Applied Industrial Annual Report 2015

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FY2015 Annual Report · Applied Industrial

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BUILDING ON OUR STRENGTHS

2011 ANNUAL REPORT

APPLIED® AT A GLANCE

Applied Industrial Technologies is one of North America’s largest industrial distributors serving

Maintenance Repair Operations (MRO), Original Equipment Manufacturing (OEM), and Government

markets. Applied is an authorized source for a diverse range of products, including bearings, power

transmission components, ﬂ uid power components and systems, industrial rubber products, linear motion

components, tools, safety products, and general maintenance and mill supply products. The Company

also provides customized shop services for mechanical, fabricated rubber and ﬂ uid power products, as well

as services to meet storeroom management and maintenance training needs.

Headquarters: Cleveland, Ohio, USA

Operating Facilities: 474 in 48 U.S. states, 7 Canadian provinces, Puerto Rico and 13 Mexican states

E-Commerce: www.Applied.com

Distribution Centers: 7

Stock Keeping Units (SKUs) Available to Customers: More than 4 million

Product Manufacturers: More than 2,000

Stock Ticker Symbol: AIT, listed on the New York Stock Exchange

Employee Associates: 4,640

Data current as of June 30, 2011

About The Cover

Applied Industrial Technologies was founded in Cleveland, Ohio in 1923 with a single branch and two

employees. At that time, our primary business was selling replacement parts for cars and trucks. Today,

our service network includes more than 470 facilities throughout North America serving a spectrum of

industries - from Food to Primary Metals, Petrochemical to Aggregate/Mining, plus many more. Building

on our strengths of providing quality brands, industry know-how, technical knowledge, and application

expertise, we are poised for continued growth and success.

This report contains statements that are forward-looking, as that term is deﬁ ned by the Securities and Exchange

Commission in its rules, regulations and releases. Applied intends that such forward-looking statements be

subject to the safe harbors created thereby. All forward-looking statements are based on current expectations

regarding important risk factors, including those identiﬁ ed on pages 10 and 11 of this report and in our Annual

Report on Form 10-K for the ﬁ scal year ended June 30, 2011. Accordingly, actual results may differ materially from

those expressed in the forward-looking statements, and the making of such statements should not be regarded as

a representation by Applied or any other person that results expressed therein will be achieved.

LETTER TO OUR SHAREHOLDERS

BENJAMIN J. MONDICS, DAVID L. PUGH

Dear Shareholder:

increase in sales since ﬁ scal 2008 and resulted in an all-time high net income - - exceeding all

W e’re pleased to report that ﬁ scal 2011 was a record year that produced our highest percentage

debt, and we have made signiﬁ cant investments to assure further operating efﬁ ciencies in the future.

expectations. The changes we made in our operating fundamentals during the recession have

allowed us to take maximum advantage of a moderate market recovery. We have eliminated all

FINANCIAL RESULTS

Sales in ﬁ scal 2011 increased by 16.9% to a record $2.2 billion
from $1.9 billion in ﬁ scal 2010. Net income improved 46.8%
to a record $96.8 million, or $2.24 per share, from $65.9
million, or $1.54 per share, in ﬁ scal 2010. Cash provided from
operations for the year was a healthy $76.8 million.

Our SD&A as a percent of sales improved to 20.9% compared
to 21.4% last year. This improvement reﬂ ects the productivity
improvements we’ve continued to foster in a post-recession
climate and includes investments in our technology
infrastructure. Our current ratio (current assets to current
liabilities) remains strong at 2.9 to 1.

2011 FINANCIAL HIGHLIGHTS

• Achieved record sales of $2.2 billion

• Increased net income to a record $96.8

million or $2.24 per share

• Posted a gross proﬁ t margin of 27.7%

and an operating margin of 6.8%

• Returned $29.8 million to shareholders

in dividends

Applied Industrial Technologies, Inc. and Subsidiaries

FINANCIAL RESULTS (Continued)

We’re confident that our solid balance sheet positions us
for growth and that we’re delivering results that continue
to reward our shareholders. Our dedicated efforts
reflect a simple principle: Properly stress excellence and
all else will follow. It’s a focus that’s grounded in our
Four Cornerstones – Profitable Sales Growth, Margin
Enhancement, Asset Management and Cost Control.
These Cornerstones drive our continuous improvement
and make us more efficient, effective and accountable.
Accountability is ingrained in our associates at every
level - - for their personal success, for our customers’
success and for Applied’s success. Our strong
communication process assures that our associates
understand what is expected and allows them to identify
what training and resources are required to meet those
expectations.

Our sales increase for the year played out in concert with a
broad manufacturing upturn. Throughout the ﬁ rst half of
ﬁ scal 2011, we saw increased demand from the majority of
our industrial segments and double-digit growth in more
than half of them. This is especially pleasing considering that
the segments related to new construction, which have been
one of our traditional strengths, are still slow to recover.
Maintaining the agility to adapt to shifting markets will
remain a focus for us.

As our ﬁ scal year progressed, we continued to see growth
in manufacturing - - albeit at a slowing rate. The slowdown
that occurred in the spring was driven by some extraordinary
events, most notably the tragic earthquake and tsunami in
Japan and severe tornado activity across the U.S. South and
Midwest. In the wake of these catastrophes, our depth of
inventory and sourcing expertise saw our customers through
many challenges. Fortunately, we did not experience any
major disruptions to our own Japanese supply chain.

In addition to natural disasters, rising prices for oil,
chemicals, metals and other raw materials further hindered
economic growth. As a result, supplier price increases have
been more frequent and margins have remained a challenge.
Meeting the challenge, our gross proﬁ t margin increased to
27.7% in ﬁ scal 2011 from 27.2% in 2010, and our operating
margin of 6.8% showed strong improvement compared to
last year’s 5.8%.

For the second year in a row, our asset management efforts
provided excellent cash ﬂ ow and positioned us to capture
LIFO layer liquidation beneﬁ ts. We are very satisﬁ ed with
our efforts to balance our inventories, and we feel conﬁ dent
that our levels are now optimized to support current business
conditions. Combined with our record earnings, this focus
on asset management has allowed us to achieve excellent
return-on-assets results of 11.1% after tax.

Our dedicated efforts reﬂ ect a simple principle:
“Properly stress excellence and all else will follow.”

Net Sales
(Dollars in Billions)

Net Income Per Share
(Dollars)

Shareholders' Equity
(Dollars in Millions)

$2.5

$2.0

$1.5

$1.0

$0.5

$0.0

$2.09

$2.01

$2.21

$2.19

$2.24

$2.5

$1.92 $1.89

$2.0

$1.93

$1.54

*
$0.99

$1.5

$1.0

$0.5

$0.0

$633.6

$555.0

$502.1 $508.1

$451.0

$700

$600

$500

$400

$300

$200

$100

* The goodwill impairment charge in fiscal 2009
reduced net income per share by $0.54.

Applied Industrial Technologies, Inc. and Subsidiaries

Net Sales

(Dollars in Billions)

Net Income

(Dollars in Millions)

Net Income Per Share

(Dollars)

Shareholders' Equity

(Dollars in Millions)

Dividends Per Share

(Dollars)

$2.5

$2.0

$1.5

$1.0

$0.5

$0.0

$100

$80

$60

$40

$20

$2.5

$2.0

$1.5

$1.0

$0.5

$0.0

6 $

* The goodwill impairment charge in fiscal 2009

reduced net income by $23.0 million.

reduced net income per share by $0.54.

0 $

$700

$600

$500

$400

$300

$200

$100

$0.7

$0.6

$0.5

$0.4

$0.3

$0.2

$0.1

$0.0

02 03 04 05 06 07 08 09 10 11

BUILDING ON OUR STRENGTHS

During ﬁ scal 2011 we continued to build on our strengths
of providing quality brands, industry know-how, technical
knowledge, and application expertise. This strategic
approach has helped our ﬂ uid power business to become
the largest in North America - - and it has been a great
contributor to our overall success in 2011. This business
provides ﬂ uid power system integration; manifold design,
machining, and assembly; and the integration of hydraulics
with electronics for complete machine design. Applied
today has one of the largest teams of Certiﬁ ed Fluid Power
Specialists, Certiﬁ ed Electronic Control Specialists, and
Certiﬁ ed Fluid Power Mechanics and Technicians. This level
of expertise and service offering is our special edge in a
competitive marketplace. Our strong – and resilient – ﬂ uid
power business remains a solid building block for our future.

Our operations in Canada and Mexico were also notable
contributors in ﬁ scal 2011. We continue to point to Canada
as an area where we want to expand. Improvements in the
economy and acquisition landscape have heightened that
interest. In August 2010 we completed the purchase of SCS
Supply Group, a distributor of bearings, power transmission
and industrial components with locations in southern
Ontario. SCS established our presence in Ontario and opens
access to the major economic sector of Eastern Canada.
Most recently, we entered the Montreal market with the
acquisition of Chaines-Plus, a distributor of bearings, power
transmission, and related products.

Other ﬁ scal year 2011 acquisitions included the July 2010
purchase of UZ Engineered Products, which has a presence
in the government arena, and the May 2011 purchase of
Gulf Coast Bearing & Supply Co., a bearing and power
transmission distributor in south Texas. We continue to seek
acquisitions that will build on our strengths and expand our
product breadth, service expertise and geographic position.
While we are also on the lookout for potential acquisitions
abroad, we still feel Applied has tremendous opportunity for
growth in North America.

During the ﬁ rst half of the ﬁ scal year, we paid off $75 million
of debt as well as related cross-currency swap liabilities
of $12.8 million. We are presently debt free - - an action
that further improves our capacity to grow and invest in
the business. To that end, we are currently undertaking a
major investment in our information technology that holds
signiﬁ cant promise for improving our operations for years to
come. In October 2010, Applied embarked on an enterprise
resource planning (ERP) initiative to help transform the
company’s technology platforms and enhance our business
information and transaction systems to support future
growth. The project, which is called Genesis, includes the
engagement of our most experienced people. We are pleased
to report it is progressing both on-time and on-budget.

We anticipate a multi-year implementation of our new ERP
system, with certain of our Canadian businesses expected
to “go-live” by 2011 calendar year end, followed by a roll-
out to other North American businesses over the next two
years. We expect the new system will contribute to greater
productivity, enhanced proﬁ tability, improved visibility, and
more efﬁ cient overall operation of our business.

While we have exciting initiatives underway to support
future growth, we remain attentive to providing value to our
shareholders today. Applied shareholders beneﬁ ted through
dividend payments which totaled $29.8 million, or $0.70 per
share, over the past year. In April 2011, Applied increased
the quarterly dividend 12% to $0.19 per share. This follows
a 13% increase in July 2010. Our shareholders received
a total return of 43.8% on their investment during ﬁ scal
2011 and a compounded annual total return of 18.1% over
the past 10 years. In addition, during ﬁ scal 2011, Applied
purchased 189,600 shares of the company’s common stock
on the open market.

During ﬁ scal 2011 we continued to build on our strengths
of providing quality brands, industry know-how,
technical knowledge, and application expertise.

Applied Industrial Technologies, Inc. and Subsidiaries

INDUSTRY AND CUSTOMER RECOGNITION

Our high level of attention to customer service and the quality of our associates
has been recognized through numerous awards we’ve received over the course of
the ﬁ scal year. Once again, we were named to Selling Power magazine’s annual
list of “The 50 Best Companies to Sell For” in the U.S. For the third consecutive
year, Applied was the highest ranked distribution company on the list and ranked
third overall in the service category. We earned a Silver Performance Excellence
award from The Boeing Company as well as a Gold Supplier of the Year award from
Vulcan Materials Company for our strong standing in the areas of product quality,
service, support, ease of transaction and value. Most recently, Applied received
both Excellence and Innovation awards from Eastman Chemical Company for our
quality materials, on-time shipping, and our ability to improve their efﬁ ciency
and competitiveness. And, for the tenth time, Applied has received the annual
NorthCoast 99 award from the Employers’ Resource Council (ERC) for being a great
workplace for top talent in Northeast Ohio.

Our product suppliers play a critical role in our customer recognition and success.
We choose supplier partners for their commitment to high-quality products and
innovation. They help us introduce new technologies, provide training when
needed, and supply strategic input on future trends. In addition, our suppliers share
our philosophy of working together to create value for our customers. Every year we
recognize outstanding supplier achievements and their commitment to excellence.

We have tremendous pride in our accomplishments, and it stems from the fact that
we are a learning organization - - always striving to continuously improve and create
value. We encourage ongoing training and skills enhancement for our associates.
From computer and professional skills training to product training, our associates are
able to expand their knowledge base through varied training initiatives, including
in-house and e-learning product courses to stay abreast of the latest technology.

LOOKING AHEAD

The strength of our organization has enabled us to weather many storms
over the years and emerge stronger each time. As we look ahead, we remain
optimistic about our ability to seize opportunities for growth and proﬁ tability.
Applied today is strong, growing and well-positioned to meet the future
needs of its customers.

As we close the chapter on Applied’s ﬁ scal 2011, we wish to express our
gratitude to Stephen E. Yates who retired from our Board of Directors in
October 2010 after nine years of service. We also thank our associates,
customers, suppliers, and shareholders for their continued support.

David L. Pugh
Chairman & Chief Executive Ofﬁ cer

Benjamin J. Mondics
President & Chief Operating Ofﬁ cer

August 17, 2011

Applied Industrial Technologies, Inc. and Subsidiaries

A NOTE FROM DAVID PUGH

In April it was announced that I would
be retiring as Chairman & Chief
Executive Ofﬁ cer of Applied Industrial
Technologies and also stepping
down from the Board of Directors.
Personally, my career with Applied has
been a very gratifying period of my life.
I inherited a wonderful organization,
was given excellent mentoring, and
have been but a small part of moving
the company ahead. From the
moment I arrived at Applied, I stressed
the importance of cost control,
customer service, proﬁ table growth,
prudence in asset management,
and employee development; our
hardworking associates enthusiastically
followed suit.

By God’s grace, these efforts allow
me to depart on the heels of a
record earnings year from a company
which is debt free, has made good
investments for the future, and has a
solid management team in place. We
have taken the market capitalization
of Applied from $240 million in 1999
to $1.5 billion at June 30, 2011. Most
importantly, we have done this in
a manner which has gained us a
reputation for the utmost integrity by
our peers and our customers.

I want to personally thank all of our
associates for their loyalty and hard
work over the last 12-plus years. I
would also like to thank our customers,
our suppliers and our shareholders
whose support has brought the
company continued success. I could
not be more satisﬁ ed with what we
have accomplished together, and I
look forward to watching Applied rise
to even greater heights in the years
to come. With sincere appreciation, I
simply say, “Good-bye and God bless.”

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
With more than 4,600 associates across North America, Applied
Industrial Technologies (“Applied,” the “Company,” “We,” “Us”
or “Our”) is one of North America’s largest industrial distributors
serving MRO, OEM and Government markets. Applied is an
authorized source for a diverse range of products, including
bearings, power transmission components, fluid power
components and systems, industrial rubber products, linear
motion components, tools, safety products, and general
maintenance and mill supply products. The Company also
provides customized shop services for mechanical, fabricated
rubber and fluid power products, as well as services to meet
storeroom management and maintenance training needs. We
have a long tradition of growth dating back to 1923, the year our
business was founded in Cleveland, Ohio. At June 30, 2011,
business was conducted in the United States, Canada, Mexico
and Puerto Rico from 474 facilities.

When reviewing the discussion and analysis set forth below,
please note that the majority of SKUs we sell in any given year
were not sold in the prior year, resulting in the inability to
quantify certain commonly used comparative metrics analyzing
sales, such as changes in product mix and volume.

Our fiscal 2011 sales were $2.2 billion, an increase of $319.6
million or 16.9% compared to the prior year. Net sales from
acquired businesses added $40.8 million or 1.8% to the current
year. Gross margin increased to 27.7% from 27.2% in the prior
year. Our operating margin increased to 6.8% compared to the
prior year’s 5.8%. Our earnings per share was $2.24 versus
$1.54 in fiscal year 2010, an increase of 45.5%.

Our consolidated balance sheet remains strong. Shareholders’
equity is $633.6 million, up from $555.0 million at June 30,
2010. Working capital increased $56.7 million from June 30,
2010 to $404.2 million at June 30, 2011, driven by operations.
Our current ratio remains strong at 2.9 to 1 versus 2.3 to 1 in
fiscal year 2010.

Applied monitors several economic indices that have been key
indicators for industrial economic activity. These include the
Manufacturing Capacity Utilization (MCU) index 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. Our sales tend to lag the MCU on the
upswing by up to six months and move closer in alignment with
the declines.

These indices showed an improving economy during fiscal 2011
that slowed noticeably during our fiscal fourth quarter. The MCU
was 74.4 in June of 2011, up from 71.7 in June of 2010. The
ISM PMI was 55.3 in June of 2011, essentially flat with June of

2010 and down from its year-long high of 61.4 in February of
2011. The ISM PMI further declined in July 2011 to 50.9. We
believe that the U.S. industrial economy has settled into a slower
pace of growth which will continue into fiscal 2012.

YEAR ENDED JUNE 30, 2011 vs. 2010
The following table is included to aid in review of Applied’s
statements of consolidated income. The percent increase column
is comparative to the same period in the prior year.

Net Sales

Gross Profit

Selling, Distribution & Administrative

Operating Income

Net Income

Year Ended June 30,

As a % of Net Sales

2011

2010

100.0%

27.7%

20.9%

6.8%

4.4%

27.2%

21.4%

5.8%

3.5%

Percent
Increase

16.9%

18.9%

14.0%

37.0%

46.8%

Net sales in fiscal 2011 were $2.2 billion, which was $319.6
million or 16.9% above the prior year driven by improvements in
the industrial economy. Incremental net sales from companies
acquired in the year contributed approximately $40.8 million or
1.8%. Currency translation increased fiscal year sales by
approximately $16.3 million or 0.7%. In local currency, net sales
from our Canadian operations were up 23.1% from fiscal 2010,
including 8.4% from acquisitions. In local currency, net sales
from our Mexican operations were up 17.9%. The number of
selling days in fiscal 2011 was the same as in fiscal 2010.

Net sales of our Service Center Based Distribution segment
increased $234.3 million, or 15.2%, compared to fiscal year 2010
led by improvements in the industrial economy, with acquisitions
adding $40.8 million or 2.7%. Net sales of our Fluid Power
Businesses segment increased $85.4 million or 23.9%, driven by
improvements in the industrial economy.

The sales product mix for fiscal 2011 was 70.5% industrial
products and 29.5% fluid power products compared to 71.7%
industrial and 28.3% fluid power in the prior year.

At June 30, 2011, we had a total of 474 operating facilities in the
U.S., Canada and Mexico versus 455 at June 30, 2010. The
increase in operating facilities represents 11 new locations due to
acquisitions, the opening of 2 new locations, the impact of
redefining certain shop operations which added 11 locations, and
the merger of 5 locations with other locations.

Our gross profit margin increased to 27.7% in fiscal 2011 from
27.2% in fiscal 2010. LIFO benefits recorded during the year
totaled $5.3 million which provided an overall benefit in our gross
profit percent of 0.2%. This compares to a LIFO benefit of $23.5
million in fiscal 2010 which added 1.2% to gross profit. The
improvement in gross profit is attributable to higher point-of-sale
supplier purchasing incentives in the current year, the positive
impact on annual LIFO expense from the resumption of a more
normal level of supplier purchasing incentives based upon

Applied Industrial Technologies, Inc. and Subsidiaries 5

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)

volume, lower scrap expense and the positive impact on margins
from businesses acquired during the fiscal year.

Selling, distribution and administration expenses (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, legal, and facility related
expenses. SD&A increased $56.7 million or 14.0% during fiscal
2011 compared to the prior year, and as a percent of sales
decreased to 20.9% from 21.4% in fiscal 2010. Associate
compensation and benefits, including amounts tied to financial
performance, increased $27.4 million. Acquisitions added $18.4
million of SD&A compared to the prior year, including additional
amortization expense of $1.4 million. Incremental expenses
associated with the development of a new ERP platform totaled
$8.6 million. Foreign currency translation had an unfavorable
impact of $3.1 million in the year.

Operating income increased 37.0% to $150.8 million during
fiscal 2011 from $110.1 million during 2010. As a percent of
sales, operating income increased to 6.8% in fiscal 2011 from
5.8% in 2010. The $40.7 million increase in operating income
during fiscal 2011 primarily reflects higher sales levels, improved
gross profit margins and the impact of leverage on increased
sales. Operating income of both of our segments increased,
reflecting improved operating leverage on sales increases.
Operating income as a percentage of sales for the Service Center
Based Distribution segment increased to 6.5% in fiscal 2011 from
5.0% in fiscal 2010. The Fluid Power Businesses segment
operating income increased to 9.5% in fiscal 2011 from 7.5% in
fiscal 2010.

Interest expense, net, decreased $3.8 million during fiscal 2011
compared with the prior year. We repaid all of our outstanding
debt in fiscal 2011 which lowered interest expense.

Other (income) expense, net, represents certain non-operating
items of income and expense. This was $3.8 million of income in
fiscal 2011 compared to income of $0.4 million in fiscal 2010.
Current year includes $2.0 million of unrealized gains on
investments held by non-qualified deferred compensation trusts
and recognition of a $1.7 million gain from death benefits
received under two life insurance policies.

Income tax expense as a percent of income before taxes was
36.7% for fiscal 2011 and 37.2% for fiscal 2010. The net
decrease in the effective tax rate reflects higher income levels
earned in fiscal 2011 in foreign jurisdictions which have a lower
overall statutory rate than the U.S. as well as the reversal of a
valuation allowance no longer necessary. These factors were
offset somewhat by provision made for U.S. income tax on a
portion of undistributed earnings not considered permanently
reinvested in our Canadian subsidiaries. We expect our
comparable tax rate for fiscal 2012 to be in the range of 37.0%
to 38.0%.

6 Applied Industrial Technologies, Inc. and Subsidiaries

As a result of the factors addressed above, net income for fiscal
2011 increased $30.9 million or 46.8% from the prior year. Net
income per share increased at a comparable rate.

The number of Company associates was 4,640 at June 30, 2011
and 4,468 at June 30, 2010. The net associate increase year-
over-year is attributable primarily to acquisitions (net increase of
239 associates), partially offset by headcount reductions in pre-
existing operations.

YEAR ENDED JUNE 30, 2010 vs. 2009
Net sales in fiscal 2010 were $1.9 billion, which was 1.6% below
fiscal 2009. Incremental net sales from companies acquired
contributed approximately $25.3 million. Currency translation
increased fiscal year 2010 sales by approximately $11.7 million or
0.6%. In local currency our Canadian business was down 6.4%
from overall fiscal 2009 levels. Net sales from our Mexican
operations were up 3.4% in local currency in fiscal 2010. The
number of selling days in fiscal 2010 and 2009 were the same.

Within the Service Center Based Distribution segment, net sales
decreased $60.5 million or 3.8% compared to fiscal year 2009,
attributed to declines in the industrial economy. Within the Fluid
Power Businesses segment, net sales increased $30.5 million or
9.4%, including $23.1 million in incremental sales from
acquisitions. Sales to customers in high-tech industries led the
recovery in this segment.

The sales product mix for fiscal 2010 was 71.7% industrial
products and 28.3% fluid power products compared to 74.0%
industrial and 26.0% fluid power in the prior year. The shift in
mix to fluid power products in fiscal 2010 was driven by
incremental sales from the fiscal 2009 Fluid Power Resource, LLC
acquisition and strong increases in sales to customers in high-tech
industries.

At June 30, 2010, we had a total of 455 operating facilities in the
U.S., Canada and Mexico versus 464 at June 30, 2009. The net
reduction in operating facilities represents four new locations
offset by the merger or closure of locations.

Our gross profit margin increased to 27.2% in fiscal 2010 from
27.0% in fiscal 2009. LIFO benefits recorded during the year
totaled $23.5 million which provided an overall benefit in our
gross profit percent of 1.2%. These benefits more than offset
lower point-of-sale pricing and reduced supplier purchasing
incentives.

The Company uses the LIFO method of valuing U.S. inventories.
In fiscal 2010, we undertook an inventory management program
which resulted in a significant decrease of inventory from the
June 30, 2009 levels. The annual current cost reduction in U.S.
bearings and drives products inventory was $101.4 million. These
inventory reductions were targeted to reduce excess quantities of
certain products within our system and therefore had no negative
impact on customer service or order fulfillment.

Reductions in the levels of inventory purchases in fiscal 2010
resulted in significant reductions in supplier purchasing incentives
which flow through the income statement as inventory is sold to

customers. This negatively impacted gross profit margins.
Reductions in our inventory levels also resulted in the liquidation
of LIFO inventory quantities carried at lower costs prevailing in
prior years. The impact of these liquidations had a positive
impact on our gross profit margins in fiscal 2010.

The LIFO benefit recorded in fiscal 2010 was $23.5 million which
reduced our cost of goods sold and equated to $0.33 of earnings
per share. The overall LIFO reserves were reduced by the same
amounts. Total fiscal year 2010 LIFO benefits were recorded as
follows: $0.7 million in the first quarter, $1.8 million in the
second quarter, $4.8 million in the third quarter and $16.2
million in the fourth quarter.

If inventory levels had remained constant with the June 30, 2009
levels, instead of recording the benefit as described above, the
Company would have recorded LIFO expense of $19.2 million in
fiscal 2010. The overall impact of LIFO layer liquidations during
the fiscal year resulted in an improvement in gross profit of $42.7
million. LIFO layer liquidations recorded for fiscal year 2009
increased gross profit by $4.4 million.

Supplier purchasing incentives which flowed into the income
statement as inventory was sold decreased $8.0 million
from 2009.

SD&A decreased $5.2 million or 1.3% during fiscal 2010
compared to fiscal year 2009, and as a percent of sales remained
flat at 21.4% in both years. Acquisitions added $6.9 million of
SD&A compared to fiscal year 2009, including additional
amortization expense of $1.4 million. Associate compensation
and benefits, including amounts tied to financial performance,
were down $2.7 million year-over-year, as company-wide
reductions in workforce and deferral of replacements for normal
associate attrition were largely offset by increases in variable
compensation. Other SD&A costs were down $9.0 million
(excluding the impact of additional SD&A from companies
acquired and not included in the full prior period), primarily
reflecting cost cutting measures, and lower bad debt and
depreciation expenses, partially offset by unfavorable foreign
currency translation of approximately $2.2 million.

Operating income increased 51.8% to $110.1 million during
fiscal 2010 from $72.5 million during 2009. As a percent of
sales, operating income increased to 5.8% in fiscal 2010 from
3.8% in 2009. The $37.6 million increase in operating income
during fiscal 2010 primarily reflects the impact of a $36.6 million
goodwill impairment charge recognized in fiscal 2009. The
favorable impact of the LIFO benefits in fiscal 2010 offset lower
point-of-sale pricing and lower supplier purchasing incentives.
Operating income of both of our segments increased in fiscal
2010. Operating income as a percentage of sales for the Service
Center Based Distribution segment increased to 5.0% in fiscal
2010 from 4.7% in fiscal 2009, reflecting the impact of reduced
discretionary spending. The Fluid Power Businesses segment
operating income increased to 7.5% in fiscal 2010 from 5.8% in
fiscal 2009 due to improved sales volume largely to customers in

the high-tech industries, cost reduction measures and lower bad
debt expense.

Interest expense, net, increased $1.0 million during fiscal 2010
compared with the prior year. Lower interest rates on invested
cash led to a reduction in interest income of approximately
$0.8 million.

Other (income) expense, net, was $0.4 million of income in fiscal
2010 compared to expense of $2.3 million in fiscal 2009. Fiscal
2009 included $1.7 million in unrealized losses on investments
held by non-qualified deferred compensation trusts. The market
value of these investments recovered somewhat in fiscal 2010,
resulting in a $1.0 million unrealized gain.

Income tax expense as a percentage of income before taxes was
37.2% for fiscal 2010 and 35.8% for 2009. The lower effective
tax rate in fiscal 2009 was primarily due to the reversal of a
valuation allowance.

As a result of the factors addressed above, net income for fiscal
2010 increased $23.6 million or 55.9% from the prior year. Net
income per share increased at a comparable rate.

The number of Company associates was 4,468 at June 30, 2010
and 4,729 at June 30, 2009. The net associate reduction year-
over-year is attributable primarily to the economic slowdown and
reflects the impact of company-wide reductions in workforce and
deferral of replacements for normal associate attrition.

LIQUIDITY AND CAPITAL RESOURCES
Our primary source of capital is cash flow from operations,
supplemented as necessary by bank borrowings or other sources
of debt. At June 30, 2011, we have no outstanding borrowings,
whereas at June 30, 2010, we had $50.0 million outstanding on
our revolving credit facility and $25.0 million outstanding on
private placement borrowings. These facilities were drawn on
primarily to fund acquisitions. Management expects that our
existing cash, cash equivalents, funds available under the
revolving credit facility, cash provided from operations, and the
use of operating leases will be sufficient to finance normal
working capital needs in each of the countries we operate in,
payment of dividends, acquisitions, investments in properties,
facilities and equipment, and the purchase of additional
Company common stock. Management also believes that
additional long-term debt and line of credit financing could be
obtained based on the Company’s credit standing and financial
strength.

The Company’s working capital at June 30, 2011 was $404.2
million compared to $347.5 million at June 30, 2010. The
current ratio was 2.9 to 1 at June 30, 2011 and 2.3 to 1 at
June 30, 2010.

Applied Industrial Technologies, Inc. and Subsidiaries 7

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)

Net Cash Flows

The following table is included to aid in review of Applied’s statements of
consolidated cash flows; all amounts are in thousands.

consisting of capital associated with additional information
system technology equipment and infrastructure investments.
Depreciation for fiscal 2012 is expected to be in the range of
$11.5 million to $12.5 million.

Net Cash Provided by
(Used in):

Year Ended June 30,

2011

2010

2009

Share Repurchases

The Board of Directors has authorized the repurchase of shares of
the Company’s stock. These purchases may be made in open
market and negotiated transactions, from time to time,
depending upon market conditions. At June 30, 2011, we had
authorization to purchase an additional 647,600 shares.

In fiscal 2011, 2010 and 2009, we repurchased 189,600,
159,900 and 68,000 shares of the Company’s common stock,
respectively, at an average price per share of $32.09, $24.57 and
$17.80, respectively.

Borrowing Arrangements

The Company has a five-year committed revolving credit
agreement that expires in June 2012 which it intends to renew.
This agreement provides for unsecured borrowings of up to
$150.0 million. We have no borrowings outstanding under this
facility at June 30, 2011 (versus $50.0 million at June 30, 2010).
Unused lines under this facility, net of outstanding letters of
credit, total $143.1 million and are available to fund future
acquisitions or other capital and operating requirements.
Borrowings under this agreement would be at variable interest
rates tied to either LIBOR, prime, or the bank’s cost of funds.

We also have an uncommitted long-term financing shelf facility
which expires in February 2013 and enables us to borrow up to
$100.0 million with terms of up to fifteen years. We had no
outstanding borrowings under this facility at June 30, 2011.

The revolving credit facility and uncommitted shelf facility
contain restrictive covenants regarding liquidity, net worth,
financial ratios, and other covenants. At June 30, 2011, the
most restrictive of these covenants required that the Company
have consolidated income before interest, taxes, depreciation
and amortization at least equal to 300% of net interest
expense. At June 30, 2011, the Company was in compliance
with all covenants and expects to remain in compliance during
the terms of the agreements.

Operating Activities

$ 76,842

$184,324

$ 81,300

Investing Activities

Financing Activities

Exchange Rate Effect

(Decrease) Increase in Cash
and Cash Equivalents

(47,887)

(116,523)

2,883

(6,784)

(178,430)

(30,514)

1,109

28,502

(5,560)

$ (84,685)

$148,135

$ (74,188)

In fiscal 2011 and typical during periods of sales expansion,
cash generated from operations is invested in working capital,
particularly receivables and inventory. The most significant
factor in the spike in 2010 operating cash flows relates to the
fiscal 2010 inventory management program which by June 30,
2010 had resulted in a $101.4 million reduction in U.S. bearing
and drives products inventory amounts from the June 30, 2009
levels. These inventory reductions were targeted to reduce
excess quantities of certain products within our system.
Inventory increased in fiscal 2011 due to acquisitions, increased
business levels and some increases to compensate for an
increase in manufacturer lead times.

Net cash used by investing activities in fiscal 2011 included
$30.5 million for acquisitions and $20.4 million for capital
expenditures. Capital expenditures included $12.5 million
related to the ERP project (discussed further below). Net cash
used by investing activities was primarily used for capital
expenditures in fiscal 2010, whereas it was primarily used for
acquisitions in fiscal 2009. Capital expenditures consist
primarily of information technology equipment and building
improvements.

In fiscal 2011, we repaid $50.0 million under our revolving credit
facility, $25.0 million under our private placement debt and
$12.8 million related to the associated cross-currency swaps.
Additionally, we paid dividends of $29.8 million and repurchased
189,600 shares of treasury stock for $6.1 million. In fiscal 2010,
financing activities included dividends paid of $25.4 million,
repayment of a net $5.0 million on our revolving credit facility,
and $3.9 million to repurchase 159,900 shares of treasury stock.

ERP Project and Capital Expenditures

On October 1, 2010, Applied announced its selection of the SAP
software platform to help transform the Company’s technology
infrastructure and enhance its business information and
transaction systems for future growth. We expect capital
expenditures for this ERP project for all of fiscal 2012 to be in the
range of $14.0 million to $16.0 million. We expect SD&A
expenses associated with this project to be in the range of $16.5
million to $18.5 million in fiscal year 2012.

Other non-ERP capital expenditures for fiscal 2012 are
expected to be in the $10.0 million to $12.0 million range,

8 Applied Industrial Technologies, Inc. and Subsidiaries

CONTRACTUAL OBLIGATIONS
The following table shows the approximate value of the
Company’s contractual obligations and other commitments to
make future payments as of June 30, 2011 (in thousands):

Period Less
Than 1 yr

Total

Period
1-3 yrs

Period
4-5 yrs

Period

Over 5 yrs Other

Operating leases

$ 75,000

$23,200

$ 30,500 $16,000

$ 5,300

Planned funding of
postretirement
obligations

Unrecognized income
tax benefit liabilities,
including interest and
penalties

Total Contractual
Cash Obligations

61,500

4,400

10,100

10,000

37,000

1,700

$ 1,700

$138,200

$27,600

$ 40,600 $26,000

$ 42,300 $ 1,700

Purchase orders for inventory and other goods and services are
not included in our estimates as we are unable to aggregate the
amount of such purchase orders that represent enforceable and
legally binding agreements specifying all significant terms. The
previous table includes the gross liability for unrecognized
income tax benefits including interest and penalties in the
“Other” column as the Company is unable to make a reasonable
estimate regarding the timing of cash settlements with the
respective taxing authorities.

CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the
United States of America requires management to make
judgments, assumptions and estimates at a specific point in time
that affect the amounts reported in the consolidated financial
statements and disclosed in the accompanying notes. The
Business and Accounting Policies note to the consolidated
financial statements describes the significant accounting policies
and methods used in preparation of the consolidated financial
statements. Estimates are used for, but not limited to,
determining the net carrying value of trade accounts receivable,
inventories, recording self-insurance liabilities and other accrued
liabilities. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by
judgments, assumptions and estimates used in the preparation of
the consolidated financial statements.

LIFO Inventory Valuation and Methodology

Inventories are valued at the lower of cost or market, using the
last-in, first-out (LIFO) method for U.S. inventories, and the
average cost method for foreign inventories. We adopted the
link chain dollar value LIFO method for accounting for U.S.
inventories in fiscal 1974. Approximately 40% of our domestic
inventory dollars relate to LIFO layers added in the 1970s. The
excess of current cost over LIFO cost is $137.6 million as reflected
in our consolidated balance sheet at June 30, 2011. The
Company maintains five LIFO pools based on the following
product groupings: bearings, power transmission products,
rubber products, fluid power products and other products.

LIFO layers and/or liquidations are determined consistently year-
to-year. See the Inventories note to the consolidated financial
statements for further information.

Allowances for Slow-Moving and
Obsolete Inventories

We evaluate the recoverability of our slow-moving or obsolete
inventories at least quarterly. We estimate the recoverable cost
of such inventory by product type while considering factors such
as its age, historic and current demand trends, the physical
condition of the inventory, as well as assumptions regarding
future demand. Our ability to recover our cost for slow moving
or obsolete inventory can be affected by such factors as general
market conditions, future customer demand and relationships
with suppliers. Most of the products we hold in inventory have
long shelf lives, are not highly susceptible to obsolescence and
are eligible for return under various supplier return programs.

Allowances for Doubtful Accounts

We evaluate the collectibility of trade accounts receivable based
on a combination of factors. Initially, we estimate an allowance
for doubtful accounts as a percentage of net sales based on
historical bad debt experience. This initial estimate is adjusted
based on recent trends of certain customers and industries
estimated to be a greater credit risk, trends within the entire
customer pool and changes in the overall aging of accounts
receivable. While we have a large customer base that is
geographically dispersed, a general economic downturn in any of
the industry segments in which we operate could result in higher
than expected defaults, and therefore, the need to revise
estimates for bad debts. Accounts are written off against the
allowance when it becomes evident collection will not occur.

As of June 30, 2011 and 2010, our allowance for doubtful
accounts was 2.4% and 2.5% of gross receivables, respectively.
Our provision for losses on accounts receivable was $2.0 million,
$2.5 million and $4.5 million in fiscal 2011, 2010 and 2009,
respectively.

Goodwill and Intangibles

Goodwill is recognized as the amount by which the cost of an
acquired entity exceeds the net amount assigned to assets
acquired and liabilities assumed. As part of acquisition
accounting, we also recognize acquired intangible assets such as
customer relationships, vendor relationships, trade names, and
non-competition agreements apart from goodwill. Finite-lived
intangibles are evaluated for impairment when changes in
conditions indicate carrying value may not be recoverable. We
evaluate goodwill and indefinite-lived intangibles for impairment
at least annually. This evaluation requires significant judgment by
management, including estimated future operating results,
estimated future cash flows, the long-term rate of growth of our
business, and determination of an appropriate discount rate.
While we use available information to prepare the estimates and
evaluations, actual results could differ significantly. For example,
a worsening of economic conditions beyond those assumed in an

Applied Industrial Technologies, Inc. and Subsidiaries 9

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)

impairment analysis could impact the estimates of future growth
and result in an impairment charge in a future period. Any
resulting impairment charge could be viewed as having a material
adverse impact on our financial condition and results of
operations.

All of the goodwill remaining on our consolidated financial
statements is related to the Service Center Based Distribution
segment. We believe the fair value of this segment is well in
excess of its carrying value.

Self-Insurance Liabilities

We maintain business insurance programs with significant self-
insured retention covering workers’ compensation, business,
automobile, general product liability and other claims. We accrue
estimated losses using actuarial calculations, models and
assumptions based on historical loss experience. We maintain a
self-insured health benefits plan, which provides medical benefits
to employees electing coverage. We maintain a reserve for all
unpaid medical claims including those incurred but not reported
based on historical experience and other assumptions. Although
management believes that the estimated liabilities for self-
insurance are adequate, the estimates described above may not
be indicative of current and future losses. In addition, the
actuarial calculations used to estimate self-insurance liabilities are
based on numerous assumptions, some of which are subjective.
We will continue to adjust our estimated liabilities for self-
insurance, as deemed necessary, in the event that future loss
experience differs from historical loss patterns.

Pension and Other Postemployment
Benefit Plans

The measurement of liabilities related to pension plans and other
post-employment benefit plans is based on management’s
assumptions related to future events including interest rates,
return on pension plan assets, rate of compensation increases,
and healthcare cost trend rates. We evaluate these assumptions
and adjust them as necessary. Changes to these assumptions
could result in a material change to the Company’s pension
obligation causing a related increase or decrease in reported net
operating results in the period of change in the estimate. A 1%
point change would have the following effects (in thousands):

Effect of change in:

Discount rate on liability

Discount rate on net periodic benefit cost

Salary scale on liability

Salary scale on net periodic benefit cost

One-Percentage Point

Increase

$ (3,554)

(151)

1,900

328

Decrease

$ 4,049

158

(1,700)

(302)

A 1% change in the return on assets is not material since most of
the plans are non-qualified and unfunded.

Income Taxes

Deferred income taxes are recorded for estimated future tax
effects of differences between the bases of assets and liabilities

10 Applied Industrial Technologies, Inc. and Subsidiaries

for financial reporting and income tax purposes, giving
consideration to enacted tax laws. As of June 30, 2011, the
Company had recognized $46.7 million of net deferred tax
assets. This includes a $0.2 million valuation allowance
recorded related to estimated limitations in the deductibility of
certain expenses. Management believes that sufficient income
will be earned in the future to realize its deferred income tax
assets. The realization of these deferred tax assets can be
impacted by changes to tax laws, statutory tax rates and future
taxable income levels.

Income taxes on undistributed earnings of non-U.S. subsidiaries
are not accrued for the portion of such earnings management
considers to be permanently reinvested. At June 30, 2011,
undistributed earnings of non-U.S. subsidiaries considered
permanently reinvested totaled approximately $58.3 million for
which no provision for U.S income tax had been made. At June
30, 2011, undistributed earnings of non-U.S. subsidiaries not
considered permanently reinvested totaled $13.3 million for
which $2.8 million in U.S. income taxes were accrued and
charged to income tax expense during fiscal 2011.

CAUTIONARY STATEMENT UNDER PRIVATE
SECURITIES LITIGATION REFORM ACT
This Annual Report to Shareholders, including Management’s
Discussion and Analysis, contains statements that are forward-
looking based on management’s current expectations about the
future. Forward-looking statements are often identified by
qualifiers, such as “guidance,” “expect,” “believe,” “plan,”
“intend,” “will,” “should,” “could,” “would,” “anticipate,”
“estimate,” “forecast,” “may,” 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

instruments for speculative or trading purposes. We do not
currently have any outstanding derivative instruments.

Foreign Currency Exchange Rate Risk
Since we operate throughout North America and approximately
15% of our fiscal year 2011 net sales were generated outside the
United States, foreign currency exchange rates can impact our
financial position, results of operations and competitive position.
The financial statements of foreign subsidiaries are translated into
their U.S. dollar equivalents at end-of-period exchange rates for
assets and liabilities, while income and expenses are translated at
average monthly exchange rates. Translation gains and losses are
included as components of accumulated other comprehensive
income (loss) in consolidated shareholders’ equity. Transaction
gains and losses arising from fluctuations in currency exchange
rates on transactions denominated in currencies other than the
functional currency are recognized in the consolidated statements
of income as a component of other (income) expense, net.
Applied does not currently hedge the net investments in our
foreign operations.

Since the beginning of the fiscal year, the Canadian and
Mexican foreign exchange rates to the U.S. dollar increased by
10.5% and 6.9%, respectively. In the twelve months ended
June 30, 2011, we experienced foreign currency translation
gains, totaling $10.3 million, net of income tax, which were
included in accumulated other comprehensive income (loss).
We utilize a sensitivity analysis to measure the potential impact
on earnings based on a hypothetical 10% change in foreign
currency rates. A 10% strengthening from the levels at June
30, 2011 of the U.S. dollar relative to foreign currencies that
affect the Company would have resulted in a $1.8 million
decrease in net income for the year ended June 30, 2011. A
10% weakening from the levels at June 30, 2011 of the U.S.
dollar would have resulted in a $1.8 million increase in net
income for the year ended June 30, 2011.

Interest Rate Risk
We repaid the debt that was outstanding at June 30, 2010
during fiscal 2011, thus, we are not currently exposed to interest
rate fluctuations on outstanding debt. We do monitor third-party
depository institutions that hold our cash and cash equivalents,
primarily for safety of principal and secondarily for maximizing
yield on those funds. We diversify our cash and cash equivalents
among counterparties to minimize exposure to any of these
entities.

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; the
potential for product shortages if suppliers are unable to fulfill in
a timely manner increased demand in the economic recovery;
competitive pressures; our reliance on information systems; our
ability to implement our ERP system in a timely, cost-effective,
and competent manner, and to capture its planned benefits while
maintaining an adequate internal control environment; 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 and the transfer of manufacturing capacity to foreign
countries; our ability to retain and attract qualified sales and
customer service personnel; our ability to identify and complete
acquisitions, integrate them effectively, and realize their
anticipated benefits; the variability and timing 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;
organizational changes within the Company; the volatility of our
stock price and the resulting impact on our consolidated financial
statements; risks related to legal proceedings to which we are a
party; adverse regulation and legislation, including potential
changes in tax regulations (e.g., those affecting the use of the
LIFO inventory accounting method and the taxation of foreign-
sourced income); and the occurrence of extraordinary events
(including prolonged labor disputes, natural events and acts of
God, terrorist acts, 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 more fully throughout our “Management’s
Discussion and Analysis” 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, 2011.

QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Our market risk is impacted by changes in foreign currency
exchange rates and to a lesser extent by changes in interest rates.
We occasionally utilize derivative instruments as part of our overall
financial risk management policy, but do not use derivative

Applied Industrial Technologies, Inc. and Subsidiaries 11

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

Year Ended June 30,
Net Sales
Cost of Sales
Gross Profit
Selling, Distribution and Administrative, including depreciation
Goodwill Impairment
Operating Income
Interest Expense
Interest Income
Other (Income) Expense, net
Income Before Income Taxes
Income Tax Expense
Net Income
Net Income Per Share - Basic
Net Income Per Share - Diluted

See notes to consolidated financial statements.

2011
$ 2,212,849
1,599,739
613,110
462,347

150,763
2,081
(413)
(3,793)
152,888
56,129
96,759
2.28
2.24

$
$
$

2010
$1,893,208
1,377,486
515,722
405,672

110,050
5,738
(280)
(425)
105,017
39,114
65,903
1.56
1.54

$
$
$

2009
$ 1,923,148
1,403,138
520,010
410,912
36,605
72,493
5,523
(1,099)
2,255
65,814
23,554
42,260
1.00
0.99

$
$
$

Applied Industrial Technologies, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
(In thousands)

June 30,
Assets

Current assets

Cash and cash equivalents
Accounts receivable, less allowances of $7,016 and $6,379
Inventories
Other current assets

Total current assets
Property - at cost

Land
Buildings
Equipment, including computers and software

Total Property - at cost

Less accumulated depreciation

Property - net
Intangibles, net
Goodwill
Deferred tax assets
Other assets

Total Assets

Liabilities

Current liabilities

Accounts payable
Short-term debt
Compensation and related benefits
Other current liabilities

Total current liabilities
Postemployment benefits
Other liabilities

Total Liabilities

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
Additional paid-in capital
Income retained for use in the business
Treasury shares - at cost (11,611 and 11,837 shares)
Accumulated other comprehensive income (loss)

Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity

See notes to consolidated financial statements.

2011

2010

91,092
290,751
204,066
33,005
618,914

10,428
73,399
129,117
212,944
143,930
69,014
89,551
76,981
43,447
17,024
$ 914,931

$ 108,509

65,413
40,766
214,688
47,730
18,950
281,368

10,000
148,307
668,421
(198,224)
5,059
633,563
$ 914,931

$ 175,777
246,402
173,253
23,428
618,860

10,569
73,099
113,593
197,261
138,790
58,471
85,916
63,405
48,493
16,375
$ 891,520

$ 94,529
75,000
50,107
51,696
271,332
48,560
16,589
336,481

10,000
143,185
601,370
(193,468)
(6,048)
555,039
$ 891,520

Applied Industrial Technologies, Inc. and Subsidiaries

STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)

Year Ended June 30,
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:

2011

2010

2009

$ 96,759

$ 65,903

$ 42,260

Goodwill impairment
Deferred income taxes
Depreciation and amortization of property
Amortization of intangibles
Provision for losses on accounts receivable
Amortization of stock options and appreciation rights
Unrealized foreign exchange transaction (gains) losses
Other share-based compensation expense
Gain on sale of property

Changes in assets and liabilities, net of acquisitions:

Accounts receivable
Inventories
Other operating assets
Accounts payable
Other operating liabilities

Net Cash provided by Operating Activities
Cash Flows from Investing Activities
Property purchases
Proceeds from property sales
Net cash paid for acquisition of businesses, net of cash acquired of $168 and $185 in 2011
and 2009, respectively
Other
Net Cash used in Investing Activities
Cash Flows from Financing Activities
Net short-term (repayments) borrowings under revolving credit facility
(Repayments) borrowings under revolving credit facility originally classified as long-term
Long-term debt repayment
Settlements of cross-currency swap agreements
Purchases of treasury shares
Dividends paid
Excess tax benefits from share-based compensation
Exercise of stock options and appreciation rights
Other
Net Cash (used in) provided by Financing Activities
Effect of Exchange Rate Changes on Cash
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year

Supplemental Cash Flow Information

Cash paid during the year for:

Income taxes
Interest

See notes to consolidated financial statements.

4,784
11,234
11,382
2,029
2,473

3,379
(765)

(36,271)
(21,197)
(11,185)
12,926
1,294
76,842

(20,431)
1,326

(30,504)
1,722
(47,887)

(50,000)
(25,000)
(12,752)
(6,085)
(29,751)
6,404
661

(116,523)
2,883
(84,685)
175,777
$ 91,092

2,408
11,465
10,151
2,508
3,020
(4)
2,361
(198)

(48,578)
83,497
17,408
13,566
20,817
184,324

(7,216)
532

36,605
(16,648)
12,736
9,655
4,540
3,702
806
800
(320)

63,929
(20,581)
6,858
(38,124)
(24,918)
81,300

(6,988)
757

(100)

(172,199)

(6,784)

(178,430)

(5,000)

5,000
50,000

(3,929)
(25,416)
2,492
1,339

(30,514)
1,109
148,135
27,642
$175,777

(1,210)
(25,378)
802
408
(1,120)
28,502
(5,560)
(74,188)
101,830
$ 27,642

$ 47,251
2,248

$ 31,179
5,195

$ 43,081
5,265

Applied Industrial Technologies, Inc. and Subsidiaries

STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(In thousands, except per share amounts)

For the Years Ended June 30, 2011, 2010 and 2009
Balance at July 1, 2008

Net income
Unrealized loss on cash flow hedges, net of income tax of $(457)
Reclassification of interest expense into income, net of

income tax of $264

Unrealized loss on investment securities available for sale, net of income

tax of $(105)

Reclassification of pension and postemployment expense into income,

net of income tax of $691

Pension and postemployment adjustment, net of income tax of $(1,154)
Foreign currency translation adjustment, net of income tax of $(3,793)

Total comprehensive income

Cash dividends - $0.60 per share
Purchases of common stock for treasury
Treasury shares issued for:

Exercise of stock options and appreciation rights
Deferred compensation plans

Compensation expense - stock options and appreciation rights
Amortization of restricted common stock compensation
Other

Balance at June 30, 2009

Net income
Unrealized loss on cash flow hedges, net of income tax of $(365)
Reclassification of interest expense into income, net of

income tax of $535

Unrealized loss on investment securities available for sale, net of income

tax of $(19)

Reclassification of pension and postemployment expense into income,

net of income tax of $677

Pension and postemployment adjustment, net of income tax of $(1,467)
Foreign currency translation adjustment, net of income tax of $(32)

Total comprehensive income

Cash dividends - $0.60 per share
Purchases of common stock for treasury
Treasury shares issued for:

Exercise of stock options and appreciation rights
Deferred compensation plans

Compensation expense - stock options and appreciation rights
Amortization of other share-based compensation
Other

Balance at June 30, 2010

Net income
Current period cash flow hedging activity, net of income tax of $(82)
Reclassification of interest expense into income, net of income

tax of $116

Unrealized loss on investment securities available for sale, net of

income tax of $(31)

Reclassification of pension and postemployment expense into income,

net of income tax of $850

Pension and postemployment adjustment, net of

income tax of $(435)

Foreign currency translation adjustment, net of income tax of $(264)

Total comprehensive income

Cash dividends - $0.70 per share
Purchases of common stock for treasury
Treasury shares issued for:

Exercise of stock options and appreciation rights
Deferred compensation plans

Compensation expense - stock options and appreciation rights
Amortization of other share-based compensation
Other

Balance at June 30, 2011

See notes to consolidated financial statements.

Shares of
Common
Stock
Outstanding
42,290

Common
Stock

Additional
Paid-in
Capital
$ 10,000 $ 133,078

Income
Treasury
Retained
Shares-
for Use in
at Cost
the Business
$ 543,692 $ (190,944)

42,260

(68)

73
18

(29)
42,284

10,000

(25,378)

560,574
65,903

(1,210)

1,007
300

(671)
(191,518)

47
110
3,701
391
(432)
136,895

(160)

214
11

27
42,376

10,000

(25,416)

(3,929)

1,372
187

309
601,370
96,759

420
(193,468)

1,499
68
3,020
2,106
(403)
143,185

Accumulated
Other
Comprehensive
Income (Loss)
$ 6,249

(569)

437

(177)

Total
Shareholders’
Equity
$ 502,075
42,260
(569)

437

(177)

1,127

(1,883)
(13,033)

(7,849)

(738)

873

(27)

1,104

(2,393)
2,982

(6,048)

(184)

200

(53)

(1,883)
(13,033)
28,162
(25,378)
(1,210)

1,054
410
3,701
391
(1,103)
508,102
65,903
(738)

873

(27)

1,104

(2,393)
2,982
67,704
(25,416)
(3,929)

2,871
255
3,020
2,106
326
555,039
96,759
(184)

200

(53)

1,364

(495)

10,275

(29,751)

(6,085)

706
119

504
$ 668,421 $ (198,224)

$ 5,059

10,275
107,866
(29,751)
(6,085)

597
221
2,473
3,158
45
$ 633,563

(190)

379
6

31
42,602

(109)
102
2,473
3,158
(502)
$10,000 $148,307

Applied Industrial Technologies, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 1: BUSINESS AND ACCOUNTING POLICIES

Business

Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is one of North America’s largest industrial
distributors serving Maintenance Repair Operations (MRO), Original Equipment Manufacturing (OEM) and Government markets.
Applied is an authorized source for a diverse range of products, including bearings, power transmission components, fluid power
components and systems, industrial rubber products, linear motion components, tools, safety products, and general maintenance
and mill supply products. The Company also provides customized shop services for mechanical, fabricated rubber and fluid power
products, as well as services to meet storeroom management and maintenance training needs. Although the Company does not
generally manufacture the products it sells, it does assemble and repair certain products and systems.

Consolidation

The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries.
Intercompany transactions and balances have been eliminated in consolidation. The financial results of the Company’s Canadian
and Mexican subsidiaries are included in the consolidated financial statements for the twelve months ended May 31.

Foreign Currency

The financial statements of the Company’s Canadian and Mexican subsidiaries are measured using local currencies as their
functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are
translated at average exchange rates. Translation gains and losses are included as components of accumulated other comprehensive
income (loss) in consolidated shareholders’ equity. Gains and losses resulting from transactions denominated in foreign currencies
are included in the statements of consolidated income as a component of other (income) expense, net.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during
the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to
be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.

Marketable Securities

The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a
non-qualified compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading
securities, and reported at fair value based on quoted market prices. Unrealized gains and losses are recorded in other (income)
expense, net in the statements of consolidated income and reflect changes in the fair value of the investments during the period.

Concentration of Credit Risk

The Company has a broad customer base representing many diverse industries across North America. As such, the Company does
not believe that a significant concentration of credit risk exists in its accounts receivable.

The Company’s cash and cash equivalents include deposits with commercial banks and investments in money market funds. While
Applied monitors the creditworthiness of these commercial banks and institutions, a crisis in the U.S., Canadian or Mexican financial
systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all
monies are available to the Company upon demand.

Allowances for Doubtful Accounts

The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company
estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial
estimate is adjusted based on recent trends of customers and industries estimated to be greater credit risks, trends within the entire
customer pool and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it
becomes evident collection will not occur. While the Company has a large customer base that is geographically dispersed, a general
economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults,
and therefore, the need to revise estimates for bad debts.

16 Applied Industrial Technologies, Inc. and Subsidiaries

Inventories

Inventories are valued at the lower of cost or market, using the last-in, first-out (LIFO) method for U.S. inventories and the average
cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S.
inventories in fiscal 1974. At June 30, 2011, approximately 40% of the Company’s domestic inventory dollars relate to LIFO layers
added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power
transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined
consistently year-to-year.

The Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the
recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the
physical condition of the inventory as well as assumptions regarding future demand. The Company’s ability to recover its cost for
slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and
relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to
obsolescence and are eligible for return under various supplier return programs.

Supplier Purchasing Programs

The Company enters into agreements with certain suppliers providing for inventory purchase incentives. The Company’s inventory
purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s
fiscal year end or the supplier’s year end. Incentives are received in the form of cash or credits against purchases upon attainment of
specified purchase volumes and are received monthly, quarterly or annually. The incentives are generally a specified percentage of
the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease
based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based
upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases
expected during the life of the program. Each supplier program is analyzed, reviewed and reconciled each quarter as information
becomes available to determine the appropriateness of the amount estimated to be received. Upon program completion,
differences between estimates and actual incentives subsequently received have not been material. Benefits under these supplier
purchasing programs are recognized under the Company’s LIFO inventory accounting method as a reduction of cost of sales when
the inventories representing these purchases are recorded as cost of sales. Accrued incentives expected to be settled as a credit
against purchases are reported on the consolidated balance sheet as an offset to amounts due to the related supplier.

Property and Related Depreciation and Amortization

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets and is included in selling, distribution and administrative expenses in the accompanying statements of consolidated
income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the
lease if a shorter period, and equipment is depreciated over three to eight years. The Company capitalizes internal use software
development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal
use. Amortization is recorded as the software is placed in service on a straight-line basis over the estimated useful life of the
software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on the
consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes
in circumstances indicate that the recorded value cannot be recovered from undiscounted future cash flows. Impairment losses, if
any, would be measured based upon the difference between the carrying amount and the fair value of the assets.

Goodwill and Intangible Assets

Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities
assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in
conditions indicate an evaluation should be completed. These conditions could include a significant change in the business climate,
legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. The
Company utilizes discounted cash flow models and market multiples for comparable businesses to determine the fair value of
reporting units. Evaluating impairment requires significant judgment by management, including estimated future operating results,
estimated future cash flows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While
the Company uses available information to prepare the estimates and evaluations, actual results could differ significantly.

The Company recognizes acquired intangible assets such as customer relationships, trade names, vendor relationships, and non-
competition agreements apart from goodwill. Customer relationship intangibles are amortized using the sum-of-the-years-digits
method over estimated useful lives consistent with assumptions used in the determination of their value. Amortization of all other
finite-lived intangible assets is computed using the straight-line method over the estimated period of benefit. The Company also
maintains intangible assets with indefinite lives which are not amortized. Amortization of intangible assets is included in selling,
distribution and administrative expenses in the accompanying statements of consolidated income. Intangible assets with finite lives are
reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. Intangible assets with indefinite
lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed.

Applied Industrial Technologies, Inc. and Subsidiaries 17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share amounts)

Self-Insurance Liabilities

The Company maintains business insurance programs with significant self-insured retention covering workers’ compensation,
business, automobile, general product liability and other claims. The Company accrues estimated losses including those incurred but
not reported using actuarial calculations, models and assumptions based on historical loss experience. The Company maintains a
self-insured health benefits plan, which provides medical benefits to employees electing coverage under the plan. The Company
estimates its reserve for all unpaid medical claims including those incurred but not reported based on historical experience, adjusted
as necessary based upon management’s reasoned judgment.

Revenue Recognition

Sales are recognized when the sales price is fixed, collectibility is reasonably assured and the product’s title and risk of loss is
transferred to the customer. Typically, these conditions are met when the product is shipped to the customer. The Company
charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net sales.
The Company reports its sales net of actual sales returns and the amount of reserves established for anticipated sales returns based
on historical rates. Sales tax collected from customers is excluded from net sales in the accompanying statements of consolidated
income.

Shipping and Handling Costs

The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and
administrative expenses in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and
administrative expenses were approximately $15,400, $14,400 and $15,400 for the fiscal years ended June 30, 2011, 2010 and
2009, respectively.

Income Taxes

Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes
are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and
income tax purposes, giving consideration to enacted tax laws. Uncertain tax positions meeting a more-likely-than-not recognition
threshold are recognized in accordance with the Income Taxes topic of the Accounting Standards Codification (ASC). The Company
recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes.

Share-Based Compensation

Share-based compensation represents the cost related to share-based awards granted to associates under the 2007 Long-Term
Performance Plan (the 2007 Plan). The Company measures share-based compensation cost at grant date, based on the estimated
fair value of the award and recognizes the cost over the associate requisite service period. Non-qualified stock options and stock
appreciation rights (SARs) are granted with an exercise price equal to the closing market price of the Company’s common stock at
the date of grant and the fair values are determined using a Black-Scholes option pricing model, which incorporates assumptions
regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. SARs and stock
option awards generally vest over four years of continuous service and have 10-year contractual terms. The fair value of restricted
stock awards, restricted stock units (RSUs), and performance shares are based on the closing market price of Company common
stock on the grant date.

Treasury Shares

Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of
shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the
cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from
additional paid-in capital.

NOTE 2: BUSINESS COMBINATIONS

Results of operations of acquired businesses are included in the accompanying consolidated financial statements from their
respective acquisition dates based on the Company’s consolidation policy.

Fluid Power Resource Acquisition

On August 29, 2008, Applied acquired Fluid Power Resource, LLC and the following fluid power distribution businesses: Bay
Advanced Technologies, Carolina Fluid Components, DTS Fluid Power, Fluid Tech, Hughes HiTech, Hydro Air, and Power Systems
(collectively “FPR”). Applied acquired certain assets and assumed certain specified liabilities of FPR for an aggregate cash purchase
price of $166,000.

18 Applied Industrial Technologies, Inc. and Subsidiaries

The acquired businesses included 19 locations and the associated assembled workforce. This acquisition is part of the Fluid Power
Businesses segment whose base business is distributing fluid power components, assembling fluid power systems, performing
equipment repair, and offering technical advice to customers. This acquisition increased the Company’s capabilities in the following
areas: fluid power system integration; manifold design, machining, and assembly; and the integration of hydraulics with electronics.

The excess of the purchase price over the estimated fair values was assigned to goodwill and is expected to be deductible for tax
purposes. The goodwill was written off as part of an impairment charge in the fourth quarter of fiscal 2009.

The table below presents summarized unaudited pro forma results of operations as if FPR had been acquired effective at the
beginning of the fiscal year ended June 30, 2009. No pro forma results are presented for fiscal year 2011 or 2010 as the results of
the acquired company are included in the actual results.

(unaudited)

Net sales
Income before income taxes
Net income
Net income per share – diluted

Other Acquisitions

2009

$1,962,882
66,357
42,601
1.00

The Company acquired the following distributors to complement and extend its business over a broader geographic area. Results of
operations for the acquired businesses below are all part of the Service Center Based Distribution segment. The results of operations
for these acquisitions are not material for any year presented.

In May 2011, the Company acquired Gulf Coast Bearing & Supply Co., a full line bearing and power transmission distributor, located
in the U.S. In July 2010, the Company acquired UZ Engineered Products, a distributor of industrial supply products for maintenance,
repair, and operational needs, in the government and commercial sectors, throughout the U.S. and Canada. In August 2010, the
Company acquired SCS Supply Group, a distributor of bearings, power transmission components, electrical components, fluid power
products and industrial supplies in Canada. In December 2008, the Company acquired certain assets of Cincinnati Transmission
Company, a distributor of power transmission and motion control products as well as gearbox repair solutions located in the U.S.

NOTE 3: INVENTORIES

Inventories consist of the following:

June 30,

U.S. inventories at current cost

Foreign inventories at average cost

Less: Excess of current cost over LIFO cost for U.S. inventories

Inventories on consolidated balance sheets

2011

$280,875

60,837

341,712

137,646

$204,066

2010

$268,021

48,403

316,424

143,171

$173,253

In fiscal 2011 and 2010, reductions in certain U.S. inventories resulted in the liquidation of LIFO inventory quantities carried at lower
costs prevailing in prior years. As a result, LIFO benefits reduced cost of goods sold by $5,300 in fiscal 2011 and $23,500 in fiscal 2010.
The LIFO reserves were reduced by the same amounts. If inventory levels had remained constant with the prior year’s levels, instead of
recording these benefits, the Company would have recorded LIFO expense of $7,000 in fiscal 2011 and $19,200 in fiscal 2010.
Therefore, the overall impact of LIFO layer liquidations increased gross profit by $12,300 in fiscal 2011 and $42,700 in fiscal 2010.

NOTE 4: GOODWILL AND INTANGIBLES

The changes in the carrying amount of goodwill for the Service Center Based Distribution segment for the years ended June 30,
2011 and 2010 is as follows:

Balance at July 1, 2009
Other, primarily currency translation

Balance at June 30, 2010

Goodwill acquired during the year
Other, primarily currency translation

Balance at June 30, 2011

$ 63,108
297

63,405

11,700
1,876

$ 76,981

Applied Industrial Technologies, Inc. and Subsidiaries 19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share amounts)

At June 30, 2011, accumulated goodwill impairment losses subsequent to fiscal year 2002, totaled $36,605 and related to the Fluid
Power Businesses segment.

During the fourth quarter of fiscal 2009, the Company performed an interim goodwill impairment test since operating results and
expected future market conditions had deteriorated from the annual goodwill impairment testing performed during the third quarter
of fiscal 2009. The fair value of the Fluid Power Businesses segment was estimated based on discounted cash flows. The Company
utilized information from the annual financial planning process completed in the fourth quarter of fiscal 2009, reviewed external
economic forecasts published in the fourth quarter of fiscal 2009, considered continuing declines in key economic indices that
correlate with the business, and considered the continuing declines in sales and operating results experienced in the third and fourth
quarters of fiscal 2009 compared to previous forecasts and projections. The Company deemed the business climate to have
dramatically changed and adjusted the longer term outlook for recovery of operating results to reflect management’s belief that it
would take longer and be more gradual than initially forecast. As a result of this interim test, the Company determined that all of
the goodwill associated with the Fluid Power Businesses segment was impaired as of June 30, 2009. Virtually all of the goodwill in
the Fluid Power Businesses segment related to the FPR acquisition in August 2008. Therefore, in accordance with the Intangibles –
Goodwill and Other topic of the ASC, the Company recognized an impairment charge of $36,605 for goodwill in the fourth quarter
of fiscal 2009, which decreased net income by $23,000 and earnings per share by $0.54. In addition, the Company performed an
impairment analysis of its intangible assets and noted no further impairment.

Intangibles consist of the following:

June 30, 2011

Finite-Lived Intangibles:

Customer relationships

Trade names

Vendor relationships

Non-competition agreements

Total Finite-Lived Intangibles

Indefinite-Lived Trade Names

Total Intangibles

June 30, 2010

Customer relationships
Trade names
Vendor relationships
Non-competition agreements

Total Intangibles

Amount

$ 78,084

25,944

14,211

5,127

123,366

1,290

$124,656

Amount

$ 65,324
25,648
13,842
4,394

$109,208

Accumulated
Amortization

Net
Book Value

$23,111

5,666

3,696

2,632

35,105

$35,105
Accumulated
Amortization

$ 15,328
3,777
2,511
1,676

$ 23,292

$54,973

20,278

10,515

2,495

88,261

1,290

$89,551
Net
Book Value

$ 49,996
21,871
11,331
2,718

$ 85,916

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

Finite-lived intangible assets acquired in fiscal 2011 had original weighted-average useful lives of 18 years. These consist of
customer relationships of $12,100 (19-year weighted-average useful life), finite-lived trade names of $267 (3-year weighted-average
useful life), and non-competition agreements of $554 (4-year weighted-average useful life). Indefinite-lived trade names valued at
$1,290 were also acquired in fiscal 2011.

Amortization of intangibles totaled $11,382, $10,151 and $9,655 in fiscal 2011, 2010 and 2009, respectively, and is included in
selling, distribution and administrative expenses in the statements of consolidated income. Amortization expense based on the
Company’s intangible assets as of June 30, 2011 is estimated to be $10,900 for 2012, $10,200 for 2013, $8,800 for 2014, $8,200
for 2015 and $7,600 for 2016.

NOTE 5: DEBT

While the Company had no outstanding borrowings as of June 30, 2011, the amounts outstanding as of June 30, 2010 consisted of:

June 30,
7.98% Private placement debt, paid at maturity in November 2010
Revolving credit facility
Total outstanding debt
Less: Payable within one year
Long-term portion of outstanding debt

20 Applied Industrial Technologies, Inc. and Subsidiaries

2010
$25,000
50,000
75,000
75,000
0

The Company has a revolving credit facility with a group of banks expiring in June 2012. This agreement provides for unsecured
borrowings of up to $150,000. Fees on this facility range from 0.07% to 0.15% per year on the average amount of the total
revolving credit commitments during the year. Borrowings under this agreement carry variable interest rates tied to either LIBOR,
prime, or the bank’s cost of funds at the Company’s discretion. Unused lines under this facility, net of outstanding letters of credit
of $6,854 to secure certain insurance obligations, totaled $143,146 at June 30, 2011 and are available to fund future acquisitions or
other capital and operating requirements. As of June 30, 2011, the Company had no outstanding borrowings on this revolving
credit facility. At June 30, 2010, there was $50,000 outstanding on this facility with a weighted-average interest rate (including the
associated interest rate swap) of 3.3%.

The Company has an agreement with Prudential Insurance Company for an uncommitted shelf facility that enables the Company to
borrow up to $100,000 in additional long-term financing with terms of up to fifteen years. The agreement expires in February
2013. There were no borrowings under this agreement at June 30, 2011.

The revolving credit facility and uncommitted shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios,
and other covenants. At June 30, 2011, the most restrictive of these covenants required that the Company have consolidated
income before interest, taxes, depreciation and amortization at least equal to 300% of net interest expense. At June 30, 2011, the
Company was in compliance with all covenants.

NOTE 6: RISK MANAGEMENT ACTIVITIES

Derivative instruments held by the Company as of June 30, 2010 were settled in the first half of fiscal 2011.

The Company is exposed to market risks, primarily resulting from changes in foreign currency exchange rates. To manage this risk,
the Company may enter into derivative transactions pursuant to the Company’s written policy. Derivative instruments are recorded
on the consolidated balance sheet at their fair value and changes in fair value are recorded each period in current earnings or
comprehensive income. The Company does not hold or issue derivative financial instruments for trading purposes. The criteria for
designating a derivative as a hedge include the assessment of the instrument’s effectiveness in risk reduction, matching of the
derivative instrument to its underlying transaction, and the probability that the underlying transaction will occur.

In fiscal 2011, the Company settled cross-currency swap agreements outstanding since November 2000, and an interest rate swap
outstanding since September 2008.

The following table summarizes the fair value of derivative instruments as recorded in other current liabilities in the consolidated
balance sheet as of June 30, 2010 (there are no amounts outstanding as of June 30, 2011):

June 30,

Derivatives designated as hedging instruments:

Cross-currency swap
Interest rate swap

Total derivatives designated as hedging instruments

Derivative not designated as a hedging instrument – cross-currency swap

Total Derivatives

2010

$ 8,728
316

9,044

2,182

$11,226

The following table summarizes the effects of derivative instruments on income and other comprehensive income (OCI) for the years
ended June 30, 2011, 2010 and 2009 (amounts presented exclude any income tax effects):

Derivatives in Cash Flow
Hedging Relationships

Amount of Gain (Loss) Recognized in OCI on
Derivatives (Effective Portion)

Amount of Loss Reclassified from Accumulated OCI into
Income (Effective Portion), Included in Interest Expense

Cross-currency swap

Interest rate swap

Total

Derivative Not Designated
as Hedging Instrument

Cross-currency swap

2011

2010

$(2,039)

(343)

$(2,382)

2009

$ 3,790

(1,381)

$ 2,409

2011

2010

2009

$ (316)

$ (1,408)

$ (701)

Amount of Gain (Loss) Recognized on Derivative,
Included in Other (Income) Expense, net

2011

$(368)

2010

$ (510)

2009

$ 947

Applied Industrial Technologies, Inc. and Subsidiaries 21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share amounts)

NOTE 7: FAIR VALUE MEASUREMENTS

Financial assets and liabilities measured at fair value on a recurring basis are as follows:

Fair Value Measurements

Quoted Prices in Active
Markets for Identical
Instruments
Level 1

Recorded Value

Significant Other
Observable Inputs
Level 2

Significant
Unobservable Inputs
Level 3

2011

2010

2011

2010

2011

2010

2011

2010

June 30,

Assets:

Marketable securities

$10,881

$ 8,592

$10,881

$8,592

Liabilities:

Cross-currency swaps

Interest rate swap

Total Liabilities

$10,910

316

$11,226

$10,910

316

$11,226

Marketable securities in the previous table are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable
securities are included in other assets in the consolidated balance sheets. The fair values were derived using quoted market prices.

Fair values for cross-currency and interest rate swaps shown in the previous table were derived based on valuation models using
foreign currency exchange rates and inputs readily available in the public swap markets for similar instruments adjusted for terms
specific to these instruments. Since the inputs used to value these instruments were observable and the counterparties were
creditworthy, the Company classified them as Level 2 inputs. These liabilities have been settled in fiscal 2011, the balances at June
30, 2010 were included in other current liabilities in the consolidated balance sheets.

NOTE 8: INCOME TAXES

Income Before Income Taxes

The components of income before income taxes are as follows:

Year Ended June 30,

U.S.

Foreign

Total income before income taxes

Provision

The provision (benefit) for income taxes consists of:

2011

$ 127,567

25,321

$ 152,888

2010

$ 91,932

13,085

$ 105,017

2009

$ 54,916

10,898

$ 65,814

Year Ended June 30,

2011

2010

2009

Current:

Federal

State and local

Foreign

Total current

Deferred:

Federal

State and local

Foreign

Total deferred

Total

$ 36,799

6,208

8,338

51,345

5,648

169

(1,033)

4,784

$ 28,342

$ 30,142

4,123

4,241

36,706

1,880

(311)

839

2,408

4,235

5,825

40,202

(14,492)

(769)

(1,387)

(16,648)

$ 56,129

$ 39,114

$ 23,554

The exercise of non-qualified stock options and appreciation rights during fiscal 2011, 2010 and 2009 resulted in $6,003, $1,466
and $452, respectively, of income tax benefits to the Company derived from the difference between the market price at the date of
exercise and the option price. Vesting of stock awards and other stock compensation in fiscal 2011, 2010 and 2009 resulted in

22 Applied Industrial Technologies, Inc. and Subsidiaries

$401, $1,026 and $422, respectively, of incremental income tax benefits over the amounts previously reported for financial
reporting purposes. These tax benefits were recorded in additional paid-in capital.

Effective Tax Rates

The following reconciles the federal statutory income tax rate and the Company’s effective income tax rate:

Year Ended June 30,

Statutory income tax rate

Effects of:

State and local taxes

U.S. tax on foreign income, net

Foreign tax credit carryforwards

Valuation allowance

Foreign income taxes

Deductible dividend

Other, net

Effective income tax rate

Consolidated Balance Sheets

Significant components of the Company’s net deferred tax assets are as follows:

June 30,

Deferred tax assets:

Compensation liabilities not currently deductible

Expenses and reserves not currently deductible

Goodwill and intangibles

Net operating loss carryforwards (expiring in years 2015-2026)

Foreign tax credits (expiring in years 2020 and 2021)

Other

Total deferred tax assets

Less: Valuation allowance

Deferred tax assets, net of valuation allowance

Deferred tax liabilities:

Inventories

Unremitted foreign earnings

Depreciation and differences in property bases

Currency translation

Total deferred tax liabilities

Net deferred tax assets

The net deferred tax asset is classified as follows:

Other current assets

Deferred tax assets (long-term)

Other current liabilities

Other liabilities

Net deferred tax assets

2011

35.0%

2.8

1.8

(.6)

(1.0)

(.5)

(.8)

2010

35.0%

2.2

(.7)

(.6)

2009

35.0%

3.2

6.4

(6.0)

(1.5)

(.4)

(1.2)

36.7%

37.2%

35.8%

2011

2010

$36,746

$ 34,963

5,498

9,075

432

4,090

677

56,518

(158)

56,360

(4,755)

(2,804)

(2,062)

(9,621)

$46,739

$ 5,510

43,447

(2,218)

$46,739

8,442

11,334

843

4,086

939

60,607

(997)

59,610

(4,764)

(480)

(264)

(5,508)

$ 54,102

$ 6,813

48,493

(349)

(855)

$ 54,102

Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not
realize the benefit of such assets. The remaining net deferred tax asset is the amount management believes is more-likely-than-not
of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future
income levels.

U.S. federal income taxes are provided on the portion of non-U.S. subsidiaries income that is not considered to be permanently
reinvested outside the U.S. and may be remitted to the U.S. At June 30, 2011, undistributed earnings of non-U.S. subsidiaries
considered to be permanently reinvested and for which no U.S. tax has been provided totaled approximately $58,300.
Determination of the net amount of the unrecognized tax liability with respect to these earnings is not practicable; however, foreign

Applied Industrial Technologies, Inc. and Subsidiaries 23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share amounts)

tax credits would be available to partially reduce U.S. income taxes in the event of a distribution. Undistributed earnings of non-U.S.
subsidiaries not considered to be permanently reinvested totaled approximately $13,600. U.S. taxes totaling $2,804 have been
accrued on these earnings.

Unrecognized Income Tax Benefits

The Company and its subsidiaries file income tax returns in U.S. federal, various state, local and foreign jurisdictions. The following
is a reconciliation of the Company’s total gross unrecognized income tax benefits:

Year Ended June 30,

Unrecognized Income Tax Benefits at beginning of the year

Current year tax positions

Prior year tax positions

Expirations of statutes of limitations

Settlements

2011

$ 1,842

153

(273)

(591)

2010

$1,860

130

(194)

2009

$ 2,004

183

(51)

(167)

(109)

Unrecognized Income Tax Benefits at end of year

$ 1,181

$1,842

$ 1,860

Included in the balance of unrecognized income tax benefits at June 30, 2011, 2010 and 2009 are $659, $988 and $984,
respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.

During 2011, 2010 and 2009, the Company recognized $(22), $22 and $32, respectively, for interest and penalties related to
unrecognized income tax benefits in its statements of consolidated income. The Company had a liability for penalties and interest of
$525 and $547 as of June 30, 2011 and 2010, respectively. The Company does not anticipate a significant change to the total
amount of unrecognized income tax benefits within the next twelve months.

The Company is subject to U.S. federal income tax examinations for the tax years 2008 through 2011. In addition, the Company is
subject to foreign, state and local income tax examinations for the tax years 2008 through 2011.

The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment
of cash is not expected within one year.

NOTE 9: SHAREHOLDERS’ EQUITY

Treasury Shares

At June 30, 2011, 596 shares of the Company’s common stock held as treasury shares were restricted as collateral under escrow
arrangements relating to change in control and director and officer indemnification agreements.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is comprised of the following:

June 30,

Pension liability, net of taxes

Foreign currency translation, net of taxes

Unrealized gains on investment securities available for sale, net of taxes

Unrealized losses on cash flow hedges, net of taxes

Total accumulated other comprehensive income (loss)

Net Income Per Share

The following is a computation of basic and diluted earnings per share:

Year Ended June 30,

Net Income

Average Shares Outstanding:

Weighted-average common shares outstanding for basic computation

Dilutive effect of potential common shares

Weighted-average common shares outstanding for dilutive computation

Net Income Per Share – Basic

Net Income Per Share – Diluted

2011

$(11,212)

16,189

$ 5,059

2011

$ 96,759

42,433

821

43,254

2.28

2.24

2010

$ 65,903

42,312

549

42,861

1.56

1.54

2010

$ (12,081)

5,914

135

(16)

$ (6,048)

2009

$42,260

42,287

507

42,794

1.00

0.99

24 Applied Industrial Technologies, Inc. and Subsidiaries

Stock options and appreciation rights relating to the acquisition of 176, 1,034 and 1,208 shares of common stock were outstanding
at June 30, 2011, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share for the fiscal
years then ended as they were anti-dilutive.

NOTE 10: SHARE-BASED COMPENSATION

Share-Based Incentive Plans

The 2007 Long-Term Performance Plan (the 2007 Plan), which expires in 2012, provides for granting of stock options, SARs, stock
awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or
the Corporate Governance Committee of the Board of Directors (the Committee) may determine to officers, other key associates and
members of the Board of Directors. Grants are generally made by the Committee at regularly scheduled meetings. Compensation
costs charged to expense under award programs paid (or to be paid) with shares (including stock options, SARs, restricted stock, RSUs
and performance shares) are summarized in the table below:

Year Ended June 30,

SARs and options

Performance shares

Restricted stock and RSUs

Total compensation costs under award programs

2011

$ 2,473

1,705

1,453

$ 5,631

2010

$ 3,020

1,076

1,029

$ 5,125

2009

$ 3,702

392

$ 4,094

Such amounts are included in selling, distribution and administrative expenses in the accompanying statements of consolidated
income. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with shares.
The aggregate unamortized compensation cost for award programs paid (or to be paid) with shares at June 30, 2011 is $6,730. This
amount will be recognized in expense over the weighted-average remaining vesting period of 2.0 years. The aggregate number of
shares of common stock which may be awarded under the 2007 Plan is 2,000; shares available for future grants at June 30, 2011
were 629.

Stock Appreciation Rights and Stock Options

The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2011, 2010 and 2009 are:

Expected life, in years

Risk free interest rate

Dividend yield

Volatility

Per share fair value of SARs and stock options granted during the year

2011

5.1

1.6%

2.5%

46.2%

$ 9.78

2010

5.5

2.4%

2.5%

52.2%

$ 8.45

2009

5.5

2.9%

2.2%

48.4%

$ 10.31

The expected life is based upon historical exercise experience of the officers, other key associates and members of the Board of
Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds with remaining terms equal to the
expected life of the SARs and stock options. The assumed dividend yield has been estimated based upon the Company’s
historical results and expectations for changes in dividends and stock prices. The volatility assumption is calculated based upon
historical daily price observations of the Company’s common stock for a period equal to the expected life.

SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be settled by the holder
with cash or by tendering Company common stock.

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

June 30, 2011

(Share amounts in thousands)

Outstanding, beginning of year

Granted

Exercised

Forfeited

Outstanding, end of year

Exercisable at end of year

2,400

227

(822)

(1)

1,804

1,169

Weighted-Average
Exercise Price

$ 18.19

29.60

11.50

20.99

$ 22.68

$ 21.03

The weighted-average remaining contractual terms for SARs and stock options outstanding and exercisable at June 30, 2011
were 6.1 and 5.1 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding and exercisable at
June 30, 2011 were $15,564. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2011, 2010
and 2009 was $18,526, $5,157 and $1,453, respectively.

Applied Industrial Technologies, Inc. and Subsidiaries 25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share amounts)

As of June 30, 2011, unrecognized compensation cost related to SARs and stock options amounted to $1,775. That cost is
expected to be recognized over a weighted-average period of 2.3 years. The total fair value of shares vested during fiscal 2011,
2010 and 2009 was $2,645, $2,673 and $2,495, respectively.

Performance Shares

Performance shares are a type of award under the 2007 Plan that are intended to provide incentives to achieve three-year goals.
Performance shares pay out in shares of Applied stock at the end of a three-year period provided the Company achieves the
established goals. The number of Applied shares payable will vary depending on the level of the goal achieved.

A summary of nonvested performance shares activity at June 30, 2011 is presented below:

June 30, 2011

(Share amounts in thousands)

Nonvested, beginning of year

Granted

Vested

Nonvested, end of year

Weighted-Average
Grant-Date
Fair Value

$ 20.67

29.27

$ 23.23

156

222

The Committee set three one-year goals for the 2011 grant tied to the Company’s earnings before interest, tax, depreciation,
and amortization (EBITDA) and after-tax return on assets (ROA). Each fiscal year during the three-year term has its own
separate goals. Achievement during any particular fiscal year is “banked” for payout at the end of the three-year term.

Fiscal 2010 was the first year performance shares were granted. Because of volatile market conditions at the beginning of fiscal
2010, the Committee set one-year goals for the fiscal 2010 grant tied to the Company’s EBITDA. As the targeted goals were
accomplished, the performance shares have been converted to 156 restricted stock units (performance share RSUs or PSRSUs).
These PSRSUs vest at the end of the original three-year performance share grant period, with dividend equivalents paid on each
PSRSU on a current basis. At June 30, 2010, 156 PSRSUs were issued under the fiscal 2010 performance share awards. These
PSRSUs are reported in the prior table.

As of June 30, 2011, unamortized compensation cost related to performance shares was $2,384 to be amortized over the
weighted-average remaining vesting period of 1.5 years.

Restricted Stock and Restricted Stock Units

Restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective
shares, but are restricted from selling or transferring the shares prior to vesting. Restricted stock awards vest over periods of
one to four years. In fiscal 2010, the Company began to grant RSUs. RSUs are grants valued in shares of Applied stock, but
shares are not issued until the grants vest three years from the award date, assuming continued employment with Applied.
RSUs vest on a pro rata basis upon retirement during the three-year term. Applied pays dividend equivalents on RSUs on a
current basis.

A summary of the status of the Company’s nonvested restricted stock and RSUs at June 30, 2011 is presented below:

June 30, 2011

(Share amounts in thousands)

Nonvested, beginning of year

Granted

Vested

Nonvested, end of year

Weighted-Average
Grant-Date
Fair Value

$21.41

30.31

22.13

$25.97

104

(27)

162

Unamortized compensation cost related to unvested restricted stock awards and RSUs aggregated $2,571 and $1,477 at June
30, 2011 and 2010, and is expected to be amortized over the weighted-average remaining vesting period of 2.1 years.

Performance Grants

In fiscal 2009 and 2008, the Executive Organization and Compensation Committee made annual awards of three-year
performance grants to key officers. A target payout was established at the beginning of each three-year performance period. The
actual payout at the end of the period is calculated based upon the Company’s achievement of sales growth, return on sales, and
total shareholder return targets. Total shareholder return is calculated based upon the increase in the Company’s common stock
price, including dividend reinvestment, over the performance period as compared to the Company’s peers, as defined in the plan.
Payouts are made in cash, common stock, or a combination thereof, as determined by the Committee at the end of the
performance period. At June 30, 2011 and 2010, the Company had no liability recorded for the sales growth and return on sales
goals as the Company estimated there would be no payouts under these goals. During fiscal 2011, 2010 and 2009, the Company
recorded $1,020, $(231) and $7, respectively, of compensation expense (income) for achievement relative to the total shareholder

26 Applied Industrial Technologies, Inc. and Subsidiaries

return-based goals of the Company’s performance grants. At June 30, 2011 and 2010, the Company had accrued $1,558 and
$538, respectively, for compensation expense relative to these goals. At June 30, 2011, all performance periods had expired.

NOTE 11: BENEFIT PLANS

Retirement Savings Plan

Substantially all U.S. associates participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect
to contribute up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company makes a discretionary
profit-sharing contribution to the Retirement Savings Plan generally based upon a percentage of the Company’s U.S. income before
income taxes and before the amount of the contribution (5% for fiscal 2011 and fiscal 2010 and 2.5% for fiscal 2009). The
Company partially matches 401(k) contributions by participants; this match was suspended from January 1, 2009 to June 30, 2010.
The Company’s expense for profit sharing and matching of associates’ 401(k) contributions was $11,251, $4,891 and $3,086 during
fiscal 2011, 2010 and 2009, respectively.

Deferred Compensation Plans

The Company has deferred compensation plans that enable certain associates of the Company to defer receipt of a portion of their
compensation and non-employee directors to defer receipt of director fees. The Company funds these deferred compensation
liabilities by making contributions to rabbi trusts. Assets held in these rabbi trusts consist of investments in money market and
mutual funds and Company common stock.

Postemployment Benefit Plans

The Company provides the following postemployment benefits which, except for the Qualified Defined Benefit Retirement Plan, are
unfunded:

Supplemental Executive Retirement Benefits Plan

The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are
payable beginning at retirement and determinable at retirement based upon a percentage of the participant’s historical
compensation.

Qualified Defined Benefit Retirement Plan

The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly associates at retirement.
These associates do not participate in the Retirement Savings Plan. The benefits are based on length of service and date of
retirement.

Salary Continuation Benefits

The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits for a period not
in excess of 15 years.

Retiree Health Care Benefits

The Company provides health care benefits to eligible retired associates who pay the Company a specified monthly premium.
Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually.
Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a
fiscal 1998 acquisition, the Company assumed the obligation for a postretirement medical benefit plan which provides health
care benefits to eligible retired associates at no cost to the individual.

The Company uses a June 30 measurement date for all plans.

Applied Industrial Technologies, Inc. and Subsidiaries 27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share amounts)

The changes in benefit obligations, plan assets and funded status for the postemployment plans were as follows:

June 30,

Change in benefit obligation:
Benefit obligation at beginning of the year

Service cost

Interest cost

Plan participants’ contributions

Benefits paid

Amendments

Actuarial loss (gain) during year

Benefit obligation at end of year

Change in plan assets:

Fair value of plan assets at beginning of year

Actual gain (loss) on plan assets

Employer contributions

Plan participants’ contributions

Benefits paid

Fair value of plan assets at end of year

Funded status at end of year

Pension Benefits

Retiree Health Care Benefits

2011

2010

2011

2010

$ 51,114

460

2,232

(1,856)

151

1,389

$ 53,490

$ 5,229

984

1,699

(1,856)

$ 6,056

$ (47,434)

$ 45,466

574

2,911

(1,801)

3,964

$ 51,114

$ 4,757

575

1,698

(1,801)

$ 5,229

$(45,885)

$ 4,593

$ 4,353

235

(227)

259

(226)

(10)

$ 4,667

120

$ 4,593

190

(227)

$ (4,667)

191

(226)

$ (4,593)

The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive income (loss) for the
postemployment plans were as follows:

June 30,

Amounts recognized in the consolidated

balance sheets:
Other current liabilities

Postemployment benefits

Net amount recognized

Amounts recognized in accumulated other

comprehensive income (loss):

Net actuarial (loss) gain

Prior service cost

Total amounts recognized in accumulated other

comprehensive income (loss)

Pension Benefits

Retiree Health Care Benefits

2011

2010

2011

2010

$ 4,151

43,283

$ 47,434

$ (15,012)

(3,808)

$ 1,698

44,187

$ 45,885

$(15,670)

(4,368)

$ 220

4,447

$ 4,667

$ 892

(274)

$ (18,820)

$(20,038)

618

$ 220

4,373

$ 4,593

$ 965

(413)

$ 552

28 Applied Industrial Technologies, Inc. and Subsidiaries

The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in
excess of plan assets:

June 30,

Projected benefit obligations

Accumulated benefit obligations

Fair value of plan assets

The net periodic costs are as follows:

Pension Benefits

2011

$ 53,490

43,528

6,056

2010

$ 51,114

39,363

5,229

Pension Benefits

Retiree Health Care Benefits

Year Ended June 30,

Service cost

Interest cost

Expected return on plan assets

Recognized net actuarial loss (gain)

Amortization of prior service cost

2011

$ 460

2,232

(385)

1,449

710

2010

$ 574

2,911

(351)

924

797

2009

$2,139

2,518

(436)

911

920

Net periodic cost

$ 4,466

$4,855

$6,052

2011

$ 39

235

(83)

139

$ 330

2010

$ 52

259

(87)

148

$ 372

2009

$ 41

228

(125)

119

$ 263

The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other
comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $1,256 and $741, respectively. The
estimated net actuarial gain and prior service cost for the retiree health care benefits that will be amortized from accumulated
other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $(72) and $139, respectively.

Assumptions

The discount rate is used to determine the present value of future payments. In general, the Company’s liability increases as the
discount rate decreases and decreases as the discount rate increases. The Company computes a weighted-average discount rate
taking into account anticipated plan payments and the associated interest rates from the Citigroup Pension Discount Yield Curve.

The weighted-average actuarial assumptions used to determine benefit obligations and net periodic benefit cost for the plans were
as follows:

June 30,

Assumptions used to determine benefit obligations at year end:

Discount rate

Rate of compensation increase

Assumptions used to determine net periodic benefit cost:

Discount rate

Expected return on plan assets

Rate of compensation increase

Pension Benefits

Retiree Health Care Benefits

2011

2010

2011

2010

4.5%

5.5%

4.3%

7.5%

5.5%

4.3%

5.5%

6.0%

7.5%

5.5%

N/A

5.5%

N/A

5.5%

N/A

6.3%

N/A

The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were
8.0% and 8.5% as of June 30, 2011 and 2010, respectively, decreasing to 5% by 2018. A one-percentage point change in the
assumed health care cost trend rates would have had the following effects as of June 30, 2011 and for the year then ended:

Effect on total service and interest cost components of periodic expense
Effect on postretirement benefit obligation

One-Percentage Point

Increase

$ 47
722

Decrease

$ (39)
(598)

Applied Industrial Technologies, Inc. and Subsidiaries 29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share amounts)

Plan Assets

The fair value of each major class of plan assets for the Company’s Qualified Benefit Retirement Plan are valued using quoted market
prices in active markets for identical instruments, or Level 1 in the fair value hierarchy. Following are the fair values and target
allocation as of June 30:

Asset Class:

Equity securities

Debt securities

Other

Total

Target Allocation

40 – 70%

20 – 50%

0 – 20%

100%

Fair Value

2011

$ 3,876

1,756

424

$ 6,056

2010

$ 2,987

1,977

265

$ 5,229

Equity securities do not include any Company common stock.

The Company has established an investment policy and regularly monitors the performance of the assets of the trust maintained in
conjunction with the Qualified Defined Benefit Retirement Plan. The strategy implemented by the trustee of the Qualified Defined
Benefit Retirement Plan is to achieve long-term objectives and invest the pension assets in accordance with ERISA and fiduciary
standards. The long-term primary objectives are to provide for a reasonable amount of long-term capital, without undue exposure
to risk; to protect the Qualified Defined Benefit Retirement Plan assets from erosion of purchasing power; and to provide investment
results that meet or exceed the actuarially assumed long-term rate of return. The expected long-term rate of return on assets
assumption was developed by considering the historical returns and the future expectations for returns of each asset class as well as
the target asset allocation of the pension portfolio.

Cash Flows

Employer Contributions

The Company expects to contribute $4,200 to its pension benefit plans and $240 to its retiree health care benefit plans in
2012. Contributions do not equal estimated future payments as certain payments are made from plan assets.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as applicable, are expected to be paid in each of the next
five years and in the aggregate for the subsequent five years:

During Fiscal Years
2012
2013
2014
2015
2016
2017 through 2021

NOTE 12: LEASES

Pension Benefits
$ 4,300
4,300
5,600
5,000
5,100
25,500

Retiree Health Care Benefits
$ 200
300
200
200
200
1,500

The Company leases its corporate headquarters facility along with many service center and distribution center facilities, vehicles and
equipment under non-cancelable lease agreements accounted for as operating leases. The minimum annual rental commitments
under non-cancelable operating leases as of June 30, 2011 are as follows:

During Fiscal Years

2012
2013
2014
2015
2016
Thereafter

Total minimum lease payments

$23,200
16,900
13,600
10,300
5,700
5,300

$75,000

Rental expenses incurred for operating leases, principally from leases for real property, vehicles and computer equipment were
$31,400 in 2011, $30,700 in 2010 and $30,900 in 2009.

30 Applied Industrial Technologies, Inc. and Subsidiaries

NOTE 13: SEGMENT AND GEOGRAPHIC INFORMATION

The Company has identified two reportable segments: Service Center Based Distribution and Fluid Power Businesses. The Service
Center Based Distribution segment provides customers with solutions to their maintenance, repair and original equipment
manufacturing needs through the distribution of industrial products including bearings, power transmission components, fluid
power components, industrial rubber products, linear motion products, safety products, general maintenance and a variety of mill
supply products. The Fluid Power Businesses segment distributes fluid power components and operates shops that assemble fluid
power systems and components, performs equipment repair, and offers technical advice to customers.

The accounting policies of the Company’s reportable segments are generally the same as those described in Note 1. Sales primarily
from the Fluid Power Businesses segment to the Service Center Based Distribution segment of $17,665, $14,006 and $5,247, in
fiscal 2011, 2010 and 2009, respectively, have been eliminated in the table below.

Segment Financial Information

Year Ended June 30, 2011

Net sales

Operating income for reportable segments

Assets used in the business

Depreciation and amortization of property

Capital expenditures

Year Ended June 30, 2010

Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures

Year Ended June 30, 2009

Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures

Service Center
Based Distribution

Fluid Power
Businesses

$ 1,770,798

115,798

700,486

9,152

19,392

$ 1,536,543
77,029
690,970
9,336
6,389

$ 1,596,998
75,411
611,255
10,876
5,537

$ 442,051

41,793

214,445

2,082

1,039

$ 356,665
26,794
200,550
2,129
827

$ 326,150
18,942
198,073
1,860
1,451

Total

$ 2,212,849

157,591

914,931

11,234

20,431

$ 1,893,208
103,823
891,520
11,465
7,216

$ 1,923,148
94,353
809,328
12,736
6,988

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

Year Ended June 30,

Operating income for reportable segments

Adjustments for:

Goodwill impairment

Intangible amortization – Service Center Based Distribution

Intangible amortization – Fluid Power Businesses

Corporate and other income, net

Total operating income

Interest expense, net

Other (income) expense, net

Income before income taxes

2011

$157,591

3,384
7,998

(4,554)

150,763

1,668

(3,793)

$152,888

2010

$103,823

1,890

8,261

(16,378)

110,050

5,458

(425)

$105,017

2009

$ 94,353

36,605

2,265

7,390

(24,400)

72,493

4,424

2,255

$ 65,814

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

Applied Industrial Technologies, Inc. and Subsidiaries 31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share amounts)

Product Category

Net sales by product category are as follows:

Year Ended June 30,

Industrial

Fluid power

Net sales

2011

$ 1,559,859

652,990

$ 2,212,849

2010

$1,357,206

536,002

$1,893,208

2009

$ 1,422,518

500,630

$ 1,923,148

The fluid power product category includes sales of hydraulic, pneumatic, lubrication and filtration components and systems, and
repair services through the Company’s Service Center Based Distribution segment as well as the Fluid Power Businesses segment.

Geographic Information

Net sales are presented in geographic areas based on the location of the facility shipping the product. Long-lived assets are based
on physical locations and are comprised of the net book value of property, goodwill and intangible assets. Information by
geographic area is as follows:

Year Ended June 30,

Net Sales:

United States

Canada

Mexico

Total

June 30,

Long-Lived Assets:

United States

Canada

Mexico

Total

2011

2010

2009

$ 1,891,700

260,015

61,134

$ 2,212,849

$1,644,237

199,772

49,199

$1,893,208

$ 1,674,769

197,795

50,584

$ 1,923,148

2011

2010

$ 191,947

29,893

13,706

$ 235,546

$177,713

16,356

13,723

$207,792

NOTE 14: COMMITMENTS AND CONTINGENCIES

In connection with the construction and lease of its corporate headquarters facility, the Company has guaranteed repayment of a
total of $4,600 of taxable development revenue bonds issued by Cuyahoga County and the Cleveland-Cuyahoga County Port
Authority. These bonds were issued with a 20-year term and are scheduled to mature in March 2016. Any default, as defined in
the guarantee agreements, would obligate the Company for the full amount of the outstanding bonds through maturity. Due to
the nature of the guarantee, the Company has not recorded any liability on the consolidated financial statements. In the event of a
default and subsequent payout under any or all guarantees, the Company maintains the right to pursue all legal options available to
mitigate its exposure.

The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the
Company believes the likelihood is remote that the ultimate resolution of any of these matters will have, either individually or in the
aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

32 Applied Industrial Technologies, Inc. and Subsidiaries

NOTE 15: OTHER (INCOME) EXPENSE, NET

Other (income) expense, net, consists of the following:

Year Ended June 30,

Unrealized (gain) loss on assets held in rabbi trust for a

nonqualified deferred compensation plan

Benefit from payouts on corporate-owned life insurance policies

Foreign currency transaction (gains) losses

Unrealized loss (gain) on cross-currency swap

Other, net

Total other (income) expense, net

2011

$ (2,016)

(1,722)

(541)

368

118

$ (3,793)

2010

$ (1,012)

510

$ (425)

2009

$ 1,741

1,466

(947)

(5)

$ 2,255

The Company is the owner and beneficiary under life insurance policies acquired in conjunction with a fiscal 1998 acquisition, with
benefits in force of $12,300 and a net cash surrender value of $3,100 at June 30, 2011. In January 2011, the Company received
death benefits under two of these policies and realized a gain of $1,722.

Applied Industrial Technologies, Inc. and Subsidiaries 33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the
"Company") as of June 30, 2011 and 2010, and the related statements of consolidated income, shareholders' equity, and cash flows
for each of the three years in the period ended June 30, 2011. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at
June 30, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended June 30,
2011, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of June 30, 2011, based on the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
August 17, 2011 expressed an unqualified opinion on the Company's internal control over financial reporting.

Cleveland, Ohio
August 17, 2011

34 Applied Industrial Technologies, Inc. and Subsidiaries

MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Chairman & Chief
Executive Officer and the Vice President – Chief Financial Officer & Treasurer, and effected by the Company’s Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America.

The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the
Company are being made only in accordance with authorizations of the Company’s Management and Board of Directors; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the consolidated financial statements.

Because of inherent limitations, internal control over financial reporting can provide only reasonable, not absolute, assurance with
respect to the preparation and presentation of the consolidated financial statements and may not prevent or detect misstatements.
Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30,
2011. This evaluation was based on the criteria set forth in the framework Internal Control — Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management determined that the
Company’s internal control over financial reporting was effective as of June 30, 2011.

The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report which is included herein.

David L. Pugh
Chairman & Chief Executive Officer

Mark O. Eisele

Vice President – Chief Financial Officer & Treasurer

Benjamin J. Mondics
President & Chief Operating Officer

Daniel T. Brezovec
Corporate Controller

August 17, 2011

Applied Industrial Technologies, Inc. and Subsidiaries 35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”)
as of June 30, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30,
2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet and the related statements of consolidated income, shareholders’ equity and cash flows as of and for the
year ended June 30, 2011 of the Company and our report dated August 17, 2011 expressed an unqualified opinion on those
consolidated financial statements.

Cleveland, Ohio
August 17, 2011

36 Applied Industrial Technologies, Inc. and Subsidiaries

QUARTERLY OPERATING RESULTS
(In thousands, except per share amounts)

(UNAUDITED)

2011

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

2010

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

2009

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Net Sales

Gross Profi t

Operating
Income (Loss)

Net Income
(Loss)

Per Common Share

Net Income

(Loss) Cash Dividend

527,501
529,517
565,970
589,861
$ 2,212,849

437,743
446,253
486,141
523,071
$ 1,893,208

543,906
502,412
451,647
425,183
$ 1,923,148

$ 143,120
144,281
156,566
169,143
$ 613,110

$ 115,444
116,905
130,356
153,017
$ 515,722

$ 146,058
135,469
122,246
116,237
$ 520,010

$ 34,891
33,056
38,201
44,615
$150,763

$ 17,641
18,903
27,037
46,469
$ 110,050

$ 37,375
28,807
21,019
(14,708)
$ 72,493

$ 20,755
21,193
26,536
28,275
$ 96,759

$ 11,187
10,487
16,525
27,704
$ 65,903

$ 22,536
16,194
11,560
(8,030)
$ 42,260

$ 0.48
0.49
0.61
0.65
$ 2.24

$ 0.26
0.24
0.39
0.64
$ 1.54

$ 0.52
0.38
0.27
(0.19)
$ 0.99

$ 0.17
0.17
0.17
0.19
$ 0.70

$ 0.15
0.15
0.15
0.15
$ 0.60

On August 5, 2011 there were 6,146 shareholders of record including 4,190 shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company’s common stock
is listed on the New York Stock Exchange. The closing price on August 5, 2011 was $29.07 per share.

The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the number of weighted shares outstanding and the effects
of rounding for each period.

Cost of sales for interim fi nancial statements are computed using estimated gross profi t percentages which are adjusted throughout the year based upon available information. Adjustments
to actual cost are primarily made based on periodic physical inventory and the effect of year-end inventory quantities on LIFO costs. During the year ended June 30, 2011, the Company
recorded overall LIFO benefi ts of $5,294, which reduced cost of goods sold. The overall LIFO reserves were reduced by the same amounts. Total fi scal year 2011 LIFO benefi ts were recorded
as follows: $301 in the fi rst quarter, $1,823 in the second quarter, $356 in the third quarter and $2,814 in the fourth quarter.

The LIFO benefi t recorded in fi scal 2010 was $23,500, which reduced cost of goods sold. The overall LIFO reserves were reduced by the same amounts. Total fi scal year 2010 LIFO benefi ts
were recorded as follows: $710 in the fi rst quarter, $1,800 in the second quarter, $4,840 in the third quarter and $16,150 in the fourth quarter.

The fi scal 2009 fourth quarter includes a goodwill impairment charge of $36,605, which decreased net income by $23,000 and earnings per share by $0.54.

QUARTERLY VOLUME AND PRICE INFORMATION

Shares Traded

Average Daily Volume

2011

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

2010

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

2009

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

18,731,300
22,875,900
17,150,600
19,014,600

12,316,800
13,876,700
11,246,000
23,193,800

23,839,000
25,940,700
27,478,700
22,937,700

292,700
357,400
276,600
301,800

192,400
216,800
184,400
368,200

372,500
405,300
450,500
364,100

Price Range

High

$31.08
33.34
34.92
36.01

$ 23.17
22.91
25.20
33.00

$ 31.29
26.78
20.49
23.95

Low

$24.15
29.00
30.36
31.94

$ 18.11
18.80
21.06
24.80

$ 22.92
14.12
14.63
16.25

Applied Industrial Technologies, Inc. and Subsidiaries

2011

2010

2009(a)

2008

2007

2006

2005

2004

2003

2002

$2,212,849
11,234

$1,893,208
11,465

$1,923,148
12,736

$2,089,456

12,776

$2,014,109

13,489

$1,900,780

13,128

$1,717,055

13,832

$1,517,004

14,381

$1,464,367

14,458

$1,446,569

15,294

10 YEAR SUMMARY
(In thousands, except per share amounts and statistical data)

Consolidated Operations - Year Ended June 30

Net sales
Depreciation and amortization of property
Amortization:
Intangible assets
Stock options and SARs (b)
Operating income
Income before cumulative effect of accounting change
Net Sales
Net income
Per share data:
(Dollars in Billions)
Income before cumulative effect of accounting change

Net Income Per Share
(Dollars)

11,382
2,473
150,763
96,759
96,759

2.28
2.24

$2.24

2.28
2.24
0.70

10,151
3,020
110,050
65,903
Shareholders' Equity
65,903
(Dollars in Millions)

1.56
1.54

$633.6

$555.0

1.56
$502.1 $508.1
1.54
0.60

$451.0

46,260
3,702
72,493
42,260
42,260

1.00
0.99

1.00
0.99
0.60

$2.0

$2.5

$2.21

$2.09

$1.92 $1.89

Basic
Diluted
$2.5
Net income
Basic
$2.01
Diluted
Cash dividend
$1.5
Year-End Position - June 30
Working capital
$1.0
Long-term debt (including long-term debt classifi ed as current)
Total assets
Shareholders’ equity
$0.5

$1.93

$0.5

$1.0

$1.5

$2.0

$2.19

$1.54

*
$0.99

$ 404,226

914,931
633,563

Year-End Statistics - June 30
$0.0
Current ratio
07
Operating facilities
Shareholders of record
Return on assets (c)
Return on equity (d)

$0.0

* The goodwill impairment charge in fiscal 2009
reduced net income per share by $0.54.

2.9
474
6,208

11.1%
16.3%

$700

$600

$500

$400

$300

$200

$100

$ 347,528
75,000
891,520
555,039

2.3
455
5,884

7.9%
12.4%

$ 369,038
75,000
809,328
508,102

3.4
464
6,329

7.7%
8.4%

1,663

2,999

152,824

95,456

2.23

2.19

2.23

2.19

0.60

1,045

2,494

135,011

86,022

1.97

1.93

1.97

1.93

0.48

732

2,658

115,592

72,299

1.62

1.57

1.62

1.57

0.40

993

2,111

87,968

55,339

1.24

1.20

1.24

1.20

0.29

826

1,586

51,448

31,471

0.73

0.71

0.73

0.71

0.21

781

36,254

19,832

0.47

0.46

0.47

0.46

0.21

1,651

30,834

14,755

2,655

0.34

0.06

0.21

$ 409,186

25,000

798,771

502,075

$ 365,523

75,395

777,369

450,983

$ 370,013

76,186

730,671

414,822

$ 345,806

76,977

690,170

393,287

$ 286,022

77,767

596,841

339,535

$ 259,359

$ 250,644

78,558

553,404

307,856

83,478

534,566

298,147

3.1

459

6,305

12.2%

20.0%

2.6

445

6,242

11.6%

19.9%

3.0

452

6,192

10.3%

17.9%

2.9

440

6,079

8.8%

15.1%

2.9

434

6,154

5.6%

9.7%

2.8

440

6,157

3.7%

6.5%

2.9

449

6,455

2.6%

4.8%

Capital expenditures
EBITDA (e)

20,431
175,852

7,216
134,686

6,988
135,191

8,410

170,262

11,192

152,039

11,057

132,110

9,208

104,904

14,383

68,241

12,794

51,493

10,050

47,779

(a) The goodwill impairment charge in fi scal 2009 reduced operating income by $36,605, net income by $23,000 and net income per share by $0.54.
(b) Prior to 2004, the Company did not record stock option expense as it was not required by Generally Accepted Accounting Principles.
(c) Return on Assets is calculated as net income divided by monthly average assets, exclusive of the goodwill impairment.
(d) Return on Equity is calculated as net income divided by the average shareholders’ equity (beginning of the year and end of the year divided by 2).
(e) EBITDA is calculated as operating income, plus depreciation and amortization of property and amortization of intangible assets, stock options and SARs.

Net Sales
(Dollars in Billions)

Net Income
(Dollars in Millions)

Net Income Per Share
(Dollars)

Shareholders' Equity

(Dollars in Millions)

Dividends Per Share

(Dollars)

$2.5

$2.0

$1.5

$1.0

$0.5

$0.0

1
2

2
$

9
0

2
$

1
0

2
$

2
9

1
$

9
8

1
$

0
9

1
$

2
7

1
$

5
4

1
$

6
4

1
$

2
5

1
$

02 03 04 05 06 07 08 09 10 11

$100

$80

$60

$40

$20

6
9
$

5
9
$

6
8
$

2
7
$

5
5
$

5
6
$

*
3

2
4
$

1
3
$

8
.
9
1
$

7
.
2
$

02 03 04 05 06 07 08 09 10 11

$2.5

$2.0

$1.5

$1.0

$0.5

$0.0

4
2

2
$

9
1

2
$

3
9

1
$

7
5

1
$

0
2

1
$

4
5

1
$

*
9
9

0
$

1
7
.
0
6 $
4
.
0
$

6
0
.
0
$

02 03 04 05 06 07 08 09 10 11

0 $

$700

$600

$500

$400

$300

$200

$100

$0.7

$0.6

$0.5

$0.4

$0.3

$0.2

$0.1

$0.0

38 Applied Industrial Technologies, Inc. and Subsidiaries

* The goodwill impairment charge in fiscal 2009
reduced net income by $23.0 million.

* The goodwill impairment charge in fiscal 2009
reduced net income per share by $0.54.

Consolidated Operations - Year Ended June 30

Net sales

Depreciation and amortization of property

Amortization:

Intangible assets

Stock options and SARs (b)

Operating income

Net Sales

Net income

Per share data:

(Dollars in Billions)

Income before cumulative effect of accounting change

$2,212,849

11,234

11,382

2,473

150,763

96,759

$1,893,208

11,465

10,151

3,020

110,050

65,903

Net Income Per Share

(Dollars)

Shareholders' Equity

65,903

(Dollars in Millions)

$2.21

$2.19

$2.24

$1.92 $1.89

$2.0

$1.93

Year-End Position - June 30

Working capital

Long-term debt (including long-term debt classifi ed as current)

$1.54

$0.99

$ 404,226

$2.5

$1.5

$1.0

$0.5

$0.0

Net income

$2.09

Basic

Diluted

$2.01

Basic

Diluted

Cash dividend

$2.5

$2.0

$1.5

$1.0

Total assets

Shareholders’ equity

$0.5

$0.0

Current ratio

Operating facilities

Shareholders of record

Return on assets (c)

Return on equity (d)

Capital expenditures

EBITDA (e)

2.28

2.24

2.28

2.24

0.70

1.56

1.54

1.56

0.60

$633.6

$555.0

$502.1 $508.1

1.54

$451.0

$700

$600

$500

$400

$300

$200

$100

914,931

633,563

2.9

474

6,208

11.1%

16.3%

$ 347,528

75,000

891,520

555,039

2.3

455

5,884

7.9%

12.4%

Year-End Statistics - June 30

* The goodwill impairment charge in fiscal 2009

reduced net income per share by $0.54.

$1,923,148

12,736

46,260

3,702

72,493

42,260

1.00

0.99

1.00

0.99

0.60

$ 369,038

75,000

809,328

508,102

3.4

464

6,329

7.7%

8.4%

(a) The goodwill impairment charge in fi scal 2009 reduced operating income by $36,605, net income by $23,000 and net income per share by $0.54.

(b) Prior to 2004, the Company did not record stock option expense as it was not required by Generally Accepted Accounting Principles.

(c) Return on Assets is calculated as net income divided by monthly average assets, exclusive of the goodwill impairment.

(d) Return on Equity is calculated as net income divided by the average shareholders’ equity (beginning of the year and end of the year divided by 2).

(e) EBITDA is calculated as operating income, plus depreciation and amortization of property and amortization of intangible assets, stock options and SARs.

2011

2010

2009(a)

2008

2007

2006

2005

2004

2003

2002

$2,089,456
12,776

$2,014,109
13,489

$1,900,780
13,128

$1,717,055
13,832

$1,517,004
14,381

$1,464,367
14,458

$1,446,569
15,294

1,663
2,999
152,824
95,456
95,456

2.23
2.19

2.23
2.19
0.60

1,045
2,494
135,011
86,022
86,022

1.97
1.93

1.97
1.93
0.48

732
2,658
115,592
72,299
72,299

1.62
1.57

1.62
1.57
0.40

993
2,111
87,968
55,339
55,339

1.24
1.20

1.24
1.20
0.29

826
1,586
51,448
31,471
31,471

0.73
0.71

0.73
0.71
0.21

781

36,254
19,832
19,832

0.47
0.46

0.47
0.46
0.21

1,651

30,834
14,755
2,655

0.34
0.34

0.06
0.06
0.21

$ 409,186
25,000
798,771
502,075

$ 365,523
75,395
777,369
450,983

$ 370,013
76,186
730,671
414,822

$ 345,806
76,977
690,170
393,287

$ 286,022
77,767
596,841
339,535

$ 259,359
78,558
553,404
307,856

$ 250,644
83,478
534,566
298,147

3.1
459
6,305

12.2%
20.0%

2.6
445
6,242

11.6%
19.9%

3.0
452
6,192
10.3%
17.9%

2.9
440
6,079

8.8%
15.1%

2.9
434
6,154

5.6%
9.7%

2.8
440
6,157

3.7%
6.5%

2.9
449
6,455

2.6%
4.8%

20,431

175,852

7,216

134,686

6,988

135,191

8,410
170,262

11,192
152,039

11,057
132,110

9,208
104,904

14,383
68,241

12,794
51,493

10,050
47,779

Net Sales

(Dollars in Billions)

Net Income

(Dollars in Millions)

Net Income Per Share

(Dollars)

Shareholders' Equity
(Dollars in Millions)

Dividends Per Share
(Dollars)

$2.5

$2.0

$1.5

$1.0

$0.5

$0.0

$100

$80

$60

$40

$20

$2.5

$2.0

$1.5

$1.0

$0.5

$0.0

6 $

* The goodwill impairment charge in fiscal 2009

reduced net income by $23.0 million.

reduced net income per share by $0.54.

02 03 04 05 06 07 08 09 10 11

$700

$600

$500

$400

$300

$200

$100

3
3
6
0 $
5
5
5
$

2
0
5
$

8
0
5
$

1
5
4
$

4
1
4
$

3
9
3
$

9
3
3
$

8
9
2
$

7
0
3
$

02 03 04 05 06 07 08 09 10 11

$0.7

$0.6

$0.5

$0.4

$0.3

$0.2

$0.1

$0.0

0
7

0
$

0
6

0
$

0
6

0
$

0
6

0
$

8
4

0
$

0
4

0
$

9
2

0
$

1
2

0
$

1
2

0
$

1
2

0
$

02 03 04 05 06 07 08 09 10 11

Applied Industrial Technologies, Inc. and Subsidiaries

DIRECTORS

WILLIAM G. BARES (4) Age 70

JOHN F. MEIER (4) Age 63

PETER C. WALLACE (3, 4) Age 57

Former Chairman and Chief Executive Ofﬁ cer

President and Chief Executive Ofﬁ cer

The Lubrizol Corporation (Specialty Chemical Products)

Libbey Inc. (Tableware Products)

Robbins & Myers, Inc. (Equipment Manufacturer)

THOMAS A. COMMES (1, 3) Age 69

J. MICHAEL MOORE (1) Age 68

Former President and Chief Operating Ofﬁ cer

President

Committees of The Board

(1) Audit Committee

The Sherwin-Williams Company (Paints and Coatings)

Oak Grove Consulting Group, Inc.

(2) Corporate Governance Committee

PETER A. DORSMAN (2, 3) Age 56

Senior Vice President, Global Operations,

and Chief Operations Ofﬁ cer

(Management Consulting)

(3) Executive Committee

Former Chairman and Chief Executive Ofﬁ cer

(4) Executive Organization and Compensation

Invetech Company (Industrial Distributor)

Committee

NCR Corporation (Self-Service Technology Solutions)

DAVID L. PUGH (3) Age 62

L. THOMAS HILTZ (2) Age 65

Attorney

EDITH KELLY-GREEN (2) Age 58

Former Vice President and Chief Sourcing Ofﬁ cer

FedEx Express (Express Transportation)

Chairman & Chief Executive Ofﬁ cer

Applied Industrial Technologies, Inc.

JERRY SUE THORNTON, Ph.D. (1) Age 64

President

Cuyahoga Community College

(Two-Year Educational Institution)

OFFICERS

DAVID L. PUGH Age 62

FRED D. BAUER Age 45

RICHARD C. SHAW Age 62

Chairman & Chief Executive Ofﬁ cer

Vice President – General Counsel & Secretary

Vice President – Communications and Learning

BENJAMIN J. MONDICS Age 53

President & Chief Operating Ofﬁ cer

MICHAEL L. COTICCHIA Age 48

DANIEL T. BREZOVEC Age 50

Vice President – Chief Administrative Ofﬁ cer

Corporate Controller

THOMAS E. ARMOLD Age 56

MARK O. EISELE Age 54

JODY A. CHABOWSKI Age 51

Vice President – Marketing and Strategic Accounts

Vice President – Chief Financial Ofﬁ cer & Treasurer

Assistant Controller

TODD A. BARLETT Age 56

Vice President – Acquisitions and

Global Business Development

OTHER KEY MANAGEMENT

IVAN J. BATISTA Age 38

General Director –

Rafael Benitez Carrillo, Inc. (Puerto Rico)

ROBERT E. CURLEY Age 51

Vice President – Southeast Area

BARBARA D. EMERY Age 52

Vice President – Human Resources

JEFFREY A. RAMRAS Age 56

ALAN M. KRUPA Age 55

Vice President – Supply Chain Management

Assistant Treasurer

JAMES A. JEFFIERS Age 37

Vice President – Midwest Area

MARY E. KERPER Age 60

RONALD A. SOWINSKI Age 50

President & Chief Operating Ofﬁ cer –

Applied Industrial Technologies Ltd. (Canada)

Vice President – Operational Excellence

MARK A. STONEBURNER Age 47

LONNY D. LAWRENCE Age 48

Vice President – Information Technology

JOHN M. LEYO Age 60

Vice President – Enterprise Transformation

DONN G. VEENHUIS Age 62

Vice President – Western Area

THEODORE L. WOLICKI Age 57

Vice President – Central States Area

WARREN E. “BUD” HOFFNER Age 51

Vice President – North Atlantic Area

Vice President, General Manager – Fluid Power

SERGIO H. NEVÁREZ Age 53

General Director – Applied Mexico

40 Applied Industrial Technologies, Inc. and Subsidiaries

SHAREHOLDER INFORMATION

Applied Industrial Technologies, Inc. common stock is listed on the New York Stock Exchange under the symbol AIT. The Company is identiﬁ ed in most

ﬁ nancial listings as “AppliedIndlTch.”

RESEARCH ON APPLIED INDUSTRIAL TECHNOLOGIES IS AVAILABLE THROUGH:

BB&T CAPITAL MARKETS

Holden Lewis, 804/782-8820

MORGAN KEEGAN

STEPHENS INC.

Brent D. Rakers, 901/579-4427

Matt Duncan, 501/377-3723

CLEVELAND RESEARCH COMPANY

SIDOTI & CO.

Adam Uhlman, 216/649-7241

Joseph Mondillo, 212/894-3339

WELLS FARGO SECURITIES, LLC

Allison Poliniak-Cusic, 212/214-5062

KEYBANC CAPITAL MARKETS

GREAT LAKES REVIEW – Division of

Jeffrey D. Hammond, 216/689-0236

Wellington Shields & Co.

Elliot Schlang, 216/767-1340

SHAREHOLDER INQUIRIES

INVESTOR RELATIONS INQUIRIES SHOULD

ANNUAL REPORT ON FORM 10-K

Requests to transfer Applied Industrial

BE DIRECTED TO:

MARK O. EISELE

Vice President – Chief Financial Ofﬁ cer

& Treasurer

Applied Industrial Technologies

1 Applied Plaza

Cleveland, OH 44115-5014

Telephone: 216/426-4000, Fax: 216/426-4845

Technologies, Inc. shares and all

correspondence regarding address change

information, duplicate mailings, missing

certiﬁ cates, failure to receive dividend

checks in a timely manner or to participate

in the Company’s direct stock purchase

program should be directed to the

Company’s transfer agent and registrar:

COMPUTERSHARE TRUST COMPANY, N.A.

250 Royall Street

Canton, MA 02021

800/988-5291

The Applied Industrial Technologies, Inc.

Annual Report on Form 10-K for the ﬁ scal

year ended June 30, 2011, including the

ﬁ nancial statements and schedules thereto,

is available at our website at

www.Applied.com. It is also available

without charge upon written request to the

Vice President – Chief Financial Ofﬁ cer &

Treasurer at the address shown.

ANNUAL MEETING

The Annual Meeting of Shareholders will be held

at 10:00 a.m., Tuesday, October 25, 2011, at the

Corporate Headquarters of Applied Industrial

Technologies, 1 Applied Plaza, East 36th and

Euclid Avenue, Cleveland, Ohio 44115.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

Applied Industrial Technologies, Inc., Standard & Poor’s 500, and Peer Group

(Performance Results from 7/1/2006 through 6/30/2011)

$200.00

$150.00

$100.00

$50.00

$0.00

Applied Industrial Technologies, Inc.

Standard & Poor’s 500

Peer Group

Assumes $100 invested at the close of trading 6/30/06 in
Applied Industrial Technologies, Inc. common stock, Standard
& Poor’s 500, and Peer Group.

Cumulative total return assumes reinvestment of dividends.

The returns of the companies in the Peer Group are weighted
based on the companies’ relative stock market capitalization.

Peer Group companies selected on a line-of-business basis
include: DXP Enterprises, Inc.; Fastenal Company; Genuine
Parts Company; W. W. Grainger, Inc.; Kaman Corporation;
Lawson Products, Inc.; MSC Industrial Direct Co., Inc.; and
WESCO International, Inc.

2006

2007

2008

2009

2010

2011

Applied Industrial Technologies, Inc.

$100.00

$123.69

$103.43

2006

2007

2008

Standard & Poor’s 500

Peer Group

Source: Value Line, Inc.

100.00

120.59

115.59

104.77

100.52

2009

$86.85

77.31

86.45

2010

$114.55

88.47

116.02

2011

$164.72

115.62

171.68

Corporate Headquarters

1 Applied Plaza

Cleveland, Ohio 44115

216/426-4000

Applied.com