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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________ 
FORM 10-Q
 __________________________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2018
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
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
One Applied Plaza, Cleveland, Ohio
 
44115
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (216) 426-4000
(Former name, former address and former fiscal year, if changed since last report)
__________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.     Yes  [X]     No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).    Yes  [X]  No [ ]
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
 
[ ]  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
[ ]
 
 
 
 
 
 
 
Emerging growth company
 
[ ]
 
 
 
 





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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 [ ]    No [X]
There were 38,696,319 (no par value) shares of common stock outstanding on April 13, 2018 .


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
 
 
 
 
Page
No.
Part I:
 
 
 
 
 
 
 
 
Item 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2:
 
 
Item 3:
 
 
Item 4:
 
 
 
 
 
Part II:
 
 
 
 
 
 
 
 
Item 1:
 
 
Item 1A:
 
 
Item 2:
 
 
Item 6:
 
 
 
 
 
 
 
 

1

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PART I:
FINANCIAL INFORMATION

ITEM I:
FINANCIAL STATEMENTS

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(In thousands, except per share amounts)
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2018
 
2017
 
2018
 
2017
Net Sales
 
$
827,665

 
$
679,304

 
$
2,175,553

 
$
1,912,275

Cost of Sales
 
588,141

 
488,502

 
1,555,245

 
1,370,687

Gross Profit
 
239,524

 
190,802

 
620,308

 
541,588

Selling, Distribution and Administrative, including depreciation
 
183,080

 
145,134

 
465,312

 
414,645

Operating Income
 
56,444

 
45,668

 
154,996

 
126,943

Interest Expense, net
 
8,216

 
2,165

 
12,521

 
6,411

Other (Income) Expense, net
 
(1,291
)
 
154

 
(2,022
)
 
(54
)
Income Before Income Taxes
 
49,519

 
43,349

 
144,497

 
120,586

Income Tax Expense
 
12,927

 
13,855

 
43,234

 
39,636

Net Income
 
$
36,592

 
$
29,494

 
$
101,263

 
$
80,950

Net Income Per Share - Basic
 
$
0.95

 
$
0.76

 
$
2.61

 
$
2.08

Net Income Per Share - Diluted
 
$
0.93

 
$
0.75

 
$
2.58

 
$
2.06

Cash dividends per common share
 
$
0.30

 
$
0.29

 
$
0.88

 
$
0.85

Weighted average common shares outstanding for basic computation
 
38,674

 
38,999

 
38,775

 
39,009

Dilutive effect of potential common shares
 
612

 
463

 
497

 
375

Weighted average common shares outstanding for diluted computation
 
39,286

 
39,462

 
39,272

 
39,384

See notes to condensed consolidated financial statements.


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,

 
2018
 
2017
 
2018
 
2017
Net income per the condensed statements of consolidated income
 
$
36,592

 
$
29,494

 
$
101,263

 
$
80,950

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, before tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(353
)
 
8,132

 
1,775

 
(4,147
)
Postemployment benefits:
 
 
 
 
 
 
 
 
Reclassification of net actuarial (gains) losses and prior service cost into other (income) expense, net and included in net periodic pension costs
 
(19
)
 
125

 
(55
)
 
377

Unrealized (loss) gain on investment securities available for sale
 
(3
)
 
11

 
39

 
77

Total of other comprehensive (loss) income, before tax
 
(375
)
 
8,268

 
1,759

 
(3,693
)
Income tax expense related to items of other comprehensive income
 
11

 
58

 
57

 
173

Other comprehensive (loss) income, net of tax
 
(386
)
 
8,210

 
1,702

 
(3,866
)
Comprehensive income, net of tax
 
$
36,206

 
$
37,704

 
$
102,965

 
$
77,084

See notes to condensed consolidated financial statements.
 


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
 
 
March 31,
2018
 
June 30,
2017
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
43,523

 
$
105,057

Accounts receivable, less allowances of $11,540 and $9,628
 
533,533

 
390,931

Inventories
 
432,449

 
345,145

Other current assets
 
41,735

 
41,409

Total current assets
 
1,051,240

 
882,542

Property, less accumulated depreciation of $172,263 and $166,143
 
121,858

 
108,068

Identifiable intangibles, net
 
448,089

 
163,562

Goodwill
 
629,783

 
206,135

Other assets
 
21,353

 
27,288

TOTAL ASSETS
 
$
2,272,323

 
$
1,387,595

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
217,852

 
$
180,614

Current portion of long-term debt
 
19,182

 
4,814

     Compensation and related benefits
 
67,994

 
58,785

Other current liabilities
 
64,936

 
65,540

Total current liabilities
 
369,964

 
309,753

Long-term debt
 
1,017,327

 
286,769

Postemployment benefits
 
13,235

 
16,715

Other liabilities
 
65,769

 
29,102

TOTAL LIABILITIES
 
1,466,295

 
642,339

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

 

Common stock—no par value; 80,000 shares authorized; 54,213 shares issued; 38,696 and 39,041 outstanding, respectively
 
10,000

 
10,000

Additional paid-in capital
 
167,848

 
164,655

Retained earnings
 
1,112,136

 
1,033,751

Treasury shares—at cost (15,517 and 15,172 shares)
 
(403,956
)
 
(381,448
)
Accumulated other comprehensive loss
 
(80,000
)
 
(81,702
)
TOTAL SHAREHOLDERS’ EQUITY
 
806,028

 
745,256

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
2,272,323

 
$
1,387,595

See notes to condensed consolidated financial statements.


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In thousands)
 
 
Nine Months Ended
 
 
March 31,
 
 
2018
 
2017
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
101,263

 
$
80,950

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of property
 
12,721

 
11,364

Amortization of intangibles
 
21,326

 
18,387

Unrealized foreign exchange transactions (gain) loss
 
(440
)
 
499

Amortization of stock options and appreciation rights
 
1,479

 
1,533

Gain on sale of property
 
(246
)
 
(1,540
)
Other share-based compensation expense
 
3,481

 
2,836

Changes in operating assets and liabilities, net of acquisitions
 
(91,642
)
 
(36,375
)
Other, net
 
(64
)
 
852

Net Cash provided by Operating Activities
 
47,878

 
78,506

Cash Flows from Investing Activities
 
 
 
 
Property purchases
 
(17,898
)
 
(11,787
)
Proceeds from property sales
 
714

 
2,724

Acquisition of businesses, net of cash acquired
 
(778,149
)
 
(2,778
)
Net Cash used in Investing Activities
 
(795,333
)
 
(11,841
)
Cash Flows from Financing Activities
 
 
 
 
Net borrowings under revolving credit facility
 
87,500

 
(4,000
)
Long-term debt borrowings
 
780,000

 

Long-term debt repayments
 
(120,488
)
 
(2,514
)
Debt issuance costs
 
(3,298
)
 

Purchases of treasury shares
 
(22,778
)
 
(8,242
)
Dividends paid
 
(34,190
)
 
(33,236
)
Acquisition holdback payments
 
(318
)
 
(7,694
)
Taxes paid for shares withheld
 
(1,498
)
 
(3,373
)
Exercise of stock options and appreciation rights
 
5

 
306

Net Cash provided by (used in) Financing Activities
 
684,935

 
(58,753
)
Effect of Exchange Rate Changes on Cash
 
986

 
(460
)
(Decrease) increase in Cash and Cash Equivalents
 
(61,534
)
 
7,452

Cash and Cash Equivalents at Beginning of Period
 
105,057

 
59,861

Cash and Cash Equivalents at End of Period
 
$
43,523

 
$
67,313

See notes to condensed consolidated financial statements.


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

  
1.    BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position of Applied Industrial Technologies, Inc. (the “Company”, or “Applied”) as of March 31, 2018 , and the results of its operations for the three and nine month periods ended March 31, 2018 and 2017 and its cash flows for the nine month periods ended March 31, 2018 and 2017 , have been included. The condensed consolidated balance sheet as of June 30, 2017 has been derived from the audited consolidated financial statements at that date. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2017 .

Operating results for the three and nine month periods ended March 31, 2018 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, 2018 .

Change in Accounting Principle - Net Periodic and Post-retirement Benefit Costs

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 early adopted ASU 2017-07 in the first quarter of fiscal 2018. The impact of the adoption of this guidance resulted in the reclassification of the other components of net benefit cost from selling, distribution, and administrative expense to other (income) expense, net in the condensed statements of consolidated income, resulting in an increase to operating income. There is no impact to income before income taxes, net income, or net income per share. The amounts reclassified resulted in an increase in operating income of $201 and $602 for the three and nine months ended March 31, 2017 , respectively.

Inventory
The Company uses the last-in, first-out (LIFO) method of valuing U.S. inventories. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory determination.

Recently Issued Accounting Guidance

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 have substantially completed an analysis of revenue streams at each of the business units and are evaluating the impact the

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

new standard will have on revenue recognition. The Company primarily sells purchased products and recognizes revenue at point of sale or delivery and the majority of its revenue will continue to be recognized at a point in time under the new standard. A small percentage of revenue will be recognized using an over time revenue recognition model. The Company plans to use the modified retrospective method of adoption, and will recognize the cumulative effect of initially applying the new standard as an adjustment to opening retained earnings as of July 1, 2018. 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 these assessments are subject to change.

In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. The core principle of this update is that a "lessee should recognize the assets and liabilities that arise from leases." This update is effective for annual and interim 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 annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted for financial 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 May 2017, the FASB issued its final standard on scope of modification accounting. This standard, issued as ASU 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.

In January 2018, the FASB issued its final standard on reporting comprehensive income. The standard, issued as ASU 2018-02, allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This update is effective for annual and interim periods beginning

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

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.

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.
FCX Acquisition
On January 31, 2018, the Company completed the acquisition of 100% of the outstanding shares of FCX Performance, Inc. ("FCX"), a Columbus, Ohio based distributor of specialty process flow control products and services. The total consideration transferred for the acquisition was $784,281 , which was financed by cash-on-hand and a new credit facility comprised of a  $780,000 Term Loan A and a $250,000  revolver, effective with the transaction closing. See note 4 Debt. As a distributor of highly engineered valves, instruments, pumps and lifecycle services to MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) customers across diverse industrial and process end markets, this business will be included in the Fluid Power & Flow Control Segment.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of FCX based on their preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase accounting will be finalized within one year from the acquisition date.
 
FCX Acquisition
Cash
$
11,146

Accounts receivable
82,666

Inventories
45,696

Other current assets
2,204

Property
8,512

Identifiable intangible assets
305,420

Goodwill
420,953

Other assets
823

Total assets acquired
877,420

Accounts payable and accrued liabilities
49,338

Other liabilities
803

Deferred tax liabilities
42,998

Net assets acquired
$
784,281

The goodwill recognized is attributable primarily to expected synergies and other benefits that the Company believes will result from the acquisition of FCX.
Net sales, operating income and net income from the FCX acquisition included in the Company’s results since January 31, 2018, the date of the acquisition, are as follows:
 
January 31, 2018 to March 31, 2018
Net sales
$
100,368

Operating income
$
6,945

Net income
$
4,922

The company incurred $2,916 in third-party costs during the nine months ended March 31, 2018 pertaining to the acquisition of FCX. These costs are included in selling, distribution and administration expense in the condensed statements of consolidated income for the nine months ended March 31, 2018 .
The following unaudited pro forma consolidated results of operations have been prepared as if the FCX acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2017:

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

 
Three Months Ended March 31,
 
Nine Months Ended March 31,
Pro forma
2018
2017
 
2018
2017
    Sales
$
866,818

$
764,999

 
$
2,432,709

$
2,167,280

    Operating income
55,950

46,917

 
156,267

131,616

    Net income
35,577

26,153

 
107,738

71,577

    Diluted net income per share
$
0.91

$
0.66

 
$
2.74

$
1.82

These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect additional amortization that would have been recorded assuming the fair value adjustments to identified intangible assets had been applied as of July 1, 2016. In addition, pro forma adjustments have been made for the interest expense that would have been incurred as a result of the indebtedness used to finance the acquisitions. The pro forma net income amounts also incorporate an adjustment to the recorded income tax expense for the income tax effect of the pro forma adjustments described above. These pro forma results of operations do not include any anticipated synergies or other effects of the planned integration of FCX; accordingly, such pro forma adjustments do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred as of the date indicated or that may result in the future.
Other Fiscal 2018 Acquisition
On July 3, 2017, the Company acquired 100% of the outstanding stock of Dise ñ o, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a distributor of accessories and components for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment. The purchase price for the acquisition was $5,920 , net tangible assets acquired were $3,395 , and goodwill was $2,525 based upon estimated fair values at the acquisition date. The purchase price includes $906 of acquisition holdback payments. Due to changes in foreign currency exchange rates, the balance of $908 is included in other current liabilities and other liabilities on the condensed consolidated balance sheets as of March 31, 2018 , which will be paid on the first three anniversaries of the acquisition with interest at a fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
Fiscal 2017 Acquisition
On March 3, 2017, the Company acquired substantially all of the net assets of Sentinel Fluid Controls ("Sentinel"), a distributor of hydraulic and lubrication components, systems and solutions operating from four locations. Sentinel is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $3,755 , net tangible assets acquired were $3,130 , and goodwill was $625 based upon estimated fair values at the acquisition date. The purchase price included $982 of acquisition holdback payments. The remaining balance of $807 will be paid plus interest at various times in the future and is included in other current liabilities and other liabilities on the condensed consolidated balance sheets as of March 31, 2018 . 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.



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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

3.    GOODWILL AND INTANGIBLES

The changes in the carrying amount of goodwill for both the Service Center Based Distribution segment and the Fluid Power & Flow Control segment for the fiscal year ended June 30, 2017 and the nine month period ended March 31, 2018 are as follows:
 
Service Centers
 
Fluid Power & Flow Control
 
Total
Balance at July 1, 2016
$
198,486

 
$
4,214

 
$
202,700

Goodwill acquired during the period
3,220

 
625

 
3,845

Other, primarily currency translation
34

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

 
$
4,395

 
$
206,135

Goodwill acquired during the period
2,525

 
420,953

 
423,478

Other, primarily currency translation
170

 

 
170

Balance at March 31, 2018
$
204,435

 
$
425,348

 
$
629,783


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 the nine months ended March 31, 2017 , which is recorded in selling, distribution and administrative expense on the condensed statements of consolidated income.

The Company has six ( 6 ) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2018.  The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts by at least 30% as of January 1, 2018. 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 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 impairment charges would be required in future periods.  Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. 

At March 31, 2018 and June 30, 2017 , accumulated goodwill impairment losses, subsequent to fiscal year 2002, totaled $64,794 related to the Service Center Based Distribution segment and $36,605 related to the Fluid Power & Flow Control segment.


10

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

The Company’s identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:
March 31, 2018
 
Amount
 
Accumulated
Amortization
 
Net Book
Value
Finite-Lived Identifiable Intangibles:
 
 
 
 
 
 
Customer relationships
 
$
467,938

 
$
117,213

 
$
350,725

Trade names
 
114,563

 
22,372

 
92,191

Vendor relationships
 
11,503

 
7,223

 
4,280

Non-competition agreements
 
3,552

 
2,659

 
893

Total Identifiable Intangibles
 
$
597,556

 
$
149,467

 
$
448,089


June 30, 2017
 
Amount
 
Accumulated
Amortization
 
Net Book
Value
Finite-Lived Identifiable 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 Identifiable Intangibles
 
$
296,822

 
$
133,260

 
$
163,562


Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.

During the nine month period ended March 31, 2018 , the Company acquired identifiable intangible assets with a preliminary acquisition cost allocation and weighted-average life as follows:
 
 
Acquisition Cost Allocation
 
Weighted-Average Life
Customer relationships
 
$
234,370

 
20
Trade names
 
71,050

 
10
Total Intangibles Acquired
 
$
305,420

 
17.7

Estimated future amortization expense by fiscal year (based on the Company’s identifiable intangible assets as of March 31, 2018 ) for the next five years is as follows: $11,900 for the remainder of 2018 , $46,600 for 2019 , $45,100 for 2020 , $42,700 for 2021 , $40,300 for 2022 and $37,800 for 2023 .

4.     DEBT

Revolving Credit Facility & Term Loan
In January 2018, in conjunction with the acquisition of FCX, the Company refinanced its existing credit facility and entered into a new five-year credit facility with a group of banks expiring in January 2023 . This agreement provides for a $780,000 unsecured term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range from 0.10% to 0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. At March 31, 2018 , the Company had $780,000 outstanding under the term loan and $87,500 outstanding under the revolver. Unused lines under this facility, net of outstanding letters of credit of $3,637 to secure certain insurance obligations, totaled $158,863 at March 31, 2018 , and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan as of March 31, 2018 was 3.69% . The weighted average interest rate on the amount outstanding under the revolving credit facility as of March 31, 2018 was 3.49% .

The new credit facility replaced the Company's previous credit facility agreement. At June 30, 2017 , the Company had $120,313 outstanding under the term loan in the previous credit facility agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017 . No amount was outstanding under the revolver as of June 30,

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

2017 . Unused lines under this facility, net of outstanding letters of credit of $2,441 to secure certain insurance obligations, totaled $247,559 at June 30, 2017 .

Additionally, the Company had letters of credit outstanding with a separate bank, not associated with either revolving credit agreement, in the amount of $2,698 as of March 31, 2018 and June 30, 2017 , in order to secure certain insurance obligations.

Other Long-Term Borrowings
At March 31, 2018 and June 30, 2017 , the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170,000 . Fees on this facility range from 0.25% to 1.25% per year based upon the Company's leverage ratio at each quarter end. The "Series C" notes have a principal amount of $120,000 and carry a fixed interest rate of 3.19% , and are due in equal principal payments in July 2020, 2021 and 2022. The "Series D" notes have a principal amount of $50,000 and carry a fixed interest rate of 3.21% , and are due in equal principal payments in October 2019 and 2023. As of March 31, 2018 , $50,000 in additional financing was available under this facility.

In 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 March 31, 2018 and June 30, 2017 , $1,496 and $1,669 was outstanding, respectively.

Unamortized debt issue costs of $551 and $105 are included as a reduction of current portion of long-term debt on the condensed consolidated balance sheets as of March 31, 2018 and June 30, 2017 , respectively. Unamortized debt issue costs of $1,936 and $294 are included as a reduction of long-term debt on the condensed consolidated balance sheets as of March 31, 2018 and June 30, 2017 , respectively.

The new credit facility and unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At March 31, 2018 , the most restrictive of these covenants required that the Company have net indebtedness less than 4.25 times consolidated income before interest, taxes, depreciation and amortization. At March 31, 2018 , the Company's indebtedness was less than 3.5 times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all covenants at March 31, 2018 .

5.    FAIR VALUE MEASUREMENTS

Marketable securities measured at fair value at March 31, 2018 and June 30, 2017 totaled $10,051 and $10,481 , respectively. 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 accompanying condensed consolidated balance sheets and their fair values are based upon quoted market prices in an active market (Level 1 in the fair value hierarchy).

The fair value of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximated its carrying value at both March 31, 2018 and June 30, 2017 (Level 2 in the fair value hierarchy).

The revolving credit facility and the term loan contain variable interest rates and their carrying values approximated fair value at both March 31, 2018 and June 30, 2017 (Level 2 in the fair value hierarchy).

6.    INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to U.S. tax law. The Act reduces the U.S. federal corporate income tax rate from 35% to 21% , requires companies to pay a one-time transition tax on certain un-remitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminates U.S. federal income tax on dividends from foreign subsidiaries, and creates new taxes on certain foreign-sourced earnings. During the nine months ended March 31, 2018 , the Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate from 35% to 21% . The rate change is administratively effective as of the beginning of our fiscal year, resulting in the Company using a blended statutory rate for the annual period of 28.06% . The corporate income tax rate change had a favorable impact to the Company of $8,823 for the nine months ended March 31, 2018 .

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)


The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act for which the accounting under ASC 740 is incomplete. To the extent that a company's accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act.

Accordingly, as of March 31, 2018 , we have not completed our accounting for the tax effects of the Act. However, we have made a reasonable estimate of the one-time transition tax and recognized a provisional tax liability of $3,936 .

We also re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of our deferred tax balance was not material to the Company's condensed consolidated financial statements.

Overall, the Act resulted in a net tax benefit of $4,915 . The net tax benefit of $2,952 and $4,915 for the quarter and nine months ending March 31, 2018 , respectively, was recorded as a discrete tax benefit and is included as a component of income tax expense in the condensed statements of consolidated income.



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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

7.    SHAREHOLDERS' EQUITY

Accumulated Other Comprehensive (Loss) Income

Changes in the accumulated other comprehensive (loss) income, are comprised of the following amounts shown net of taxes:
 
 
Three Months Ended March 31, 2018
 
 
Foreign currency translation adjustment

 
Unrealized gain on securities available for sale

 
Postemployment benefits

 
Total Accumulated other comprehensive income (loss)

Balance at December 31, 2017
 
$
(77,355
)
 
$
35

 
$
(2,294
)
 
$
(79,614
)
Other comprehensive (loss) income
 
(378
)
 
6

 

 
(372
)
Amounts reclassified from accumulated other comprehensive (loss) income
 

 

 
(14
)
 
(14
)
Net current-period other comprehensive (loss) income
 
(378
)
 
6

 
(14
)
 
(386
)
Balance at March 31, 2018
 
$
(77,733
)
 
$
41

 
$
(2,308
)
 
$
(80,000
)

 
 
Three Months Ended March 31, 2017
 
 
Foreign currency translation adjustment

 
Unrealized (loss) gain on securities available for sale

 
Postemployment benefits

 
Total Accumulated other comprehensive income (loss)

Balance at December 31, 2016
 
$
(93,964
)
 
$
11

 
$
(3,669
)
 
$
(97,622
)
Other comprehensive income
 
8,132

 
1

 

 
8,133

Amounts reclassified from accumulated other comprehensive (loss) income
 

 

 
77

 
77

Net current-period other comprehensive income
 
8,132

 
1

 
77

 
8,210

Balance at March 31, 2017
 
$
(85,832
)
 
$
12

 
$
(3,592
)
 
$
(89,412
)

 
 
Nine Months Ended March 31, 2018
 
 
Foreign currency translation adjustment

 
Unrealized (loss) gain on securities available for sale

 
Postemployment benefits

 
Total Accumulated other comprehensive income (loss)

Balance at July 1, 2017
 
$
(79,447
)
 
$
21

 
$
(2,276
)
 
$
(81,702
)
Other comprehensive income
 
1,714

 
20

 

 
1,734

Amounts reclassified from accumulated other comprehensive (loss) income
 

 

 
(32
)
 
(32
)
Net current-period other comprehensive income (loss)
 
1,714

 
20

 
(32
)
 
1,702

Balance at March 31, 2018
 
$
(77,733
)
 
$
41

 
$
(2,308
)
 
$
(80,000
)


14

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

 
 
Nine Months Ended March 31, 2017
 
 
Foreign currency translation adjustment

 
Unrealized loss on securities available for sale

 
Postemployment benefits

 
Total Accumulated other comprehensive income (loss)

Balance at July 1, 2016
 
$
(81,685
)
 
$
(38
)
 
$
(3,823
)
 
$
(85,546
)
Other comprehensive (loss) income
 
(4,147
)
 
50

 

 
(4,097
)
Amounts reclassified from accumulated other comprehensive (loss) income
 

 

 
231

 
231

Net current-period other comprehensive (loss) income
 
(4,147
)
 
50

 
231

 
(3,866
)
Balance at March 31, 2017
 
$
(85,832
)
 
$
12

 
$
(3,592
)
 
$
(89,412
)

Other Comprehensive (Loss) Income

Details of other comprehensive (loss) income are as follows:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
Pre-Tax Amount
 
Tax Expense (Benefit)
 
Net Amount
 
Pre-Tax Amount
 
Tax Expense
 
Net Amount
Foreign currency translation adjustments
 
$
(353
)
 
$
25

 
$
(378
)
 
$
8,132

 
$

 
$
8,132

Postemployment benefits:
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of actuarial (gains) losses and prior service cost into other (income) expense, net and included in net periodic pension costs
 
(19
)
 
(5
)
 
(14
)
 
125

 
48

 
77

Unrealized gain on investment securities available for sale
 
(3
)
 
(9
)
 
6

 
11

 
10

 
1

Other comprehensive (loss) income
 
$
(375
)
 
$
11

 
$
(386
)
 
$
8,268

 
$
58

 
$
8,210


 
 
Nine Months Ended March 31,
 
 
2018
 
2017
 
 
Pre-Tax Amount
 
Tax Expense (Benefit)
 
Net Amount
 
Pre-Tax Amount
 
Tax Expense
 
Net Amount
Foreign currency translation adjustments
 
$
1,775

 
$
61

 
$
1,714

 
$
(4,147
)
 
$

 
$
(4,147
)
Postemployment benefits:
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of actuarial (gains) losses and prior service cost into other (income) expense, net and included in net periodic pension costs
 
(55
)
 
(23
)
 
(32
)
 
377

 
146

 
231

Unrealized gain on investment securities available for sale
 
39

 
19

 
20

 
77

 
27

 
50

Other comprehensive income (loss)
 
$
1,759

 
$
57

 
$
1,702

 
$
(3,693
)
 
$
173

 
$
(3,866
)

Anti-dilutive Common Stock Equivalents
In the three month period ended March 31, 2018 , stock options and stock appreciation rights related to 67 shares of common stock were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive. In the three month period ended March 31, 2017, there were no anti-dilutive shares . In the nine month periods ended March 31, 2018 and 2017 , stock options and stock appreciation rights related to 313 and 270

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

shares of common stock were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive.

8.    BENEFIT PLANS

The following table provides summary disclosures of the net periodic postemployment costs recognized for the Company’s postemployment benefit plans:
 
 
Pension Benefits
 
Retiree Health Care
Benefits
Three Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
Components of net periodic cost:
 
 
 
 
 
 
 
 
Service cost
 
$
31

 
$
31

 
$
5

 
$
7

Interest cost
 
182

 
173

 
13

 
16

Expected return on plan assets
 
(118
)
 
(115
)
 

 

Recognized net actuarial loss (gain)
 
106

 
218

 
(39
)
 
(45
)
Amortization of prior service cost
 
7

 
22

 
(92
)
 
(68
)
Net periodic cost
 
$
208

 
$
329

 
$
(113
)
 
$
(90
)
                        
 
 
Pension Benefits
 
Retiree Health Care
Benefits
Nine Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
Components of net periodic cost:
 
 
 
 
 
 
 
 
Service cost
 
$
93

 
$
94

 
$
14

 
$
21

Interest cost
 
549

 
519

 
39

 
48

Expected return on plan assets
 
(355
)
 
(345
)
 

 

Recognized net actuarial loss (gain)
 
318

 
654

 
(116
)
 
(136
)
Amortization of prior service cost
 
21

 
65

 
(276
)
 
(203
)
Net periodic cost
 
$
626

 
$
987

 
$
(339
)
 
$
(270
)

In accordance with the Company's adoption of ASU 2017-07, the Company reports the service cost component of the net periodic post-employment costs 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 periodic post-employment costs are presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Therefore, $36 and $38 and $107 and $115 of service costs are included in selling, distribution and administrative expense, and $59 and $201 and $180 and $602 of net other periodic post-employment costs are included in other income, net in the condensed statements of consolidated income for the three and nine months ended March 31, 2018 and 2017 , respectively. The Company contributed $2,700 to its pension benefit plans and $143 to its retiree health care plans in the nine months ended March 31, 2018 . Expected contributions for the remainder of fiscal 2018 are $120 for the pension benefit plans to fund scheduled retirement payments and $47 for retiree health care plans.

9.    SEGMENT AND GEOGRAPHIC INFORMATION

Effective July 1, 2017, the Company completed a number of changes to its organizational structure that resulted in a change in how the Company manages its businesses, allocates resources and measures performance. As a result, the Company has revised its reportable segments to reflect how management currently reviews financial information and makes operating decisions. All Canadian and Mexican subsidiaries are now grouped under the Service Center Based Distribution segment. All prior-period amounts have been adjusted to reflect the reportable segment change.

The accounting policies of the Company’s reportable segments are generally the same as those used to prepare the condensed consolidated financial statements. Intercompany sales primarily from the Fluid Power & Flow Control segment to the Service Center Based Distribution segment of $6,706 and $6,757 , in the three months ended March 31,

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Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

2018 and 2017 , respectively, and $18,461 and $17,285 in the nine months ended March 31, 2018 and 2017, respectively, have been eliminated in the Segment Financial Information tables below.
Three Months Ended
 
Service Center Based Distribution
 
Fluid Power & Flow Control
 
Total
March 31, 2018
 
 
 
 
 
 
Net sales
 
$
601,214

 
$
226,451

 
$
827,665

Operating income for reportable segments
 
48,229

 
26,584

 
74,813

Depreciation and amortization of property
 
3,885

 
828

 
4,713

Capital expenditures
 
4,385

 
2,054

 
6,439

 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
Net sales
 
$
573,797

 
$
105,507

 
$
679,304

Operating income for reportable segments
 
36,042

 
12,268

 
48,310

Depreciation and amortization of property
 
3,650

 
227

 
3,877

Capital expenditures
 
3,228

 
1,849

 
5,077

Nine Months Ended
 
Service Center Based Distribution
 
Fluid Power & Flow Control
 
Total
March 31, 2018
 
 
 
 
 
 
Net sales
 
$
1,725,734

 
$
449,819

 
$
2,175,553

Operating income for reportable segments
 
111,957

 
53,698

 
165,655

Assets used in business
 
1,202,593

 
1,069,730

 
2,272,323

Depreciation and amortization of property
 
11,356

 
1,365

 
12,721

Capital expenditures
 
14,754

 
3,144

 
17,898

 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
Net sales
 
$
1,617,361

 
$
294,914

 
$
1,912,275

Operating income for reportable segments
 
85,125

 
32,446

 
117,571

Assets used in business
 
1,184,150

 
162,541

 
1,346,691

Depreciation and amortization of property
 
10,674

 
690

 
11,364

Capital expenditures
 
9,496

 
2,291

 
11,787


A reconciliation of operating income for reportable segments to the condensed consolidated income before income taxes is as follows:

17

Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

 
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2018
 
2017
 
2018
 
2017
Operating income for reportable segments
 
$
74,813

 
$
48,310

 
$
165,655

 
$
117,571

Adjustment for:
 
 
 
 
 
 
 
 
Intangible amortization—Service Center Based Distribution
 
4,311

 
4,714

 
13,248

 
14,312

Intangible amortization—Fluid Power & Flow Control
 
5,489

 
1,342

 
8,078

 
4,075

Corporate and other expense (income), net
 
8,569

 
(3,414
)
 
(10,667
)
 
(27,759
)
Total operating income
 
56,444

 
45,668

 
154,996

 
126,943

Interest expense, net
 
8,216

 
2,165

 
12,521

 
6,411

Other (income) expense, net
 
(1,291
)
 
154

 
(2,022
)
 
(54
)
Income before income taxes
 
$
49,519

 
$
43,349

 
$
144,497

 
$
120,586


The change in corporate and other income, net is due to changes in the amounts and levels of certain supplier support benefits as well as expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.

Net sales are presented in geographic areas based on the location of the facility shipping the product and are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2018
 
2017
 
2018
 
2017
Geographic Areas:
 
 
 
 
 
 
 
 
United States
 
$
713,895

 
$
572,685

 
$
1,838,471

 
$
1,604,594

Canada
 
68,112

 
65,527

 
202,408

 
190,312

Other countries
 
45,658

 
41,092

 
134,674

 
117,369

Total
 
$
827,665

 
$
679,304

 
$
2,175,553

 
$
1,912,275

    
Other countries consist of Mexico, Australia, New Zealand, and Singapore.

10.    OTHER (INCOME) EXPENSE, NET

Other (income) expense, net consists of the following:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2018
 
2017
 
2018
 
2017
Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan
 
$

 
$
(446
)
 
$
(784
)
 
$
(890
)
Foreign currency transactions loss
 
130

 
544

 
79

 
202

Net other periodic post-employment costs
 
59

 
201

 
180

 
602

Life insurance (income) expense, net
 
(1,488
)
 
(160
)
 
(1,495
)
 
32

Other, net
 
8

 
15

 
(2
)
 

Total other (income) expense, net
 
$
(1,291
)
 
$
154

 
$
(2,022
)
 
$
(54
)


18

Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)


11.    SUBSEQUENT EVENTS

We have evaluated events and transactions occurring subsequent to March 31, 2018 through the date the financial statements were issued.



19




APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The accompanying condensed consolidated financial statements of the Company have been reviewed by the Company’s independent registered public accounting firm, Deloitte & Touche LLP, whose report covering their reviews of the condensed consolidated financial statements follows.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying condensed consolidated balance sheet of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of March 31, 2018 , and the related condensed statements of consolidated income and consolidated comprehensive income for the three-month and nine -month periods ended March 31, 2018 and 2017 , and consolidated cash flows for the nine-month periods ended March 31, 2018 and 2017 . These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of June 30, 2017 , and the related statements of consolidated income, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated August 18, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 2017 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
/s/ Deloitte & Touche LLP         

Cleveland, Ohio
April 27, 2018



20

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Overview

With more than 6,500 employees across North America, Australia, New Zealand, and Singapore, Applied Industrial Technologies (“Applied,” the “Company,” “We,” “Us” or “Our”) is a leading industrial distributor of bearings, power transmission products, engineered fluid power components, specialty flow control solutions, 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, fluid power, and flow control 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. During the third quarter of fiscal 2018 , business was conducted in the United States, Canada, Mexico, Puerto Rico, Australia, New Zealand, and Singapore from 618 facilities.

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

On January 31, 2018, Applied completed the acquisition of all of the outstanding shares of FCX Performance, Inc. (“FCX”), a Columbus, Ohio based distributor of specialty process flow control products and services. At the time of closing, FCX operated 68 locations with approximately 1,000 employees. The total consideration transferred was approximately $784 million, which was financed by cash-on-hand and a new credit facility comprised of a $780 million Term Loan A and $250 million revolver, effective with the transaction closing.

Consolidated sales for the quarter ended March 31, 2018 increased $148.4 million or 21.8% compared to the prior year quarter, with the acquisitions of FCX, Sentinel, and DICOFASA increasing sales by $103.9 million or 15.3% and favorable foreign currency translation of $5.6 million increasing sales by 0.8% . Operating margin of 6.8% of sales was up from 6.7% of sales for the same quarter in the prior year. Net income of $36.6 million for the quarter ended March 31, 2018 increased 24.1% compared to the prior year quarter. Shareholders' equity was $ 806.0 million at March 31, 2018 , up from the June 30, 2017 level of $745.3 million . The current ratio was 2.8 to 1 at March 31, 2018 and at June 30, 2017 .

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.

The MCU (total industry) and IP indices have increased since September 2017. The MCU for March 2018 was 78.0, which increased from the December 2017 revised reading of 77.3. The ISM PMI registered 59.3 in March ; remaining stable with the December 2017 revised reading of 59.3, and remaining above 50 (its expansionary threshold). The indices for the months during the current quarter were as follows:

 
Index Reading
Month
MCU
PMI
IP
January 2018
77.1
59.1
102.6
February 2018
77.7
60.8
104.1
March 2018
78.0
59.3
104.2

The number of Company employees was 6,558 at March 31, 2018 , 5,554 at June 30, 2017 , and 5,564 at March 31, 2017 . The number of operating facilities totaled 618 at March 31, 2018 , 552 at June 30, 2017 , and 560 at March 31, 2017 .

21

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Results of Operations

Three months Ended March 31, 2018 and 2017

The following table is included to aid in review of Applied's condensed statements of consolidated income.
 
 
Three Months Ended March 31,
 
Change in $'s Versus Prior Period - % Increase
 
 
As a Percent of Net Sales
 
 
 
2018
 
2017
 
Net Sales
 
100.0
%
 
100.0
%
 
21.8
%
Gross Profit
 
28.9
%
 
28.1
%
 
25.5
%
Selling, Distribution & Administrative
 
22.1
%
 
21.4
%
 
26.1
%
Operating Income
 
6.8
%
 
6.7
%
 
23.6
%
Net Income
 
4.4
%
 
4.3
%
 
24.1
%

During the quarter ended March 31, 2018 , sales increased $148.4 million or 21.8% compared to the prior year quarter, with sales from the acquisitions of FCX, Sentinel and DICOFASA adding $103.9 million or 15.3% and favorable foreign currency translation accounting for an increase of $5.6 million or 0.8% . There were 63.5 selling days in the quarter ended March 31, 2018 and 64 selling days in the quarter ended March 31, 2017 . Excluding the impact of businesses acquired and the impact of currency translation, sales increased $38.9 million or 5.7% during the quarter, of which 3.8% is from the Service Center Based Distribution segment and 2.9% is from the Fluid Power & Flow Control segment; these were offset by a 1.0% decrease due to headwinds from one half less selling day.

The following table shows changes in sales by reportable segment.
 
 
 
 
Amount of change due to
Sales by Reportable Segment
Three months ended March 31,
Sales Increase
 
Foreign Currency
Organic Change
2018
2017
Acquisitions
Service Center Based Distribution
$
601.2

$
573.8

$
27.4

$
0.9

$
5.6

$
20.9

Fluid Power & Flow Control
226.5

105.5

121.0

103.0


18.0

Total
$
827.7

$
679.3

$
148.4

$
103.9

$
5.6

$
38.9


Sales from our Service Center Based Distribution segment increased $27.4 million or 4.8% . Acquisitions within this segment increased sales by $0.9 million or 0.2% , and favorable foreign currency translation increased sales by $5.6 million or 1.0% . Excluding the impact of businesses acquired and the impact of currency translation, sales increased $20.9 million or 3.6%, driven by an increase of 4.4% from operations, offset by a 0.8% decrease due to one half less sales day.

Sales from our Fluid Power & Flow Control segment increased $121.0 million or 114.6% , primarily due to acquisitions within this segment contributing sales of $103.0 million or 97.6% . Excluding the impact of businesses acquired, sales increased $18.0 million or 17.0%, driven by an increase from operations of 18.7%, offset by a decrease of 1.7% due to one half less sales day.


22

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


The following table shows changes in sales by geographic area. Other countries includes Mexico, Australia, New Zealand, and Singapore.
 
 
 
 
Amount of change due to
 
Three months ended March 31,
Sales Increase
 
Foreign Currency
Organic Change
Sales by Geographic Area
2018
2017
Acquisitions
United States
$
713.9

$
572.7

$
141.2

$
103.0

$

$
38.2

Canada
68.1

65.5

2.6


3.1

(0.5
)
Other countries
45.7

41.1

4.6

0.9

2.5

1.2

Total
$
827.7

$
679.3

$
148.4

$
103.9

$
5.6

$
38.9


Sales in our U.S. operations were up $141.2 million or 24.7% as acquisitions added $103.0 million or 18.0% . Excluding the impact of businesses acquired, U.S. sales were up $38.2 million or 6.7% of which 7.7% is growth from operations, offset by a 1.0% decrease due to one half less sales day. Sales from our Canadian operations increased $2.6 million or 3.9% , and favorable foreign currency translation increased Canadian sales of $3.1 million or 4.7% . Excluding the impact of foreign currency translation, Canadian sales decreased $0.5 million or 0.8%. Consolidated sales from our other country operations increased $4.6 million or 11.1% compared to the same quarter in the prior year. Acquisitions added sales of $0.9 million or 2.3% and favorable foreign currency translation increased other country sales by $ 2.5 million or 6.0% . Excluding the impact of businesses acquired and the impact of currency translation, other country sales were up $1.2 million or 2.8%.

During the quarter ended March 31, 2018 , industrial products and fluid power/flow control products accounted for 62.6% and 37.4%, respectively, of sales as compared to 70.5% and 29.5%, respectively, for the same period in the prior year.

Our gross profit margin was 28.9% for the quarter ended March 31, 2018 compared to 28.1% for the quarter ended March 31, 2017 . The acquisition of FCX favorably impacted the gross profit margin by 56 basis points during the quarter ended March 31, 2018 .
 
 
 
 
Amount of change due to
 
Three months ended March 31,
SD&A Increase
 
Foreign Currency
Organic Change
 
2018
2017
Acquisitions
SD&A
$
183.1

$
145.1

$
38.0

$
32.7

$
1.3

$
4.0


Selling, distribution and administrative expense (SD&A) consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was 22.1% of sales in the quarter ended March 31, 2018 compared to 21.4% in the prior year quarter. SD&A increased $38.0 million or 26.1% compared to the prior year quarter. Changes in foreign currency exchange rates had the effect of increasing SD&A during the quarter ended March 31, 2018 by $1.3 million or 0.9% compared to the prior year quarter. SD&A from businesses acquired added $32.7 million or 22.5% of SD&A expenses, including $5.7 million of one-time costs and $4.2 million of intangibles amortization related to the FCX acquisition. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A increased $4.0 million or 2.7% during the quarter ended March 31, 2018 compared to the prior year quarter. Excluding the impact of acquisitions, total compensation increased $5.6 million during the quarter ended March 31, 2018 compared to the prior year quarter as a result of merit increases and improved Company performance. All other expenses within SD&A were down $1.6 million.

Operating income increased $10.8 million or 23.6% and as a percent of sales increased to 6.8% from 6.7% during the same quarter in the prior year.

Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 8.0% in the current year quarter from 6.3% in the prior year quarter. This increase is due to the positive leveraging impact from the increase in sales in the current year.


23

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Operating income as a percentage of sales for the Fluid Power & Flow Control segment was 11.7% in the current year quarter and in the prior year quarter.

Other income, net in the quarter consists of life insurance income of $1.5 million , offset by $0.1 million net unfavorable foreign currency transaction losses and $0.1 million of net other periodic post-employment costs. During the prior year quarter, other expense, net included unrealized gains on investments held by non-qualified deferred compensation trusts of $0.4 million and life insurance income of $0.2 million , offset by $0.5 million net unfavorable foreign currency transaction losses and $0.2 million of net other periodic post-employment costs.

The effective income tax rate was 26.1% for the quarter ended March 31, 2018 compared to 32.0% for the quarter ended March 31, 2017 . The decrease in the effective tax rate is primarily due to the enactment of the Tax Cuts and Jobs Act in December 2017, which reduces the Company's U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. This resulted in a blended statutory rate for the Company for fiscal 2018, which was 28.06% for the quarter ended March 31, 2018 . The Act resulted in a net tax benefit of $3.0 million for the quarter ended March 31, 2018 , which primarily relates to the favorable impact of the corporate income tax rate change. During the quarter ended March 31, 2017 , $1.3 million of net excess tax benefits resulting from stock-based compensation awards vesting and exercises were recognized as a reduction of income tax expense, which decreased the effective tax rate for the quarter ended March 31, 2017 by 2.9%. We expect our full year tax rate for fiscal 2018 to be in the 30.0% to 32.0% range.

As a result of the factors discussed above, net income increased $7.1 million or 24.1% compared to the prior year quarter. Net income per share was $0.93 per share for the quarter ended March 31, 2018 , compared to $0.75 per share for the quarter ended March 31, 2017 . Net income per share was also favorably impacted due to lower weighted average common shares outstanding.

Nine months Ended March 31, 2018 and 2017

The following table is included to aid in review of Applied's condensed statements of consolidated income.
 
 
Nine Months Ended March 31,
 
Change in $'s Versus Prior Period - % Increase
 
 
As a Percent of Net Sales
 
 
 
2018
 
2017
 
Net Sales
 
100.0
%
 
100.0
%
 
13.8
%
Gross Profit
 
28.5
%
 
28.3
%
 
14.5
%
Selling, Distribution & Administrative
 
21.4
%
 
21.7
%
 
12.2
%
Operating Income
 
7.1
%
 
6.6
%
 
22.1
%
Net Income
 
4.7
%
 
4.2
%
 
25.1
%

During the nine months ended March 31, 2018 , sales increased $263.3 million or 13.8% compared to the same period in the prior year, with sales from acquisitions adding $114.3 million or 6.0% , and favorable foreign currency translation accounting for an increase of $14.9 million or 0.8% . There were 187.5 selling days in the nine months ended March 31, 2018 and 189 selling days in the nine months ended March 31, 2017 . Excluding the impact of businesses acquired and the impact of currency translation, sales were up $134.1 million or 7.0% during the period, of which 5.5% is from the Service Center Based Distribution segment and 2.5% is from the Fluid Power & Flow Control segment, offset by a 1.0% decrease due to one and a half less sales days.

The following table shows changes in sales by reportable segment.
 
 
 
 
Amount of change due to
Sales by Reportable Segment
Nine months ended March 31,
Sales Increase
 
Foreign Currency
Organic Change
2018
2017
Acquisitions
Service Center Based Distribution
$
1,725.8

$
1,617.4

$
108.4

$
2.6

$
14.9

$
90.9

Fluid Power & Flow Control
449.8

294.9

154.9

111.7


43.2

Total
$
2,175.6

$
1,912.3

$
263.3

$
114.3

$
14.9

$
134.1


24

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



Sales from our Service Center Based Distribution segment increased $108.4 million or 6.7% during the nine months ended March 31, 2018 from the same period in the prior year. Acquisitions within this segment increased sales by $2.6 million or 0.2% , and favorable foreign currency translation increased sales by $14.9 million or 0.9% . Excluding the impact of businesses acquired and the impact of currency translation, sales increased $90.9 million or 5.6%, driven by an increase of 6.5% from operations, offset by a 0.9% decrease due to one and a half less sales days.

Sales from our Fluid Power & Flow Control segment increased $154.9 million or 52.5% during the nine months ended March 31, 2018 from the same period in the prior year. Acquisitions within this segment increased sales by $111.7 million or 37.9% . Excluding the impact of businesses acquired, sales increased $43.2 million or 14.6%, driven by an increase from operations of 15.8%, offset by a decrease of 1.2% due to one and a half less sales days.

The following table shows changes in our sales by geographic area. Other countries includes Mexico, Australia, New Zealand, and Singapore.
 
 
 
Amount of change due to
 
Nine months ended March 31,
Sales Increase
 
Foreign Currency
Organic Change
Sales by Geographic Area
2018
2017
Acquisitions
United States
$
1,838.5

$
1,604.6

$
233.9

$
111.7

$

$
122.2

Canada
202.4

190.3

12.1


8.9

3.2

Other countries
134.7

117.4

17.3

2.6

6.0

8.7

Total
$
2,175.6

$
1,912.3

$
263.3

$
114.3

$
14.9

$
134.1


During the nine months ended March 31, 2018, sales in our U.S. operations were up $233.9 million or 14.6% , while acquisitions added $111.7 million or 7.0% . Excluding the impact of businesses acquired, U.S. sales were up $122.2 million or 7.6%, of which 8.5% is growth from operations, offset by a 0.9% decrease due to one and a half less sales days. Sales from our Canadian operations increased $12.1 million or 6.4% , and favorable foreign currency translation increased Canadian sales by $8.9 million or 4.7% . Excluding the impact of foreign currency translation, Canadian sales were up $3.2 million or 1.7%. Consolidated sales from our other country operations increased $17.3 million or 14.7% compared to the same period in the prior year. Acquisitions added sales of $2.6 million or 2.2% and favorable foreign currency translation increased other country sales by $6.0 million or 5.1% . Excluding the impact of businesses acquired and the impact of currency translation, other country sales were up $8.7 million or 7.4% during the period.

During the nine months ended March 31, 2018 , industrial products and fluid power/flow control products accounted for 68.7% and 31.3%, respectively, of sales as compared to 72.0% and 28.0% respectively, for the same period in the prior year.

Our gross profit margin for the period was 28.5% compared to 28.3% in the prior year period. The FCX acquisition favorably impacted the gross profit margin by 22 basis points during the nine months ended March 31, 2018 .
 
 
 
 
Amount of change due to
 
Nine months ended March 31,
SD&A Increase
 
Foreign Currency
Organic Change
 
2018
2017
Acquisitions
SD&A
$
465.3

$
414.6

$
50.7

$
35.0

$
3.4

$
12.3


Selling, distribution and administrative expense (SD&A) consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was 21.4% of sales for the nine months ended March 31, 2018 , compared to 21.7% of sales for the prior year period. SD&A increased $50.7 million or 12.2% compared to the prior year period. Changes in foreign currency exchange rates had the effect of increasing SD&A during the nine months ended March 31, 2018 by $3.4 million or 0.8% compared to the prior year period. SD&A from businesses acquired added $35.0 million or 8.5% of SD&A expenses, including $6.1 million of one-time costs and $4.2 million of intangibles amortization related to the FCX acquisition. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A increased $12.3 million or 2.9% during the nine months ended March 31, 2018 compared to

25

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


the same period in the prior year. Excluding the impact of acquisitions, total compensation increased $13.5 million for the nine months ended March 31, 2018 compared to the prior year period as a result of merit increases and improved Company performance. All other expenses within SD&A were down $1.2 million.

Operating income increased $28.1 million or 22.1% , and as a percent of sales increased to 7.1% from 6.6% in the prior year period.

Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 6.5% in the current year period from 5.3% in the prior year period. Operating income as a percentage of sales for the Fluid Power & Flow Control segment increased to 11.9% in the current year period from 11.0% in the prior year period. These increases are due to the positive leveraging impact from the increase in sales in the current year period.

Other income, net was $2.0 million in the nine months ended March 31, 2018 which included life insurance income of $1.5 million and unrealized gains on investments held by non-qualified deferred compensation trusts of $0.8 million , which were offset by net unfavorable foreign currency transaction losses of $0.1 million and $0.2 million of net other periodic post-employment costs. During the prior year period, other income, net was $0.1 million , which included unrealized gains on investments held by non-qualified deferred compensation trusts of $0.9 million , offset by $0.6 million of net other periodic post-employment costs and net unfavorable foreign currency transaction losses of $0.2 million .

The effective income tax rate was 29.9% for the nine months ended March 31, 2018 compared to 32.9% for the prior year period ended March 31, 2017 . The decrease in the effective tax rate is primarily due to the enactment of the Tax Cuts and Jobs Act in December 2017, which reduces the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. This resulted in a blended statutory rate for the Company for fiscal 2018, which is 28.06% for the nine months ended March 31, 2018 . Overall, the Act resulted in a net tax benefit of $4.9 million for the nine months ended March 31, 2018 . The corporate income tax rate change had a favorable impact to the Company of $8.8 million , which was offset by income tax expense of $3.9 million accounting for the one-time transition tax related to the Company's undistributed foreign earnings. During the nine months ended March 31, 2017 , $2.0 million of net excess tax benefits, resulting from stock-based compensation awards vesting and exercises, were recognized as a reduction of income tax expense, which decreased the effective income tax rate for the nine months ended March 31, 2017 by 1.6%. We expect our full year tax rate for fiscal 2018 to be in the 30.0% to 32.0% range.

As a result of the factors addressed above, net income increased $20.3 million compared to the prior year period. Net income per share was $2.58 per share for the nine months ended March 31, 2018 compared to $2.06 per share in the prior year period. Net income per share was also favorably impacted due to lower weighted average common shares outstanding as a result of our share repurchase program.

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 March 31, 2018 , we had $1,039.0 million in outstanding borrowings. At June 30, 2017 , we had $292.0 million in outstanding borrowings. 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, payment of dividends, 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's working capital at March 31, 2018 was $681.3 million , compared to $572.8 million at June 30, 2017 . Working capital increased $91.6 million due to the inclusion of FCX. The current ratio was 2.8 to 1 at March 31, 2018 and at June 30, 2017 .


26

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Net Cash Flows
The following table is included to aid in review of Applied's condensed statements of consolidated cash flows; all amounts are in thousands.
 
 
Nine Months Ended March 31,
Net Cash Provided by (Used in):
 
2018
 
2017
Operating Activities
 
$
47,878

 
$
78,506

Investing Activities
 
(795,333
)
 
(11,841
)
Financing Activities
 
684,935

 
(58,753
)
Exchange Rate Effect
 
986

 
(460
)
(Decrease) Increase in Cash and Cash Equivalents
 
$
(61,534
)
 
$
7,452


Net cash provided by operating activities was $47.9 million for the nine months ended March 31, 2018 as compared to $78.5 million provided by operating activities in the prior period. The decrease in cash provided by operating activities during the nine months ended March 31, 2018 is related to increased working capital levels to support increased sales compared to the prior period.

Net cash used in investing activities during the nine months ended March 31, 2018 increased significantly from the prior period as $778.1 million was used for acquisitions in the current period, compared to $2.8 million for the acquisition in the prior year period. Further, there was $6.1 million more spent on property purchases in the current year period primarily due to an increase in expenditures for building improvements and shop equipment, primarily attributable to the relocation and expansion of capacity related to our MSS business.

Net cash provided by financing activities was $684.9 million for the nine months ended March 31, 2018 versus net cash used by financing activities of $58.8 million in the prior period. The change in cash provided by financing activities is primarily due to $867.5 million of borrowings from the new credit facility, offset by $120.4 million of debt repayments of the old credit facility during the nine months ended March 31, 2018 compared to $6.5 million of net debt payments in the prior year period. Also, cash was used in the current period for the purchase of treasury shares in the amount of $22.8 million and dividends paid in the amount of $34.2 million. In the prior period, $8.2 million of cash was used for the purchase of treasury shares and $33.2 million of cash was used for the payment of dividends. Further, $0.3 million of cash was used in the current period to make acquisition holdback payments, while $7.7 million was used in the prior year period.

Share Repurchases
The Board of Directors has authorized the repurchase of shares of the Company's common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. No shares of treasury stock were acquired on the open market in the three months ended March 31, 2018 . During the nine months ended March 31, 2018 we acquired 393,300 shares of treasury stock for $22.8 million. At March 31, 2018 , we had authorization to repurchase an additional 1,056,700 shares. During the nine months ended March 31, 2017 , we acquired 162,500 shares of treasury stock on the open market for $8.2 million.

Borrowing Arrangements
In January 2018, in conjunction with the acquisition of FCX, the Company refinanced its existing credit facility and entered into a new five-year credit facility with a group of banks expiring in January 2023 . This agreement provides for a $780.0 million unsecured term loan and a $250.0 million unsecured revolving credit facility. Fees on this facility range from 0.10% to 0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. At March 31, 2018 , the Company had $780.0 million outstanding under the term loan and $87.5 million outstanding under the revolver. Unused lines under this facility, net of outstanding letters of credit of $3.6 million to secure certain insurance obligations, totaled $158.9 million at March 31, 2018 , and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan as of March 31, 2018 was 3.69% . The weighted average interest rate on the revolving credit facility outstanding as of March 31, 2018 was 3.49% .

The new credit facility replaced the Company's previous credit facility agreement. At June 30, 2017 , the Company had $120.3 million outstanding under the term loan in the previous credit facility agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017 . No amount was outstanding under the revolver as of June 30, 2017 . Unused lines

27

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


under this facility, net of outstanding letters of credit of $2.4 million to secure certain insurance obligations, totaled $247.6 million at June 30, 2017 .

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 March 31, 2018 and June 30, 2017 , in order to secure certain insurance obligations.

At March 31, 2018 and June 30, 2017 , the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 million . Fees on this facility range from 0.25% to 1.25% per year based upon the Company's leverage ratio at each quarter end. The "Series C" notes have a principal amount of $120.0 million 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 $50.0 million and carry a fixed interest rate of 3.21% , and are due in equal principal payments in October 2019 and 2023. As of March 31, 2018 , $50.0 million in additional financing was available under this facility.

In April 2014, the Company assumed $2.4 million 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 March 31, 2018 and June 30, 2017 , $1.5 million and $1.7 million was outstanding, respectively.

The new credit facility and unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At March 31, 2018 , the most restrictive of these covenants required that the Company have net indebtedness less than 4.25 times consolidated income before interest, taxes, depreciation and amortization. At March 31, 2018 , the Company's indebtedness was less than 3.5 times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all covenants at March 31, 2018 .

Accounts Receivable Analysis
The following tables are included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable:
 
 March 31,
June 30,
 
2018
2017
Accounts receivable, gross
$
545,073

$
400,559

Allowance for doubtful accounts
11,540

9,628

Accounts receivable, net
$
533,533

$
390,931

Allowance for doubtful accounts, % of gross receivables
2.1
%
2.4
%
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2018
 
2017
 
2018
 
2017
Provision for losses on accounts receivable
 
$
587

 
$
533

 
$
1,678

 
$
1,924

Provision as a % of net sales
 
0.07
%
 
0.08
%
 
0.08
%
 
0.10
%

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 58.0 at March 31, 2018 versus 51.6 at June 30, 2017 . The inclusion of FCX increased the Company's DSO by 3.5 days. Accounts receivable increased 36.5% this year, of which 21.1% is accounts receivable for FCX. The remaining increase is due to an increase in sales excluding FCX for the nine months ended March 31, 2018 .

Approximately 2.1% of our accounts receivable balances are more than 90 days past due at March 31, 2018 compared to 1.7% at June 30, 2017 due to increases in our Service Center Based Distribution segment. On an overall basis, our provision for losses from uncollected receivables represents 0.08% of our sales in the nine months ended March 31, 2018 , and the provision for losses from uncollected receivables represents 0.07% of sales for the three months ended March 31, 2018 . Historically, this percentage is around 0.10% to 0.15%. The decrease in the provision as a percentage of sales for the nine months ended March 31, 2018 is the result of recoveries of amounts reserved for in the prior year periods for our subsidiaries focused on

28

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


upstream oil and gas customers, in conjunction with the recovery of the energy markets in the U.S. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels.

Inventory Analysis
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.  Management uses an inventory turnover ratio to monitor and evaluate inventory.  Management calculates this ratio on an annual as well as a quarterly basis, and believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis.  The annualized inventory turnover based on average costs for the period ended March 31, 2018 was 3.9 compared to 3.7 for the period ended June 30, 2017 .  We believe our inventory turnover ratio at the end of the year will be similar or slightly better than the ratio at March 31, 2018 .

29

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Cautionary Statement Under Private Securities Litigation Reform Act

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 and risks relating to the security of those systems and the data stored in or transmitted through them; 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; potentially adverse government regulation, legislation, or policies, both enacted and under consideration, including with respect to federal tax policy, and international trade, such as recent tariffs and proposed tariffs on imports; 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 this Form 10-Q as well as other of our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended June 30, 2017 .
In addition, please review the various risk factors specific to the recently completed FCX acquisition, and our incurrence of debt to complete the acquisition, discussed in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2017.

30


APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



For quantitative and qualitative disclosures about market risk, see Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended June 30, 2017 .


31


APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 4: 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.
Changes in Internal Control Over Financial Reporting
On January 31, 2018, the Company completed the acquisition of FCX Performance, Inc ("FCX"). As permitted by SEC guidance, the scope of management’s evaluation of internal control over financing reporting as of March 31, 2018 did not include the internal control over financial reporting of FCX. However, we are extending our oversight and monitoring processes that support our internal control over financial reporting to include FCX's operations.
There have not been any changes in internal control over financial reporting during the three months ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


32


PART II.
OTHER INFORMATION

ITEM 1.
Legal Proceedings

The Company is a party to pending legal proceedings with respect to various product liability, commercial, and other matters. Although it is not possible to predict the outcome of these proceedings or the range of reasonably possible loss, the Company believes, 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 the Company's consolidated financial position, results of operations, or cash flows.

ITEM 1A.
Risk Factors

In addition to other information set forth in this report, you should carefully consider risk factors described in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017, and the Quarterly Report on Form 10-Q for the quarter ended December 31, 2017 (except for the risk factor relating to our ability to complete the acquisition of FCX Performance, Inc., which acquisition closed on January 31, 2018). This information, discussing risks that could materially affect our business, financial condition, or results of operations, is incorporated here by reference.

33

Table of Contents


ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of common stock in the quarter ended March 31, 2018 were as follows:
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)
January 1, 2018 to January 31, 2018
103
$70.54
0
1,056,700
February 1, 2018 to February 28, 2018
0
$0.00
0
1,056,700
March 1, 2018 to March 31, 2018
0
$0.00
0
1,056,700
Total
103
$70.54
0
1,056,700

(1)
During the quarter the Company purchased 103 shares in connection with the Deferred Compensation Plan.
(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.



34

Table of Contents

ITEM 6.         Exhibits
Exhibit No.
  
Description
3.1
  
 
 
3.2
  
 
 
4.1
  
 
 
4.2
 
 
 
 
4.3
 
 
 
 
4.4
 
 
 
 
4.5
 
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
15
  
 
 
31
  
 
 
32
  
 
 
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

The Company 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 the Company’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

35

Table of Contents

on a consolidated basis. The Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each such instrument.



36

Table of Contents


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
 
 APPLIED INDUSTRIAL TECHNOLOGIES, INC.
 
 
(Company)
 
 
 
Date:
April 27, 2018
By:    /s/ Neil A.Schrimsher
 
 
Neil A. Schrimsher
 
 
President & Chief Executive Officer
 
 
 
 
 
 
Date:
April 27, 2018
By:    /s/ David K. Wells
 
 
David K. Wells
 
 
Vice President-Chief Financial Officer & Treasurer



37


EXHIBIT 10.1


RESTRICTED STOCK AWARD TERMS


1. Award of Restricted Stock . The Corporate Governance Committee (the “Committee”) of the Board of Directors of Applied Industrial Technologies, Inc. (“Applied”) has awarded you shares of Applied common stock, which shares are subject to the restrictions, terms, and conditions and to the risk of forfeiture set forth in the 2015 Long-Term Performance Plan (the “Plan”), in these terms, and in policies that may be adopted from time to time by the Committee. Unless otherwise provided herein, capitalized words in these terms shall have the same meanings as set forth in the Plan.
        
2. Rights During Restriction Period . Until the expiration of the corresponding Restriction Period (as defined in Section 3 hereof), the shares shall be subject to forfeiture and Applied’s Treasurer or his designee will hold the certificate representing the shares. During the Restriction Period, you will not have the right to sell, exchange, transfer, pledge, hypothecate, or otherwise dispose of forfeitable shares. Notwithstanding any restrictions or risks of forfeiture, during the Restriction Period and so long as no forfeiture has occurred, you shall be entitled to receive dividends attributable to the shares and to exercise all voting rights.
        
3. Restriction Period . The term “Restriction Period” means the period during which shares are subject to forfeiture. In each case assuming that you have remained continuously a member of Applied’s Board of Directors since the grant date, the Restriction Period will expire with respect to the shares on the earlier of (a) the first anniversary of the grant date, and (b) the expiration of your term as a director if you do not thereafter remain in office, including retirement pursuant to the Board’s mandatory retirement policy.

Subject to the terms hereof, after the Restriction Period expires, the corresponding shares will no longer be subject to forfeiture and Applied shall release to you the certificate representing the non-forfeitable shares.

4. Payment of Taxes . Upon vesting of the shares, you must take such actions (if any), including the payment of cash and/or stock, as Applied deems necessary pursuant to federal, state or local tax laws, including withholding requirements.

5. Change in Control . Notwithstanding Section 3, if you experience a Separation from Service following any Change in Control (as defined under Section 409A), the Restriction Period shall be deemed to have expired with respect to all of the remaining forfeitable shares and those shares shall no longer be subject to forfeiture. For purposes of this section, a Separation from Service shall include any termination of your service as a member of the Board of Directors of Applied (including a failure of the Board of Directors or a duly authorized committee of the Board to nominate you as a director), other than due to (i) death, (ii) Disability, or your resignation or refusal to stand for re-election as a director.

6. Death or Disability . If you cease to be a director of Applied due to death or Disability (as defined under Section 409A) prior to the expiration of the Restriction Period, the Restriction Period shall be deemed to have expired with respect to all of the remaining forfeitable shares and those shares shall no longer be subject to forfeiture.
  





7. Other Terminations . If you cease to be a director of Applied during the Restriction Period for any reason other than those specifically set forth in Sections 5 and 6 above, you shall, for no consideration, forfeit to Applied, and have no further interest in, all of the remaining forfeitable shares.

8. Adjustment of Shares for Certain Events . In the event of a stock split, stock dividend, combination, reclassification, recapitalization, merger, consolidation, exchange, spin-off, spin-out, or other distribution of assets to shareholders, or other similar event or change in capitalization such that shares of Applied common stock are changed into or become exchangeable for a different number of shares, thereafter the number of shares shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of common stock by reason of such change in corporate structure; provided, however, that the number of shares shall always be a whole number. If there occurs any other change in the number or kind of outstanding shares of common stock or other Applied securities, or of any shares of stock or other securities into which such shares of common stock shall have been changed or for which they shall have been exchanged, then Applied may adjust the number or kind of shares of stock or other securities granted hereunder, as the Committee, in its sole discretion, may determine is equitable, and such adjustment so made shall be effective and binding for all purposes.

9. Securities Laws Requirements . The Restriction Period shall not be deemed to expire if such lapse of restrictions would violate:

(a)      any applicable state securities law;
(b)      any applicable registration or other requirements under the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended, or the listing requirements of any exchange on which the shares are traded; or
(c)      any similar legal requirement of any governmental authority regulating the Applied’s issuance of shares.

Applied may require you to represent and warrant to Applied that at the grant date and at the expiration of the Restriction Period, it is your intention to acquire the common stock for your own account for investment only and not with a view to, or for resale in connection with, the distribution thereof other than in a transaction that does not require registration under the Securities Act (which may, but will not be required to, be conclusively determined for the purposes of these terms based on written advice of counsel for Applied or you); that you understand the shares may be “restricted securities” as defined in Rule 144 of the Securities and Exchange Commission; and that any resale, transfer or other disposition of the shares will be accomplished only in compliance with Rule 144, the Securities Act, or other or subsequent rules and regulations thereunder. In such circumstances except as otherwise provided herein, Applied may place on the stock certificate(s) a legend reflecting such commitment and Applied may refuse to permit transfer of such certificates until it has been furnished evidence satisfactory to it that no violation of the Securities Act or the rules and regulations thereunder would be involved in such transfer.

10. Administration of the Plan . The Committee shall have conclusive authority, subject to the express provisions of the Plan as in effect from time to time and these terms, to construe these terms and the Plan, and to establish, amend, and rescind rules and regulations for the Plan’s administration. The Committee may correct any defect or supply any omission or reconcile any inconsistency in these terms in the manner and to the extent it shall deem expedient to carry the Plan into effect, and it shall be the sole and final judge of such expediency. Applied’s Board of Directors may from time to time grant to the Committee such further powers and authority as the Board shall determine to be necessary or desirable.





Notwithstanding any other provision of these terms, any amendment, construction, establishment, rescission or correction of the type referred to above which is made or adopted following a Change in Control, and which amendment, construction, establishment or correction adversely affects your rights hereunder, shall be in writing and shall be effective only with your express and prior written consent.

11. Relationship to the Plan . This Agreement is subject to the terms of the Plan and any administrative policies adopted by the Committee. If there is any inconsistency between these terms and the Plan or such policies, the Plan and the policies, in that order, shall govern. References in these terms to Applied shall include Applied’s subsidiaries.
        


(January 2018)





EXHIBIT 15



April 27, 2018
Applied Industrial Technologies, Inc.
One Applied Plaza
Euclid Avenue at East 36th Street
Cleveland, Ohio 44115
We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of Applied Industrial Technologies, Inc. and subsidiaries for the periods ended March 31, 2018 and 2017, as indicated in our report dated April 27, 2018; because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, is incorporated by reference in Registration Statement Nos. 033-53401, 033-53361, 033-65513, 333-83809, 333-124574, 333-138054, 333-149183, 333-179354, and 333-207922 on Form S-8.

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.


/s/ Deloitte & Touche LLP


Cleveland, Ohio




EXHIBIT 31
Certifications of Disclosure in Quarterly Report on Form 10-Q

I, Neil A. Schrimsher, President & Chief Executive Officer, certify that:

1.
I have reviewed this quarterly report on Form 10-Q 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: April 27, 2018
By: /s/ Neil A. Schrimsher
 
Neil A. Schrimsher
 
President & Chief Executive Officer






I, David K. Wells, Vice President-Chief Financial Officer & Treasurer, certify that:

1.
I have reviewed this quarterly report on Form 10-Q 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: April 27, 2018
By:   /s/ David K. Wells
 
David K. Wells
 
Vice President-Chief Financial Officer & Treasurer






EXHIBIT 32


[The following certification accompanies Applied Industrial Technologies'
Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, and is not filed, as provided in applicable SEC releases.]


Certification of Principal Executive Officer and
Principal Financial Officer Pursuant to
18 U.S.C. 1350


In connection with the Form 10-Q (the “Report”) of Applied Industrial Technologies, Inc.    (the “Company”) for the period ending March 31, 2018, we, Neil A. Schrimsher, President & Chief Executive Officer, and David K. Wells, 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/ David K. Wells
Neil A. Schrimsher
 
David K. Wells
President & Chief Executive Officer
 
Vice President-Chief Financial Officer & Treasurer
 
 
 
 
 
 
Date: April 27, 2018
 
 
 
 
 


[A signed original of this written statement required by Section 906 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.]