of oilfield pumps and supplies on November 3, 2014. These companies are included in the Service Center Based Distribution Segment. The total combined consideration for these acquisitions was approximately $54,900 . Net tangible assets acquired were $21,000 and intangibles including goodwill were $33,900 , based upon estimated fair values at the acquisition date. The Company funded these acquisitions from borrowings under our existing debt facilities. Acquisition holdback payments totaled $6,900 for these acquisitions, of which $340 remains to be paid in July 2017 and is included in other current liabilities on the consolidated balance sheets. The results of operations for the Mexican, Australian, and Ira Pump acquisitions are not material for any period presented.
Holdback Liabilities for Acquisitions
Acquisition holdback payments of approximately $672 , $2,384 , $75 and $75 will be made in fiscal 2018, 2019, 2020 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 2018 and other liabilities for the amounts due in fiscal years 2019 through 2024.


42

NOTE 3: INVENTORIES
Inventories consist of the following:
June 30,
 
2017

 
2016

U.S. inventories at average cost
 
$
373,984

 
$
380,000

Foreign inventories at average cost
 
108,734

 
105,465

 
 
482,718

 
485,465

Less: Excess of average cost over LIFO cost for U.S. inventories
 
137,573

 
147,244

Inventories on consolidated balance sheets
 
$
345,145

 
$
338,221

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. The overall impact of LIFO layer liquidations increased gross profit by $9,414 and $2,100 in fiscal 2017 and fiscal 2016 , respectively. There were no LIFO layer liquidations in fiscal 2015 .
NOTE 4: GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for both the Service Center Based Distribution Segment and the Fluid Power Businesses segment for the years ended June 30, 2017 and 2016 are as follows:
 
Service Center Based Distribution

 
Fluid Power Businesses

 
Total

Balance at July 1, 2015
$
253,477

 
$
929

 
$
254,406

Goodwill acquired during the year
18,683

 
3,285

 
21,968

Impairment
(64,794
)
 
—

 
(64,794
)
Other, primarily currency translation
(8,880
)
 
—

 
(8,880
)
Balance at June 30, 2016
198,486

 
4,214

 
202,700

Goodwill added during the year
3,220

 
625

 
3,845

Other, primarily currency translation
34

 
(444
)
 
(410
)
Balance at June 30, 2017
$
201,740

 
$
4,395

 
$
206,135

During the first quarter of fiscal 2017 , the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the HUB acquisition. The fair values of the customer relationships and trade names intangible assets were decreased by $2,636 and $584 , respectively, with a corresponding total increase to goodwill of $3,220 . The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of $156 during fiscal 2017 , which is recorded in selling, distribution and administrative expense on the statements of consolidated income.
On July 1, 2016, the Company enacted a change in its management reporting structure which changed the composition of the Canada service center reporting unit. This triggering event required the Company to perform an interim goodwill impairment test for the Canada service center reporting unit. The Company performed step one of the goodwill impairment test for the Canada service center reporting unit as of July 1, 2016 and determined that the reporting unit had excess fair value of approximately $8,000 or 5% when compared to its carrying amount of approximately $163,000 .
In conjunction with this management change, $2,628 of goodwill was reallocated from the Canada service center reporting unit to the U.S. service center reporting unit based on the relative fair value as of July 1, 2016.
The Company has six ( 6 ) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2017.  The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts by at least 20% as of January 1, 2017. 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. The Market approach utilizes an analysis of comparable publicly traded companies. 
The Company had seven ( 7 ) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2016.  The Company concluded that five ( 5 ) of the reporting units’ fair value substantially exceeded their carrying amounts. The carrying value for two ( 2 ) reporting units (Canada service center and Australia/New

43

Zealand service center) exceeded the fair value, indicating there may be goodwill impairment.  The fair values of the reporting units in accordance with step one of the goodwill impairment test were determined using the Income and Market approaches.
Step two of the goodwill impairment test compares the fair value of the reporting unit goodwill with the carrying amount of goodwill.  The implied fair value of goodwill is determined in the same manner as in a business combination.  The fair value of the reporting unit from step one is allocated to all of the assets and liabilities of the reporting unit, including unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. 
Step two of the goodwill impairment test for the Canada service center reporting unit was completed in the third quarter of fiscal 2016.  The analysis resulted in a goodwill impairment of $56,022 for the Canada service center reporting unit.  The non-cash impairment charge was the result of the overall decline in the industrial economy in Canada coupled with the substantial and sustained decline in the oil and gas sector during calendar year 2015.  This led to reduced spending by customers and reduced revenue expectations.  The uncertainty regarding the oil and gas industries and overall industrial economy in Canada also led the reporting unit to reduce expectations.
Step two of the goodwill impairment test for the Australia/New Zealand reporting unit was completed in the third quarter of fiscal 2016.  The analysis concluded that all of the Australia/New Zealand reporting unit’s goodwill was impaired, and therefore the Company recorded a non-cash impairment expense of $8,772 in the third quarter of fiscal 2016.  The impairment charge was primarily the result of the decline in the mining and extraction industries in Australia, reduced spending by customers, and the effects of reduced revenue expectations.
The techniques used in the Company's impairment tests have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement dates. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date.  The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years.  Key Level 3 based assumptions relate to pricing trends, inventory costs, customer demand, and revenue growth.  A number of benchmarks from independent industry and other economic publications were also used.  Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods.  Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.  Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values.
At June 30, 2017 and 2016 , 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 Businesses segment.


44

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, 2017
Amount

 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:
 
 
 
 
 
Customer relationships
$
235,009

 
$
102,414

 
$
132,595

Trade names
43,873

 
19,295

 
24,578

Vendor relationships
14,152

 
9,141

 
5,011

Non-competition agreements
3,788

 
2,410

 
1,378

Total Intangibles
$
296,822

 
$
133,260

 
$
163,562

June 30, 2016
Amount

 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:
 
 
 
 
 
Customer relationships
$
239,132

 
$
84,566

 
$
154,566

Trade names
44,430

 
16,099

 
28,331

Vendor relationships
14,042

 
8,003

 
6,039

Non-competition agreements
4,700

 
2,396

 
2,304

Total Intangibles
$
302,304

 
$
111,064

 
$
191,240

Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
Due to continued softness in the upstream oil and gas industry, management also assessed long-lived intangible assets related to the Reliance asset groups for impairment during the first and third quarters of fiscal 2017. For the assessment in the third quarter of fiscal 2017, the sum of the undiscounted cash flows exceeded the carrying values of the Reliance U.S. and Reliance Canada asset groups of $15,657 and $80,228 , respectively, by 149% and 13% , respectively, therefore, no impairment was recognized. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where impairment charges would be required in future periods.  Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.  Further, continued adverse market conditions could result in the recognition of impairment if the Company determines that the fair values of its intangible assets have fallen below their carrying values.
Amortization of identifiable intangibles totaled $24,371 , $25,580 and $ 25,797 in fiscal 2017 , 2016 and 2015 , 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, 2017 is estimated to be $22,500 for 2018 , $20,700 for 2019 , $18,900 for 2020 , $17,400 for 2021 and $15,100 for 2022 .
NOTE 5: DEBT
Revolving Credit Facility & Term Loan
In December 2015, the Company entered into a five-year credit facility with a group of banks expiring in December 2020 . This agreement provides for a $125,000 unsecured term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range from 0.09% to 0.175% 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, 2017 and June 30, 2016 , the Company had $120,313 and $123,438 , respectively, outstanding under the term loan. The Company had no outstanding balance under the revolver as of June 30, 2017 and $33,000 outstanding as of June 30, 2016 . Unused lines under this facility, net of outstanding letters of credit of $2,441 and $2,707 to secure certain insurance obligations, totaled $247,559 and $214,293 at June 30, 2017 and June 30, 2016 , respectively, and are available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 2.25% as of June 30, 2017 and 1.5% as of June 30, 2016 . The weighted-average interest rate on the revolving credit facility outstanding was 1.44% as of June 30, 2016 .
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, 2017 and June 30, 2016 , respectively, in order to secure certain insurance obligations.

45

Other Long-Term Borrowings
At June 30, 2017 and June 30, 2016 , the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170,000 . 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 and carry a fixed interest rate of 3.21% , and are due in equal principal payments in October 2019 and 2023. As of June 30, 2017 , $50,000 in additional financing was available under this facility.
In April 2014 the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At June 30, 2017 and 2016 , $1,669 and $1,896 was outstanding, respectively.
Unamortized debt issue costs of $105 are included as a reduction of current portion of long-term debt on the consolidated balance sheets as of June 30, 2017 and June 30, 2016 . Unamortized debt issue costs of $294 and $399 are included as a reduction of long-term debt on the consolidated balance sheets as of June 30, 2017 and June 30, 2016 , 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

2018
$
4,919

2019
6,484

2020
33,051

2021
141,802

2022
40,245

Thereafter
65,481

Covenants
The revolving credit facility, the term loan agreement, and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2017 , the most restrictive of these covenants required that the Company have net indebtedness less than 3.25 times consolidated income before, interest, taxes, depreciation and amortization. The Company was in compliance with all financial covenants at June 30, 2017 .
NOTE 6: FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at June 30, 2017 and June 30, 2016 totaled $10,481 and $9,097 , 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, 2017 , 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).


46

NOTE 7: INCOME TAXES
Income Before Income Taxes
The components of income before income taxes are as follows:
Year Ended June 30,
2017

 
2016

 
2015

U.S.
$
154,472

 
$
139,960

 
$
152,618

Foreign
12,494

 
(60,982
)
 
23,253

Income before income taxes
$
166,966

 
$
78,978

 
$
175,871

Provision
The provision (benefit) for income taxes consists of:
Year Ended June 30,
2017

 
2016

 
2015

Current:
 
 
 
 
 
Federal
$
26,456

 
$
45,226

 
$
52,861

State and local
4,692

 
6,349

 
6,884

Foreign
4,760

 
4,407

 
5,603

Total current
35,908

 
55,982

 
65,348

Deferred:
 
 
 
 
 
Federal
852

 
397

 
(3,799
)
State and local
535

 
(30
)
 
(153
)
Foreign
(4,239
)
 
(6,948
)
 
(1,009
)
Total deferred
(2,852
)
 
(6,581
)
 
(4,961
)
Total
$
33,056

 
$
49,401

 
$
60,387

During the fourth quarter of fiscal 2017, the Company recorded a net tax benefit of $22,246 pertaining to a worthless stock deduction. The tax benefit of this deduction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for US tax purposes reduced by $1,019 of tax provided for a valuation allowance applicable to the related state deferred income tax asset.
The exercise of non-qualified stock appreciation rights and options during fiscal 2017 , 2016 and 2015 resulted in $1,921 , $212 and $352 , respectively, of income tax benefits to the Company derived from the difference between the market and option price of the shares at the date of exercise and the fair value of the options on the grant date. Vesting of stock awards and other stock compensation in fiscal 2017 , 2016 and 2015 resulted in $482 , $(4) and $690 , respectively, of incremental income tax benefits (expense) over the amounts previously reported for financial reporting purposes. Due to the adoption of ASU 2016-09, the tax benefits for fiscal 2017 were recorded in income tax expense in the statements of consolidated income, while the fiscal 2016 and 2015 tax (expense) benefits were recorded in additional paid-in capital.
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,
2017

 
2016

 
2015

Statutory income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
Effects of:
 
 
 
 
 
State and local taxes
2.8

 
5.2

 
2.5

Worthless stock deduction
(13.9
)
 
—

 
—

Stock compensation
(1.4
)
 
—

 
—

Goodwill impairment
—

 
27.1

 
—

Foreign income taxes
(2.3
)
 
(3.0
)
 
(2.5
)
Deductible dividend
(0.4
)
 
(0.9
)
 
(0.5
)
Valuation allowance
0.3

 
0.5

 
0.5

Other, net
(0.3
)
 
(1.3
)
 
(0.7
)
Effective income tax rate
19.8
 %
 
62.6
 %
 
34.3
 %

47

Consolidated Balance Sheets
Significant components of the Company’s deferred tax assets and liabilities are as follows:
June 30,
2017

 
2016

Deferred tax assets:
 
 
 
Compensation liabilities not currently deductible
$
26,873

 
$
25,992

Other expenses and reserves not currently deductible
11,601

 
11,650

Goodwill and intangibles
5,661

 
6,366

Foreign tax credit (expiring in years 2025-2026)
709

 
849

Net operating loss carryforwards (expiring in years 2018-2037)
5,729

 
4,960

Other
119

 
83

Total deferred tax assets
50,692

 
49,900

Less: Valuation allowance
(1,831
)
 
(1,347
)
Deferred tax assets, net of valuation allowance
48,861

 
48,553

Deferred tax liabilities:
 
 
 
Inventories
(7,447
)
 
(4,785
)
Goodwill and intangibles
(30,482
)
 
(33,353
)
Depreciation and differences in property bases
(10,122
)
 
(9,892
)
Total deferred tax liabilities
(48,051
)
 
(48,030
)
Net deferred tax assets
$
810

 
$
523

Net deferred tax assets are classified as follows:
 
 
 
Deferred tax assets
$
8,985

 
$
12,277

Other liabilities
(8,175
)
 
(11,754
)
Net deferred tax assets
$
810

 
$
523

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 rates and future income levels.
U.S. federal income taxes are provided on the portion of non-U.S. subsidiaries' income that is not considered to be permanently reinvested outside the U.S. and may be remitted to the U.S. At June 30, 2017 , all undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested and totaled approximately $92,106 , for which no U.S. tax has been provided. Determination of the net amount of the unrecognized tax liability with respect to the distribution of these earnings is not practicable; however, foreign tax credits would be available to partially reduce U.S. income taxes in the event of a distribution.
In fiscal 2015, $17,793 of cash was distributed by one of the Company's non-US subsidiaries as a non-taxable return of capital.
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, 2017 , 2016 and 2015 :
Year Ended June 30,
2017

 
2016

 
2015

Unrecognized Income Tax Benefits at beginning of the year
$
2,915

 
$
2,604

 
$
2,364

Current year tax positions
574

 
539

 
472

Prior year tax positions
259

 
—

 
—

Expirations of statutes of limitations
(189
)
 
(132
)
 
(160
)
Settlements
(26
)
 
(96
)
 
(72
)
Unrecognized Income Tax Benefits at end of year
$
3,533

 
$
2,915

 
$
2,604

Included in the balance of unrecognized income tax benefits at June 30, 2017 , 2016 and 2015 are $3,323 , $2,691 and $2,377 , respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.

48

During 2017 , 2016 and 2015 , the Company recognized $163 and $127 and $49 of expense, respectively, for interest and penalties related to unrecognized income tax benefits in its statements of consolidated income. The Company had a liability for penalties and interest of $787 and $625 as of June 30, 2017 and 2016 , 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 2014 through 2017 and to state and local income tax examinations for the tax years 2011 through 2017. In addition, the Company is subject to foreign income tax examinations for the tax years 2010 through 2017.
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.
NOTE 8: SHAREHOLDERS’ EQUITY
Treasury Shares
At June 30, 2017 , 596 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, 2017, 2016 and 2015, are comprised of the following amounts, shown net of taxes:
 
Foreign currency translation adjustment

 
Unrealized gain (loss) on securities available for sale

 
Postemployment benefits

 
Total accumulated other comprehensive (loss) income

Balance at July 1, 2014
$
989

 
$
21

 
$
(2,625
)
 
$
(1,615
)
Other comprehensive loss
(58,233
)
 
(25
)
 
(472
)
 
(58,730
)
Amounts reclassified from accumulated other comprehensive income (loss)
—

 
—

 
174

 
174

Net current-period other comprehensive loss
(58,233
)
 
(25
)
 
(298
)
 
(58,556
)
Balance at June 30, 2015
(57,244
)
 
(4
)
 
(2,923
)
 
(60,171
)
Other comprehensive loss
(24,441
)
 
(34
)
 
(1,215
)
 
(25,690
)
Amounts reclassified from accumulated other comprehensive income (loss)
—

 
—

 
315

 
315

Net current-period other comprehensive loss
(24,441
)
 
(34
)
 
(900
)
 
(25,375
)
Balance at June 30, 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
)

49

Other Comprehensive Income (Loss)
Details of other comprehensive income (loss) are as follows:
Year Ended June 30,
2017
 
2016
 
2015
 
Pre-Tax Amount

 
Tax Expense

 
Net Amount

 
Pre-Tax Amount

 
Tax (Benefit) Expense

 
Net Amount

 
Pre-Tax Amount

 
Tax (Benefit) Expense

 
Net Amount

Foreign currency translation adjustments
$
2,238

 
$
—

 
$
2,238

 
$
(24,441
)
 
$
—

 
$
(24,441
)
 
$
(58,233
)
 
$
—

 
$
(58,233
)
Postemployment benefits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Actuarial gain (loss) on remeasurement
2,038

 
799

 
1,239

 
(1,998
)
 
(783
)
 
(1,215
)
 
(776
)
 
(304
)
 
(472
)
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs
506

 
198

 
308

 
518

 
203

 
315

 
286

 
112

 
174

Unrealized gain (loss) on investment securities available for sale
91

 
32

 
59

 
(52
)
 
(18
)
 
(34
)
 
(38
)
 
(13
)
 
(25
)
Other comprehensive income (loss)
$
4,873

 
$
1,029

 
$
3,844

 
$
(25,973
)
 
$
(598
)
 
$
(25,375
)
 
$
(58,761
)
 
$
(205
)
 
$
(58,556
)
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 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,
2017

 
2016

 
2015

Net Income
$
133,910

 
$
29,577

 
$
115,484

Average Shares Outstanding:
 
 
 
 
 
Weighted-average common shares outstanding for basic computation
39,013

 
39,254

 
40,892

Dilutive effect of potential common shares
391

 
212

 
295

Weighted-average common shares outstanding for dilutive computation
39,404

 
39,466

 
41,187

Net Income Per Share — Basic
$
3.43

 
$
0.75

 
$
2.82

Net Income Per Share — Diluted
$
3.40

 
$
0.75

 
$
2.80

Stock appreciation rights and options relating to 141 , 775 and 435 shares of common stock were outstanding at June 30, 2017 , 2016 and 2015 , respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.
NOTE 9: SHARE-BASED COMPENSATION
Share-Based Incentive Plans
Following approval by the Company's shareholders in October 2015, the 2015 Long-Term Performance Plan (the "2015 Plan") replaced the 2011 Long-Term Performance Plan. The 2015 Plan, which expires in 2020, provides for granting of SARs, stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or, in the case of director awards, the Corporate Governance Committee of the Board of Directors (together referred to as the Committee) may determine to officers, other key employees and members of the Board of Directors. Grants are generally made at regularly scheduled committee

50

meetings. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below:
Year Ended June 30,
2017

 
2016

 
2015

SARs and options
$
1,891

 
$
1,543

 
$
1,610

Performance shares
1,331

 
446

 
836

Restricted stock and RSUs
2,298

 
2,078

 
2,015

Total compensation costs under award programs
$
5,520

 
$
4,067

 
$
4,461

Such amounts are included in selling, distribution and administrative expense in the accompanying statements of consolidated income. The total income tax benefit recognized in the statements of consolidated income for share-based compensation plans was $4,848 , $1,595 and $1,749 for fiscal years 2017 , 2016 and 2015 , respectively. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with shares.
The aggregate unrecognized compensation cost for share-based award programs with the potential to be paid at June 30, 2017 are summarized in the table below:
June 30,
2017

 
Average Expected Period of Expected Recognition (Years)
SARs and options
$
2,893

 
2.6
Performance shares
3,910

 
1.7
Restricted stock and RSUs
2,149

 
1.9
Total unrecognized compensation costs under award programs
$
8,952

 
2.0
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.0  years. The aggregate number of shares of common stock which may be awarded under the 2015 Plan is 2,500 ; shares available for future grants at June 30, 2017 were 2,021 .
Stock Appreciation Rights and Stock Options
The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2017 , 2016
and 2015 are:
 
2017

 
2016

 
2015

Expected life, in years
4.8

 
4.4

 
4.7

Risk free interest rate
1.2
%
 
1.3
%
 
1.4
%
Dividend yield
2.5
%
 
2.5
%
 
2.5
%
Volatility
24.1
%
 
26.0
%
 
29.0
%
Per share fair value of SARs and stock options granted during the year
$7.97
 
$6.79
 
$9.53
The expected life is based upon historical exercise experience of the officers, other key employees and members of the Board of Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds with remaining terms equal to the expected life of the SARs and stock options. The assumed dividend yield has been estimated based upon the Company’s historical results and expectations for changes in dividends and stock prices. The volatility assumption is calculated based upon historical daily price observations of the Company’s common stock for a period equal to the expected life.
SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be settled by the holder with cash or by tendering Company common stock.

51

A summary of SARs and stock options activity is presented below :
 
Shares

 
Weighted-Average
Exercise Price

Year Ended June 30, 2017
 
(Shares in thousands)
 
Outstanding, beginning of year
1,236

 
$
37.69

Granted
335

 
48.97

Exercised
(343
)
 
32.30

Forfeited
(10
)
 
42.69

Outstanding, end of year
1,218

 
$
42.26

Exercisable at end of year
585

 
$
38.44

Expected to vest at end of year
1,187

 
$
42.14

The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and expected to vest at June 30, 2017 were 7.0 , 5.3 , and 6.9 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and expected to vest at June 30, 2017 were $20,456 $12,051 , and $20,075 , respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2017 , 2016 , and 2015 was $8,396 , $2,422 , and $1,601 , respectively.
The total fair value of shares vested during fiscal 2017 , 2016 , and 2015 was $1,788 , $1,291 , and $2,187 , respectively.
Performance Shares
Performance shares are paid in shares of Applied stock at the end of a three -year period provided the Company achieves goals established by the committee. The number of Applied shares payable will vary depending on the level of the goals achieved.
A summary of nonvested performance shares activity at June 30, 2017 is presented below:
 
Shares

 
Weighted-Average
Grant-Date   
Fair Value

Year Ended June 30, 2017
 
(Shares in thousands)
 
Nonvested, beginning of year
37

 
$
46.01

Awarded
29

 
44.56

Vested
(14
)
 
50.39

Nonvested, end of year
52

 
$
43.99

The Committee set three one -year goals for each of the 2017, 2016 and 2015 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. Based upon the outstanding grants as of June 30, 2017 , the maximum number of shares which could be earned in future periods was 91 .

52

Restricted Stock and Restricted Stock Units
Restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective shares, but are restricted from selling or transferring the shares prior to vesting. Restricted stock awards vest over periods of one to four years. RSUs are grants valued in shares of Applied stock, but shares are not issued until the grants vest one to four years from the award date, assuming continued employment with Applied. Applied primarily pays dividend equivalents on RSUs on a current basis.
A summary of the status of the Company’s non-vested restricted stock and RSUs at June 30, 2017 is
presented below:
 
Shares

 
Weighted-Average
Grant-Date   
Fair Value

Year Ended June 30, 2017
 
(Share amounts in thousands)
 
Nonvested, beginning of year
118

 
$
43.56

Granted
47

 
52.91

Forfeitures
(4
)
 
44.27

Vested
(45
)
 
44.69

Nonvested, end of year
116

 
$
46.91

NOTE 10: BENEFIT PLANS
Retirement Savings Plan
Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company’s expense for matching of employees’ 401(k) contributions was $6,677 , $2,535 and $3,156 during fiscal 2017 , 2016 and 2015 , respectively.
Deferred Compensation Plans
The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Non-employee directors were able to defer receipt of director fees until January 1, 2015. The Company funded these deferred compensation liabilities by making contributions to rabbi trusts. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.
Post-employment Benefit Plans
The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded:
Supplemental Executive Retirement Benefits Plan
The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011.
Key Executive Restoration Plan
In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $289 , $268 , and $300 of expense associated with this plan in fiscal 2017, 2016, and 2015, respectively.
Qualified Defined Benefit Retirement Plan
The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly employees at retirement. These employees do not participate in the Retirement Savings Plan. The benefits are based on length of service and date of retirement.
Salary Continuation Benefits
The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits through fiscal 2020.
Retiree Health Care Benefits
The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially

53

subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees at no cost to the individual.
The Company uses a June 30 measurement date for all plans.
The following table sets forth the changes in benefit obligations and plan assets during the year and the funded status for the post-employment plans at June 30:
 
Pension Benefits
 
Retiree Health Care Benefits
 
2017

 
2016

 
2017

 
2016

Change in benefit obligation:
 
 
 
 
 
 
 
Benefit obligation at beginning of the year
$
26,605

 
$
29,994

 
$
2,235

 
$
2,144

Service cost
126

 
91

 
29

 
22

Interest cost
687

 
879

 
63

 
75

Plan participants’ contributions
—

 
—

 
69

 
60

Benefits paid
(1,562
)
 
(5,555
)
 
(237
)
 
(229
)
Amendments
—

 
—

 
(245
)
 
—

Actuarial (gain) loss during year
(1,445
)
 
1,196

 
(230
)
 
163

Benefit obligation at end of year
$
24,411

 
$
26,605

 
$
1,684

 
$
2,235

Change in plan assets:
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
$
6,737

 
$
7,185

 
$
—

 
$
—

Actual gain (loss) on plan assets
578

 
(149
)
 
—

 
—

Employer contributions
776

 
5,256

 
168

 
169

Plan participants’ contributions
—

 
—

 
69

 
60

Benefits paid
(1,561
)
 
(5,555
)
 
(237
)
 
(229
)
Fair value of plan assets at end of year
$
6,530

 
$
6,737

 
$
—

 
$
—

Funded status at end of year
$
(17,881
)
 
$
(19,868
)
 
$
(1,684
)
 
$
(2,235
)
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive loss for the post-employment plans were as follows:
 
Pension Benefits
 
Retiree Health Care Benefits
June 30,
2017

 
2016

 
2017

 
2016

Amounts recognized in the consolidated balance sheets:
 
 
 
 
 
 
 
Other current liabilities
$
2,814

 
$
741

 
$
220

 
$
220

Post-employment benefits
15,067

 
19,127

 
1,464

 
2,015

Net amount recognized
$
17,881

 
$
19,868

 
$
1,684

 
$
2,235

Amounts recognized in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Net actuarial (loss) gain
$
(5,798
)
 
$
(8,234
)
 
$
1,167

 
$
1,119

Prior service cost
(35
)
 
(121
)
 
922

 
948

Total amounts recognized in accumulated other comprehensive loss
$
(5,833
)
 
$
(8,355
)
 
$
2,089

 
$
2,067

The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets:
 
Pension Benefits
June 30,
2017

 
2016

Projected benefit obligations
$
24,411

 
$
26,605

Accumulated benefit obligations
24,411

 
26,605

Fair value of plan assets
6,530

 
6,737


54

The net periodic costs (benefits) are as follows:
 
Pension Benefits
 
Retiree Health Care Benefits
Year Ended June 30,
2017

 
2016

 
2015

 
2017

 
2016

 
2015

Service cost
$
126

 
$
91

 
$
97

 
$
29

 
$
22

 
$
53

Interest cost
687

 
879

 
896

 
63

 
75

 
95

Expected return on plan assets
(460
)
 
(491
)
 
(495
)
 
—

 
—

 
—

Recognized net actuarial loss (gain)
872

 
913

 
559

 
(181
)
 
(210
)
 
(87
)
Amortization of prior service cost
86

 
86

 
86

 
(271
)
 
(271
)
 
(272
)
Net periodic cost (benefits)
$
1,311

 
$
1,478

 
$
1,143

 
$
(360
)
 
$
(384
)
 
$
(211
)
The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $424 and $27 , respectively. The estimated net actuarial gain and income from prior service cost for the retiree health care benefits that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $155 and $369 , respectively.
Assumptions
A discount rate is used to determine the present value of future payments. In general, the Company’s liability increases as the discount rate decreases and decreases as the discount rate increases. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the Citigroup Pension Discount Yield Curve and the BPS&M Discount Curve. During fiscal 2015, the Society of Actuaries released a series of updated mortality tables resulting from recent studies measuring mortality rates for various groups of individuals. As of June 30, 2015, the Company adopted these mortality tables, which reflect improved trends in longevity and have the effect of increasing the estimate of benefits to be received by plan participants.
The weighted-average actuarial assumptions used to determine benefit obligations and net periodic benefit cost for the plans were as follows:
 
Pension Benefits
 
Retiree Health Care Benefits
June 30,
2017

 
2016

 
2017

 
2016

Assumptions used to determine benefit obligations at year end:
 
 
 
 
 
 
 
Discount rate
2.8
%
 
2.3
%
 
3.3
%
 
3.3
%
Assumptions used to determine net periodic benefit cost:
 
 
 
 
 
 
 
Discount rate
2.3
%
 
3.0
%
 
2.9
%
 
4.0
%
Expected return on plan assets
7.0
%
 
7.0
%
 
N/A

 
N/A

The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 7.0% as of June 30, 2017 and 2016 , respectively, decreasing to 5.0% by 2027.
A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 2017 and for the year then ended:
 
One-Percentage Point
 
 
Increase
 
Decrease
Effect on total service and interest cost components of periodic expense
$
15

 
$
(12
)
Effect on post-retirement benefit obligation
159

 
(135
)

55

Plan Assets
The fair value of each major class of plan assets for the Company’s Qualified Defined Benefit Retirement Plan is valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair values and target allocation as of June 30:
 
Target Allocation
 
Fair Value
 
 
 
2017

 
2016

Asset Class:
 
 
 
 
 
Equity* securities (Level 1)
40 – 70%
 
$
3,880

 
$
3,843

Debt securities (Level 2)
20 – 50%
 
2,538

 
2,759

Other (Level 1)
0 – 20%
 
112

 
135

Total
100%
 
$
6,530

 
$
6,737

*     Equity securities do not include any Company common stock.
The Company has established an investment policy and regularly monitors the performance of the assets of the trust maintained in conjunction with the Qualified Defined Benefit Retirement Plan. The strategy implemented by the trustee of the Qualified Defined Benefit Retirement Plan is to achieve long-term objectives and invest the pension assets in accordance with ERISA and fiduciary standards. The long-term primary objectives are to provide for a reasonable amount of long-term capital, without undue exposure to risk; to protect the Qualified Defined Benefit Retirement Plan assets from erosion of purchasing power; and to provide investment results that meet or exceed the actuarially assumed long-term rate of return. The expected long-term rate of return on assets assumption was developed by considering the historical returns and the future expectations for returns of each asset class as well as the target asset allocation of the pension portfolio.
Cash Flows
Employer Contributions
The Company expects to contribute $2,820 to its pension benefit plans and $190 to its retiree health care benefit plans in fiscal 2017. Contributions do not equal estimated future benefit payments as certain payments are made from plan assets .
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as applicable, are expected to be paid in each of the next five years and in the aggregate for the subsequent five years:
During Fiscal Years
Pension Benefits

 
Retiree Health   
 Care Benefits

2018
$
3,200

 
$
190

2019
3,700

 
150

2020
3,800

 
130

2021
1,300

 
120

2022
1,300

 
110

2023 through 2027
4,400

 
480




56

NOTE 11: LEASES
The Company leases many service center and distribution center facilities, vehicles and equipment under non-cancelable lease agreements accounted for as operating leases. The minimum annual rental commitments under non-cancelable operating leases as of June 30, 2017 are as follows:
During Fiscal Years
 
2018
$
29,000

2019
22,700

2020
15,300

2021
8,200

2022
5,300

Thereafter
14,600

Total minimum lease payments
$
95,100

Rental expense incurred for operating leases, principally from leases for real property, vehicles and computer equipment was $35,900 in 2017 , $37,300 in 2016 and $39,300 in 2015 , and was classified within selling, distribution and administrative expenses on the statements of consolidated income.
The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $2,400 , $3,800 , $3,100 and in fiscal 2017, 2016 and 2015, respectively.
NOTE 12: SEGMENT AND GEOGRAPHIC INFORMATION
The Company's reportable segments are: Service Center Based Distribution and Fluid Power Businesses. These reportable segments contain the Company's various operating segments which have been aggregated based upon similar economic and operating characteristics. The Service Center Based Distribution segment provides customers with solutions to their maintenance, repair and original equipment manufacturing needs through the distribution of industrial products including bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion products, tools, safety products, and other industrial and maintenance supplies. The Fluid Power Businesses segment distributes fluid power components and operates shops that assemble fluid power systems and components, performs equipment repair, and offers technical advice to customers.
The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power Businesses segment to the Service Center Based Distribution segment of $23,704 , $21,485 , and $24,087 , in fiscal 2017 , 2016 , and 2015 , respectively, have been eliminated in the following table.

57

Segment Financial Information
 
Service Center
Based Distribution

 
Fluid Power
Businesses

 
Total

Year Ended June 30, 2017
 
 
 
 
 
Net sales
$
2,119,904

 
$
473,842

 
$
2,593,746

Operating income for reportable segments
111,357

 
51,006

 
162,363

Assets used in the business
1,153,411

 
234,184

 
1,387,595

Depreciation and amortization of property
14,010

 
1,296

 
15,306

Capital expenditures
14,497

 
2,548

 
17,045

Year Ended June 30, 2016
 
 
 
 
 
Net sales
$
2,087,041

 
$
432,387

 
$
2,519,428

Operating income for reportable segments
109,491

 
40,794

 
150,285

Assets used in the business
1,123,597

 
188,428

 
1,312,025

Depreciation and amortization of property
14,595

 
1,371

 
15,966

Capital expenditures
12,227

 
903

 
13,130

Year Ended June 30, 2015
 
 
 
 
 
Net sales
$
2,254,768

 
$
496,793

 
$
2,751,561

Operating income for reportable segments
140,421

 
48,535

 
188,956

Assets used in the business
1,228,131

 
204,425

 
1,432,556

Depreciation and amortization of property
15,196

 
1,382

 
16,578

Capital expenditures
13,531

 
1,402

 
14,933

ERP related assets are included in assets used in the business and capital expenditures within the Service Center Based Distribution segment. Within the geographic disclosures, these assets are included in the United States. Expenses associated with the ERP are included in the Corporate and other income, net, line in the reconciliation of operating income for reportable segments to the consolidated income before income taxes table below.
A reconciliation of operating income for reportable segments to the consolidated income before income taxes
is as follows:
Year Ended June 30,
2017

 
2016

 
2015

Operating income for reportable segments
$
162,363

 
$
150,285

 
$
188,956

Adjustments for:
 
 
 
 
 
Intangible amortization — Service Center Based Distribution
18,669

 
19,595

 
19,561

Intangible amortization — Fluid Power Businesses
5,702

 
5,985

 
6,236

Goodwill Impairment — Service Center Based Distribution
—

 
64,794

 
—

Corporate and other income, net
(36,598
)
 
(28,890
)
 
(21,460
)
Total operating income
174,590

 
88,801

 
184,619

Interest expense, net
8,541

 
8,763

 
7,869

Other (income) expense, net
(917
)
 
1,060

 
879

Income before income taxes
$
166,966

 
$
78,978

 
$
175,871

Fluctuations in corporate and other (income) expense, net, are due to changes in corporate expenses, as well as in the amounts and levels of certain supplier support benefits and expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.
Product Category
Net sales by product category are as follows:
Year Ended June 30,
2017

 
2016

 
2015

Industrial
$
1,855,437

 
$
1,836,484

 
$
2,013,447

Fluid power
738,309

 
682,944

 
738,114

Net sales
$
2,593,746

 
$
2,519,428

 
$
2,751,561


58

The fluid power product category includes sales of hydraulic, pneumatic, lubrication and filtration components and systems, and repair services through the Company’s Fluid Power Businesses segment as well as the Service Center Based Distribution segment.
Geographic Information
Net sales are presented in geographic areas based on the location of the facility shipping the product. Long-lived assets are based on physical locations and are comprised of the net book value of property and intangible assets. Information by geographic area is as follows:
Year Ended June 30,
2017

 
2016

 
2015

Net Sales:
 
 
 
 
 
United States
$
2,182,552

 
$
2,117,485

 
$
2,238,263

Canada
251,999

 
257,797

 
358,580

Other Countries
159,195

 
144,146

 
154,718

Total
$
2,593,746

 
$
2,519,428

 
$
2,751,561

June 30,
2017

 
2016

 
2015

Long-Lived Assets:
 
 
 
 
 
United States
$
207,126

 
$
225,538

 
$
217,597

Canada
57,947

 
66,304

 
76,565

Other Countries
6,558

 
7,163

 
9,113

Total
$
271,631

 
$
299,005

 
$
303,275

Other countries consist of Mexico, Australia, New Zealand, and Singapore.
NOTE 13: COMMITMENTS AND CONTINGENCIES
The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company believes the likelihood is remote that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
NOTE 14: OTHER (INCOME) EXPENSE, NET
Other (income) expense, net, consists of the following:
Year Ended June 30,
2017

 
2016

 
2015

Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan
$
(1,188
)
 
$
(87
)
 
$
(442
)
Foreign currency transaction losses
209

 
1,039

 
1,251

Other, net
62

 
108

 
70

Total other (income) expense, net
$
(917
)
 
$
1,060

 
$
879

NOTE 15: SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to June 30, 2017 through the date the financial statements were issued.

On July 3, 2017, the Company acquired 100% of the outstanding stock of DICOFASA, located in Puebla, Mexico, for a purchase price of approximately $5,898 . The Company funded this acquisition using available cash. As a distributor of accessories and components for hydraulic systems and lubrication, this business will be included in the Fluid Power Businesses Segment.



59

QUARTERLY OPERATING RESULTS
(In thousands, except per share amounts)
(UNAUDITED)
 
 
 
 
 
 
 
 
 
Per Common Share
 
Net Sales

 
Gross Profit

 
Operating Income

 
Net Income

 
Net Income

 
Cash Dividend

2017
 
 
 
 
 
 
 
 
 
 
 
  First Quarter
$
624,848

 
$
178,330

 
$
43,218

 
$
27,371

 
$
0.70

 
$
0.28

  Second Quarter
608,123

 
172,456

 
37,656

 
24,085

 
0.61

 
0.28

  Third Quarter
679,304

 
190,802

 
45,467

 
29,494

 
0.75

 
0.29

  Fourth Quarter
681,471

 
196,107

 
48,249

 
52,960

 
1.34

 
0.29

 
$
2,593,746

 
$
737,695

 
$
174,590

 
$
133,910

 
$
3.40

 
$
1.14

2016
 
 
 
 
 
 
 
 
 
 
 
  First Quarter
$
641,904

 
$
181,012

 
$
41,026

 
$
24,291

 
$
0.61

 
$
0.27

  Second Quarter
610,346

 
173,167

 
38,362

 
23,947

 
0.61

 
0.27

  Third Quarter
633,172

 
174,793

 
(33,032
)
 
(44,728
)
 
(1.14
)
 
0.28

  Fourth Quarter
634,006

 
178,450

 
42,445

 
26,067

 
0.66

 
0.28

 
$
2,519,428

 
$
707,422

 
$
88,801

 
$
29,577

 
$
0.75

 
$
1.10

2015
 
 
 
 
 
 
 
 
 
 
 
First Quarter
$
702,325

 
$
194,932

 
$
46,165

 
$
29,122

 
$
0.70

 
$
0.25

Second Quarter
691,702

 
195,713

 
46,807

 
29,707

 
0.72

 
0.25

Third Quarter
679,994

 
187,363

 
43,772

 
28,610

 
0.70

 
0.27

Fourth Quarter
677,540

 
191,806

 
47,875

 
28,045

 
0.70

 
0.27

 
$
2,751,561

 
$
769,814

 
$
184,619

 
$
115,484

 
$
2.80

 
$
1.04

On August 11, 2017 , there were 4,617 shareholders of record including 3,173 shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company’s common stock is listed on the New York Stock Exchange. The closing price on August 11, 2017 was $55.45 per share.
The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the number of weighted shares outstanding and the effects of rounding for each period.
Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are primarily made based on periodic physical inventory and the effect of year-end inventory quantities on LIFO costs.
Fiscal 2017
During the fourth quarter of fiscal 2017, the Company recorded a non-routine tax benefit pertaining to a worthless stock tax deduction of $22.2 million, or $0.56 per share.  This deduction is based on the write-off of its investment in one of its Canadian subsidiaries for U.S. tax purposes.  
In fiscal 2017 reductions in U.S. inventories in the bearings pool resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years.  A portion of these reductions resulted from the scrapping of $6.0 million of bearings inventory which resulted in a similar amount of scrap expense being recognized in the fourth quarter of fiscal 2017.   The overall impact of the fiscal 2017 LIFO layer liquidations increased gross profit by $9.4 million in the fourth quarter of fiscal 2017.  The net benefit of the bearings products LIFO layer liquidation benefit, less the bearing product scrap expense was $3.4 million.
Fiscal 2016
During the third quarter of fiscal 2016, the Company recorded goodwill impairment of $64.8 million related to the Canada and Australia/New Zealand service center reporting units within the Service Center Based Distribution reportable segment. After taxes, the impairment had a negative impact on earnings of $63.8 million and reduced earnings per share by $1.62 per share.
During fiscal 2016, the Company incurred certain restructuring charges. During the third quarter, a reserve of $3.6 million was recorded within cost of sales for potential non-salable, non-returnable and excess inventory due to declining demand, primarily for Canada oil and gas operations. SD&A included expenses of $5.2 million during the fiscal year related to severance and facility consolidations, primarily for oil and gas operations. Total restructuring charges reduced gross profit for the year by $3.6 million, operating income by $8.8 million, net income by $6.2 million and earnings per share by $0.16.

60

During the fourth quarter of fiscal 2016, the Company realized LIFO layer liquidation benefits of $2.1 million from certain inventory quantity levels decreasing.
Fiscal 2015
During the fourth quarter of fiscal 2015, the Company recorded severance of $1.8 million. Also, we sold a building recognizing a gain of $1.5 million.
During the fourth quarter of fiscal 2015, income tax expense increased due to recording a valuation allowance against certain deferred tax assets for foreign jurisdictions of $1.0 million. Also, an increase of tax rates in certain foreign jurisdictions at the end of the fiscal period increased tax expense by $1.2 million during the quarter.
No LIFO layer liquidations took place during the year ended June 30, 2015.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company's management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective.

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Management's Report on Internal Control over Financial Reporting
The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President & Chief Executive Officer and the Vice President - Chief Financial Officer & Treasurer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s Management and Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of inherent limitations, internal control over financial reporting can provide only reasonable, not absolute, assurance with respect to the preparation and presentation of the consolidated financial statements and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017 . This evaluation was based on the criteria set forth in the framework "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management determined that the Company’s internal control over financial reporting was effective as of June 30, 2017 .
The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
/s/ Neil A. Schrimsher
 
/s/ Mark O. Eisele
President & Chief Executive Officer
 
Vice President - Chief Financial Officer & Treasurer
August 18, 2017


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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio

We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2017 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017 ,based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2017 of the Company and our report dated August 18, 2017 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 18, 2017


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Changes in Internal Control Over Financial Reporting
There have not been any changes in internal control over financial reporting during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item as to Applied's directors is incorporated by reference to Applied's proxy statement relating to the annual meeting of shareholders to be held October 24, 2017, under the caption “Item 1 - Election of Directors.” The information required by this Item as to Applied's executive officers has been furnished in this report in Part I, after Item 4, under the caption “Executive Officers of the Registrant.”
The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to Applied's proxy statement, under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Applied has a code of ethics, named the Code of Business Ethics, that applies to our employees, including our principal executive officer, principal financial officer, and principal accounting officer. The Code of Business Ethics is posted via hyperlink at the investor relations area of our www.applied.com website. In addition, amendments to and waivers from the Code of Business Ethics will be disclosed promptly at the same location.
Information regarding the composition of Applied’s audit committee and the identification of audit committee financial experts serving on the audit committee is incorporated by reference to Applied's proxy statement, under the caption “Corporate Governance.”
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 24, 2017, under the captions “Executive Compensation” and “Compensation Committee Report. ”

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Applied's shareholders have approved the following equity compensation plans: the 1997 Long-Term Performance Plan, the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the Deferred Compensation Plan, and the Deferred Compensation Plan for Non-Employee Directors. All of these plans are currently in effect.
The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied as of June 30, 2017 .
Plan Category
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights

 
Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights

 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans

Equity compensation plans approved by security holders
1,187,452

 
$42.14
 
*

Equity compensation plans not approved by   
security holders
—

 
—

 
—

Total
1,187,452

 
$42.14
 
*

*
The 2015 Long-Term Performance Plan was adopted to replace the 2011 Long-Term Performance Plan, the 2011 Long-Term Performance Plan was adopted to replace the 2007 Long-Term Performance Plan, and the 2007 Long-Term Performance Plan replaced the 1997 Long-Term Performance Plan. Stock options and stock appreciation rights remain outstanding under each of the 1997, 2007 and 2011 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 2015 Long-Term Performance Plan at June 30, 2017 was 2,021,407.
Information concerning the security ownership of certain beneficial owners and management is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 24, 2017, under the caption “Holdings of Major Shareholders, Officers, and Directors.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 24, 2017, under the caption “Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 24, 2017, under the caption “Item 3 - Ratification of Auditors.”


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PART IV
I TEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a)1. Financial Statements.
The following consolidated financial statements, notes thereto, the reports of independent registered public accounting firm, and supplemental data are included in Item 8 of this report:
•
Report of Independent Registered Public Accounting Firm
 
 
 
•
Statements of Consolidated Income for the Years Ended June 30, 2017, 2016, and 2015
 
 
 
•
Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2017, 2016, and 2015
 
 
 
•
Consolidated Balance Sheets at June 30, 2017 and 2016
 
 
 
•
Statements of Consolidated Cash Flows for the Years Ended June 30, 2017, 2016, and 2015
 
 
 
•
Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2017, 2016, and 2015
 
 
 
•
Notes to Consolidated Financial Statements for the Years Ended June 30, 2017, 2016, and 2015
 
 
 
•
Supplementary Data:
 
 
 
 
•
Quarterly Operating Results
(a)2. Financial Statement Schedule.
The following schedule is included in this Part IV, and is found in this report at the page indicated:
 
Page No.
 
 
 
 
Schedule II - Valuation and Qualifying Accounts: Pg. 70
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto.
(a)3. Exhibits.
* Asterisk indicates an executive compensation plan or arrangement.
Exhibit No.
Description
 
 
3.1
Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit 3(a) to Applied's Form 10-Q for the quarter ended December 31, 2005, SEC File No. 1-2299, and incorporated here by reference).
 
 
3.2
Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference).
 
 
4.1
Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
 
 
4.2
Private Shelf Agreement dated as of November 27, 1996, as amended through December 23, 2015, between Applied and Prudential Investment Management, Inc. (assignee of The Prudential Insurance Company of America), conformed to show all amendments (filed as Exhibit 4.2 to Applied's Form 10-Q for the quarter ended December 31, 2015, SEC File No. 1-2299, and incorporated here by reference).
 
 
4.3
Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as most recently amended on February 4, 2013, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K dated July 1, 2014, SEC File No. 1-2299, and incorporated here by reference).
 
 

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4.4
Request for Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 4.5 to Applied's Form 10-Q dated November 4, 2014, SEC File No. 1-2299, and incorporated here by reference).
 
 
4.5
Credit Agreement dated as of December 22, 2015, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 10.1 to Applied's Form 8-K dated December 28, 2015, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.1
A written description of Applied's director compensation program is incorporated by reference to Applied’s proxy statement for the annual meeting of shareholders to be held October 24, 2017 under the caption “Director Compensation.”
 
 
*10.2
Deferred Compensation Plan for Non-Employee Directors (September 1, 2003 Restatement), the terms of which govern benefits vested as of December 31, 2004, for Peter A. Dorsman, an Applied director (filed as Exhibit 10(c) to Applied's Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.3
Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.2 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.4
Amendment to the Applied Industrial Technologies, Inc. Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.1 to Applied’s Form 10-Q for the quarter ended March 31, 2014, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.5
Form of Director and Officer Indemnification Agreement entered into between Applied and each of its directors and executive officers (filed as Exhibit 10(g) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
 
 
*10.6
2007 Long-Term Performance Plan (filed as Exhibit 10 to Applied's Form 8-K dated October 23, 2007, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.7
Section 409A Amendment to the 2007 Long-Term Performance Plan (filed as Exhibit 10.5 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.8
2011 Long-Term Performance Plan (filed as Appendix to Applied’s proxy statement for the annual meeting of shareholders held on October 25, 2011, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.9
2015 Long-Term Performance Plan (filed as Appendix to Applied's proxy statement for the annual meeting of shareholders held on October 27, 2015, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.10
Non-Statutory Stock Option Award Terms and Conditions (Directors) (filed as Exhibit 10 to Applied's Form 8-K dated November 30, 2005, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.11
Restricted Stock Award Terms and Conditions (Directors) (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended March 31, 2012, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.12
Stock Appreciation Rights Award Terms and Conditions (Officers) (August 2016 revision) (filed as Exhibit 10.2 to Applied's Form 10-Q for the quarter ended September 30, 2016, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.13
Performance Shares Terms and Conditions (filed as Exhibit 10.4 to Applied's Form 10-Q for the quarter ended September 30, 2016, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.14
Restricted Stock Units Terms and Conditions (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended September 30, 2016, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.15
Management Incentive Plan General Terms (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended September 30, 2016, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.16
Key Executive Restoration Plan, as amended and restated, in which Applied's executive officers participate (filed as Exhibit 10.1 to Applied's Form 8-K dated August 16, 2013, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.17
Schedule of executive officer participants in the Key Executive Restoration Plan, as amended and restated (filed as Exhibit 10.19 to Applied's Form 10-K for the year ended June 30, 2016, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.18
Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) in which Todd A. Barlett, Fred D. Bauer, and Mark O. Eisele participate (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.19
First Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to Applied's Form 8-K dated December 22, 2011, SEC File No. 1-2299, and incorporated here by reference).
 
 

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*10.20
Second Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to Applied's Form 8-K dated October 22, 2012, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.21
Deferred Compensation Plan (September 1, 2003 Restatement), the terms of which govern benefits vested as of December 31, 2004, for Mark O. Eisele (filed as Exhibit 10(h) to Applied's Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.22
First Amendment to Deferred Compensation Plan (September 1, 2003 Restatement) (filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31, 2003, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.23
Deferred Compensation Plan (Post-2004 Terms) (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.24
Supplemental Defined Contribution Plan (January 1, 1997 Restatement) the terms of which govern benefits vested as of December 31, 2004, for certain executive officers (filed as Exhibit 10(m) to Applied’s Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
 
 
*10.25
First Amendment to Supplemental Defined Contribution Plan effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied’s Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.26
Second Amendment to Supplemental Defined Contribution Plan effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.27
Supplemental Defined Contribution Plan (Post-2004 Terms), restated effective as of January 1, 2017.
 
 
*10.28
Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K dated October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.29
Amendment to Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K dated October 22, 2012, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.30
Change in Control Agreement for Neil A. Schrimsher (filed as Exhibit 10.3 to Applied's Form 8-K dated October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.31
Form of Change in Control Agreement for each of Todd A. Barlett, Fred D. Bauer, and Mark O. Eisele (filed as Exhibit 99.1 to Applied's Form 8-K dated April 25, 2008, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.32
Form of Change in Control Agreement for executive officers newly hired since 2012 (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended September 30, 2013, SEC File No. 1-2299, and incorporated here by reference).
 
 
*10.33
A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers.
 
 
*10.34
A written description of Applied's Long-Term Disability Insurance for executive officers.
 
 
*10.35
A written description of Applied's Retiree Health Care Coverage for certain executive officers.
 
 
21
Applied’s subsidiaries at June 30, 2017.
 
 
23
Consent of Independent Registered Public Accounting Firm.
 
 
24
Powers of attorney.
 
 
31
Rule 13a-14(a)/15d-14(a) certifications.
 
 
32
Section 1350 certifications.
 
 
95
Mine safety and health disclosure.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

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Applied will furnish a copy of any exhibit described above and not contained herein upon payment of a specified reasonable fee, which shall be limited to Applied's reasonable expenses in furnishing the exhibit.
Certain instruments with respect to long-term debt have not been filed as exhibits because the total amount of securities authorized under any one of the instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each such instrument.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2017, 2016, AND 2015
(in thousands)
COLUMN A
 
COLUMN B
 
COLUMN C
 
 
COLUMN D
 
 
COLUMN E
DESCRIPTION
 
Balance at Beginning of Period

 
Additions Charged to Cost and Expenses

 
Additions (Deductions) Charged to Other Accounts

 
 
Deductions from Reserve

 
 
Balance at End of Period

Year Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Reserve deducted from assets to which it applies — accounts receivable allowances
 
$
11,034

 
$
2,071

 
$
(133
)
(A)
 
$
3,344

(B)
 
$
9,628

Year Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Reserve deducted from assets to which it applies — accounts receivable allowances
 
$
10,621

 
$
4,303

 
$
(46
)
(A)
 
$
3,844

(B)
 
$
11,034

Year Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Reserve deducted from assets to which it applies — accounts receivable allowances
 
$
10,385

 
$
2,597

 
$
231

(A)
 
$
2,592

(B)
 
$
10,621

(A)
Amounts represent reserves for the return of merchandise by customers.
(B)
Amounts represent uncollectible accounts charged off.


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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
/s/ Neil A. Schrimsher
 
/s/ Mark O. Eisele
Neil A. Schrimsher
President & Chief Executive Officer
 
Mark O. Eisele
Vice President-Chief Financial Officer
& Treasurer
 
 
 
/s/ Christopher Macey
 
 
Christopher Macey
Corporate Controller (Principal Accounting Officer)
 
 
Date: August 18, 2017


Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
*
 
*
Peter A. Dorsman, Director
 
L. Thomas Hiltz, Director
 
 
 
*
 
*
Edith Kelly-Green, Director
 
Dan P. Komnenovich, Director
 
 
 
 
 
*
Robert J. Pagano, Jr., Director
 
Vincent K. Petrella, Director
 
 
 
 
 
/s/ Neil A. Schrimsher
Joe A. Raver, Director
 
Neil A. Schrimsher, President & Chief Executive Officer and Director
 
 
 
*
 
*
Dr. Jerry Sue Thornton, Director
 
Peter C. Wallace, Director and Chairman
 
 
 
 
 
 
/s/ Fred D. Bauer  
Fred D. Bauer, as attorney in fact 
for persons indicated by “*” 
Date: August 18, 2017


71
EXHIBIT 10.27











APPLIED INDUSTRIAL TECHNOLOGIES, INC.
SUPPLEMENTAL DEFINED CONTRIBUTION PLAN




APPLIED INDUSTRIAL TECHNOLOGIES, INC,
SUPPLEMENTAL DEFINED CONTRIBUTION PLAN

TABLE OF CONTENTS
Article I

DEFINITIONS
2

1.1

Definitions    
2

1.2

Construction
5

 
 
 
Article II

ELIGIBILITY FOR PLAN PARTICIPATION
6

 
 
 
Article III

SUPPLEMENTAL 401(k) CONTRIBUTIONS
7

3.1

Supplemental 401(k) Contribution Elections
7

3.2

Withholding of Supplemental 401(k) Contributions
9

3.3

Crediting of Supplemental 401(k) Contributions
10

 
 
 
Article IV

ESTABLISHMENT AND ADMINISTRATION OF SUPPLEMENTAL 401(K) CONTRIBUTION ACCOUNTS
11

4.1

Establishment of Supplemental 401(k) Contribution Accounts
11

4.2

Adjustment of Supplemental 401(k) Contribution Accounts
11

4.3

Investment Elections for Supplemental 401(k) Contributions
11

4.4

Investment Change of Future Supplemental 401(k) Contributions
12

4.5

Election to Transfer Invested Past Supplemental 401(k) Contributions    
12

 
 
 
Article V

DISTRIBUTION
14

5.1

Default Distribution Upon Separation from Service
14

5.2

Optional Distribution Elections for Participants    
14

5.3

Changes to Distribution Elections
15

5.4

Distributions to Specified Employees
16

5.5

No Acceleration
17

5.6

Payment of De Minimis Amounts
17

5.7

Payment upon Change in Control
17

5.8

Distributions Upon Death
17

5.9

Emergency Distribution
17

5.10

Taxes
18

 
 
 
Article VI

BENEFICIARIES
 
 
 
19

Article VI

ADMINISTRATIVE PROVISIONS    
20

7.1

Powers and Authorities of the Committee
20

7.2

Indemnification
20








Article VIII

AMENDMENT AND TERMINATION
22

 
 
 
Article IX

MISCELLANEOUS
23

9.1

Non-Alienation of Benefits
23

9.2

Payment of Benefits to Others
23

9.3

Plan Non-Contractual
23

9.4

Funding
23

9.5

Claims of Other Persons
24

9.6

Section 409A
24

9.7

Withholding
25

9.8

Department of Labor or Judicial Determinations
25

9.9

Severability
26

9.10

Governing Law
26

 
 
 
Article X

CLAIMS PROCEDURES
27

10.1

Claim for Benefits    
27

10.2

Notice of Denial
27

10.3

Review of Claim
27

10.4

Decision After Review
28

10.5

Legal Action
28

10.6

Discretion of the Committee
28

 
 
 
 
 
 





APPLIED INDUSTRIAL TECHNOLOGIES, INC.
SUPPLEMENTAL DEFINED CONTRIBUTION PLAN

WHEREAS , effective as of January 1, 1996, Bearings, Inc., the predecessor plan sponsor to Applied Industrial Technologies, Inc. (hereinafter referred to as the "Company"), established the Bearings, Inc. Supplemental Defined Contribution Plan, which is now known as the Applied Industrial Technologies, Inc. Supplemental Defined Contribution Plan (hereinafter referred to as the "Plan") for Participants;
WHEREAS, the Company intends that the Plan constitute an unfunded, deferred compensation plan for a select group of management or highly compensated employees within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (hereinafter referred to as “ERISA”), and all provisions of the Plan shall be interpreted and administered to the extent possible in a manner consistent with the stated intentions;
WHEREAS , in order to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (hereinafter referred to as "Section 409A") and to facilitate the administration of benefits under the Plan, the Plan is hereby bifurcated effective as of January 1, 2005 into two parts; namely, the first part which will consist of the Plan, as in effect on October 3, 2004, and which is hereby frozen and will not be modified except as permitted under Section 409A so as to preserve the grandfathered status of vested deferrals thereunder (hereinafter referred to as the "Frozen Terms"), and the second part which will consist of deferrals and benefits earned or vested after December 31, 2004 that are subject to the post-2004 terms of the Plan, as amended effective January 1, 2005, for compliance with Section 409A (hereinafter referred to as the "Post-2004 Terms");
WHEREAS , the Company desires to revise the Plan, effective January 1, 2017, to clarify various administrative provisions, including, but not by way of limitation, to: (1) clarify applicability and irrevocability of deferral elections, (2) clarify deferral withholding and crediting, (3) clarify the cessation of earnings adjustments on distribution, (4) add accelerated distributions for de minimis accounts, and (5) add claims procedures compliant with section 502 of ERISA; and
WHEREAS, the Company desires to amend the Plan, effective January 1, 2018, to provide additional features and flexibility in its design, including, but not by way of limitation, to: (1) provide the administrative committee discretionary authority to make eligibility determinations, (2) add mid-year eligibility for new hires, rehires and other newly eligible participants, (3) add investment election flexibility on a participant’s account or subaccounts, (4) expand participant deferral election procedures, (5) permit evergreen deferral elections, (5) clarify availability of specified date distributions, and (6) add times and forms of distributions elections for each year’s deferrals or a portion thereof.
NOW, THEREFORE, effective January 1, 2017, unless otherwise provided herein, the Plan is restated and its terms are hereinafter set forth.

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ARTICLE I

DEFINITIONS

1.1     Definitions . Except as otherwise required by the context, the terms used in the Plan shall have the meaning hereinafter set forth.

1. The term " Affiliate " shall mean any member of a controlled group of corporations (as determined under Section 414(b) of the Code) of which the Company is a member; any member of a group of trades or businesses under common control (as determined under Section 414(c) of the Code) with the Company; any member of an affiliated service group (as determined under Section 414(m) of the Code) of which the Company is a member; and any other entity which is required to be aggregated with the Company pursuant to the provisions of Section 414(o) of the Code.

2. The term “Base Salary” shall mean the Participant’s regular base salary for the Plan Year determined before: (a) any reduction pursuant to Sections 125, 132(f)(4), or 401(k) of the Code; (b) any reduction to reflect a deferral election in accordance with this Plan; (c) after-tax withholdings for insurance premium payments, including accident, death and disability, and life insurance premiums; and (d) Social Security and Medicare withholding obligations imposed on an Employer and any other withholding requirements imposed by law with respect to such amounts. “Base Salary” excludes: (z) moving or educational reimbursement expenses; (y) amounts deferred under any non-qualified deferred compensation program other than this Plan; (x) amounts realized from exercising or vesting in equity and equity-based awards, including stock options, stock appreciation rights, performance shares, restricted stock, and restricted stock units, whether such award is contingent on performance or not; (w) imputed income attributable to any fringe benefit; (v) any cash amounts received in lieu of health benefits under a plan that meets the requirements of Section 125 of the Code; and (u) other special compensation amounts.

3. The term " Beneficiary " shall mean the person or persons who, in accordance with the provisions of Article VI, shall be entitled to receive distribution hereunder in the event a Participant dies before his interest under the Plan has been distributed to him in full.

4. The term " Board " shall mean the Board of Directors of the Company.

5. The term “Bonuses” shall mean a payment of incentive remuneration other than Commissions earned by a Participant and payable by an Employer.

6. The term " Change in Control " shall mean the occurrence of a change in the ownership or effective control of the Company or a change in the ownership of a substantial portion of the assets of the Company that constitutes a “change in control” under Section 409A.


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6. The term " Code " shall mean the Internal Revenue Code of 1986, as amended from time to time. Reference to a section of the Code shall include such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section.

7. The term " Company " shall mean Applied Industrial Technologies, Inc., its corporate successors, and the surviving corporation resulting from any merger of Applied Industrial Technologies, Inc. with any other corporation or corporations.

8. The term " Committee " shall mean the Applied Industrial Technologies, Inc. Supplemental Defined Contribution Plan Committee (formerly the Bearings, Inc. Supplemental Defined Contribution Plan Committee) which shall be comprised of the same individuals who serve on the administrative committee for the Retirement Savings Plan and which shall administer the Plan in accordance with the provisions of Article VII.

9. The term “Commissions” means any fee, sum or percentage earned by a Participant for transacting a piece of business or performing a service for an Employer.

10. The term " Compensation " shall mean the Base Salary, Bonuses, and Commissions a Participant earns for services rendered to an Employer with respect to a Plan Year.

11. The term " Comprehensive Plan " shall mean the Applied Industrial Technologies, Inc. Deferred Compensation and Supplemental Benefit Plan (formerly known as the Bearings, Inc. Comprehensive Deferred Compensation and Supplemental Benefit Plan), as of January 1, 2005, and as may be amended from time to time.

12. The term " Employee " shall mean an individual carried on and paid through the payroll of an Employer as a common law employee.

13. The term “Employer” shall mean the Company and its Affiliates.

14. The term " Frozen Terms " shall mean the terms of the Plan as in effect on October 3, 2004, that govern pre-2005 contributions made under the Plan.

15. The term " Fund " shall mean any of the funds that may be maintained for the investment of Plan assets as may be authorized by the Committee.

16. The term " Participant " shall mean any Employee who participates in the Plan pursuant to Article II of the Plan.

17. The term “Person” shall mean a person as defined in Section 13(d)(3) of the Securities and Exchange Act of 1934, as amended.

18. The term " Plan " shall mean the Applied Industrial Technologies, Inc. Supplemental Defined Contribution Plan, originally effective January 1, 1996, and subsequently restated twice effective on January 1, 2005 and January 1, 2017.

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19. The term " Plan Year " shall mean each calendar year beginning January 1 and ending December 31. The term "Plan Year" shall not be changed to a period that is not the calendar year unless appropriate changes are made to the Plan regarding Participant elections in compliance with the requirements of Section 409A.

20. The term " Retirement Savings Plan " shall mean the Applied Industrial Technologies, Inc. Retirement Savings Plan as of January 1, 2017, and as may be amended from time to time.

21. The term " Section 409A" shall mean Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and rulings promulgated thereunder.

22. The term " Separation from Service " shall mean a termination of employment of an employee with the Employer; provided, however, that an approved leave of absence shall not be considered a termination of employment if the leave does not exceed six months or, if longer, so long as the employee’s right to reemployment is provided by statute or by contract. Whether an employee has incurred a Separation from Service shall be determined in accordance with Section 409A.

23. The term " Specified Employee " shall mean a "specified employee" within the meaning of Section 1.409A-1(i) of the Treasury Regulations and pursuant to the specified employee procedure adopted by the Company.

24. The term " Supplemental 401(k) Contribution Account " shall mean the account to which Supplemental 401(k) Contributions are credited in accordance with the provision of Section 4.1. Each Participant’s Supplemental 401(k) Contribution Account may be further divided into separate subaccounts, corresponding to Funds elected by the Participant pursuant to Article IV or such other subaccounts determined by the Committee to be necessary or appropriate for proper Plan administration.

25. The term " Supplemental 401(k) Contributions " shall mean the contributions credited to a Participant under the Plan pursuant to Section 3.1.

26. The term " Trust " shall mean the trust maintained pursuant to the terms of the Applied Industrial Technologies, Inc. Supplemental Defined Contribution Plan Trust.

27. The term " Unforeseeable Emergency " shall be defined and determined in accordance with the provisions of Section 409A, which includes Participant’s unforeseen, severe financial hardship for funeral or medical expenses resulting from an illness or accident of the Participant, the Participant's spouse, or the Participant's dependent (as defined in Section 152 of the Code (without regard to Sections 152(b)(1), (b)(2), and (d)(1)(B) of the Code); a loss of the Participant's property due to casualty (including the need to rebuild a home following damage to the home by natural disaster not otherwise covered by insurance); or other similar or extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant as determined in the sole discretion of the Committee.


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28. The term " Valuation Date " shall mean each business day of each calendar month.

29. The term “Variable Pay” shall mean the Bonuses and Commissions a Participant earns for services rendered to an Employer with respect to a Plan Year.
1.2     Construction . Where necessary or appropriate to the meaning hereof, the singular shall be deemed to include the plural, the plural to include the singular, the masculine to include the feminine, and the feminine to include the masculine. Headings and subheadings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof.

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ARTICLE II

ELIGIBILITY FOR PLAN PARTICIPATION
Effective January 1, 2018, Employees of an Employer are eligible to participate in the Plan if selected by the Committee. The Committee has the sole discretionary authority to determine eligibility to participate in the Plan. The Plan is intended to benefit only a select group of executive management and highly compensated executive employees within the meaning of sections 201(2), 301(a)(3), and 401(a)(1) of ERISA.
Prior to January 1, 2018, any select group of management or highly compensated Employee of the Company (i) who is determined to be highly compensated pursuant to procedures established by the Company and (ii) whose contributions under the Retirement Savings Plan are limited by the provisions of Section 401(a)(17), 401(k), 401(m), 402(g), or 415 of the Code shall participate in the Plan.

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ARTICLE III

SUPPLEMENTAL 401(k) CONTRIBUTIONS
3.1     Supplemental 401(k) Contribution Elections.
(1) Annual Elections . For each Plan Year, a Participant may elect to contribute some or all of his Compensation to be paid for services performed during the Plan Year to be credited under a Supplemental 401(k) Contribution Account under the Plan as Supplemental 401(k) Contributions, and, to the extent permitted by this Plan, the time and form of distribution of such contributions. For each Plan Year, a Participant who is an Area Vice President, and, effective January 1, 2018, all Participants, may elect to contribute to the Plan different amounts or percentages of their Base Salary and Variable Pay. An election to contribute Supplemental 401(k) Contributions is effective on a calendar year basis and is irrevocable no later than the date specified by the Committee, but in any event before the beginning of the Plan Year to which the election relates. A Participant’s elections will become effective only if the forms required by the Committee have been properly completed and signed by the Participant (including, but not limited to, an electronic form), timely delivered to the Committee, and accepted by the Committee. Subject to Section 3.1(2), a Participant who fails to file an election before the required date will be treated as having elected not to contribute Supplemental 401(k) Contributions for the following Plan Year.
(2) Evergreen Elections . Effective for elections relating to Plan Years in 2018 or later, except as otherwise directed by the Committee, a Participant’s election to contribute Supplemental 401(k) Contributions will remain in effect for all subsequent Plan Years unless such Participant revokes or modifies any such election in a manner consistent with the election timing rules of this Section and applicable law.

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(3) Special Rules for Newly Eligible Employees.
(a) New Hires and Promotions . Effective January 1, 2018, the Committee may, in its discretion, permit an Employee who becomes an eligible for the Plan under Article II after the beginning of a Plan Year to elect to contribute Supplemental 401(k) Contributions by filing with the Committee an irrevocable election to contribute Supplemental 401(k) Contributions during the 30 day period following the date the Employee becomes eligible for the Plan. Any election by a Participant, pursuant to this Section, to contribute Supplemental 401(k) Contributions shall apply only to Compensation to be paid for services performed by the Participant after the date on which the election is filed. Notwithstanding the foregoing, a newly eligible Employee who participates in any other account balance plan that is aggregated with the Plan pursuant to Section 409A shall not be permitted to file an election to contribute Supplemental 401(k) Contributions in accordance with this Section.
(b) Formerly Eligible Employees Who Again Become Eligible . Effective January 1, 2018, an Employee who again becomes eligible for the Plan after a period of ineligibility may elect to contribute Supplemental 401(k) Contributions in accordance with Section 3.1(3)(a) only if the Employee was not eligible to elect to contribute Supplemental 401(k) Contributions in the Plan and any other account balance plan aggregated with the Plan pursuant to Section 409A for the 24 month period ending on the date on which the Employee again became eligible for the Plan. Any Employee who again becomes an eligible for the Plan after a period of ineligibility and who has a Supplemental 401(k) Contribution Account cannot file

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new distribution election for previously deferred amounts credited to such account except as otherwise provided in the Plan.
(4) Application of Contribution Election to the Plan Year and Final Payroll Period . An election to contribute Supplemental 401(k) Contributions shall be effective on Compensation that is paid with respect to services performed during the Plan Year except that a Participant’s election to contribute Supplemental 401(k) Contributions for a Plan Year shall not be effective with respect to Compensation for the final payroll period of the Plan Year if such payroll period contains the last day of the Plan Year (i.e., December 31) and the Compensation for such payroll period is paid in the following Plan Year. In such event, a Participant’s election to contribute Supplemental 401(k) Contributions (if any) for the following Plan Year shall be effective with respect to Compensation for the final payroll period of the Plan Year, and if Participant does not file an election to contribute Supplemental 401(k) Contributions for the following Plan Year, then no portion of such Compensation for the final payroll period shall be deferred. A Participant’s election to contribute Supplemental 401(k) Contributions for a Plan Year shall remain in effect for the entire Plan Year for which the election relates (or if approved by the Committee pursuant to Section 3.1(3)(a), the remainder of the Plan Year for which the election relates).
3.2     Withholding of Supplemental 401(k) Contributions . The Committee shall have the sole discretion to withhold the percentage or amount of Compensation elected by the Participant as a Supplemental 401(k) Contribution for a Plan Year at the times and in the amounts that the Committee, in its sole discretion, selects, which need not be uniform among Participants or as to payments to a single Participant; provided, however, that Supplemental 401(k) Contributions must be withheld not later than the end of the calendar year during which the an Employer would otherwise have paid the amounts to the Participant but for the Participant’s election to contribute Supplemental 401(k) Contributions.

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3.3     Crediting of Supplemental 401(k) Contributions . As of the date on which a payroll withholding is made for a Participant, or as soon as administratively practicable thereafter, the Committee shall credit the Participant’s Supplemental 401(k) Contribution Account with an amount equal to the Supplemental 401(k) Contributions by the Participant during each such pay period in accordance with the Participant’s election.

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ARTICLE IV

ESTABLISHMENT AND ADMINISTRATION OF SUPPLEMENTAL 401(K)
CONTRIBUTION ACCOUNTS
4.1     Establishment of Supplemental 401(k) Contribution Accounts . Each Participant shall have a Supplemental 401(k) Contribution Account established in his name which shall reflect the Supplemental 401(k) Contributions credited to him pursuant to Article III and any adjustment thereto pursuant to Section 4.2.
4.2     Adjustment of Supplemental 401(k) Contribution Accounts . The Supplemental 401(k) Contribution Account of a Participant shall be adjusted as of each Valuation Date to reflect the deemed investment of such Supplemental 401(k) Contribution Account in the Funds as determined by the Committee. Notwithstanding anything to the contrary, in no event shall the Participant’s Supplemental 401(k) Contribution Account or part thereof be adjusted for deemed earnings after the Participant’s Supplemental 401(k) Contribution Account or part thereof has been distributed to the Participant.
4.3     Investment Elections for Supplemental 401(k) Contributions . Each Participant, upon becoming a Participant under the Plan in accordance with the provisions of Article II, shall make an investment election directing the manner in which all or a portion of his Supplemental 401(k) Contributions shall be deemed to be invested in the Funds. The Participant must specify that his entire Supplemental 401(k) Contribution Account be deemed to be invested in one or more of the Funds offered by the Committee. Effective January 1, 2018, separate investment elections may be made for all or a portion of a Participant’s Supplemental 401(k) Contributions each Plan Year. In all cases, the investment election of a Participant shall specify a combination, which in the aggregate equals 100 percent and conforms to procedures prescribed by the Committee, indicating in which Funds his Supplemental 401(k) Contribution Account and Supplemental 401(k) Contributions for a Plan Year shall be deemed to be invested. The Committee may, from time to time, in its sole and

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absolute discretion, change the Funds available for investment. Unless otherwise changed by the Committee in its sole discretion, the investment option(s) so elected by a Participant shall remain in effect until he changes his investment election pursuant to Section 4.4 or receives distribution of his Supplemental 401(k) Contribution Account.
4.4     Investment Change of Future Supplemental 401(k) Contributions . Each Participant may elect to change the manner in which his Supplemental 401(k) Contributions for a Plan Year or his entire Supplemental 401(k) Contribution Account are to be deemed invested. Any such change in the investment shall specify a combination among the Funds which in the aggregate equals 100 percent. Such election shall be made in the manner specified by the Committee and in accordance with procedures prescribed by the Committee. The investment option so elected by a Participant shall remain in effect until he makes another election change with respect to future contributions in accordance with the provisions of the Plan. Any such election which directs a change in an investment election heretofore in effect shall become effective in accordance with procedures prescribed by the Committee. Amounts credited to the Supplemental 401(k) Contribution Account of such Participant as of any date prior to the date on which such change is to become effective shall not be affected by any such change.
4.5     Election to Transfer Invested Past Supplemental 401(k) Contributions . Subject to any procedures adopted by the Committee, a Participant may elect to have the balance of his Supplemental 401(k) Contribution Account transferred from the Fund or Funds in which it is deemed invested to one or more of the other Funds. Any such election shall be made in accordance with procedures prescribed by the Committee. Upon receipt of such election, the Committee shall cause the transfer of such amount as of the effective date of the election of the Participant from the Fund or Funds in which it is deemed invested to the Fund or Funds so elected and designated by the Participant.

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ARTICLE V

DISTRIBUTION
5.1     Default Distribution Upon Separation from Service . Unless elected otherwise as provided in Sections 5.2 and 5.3, and as subject to Section 5.4, a Participant's Supplemental 401(k) Contributions for a Plan Year or the entire Supplemental 401(k) Contribution Account shall be distributed to such Participant or his Beneficiary in a single cash payment determined as of the most recent Valuation Date within 60 days after such Participant's Separation from Service.
5.2     Optional Distribution Elections for Participants .
(1)     Distribution Elections, generally . Each Participant shall have the opportunity to file an optional election with respect to the time and form of distribution for his entire Supplemental 401(k) Contribution Account. Effective January 1, 2018, separate distribution elections may be made for all or a portion of a Participant’s Supplemental 401(k) Contributions, including associated adjustments under Section 4.2, each Plan Year. The Participant must make the distribution election by completing a form approved by and filed with the Committee by the end of the applicable election period during which the Participant makes an election to contribute Supplemental 401(k) Contributions, provided it is made at the latest (i) before the end of the calendar year prior to the year in which services related to the Supplemental 401(k) Contributions in question will be performed, or (ii) in the case of new Participant’s initial election, if the Committee so approves, within 30 days after becoming eligible to participate in the Plan. Subject to Section 5.3, all elections to the time and form of distribution of Supplemental 401(k) Contributions and their related adjustments pursuant to Section 4.2 effective on or before January 1, 2018 (“Prior Contributions”), including a default election under Section 5.1, shall remain unchanged and operate in accordance with the terms of election applicable to the Prior Contributions.

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(2)     Form of Distribution . Subject to Section 5.3, a Participant may elect distribution at a specified payment date or upon Separation from Service as a lump sum payment or in substantially equal annual installments of three years or less. Effective January 1, 2018, a Participant may elect substantially equal annual installments of five years or less.
(3)     Time of Distribution . If a Participant elects a lump sum payment at a specified payment date, the lump sum payment shall be made within the 30-day period following the specified payment date. If the Participant elects a lump sum payment at the Participant’s Separation from Service, the lump sum payment shall be made within the 60-day period following the Participant’s Separation from Service. If the Participant elects substantially equal installment payments at a specified date, the initial annual installment payment shall be made within the 30-day period following the specified payment date. If the Participant elects substantially equal installment payments upon the Participant’s Separation from Service, the initial annual installment payment shall be made within the 60-day period following the Participant’s Separation from Service. Any remaining annual installments whether elected to be made on a specified payment date or the Participant’s Separation from Service shall be made on the first day of the succeeding calendar years after the calendar year in which the first installment payment is made to the Participant.
5.3     Changes to Distribution Elections . Subject to the Committee’s consent, a Participant may elect to delay payment or to change the form of payment of his Supplemental 401(k) Contributions for a Plan Year or his Supplemental 401(k) Contribution Account if all the following conditions are met: (i) such election will not take effect until at least twelve (12) months after the date on which the election is made; (ii) the payment with respect to which such election is made is deferred for a period of not less than five years from the date such payment would otherwise be made; and (iii) any election for a "specified time" (or pursuant to a fixed schedule) within the meaning of Section 409A(a)(2)(A)(iv) of the Code, may not be made less than 12 months

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prior to the date of the first scheduled payment. The Committee has the sole discretionary authority to withhold or provide its consent to any Participant requesting a delay of payment or change in the form of payment under this Section 5.3. To the extent permitted under Section 409A, installment payments shall be treated as a single payment.
5.4     Distributions to Specified Employees . Notwithstanding any other provision of the Plan, if a Participant becomes entitled to a distribution on account of a Separation from Service (other than due to death) and is a Specified Employee on the date of the Separation from Service, distributions shall not commence until at least 6 months following his Separation from Service. Payment to which a Specified Employee would otherwise be entitled to during this 6-month period shall (i) if scheduled to be paid in a lump sum payment, be accumulated and paid, without interest, on the first day that is 7 months following the date of the Participant’s Separation from Service and (ii) if scheduled to be paid in installments, be accumulated and paid, without interest, and commence on the first day that is 7 months following date of the Participant’s Separation from Service. Installment payments not due by the first day that is 7 months following the Participant’s Separation from Service shall be paid on its scheduled payment date under Section 5.2(3).
5.5     No Acceleration . Except as permitted under Section 409A and the Plan, no acceleration of the time or form of payment of a Participant's Supplemental 401(k) Contributions for a Plan Year or his Supplemental 401(k) Contribution Account shall be permitted.
5.6     Payment of De Minimis Amounts . The Committee may accelerate payment of a Participant's Supplemental 401(k) Contribution Account to the extent that (i) the aggregate amount in the Participant's Supplemental 401(k) Contribution Account does not exceed the applicable dollar amount under Section 402(g)(1)(B) of the Code, (ii) the payment results in the termination of the Participant's entire interest in the Plan and any plans that are aggregated with the Plan pursuant to Section 1.409A-1(c)(2) of the Treasury Regulations, and (iii) the Committee's decision to cash out

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the Participant's Supplemental 401(k) Contribution Account is evidenced in writing no later than the date of payment.
5.7     Payment upon Change in Control . Notwithstanding any provision of the Plan to the contrary, to the extent permitted under Section 409A, upon a Change in Control, the balance of the Supplemental 401(k) Contribution Accounts of Participants under the Plan shall be paid to Participants within 15 days following the Change in Control.
5.8     Distributions Upon Death . Notwithstanding any provision of the Plan to the contrary, upon the death of a Participant (including a Participant who is a Specified Employee), any remaining balance of his Supplemental 401(k) Contribution Account shall be paid to his Beneficiary in a single sum pursuant to the provisions of Article VI.
5.9     Emergency Distribution . Upon the written request of a Participant and the showing of an Unforeseeable Emergency, the Committee may, upon its determination that such an emergency exists, direct that an amount of such Participant's Deferral Account be paid to him. The amount that can be paid shall not exceed the amount necessary to satisfy the Unforeseeable Emergency, plus an amount necessary to pay taxes reasonably anticipated because of such distribution, after taking into account the extent to which such emergency is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent the liquidation would not itself cause severe financial hardship). Payment shall be made within 30 days of the Committee's determination made in its sole discretion that an Unforeseeable Emergency exists.
5.10     Taxes . In the event any Federal, state, local, or foreign taxes are required by law to be withheld or paid from any payments made pursuant to the Plan, an Employer shall cause the withholding of such amounts from such payments and shall transmit the withheld amounts to the appropriate taxing authority. In addition, it is the intention of the Employer that benefits credited to a Participant under the Plan shall not be included in the gross income of the Participants or their

16


Beneficiaries until such time as benefits are distributed under the provisions of the Plan. If, at any time, it is determined that benefits under the Plan are currently taxable to a Participant or his Beneficiary, the amounts credited to the Participant's Supplemental 401(k) Contribution Account which become so taxable shall be distributable immediately to him; provided, however, that in no event shall amounts so payable to a Participant exceed the value of his Supplemental 401(k) Contribution Account.


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ARTICLE VI

BENEFICIARIES
In the event a Participant dies before his interest under the Plan in his Supplemental 401(k) Contribution Account has been distributed in full, any remaining interest of such account shall be distributed in a single sum by December 31 of the year following the year of his death to his Beneficiary, who shall be the person designated as such in writing by the Participant in the form and manner specified by the Committee. In the event a Participant does not designate a Beneficiary or his designated Beneficiary does not survive him, his beneficiary under the Retirement Savings Plan shall be his Beneficiary for the Plan.


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ARTICLE VII

ADMINISTRATIVE PROVISIONS
7.1     Powers and Authorities of the Committee . The Company shall have sole discretionary power and authority to interpret, construe and administer the Plan and its interpretations and construction hereof, and such interpretation, construction, administration and other Company actions hereunder, including the timing, form, amount or recipient of any payment to be made hereunder, shall be binding and conclusive on all persons for all purposes. The Company may delegate any of its powers, authorities, or responsibilities of the Plan to any individual or to the Committee so designated in writing by it and may employ such attorneys, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. No member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan unless attributable to his own willful misconduct or lack of good faith. Members of the Committee shall not participate in any action or determination regarding their own benefits, if any, payable under the Plan.
7.2     Indemnification . In addition to whatever rights of indemnification a member of the Committee, or any other person or persons to whom any power, authority, or responsibility is delegated pursuant to Section 7.1, may be entitled under the articles of incorporation, regulations, or by-laws of an Employer, under any provision of law, or under any other agreement, an Employer shall satisfy any liability actually and reasonably incurred by any such member or such other person or persons, including expenses, attorneys' fees, judgments, fines, and amounts paid in settlement, in connection with any threatened, pending, or completed action, suit, or proceeding which is related to the exercise or failure to exercise by such member or such other person or persons of any of the powers, authority, responsibilities, or discretion provided under the Plan. This indemnity shall not

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preclude overlapping or additional indemnities as may be available under insurance purchased by an Employer.

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ARTICLE VIII

AMENDMENT AND TERMINATION
The Company reserves the right in its sole discretion to amend, modify, suspend or terminate (individually or in the aggregate, a "Change") the Plan for any purpose or extend the Plan to any Affiliate by action of the Committee, except that: (i) no Change shall adversely affect any Participant who is receiving benefits under the Plan or whose Supplemental 401(k) Contribution Account are credited with any contributions thereto, unless an equivalent benefit is otherwise provided under another plan or program sponsored by an Employer; (ii) following a Change in Control, the terms and conditions of deferrals under the Plan may not be changed to the detriment of any Participant without such Participant's written consent; and (iii) no distribution of Supplemental 401(k) Contributions subject to Section 409A shall occur unless the requirements of Section 409A have been met. A Change shall be in writing and may be retroactive to the extent permitted by this Section and applicable law.

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ARTICLE IX

MISCELLANEOUS
9.1     Non-Alienation of Benefits . No benefit under the Plan shall at any time be subject in any manner to alienation or encumbrance. If any Participant or Beneficiary shall attempt to, or shall, alienate or in any way encumber his benefits under the Plan, or any part thereof, or if by reason of his bankruptcy or other event happening at any time any such benefits would otherwise he received by anyone else or would not be enjoyed by him, his interest in all such benefits shall automatically terminate and the same shall be held or applied to or for the benefit of such person, his spouse, children, or other dependents as the Board may select.
9.2     Payment of Benefits to Others . If any Participant or Beneficiary to whom a benefit is payable is unable to care for his affairs because of illness or accident, any payment due (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may be paid to the spouse, parent, brother, or sister, or any other individual deemed by the Board to be maintaining or responsible for the maintenance of such person. Any payment made in accordance with the provisions of this Section 9.2 shall be a complete discharge of any liability of the Plan with respect to the benefit so paid.
9.3     Plan Non-Contractual . Nothing herein contained shall be construed as a commitment or agreement on the part of any person employed by an Employer to continue his employment with the Employer, and nothing herein contained shall be construed as a commitment on the part of an Employer to continue the employment or the annual rate of compensation of any such person for any period, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been established.
9.4     Funding . An Employer may cause Plan benefits to be paid from the Trust, which is a grantor trust that provides for full funding of Plan benefits in the event of a potential Change

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in Control or a Change in Control. Subject to the provisions of the trust agreement governing such trust fund, the obligation of an Employer under the Plan to provide a Participant or a Beneficiary with a benefit constitutes the unsecured promise of the Employer to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim upon, any property of an Employer.
9.5     Claims of Other Persons . The provisions of the Plan shall in no event be construed as giving any person, firm or corporation any legal or equitable right as against an Employer, their officers, employees, or directors, except any such rights as are specifically provided for in the Plan or are hereafter created in accordance with the terms and provisions of the Plan.
9.6     Section 409A . Notwithstanding any provision to the contrary in the Plan, nothing shall restrict the Company's right to amend the Plan, without the consent of Participants and without additional consideration to affected Participants, to the extent necessary to avoid taxation, penalties, and/or interest arising under Section 409A, even if such amendments reduce, restrict, or eliminate rights granted thereunder before such amendments. Although an Employer shall use its best efforts to avoid the imposition of taxation, penalties, and/or interest under Section 409A, tax treatment of deferrals and other credits under the Plan is not warranted or guaranteed. If, at any time, it is determined that amounts deferred pursuant to the Plan are currently taxable to a Participant or his Beneficiary under Section 409A, the amounts credited to such Participant's Supplemental 401(k) Contribution Account which become so taxable shall be distributed immediately to him; provided, however, that in no event shall amounts so payable under the Plan to a Participant exceed the value of his Supplemental 401(k) Contribution Account. Notwithstanding the foregoing, an Employer or any delegate shall not be held liable for any taxes, penalties, interest or other monetary amount owed by any Participant, Beneficiary, or other person as a result of the deferral or payment of any amounts under the Plan or as a result of the administration of amounts subject to the Plan.

23


9.7     Withholding . Participant is responsible for all applicable taxes with respect to contributions or distributions pursuant to the Plan. For each Plan Year during which a Participant has contributions, the Participant’s employer(s) may, in a manner determined by the employer(s), withhold the Participant’s share of FICA and other required employment or state, local, and foreign taxes on the contribution or distribution pursuant to the Plan from that portion of the Participant’s Compensation that is not deferred. To the extent required by the law in effect at the time of any distribution, the Participant’s employer may withhold from each payment made under the Plan all federal, state, local or foreign taxes that are required to be withheld by the employer in respect of such payment. To the extent taxes owed by the Participant with respect to contributions or distributions under the Plan are not withheld for any reason, Participant shall continue to be responsible for such taxes and in no event shall an Employer have any responsibility or liability to any Participant for any failure to comply with any applicable tax withholding requirements.
9.8     Department of Labor or Judicial Determinations . In the event that any Participants are found to be ineligible, that is, not members of a select group of management or highly compensated employees, according to a determination made by a court of competent jurisdiction or the United States Department of Labor, the Committee may take whatever steps it deems necessary, in its sole and absolute discretion, to equitably protect the interests of affected Participants.
9.9     Severability . The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom.
9.10     Governing Law . The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio.

24



ARTICLE X

CLAIMS PROCEDURES

10.1     Claim for Benefits . Any claim for benefits under this Plan must be submitted in writing to the Committee no later than 12 months after the date on which the event that caused the claim to arise occurred. If a claim for benefits is wholly or partially denied, the Committee, or its delegate, shall so notify the claimant within 90 days after receipt of the claim. If the Committee determines that an extension is necessary, the Committee will notify the claimant within the initial 90-day period that the Committee needs up to an additional 90 days to review the claim.
10.2     Notice of Denial . The notice of denial shall be written in a manner calculated to be understood by the claimant and shall contain (a) the specific reason or reasons for denial of the claim, (b) specific references to the pertinent Plan provisions upon which the denial is based, (c) a description of any additional material or information necessary to perfect the claim together with an explanation of why such material or information is necessary and (d) an explanation of the claims review procedure and time limits, including a statement of the claimant’s right to bring a civil action under section 502(a) of ERISA following an adverse benefit determination on review. The decision or action of the Committee shall be final, conclusive and binding on all persons having any interest in the Plan, unless a written appeal is filed as provided in Section 10.3.
10.3     Review of Claim . Within 60 days after the receipt by the claimant of notice of denial of a claim, the claimant may (a) file a request with the Committee that it conduct a full and fair review of the denial of the claim, (b) receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim for benefits, and (c) submit questions and comments to the Committee in writing.
10.4     Decision After Review . Within 60 days after the receipt of a request for review under Section 10.3, the Committee, or its delegate, shall deliver to the claimant a written decision

25


with respect to the claim, except that if there are special circumstances which require more time for processing, the 60-day period shall be extended to 120 days upon notice to that effect to the claimant. The decision shall be written in a manner calculated to be understood by the claimant and shall (a) include the specific reason or reasons for the decision, (b) contain a specific reference to the pertinent Plan provisions upon which the decision is based, (c) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim for benefits, and (d) a statement of the claimant’s right to bring a civil action under section 502(a) of ERISA.
10.5     Legal Action . A claimant may not bring any legal action relating to a claim for benefits under the Plan unless and until the claimant has followed the claims procedures under the Plan and exhausted his or her administrative remedies under such claims procedures. A claimant wishing to seek any further legal action with respect to a final adverse benefit determination must file such claim in a court of law within 1 year of the final adverse benefit determination or lose any right to bring such action. Such legal action must be filed only in the United States District Court for the Northern District of Ohio, Cleveland, Ohio courthouse.
10.6     Discretion of the Committee . All interpretations, determinations and decisions of the Committee, or its delegate, with respect to any claim shall be made in its sole discretion, and shall be final and conclusive.

Executed at Cleveland, Ohio, this 27 th day of June, 2017.



APPLIED INDUSTRIAL TECHNOLOGIES, INC.


By:      /s/ Kurt W. Loring             
Title: Vice President



By:      /s/ Fred D. Bauer             
Title: Vice President

26




EXHIBIT 10.33



LIFE AND ACCIDENTAL DEATH AND DISMEMBERMENT INSURANCE



Applied maintains life insurance for its executive officers. The program utilizes individual term life insurance policies that are owned by the officer and that provide death benefits equal to two and one-half times the officer’s base salary plus the average of the most recent 3 years of annual incentive awards. The annual premium for coverage up to $300,000 under such policies is paid by Applied and treated as a taxable bonus to the covered officer. The premium for coverage in excess of $300,000 under such policies is paid by the officer.

Applied maintains accidental death and dismemberment insurance for its executive officers, providing benefits up to two and one-half times the officer’s annual base salary, but in no event more than $250,000. Applied also provides its executive officers with travel accident insurance in the amount of $500,000.







                                                         

EXHIBIT 10.34


LONG-TERM DISABILITY INSURANCE


Applied’s long-term disability insurance plan provides for long-term disability coverage to U.S. employees who become eligible after a 30-day waiting period based on plan requirements. Under the plan, eligible employees who become totally disabled as defined in the plan receive 60% of monthly base earnings, subject to a maximum schedule amount of $5,000 per month, without evidence of insurability. Applied’s executive officers are covered under the plan, subject to a maximum schedule amount of $18,000 per month.


In addition, executive officers are covered by a supplemental long-term disability program. Under this program, participants are provided additional disability insurance with respect to 60% of their total compensation (base salary plus average of their most recent three years' incentive awards) minus the basic benefit (60% of base salary), up to a benefit of $3,000 per month, and are charged for the cost of any supplemental insurance relating to incentive awards.






EXHIBIT 10.35


RETIREE HEALTH CARE COVERAGE

Applied provides continuation health care coverage, at the active employee premium rate, to executive officers who retire after reaching age 55, with at least ten years of service, for the 18-month period under the Consolidated Omnibus Budget Reconciliation Act of 1986. In addition, when the retiree attains age 65, Applied provides Medicare supplement coverage through a third-party policy. Individuals first elected as executive officers after 2012 are not eligible for these benefits.




EXHIBIT 21
APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 2017
SUBSIDIARIES (as of June 30, 2017)
Name
 
Jurisdiction of
Incorporation or Organization
* Air-Hydraulic Systems, Inc.
 
Minnesota
 
 
 
* Air Draulics Engineering Co.
 
Tennessee
 
 
 
AIT Canada, ULC
 
Nova Scotia
 
 
 
AIT International Inc.
 
Ohio
 
 
 
Applied Australia Holdings Pty Ltd.
 
Australia
 
 
 
Applied Canada Holdings, ULC
 
Nova Scotia
 
 
 
* Applied Fluid Power Holdings, LLC
 
Ohio
 
 
 
Applied Industrial Technologies - CA LLC
 
Delaware
 
 
 
Applied Industrial Technologies - Capital, Inc.
 
Delaware
 
 
 
Applied Industrial Technologies - Dixie, Inc.
 
Tennessee
 
 
 
Applied Industrial Technologies, LP
 
Ontario
 
 
 
Applied Industrial Technologies Limited
 
New Zealand
 
 
 
Applied Industrial Technologies - PA LLC
 
Pennsylvania
 
 
 
Applied Industrial Technologies - PACIFIC LLC
 
Delaware
 
 
 
Applied Industrial Technologies Canada, ULC
 
Nova Scotia
 
 
 
Applied Industrial Technologies Pty Ltd.
 
Australia
 
 
 
Applied Luxembourg, S.a.r.l.
 
Luxembourg
 
 
 
Applied Maintenance Supplies & Solutions, LLC
 
Ohio
 
 
 
* Applied México, S.A. de C.V.
(97%-owned by subsidiaries of Applied Industrial Technologies, Inc.)
 
Mexico
 
 
 
Applied Mexico Holdings, S.A. de C.V.
 
Mexico
 
 
 
Applied Northern Holdings, ULC
 
Nova Scotia
 
 
 
Applied Nova Scotia Company
 
Nova Scotia
 
 
 
Applied US, L.P.
 
Delaware
 
 
 
Applied US Energy, Inc.
 
Ohio
 
 
 
* Atlantic Fasteners Co., LLC
 
Ohio
 
 
 
BER International, Inc.
 
Barbados
 
 
 
* Bay Advanced Technologies, LLC
 
Ohio
 
 
 
* Bay Advanced Technologies Singapore Pte. Ltd.
 
Singapore
 
 
 
Bearing Sales & Services Inc.
 
Washington
 
 
 
Bearings Pan American, Inc.
 
Ohio
 
 
 
* Carolina Fluid Components, LLC
 
Ohio
 
 
 
* DTS Fluid Power, LLC
 
Ohio
 
 
 




* ESI Acquisition Corporation
(d/b/a Engineered Sales, Inc., ESI Power Hydraulics, and Applied Engineered Systems)
 
Ohio
 
 
 
* FluidTech, LLC
 
Ohio
 
 
 
* HUB Industrial Supply, LLC
 
Ohio
 
 
 
* HydroAir Hughes, LLC
 
Ohio
 
 
 
* HyQuip, LLC
 
Ohio
 
 
 
* Ira Pump & Supply Co., LLC
 
Ohio
 
 
 
* Knox Oil Field Supply, Inc.
 
Texas
 
 
 
* Power Systems, LLC
 
Ohio
 
 
 
* Rafael Benitez Carrillo Inc.
 
Puerto Rico
 
 
 
* Reliance Industrial Products USA, Ltd.
 
Colorado
 
 
 
* Rodensa Mexico S.A. de C.V.
 
Mexico
 
 
 
* S. G. Morris Co., LLC
 
Ohio
 
 
 
* Seals Unlimited Holding Co., Inc.
 
Ontario
 
 
 
* Seals Unlimited (1976) Incorporated
 
Ontario
 
 
 
* Sentinel Fluid Controls, LLC
 
Ohio
 
 
 
* Spencer Fluid Power, Inc.
 
Ohio
 
 
 
* Texas Oilpatch Services, LLC
 
Ohio
 
 
 
* VYCMEX Mexico, S.A. de C.V.
 
Mexico
* Operating companies that do not conduct business under Applied Industrial Technologies trade name
 
 




EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement Nos. 333-207922, 333-179354, 333-149183, 333-138054, 333-124574, 333-83809, 033-65513, 033-53361, and 033-53401 on Form S-8 of our reports dated August 18, 2017 , relating to the consolidated financial statements and financial statement schedule of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”), and the effectiveness of the Company's internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended June 30, 2017.

/s/ Deloitte & Touche LLP

Cleveland, Ohio
August 18, 2017








EXHIBIT 24

POWER OF ATTORNEY

          The undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2017 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized.



Date: 8/10/17
 
By: /s/ Peter A. Dorsman  





EXHIBIT 24

POWER OF ATTORNEY

          The undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2017 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized.



Date: 8/10/17
 
By: /s/ L. Thomas Hiltz  





EXHIBIT 24

POWER OF ATTORNEY

          The undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2017 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized.



Date: 8/10/2017
 
By:   /s/ Edith Kelly-Green    











EXHIBIT 24

POWER OF ATTORNEY

          The undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2017 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized.



Date: 8-10-2017
 
By:   /s/ D. P. Komnenovich 








EXHIBIT 24

POWER OF ATTORNEY

          The undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2017 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized.



Date: August 10, 2017
 
By:   /s/ Vincent K. Petrella  






EXHIBIT 24

POWER OF ATTORNEY

          The undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2017 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized.



Date: 8/10/2017
 
By:   /s/ Jerry Sue Thornton  





EXHIBIT 24

POWER OF ATTORNEY

          The undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2017 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized.



Date: August 10, 2017
 
By: /s/ Peter C. Wallace  





EXHIBIT 31

APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 2017
CERTIFICATIONS
I, Neil A. Schrimsher, certify that:
1.
 
I have reviewed this annual report on Form 10-K of Applied Industrial Technologies, Inc.;
 
 
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4.
 
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
 
5.
 
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
 
 
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 18, 2017
 
/s/ Neil A. Schrimsher  
 
 
Neil A. Schrimsher 
 
 
President & Chief Executive Officer 





I, Mark O. Eisele, certify that:

1.
 
I have reviewed this annual report on Form 10-K of Applied Industrial Technologies, Inc.;
 
 
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4.
 
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
 
5.
 
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
 
 
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 18, 2017
 
/s/ Mark O. Eisele  
 
 
Mark O. Eisele 
 
 
Vice President-Chief Financial Officer & Treasurer 
 





EXHIBIT 32

APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 2017

[The following certification accompanies the Annual Report on Form 10-K for the year
ended June 30, 2017, and is not filed, as provided in applicable SEC releases.]

CERTIFICATIONS PURSUANT TO 18 U.S.C. 1350

     In connection with the Form 10-K (the “Report”) of Applied Industrial Technologies, Inc. (the “Company”) for the period ending June 30, 2017, we, Neil A. Schrimsher, President & Chief Executive Officer, and Mark O. Eisele, Vice President-Chief Financial Officer & Treasurer of the Company, certify that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Neil A. Schrimsher
 
/s/ Mark O. Eisele
Neil A. Schrimsher
President & Chief Executive Officer
 
Mark O. Eisele
Vice President-Chief Financial Officer & Treasurer
 
 
 
Dated: August 18, 2017
 
 

[A signed original of this written statement has been provided to Applied Industrial Technologies,
Inc. and will be retained by Applied Industrial Technologies, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.]





Exhibit 95


Mine Safety and Health Disclosure
Mine Safety and Health Administration Contractor Identification Number 9EI


The operation of domestic mines is subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). Under the Mine Act, an “independent contractor” who provides onsite services to the mine industry is deemed to be a “mine operator.” Applied supplies MRO parts and related services to mine operators, and as such we are providing this report pursuant to section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K.

MSHA inspects mines on a regular basis and issues citations and orders when it believes a violation has occurred under the Mine Act. The table below sets forth, by mining complex, the total number of citations and/or orders issued, that required disclosure, to Applied during the year ended June 30, 2017 by MSHA under the indicated provisions of the Mine Act, together with the total dollar value of proposed MSHA assessments.

Mine or Operating Name / MSHA Identification Number
(#) Section 104 S&S Citations
(#) Section 104(b) Orders
(#) Section 104(d) Citations and Orders
(#) Section 110(b)(2) Violations
(#) Section 107(a) Orders
($) Total Dollar Value of MSHA Assessments Proposed
(#) Total Number of Mining Related Fatalities
(yes/no) Received Notice of Pattern of Violations Under Section 104(e)
(yes/no) Received Notice of Potential to Have Pattern Under Section 104(e)
(#) Legal Actions Pending as of 6/30/2017
(#) Legal Actions Initiated During Period
(#) Legal Actions Resolved During the Period
(1)
(2)
(3)
(4)
(5)
(6)
 
 
 
 
 
 
 
Louisville Plant Quarry & Mill
#2500002
0
0
0
0
0
0
0
No
No
0
0
1
In evaluating this information, note that citations and orders can be contested and appealed, and in that process, are often reduced in severity and amount, and are sometimes dismissed.

(1)
United States mines.
 
 
(2)
Total number of citations received from MSHA under section 104 of the Mine Act for health or safety standards that could significantly and substantially contribute to a serious injury if left unabated.
 
 
(3)
Total number of orders under section 104(b) of the Mine Act, which represents a failure to abate a citation under section 104(a) within the period of time prescribed by MSHA.
 
 
(4)
Total number of citations and orders for unwarrantable failure to comply with mandatory health or safety standards under section 104(d) of the Mine Act.
 
 
(5)
Total number of flagrant violations under section 110(b)(2) of the Mine Act.
 
 
(6)
Total number of imminent danger orders issued under section 107(a) of the Mine Act.