Annual Report 2016
Customers. Capabilities. Commitment.
Working Together, Winning Together
Applied® at a Glance
Applied Industrial Technologies is a leading industrial distributor in North
America, Australia and New Zealand, serving MRO and OEM customers in virtually every
industry. In addition, Applied provides engineering, design and systems integration for
industrial and fluid power applications, as well as customized mechanical, fabricated
rubber and fluid power shop services. Applied also offers maintenance training and
inventory management solutions that provide added value to our customers.
Simply stated – We Keep Industry Running… Productively.
DIRECTORS
OFFICERS
SENIOR MANAGEMENT
NEIL A. SCHRIMSHER
President & Chief Executive Officer
MARK O. EISELE
Vice President – Chief Financial
Officer & Treasurer
THOMAS E. ARMOLD
Vice President – Sales
TODD A. BARLETT
Vice President – Acquisitions and
Global Business Development
FRED D. BAUER
Vice President – General Counsel
& Secretary
WARREN E. “BUD” HOFFNER
Vice President, General Manager –
Fluid Power
KURT W. LORING
Vice President – Chief Human
Resources Officer
CHRISTOPHER MACEY
Corporate Controller
JODY A. CHABOWSKI
Assistant Controller
SHAUN S. McELHANNON
Assistant Treasurer
IVAN J. BATISTA
General Director –
Rafael Benitez Carrillo, Inc.
(Puerto Rico)
BARBARA D. EMERY
Vice President – Human Resources
MARK P. GILK
President – Applied Industrial Technologies
(Canada)
DAVID S. GREEN
Vice President – North Atlantic Area
JAMES A. JEFFIERS
Vice President – Central States Area
LONNY D. LAWRENCE
Vice President – Information Technology
TRACIE M. LONGPRE
Vice President – Supply Chain
JOE MANGIAPANE
Managing Director – Australia &
New Zealand
JEREMY S. MOORMAN
Vice President – Operational Excellence
SERGIO H. NEVÁREZ
General Director – Applied Mexico
ROBERT E. ONORATO
Vice President – Marketing & MSS
DARREN B. “BEN” PADD
Vice President – Midwest Area
JASON W. VASQUEZ
Vice President – Southeast Area
KURT J. WEINHEIMER
Vice President – Western Area
PETER C. WALLACE (3, 4)
Chairman of the Board of Directors
Former Chief Executive Officer
Gardner Denver, Inc.
(Equipment Manufacturer)
Former President and Chief Executive Officer
Robbins & Myers, Inc.
(Equipment Manufacturer)
PETER A. DORSMAN (3, 4)
Former Executive Vice President, Services
NCR Corporation (Self-Service Technology
Solutions)
L. THOMAS HILTZ (2, 3)
Attorney
EDITH KELLY-GREEN (1, 2)
Former Vice President and
Chief Sourcing Officer
FedEx Express (Express Transportation)
DAN P. KOMNENOVICH (1, 2)
Former President and
Chief Executive Officer
Aviall, Inc. (Aviation Parts, Related
Aftermarket Operations)
JOHN F. MEIER (1, 4)
Former Chairman and
Chief Executive Officer
Libbey Inc. (Tableware Products)
VINCENT K. PETRELLA (1, 3, 4)
Executive Vice President,
Chief Financial Officer and Treasurer
Lincoln Electric Holdings, Inc.
(Welding, Brazing Products Manufacturer)
NEIL A. SCHRIMSHER (3)
President & Chief Executive Officer
Applied Industrial Technologies, Inc.
JERRY SUE THORNTON, PH.D. (2)
President Emeritus
Cuyahoga Community College
(Two-Year Educational Institution)
COMMITTEES OF THE BOARD
(1) Audit Committee
Chairman: Vincent K. Petrella
(2) Corporate Governance Committee
Chairman: L. Thomas Hiltz
(3) Executive Committee
Chairman: Peter C. Wallace
(4) Executive Organization and
Compensation Committee
Chairman: Peter A. Dorsman
Headquarters:
Cleveland, Ohio, USA
Operating Facilities:
More than 550 in the
United States, Puerto
Rico, Canada, Mexico,
Australia and New
Zealand
E-Commerce:
www.Applied.com
Distribution
Centers: 12
Stock Keeping Units
(SKUs) Available to
Customers:
More than 6 million
Product
Manufacturers: More
than 4,000
Stock Ticker Symbol:
NYSE: AIT
Employee
Associates:
More than 5,500
Data current as
of June 30, 2016
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
2016 ANNUAL REPORT
TO OUR SHAREHOLDERS:
Throughout fiscal 2016, we experienced a continuation of a challenging economic
environment, including reduced demand in oil and gas, mining and other industrial
end markets. Amidst this backdrop, we remained focused on serving our customers,
enhancing our value-add capabilities and delivering on our commitment to
generate benefits for all Applied stakeholders.
In the fiscal year, we generated more than $160 million in cash from operations,
while returning over $80 million to shareholders via dividends and share repurchases
– our second highest year of cash returned to shareholders. We remained disciplined
in our operations, including appropriate cost controls and restructuring that will
yield benefits in the years ahead. And, we continued to build on our strengths via
investments in technology, talent initiatives and strategic acquisitions.
Applied associates know that we have the opportunity and the responsibility to help
ourselves in this current industrial economic environment. We also know that our
Core Values matter, including the value of Teamwork and our corresponding belief of
Working Together, Winning Together! Our teams are committed to winning every
day – in any economic environment – through our business performance; expanding
our product, service and solution offering; and creating opportunities with current
and new customers.
With our strong foundation and significant position as a well-diversified industrial
distributor, we have much to offer and even greater potential. Serving customers,
further enhancing our value-add capabilities and delivering on our commitment to
generate sustained shareholder value – we are Applied Industrial Technologies.
NEIL A. SCHRIMSHER
Net Sales
(Dollars in Billions)
Net Income
(Dollars in Millions)
Net Income Per Share
(Dollars)
Cash Returned to Shareholders
Dividends + Share Repurchases
(Dollars in Millions)
*The goodwill impairment charge in fiscal 2016 reduced net income by $63.8 million and net income per share by $1.62.
1
$64.8 $37.2 $77.1 $119.2 $80.8 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 12 13 14 15 16 $108.8 $118.1 $112.8 $115.5 $29.6* $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 12 13 14 15 16 $2.4 $2.5 $2.5 $2.7 $2.5 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 12 13 14 15 16 $2.54 $2.78 $2.67 $2.80 $0.75* $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 12 13 14 15 16 APPLIED INDUSTRIAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
2016 ANNUAL REPORT
CUSTOMERS
Applied’s founding philosophy – to take care of the
customer – remains our guiding principle through
our dedicated associates who are highly trained
and focused on providing specialized services. Our
experience in diverse industries and local markets
provides the leverage and know-how to promptly
address a wide variety of unique customer needs.
Because we serve the local industrial economy, our
network, capabilities and experience are well matched
to the complexity of our customer base and product
demand variability. Simply stated, we keep industry
running – productively – across a highly diverse base of
customers.
Whether small, medium or large, all Applied customers
can count on our commitment to their success – and
that success comes in many forms. Our teams work to
generate savings from increased product life, reduced
maintenance costs, decreased energy consumption
and enhanced inventory optimization. Every year we
generate tens of millions of dollars in Documented
Value Added® (DVA®) to positively impact our
customers’ owning and operating costs.
In recognition for our efforts, we have received
numerous acknowledgments and awards from
customers for our commitment to quality service and
value-added support – and that makes us very proud.
Of special note, we were pleased to earn a Supplier
Collaboration Award in fiscal 2016 from semiconductor
equipment customer Applied Materials, Inc. for
our work in bringing new projects into production
as well as generating significant operating cost
reductions. While our entire organization contributed
to this achievement, our associates at Bay Advanced
Technologies – an Applied Fluid Power business –
played a significant role and proved how well our
Company can operate as a team to produce results.
2
Across the organization, we are utilizing the strong
industry knowledge and capabilities of our Fluid Power
businesses, expert rubber shops and expanded Applied
Maintenance Supplies & SolutionsSM (Applied MSSSM)
resources to support product expansion and drive
new sales. Working together, our sales associates and
Fluid Power Specialists are engaging targeted customers
and connecting with our Fluid Power businesses –
conducting plant energy assessments, implementing
solutions on compressed air systems, and reviewing
hydraulic operations to generate growth and
customer DVA.
We call this collaborative approach One Applied, and
it comes about when we leverage our strengths and
our full product and service offering to win in the
marketplace. As One Applied, we share our collective
expertise throughout the Company and realize
opportunities across all our product groups to retain,
penetrate and add profitable new business. Working
together, as One Applied, we are able to help ourselves
in any economic environment.
CAPABILITIES
This past year we prioritized a number of investments
in areas where we have potential for growth, including
talent, systems and e-commerce. Our Human Resources
team has been busy introducing many exciting
initiatives around performance management, talent
acquisition and associate development to enhance
our organizational effectiveness. Performance is an
important part of our culture because we know…
The Best Team Wins!
We seek to create an environment that supports
our business strategy implementation, and that
means having the right associates. We look to
enhance individual skill sets with our training and
learning programs, providing growth and promotion
opportunities for our top performers. Time and time
again we hear… “It’s our people that make the
difference.” We stand committed to helping our
associates reach their full potential, which in turn
helps Applied reach ours.
In addition, our teams have been focused on enhancing
the operating experience in our ERP systems. From our
field sales functionality to our internal financial system
transformation, we are continuing to increase system
proficiency for improvements in operating efficiency
and profitability.
Enhancing our full range of electronic capabilities
includes work on a new Applied.com e-commerce site
that is launching early in fiscal 2017. Over the past
year, the Applied.com cross-functional team has been
working diligently to re-platform the Company’s legacy
e-commerce solution.
The transformed Applied.com includes:
» Enriched user experience – featuring a clean,
modern and intuitive design, along with improved
search and navigation capabilities.
» Improved order and account management –
complete with multichannel quote, order history and
shopping cart enhancements… plus much more!
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
2016 ANNUAL REPORT
Beyond our talent, systems and e-commerce
capabilities, our success is greatly aided by partnerships
with our suppliers. We represent leading manufacturers
with the highest quality brands, delivering innovative
solutions for our customers’ needs. Our Fluid Power
product range is the broadest in the industry, and
we have the largest team of Certified Fluid Power
Specialists, Certified Electronic Control Specialists
and Certified Fluid Power Mechanics and Technicians
to assist with problem solving, system design and
assembly. We are skilled at linking electrohydraulic and
electronic controls to enhance Fluid Power systems for
mobile and industrial OEMs, and we are leveraging our
system design and assembly capabilities for critical MRO
applications.
COMMITMENT
Throughout the fiscal year, we maintained our
disciplined approach to controlling costs and driving
improved efficiencies across our businesses. We
continue to respond to the energy market challenges
by decreasing operating expenses, while positioning
Applied for ongoing value creation as the markets
improve.
We have implemented restructuring activities
throughout our organization – mainly within our
upstream oil and gas focused businesses – to
reduce operating expenses and align resources to
opportunities, customer requirements and market
conditions. These moves prepare us for an enhanced
fiscal 2017 and further strengthen our competitive
position.
We also remain active pursuing strategic opportunities
that extend our business reach and enhance our
capabilities to expand with new and current customers.
During fiscal 2016, we completed four strategic
acquisitions that bolster our product and service
offerings and will create long-term value for
our shareholders:
Continued on next page
3
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
2016 ANNUAL REPORT
» Atlantic Fasteners – a distributor of industrial
fasteners and related supplies that builds on our
Applied MSS platform.
» S. G. Morris Co. – a fluid power distributor that
further enhances our fluid power market leadership
and provides additional growth opportunities.
» HUB Industrial Supply – a distributor of
consumable industrial products and another
addition to strengthen and diversify our Applied
MSS business.
» Seals Unlimited – a distributor of sealing, fastener
and hose products that expands our bearings and
power transmission platform in Eastern Canada.
We are excited about the growth opportunities and
operational synergies of these added businesses.
Each contributes a highly regarded reputation, strong
customer relationships and supplier partners, and
exceptional product knowledge.
Increasing our dividend reflects confidence in our
ongoing cash generation and profitable operating
strategies, as well as our steadfast commitment to
driving shareholder value.
Working Together,
Winning Together
We remain confident that great accomplishments are
possible when we focus on serving our customers,
enhancing our value-add capabilities and delivering
on our commitment to generate benefits for all
Applied stakeholders. Propelling us forward is our rich
heritage of 90+ years of strength in distribution, built
on a strong foundation of quality brands, innovative
solutions, dedicated customer service, the highest
ethical standards and a commitment to our Core
Values.
Working Together, Winning Together – that’s
the theme across Applied as we pursue our business
potential and opportunities for growth – organically,
via acquisition and through our technology
investments. Undeniably, we are committed…
to winning in any environment and to generating
value for all Applied stakeholders.
Thank you for your ongoing support and
continued interest in Applied.
I have said this before, but it bears repeating – we
recognize our requirements in this operating environment
and going forward, and we are taking the appropriate
actions to serve all Applied stakeholders. To that end, we
returned $80.8 million to shareholders through dividends
and share repurchases in fiscal 2016. Our most recent
dividend increase, made in January 2016, marked the
Company’s seventh dividend increase since 2010 and a
cumulative increase of more than 85% in the quarterly
dividend over this six-year period.
Neil A. Schrimsher
President & Chief Executive Officer
August 24, 2016
4
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2016, or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-2299
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of
incorporation or organization)
34-0117420
(I.R.S. Employer
Identification No.)
1 Applied Plaza, Cleveland, Ohio 44115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, without par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. x Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). x Yes ¨ No
Table of Contents
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X
Non-accelerated filer __
Accelerated filer __
Smaller reporting company __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrant's most recently completed second fiscal quarter
(December 31, 2015): $1,565,290,000.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest
practicable date.
Class
Common Stock, without par value
Outstanding at August 5, 2016
39,057,155
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Applied's proxy statement for the annual meeting of shareholders to be held October 25, 2016, are
incorporated by reference into Parts II, III, and IV of this Form 10-K.
Table of Contents
TABLE OF CONTENTS
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SIGNATURES
Page
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Table of Contents
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
This report, including the documents incorporated by reference, contains statements that are forward-
looking, based on management's current expectations about the future. Forward-looking statements are
often identified by qualifiers such as “guidance,” “expect,” “believe,” “plan,” “intend,” “will,” “should,”
“could,” “would,” “anticipate,” “estimate,” “forecast,” “may,” "optimistic" and derivative or similar
words or expressions. Similarly, descriptions of our objectives, strategies, plans, or goals are also forward-
looking statements. These statements may discuss, among other things, expected growth, future sales,
future cash flows, future capital expenditures, future performance, and the anticipation and expectations
of Applied and its management as to future occurrences and trends. Applied intends that the forward-
looking statements be subject to the safe harbors established in the Private Securities Litigation Reform
Act of 1995 and by the Securities and Exchange Commission in its rules, regulations, and releases.
Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking
statements are based on current expectations regarding important risk factors, many of which are outside
Applied's control. Accordingly, actual results may differ materially from those expressed in the forward-
looking statements, and the making of those statements should not be regarded as a representation by
Applied or another person that the results expressed in the statements will be achieved. In addition,
Applied assumes no obligation publicly to update or revise forward-looking statements, whether because
of new information or events, or otherwise, except as may be required by law.
Applied believes its primary risk factors include, but are not limited to, those identified in the following
sections of this annual report on Form 10-K: “Risk Factors” in Item 1A; “Narrative Description of Business,”
in Item 1, section (c); and “Management's Discussion and Analysis of Financial Condition and Results of
Operations” in Item 7. PLEASE READ THOSE DISCLOSURES CAREFULLY.
1
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Table of Contents
PART I
ITEM 1. BUSINESS.
In this annual report on Form 10-K, “Applied” refers to Applied Industrial Technologies, Inc., an Ohio corporation.
References to “we,” “us,” “our,” and “the Company” refer to Applied and its subsidiaries.
We are a leading industrial distributor in North America, Australia, and New Zealand, serving MRO (maintenance,
repair, and operations) and OEM (original equipment manufacturing) customers in virtually every industry. In
addition, the Company provides engineering, design, and systems integration for industrial and fluid power
applications, as well as customized mechanical, fabricated rubber, and fluid power shop services.
We add value for our customers by providing product-related technical application support and solutions to help
customers minimize their production downtime, improve machine performance, and reduce overall procurement
and maintenance costs.
Applied and its predecessor companies have engaged in this business since 1923. Applied reincorporated in Ohio
in 1988.
Our Internet address is www.applied.com. The following documents are available free of charge via hyperlink from
the investor relations area of our website:
• Applied's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, together with Section 16 insider beneficial stock ownership reports - these
documents are posted as soon as reasonably practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission
• Applied's Code of Business Ethics
• Applied's Board of Directors Governance Principles and Practices
• Applied's Director Independence Standards
• Charters for the Audit, Corporate Governance, and Executive Organization & Compensation Committees of
Applied's Board of Directors
The information available via hyperlink from our website is not incorporated into this annual report on Form 10-K.
(a) General Development of Business.
Information regarding developments in our business can be found in Item 7 under the caption “Management's
Discussion and Analysis of Financial Condition and Results of Operations.” This information is incorporated here
by reference.
(b) Financial Information about Segments.
We have identified two reportable segments, service center-based distribution and fluid power businesses.
The service center-based distribution segment provides customers with a wide range of industrial products primarily
through a network of service centers. The fluid power businesses segment consists of specialized regional
companies that distribute fluid power components, design and assemble fluid power systems and perform
equipment repair. The fluid power businesses primarily sell products and services directly to customers rather than
through the service centers.
Segment financial information can be found in note 12 to the consolidated financial statements, included in Item 8
under the caption “Financial Statements and Supplementary Data.” That information is incorporated here
by reference.
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Table of Contents
(c) Narrative Description of Business.
Overview. Our field operating structure is built on two platforms - service center-based distribution and fluid power
businesses:
Service Center-Based Distribution. We distribute a wide range of industrial products through service
centers across North America, Australia, and New Zealand. Customers primarily purchase our products for
scheduled maintenance of their machinery and equipment and for emergency repairs.
The service center-based distribution business accounts for a substantial majority of our field operations and
82.8% of our 2016 sales dollars.
The service center-based distribution segment includes operations specialized in serving customers in the
upstream oil and gas industry; the Applied Maintenance Supplies & Solutions service offering; regional
fabricated rubber shops, which modify and repair conveyor belts and make hose assemblies in accordance
with customer requirements; and rubber service field crews, which install and repair conveyor belts and
rubber linings at customer locations.
Fluid Power Businesses. Our specialized fluid power businesses primarily market products and services to
customers within the businesses' geographic regions. In the United States, the businesses also market
products and services through our service center network. In addition to distributing fluid power
components, the businesses design and assemble hydraulic and electro-hydraulic power units and control
systems, pneumatic and electro-pneumatic panels and sub-assemblies, fabricated aluminum assemblies,
lubrication systems, hydraulic manifolds, and custom-machined metal parts. They also perform equipment
repair and offer technical advice to customers. Customers include firms purchasing for maintenance, repair,
and operational needs, as well as for original equipment manufacturing applications.
Products. We are a leading distributor of products including bearings, power transmission components, fluid
power components and systems, industrial rubber products, linear motion components, tools, safety products,
oilfield supplies, and other industrial and maintenance supplies. Fluid power products include hydraulic, electro-
hydraulic, pneumatic, electro-pneumatic, lubrication, and filtration components and systems.
These products are generally supplied to us by manufacturers whom we serve as a non-exclusive distributor. The
suppliers also may provide us product training, as well as sales and marketing support. Authorizations to represent
particular suppliers and product lines may vary by geographic region, particularly for our fluid power businesses. We
believe our supplier relationships are generally good, and many have existed for decades. The disruption of
relationships with certain suppliers, or the disruption of their operations, could adversely affect our business.
Our product suppliers typically confine their direct sales activities to large-volume transactions, mainly with large
original equipment manufacturers. The suppliers generally do not sell maintenance and repair products directly to
the customer, but instead refer the customer to us or another distributor.
Net sales by product category for the most recent three fiscal years is detailed in note 12 to the consolidated
financial statements, included in Item 8 under the caption “Financial Statements and Supplementary Data.”
That information is incorporated here by reference.
Services. Our employees advise and assist customers in selecting and applying products, and in managing
inventory. We consider this advice and assistance to be an integral part of our product sales efforts. Beyond
logistical distribution services, we offer product and process solutions involving multiple technologies. These
solutions help customers minimize production downtime, improve machine performance, and reduce overall
procurement and maintenance costs. By providing high levels of service, product and industry expertise, and
technical support, while at the same time offering product breadth and competitive pricing, we believe we develop
stronger, longer-lasting, and more profitable customer relationships.
Our service center sales employees include customer sales and service representatives and account managers, as well
as product and industry specialists. Customer sales and service representatives receive, process, and expedite
customer orders, provide product information, and assist account managers in serving customers. Account
managers make on-site calls to customers to provide product information, identify customer requirements, make
recommendations, and assist in implementing equipment maintenance and storeroom management programs, as
well as automated supplies dispensing systems. Account managers also measure and document the value of the
cost savings and increased productivity we help generate. Product and industry specialists assist with applications in
their areas of expertise.
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Table of Contents
We maintain product inventory levels at each service center tailored to the local market. These inventories consist of
standard items as well as other items specific to local customer demand. Distribution centers replenish service center
inventories and also may ship products directly to customers. Having product in stock helps us satisfy customers'
immediate needs.
Timely delivery of products is an integral part of our service, particularly when customers require products for
emergency repairs. Service centers and distribution centers use the most effective method of transportation
available to meet customer needs. These methods include our own delivery vehicles, dedicated third-party
transportation providers, as well as surface and air common carrier and courier services. Customers can also pick up
items at our service centers.
Our information systems enhance our customer service. Customers can turn to our website at www.applied.com
to search for products in a comprehensive electronic catalog, research product attributes, view prices, check
inventory levels, place orders, and track order status. We also use electronic data interchange (EDI) and other
electronic interfaces with customers' technology platforms and plant maintenance systems.
In addition to our electronic capabilities, we provide customers our paper catalog, a comprehensive purchasing tool
and resource guide for industrial and maintenance products (also available in a mobile-friendly digital version).
The Applied Maintenance Supplies & Solutions service offering provides traditional vendor managed inventory (VMI)
services, at customer sites, for industrial and maintenance supplies, including fasteners, cutting tools, paints and
chemicals, fluid flow, safety, and janitorial products.
In addition to distributing products, we offer shop services in select geographic areas. Our fabricated rubber shops
modify and repair conveyor belts and provide hose assemblies (also available at select service centers and distribution
centers) in accordance with customer requirements. Field crews install and repair conveyor belts and rubber lining,
primarily at customer locations. Among the other services we offer, either performed by us directly or by third party
providers, are the rebuilding or assembly of speed reducers, pumps, valves, cylinders, and electric and hydraulic
motors, and custom machining.
Our specialized fluid power businesses generally operate independently of the service centers, but as product
distributors, share the same focus on customer service. Product and application recommendations, inventory
availability, and delivery speed are all important to the businesses' success.
The fluid power businesses distinguish themselves from most component distributors by offering engineering,
design, system fabrication, installation, and repair services for fluid power systems. Our capabilities extend to the
following specialties: fluid power system integration; manifold design, machining, and assembly; and the integration
of hydraulic and pneumatic equipment with electronics for complete machine design.
Each business has account managers with technical knowledge, who handle sophisticated projects, including original
equipment manufacturing applications. The businesses also provide technical support to our service centers and
their customers.
Markets. We purchase from thousands of product manufacturers and resell the products to thousands of
customers in a wide variety of industries, including agriculture and food processing, automotive, chemicals and
petrochemicals, fabricated metals, forest products, industrial machinery and equipment, mining, oil and gas, primary
metals, transportation, and utilities, as well as to government entities. Customers range from very large businesses,
with which we may have multiple-location relationships, to very small ones. We are not significantly dependent on a
single customer or group of customers, the loss of which would have a material adverse effect on our business as a
whole, and no single customer accounts for more than 3% of our net sales.
Competition. We consider our business to be highly competitive. In addition, our markets present few economic
or technological barriers to entry, contributing to a high fragmentation of market share. Longstanding supplier and
customer relationships, geographic coverage, name recognition, and our employees' knowledge and experience do,
however, support our competitive position. Competition is based generally on breadth and quality of product and
service offerings, product availability, price, ease of product selection and ordering, e-commerce capabilities,
catalogs, and having a local presence. In the fluid power businesses, product manufacturer authorizations are often
more selective and can be a more significant competitive factor, along with market reputation and product
application knowledge.
Our principal competitors are other bearing, power transmission, industrial rubber, fluid power, linear motion, tools,
and safety product distributors, as well as specialized oilfield supply distributors and distributors of other industrial
and maintenance supplies and catalog companies. These competitors include local, regional, national, and
multinational operations. We also compete with original equipment manufacturers and their distributors in the sale
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of maintenance and replacement components. Some competitors have greater financial resources than we do.
The identity and number of our competitors vary throughout the geographic, industry, and product markets we
serve.
Although we are one of the leading distributors in North America, Australia, and New Zealand for the primary
categories of products we provide in those areas, our market share for those products in a given geographic market
may be relatively small compared to the portion of the market served by original equipment manufacturers and
other distributors.
Backlog Orders and Seasonality. Because of the type of industrial distribution we provide, backlog orders are not
material to our business as a whole, although they are a more important factor for our fluid power businesses.
Our business has exhibited minor seasonality - in particular, sales per day during the first half of our fiscal year have
tended in the past to be slightly lower compared with the second half due, in part, to the impact of customer plant
shutdowns, summer vacations and holidays.
Patents, Trademarks, Trade Names, and Licenses. Customer recognition of our service marks and trade names,
including Applied Industrial Technologies® , Applied® , and AIT® , is an important contributing factor to our sales.
Patents and licenses are not of material importance to our business.
Raw Materials and General Business Conditions. Our operations are dependent on general industrial and
economic conditions. We would be adversely affected by the unavailability of raw materials to our suppliers,
prolonged labor disputes experienced by suppliers or customers, or by events or conditions that have an adverse
effect on industrial activity generally in the markets we serve or on key customer industries.
Number of Employees. At June 30, 2016, we had 5,569 employees.
Working Capital. Our working capital position is discussed in Item 7 under the caption “Management's Discussion
and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference.
We require substantial working capital related to accounts receivable and inventories. Significant amounts of
inventory are carried to meet customers' delivery requirements. We generally require payments for sales on account
within 30 days. Returns are not considered to have a material effect on our working capital requirements.
We believe these practices are generally consistent among companies in our industry.
Environmental Laws. We believe that compliance with laws regulating the discharge of materials into the
environment or otherwise relating to environmental protection will not have a material adverse effect on our capital
expenditures, earnings, or competitive position.
(d) Financial Information about Geographic Areas.
Information regarding our foreign operations, including information about revenues and long-lived assets, is
included in note 12 to the consolidated financial statements, included in Item 8 under the caption “Financial
Statements and Supplementary Data,” as well as in Item 7A under the caption “Quantitative and Qualitative
Disclosures about Market Risk.” That information is incorporated here by reference.
ITEM 1A. RISK FACTORS.
In addition to other information set forth in this report, you should carefully consider the following factors that could
materially affect our business, financial condition, or results of operations. The risks described below are not the
only risks facing our Company. Certain risks are identified below in Item 7 under the caption “Management's
Discussion and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by
reference. Additional risks not currently known to us, risks that could apply broadly to issuers, or risks that we
currently deem immaterial, may also impact our business and operations. Risks can also change over time.
Our business depends heavily on the operating levels of our customers and the economic factors that
affect them. The markets for the products and services we sell are subject to conditions or events that affect
demand for goods and materials that our customers produce. Consequently, demand for our products and services
has been and will continue to be influenced by most of the same economic factors that affect demand for and
production of customers' goods and materials.
When customers or prospective customers reduce production levels because of lower demand, increased supply,
higher costs, tight credit conditions, unfavorable currency exchange rates, foreign competition, other competitive
disadvantage, offshoring of production, or other reasons, their need for our products and services diminishes.
Selling prices and terms of sale come under pressure, adversely affecting the profitability and the durability of
customer relationships, and credit losses may increase. Inventory management becomes more difficult in times of
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economic uncertainty. Volatile economic and credit conditions also make it more difficult for us, as well as our
customers and suppliers, to forecast and plan future business activities.
Consolidation in our customers' and suppliers' industries could adversely affect our business and financial
results. Consolidation continues to occur among our product suppliers and customers. As customers industries
consolidate, a greater proportion of our sales could be derived from higher volume contracts, which could adversely
impact margins. Consolidation among customers can trigger changes in their purchasing strategies, potentially
moving large blocks of business among competing distributors and contributing to volatility in our sales and pressure
on prices. Similarly, continued consolidation among our suppliers could reduce our ability to negotiate favorable
pricing and other commercial terms for our inventory purchases. There can be no assurance we will be able to take
advantage of consolidation trends.
Loss of key supplier authorizations, lack of product availability, or changes in distribution programs could
adversely affect our sales and earnings. Our business depends on maintaining an immediately available supply of
various products to meet customer demand. Many of our relationships with key product suppliers are longstanding,
but are terminable by either party. The loss of key supplier authorizations, or a substantial decrease in the availability
of their products, could put us at a competitive disadvantage and have a material adverse effect on our business.
Supply interruptions could arise from raw materials shortages, inadequate manufacturing capacity or utilization to
meet demand, financial problems, trade issues, labor disputes, or weather conditions affecting suppliers' production,
transportation disruptions, or other reasons beyond our control.
In addition, as a distributor, we face the risk of key product suppliers changing their relationships with distributors
generally, or Applied in particular, in a manner that adversely impacts us. For example, key suppliers could change
the following: the prices we must pay for their products relative to other distributors or relative to competing
products; the geographic or product line breadth of distributor authorizations; supplier purchasing incentive or other
support programs; or product purchase or stocking expectations.
An increase in competition could decrease sales or earnings. We operate in a highly competitive industry. The
industry remains fragmented, but is consolidating. Our competitors include local, regional, national, and
multinational distributors of industrial machinery parts, equipment, and supplies. Competition is largely focused in
the local service area and is generally based on product line breadth, product availability, service capabilities, and
price. Existing competitors have, and future competitors may have, greater financial or other resources than we do,
broader product or service offerings, greater market presence, or better name recognition. If existing or future
competitors seek to gain or to retain market share by aggressive pricing strategies and sales methods, or otherwise
through competitive advantage, our sales and profitability could be adversely affected. Our success will also be
affected by our ability to continue to provide competitive offerings as customer preferences or demands evolve, for
example with respect to our product portfolio or our e-commerce and inventory management solutions.
The purchasing incentives we earn from product suppliers can be impacted if we reduce our purchases in
response to declining customer demand. Certain of our product suppliers have historically offered to their
distributors, including us, incentives for purchasing their products. In addition to market or customer account-
specific incentives, certain suppliers pay incentives to the distributor for attaining specific purchase volumes during
the program period. In some cases, in order to earn incentives, we must achieve year-over-year growth in purchases
with the supplier. When demand for our products declines, we may be less inclined to add inventory to take
advantage of certain incentive programs, thereby potentially adversely impacting our profitability.
Changes in customer or product mix and downward pressure on sales prices could cause our gross profit
percentage to fluctuate or decline. Because we serve thousands of customers in many end markets, and offer
millions of products, with varying profitability levels, changes in our customer or product mix could cause our gross
profit percentage to fluctuate or decline. Downward pressure on sales prices could also cause our gross profit
percentage to fluctuate or decline. We can experience downward pressure on sales prices as a result of deflation,
pressure from customers to reduce costs, or increased competition.
Our ability to transact business is highly reliant on information systems. A disruption or security breach
could materially affect our business, financial condition, or results of operation. We depend on information
systems to process customer orders, manage inventory and accounts receivable collections, purchase products,
manage accounts payable processes, ship products to customers on a timely basis, maintain cost-effective
operations, provide superior service to customers, and accumulate financial results. A serious, prolonged disruption
of our information systems, due to manmade or natural causes, or breach in security, could materially impair
fundamental business processes and increase expenses, decrease sales, or otherwise reduce earnings.
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Because of our reliance on information systems, we may be vulnerable to the growing threat of damage or intrusion
from computer viruses or other cyber-attacks on our systems. Despite precautions taken to prevent or mitigate the
risks of such incidents, an attack on our systems could not only cause business disruption, but could also result in the
theft or disclosure of proprietary or confidential information, or a breach of customers, supplier, or employee
information. Such an incident could negatively impact our sales, damage our reputation, and cause us to incur
unanticipated legal liability and costs.
In recent years, we replaced multiple legacy applications with an SAP software platform, to enhance our business
information and transaction systems to support future growth. We are considering additional enterprise resource
planning system conversions, on a smaller scale, in discrete business operations. Despite extensive planning, we
could experience disruptions related to the implementation because of the projects' complexity. The potential
adverse consequences could include delays, loss of information, diminished management reporting capabilities,
damage to our ability to process transactions, harm to our control environment, diminished employee productivity
and unanticipated increases in costs. Further, our ability to achieve anticipated operational benefits from new
platforms is not assured.
Volatility in product and energy costs can affect our profitability. Changes in costs of raw materials and
energy can lead product manufacturers to adjust the prices of products we distribute. In addition, a portion of our
own distribution costs is comprised of fuel for our sales and delivery vehicles, freight, and utility expenses for our
facilities. Our ability to pass along increases in our product and distribution costs to our customers depends on
market conditions. Raising our prices could result in decreased sales volume, which could significantly reduce our
profitability. While increases in the cost of energy or products could be damaging to us, decreases in those costs,
particularly if severe, could also adversely impact us by creating deflation in selling prices, which could cause our
gross profit margin to deteriorate. Changes in energy or raw materials costs can also adversely affect customers; for
example, declines in oil and gas prices negatively impacted customers operating in those industries and,
consequently, our sales to those customers.
Acquisitions are a key component of our anticipated growth. We may not be able to identify or to
complete future acquisitions, to integrate them effectively into our operations, or to realize their
anticipated benefits. Many industries we serve are mature. As a result, acquisitions of businesses have been
important to our growth. While we wish to continue to acquire businesses, we may not be able to identify and to
negotiate suitable acquisitions, to obtain financing for them on satisfactory terms, or otherwise to complete
acquisitions. In addition, existing or future competitors may increasingly seek to compete with us for acquisitions,
which could increase prices and reduce the number of suitable opportunities.
We seek acquisition opportunities that complement and expand our operations. However, substantial costs, delays,
or other difficulties related to integrating acquisitions could adversely affect our business or financial results. We
could face significant challenges in consolidating functions, integrating information systems, personnel, and
operations, and implementing procedures and controls in a timely and efficient manner.
Further, even if we successfully integrate the acquisitions with our operations, we may not be able to realize cost
savings, sales, profit levels, or other benefits that we anticipate from these acquisitions, either as to amount or in the
time frame we expect. Our ability to realize anticipated benefits may be affected by a number of factors, including
the following: our ability to achieve planned operating results, to reduce duplicative expenses and inventory
effectively, and to consolidate facilities; economic and market factors; the incurrence of significant integration costs
or charges in order to achieve those benefits; our ability to retain key product supplier authorizations, customer
relationships, and employees; and our ability to address competitive, distribution, and regulatory challenges arising
from entering into new markets, especially those in which we may have limited or no direct experience. In addition,
acquisitions could place significant demand on administrative, operational, and financial resources.
Goodwill and other intangible assets recorded as a result of our acquisitions could become impaired.
We review long-lived assets, including property, plant and equipment and identifiable amortizing intangible assets,
for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not
recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference.
Factors which may cause an impairment of long-lived assets include significant changes in the manner of use of
these assets, negative industry or market trends, a significant underperformance relative to historical or projected
future operating results, or a likely sale or disposal of the asset before the end of its estimated useful life. In 2016
we recorded a $64.8 million non-cash impairment charge for goodwill associated with the service center-based
distribution reporting units in Canada, Australia, and New Zealand.
As of June 30, 2016, we had remaining $202.7 million of goodwill and $191.2 million of other intangible assets,
net. We assess all existing goodwill at least annually for impairment on a reporting unit basis. The techniques used
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in our qualitative assessment and goodwill impairment tests incorporate a number of estimates and assumptions that
are subject to change. Although we believe these estimates and assumptions are reasonable and reflect market
conditions forecasted at the assessment date, any changes to these assumptions and estimates due to market
conditions or otherwise may lead to an outcome where impairment charges would be required in future periods.
Tight credit markets could impact our ability to obtain financing on reasonable terms or increase the cost
of future financing. Although the credit market turmoil of several years ago did not have a significant adverse
impact on our liquidity or borrowing costs, the availability of funds tightened and credit spreads on corporate debt
increased. If credit market volatility were to return, then obtaining additional or replacement financing could be
more difficult and the cost of issuing new debt or replacing a credit facility could be higher than under our current
facilities. Tight credit conditions could limit our ability to finance acquisitions on terms acceptable to us.
For more information relating to borrowing and interest rates, see the following sections below: “Liquidity and
Capital Resources” in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and
Results of Operations;” Item 7A under the caption “Quantitative and Qualitative Disclosures about Market Risk;”
and note 5 to the consolidated financial statements, included below in Item 8 under the caption “Financial
Statements and Supplementary Data.” That information is incorporated here by reference.
Our ability to maintain effective internal control over financial reporting may be insufficient to allow us to
accurately report our financial results or prevent fraud, and this could cause our financial statements to
become materially misleading and adversely affect the trading price of our common stock. We require
effective internal control over financial reporting in order to provide reasonable assurance with respect to our
financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect
misstatements because of its inherent limitations, including the possibility of human error, the circumvention or
overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance
with respect to the preparation and fair presentation of financial statements. If we cannot provide reasonable
assurance with respect to our financial statements and effectively prevent fraud, our financial statements could
become materially misleading, which could adversely affect the trading price of our common stock.
If we are not able to maintain the adequacy of our internal control over financial reporting, including any failure to
implement required new or improved controls, or if we experience difficulties in their implementation, our business,
financial condition and operating results could be harmed. Any material weakness could affect investor confidence
in the accuracy and completeness of our financial statements. As a result, our ability to obtain any additional
financing, or additional financing on favorable terms, could be materially and adversely affected. This, in turn, could
materially and adversely affect our business, financial condition, and the market value of our stock and require us to
incur additional costs to improve our internal control systems and procedures. In addition, perceptions of the
Company among customers, suppliers, lenders, investors, securities analysts, and others could also be adversely
affected.
We can give no assurances that any material weaknesses will not arise in the future due to our failure to implement
and maintain adequate internal control over financial reporting. In addition, although we have been successful
historically in strengthening our controls and procedures, those controls and procedures may not be adequate to
prevent or identify irregularities or ensure the fair presentation of our financial statements included in our periodic
reports filed with the SEC.
There is no assurance that we will continue to pay dividends on our common stock, and our indebtedness
could limit our ability to pay dividends. The timing, declaration, amount, and payment of dividends to our
shareholders fall within the discretion of our Board of Directors and depend on many factors, including our financial
condition and results of operations, as well as applicable law and business considerations that our Board of Directors
considers relevant. There can be no assurance that we will continue to pay a quarterly dividend.
Additionally, if we cannot generate sufficient cash flow from operations to meet our debt payment obligations, then
our ability to pay dividends, if so determined by the Board of Directors, will be impaired and we may be required to
attempt to restructure or refinance our debt, raise additional capital, or take other actions such as selling assets,
reducing, or delaying capital expenditures, or reducing our dividend. There can be no assurance, however, that any
such actions could be effected on satisfactory terms, if at all, or would be permitted by the terms of our debt or our
other credit and contractual arrangements.
Our growth outside the United States increases our exposure to global economic and political conditions
and currency exchange volatility. Foreign operations contributed 16.0% of our sales in 2016. If we continue to
grow outside the U.S., risks associated with exposure to more volatile economic conditions, political instability,
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cultural and legal differences in conducting business, (including corrupt practices), and currency exchange
fluctuations will increase.
Our foreign operations' results are reported in the local currency and then translated into U.S. dollars at applicable
exchange rates for inclusion in our consolidated financial statements. Fluctuations in currency exchange rates affect
our operating results and financial position and affect the comparability of results between financial periods.
Our business depends on our ability to attract, develop, motivate, and retain qualified employees. Our
success depends on hiring, developing, motivating, and retaining key employees, including executive, managerial,
sales, professional, and other personnel. We may have difficulty identifying and hiring qualified personnel. In
addition, we may have difficulty retaining such personnel once hired, and key people may leave and compete against
us. With respect to sales and customer service positions in particular, we greatly benefit from having employees who
are familiar with the products we sell and their applications, as well as with our customer and supplier relationships.
The loss of key employees or our failure to attract and retain other qualified workers could disrupt or adversely affect
our business. In addition, our operating results could be adversely affected by increased competition for employees,
shortages of qualified workers, higher employee turnover (including through retirement as the workforce ages), or
increased employee compensation or benefit costs.
An interruption of operations at our headquarters or distribution centers, or in our means of transporting
product, could adversely impact our business. Our business depends on maintaining operating activity at our
headquarters and distribution centers, and being able to receive and deliver product in a timely manner. A serious,
prolonged interruption due to power or telecommunications outage, terrorist attack, earthquake, extreme weather
events, other natural disasters, fire, flood, or other interruption could have a material adverse effect on our business
and financial results.
We are subject to litigation and regulatory risk due to the nature of our business, which may have a
material adverse effect on our business. From time to time, we are involved in lawsuits or other legal
proceedings that arise from our business. These may, for example, relate to product liability claims, commercial
disputes, personal injuries, or employment-related matters. In addition, we could face claims over other matters,
such as claims arising from our status as a public company or government contractor, or otherwise relating to our
compliance with a wide array of laws and regulations to which we are subject. The defense and ultimate outcome
of lawsuits or other legal proceedings or inquiries may result in higher operating expenses, which could have a
material adverse effect on our business, financial condition, or results of operations.
Our business is subject to risks, some for which we maintain third-party insurance and some for which we
self-insure. We may incur losses and be subject to liability claims that could have a material adverse effect
on our financial condition, results of operations, or cash flows. We maintain insurance policies that provide
limited coverage for some, but not all, of the potential risks and liabilities associated with our business. The policies
are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insured basis. For
some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks
presented. Because of market conditions, premiums and deductibles for certain insurance policies can increase
substantially, and in some instances, certain insurance may become unavailable or available only for reduced
amounts of coverage. As a result, we may not be able to renew existing insurance policies or procure other
desirable insurance on commercially reasonable terms, if at all. Even where insurance coverage applies, insurers may
contest their obligations to make payments. Our financial condition, results of operations, and cash flows could be
materially and adversely affected by losses and liabilities from uninsured or under-insured events, as well as by delays
in the payment of insurance proceeds, or the failure by insurers to make payments.
In addition to the risks identified above, other risks to our future performance include, but are not limited
to, the following:
changes in customer preferences for products and services of the nature, brands, quality,
or cost sold by us;
changes in customer procurement policies and practices;
changes in the market prices for products and services relative to the costs of providing them;
changes in operating expenses;
organizational changes within the Company;
adverse regulation and legislation, both enacted and under consideration, including with respect to
federal tax policy (e.g., affecting the use of the LIFO inventory accounting method and the taxation of
foreign-sourced income);
the variability and timing of new business opportunities including acquisitions, customer relationships, and
supplier authorizations;
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the incurrence of debt and contingent liabilities in connection with acquisitions;
volatility of our stock price and the resulting impact on our consolidated financial statements; and
changes in accounting policies and practices that could impact our financial reporting and increase
compliance costs.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
We believe having a local presence is important to serving our customers, so we maintain service centers and other
operations in local markets throughout the countries in which we operate. At June 30, 2016, we owned real
properties at 125 locations and leased 405 locations. Certain properties house more than one operation.
The following were our principal owned real properties (each of which has more than 30,000 square feet of floor
space) at June 30, 2016.
Location of Principal Owned
Real Property
Cleveland, Ohio
Lake City, Florida
Atlanta, Georgia
Florence, Kentucky
Highland Heights, Ohio
Agawam, Massachusetts
Carlisle, Pennsylvania
Fort Worth, Texas
Clairmont, Alberta
Type of Facility
Corporate headquarters
Office and warehouse
Distribution center and service center
Distribution center
Fluid power shop
Office and warehouse
Distribution center
Distribution center and rubber shop
Service center
Our principal leased real properties (each of which has more than 30,000 square feet of floor space) at June 30,
2016 were:
Location of Principal Leased
Real Property
Fontana, California
Newark, California
Denver, Colorado
Lenexa, Kansas
Chanhassen, Minnesota
Billings, Montana
Elyria, Ohio
Parma, Ohio
Portland, Oregon
Houston, Texas
Kent, Washington
Longview, Washington
Appleton, Wisconsin
Edmonton, Alberta
Winnipeg, Manitoba
Type of Facility
Distribution center, rubber shop, fluid power shop, and
service center
Fluid power shop
Rubber shop and service center
Fluid power shop
Fluid power shop
Fluid power shop
Product return center and service center
Offices and warehouse
Distribution center
Service center and shop
Offices and fluid power shop
Service center, rubber shop, and fluid power shop
Offices, service center, and rubber shop
Service center and shop
Distribution center and service center
The properties in Highland Heights, Newark, Lenexa, Chanhassen, Billings and Kent are used in our fluid power
businesses segment.
The Fontana and Longview properties are used in both the service center-based distribution segment and the fluid
power businesses segment. The remaining properties are used in the service center-based distribution segment.
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We consider our properties generally sufficient to meet our requirements for office space and inventory stocking.
A service center's size is primarily influenced by the amount and types of inventory the service center requires to
meet customers' needs.
When opening new operations, we have tended to lease rather than purchase real property. We do not consider
any service center, distribution center, or shop property to be material, because we believe that, if it becomes
necessary or desirable to relocate an operation, other suitable property could be found.
In addition to operating locations, we own or lease certain properties which in the aggregate are not material and
are either for sale, lease, or sublease to third parties due to a relocation or closing. We also may lease or sublease to
others unused portions of buildings.
Additional information regarding our properties can be found in note 11 to the consolidated financial statements,
included below in Item 8 under the caption “Financial Statements and Supplementary Data.” That information is
incorporated here by reference.
ITEM 3. LEGAL PROCEEDINGS.
Applied and/or one of its subsidiaries is a party to pending legal proceedings with respect to product liability,
commercial, personal injury, and other matters. Although it is not possible to predict the outcome of these
proceedings or the range of reasonably possible loss, we believe, based on circumstances currently known, that the
likelihood is remote that the ultimate resolution of any of these proceedings will have, either individually or in the
aggregate, a material adverse effect on Applied's consolidated financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-
Frank Wall Street Reform and Consumer Protection Act and Item 104 of the SEC Regulation S-K is included in Exhibit
95 to this annual report on Form 10-K.
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EXECUTIVE OFFICERS OF THE REGISTRANT.
Applied's executive officers are elected by the Board of Directors for a term of one year, or until their successors are
chosen and qualified, at the Board's organizational meeting held following the annual meeting of shareholders.
The following is a list of the executive officers and a description of their business experience during the past five
years. Except as otherwise stated, the positions and offices indicated are with Applied, and the persons were most
recently elected to their current positions on October 27, 2015:
Name
Neil A. Schrimsher
Thomas E. Armold
Todd A. Barlett
Fred D. Bauer
Mark O. Eisele
Warren E. Hoffner
Kurt W. Loring
Positions and Experience
President (since August 2013) and Chief Executive Officer (since October
2011). From 2010 to August 2011, Mr. Schrimsher was Executive Vice
President of Cooper Industries plc (formerly NYSE: CBE), a global electrical
products manufacturer, where he led Cooper's Electrical Products Group
and headed numerous domestic and international growth initiatives. He
was President of Cooper Lighting, Inc. from 2006 to 2010.
Vice President-Sales since February 2015. Prior to that, he had served as
Vice President-Marketing and Strategic Accounts since 2008.
Vice President-Acquisitions and Global Business Development since 2004.
Vice President-General Counsel & Secretary since 2002.
Vice President-Chief Financial Officer & Treasurer since 2004.
Vice President-General Manager, Fluid Power since 2003. The Board of
Directors designated him an executive officer in October 2015.
Vice President-Chief Human Resources Officer since July 2014. From
October 2011 to July 2014 he was Vice President, Human Resources for the
Forged Products segment of Precision Castparts Corporation (formerly NYSE:
PCP). The $4.3 billion segment, with greater than 5,000 employees, is a
world-leading producer of complex forgings and high-performance nickel-
based alloys and super alloys for aerospace, power generation, and general
industrial applications. Prior to that he served with Danaher Corporation
(NYSE: DHR), most recently as the Vice President, Human Resources for its
Fluke Corporation subsidiary, a leader in the manufacture, distribution, and
service of electronic test tools and software worldwide.
Age
52
61
61
50
59
56
47
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Applied's common stock, without par value, is listed for trading on the New York Stock Exchange with the ticker
symbol “AIT.” Information concerning the quarterly stock dividends for the fiscal years ended June 30, 2016, 2015,
and 2014 and the number of shareholders of record as of August 5, 2016 are set forth in Item 8, “Financial
Statements and Supplementary Data,” in the “Quarterly Operating Results” table. That information is incorporated
here by reference.
Set forth below is market information on Applied's common stock.
Shares Traded
Average Daily Volume
High
Low
Price Range
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
17,146,300
14,832,500
14,619,200
12,583,200
9,932,400
11,023,400
17,181,400
16,892,300
9,157,400
12,634,700
10,107,300
12,799,900
267,900
231,800
239,700
196,600
$
42.65
43.54
44.24
47.18
$
37.15
37.00
35.55
42.52
155,200
$
52.62
$
45.54
172,200
281,700
268,100
50.00
46.05
45.22
42.92
39.76
39.54
143,100
$
53.57
$
47.21
197,400
165,700
203,200
53.45
52.27
51.44
45.62
45.74
45.62
The following table summarizes Applied's repurchases of its common stock in the quarter ended June 30, 2016.
Period
April 1, 2016 to April 30, 2016
May 1, 2016 to May 31, 2016
June 1, 2016 to June 30, 2016
Total
(a) Total
Number of
Shares (1)
(b) Average
Price Paid per
Share ($)
87
—
—
87
$45.62
—
—
$45.62
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
—
—
—
—
(d) Maximum Number of Shares
that May Yet Be Purchased Under
the Plans or Programs (2)
296,200
296,200
296,200
296,200
(1) During the quarter ended June 30, 2016, Applied purchased 87 shares in connection with an employee deferred compensation
program. This purchase is not counted in the authorization in note (2).
(2) On April 28, 2015, the Board of Directors authorized the purchase of up to 1.5 million shares of Applied's common stock.
We publicly announced the authorization on April 30, 2015. Purchases can be made in the open market or in privately negotiated
transactions. The authorization is in effect until all shares are purchased, or the Board revokes or amends the authorization.
13
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ITEM 6. SELECTED FINANCIAL DATA.
This selected financial data should be read in conjunction with Applied's consolidated financial statements and
related notes included elsewhere in this annual report as well as the section of the annual report titled Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
(In thousands, except per share amounts and statistical data)
Consolidated Operations — Year Ended June 30
Net sales
Depreciation and amortization of property
Amortization:
Intangible assets
SARs and stock options
Operating income (a)
Net income (a)
Per share data:
Net income:
Basic
Diluted (a)
Cash dividend
2016
2015
2014
2013
2012
$2,519,428
15,966
$ 2,751,561
16,578
$2,459,878
13,977
$2,462,171
12,501
$ 2,375,445
11,236
25,580
1,543
88,801
29,577
0.75
0.75
1.10
25,797
1,610
184,619
115,484
14,023
1,808
164,358
112,821
13,233
2,317
176,399
118,149
2.82
2.80
1.04
2.69
2.67
0.96
2.81
2.78
0.88
11,465
2,058
168,395
108,779
2.58
2.54
0.80
Year-End Position — June 30
Working capital
Long-term debt (including portion classified as current)
Total assets
Shareholders’ equity
$ 507,238
328,334
1,312,529
657,916
$ 535,938
320,995
1,432,556
741,328
$ 545,193
170,712
1,334,169
800,308
$ 491,380
—
1,058,706
759,615
$ 435,593
—
962,183
672,131
Year-End Statistics — June 30
Current ratio
Operating facilities
Shareholders of record (b)
Return on assets (a) (c)
Return on equity (d)
Capital expenditures (e)
Cash Returned to Shareholders During the Year
Dividends paid
Purchases of treasury shares
Total
2.8
559
5,372
2.2%
4.2%
2.7
565
6,016
7.9%
15.0%
2.9
538
6,330
10.2%
14.5%
3.0
522
6,319
11.6%
16.5%
2.9
476
6,225
11.8%
16.7%
$
$
$
13,130
$
14,933
43,330
37,465
80,795
$
42,663
76,515
$ 119,178
$
$
$
20,190
40,410
36,732
77,142
$
$
$
12,214
37,194
53
37,247
$
$
$
26,021
33,800
31,032
64,832
(a) A goodwill impairment charge in fiscal 2016 reduced operating income by $64.8 million, net income by $63.8 million, and diluted
earnings per share by $1.62. Excluding the goodwill impairment charge, the fiscal 2016 return on assets would be 6.7%.
(b)
Includes participant-shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan and shareholders in the
Company's direct stock purchase program.
(c) Return on assets is calculated as net income divided by monthly average assets.
(d) Return on equity is calculated as net income divided by the average shareholders’ equity (beginning of the year plus end of
the year divided by 2).
(e) Capital expenditures for fiscal 2014 included the purchase of our headquarters facility which used $10.0 million of cash.
Capital expenditures for 2013 and 2012 include $5.6 million and $16.7 million related to Applied's Enterprise Resource Planning
(ERP) system project, respectively. See Item 7 under the caption “Management's Discussion and Analysis of Financial Condition
and Results of Operations” for further description of the ERP project.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
With more than 5,500 employees across North America, Australia and New Zealand, Applied Industrial Technologies
(“Applied,” the “Company,” “We,” “Us” or “Our”) is a leading industrial distributor serving MRO (Maintenance,
Repair & Operations) and OEM (Original Equipment Manufacturer) customers in virtually every industry. In addition,
Applied provides engineering, design and systems integration for industrial and fluid power applications, as well as
customized mechanical, fabricated rubber and fluid power shop services. We have a long tradition of growth dating
back to 1923, the year our business was founded in Cleveland, Ohio. At June 30, 2016, business was conducted in
the United States, Puerto Rico, Canada, Mexico, Australia and New Zealand from 559 facilities.
The following is Management's Discussion and Analysis of significant factors that have affected our financial
condition, results of operations and cash flows during the periods included in the accompanying consolidated
balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash
flows in Item 8 under the caption "Financial Statements and Supplementary Data." When reviewing the discussion
and analysis set forth below, please note that the majority of SKUs (Stock Keeping Units) we sell in any given year
were not sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used
comparative metrics analyzing sales, such as changes in product mix and volume.
Our fiscal 2016 consolidated sales were $2.52 billion, a decrease of $232.1 million or 8.4% compared to the prior
year, with acquisitions contributing $57.1 million or 2.1% and unfavorable foreign currency translation of $60.1
million decreasing sales by 2.2%. Gross profit margin remained stable at 28.1% for fiscal 2016 and 28.0% for fiscal
2015. Operating margin decreased to 3.5% in fiscal 2016, down from 6.7% in fiscal 2015 due to a non-cash
goodwill impairment charge recorded during the third quarter of fiscal 2016, totaling $64.8 million, related to the
goodwill associated with the Company's Canada and Australia/New Zealand reporting units within the Service
Center Based Distribution segment.
During fiscal 2016, the Company recorded charges of $8.8 million for restructuring activities within the Service
Center Based Distribution segment to reduce headcount and consolidate locations. Of the total, $3.6 million related
to inventory reserves for excess and obsolete inventory recorded within cost of sales, and $5.2 million related to
severance and facility consolidation recorded within selling, distribution and administrative expense.
Our earnings per share was $0.75 in fiscal 2016 versus $2.80 in fiscal year 2015, a decrease of 73.2%. The current
year results include negative impacts on earnings per share of $1.62 per share for the non-cash goodwill impairment
charge and $0.16 per share for restructuring charges.
Shareholders’ equity was $657.9 million at June 30, 2016, down from $741.3 million at June 30, 2015. Working
capital decreased $28.7 million from June 30, 2015 to $507.2 million at June 30, 2016. The current ratio was 2.8 to
1 at June 30, 2016, compared to 2.7 to 1 at June 30, 2015.
Applied monitors several economic indices that have been key indicators for industrial economic activity in the United
States. These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published
by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply
Management (ISM). Historically, our performance correlates well with the MCU, which measures productivity and
calculates a ratio of actual manufacturing output versus potential full capacity output. When manufacturing plants
are running at a high rate of capacity, they tend to wear out machinery and require replacement parts.
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The MCU (total industry) and IP indices have generally trended lower during fiscal 2016 correlating with the overall
downturn in the industrial economy, although they increased in the June 2016 quarter. The ISM PMI registered 53.2
in June 2016, the highest reading in fiscal 2016, and an increase from the June 2015 revised reading of 53.1. A
reading above 50 generally indicates expansion. The index readings for the months during the current quarter,
along with the revised indices for previous quarter ends, were as follows:
Month
June 2016
May 2016
April 2016
March 2016
December 2015
September 2015
June 2015
MCU
75.4
74.9
75.2
74.8
75.4
77.8
76.4
Index Reading
PMI
53.2
51.3
50.8
51.8
48.0
50.0
53.1
IP
103.2
102.8
103.0
103.0
103.0
105.8
105.1
YEAR ENDED JUNE 30, 2016 vs. 2015
The following table is included to aid in review of Applied’s statements of consolidated income.
Net Sales
Gross Profit Margin
Selling, Distribution & Administrative
Operating Income
Net Income
Year Ended June 30,
As a % of Net Sales
Change in
$'s Versus
Prior Period
2016
2015
% Change
100.0%
100.0%
28.1%
22.0%
3.5%
1.2%
28.0%
21.3%
6.7%
4.2%
(8.4)%
(8.1)%
(5.4)%
(51.9)%
(74.4)%
Sales in fiscal 2016 were $2.52 billion, which was $232.1 million or 8.4% below the prior year, with unfavorable
foreign currency translation accounting for $60.1 million or 2.2% of the decrease, offset by sales from acquisitions
of $57.1 million or 2.1%. Excluding the impact of businesses acquired and prior to the impact of foreign currency
translation, sales were down $229.1 million or 8.3% during the year. Of the 8.3% decrease, 5.1% pertains to our
upstream oil and gas-focused operations (which experienced sales declines of 50.1% during the year) and 3.2% is
within our traditional core operations. There were 253.5 selling days in fiscal 2016 and 252.5 selling days in fiscal
2015.
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $167.7
million, or 7.4%. Acquisitions within this segment increased sales by $38.7 million or 1.7%, while unfavorable
foreign currency translation decreased sales by $50.7 million or 2.2%. Excluding the impact of businesses acquired
and unfavorable currency translation impact, sales decreased $155.7 million or 6.9%, the majority of which relates
to the upstream oil and gas-focused operations, as the traditional core operations had a decrease of only 1.7%.
Sales of our Fluid Power Businesses segment, which operates primarily in OEM markets, decreased $64.4 million or
13.0%. Acquisitions within this segment increased sales $18.4 million or 3.7%, while unfavorable foreign currency
translation decreased sales by $9.4 million or 1.9%. Excluding the impact of businesses acquired and unfavorable
currency translation impact, sales decreased $73.4 million or 14.8%.
Sales in our U.S. operations were down $120.8 million or 5.4%, while acquisitions added $56.9 million or 2.5%.
Excluding the impact of businesses acquired, U.S. sales were down $177.7 million or 7.9%, of which 3.7% is from
our upstream oil and gas-focused operations and 4.2% is within our traditional core operations. Sales from our
Canadian operations decreased $100.8 million or 28.1%, with unfavorable foreign currency translation decreasing
Canadian sales by $33.6 million or 9.4%. Acquisitions added $0.2 million, or less than 1.0%. Prior to the impact of
foreign currency translation and excluding businesses acquired, Canadian sales were down $67.4 million or 18.7%,
of which 15.4% related to upstream oil and gas operations with the remaining 3.3% decrease from the traditional
core operations. Consolidated sales from our other country operations, which include Mexico, Australia and New
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Zealand, decreased $10.5 million or 6.8% compared to the prior year. Unfavorable foreign currency translation
decreased other country sales by $26.5 million or 17.1%. Prior to the impact of currency translation, other country
sales were up $16.0 million or 10.3% compared to the prior year, driven by growth in operations in Mexico.
The sales product mix for fiscal 2016 was 72.9% industrial products and 27.1% fluid power products compared to
73.2% industrial and 26.8% fluid power in the prior year.
Our gross profit margin remained stable at 28.1% in fiscal 2016 and 28.0% in fiscal 2015. The increase is due to
the impact of LIFO layer liquidations recorded in fiscal 2016 which increased gross profit by $2.1 million.
Selling, distribution and administrative expenses (SD&A) consist of associate compensation, benefits and other
expenses associated with selling, purchasing, warehousing, supply chain management, and providing marketing and
distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as
human resources, information technology, treasury, accounting, legal, facility related expenses and expenses
incurred with acquiring businesses. SD&A decreased $31.4 million or 5.4% during fiscal 2016 compared to the prior
year, and as a percent of sales increased to 22.0% from 21.3% in fiscal 2015. Changes in foreign currency
exchange rates had the effect of decreasing SD&A by $14.9 million or 2.5% compared to the prior year. Additional
SD&A from businesses acquired in the current year added $16.0 million or 2.7% of SD&A expenses including $2.1
million associated with intangibles amortization. Further, severance expense and other restructuring charges related
to consolidating facilities added $5.2 million or 0.9% of SD&A for the twelve months ended June 30, 2016.
Excluding the impact of businesses acquired, restructuring expenses, and the favorable currency translation impact,
SD&A declined $37.7 million or 6.5% during fiscal 2016 compared to fiscal 2015 as a result of continuous efforts to
minimize such expenses. These efforts to minimize expense were led by efforts to control headcount. Excluding the
effect of acquisitions, overall headcount is down by over 400 associates from June 30, 2015 to June 30, 2016. Total
salaries and wages were down $17.0 million for fiscal 2016 compared to fiscal 2015 while all other expenses within
SD&A were down $14.4 million.
During the third quarter of fiscal 2016, the Company performed its annual goodwill impairment test. As a result of
this test, the Company determined that all of the goodwill associated with the Australia/New Zealand Service Center
Based Distribution reporting unit was impaired as of January 1, 2016. This impairment is the result of the decline in
the mining and extraction industries in Australia and the resulting reduced customer spending due to a decline in
demand throughout Asia. Further, due to a sustained decline in oil prices and reduced customer spending in
Canada, the Company determined that a portion of the goodwill associated with the Canada Service Center Based
Distribution reporting unit was also impaired as of January 1, 2016. Accordingly, the Company recognized a
combined non-cash impairment charge of $64.8 million for goodwill during fiscal 2016, which decreased net income
by $63.8 million and earnings per share by $1.62. Changes in future results, assumptions, and estimates used in
calculating the goodwill impairment test could result in additional impairment charges in future periods.
Operating income decreased $95.8 million, or 51.9%, to $88.8 million during fiscal 2016 from $184.6 million during
fiscal 2015, and as a percent of sales, decreased to 3.5%, primarily due to the non-cash goodwill impairment charge
of $64.8 million. Excluding the goodwill impairment charge, operating income as a percent of sales was 6.1%,
down from 6.7% in the prior year primarily due to the $8.8 million of restructuring charges incurred during fiscal
2016 and lower sales volume.
Operating income, before the goodwill impairment charge, as a percentage of sales for the Service Center Based
Distribution segment decreased to 5.2% in fiscal 2016 from 6.2% in fiscal 2015. This decrease is primarily
attributable to the impact of lower sales and the $8.8 million of restructuring charges recorded to costs of sales and
SD&A during fiscal 2016.
Operating income as a percentage of sales for the Fluid Power Businesses segment decreased to 9.4% in fiscal 2016
from 9.8% in fiscal 2015. This decrease is primarily attributable to a decline in sales without a commensurate
decline in the business segment's SD&A expenses.
Segment operating income is impacted by changes in the amounts and levels of expenses allocated to the segments.
The expense allocations include corporate charges for working capital, logistics support and other items and impact
segment gross profit and operating expense.
Other expense (income), net, represents certain non-operating items of income and expense. This was $1.1 million
of expense in fiscal 2016 compared to $0.9 million of expense in fiscal 2015. Current year expense primarily consists
of foreign currency transaction losses of $1.0 million offset by unrealized gains on investments held by non-qualified
deferred compensation trusts of $0.1 million. Fiscal 2015 expense consisted primarily of foreign currency transaction
losses of $1.3 million offset by unrealized gains on investments held by non-qualified deferred compensation trusts
of $0.4 million.
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The effective income tax rate was 62.6% for fiscal 2016 compared to 34.3% for fiscal 2015. The increase in the
effective tax rate is due to the recording of $64.8 million of goodwill impairment during the current period, of which
$61.3 million is not tax deductible. The goodwill impairment increased the effective tax rate for fiscal 2016 by
27.1%. The remaining increase in the effective tax rate, adjusted for goodwill impairment, was due to state and
local taxes and mix of income negatively impacting the rate. All undistributed earnings of our foreign subsidiaries
are considered to be permanently reinvested at June 30, 2016 and 2015.
We expect our income tax rate for fiscal 2017 to be in the range of 34.0% to 35.0%.
As a result of the factors addressed above, net income for fiscal 2016 decreased $85.9 million or 74.4% from the
prior year. Net income per share was $0.75 per share for fiscal 2016 compared to $2.80 for fiscal 2015, a decrease
of 73.2%. The current year results include negative impacts on earnings per share of $1.62 per share for goodwill
impairment charges and $0.16 per share for restructuring charges. Net income per share was favorably impacted by
lower weighted average common shares outstanding in fiscal 2016 as a result of our share repurchase program.
At June 30, 2016, we had a total of 559 operating facilities in the United States, Puerto Rico, Canada, Mexico,
Australia and New Zealand, versus 565 at June 30, 2015.
The number of Company employees was 5,569 at June 30, 2016 and 5,839 at June 30, 2015.
YEAR ENDED JUNE 30, 2015 vs. 2014
The following table is included to aid in review of Applied’s statements of consolidated income.
Net Sales
Gross Profit Margin
Selling, Distribution & Administrative
Operating Income
Net Income
Year Ended June 30,
As a % of Net Sales
Change in
$'s Versus
Prior Period
2015
2014
% Change
100.0%
100.0%
28.0%
21.3%
6.7%
4.2%
27.9%
21.2%
6.7%
4.6%
11.9%
12.1%
12.0%
12.3%
2.4%
Sales in fiscal 2015 were $2.75 billion, which was $291.7 million or 11.9% above fiscal 2014, with acquisitions
accounting for $280.2 million or 11.4%. Unfavorable foreign currency translation decreased sales by $43.3 million
or 1.8%. Excluding the impact of businesses acquired and prior to the impact of currency translation, sales were up
$54.8 million or 2.3% during fiscal year 2015. We had 252.5 selling days in both fiscal 2015 and fiscal 2014.
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $281.4
million, or 14.3%. Acquisitions within this segment increased sales by $280.2 million or 14.2%. Unfavorable
foreign currency translation decreased sales by $36.5 million or 1.8%. Excluding the impact of businesses acquired
and unfavorable currency translation impact, sales increased $37.7 million or 1.9%.
Sales of our Fluid Power Businesses segment, which operates primarily in OEM markets, increased $10.3 million or
2.1%, primarily attributed to strong sales growth at several of our U.S. based Fluid Power businesses which added
$17.1 million or 3.5%, while unfavorable foreign currency translation decreased sales by $6.8 million or 1.4%.
Sales in our U.S. operations were up $207.1 million or 10.2%, with acquisitions adding $175.8 million or 8.7%.
Sales from our Canadian operations increased $67.5 million or 23.2%, with acquisitions adding $86.4 million or
29.7%. Unfavorable foreign currency translation decreased Canadian sales by $30.4 million or 10.4%. Excluding
the impact of businesses acquired and prior to the impact of currency translation, sales were up $11.5 million or
3.9% during fiscal year 2015. Consolidated sales from our other country operations, which include Mexico,
Australia and New Zealand, were $17.1 million or 12.4% above fiscal year 2014, with acquisitions adding sales of
$18.0 million or 13.1%. Unfavorable foreign currency translation decreased other country sales by $12.9 million or
9.4%. Excluding the impact of businesses acquired and prior to the impact of currency translation, sales were up
$12.0 million or 8.7% during fiscal 2015.
The sales product mix for fiscal 2015 was 73.2% industrial products and 26.8% fluid power products compared to
70.7% industrial and 29.3% fluid power in fiscal year 2014. These changes in product mix related entirely to the
product mix of recent acquisitions being primarily industrial products.
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Our gross profit margin was 28.0% in fiscal 2015 versus 27.9% in fiscal 2014. The increased margins were
attributable to the impact of relatively higher gross margins from acquired operations.
Selling, distribution and administrative expenses (SD&A) consist of associate compensation, benefits and other
expenses associated with selling, purchasing, warehousing, supply chain management, and providing marketing and
distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as
human resources, information technology, treasury, accounting, legal, facility related expenses and expenses
incurred with acquiring businesses. SD&A increased $62.6 million or 12.0% during fiscal 2015 compared to fiscal
2014, and as a percent of sales increased to 21.3% in fiscal 2015 from 21.2% in fiscal 2014. The acquired
businesses added an incremental $69.4 million of SD&A expenses, which included an additional $13.4 million
associated with acquired identifiable intangibles amortization. Excluding the $11.0 million decline in SD&A from
foreign currency translation, the remaining SD&A amounts were similar to fiscal 2014. The increase in SD&A as a
percentage of sales was driven by additional intangible asset amortization from businesses acquired.
Operating income increased $20.3 million, or 12.3%, to $184.6 million during fiscal 2015 from $164.4 million
during fiscal 2014, and as a percent of sales, remained stable at 6.7%. The increase in operating income dollars was
primarily attributable to our acquired businesses.
Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 6.2% in
fiscal 2015 from 6.0% in fiscal 2014. This increase was primarily attributable to an increase in gross profit as a
percentage of sales, as a result of acquisitions in fiscal 2015 which operated at higher gross profit margins,
representing an increase of 0.1%, along with a decrease in SD&A as a percentage of sales of 0.1%.
Operating income as a percentage of sales for the Fluid Power Businesses segment increased to 9.8% in fiscal 2015
from 9.2% in fiscal 2014. This increase was primarily attributable to the leveraging of organic sales growth in our
U.S. based Fluid Power Businesses, without a commensurate increase in SD&A expenses.
Segment operating income was impacted by changes in the amounts and levels of expenses allocated to the
segments. The expense allocations included corporate charges for working capital, logistics support and other items
and impact segment gross profit and operating expense.
Interest expense, net, increased to $7.9 million in fiscal 2015 entirely due to acquisition related borrowing.
Other expense (income), net, represented certain non-operating items of income and expense. This was $0.9 million
of expense in fiscal 2015 compared to $2.2 million of income in fiscal 2014. Fiscal 2015 expense primarily consisted
of foreign currency transaction losses of $1.3 million offset by unrealized gains on investments held by non-qualified
deferred compensation trusts of $0.4 million. Fiscal 2014 consisted primarily of unrealized gains on investments held
by non-qualified deferred compensation trusts of $1.7 million as well as $1.3 million of income associated with the
elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption
"Financial Statements and Supplementary Data"), offset by foreign currency transaction losses of $0.8 million.
Income tax expense as a percent of income before taxes was 34.3% for fiscal 2015 and 32.1% for fiscal 2014. This
increase in the effective rate was due to recording of valuation allowances against certain deferred tax assets for
foreign jurisdictions in fiscal 2015 as well as the non-recurrence of a one-time favorable tax benefit in fiscal 2014 in
accounting for undistributed earnings of non-U.S. subsidiaries. All undistributed earnings of our foreign subsidiaries
were considered to be permanently reinvested at June 30, 2015 and 2014.
As a result of the factors addressed above, net income for fiscal 2015 increased $2.7 million or 2.4% from the prior
year. Net income per share increased at a slightly higher rate of 4.9% due to lower weighted-average shares
outstanding in fiscal 2015.
At June 30, 2015, we had a total of 565 operating facilities in the United States, Puerto Rico, Canada, Mexico,
Australia and New Zealand, versus 538 at June 30, 2014.
The number of Company employees was 5,839 at June 30, 2015 and 5,472 at June 30, 2014.
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, 2016 we had total debt obligations outstanding of $328.3 million compared to $321.0
million at June 30, 2015. Management expects that our existing cash, cash equivalents, funds available under the
revolving credit and uncommitted shelf facilities, 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
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stock. Management also believes that additional long-term debt and line of credit financing could be obtained
based on the Company’s credit standing and financial strength.
The Company holds significant cash and cash equivalent balances outside of the United States of America. The
following table shows the Company's total cash as of June 30, 2016 by geographic location; all amounts are in
thousands.
Country
United Sates
Canada
Other Countries
Total
Amount
$
10,828
36,981
12,052
$
59,861
To the extent cash in foreign countries is distributed to the U.S., it could become subject to U.S. income taxes.
Foreign tax credits may be available to offset all or a portion of such taxes. At June 30, 2016, all foreign earnings
are considered permanently reinvested.
The Company’s working capital at June 30, 2016 was $507.2 million compared to $535.9 million million at June 30,
2015. The current ratio was 2.8 to 1 at June 30, 2016 compared to 2.7 to 1 at June 30, 2015.
Net Cash Flows
The following table is included to aid in review of Applied’s statements of consolidated cash flows; all amounts
are in thousands.
Year Ended June 30,
2016
2015
2014
Net Cash Provided by (Used in):
Operating Activities
Investing Activities
Financing Activities
Exchange Rate Effect
Decrease in Cash and Cash Equivalents
$ 160,992
(75,031)
(91,985)
(3,585)
(9,609) $
$ 154,538
(173,621)
24,689
(7,325)
(1,719) $
$ 110,110
(203,637)
92,142
(590)
(1,975)
$
The increase in cash provided by operating activities during fiscal 2016 is due primarily to decreased working capital
needs due to lower receivables levels resulting from lower sales levels as compared to the prior period, partially offset
by lower operating results.
Net cash used in investing activities in fiscal 2016 included $13.1 million for capital expenditures and $62.5 million
used for acquisitions. Net cash used in investing activities in fiscal 2015 included $14.9 million for capital
expenditures and $160.6 million used for acquisitions. Net cash used in investing activities in fiscal 2014 included
$20.2 million for capital expenditures, $10.0 million of which was used for the purchase of our headquarters facility,
and $184.3 million for acquisitions.
Net cash used in financing activities in fiscal 2016 included $98.7 million of long-term debt repayments and $19.0
million of net repayments under the revolving credit facility, offset by $125.0 million of cash from borrowings under
the new credit facility. Further uses of cash were $43.3 million for dividend payments, $37.5 million used to
repurchase 951,100 shares of treasury stock, and $18.9 million of acquisition holdback payments.
Net cash provided by financing activities in fiscal 2015 included $170.0 million from borrowings under long-term
debt facilities used for the financing of acquisitions, offset by $17.0 million of net repayments under our revolving
credit facility and $2.7 million of long-term debt repayments. Further uses of cash were $42.7 million for dividend
payments, $76.5 million used to repurchase 1,740,100 shares of treasury stock and $7.7 million of acquisition
holdback payments.
Net cash provided by financing activities in fiscal 2014 included $100.0 million from borrowings under long-term
debt facilities as well as $69.0 million in net borrowings under our revolving credit facility, both of which were
utilized for the financing of acquisitions. These sources of cash were offset by $40.4 million for dividend payments
and $36.7 million used to repurchase 759,900 shares of treasury stock.
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The increase in dividends over the last three fiscal years is the result of regular increases in our dividend payout rates.
We paid dividends of $1.10, $1.04 and $0.96 per share in fiscal 2016, 2015 and 2014, respectively.
Capital Expenditures
We expect capital expenditures for fiscal 2017 to be in the $17.0 million to $19.0 million range, primarily consisting
of capital associated with additional information technology equipment and infrastructure investments. Depreciation
for fiscal 2017 is expected to be in the range of $16.0 million to $17.0 million.
ERP Project
In fiscal 2011 Applied commenced its ERP (SAP) project to transform the Company's technology platforms
and enhance its business information and technology systems for future growth. We have deployed our solution in
our Western Canadian operating locations and our traditional U.S. Service Center Based Distribution businesses,
excluding recent acquisitions. In fiscal 2014, the Company initiated the conversion to SAP of its related financial and
accounting systems, including the receivables, payables, treasury, inventory, fixed assets, general ledger and
consolidation systems. All of these underlying financial and accounting systems, except for the consolidation
process/system, were transitioned to SAP during fiscal 2015. At the beginning of fiscal 2016 the Company
converted to a new consolidation process and system. During the third quarter of fiscal 2016, the Company
determined that operations in Eastern Canada will be transitioned onto SAP throughout fiscal 2017 and 2018. The
Company will continue to evaluate and consider an appropriate deployment schedule for other operations not on
SAP.
Share Repurchases
The Board of Directors has authorized the repurchase of shares of the Company’s stock. These purchases may
be made in open market and negotiated transactions, from time to time, depending upon market conditions.
At June 30, 2016, we had authorization to purchase an additional 296,200 shares.
In fiscal 2016, 2015 and 2014, we repurchased 951,100, 1,740,100 and 759,900 shares of the Company’s common
stock, respectively, at an average price per share of $39.39, $43.97, and $48.34, respectively.
Borrowing Arrangements
In December 2015, the Company entered into a new five-year credit facility with a group of banks expiring in
December 2020. This agreement provides for a $125.0 million unsecured term loan and a $250.0 million unsecured
revolving credit facility. Fees on this facility range from 0.09% to 0.175% per year based upon the Company's
leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR
or prime at the Company’s discretion. At June 30, 2016, the Company had $123.4 million outstanding under the
term loan and $33.0 million outstanding under the revolver. Unused lines under this facility, net of outstanding
letters of credit of $2.7 million to secure certain insurance obligations, totaled $214.3 million at June 30, 2016 and
are available to fund future acquisitions or other capital and operating requirements. The interest rate on the term
loan as of June 30, 2016 was 1.50%. The weighted-average interest rate on the revolving credit facility outstanding
as of June 30, 2016 was 1.44%.
The new credit facility replaced the Company's previous term loan and revolving credit facility agreements. The
Company had $96.9 million outstanding at June 30, 2015 under the previous term loan agreement, which carried a
variable interest rate tied to LIBOR and was 1.19% at June 30, 2015. At June 30, 2015, the Company had $52.0
million outstanding under the previous revolving credit facility. Unused lines under this facility, net of outstanding
letters of credit of $3.8 million to secure certain insurance obligations, totaled $94.2 million at June 30, 2015 and
were available to fund future acquisitions or other capital and operating requirements. The weighted-average
interest rate on the revolving credit facility outstanding as of June 30, 2015 was 1.15%.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving
credit agreement, in the amount of $2.7 million as of June 30, 2016 and $1.8 million as of June 30, 2015, in order
to secure certain insurance obligations.
In April 2014 the Company assumed $2.4 million of debt as a part of the acquisition of our headquarters facility.
The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency and matures in May
2024. We had $1.9 million and $2.1 million outstanding under this note at June 30, 2016 and 2015, respectively.
At June 30, 2016, the Company had borrowings outstanding under its unsecured shelf facility agreement with
Prudential Investment Management of $170.0 million. The "Series C" notes have a principal amount of $120.0
million and carry a fixed interest rate of 3.19%; the principal is due in equal payments in July 2020, 2021, and 2022.
The "Series D" notes have a principal amount of $50.0 million and carry a fixed interest rate of 3.21%; the principal
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is due in equal payments in October 2019 and 2023. As of June 30, 2016, $50.0 million in additional financing was
available under this facility.
The revolving credit facility and unsecured shelf facility contain restrictive covenants regarding liquidity, net worth,
financial ratios, and other covenants. At June 30, 2016, the most restrictive of these covenants required that the
Company have net indebtedness less than 3.25 times consolidated income before interest, taxes, depreciation and
amortization. At June 30, 2016, the Company's indebtedness was less than two times consolidated income before
interest, taxes, depreciation and amortization. The Company was in compliance with all covenants at June 30, 2016.
Accounts Receivable Analysis
The following table is included to aid in analysis of accounts receivable and the associated provision for losses on
accounts receivable (all dollar amounts are in thousands):
June 30,
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
Allowance for doubtful accounts, % of gross receivables
Year Ended June 30,
Provision for losses on accounts receivable
Provision as a % of net sales
$
$
$
2016
358,891
11,034
347,857
3.1%
2016
4,303
0.17%
$
$
$
2015
386,926
10,621
376,305
2.7%
2015
2,597
0.09%
Accounts receivable are reported at net realizable value and consist of trade receivables from customers.
Management monitors accounts receivable by reviewing Days Sales Outstanding (DSO) and the aging of receivables
for each of the Company's locations.
On a consolidated basis, DSO was 49.4 at June 30, 2016 versus 50.0 at June 30, 2015. Accounts receivable
decreased 7.6% this year, compared to an decrease of 8.4% in sales in the twelve months ended June 30, 2016.
Acquisitions added $8.0 million, or 2.1%, of accounts receivable in fiscal 2016. We primarily attribute the decrease
in DSO to the improved timing of collections within our traditional U.S. Service Center Based Distribution businesses.
Approximately 2.7% of our accounts receivable balances are more than 90 days past due at June 30, 2016
compared to 4.2% at June 30, 2015. This improvement relates to our U.S. Service Center Based Distribution
businesses. On an overall basis, our provision for losses from uncollected receivables represents 0.17% of our sales
in the year ended June 30, 2016. Historically, this percentage is around 0.10% to 0.15%. The increase in the
provision as a percentage of sales for fiscal 2016 relates to $2.4 million of expense for reserves added in the twelve
months ended June 30, 2016 for our operations focused on upstream oil and gas customers due to the recent
downturn in the energy markets. Management believes the overall receivables aging and provision for losses on
uncollected receivables are at reasonable levels, and that past due balances will continue to decline in fiscal 2017.
Inventory Analysis
Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories and
the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and
evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis and uses inventory
valued at average costs. The annualized inventory turnover (using average costs) for the period ended June 30, 2016
was 3.6 versus 3.7 at June 30, 2015. By actively managing our inventory levels, we were able to maintain our
inventory turnover in a period of declining sales. We believe our inventory turnover ratio in fiscal 2017 will be
slightly better than our fiscal 2016 levels.
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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, 2016 (in thousands):
Operating leases
Planned funding of post-retirement obligations
Unrecognized income tax benefit liabilities, including
interest and penalties
Long-term debt obligations
Interest on long-term debt obligations (1)
Acquisition holdback payments
Total Contractual Cash Obligations
Total
$ 80,500
21,400
Period Less
Than 1 yr
$ 27,500
900
Period
2-3 yrs
Period
4-5 yrs
Period
Over 5 yrs
$ 35,500
3,500
$ 12,200
6,100
$
5,300
10,900
3,500
328,400
34,900
3,400
7,300
11,400
14,300
207,900
105,700
10,100
3,200
14,000
$ 482,700
7,700
$ 46,800
6,300
$ 71,000
—
$ 236,300
—
$ 125,100
Other
—
—
3,500
—
—
—
$
3,500
(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations. Rates in
effect as of June 30, 2016 are used for variable rate debt.
Purchase orders for inventory and other goods and services are not included in our estimates as we are unable to
aggregate the amount of such purchase orders that represent enforceable and legally binding agreements specifying
all significant terms. The previous table includes the gross liability for unrecognized income tax benefits including
interest and penalties in the “Other” column as the Company is unable to make a reasonable estimate regarding the
timing of cash settlements, if any, with the respective taxing authorities.
SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to June 30, 2016 through the date the financial
statements were issued.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally
accepted in the United States of America requires management to make judgments, assumptions and estimates at a
specific point in time that affect the amounts reported in the consolidated financial statements and disclosed in the
accompanying notes. The Business and Accounting Policies note to the consolidated financial statements describes
the significant accounting policies and methods used in preparation of the consolidated financial statements.
Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable,
inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing
opening balances in relation to purchase accounting. Actual results could differ from these estimates. The following
critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the
preparation of the consolidated financial statements.
LIFO Inventory Valuation and Methodology
Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories, and
the average cost method for foreign inventories. We adopted the link chain dollar value LIFO method for accounting
for U.S. inventories in fiscal 1974. Approximately 22.8% of our domestic inventory dollars relate to LIFO layers
added in the 1970s. The excess of average cost over LIFO cost is $147.2 million as reflected in our consolidated
balance sheet at June 30, 2016. The Company maintains five LIFO pools based on the following product groupings:
bearings, power transmission products, rubber products, fluid power products and other products.
LIFO layers and/or liquidations are determined consistently year-to-year. See the Inventories note to the
consolidated financial statements in Item 8 under the caption "Financial Statements and Supplementary Data,
for further information.
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. A significant portion of the products we hold
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in inventory have long shelf lives, are not highly susceptible to obsolescence and are eligible for return under various
supplier return programs.
As of June 30, 2016 and 2015, the Company's reserve for slow-moving or obsolete inventories was $25.1 million
and $17.7 million, respectively, recorded in inventories in the consolidated balance sheets. The increase is due to
$3.6 million added to the reserve related to closing locations for restructuring activities within the Service Center
Based Distribution segment along with with additional reserves for slow-moving inventory due to lower sales levels.
Allowances for Doubtful Accounts
We evaluate the collectibility of trade accounts receivable based on a combination of factors. Initially, we estimate
an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial
estimate is adjusted based on recent trends of certain customers and industries estimated to be a greater credit risk,
trends within the entire customer pool and changes in the overall aging of accounts receivable. While we have a
large customer base that is geographically dispersed, a general economic downturn in any of the industry segments
in which we operate could result in higher than expected defaults, and therefore, the need to revise estimates for
bad debts. Accounts are written off against the allowance when it becomes evident that collection will not occur.
As of June 30, 2016 and 2015, our allowance for doubtful accounts was 3.1% and 2.7% of gross receivables,
respectively. Our provision for losses on accounts receivable was $4.3 million, $2.6 million and $4.0 million in fiscal
2016, 2015 and 2014, respectively.
Goodwill and Intangibles
Goodwill is recognized as the amount by which the cost of an acquired entity exceeds the net amount assigned to
assets acquired and liabilities assumed. Goodwill for acquired businesses is accounted for using the acquisition
method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the
acquisition at their respective estimated fair values. The judgments made in determining the estimated fair value
assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net
income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances
through impairment charges, if the asset becomes impaired in the future. As part of acquisition accounting, we also
recognize acquired identifiable intangible assets such as customer relationships, vendor relationships, trade names,
and non-competition agreements apart from goodwill. Finite-lived identifiable intangibles are evaluated for
impairment when changes in conditions indicate carrying value may not be recoverable.
We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event
occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. Events or circumstances that may result in an impairment review include
changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial
performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease
in share price. Each year, the Company may elect to perform a qualitative assessment to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in
the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the
impairment test uses a two-step approach. Step one compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not impaired, and the second step of goodwill impairment test is unnecessary. If the carrying
amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to
measure the amount of impairment loss (if any). Step two compares the implied fair value of the reporting unit
goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination, meaning, the reporting unit's fair value is allocated
to all the assets and liabilities of the reporting unit (including unrecognized intangible assets) as if the reporting unit
had been acquired in a business combination and the fair value of the reporting unit is the price paid to acquire the
reporting unit. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an
impairment loss is recognized in an amount equal to the excess.
Goodwill on our consolidated financial statements relates to both the Service Center Based Distribution segment and
the Fluid Power Businesses segment. The Company has seven (7) reporting units for which an annual goodwill
impairment assessment was performed as of January 1, 2016. The Company concluded that five (5) of the reporting
units’ fair value substantially exceeded their carrying amounts. The carrying value for two (2) reporting units (Canada
service center and Australia/New Zealand service center) exceeded the fair value, indicating there may be goodwill
impairment. The fair values of the reporting units in accordance with step one of the goodwill impairment test were
determined using the Income and Market approaches. The Income approach employs the discounted cash flow
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method reflecting projected cash flows expected to be generated by market participants and then adjusted for time
value of money factors. The Market approach utilized an analysis of comparable publicly traded companies.
Step two of the goodwill impairment test for the Canada service center reporting unit was completed in the third
quarter of fiscal 2016. The analysis resulted in a goodwill impairment of $56.0 million for the Canada service center
reporting unit. The non-cash impairment charge was the result of the overall decline in the industrial economy in
Canada coupled with the substantial and sustained decline in the oil and gas sector during calendar year 2015. This
led to reduced spending by customers and reduced revenue expectations. The uncertainty regarding the oil and gas
industries and overall industrial economy in Canada also led the reporting unit to reduce expectations. The
remaining goodwill for the Canada service center reporting unit at June 30, 2016 is $31.2 million.
Step two of the goodwill impairment test for the Australia/New Zealand reporting unit was completed in the third
quarter of fiscal 2016. The analysis concluded that all of the Australia/New Zealand reporting unit’s goodwill was
impaired, and therefore the Company recorded a non-cash impairment expense of $8.8 million in the third quarter
of fiscal 2016. The impairment charge was primarily the result of the decline in the mining and extraction industries
in Australia, reduced spending by customers, and the effects of reduced revenue expectations.
The techniques used in the Company's impairment test have incorporated a number of assumptions that the
Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions
in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast
future cash flows as accurately as possible with the information available at the measurement date. The Company
evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming
years with actual results of preceding years. Key Level 3 based assumptions relate to pricing trends, inventory costs,
customer demand, and revenue growth. A number of benchmarks from independent industry and other economic
publications were also used. Changes in future results, assumptions, and estimates after the measurement date may
lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual
results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby
triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market
conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if
the Company determines that the fair values of its reporting units have fallen below their carrying values.
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 also maintain a partially self-insured
health benefits plan, which provides medical benefits to U.S. based 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. Self -
insurance liabilities totaled $9.0 million and $8.6 million as of June 30, 2016 and 2015, respectively, and were
recorded in compensation and related benefits and other current liabilities in the consolidated balance sheets. 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.
Income Taxes
Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and
liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. As of June 30,
2016, the Company had recognized $0.5 million of net deferred tax assets. Valuation allowances are provided
against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit
of such assets. The remaining net deferred tax asset is the amount management believes is more-likely-than-not of
being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates
and future taxable income levels.
Income taxes on undistributed earnings of non-U.S. subsidiaries are not accrued for the portion of such earnings that
management considers to be permanently reinvested. At June 30, 2016, management considered all undistributed
earnings of non-U.S. subsidiaries to be permanently reinvested. Undistributed earnings of non-U.S. subsidiaries
totaled $141.5 million for which no provision for U.S. income tax had been made.
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CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
This Form 10-K, including Management’s Discussion and Analysis, contains statements that are forward-
looking based on management’s current expectations about the future. Forward-looking statements are
often identified by qualifiers, such as “guidance”, “expect”, “believe”, “plan”, “intend”, “will”, “should”,
“could”, “would”, “anticipate”, “estimate”, “forecast”, “may”, "optimistic" and derivative or similar
words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-
looking statements. These statements may discuss, among other things, expected growth, future sales,
future cash flows, future capital expenditures, future performance, and the anticipation and expectations
of the Company and its management as to future occurrences and trends. The Company intends that the
forward-looking statements be subject to the safe harbors established in the Private Securities Litigation
Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-
looking statements are based on current expectations regarding important risk factors, many of which are
outside the Company’s control. Accordingly, actual results may differ materially from those expressed in
the forward-looking statements, and the making of those statements should not be regarded as a
representation by the Company or any other person that the results expressed in the statements will be
achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-
looking statements, whether because of new information or events, or otherwise, except as may be
required by law.
Important risk factors include, but are not limited to, the following: risks relating to the operations levels
of our customers and the economic factors that affect them; changes in the prices for products and services
relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key
supplier authorizations, lack of product availability, or changes in supplier distribution programs; the cost
of products and energy and other operating costs; changes in customer preferences for products and
services of the nature and brands sold by us; changes in customer procurement policies and practices;
competitive pressures; our reliance on information systems; the impact of economic conditions on the
collectability of trade receivables; reduced demand for our products in targeted markets due to reasons
including consolidation in customer industries; our ability to retain and attract qualified sales and
customer service personnel and other skilled executives, managers and professionals; our ability to identify
and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability,
timing and nature of new business opportunities including acquisitions, alliances, customer relationships,
and supplier authorizations; the incurrence of debt and contingent liabilities in connection with
acquisitions; our ability to access capital markets as needed on reasonable terms; disruption of operations
at our headquarters or distribution centers; risks and uncertainties associated with our foreign operations,
including volatile economic conditions, political instability, cultural and legal differences, and currency
exchange fluctuations; the potential for goodwill and intangible asset impairment; changes in accounting
policies and practices; our ability to maintain effective internal control over financial reporting;
organizational changes within the Company; the volatility of our stock price and the resulting impact on
our consolidated financial statements; risks related to legal proceedings to which we are a party; adverse
regulation and legislation, both enacted and under consideration, including with respect to federal tax
policy (e.g., 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, power
outages,telecommunication outages, terrorist acts, earthquakes, extreme weather events, other natural
disasters, fires, floods, and accidents). Other factors and unanticipated events could also adversely affect
our business, financial condition or results of operations.
We discuss certain of these matters and other risk factors more fully throughout our Form 10-K, as well as
other of our filings with the Securities and Exchange Commission.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates.
We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use
derivative instruments for speculative or trading purposes. We do not currently have any outstanding derivative
instruments.
Foreign Currency Exchange Rate Risk
Because we operate throughout North America, Australia and New Zealand and approximately 16.0% of our fiscal
year 2016 net sales were generated outside the United States, foreign currency exchange rates can impact our
financial position, results of operations and competitive position. The financial statements of foreign subsidiaries are
translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income
and expenses are translated at average monthly exchange rates. Translation gains and losses are components of
other comprehensive income (loss) as reported in the statements of consolidated comprehensive income.
Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in
currencies other than the functional currency are recognized in the statements of consolidated income as a
component of other expense (income), net. Applied does not currently hedge the net investments in our foreign
operations.
During the course of the fiscal year, the Canadian, Australian, and Mexican currency exchange rates decreased in
relation to the U.S. dollar by 5.0%, 3.1%, and 15.6%, respectively, and the New Zealand currency exchange rate
increased in relation to the U.S. dollar by 3.7%. In the twelve months ended June 30, 2016, we experienced net
foreign currency translation losses totaling $24.4 million, which were included in other comprehensive income (loss).
We utilize a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in
foreign currency rates. Excluding the non-cash impairment charge recorded in fiscal 2016, a 10% strengthening or
weakening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced
during the year ended June 30, 2016 would not have a material impact on net income for the year ended June 30,
2016.
Interest Rate Risk
Our primary exposure to interest rate risk results from our outstanding debt obligations with variable interest rates.
The levels of fees and interest charged on our various debt facilities are based upon leverage levels and market
interest rates.
Our variable interest rate debt facilities outstanding include our five-year credit facility, which provides for a revolving
credit facility with a capacity of up to $250.0 million in borrowings and $33.0 million outstanding at June 30, 2016,
and a $125.0 million term loan, of which $123.4 million was outstanding at June 30, 2016. Fixed interest rate debt
facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $1.9 million of
assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank
borrowings of $195.4 million during fiscal 2016. The impact of a hypothetical 1.0% increase in the interest rates on
our average variable interest rate bank borrowings would have resulted in a $2.0 million increase in interest expense.
Changes in market interest rates would also impact interest rates on these facilities.
We monitor 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.
For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of
“Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and note 5 to
the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition,
see Item 1A, “Risk Factors,” for additional risk factors relating to our business.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and
subsidiaries (the "Company") as of June 30, 2016 and 2015, and the related statements of consolidated income,
comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended June 30,
2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial
statements and financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
the Company at June 30, 2016 and 2015, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 2016, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of June 30, 2016, based on the criteria established
in "Internal Control-Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated August 24, 2016 expressed an unqualified opinion on the Company's
internal control over financial reporting.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 24, 2016
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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 Expense (Income), 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.
2016
2015
2014
$ 2,519,428
$ 2,751,561
$ 2,459,878
1,812,006
1,981,747
1,772,952
707,422
553,827
64,794
88,801
9,004
(241)
1,060
78,978
49,401
29,577
0.75
0.75
$
$
$
769,814
585,195
—
184,619
8,121
(252)
879
175,871
60,387
115,484
2.82
2.80
$
$
$
686,926
522,568
—
164,358
900
(651)
(2,153)
166,262
53,441
112,821
2.69
2.67
$
$
$
2929
Table of Contents
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In thousands)
Year Ended June 30,
Net income per the statements of consolidated income
2016
29,577
$
2015
115,484
$
2014
112,821
$
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments
Postemployment benefits:
Actuarial (loss) gain on remeasurement
Reclassification of actuarial losses and prior service cost into SD&A expense and
included in net periodic pension costs
Unrealized (loss) gain on investment securities available for sale
Total other comprehensive (loss) income, before tax
Income tax (benefit) expense related to items of other comprehensive income (loss)
Other comprehensive (loss) income, net of tax
Comprehensive income
See notes to consolidated financial statements.
(24,441)
(58,233)
629
(1,998)
(776)
1,402
518
(52)
(25,973)
(598)
(25,375)
4,202
$
286
(38)
(58,761)
(205)
(58,556)
56,928
$
382
112
2,525
719
1,806
114,627
$
3030
Table of Contents
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30,
Assets
Current assets
Cash and cash equivalents
Accounts receivable, less allowances of $11,034 and $10,621
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
Identifiable intangibles, net
Goodwill
Deferred tax assets
Other assets
Total Assets
Liabilities
Current liabilities
Accounts payable
Current portion of long-term debt
Compensation and related benefits
Other current liabilities
Total current liabilities
Long-term debt
Post-employment 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;
39,057 and 39,905 shares outstanding, respectively
Additional paid-in capital
Retained earnings
Treasury shares — at cost (15,156 and 14,308 shares), respectively
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See notes to consolidated financial statements.
3131
2016
2015
$
59,861
347,857
338,221
35,687
781,626
$
69,470
376,305
362,419
37,816
846,010
14,214
97,521
157,496
269,231
161,466
107,765
191,240
202,700
12,277
16,921
$ 1,312,529
12,950
89,325
166,515
268,790
164,343
104,447
198,828
254,406
10,980
17,885
$ 1,432,556
$ 148,543
3,352
57,187
65,306
274,388
324,982
21,322
33,921
654,613
$ 179,825
3,349
63,780
63,118
310,072
317,646
19,627
43,883
691,228
—
—
10,000
162,529
944,821
(373,888)
(85,546)
657,916
$ 1,312,529
10,000
160,072
969,548
(338,121)
(60,171)
741,328
$ 1,432,556
Table of Contents
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:
2016
2015
2014
$
29,577
$ 115,484
$ 112,821
Goodwill impairment
Depreciation and amortization of property
Amortization of intangibles
Amortization of stock appreciation rights and options
Deferred income taxes
Provision for losses on accounts receivable
Unrealized foreign exchange transaction losses (gains)
Other share-based compensation expense
Shares issued for deferred compensation plans
Loss (gain) on sale of property
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
Inventories
Other operating assets
Accounts payable
Other operating liabilities
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
Cash used in Investing Activities
Cash Flows from Financing Activities
Net (repayments) borrowings under revolving credit facility, classified as long term
Borrowings under long-term debt facilities
Long-term debt repayments
Deferred financing costs
Purchases of treasury shares
Dividends paid
Excess tax benefits from share-based compensation
Acquisition holdback payments
Exercise of stock appreciation rights and options
Cash provided by (used in) Financing Activities
Effect of exchange rate changes on cash
Decrease 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.
3232
64,794
15,966
25,580
1,543
(6,581)
4,303
61
2,524
—
337
26,414
25,081
2,964
(28,644)
(2,927)
160,992
(13,130)
603
(62,504)
(75,031)
(19,000)
125,000
(98,662)
(719)
(37,465)
(43,330)
208
(18,913)
896
(91,985)
(3,585)
(9,609)
69,470
59,861
54,749
9,497
—
16,578
25,797
1,610
(4,961)
2,597
(727)
2,851
45
(1,291)
13,129
(15,704)
797
1,040
(2,707)
154,538
—
13,977
14,023
1,808
(8,209)
3,970
204
2,703
161
(53)
(29,089)
(29,171)
17,966
21,369
(12,370)
110,110
(14,933)
1,932
(160,620)
(173,621)
(20,190)
877
(184,324)
(203,637)
(17,000)
170,000
(2,717)
—
(76,515)
(42,663)
1,042
(7,693)
235
24,689
(7,325)
(1,719)
71,189
69,470
69,272
5,851
$
$
69,000
100,000
(647)
—
(36,732)
(40,410)
2,674
(1,839)
96
92,142
(590)
(1,975)
73,164
71,189
51,548
1,026
$
$
$
$
Table of Contents
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands)
Shares of
Common
Stock
Outstanding
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Shares-
at Cost
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders'
Equity
42,169
$ 10,000
$ 153,893
$ 824,362
$ (225,219) $
(3,421) $
759,615
Purchases of common stock for treasury
(760)
For the Years Ended June 30, 2016, 2015 and 2014
Balance at July 1, 2013
Net income
Other comprehensive income (loss)
Cash dividends — $0.96 per share
Treasury shares issued for:
Exercise of stock appreciation rights and options
Performance share awards
Restricted stock units
Deferred compensation plans
Compensation expense — stock appreciation rights
and options
Other share-based compensation expense
Other
Balance at June 30, 2014
Net income
Other comprehensive income (loss)
Cash dividends — $1.04 per share
Treasury shares issued for:
Exercise of stock appreciation rights and options
Performance share awards
Restricted stock units
Deferred compensation plans
Compensation expense — stock appreciation rights
and options
Other share-based compensation expense
Other
Balance at June 30, 2015
Net income
Other comprehensive income (loss)
Cash dividends — $1.10 per share
76
36
31
3
8
34
12
36
1
(1)
112,821
(40,410)
1,806
(36,732)
324
(21)
(247)
63
3
(20)
849
(1,062)
(1,110)
98
1,808
2,703
(180)
(76,515)
415
52
76
21
(49)
(318)
552
(425)
(1,312)
24
1,610
2,851
(227)
41,563
10,000
156,999
896,776
(261,852)
(1,615)
115,484
(42,663)
(58,556)
Purchases of common stock for treasury
(1,740)
39,905
10,000
160,072
969,548
(338,121)
(60,171)
29,577
(54,266)
(25,375)
Purchases of common stock for treasury
(951)
Treasury shares issued for:
Exercise of stock appreciation rights and options
Performance share awards
Restricted stock units
Compensation expense — stock appreciation rights
and options
Other share-based compensation expense
Other
64
8
15
16
(37,465)
1,000
116
232
(38)
350
(391)
(308)
(530)
1,543
2,524
(381)
Balance at June 30, 2016
39,057
$ 10,000
$ 162,529
$ 944,821
$ (373,888) $
(85,546) $
657,916
See notes to consolidated financial statements.
3333
112,821
1,806
(40,410)
(36,732)
1,173
(1,083)
(1,357)
161
1,808
2,703
(197)
800,308
115,484
(58,556)
(42,663)
(76,515)
967
(373)
(1,236)
45
1,610
2,851
(594)
741,328
29,577
(25,375)
(54,266)
(37,465)
609
(192)
(298)
1,543
2,524
(69)
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES
Business
Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is a leading industrial distributor
serving Maintenance Repair & Operations (MRO) and Original Equipment Manufacturer (OEM) customers in virtually
every industry. In addition, Applied provides engineering, design and systems integration for industrial and fluid
power applications, as well as customized mechanical, fabricated rubber and fluid power shop services. 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. For the year ended
June 30, 2013 the financial results of the Company’s Canadian and Mexican subsidiaries were included in the
consolidated financial statements for the twelve months ended May 31. During fiscal 2014, the Company
eliminated the one month reporting lag for both the Canadian and Mexican subsidiaries in the first and third
quarters respectively. See the "Change in Accounting Principle" section below for additional information related to
the elimination of the reporting lag.
Foreign Currency
The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are
measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at
current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and
losses are reported in other comprehensive (loss) income in the statements of consolidated comprehensive income.
Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of
consolidated income as a component of other expense (income), net.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the period. Actual results may differ from the estimates and
assumptions used in preparing the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with maturities of three months or less at the date
of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.
Marketable Securities
The primary marketable security investments of the Company include money market and mutual funds held in a
rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated
balance sheets, are classified as trading securities, and reported at fair value based on quoted market prices.
Changes in the fair value of the investments during the period are recorded in other expense (income), net in the
statements of consolidated income.
Concentration of Credit Risk
The Company has a broad customer base representing many diverse industries across North America, Australia and
New Zealand. As such, the Company does not believe that a significant concentration of credit risk exists in its
accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and
regulated non-bank subsidiaries. While Applied monitors the creditworthiness of these institutions, a crisis in the
financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and
investments provide that all monies are available to the Company upon demand.
3434
Table of Contents
Allowances for Doubtful Accounts
The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the
Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt
experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be
greater credit risks, trends within the entire customer pool, and changes in the overall aging of accounts receivable.
Accounts are written off against the allowance when it becomes evident collection will not occur. While the
Company has a large customer base that is geographically dispersed, a general economic downturn in any of the
industry segments in which the Company operates could result in higher than expected defaults, and therefore, the
need to revise estimates for bad debts.
Inventories
Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories and
the average cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of
accounting for U.S. inventories in fiscal 1974. At June 30, 2016, approximately 22.8% 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, in certain
instances, can be eligible for return under supplier return programs.
Supplier Purchasing Programs
The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s
inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at
either the Company’s fiscal year end or the supplier’s year end; however, program length and ending dates can vary.
Incentives are received in the form of cash or credits against purchases upon attainment of specified purchase
volumes and are received either monthly, quarterly or annually. The incentives are generally a specified percentage
of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can
increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these
inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based
upon the estimated total volume of purchases expected during the life of the program. Supplier programs are
analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon
program completion, differences between estimates and actual incentives subsequently received have not been
material. Benefits under these supplier purchasing programs are recognized under the Company’s 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 future purchases are reported on the
consolidated balance sheet as an offset to amounts due to the related supplier.
Property and Related Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets and is included in selling, distribution and administrative expenses in the
accompanying statements of consolidated income. Buildings, building improvements and leasehold improvements
are depreciated over ten to thirty years or the life of the lease if a shorter period, and equipment is depreciated over
three to ten years. The Company capitalizes internal use software development costs in accordance with guidance
on accounting for costs of computer software developed or obtained for internal use. Amortization of software
begins when it is ready for its intended use, and is computed on a straight-line basis over the estimated useful life of
the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as
property on the consolidated balance sheets. The carrying values of property and equipment are reviewed for
impairment when events or changes in circumstances indicate that the recorded value cannot be recovered from
undiscounted future cash flows. Impairment losses, if any, would be measured based upon the difference between
the carrying amount and the fair value of the assets.
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Table of Contents
Goodwill and Intangible Assets
Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and
liabilities assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or
whenever changes in conditions indicate an evaluation should be completed. These conditions could include a
significant change in the business climate, legal factors, operating performance indicators, competition, or sale or
disposition of a significant portion of a reporting unit. The Company utilizes discounted cash flow models and
market multiples for comparable businesses to determine the fair value of reporting units. Evaluating impairment
requires significant judgment by management, including estimated future operating results, estimated future cash
flows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While the
Company uses available information to prepare the estimates and evaluations, actual results could differ significantly.
The Company recognizes acquired identifiable intangible assets such as customer relationships, trade names, vendor
relationships, and non-competition agreements apart from goodwill. Customer relationship identifiable intangibles
are amortized using the sum-of-the-years-digits method over estimated useful lives consistent with assumptions used
in the determination of their value. Amortization of all other finite-lived identifiable intangible assets is computed
using the straight-line method over the estimated period of benefit. Amortization of identifiable intangible assets is
included in selling, distribution and administrative expenses in the accompanying statements of consolidated income.
Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate
carrying value may not be recoverable. Identifiable intangible assets with indefinite lives are reviewed for impairment
on an annual basis or whenever changes in conditions indicate an evaluation should be completed. The Company
does not currently have any indefinite lived identifiable intangible assets.
Self-Insurance Liabilities
The Company maintains business insurance programs with significant self-insured retention covering workers’
compensation, business, automobile, general product liability and other claims. The Company accrues estimated
losses including those incurred but not reported using actuarial calculations, models and assumptions based on
historical loss experience. The Company also maintains a self-insured health benefits plan which provides medical
benefits to U.S. based employees electing coverage under the plan. The Company estimates its reserve for all unpaid
medical claims, including those incurred but not reported, based on historical experience, adjusted as necessary
based upon management’s reasoned judgment.
Revenue Recognition
Sales are recognized when there is evidence of an arrangement, the sales price is fixed, collectibility is reasonably
assured and the product’s title and risk of loss is transferred to the customer. Typically, these conditions are met
when the product is shipped to the customer. The Company charges shipping and handling fees when products are
shipped or delivered to a customer, and includes such amounts in net sales. The Company reports its sales net of
actual sales returns and the amount of reserves established for anticipated sales returns based on historical rates.
Sales tax collected from customers is excluded from net sales in the accompanying statements of consolidated
income.
Shipping and Handling Costs
The Company records freight payments to third parties in cost of sales and internal delivery costs in selling,
distribution and administrative expenses in the accompanying statements of consolidated income. Internal delivery
costs in selling, distribution and administrative expenses were approximately $21,480, $24,430 and $16,230 for the
fiscal years ended June 30, 2016, 2015 and 2014, respectively.
Income Taxes
Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred
income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities
for financial reporting and income tax purposes, giving consideration to enacted tax laws. Uncertain tax positions
meeting a more-likely-than-not recognition threshold are recognized in accordance with the Income Taxes topic of
the ASC (Accounting Standards Codification). The Company recognizes accrued interest and penalties related to
unrecognized income tax benefits in the provision for income taxes.
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Table of Contents
Share-Based Compensation
Share-based compensation represents the cost related to share-based awards granted to employees under the 2015
Long-Term Performance Plan, the 2011 Long-Term Performance Plan, or the 2007 Long-Term Performance Plan.
The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the
award and recognizes the cost over the requisite service period. Non-qualified stock appreciation rights (SARs) and
stock options are granted with an exercise price equal to the closing market price of the Company’s common stock
at the date of grant and the fair values are determined using a Black-Scholes option pricing model, which
incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and
the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and
have ten-year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and
performance shares are based on the closing market price of Company common stock on the grant date.
Treasury Shares
Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a
reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost
method for determining the cost of shares reissued. The difference between the cost of the shares and the
reissuance price is added to or deducted from additional paid-in capital.
Changes in Accounting Principle
Deferred Income Taxes
In November 2015, the FASB issued its final standard on the simplification of the presentation of deferred income
taxes. The standard, issued as Accounting Standards Update ("ASU") 2015-17, requires that deferred tax liabilities
and assets be classified as non-current in the consolidated balance sheet. This update is effective for financial
statement periods beginning after December 15, 2016, and interim periods within those fiscal years, with early
adoption permitted. The Company early adopted ASU 2015-17 in the second quarter of fiscal 2016. The Company
applied the new standard retrospectively to the prior period presented in the consolidated balance sheets; the impact
of this change in accounting principle on balances previously reported as of June 30, 2015 was as follows:
Balance Sheet Line Item
Other current assets
Deferred tax assets
Other liabilities
Amount as of June 30, 2015
As Previously
Reported
As Revised
Change
$
$
$
51,111 $
97 $
46,295 $
37,816 $
10,980 $
43,883 $
(13,295)
10,883
(2,412)
Alignment of Canadian Subsidiary Reporting
Effective July 1, 2013, the Company aligned the consolidation of the Company’s Canadian subsidiary in the
consolidated financial statements, which previously included the results on a one month reporting lag. The
Company believes that this change in accounting principle is preferable as it provides contemporaneous reporting
within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of
a one month reporting lag of a subsidiary is treated as a change in accounting principle and requires retrospective
application. The Company determined that the effect of this change is not material to the financial statements for
all periods presented and therefore, the Company has not presented retrospective application of this change. The
net impact of the lag elimination was $1,200 of income for the month of June 2013 and has been included within
other expense (income), net on the statement of consolidated income for the year ended June 30, 2014. The
statement of consolidated income for the year ended June 30, 2014 reflects the same results, had the financial
statements been retrospectively adjusted, with the exception of net income which would have decreased by $1,200.
Alignment of Mexican Subsidiary Reporting
Effective January 1, 2014, the Company aligned the consolidation of the Company’s Mexican subsidiary in the
consolidated financial statements, which previously included the results on a one month reporting lag. The
Company believes that this change in accounting principle is preferable as it provides contemporaneous reporting
within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of
a one month reporting lag of a subsidiary is treated as a change in accounting principle and requires retrospective
application. The Company determined that the effect of this change is not material to the financial statements for
all periods presented and therefore, the Company has not presented retrospective application of this change. The
net impact of the lag elimination was $200 of income for the month of December 2013 and has been included
within other expense (income), net on the statement of consolidated income for year ended June 30, 2014.
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Table of Contents
Net sales, operating income and net income for the year ended June 30, 2014 would have decreased by $1,100,
$100 and $250 had the financial statements been retrospectively adjusted.
Other Recently Adopted Accounting Guidance
In June 2014, the FASB issued its final standard on accounting for share-based payments when the terms of an
award provide that a performance target could be achieved after the requisite service period. The standard, issued as
ASU 2014-12, clarifies that a performance target that affects vesting and that can be achieved after the requisite
service period, should be treated as a performance condition. The update is effective for financial statement periods
beginning after December 15, 2015, with early adoption permitted. The Company adopted ASU 2014-12 in the first
quarter of fiscal 2016. The adoption of this update did not have an impact on the financial statements of the
Company.
New Accounting Pronouncements
In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers.
The standard, issued as ASU 2014-09, outlines a single comprehensive model for entities to use in the accounting for
revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including
industry specific guidance. The core principle of this model is that "an entity recognizes revenue to depict the
transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods and services." In August 2015, the FASB issued ASU 2015-14 to
delay the effective date of ASU 2014-09 by one year. In accordance with the delay, the update is effective for
financial statement periods beginning after December 15, 2017. Early adoption is permitted, but not before
financial statement periods beginning after December 15, 2016. In March 2016 the FASB issued ASU 2016-08 and
ASU 2016-10, and in May 2016 the FASB issued ASU 2016-12, which clarify the guidance in ASU 2014-09 but do
not change the core principle of the revenue recognition model. The Company has not determined the collective
impact of these pronouncements on its financial statements and related disclosures or the method of adoption.
In April 2015, the FASB issued its final standard on simplifying the presentation of debt issue costs. This standard,
issued as ASU 2015-03, requires that all costs incurred to issue debt be presented in the balance sheet as a direct
reduction from the carrying value of the debt, similar to the presentation of debt discounts. This update is effective
for financial statement periods beginning after December 15, 2015, and interim periods within those fiscal years,
with early adoption permitted. The impact of the adoption of this guidance will result in the reclassification of the
unamortized debt issuance costs on the consolidated balance sheets, which were $504 and $394 at June 30, 2016
and 2015, respectively, recorded in other current assets and other assets in the consolidated balance sheets.
In July 2015, the FASB issued its final standard on simplifying the measurement of inventory. This standard, issued
as ASU 2015-11, specifies that an entity should measure inventory at the lower of cost and net realizable value. Net
realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of
completion, disposal and transportation. The new standard does not apply to inventory that is measured using LIFO;
therefore, it is not applicable to the Company's U.S. inventory values, but does apply to the Company's foreign
inventories which are valued using the average cost method. The update is effective for financial statement periods
beginning after December 15, 2016, with earlier application permitted. The Company has not yet determined the
impact of this pronouncement on its financial statements and related disclosures.
In September 2015, the FASB issued its final standard on simplifying the accounting for measurement-period
adjustments for business combinations. This standard, issued as ASU 2015-16, requires that an entity that is the
acquirer in a business combination that identifies adjustments to provisional amounts during the measurement
period recognize those adjustments in the reporting period in which the amounts are determined. This update
further requires that the acquirer record, in the same period's financial statements, the effect on earnings of changes
in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts,
calculated as if the accounting had been completed at the acquisition date. The update is effective for financial
statement periods beginning after December 15, 2015, and should be applied prospectively to adjustments to
provisional amounts that occur after the effective date of this update, with early adoption permitted. When
adjustments to provisional amounts occur in the future, the Company will make the adjustments in the appropriate
period and include the required disclosures.
In January 2016, the FASB issued its final standard on financial instruments. This standard, issued as ASU 2016-01,
enhances the reporting model for financial instruments to provide users of financial statements with more decision-
useful information and addresses certain aspects of recognition, measurement, presentation, and disclosure of
financial instruments. The update is effective for financial statement periods beginning after December 15, 2017,
with earlier application permitted for only certain aspects of the standard; earlier application of the remaining
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aspects is not permitted. The Company has not yet determined the impact of this pronouncement on its financial
statements and related disclosures.
In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02,
requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases
and disclose key information about leasing arrangements. The core principle of this update is that a "lessee should
recognize the assets and liabilities that arise from leases." This update is effective for financial statement periods
beginning after December 15, 2018, with earlier application permitted. The Company has not yet determined the
impact of this pronouncement on its financial statements and related disclosures.
In March 2016, the FASB issued its final standard on simplifying the accounting for share-based payment awards.
This standard, issued as ASU 2016-09, simplifies several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification on the statement of cash flows, and accounting
for forfeitures. This update is effective for financial statement periods beginning after December 15, 2016, with
early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial
statements and related disclosures or the method of adoption.
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This
standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments,
including trade receivables, based on expected losses rather than incurred losses. This update is effective for
financial statement periods beginning after December 15, 2019, with early adoption permitted for financial
statement periods beginning after December 15, 2018. The Company has not yet determined the impact of this
pronouncement on its financial statements and related disclosures.
NOTE 2: BUSINESS COMBINATIONS
The operating results of all acquired entities are included within the consolidated operating results of the Company
from the date of each respective acquisition.
Fiscal 2016 Acquisitions
On June 14, 2016, the Company acquired 100% of the outstanding stock of Seals Unlimited ("Seals"), a distributor
of sealing, fastener, and hose products located in Burlington, Ontario. On January 4, 2016, the Company acquired
substantially all of the net assets of HUB Industrial Supply ("HUB"), a distributor of consumable industrial products
operating from three locations - Lake City, FL, Indianapolis, IN, and Las Vegas, NV. On August 3, 2015, the
Company acquired substantially all of the net assets of Atlantic Fasteners Co., Inc. ("Atlantic Fasteners"), a
distributor of C-Class consumables including industrial fasteners and related industrial supplies located in Agawam,
MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. On
October 1, 2015, the Company acquired substantially all of the net assets of S.G. Morris Co. ("SGM"). SGM,
headquartered in Cleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania
and West Virginia and is included in the Fluid Power Businesses Segment. The total combined consideration for
these acquisitions was approximately $66,250, net tangible assets acquired were $22,650, and intangibles including
goodwill were $43,600 based upon preliminary estimated fair values at the acquisition dates, which are subject to
adjustment. The total combined consideration includes $3,750 of acquisition holdback payments, included in other
current liabilities and other liabilities on the condensed consolidated balance sheets, which will be paid plus interest
at various times through October 2018. The Company funded the amounts paid for the acquisitions at closing using
available cash and borrowings under the revolving credit facility at variable interest rates. The acquisition prices and
the results of operations for the acquired entities are not material in relation to the Company's consolidated financial
statements.
Knox Acquisition
On July 1, 2014, the Company acquired 100% of the outstanding stock of Knox Oil Field Supply Inc. (“Knox”),
headquartered in San Angelo, Texas, for total consideration of $132,000, including cash paid of $118,000 at
closing. The primary reason for the acquisition of Knox was to complement and expand the Company’s capabilities
to serve the upstream oil and gas industry in the United States. As a distributor of oilfield supplies and related
services, this business is included in the Service Center Based Distribution Segment. The Company funded the
acquisition by drawing $120,000 from the previously uncommitted shelf facility with Prudential Investment
Management at a fixed interest rate of 3.19% with an average seven year life. The remaining $14,000 purchase
price was to be paid as acquisition holdback payments on the first three anniversaries of the acquisition with interest
at a fixed rate of 1.50% per annum; $7,100 was paid on the first anniversary in the first quarter of fiscal 2016.
39
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The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection
with the acquisition of Knox based on their estimated fair values at the acquisition date:
Accounts receivable
Inventories
Property
Identifiable intangible assets
Goodwill
Total assets acquired
Accounts payable and accrued liabilities
Deferred income taxes
Net assets acquired
Purchase price
Reconciliation of fair value transferred:
Working Capital Adjustments
Total Consideration
Knox
Acquisition
2015
19,100
18,800
3,900
58,500
63,200
163,500
7,200
24,300
132,000
132,800
(800)
132,000
$
$
$
$
None of the goodwill acquired is expected to be deductible for income tax purposes. The goodwill recognized was
attributable primarily to expected synergies and other benefits that the Company believed would result from the
acquisition of Knox.
Reliance Acquisition
On May 1, 2014, the Company acquired 100% of the outstanding stock of Reliance Industrial Products (“Reliance”),
headquartered in Nisku, Alberta, Canada, with operations in Western Canada and the Western United States, for a
total purchase price in the amount of $188,500. The primary reasons for the acquisition were to provide the
Company enhanced capabilities to serve the upstream oil and gas industry in the United States and Canada. A
distributor of fluid conveyance and oilfield supplies, this business is included in the Service Center Based Distribution
Segment. The Company funded the acquisition by using available cash in Canada in the amount of $31,900,
existing revolving credit facilities of $36,600 and a new $100,000 five-year term loan facility, with the remainder of
$20,000 to be paid in equal amounts as acquisition holdback payments on the first two anniversaries of the
acquisition, plus interest at 2% per annum; $8,300 was paid during fiscal 2016.
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The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection
with the acquisition of Reliance based on their estimated fair values at the acquisition date:
Accounts receivable
Inventories
Other current assets
Property
Identifiable intangible assets
Goodwill
Total assets acquired
Accounts payable and accrued liabilities
Deferred income taxes
Net assets acquired
Purchase price
Reconciliation of fair value transferred:
Cash acquired
Working capital adjustments
Debt assumed
Total Consideration
Reliance
Acquisition
2014
20,600
22,900
6,000
12,900
73,200
79,500
215,100
15,800
19,500
179,800
188,500
$
$
$
(1,400)
(8,200)
900
$
179,800
None of the goodwill acquired is expected to be deductible for income tax purposes. The goodwill recognized was
attributable primarily to expected synergies and other benefits that the Company believed would result from the
acquisition of Reliance.
The Company incurred $1,448 in third party costs during fiscal 2014 pertaining to the acquisition of Reliance. These
expenses are included in selling, distribution and administration expense in the statement of consolidated income for
the year ended June 30, 2014.
Knox and Reliance Pro Forma Results (Unaudited)
The following unaudited pro forma consolidated results of operations have been prepared as if the Reliance
acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2013 and the Knox
acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2014:
Pro forma, year ended June 30:
Sales
Operating income
Net income
Diluted net income per share
2014
2013
$ 2,687,903 $ 2,600,453
$ 184,164 $ 187,419
$ 121,158 $ 128,779
3.03
$
2.86 $
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the
results to reflect additional depreciation and amortization that would have been charged assuming the fair value
adjustments to property, plant, and equipment, and amortizable intangible assets had been applied as of July 1,
2013. In addition, pro forma adjustments have been made for the interest expense that would have been incurred
as a result of the indebtedness used to finance the acquisitions. The pro forma net income amounts also incorporate
an adjustment to the recorded income tax expense for the income tax effect of the pro forma adjustments described
above. These pro forma results of operations do not include any anticipated synergies or other effects of the
planned integration of Reliance and Knox; accordingly, such pro forma adjustments do not purport to be indicative
of the results of operations that actually would have resulted had the acquisitions occurred as of the date indicated
or that may result in the future.
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Other Fiscal 2015 Acquisitions
Other acquisitions during fiscal 2015 included the acquisition of substantially all of the net assets of Rodamientos y
Derivados del Norte S.A. de C.V., a Mexican distributor of bearings and power transmission products and related
products, and Great Southern Bearings / Northam Bearings, a Western Australia distributor of bearings and power
transmission products on July 1, 2014 as well as Ira Pump and Supply Inc., ("Ira Pump") a Texas distributor of oilfield
pumps and supplies on November 3, 2014. These companies are included in the Service Center Based Distribution
Segment. The total combined consideration for these acquisitions was approximately $54,900. Net tangible assets
acquired were $21,000 and intangibles including goodwill were $33,900, based upon estimated fair values at the
acquisition date. The Company funded these acquisitions from borrowings under our existing debt facilities. Total
acquisition holdback payments of $6,900 are being paid at various times through July 2017. The results of
operations for the Mexican, Australian, and Ira Pump acquisitions are not material for any period presented.
Other Fiscal 2014 Acquisitions
In December 2013, the Company acquired substantially all of the net assets of Texas Oilpatch Services Corporation, a
Texas distributor of bearings, oil seals, power transmission products, and related replacement parts to the oilfield
industry. The acquired business is included in the Service Center Based Distribution segment. The purchase price for
this acquisition was $17,000, tangible assets acquired were $3,863 and intangibles, including goodwill was $13,137.
The purchase price included $2,550 of acquisition holdback payments which were paid into an escrow account
controlled by a third party. The acquisition price and the results of operations of the acquired entity are not material
in relation to the Company’s consolidated financial statements.
Holdback Liabilities for Acquisitions
Acquisition holdback payments of approximately $7,700, $3,800 and $2,500 will be made in fiscal 2017, 2018 and
2019, respectively. The related liabilities for these payments are recorded in the consolidated balance sheets in other
current liabilities for the amounts due in fiscal year 2017 and other liabilities for the amounts due in fiscal years 2018
through 2019.
NOTE 3: INVENTORIES
Inventories consist of the following:
June 30,
U.S. inventories at average cost
Foreign inventories at average cost
Less: Excess of average cost over LIFO cost for U.S. inventories
Inventories on consolidated balance sheets
$
$
2016
380,000
105,465
485,465
147,244
2015
397,524
116,674
514,198
151,779
$
338,221
$
362,419
In fiscal 2016, reductions in U.S. inventories, primarily in the bearings pool, resulted in liquidation of LIFO inventory
quantities carried at lower costs prevailing in prior years. The overall impact of LIFO layer liquidations increased gross
profit by $2,100 in fiscal 2016. There were no LIFO layer liquidations in fiscal 2015 or 2014.
NOTE 4: GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for both the Service Center Based Distribution Segment and the
Fluid Power Businesses segment for the years ended June 30, 2016 and 2015 are as follows:
Balance at July 1, 2014
Goodwill acquired during the year
Other, primarily currency translation
Balance at June 30, 2015
Goodwill acquired during the year
Impairment
Other, primarily currency translation
Balance at June 30, 2016
42
42
$
Service Center
Based
Distribution
192,565
77,728
(16,816)
253,477
18,683
(64,794)
(8,880)
198,486
$
Fluid Power
Businesses
929
—
—
929
3,285
—
—
4,214
$
$
$
$
Total
193,494
77,728
(16,816)
254,406
21,968
(64,794)
(8,880)
202,700
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The Company has seven (7) reporting units for which an annual goodwill impairment assessment was performed as
of January 1, 2016. The Company concluded that five (5) of the reporting units’ fair value substantially exceeded
their carrying amounts. The carrying value for two (2) reporting units (Canada service center and Australia/New
Zealand service center) exceeded the fair value, indicating there may be goodwill impairment. The fair values of the
reporting units in accordance with step one of the goodwill impairment test were determined using the Income and
Market approaches. The Income approach employs the discounted cash flow method reflecting projected cash flows
expected to be generated by market participants and then adjusted for time value of money factors. The Market
approach utilized an analysis of comparable publicly traded companies.
Step two of the goodwill impairment test compares the fair value of the reporting unit goodwill with the carrying
amount of goodwill. The implied fair value of goodwill is determined in the same manner as in a business
combination. The fair value of the reporting unit from step one is allocated to all of the assets and liabilities of the
reporting unit, including unrecognized intangible assets, as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
Step two of the goodwill impairment test for the Canada service center reporting unit was completed in the third
quarter of fiscal 2016. The analysis resulted in a goodwill impairment of $56,022 for the Canada service center
reporting unit. The non-cash impairment charge is the result of the overall decline in the industrial economy in
Canada coupled with the substantial and sustained decline in the oil and gas sector during calendar year 2015. This
has led to reduced spending by customers and reduced revenue expectations. The uncertainty regarding the oil and
gas industries and overall industrial economy in Canada has also led the reporting unit to reduce expectations. The
remaining goodwill for the Canada service center reporting unit at June 30, 2016 is $31,242. Because the carrying
value of the Canada service center reporting unit approximated fair value of the reporting unit after the impairment
was recorded, a future decline in the estimated cash flows could result in an additional impairment loss. A future
decline in the estimated cash flows could result from a significant decline in capital spending by oil and gas
producers and related businesses.
Step two of the goodwill impairment test for the Australia/New Zealand reporting unit was completed in the third
quarter of fiscal 2016. The analysis concluded that all of the Australia/New Zealand reporting unit’s goodwill was
impaired, and therefore the Company recorded a non-cash impairment expense of $8,772 in the third quarter of
fiscal 2016. The impairment charge is primarily the result of the decline in the mining and extraction industries in
Australia, reduced spending by customers, and the effects of reduced revenue expectations.
The techniques used in the Company's impairment test have incorporated a number of assumptions that the
Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions
in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast
future cash flows as accurately as possible with the information available at the measurement date. The Company
evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming
years with actual results of preceding years. Key Level 3 based assumptions relate to pricing trends, inventory costs,
customer demand, and revenue growth. A number of benchmarks from independent industry and other economic
publications were also used. Changes in future results, assumptions, and estimates after the measurement date may
lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual
results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby
triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market
conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if
the Company determines that the fair values of its reporting units have fallen below their carrying values.
Accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $36,605 related to the Fluid Power
Businesses segment at June 30, 2016, 2015, and 2014, and totaled $64,794 related to the Service Center Based
Distribution segment at June 30, 2016.
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The Company's identifiable intangible assets resulting from business combinations are amortized over their estimated
period of benefit and consist of the following:
June 30, 2016
Finite-Lived Intangibles:
Customer relationships
Trade names
Vendor relationships
Non-competition agreements
Total Intangibles
June 30, 2015
Finite-Lived Intangibles:
Customer relationships
Trade names
Vendor relationships
Non-competition agreements
Total Intangibles
Amount
Accumulated
Amortization
Net
Book Value
239,132
44,430
14,042
4,700
302,304
Amount
225,332
42,689
14,465
4,578
287,064
$
$
$
$
84,566
16,099
8,003
2,396
111,064
Accumulated
Amortization
65,789
13,187
7,258
2,002
88,236
$
$
$
$
154,566
28,331
6,039
2,304
191,240
Net
Book Value
159,543
29,502
7,207
2,576
198,828
$
$
$
$
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
During 2016, the Company acquired identifiable intangible assets with an acquisition cost allocation and weighted-
average life as follows:
Customer relationships
Trade names
Non-competition agreements
Total Intangibles Acquired
Acquisition
Cost
Allocation
17,996
2,889
765
21,650
$
$
Weighted-
Average Life
15.0 years
15.0 years
5.0 years
14.7 years
Amortization of identifiable intangibles totaled $25,580, $25,797 and $14,023 in fiscal 2016, 2015 and 2014,
respectively, and is included in selling, distribution and administrative expenses in the statements of consolidated
income. Future amortization expense based on the Company’s identifiable intangible assets as of June 30, 2016 is
estimated to be $25,000 for 2017, $22,700 for 2018, $21,000 for 2019, $19,200 for 2020 and $17,600 for 2021.
NOTE 5: DEBT
Revolving Credit Facility & Term Loan
In December 2015, the Company entered into a new five-year credit facility with a group of banks expiring in
December 2020. This agreement provides for a $125,000 unsecured term loan and a $250,000 unsecured revolving
credit facility. Fees on this facility range from 0.09% to 0.175% per year based upon the Company's leverage ratio
at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR or prime at
the Company’s discretion. At June 30, 2016, the Company had $123,438 outstanding under the term loan and
$33,000 outstanding under the revolver. Unused lines under this facility, net of outstanding letters of credit of
$2,707 to secure certain insurance obligations, totaled $214,293 at June 30, 2016 and are available to fund future
acquisitions or other capital and operating requirements. The interest rate on the term loan as of June 30, 2016 was
1.50%. The weighted-average interest rate on the revolving credit facility outstanding as of June 30, 2016 was
1.44%.
The new credit facility replaced the Company's previous term loan and revolving credit facility agreements. The
Company had $96,875 outstanding at June 30, 2015 under the previous term loan agreement, which carried a
variable interest rate tied to LIBOR and was 1.19% at June 30, 2015. At June 30, 2015, the Company had $52,000
outstanding under the previous revolving credit facility. Unused lines under this facility, net of outstanding letters of
credit of $3,764 to secure certain insurance obligations, totaled $94,236 at June 30, 2015 and were available to
44
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Table of Contents
fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the
revolving credit facility outstanding as of June 30, 2015 was 1.15%.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving
credit agreement, in the amount of $2,698 as of June 30, 2016 and $1,841 as of June 30, 2015, in order to secure
certain insurance obligations.
Other Long-Term Borrowings
In April 2014 the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.5%
fixed interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At
June 30, 2016 and 2015, $1,896 and $2,120 was outstanding, respectively.
At June 30, 2016 and June 30, 2015, the Company had borrowings outstanding under its unsecured shelf facility
agreement with Prudential Investment Management of $170,000. The "Series C" notes have a principal amount of
$120,000 and carry a fixed interest rate of 3.19%, and are due in equal principal payments in July 2020, 2021, and
2022. The "Series D" notes have a principal amount of $50,000 and carry a fixed interest rate of 3.21%, and are
due in equal principal payments in October 2019 and 2023. As of June 30, 2016, $50,000 in additional financing
was available under this facility.
The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing
arrangements for each of the next five years:
Fiscal Year
2017
2018
2019
2020
2021
Thereafter
Covenants
Aggregate
Maturity
$
3,352
4,918
6,484
33,050
174,804
105,726
The revolving credit facility, the term loan agreement, and the unsecured shelf facility contain restrictive covenants
regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2016, the most restrictive of these
covenants required that the Company have net indebtedness less than 3.25 times consolidated income before,
interest, taxes, depreciation and amortization. The Company was in compliance with all covenants at June 30, 2016.
NOTE 6: FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at June 30, 2016 and June 30, 2015 totaled $9,097 and $9,330,
respectively. The majority of these marketable securities are held in a rabbi trust for a non-qualified deferred
compensation plan. The marketable securities are included in other assets on the consolidated balance sheets and
their fair values were valued using quoted market prices (Level 1 in the fair value hierarchy).
As of June 30, 2016, the carrying value of the Company's fixed interest rate debt outstanding under its unsecured
shelf facility agreement with Prudential Investment Management approximates fair value (Level 2 in the fair value
hierarchy).
The revolving credit facility and the term loan contain variable interest rates and their carrying values approximate fair
value (Level 2 in the fair value hierarchy).
NOTE 7: INCOME TAXES
Income Before Income Taxes
The components of income before income taxes are as follows:
Year Ended June 30,
U.S.
Foreign
Income before income taxes
2016
139,960
(60,982)
78,978
$
$
2015
152,618
23,253
175,871
$
$
2014
147,980
18,282
166,262
$
$
45
45
Table of Contents
Provision
The provision (benefit) for income taxes consists of:
Year Ended June 30,
Current:
Federal
State and local
Foreign
Total current
Deferred:
Federal
State and local
Foreign
Total deferred
Total
2016
2015
2014
$
45,226
$
52,861
$
50,455
6,349
4,407
55,982
397
(30)
(6,948)
(6,581)
49,401
$
6,884
5,603
65,348
(3,799)
(153)
(1,009)
(4,961)
60,387
$
6,576
4,619
61,650
(5,328)
(267)
(2,614)
(8,209)
53,441
$
The exercise of non-qualified stock appreciation rights and options during fiscal 2016, 2015 and 2014 resulted in
$212, $352 and $1,462, respectively, of income tax benefits to the Company derived from the difference between
the market and option price of the shares at the date of exercise and the fair value of the options on the grant date.
Vesting of stock awards and other stock compensation in fiscal 2016, 2015 and 2014 resulted in $(4), $690 and
$1,211, respectively, of incremental income tax (expense), benefits over the amounts previously reported for financial
reporting purposes. These tax (expenses) benefits were recorded in additional paid-in capital.
Effective Tax Rates
The following reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate:
Year Ended June 30,
Statutory income tax rate
Effects of:
State and local taxes
Goodwill impairment
U.S. tax on foreign income, net
Foreign income taxes
Deductible dividend
Valuation allowance
Other, net
Effective income tax rate
2016
35.0 %
5.2 %
27.1 %
— %
(3.0)%
(0.9)%
0.5 %
(1.3)%
62.6 %
2015
35.0 %
2.5 %
— %
— %
(2.5)%
(0.5)%
0.5 %
(0.7)%
34.3 %
2014
35.0 %
2.4 %
— %
(1.6)%
(2.6)%
(0.5)%
— %
(0.6)%
32.1 %
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Consolidated Balance Sheets
Significant components of the Company’s deferred tax assets and liabilities are as follows:
June 30,
Deferred tax assets:
Compensation liabilities not currently deductible
Other expenses and reserves not currently deductible
Goodwill and intangibles
Foreign tax credit (expiring in years 2025-2026)
Net operating loss carryforwards (expiring in years 2017-2036)
Other
Total deferred tax assets
Less: Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Inventories
Goodwill and intangibles
Depreciation and differences in property bases
Total deferred tax liabilities
Net deferred tax assets (liabilities)
Net deferred tax assets (liabilities) are classified as follows:
Deferred tax assets
Other liabilities
Net deferred tax assets (liabilities)
2016
2015
$
$
$
$
25,992
11,650
6,366
849
4,960
83
49,900
(1,347)
48,553
(4,785)
(33,353)
(9,892)
(48,030)
523
12,277
(11,754)
523
$
$
$
$
28,902
9,115
7,363
1,155
860
289
47,684
(917)
46,767
(5,499)
(38,707)
(9,328)
(53,534)
(6,767)
10,980
(17,747)
(6,767)
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, 2016, all undistributed
earnings of non-U.S. subsidiaries are considered to be permanently reinvested and totaled approximately $141,482,
for which no U.S. tax has been provided. Determination of the net amount of the unrecognized tax liability with
respect to the distribution of these earnings is not practicable; however, foreign tax credits would be available to
partially reduce U.S. income taxes in the event of a distribution.
In 2014, the Company recognized a tax benefit of $2,804 related to U.S. tax on foreign income which reduced the
Company's effective tax rate by approximately 1.6%. This tax benefit was due to the reversal of taxes previously
accrued on a portion of the undistributed earnings of non-US subsidiaries applicable to a change in the permanent
reinvestment assertion. In 2015, $17,793 of cash was distributed by one of the Company's non-U.S. subsidiaries as
a non-taxable return of capital.
Unrecognized Income Tax Benefits
The Company and its subsidiaries file income tax returns in U.S. federal, various state, local and foreign jurisdictions.
The following table sets forth the changes in the amount of unrecognized tax benefits for the years ended June 30,
2016, 2015 and 2014:
Year Ended June 30,
Unrecognized Income Tax Benefits at beginning of the year
Current year tax positions
Expirations of statutes of limitations
Settlements
Unrecognized Income Tax Benefits at end of year
2016
2,604
539
(132)
(96)
2,915
$
$
2015
2,364
472
(160)
(72)
2,604
$
$
2014
2,655
730
(1,007)
(14)
2,364
$
$
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Included in the balance of unrecognized income tax benefits at June 30, 2016, 2015 and 2014 are $2,691, $2,377
and $2,104, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
During 2016, 2015 and 2014, the Company recognized $127 and $49 and $16 of expense, respectively, for interest
and penalties related to unrecognized income tax benefits in its statements of consolidated income. The Company
had a liability for penalties and interest of $625 and $497 as of June 30, 2016 and 2015, respectively. The Company
does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next
twelve months.
The Company is subject to U.S. federal income tax examinations for the tax years 2014 through 2016 and to state
and local income tax examinations for the tax years 2010 through 2016. In addition, the Company is subject to
foreign income tax examinations for the tax years 2009 through 2016.
The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets
since payment of cash is not expected within one year.
NOTE 8: SHAREHOLDERS’ EQUITY
Treasury Shares
At June 30, 2016, 596 shares of the Company’s common stock held as treasury shares were restricted as collateral
under escrow arrangements relating to change in control and director and officer indemnification agreements.
Accumulated Other Comprehensive Income (Loss)
Changes in the accumulated other comprehensive income (loss) for the years ended June 30, 2016 and 2015, is
comprised of the following:
Foreign currency
translation
adjustment
Unrealized gain
(loss) on
securities
available for sale
Postemployment
benefits
Total accumulated
other
comprehensive
income (loss)
Balance at July 1, 2013
Other comprehensive income (loss)
Amounts reclassified from accumulated other
comprehensive income (loss)
Net current-period other comprehensive income (loss), net
of taxes
Balance at June 30, 2014
Other comprehensive income (loss)
Amounts reclassified from accumulated other
comprehensive income (loss)
Net current-period other comprehensive income (loss), net
of taxes
Balance at June 30, 2015
Other comprehensive income (loss)
Amounts reclassified from accumulated other
comprehensive income (loss)
Net current-period other comprehensive income (loss), net
of taxes
Balance at June 30, 2016
$
$
$
$
$
360
629
—
629
$
989
(58,233)
—
(58,233)
(57,244) $
(24,441)
—
(24,441)
(81,685) $
(52) $
73
—
73
21
(25)
—
$
(25)
(4) $
(34)
—
(34)
(38) $
(3,729) $
871
233
1,104
(2,625) $
(472)
(3,421)
1,573
233
1,806
(1,615)
(58,730)
174
174
(298)
(2,923) $
(1,215)
(58,556)
(60,171)
(25,690)
315
315
(900)
(3,823) $
(25,375)
(85,546)
48
48
Table of Contents
Other Comprehensive (Loss) Income
Details of other comprehensive (loss) income are as follows:
Year Ended June 30,
2016
Tax
(Benefit)
Expense
Pre-Tax
Amount
Net
Amount
Pre-Tax
Amount
2015
Tax
(Benefit)
Expense
2014
Net
Amount
Pre-Tax
Amount
Tax
Expense
Net
Amount
Foreign currency translation
adjustments
$(24,441) $
— $(24,441) $(58,233) $
— $(58,233) $
629
$
— $
629
Postemployment benefits:
Actuarial (loss) gain on
remeasurement
Reclassification of
actuarial losses and
prior service cost into
SD&A expense and
included in net periodic
pension costs
Unrealized (loss) gain on
investment securities
available for sale
Other comprehensive (loss)
(1,998)
(783)
(1,215)
(776)
(304)
(472)
1,402
531
871
518
203
315
286
112
174
382
149
233
(52)
(18)
(34)
(38)
(13)
(25)
112
39
73
income
$(25,973) $
(598) $(25,375) $(58,761) $
(205) $(58,556) $ 2,525
$
719
$ 1,806
Net Income Per Share
Basic net income per share is based on the weighted-average number of common shares outstanding. Diluted net
income per share includes the dilutive effect of potential common shares outstanding. Under the two-class method
of computing net income per share, non-vested share-based payment awards that contain rights to receive non-
forfeitable dividends are considered participating securities. The Company’s participating securities include RSUs and
restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury
stock method and the two-class method. For the years presented there were no material differences in the net
income per share amounts calculated using the two methods. Accordingly, the treasury stock method is disclosed
below.
The following table presents amounts used in computing net income per share and the effect on the weighted-
average number of shares of dilutive potential common shares:
Year Ended June 30,
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
2016
29,577
$
2015
115,484
$
2014
112,821
39,254
212
39,466
40,892
295
41,187
0.75
0.75
$
$
2.82
2.80
$
$
41,942
389
42,331
2.69
2.67
$
$
$
Stock appreciation rights and options relating to 775, 435 and 289 shares of common stock were outstanding at
June 30, 2016, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per share
for the fiscal years then ended as they were anti-dilutive.
NOTE 9: SHARE-BASED COMPENSATION
Share-Based Incentive Plans
Following approval by the Company's shareholders in October 2015, the 2015 Long-Term Performance Plan (the
"2015 Plan") replaced the 2011 Long-Term Performance Plan. The 2015 Plan, which expires in 2020, provides for
granting of SARs, stock options, stock awards, cash awards, and such other awards or combination thereof as the
Executive Organization and Compensation Committee or, in the case of director awards, the Corporate Governance
Committee of the Board of Directors (together referred to as the Committee) may determine to officers, other key
employees and members of the Board of Directors. Grants are generally made at regularly scheduled committee
49
49
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meetings. Compensation costs charged to expense under award programs paid (or to be paid) with shares
(including SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below:
Year Ended June 30,
SARs and options
Performance shares
Restricted stock and RSUs
Total compensation costs under award programs
$
2016
1,543
446
2,078
$
2015
1,610
836
2,015
4,067
$
4,461
$
2014
1,808
309
2,394
4,511
$
$
Such amounts are included in selling, distribution and administrative expense in the accompanying statements of
consolidated income. The total income tax benefit recognized in the statements of consolidated income for share-
based compensation plans was $1,595, $1,749 and $1,768 for fiscal years 2016, 2015 and 2014, respectively. It
has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with
shares.
The aggregate unrecognized compensation cost for share-based award programs with the potential to be paid at
June 30, 2016 are summarized in the table below:
June 30,
(Shares in thousands)
SARs and options
Performance shares
Restricted stock and RSUs
Total unrecognized compensation costs under award programs
Average Expected
Period of Expected
Recognition (Years)
2.6
1.7
2.0
2.0
2016
$
2,193
3,933
2,133
$
8,259
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of
2.0 years. The aggregate number of shares of common stock which may be awarded under the 2015 Plan is 2,500;
shares available for future grants at June 30, 2016 were 2,449.
Stock Appreciation Rights and Stock Options
The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2016, 2015
and 2014 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
2016
4.4
1.3%
2.5%
26.0%
$6.79
2015
4.7
1.4%
2.5%
29.0%
$9.53
2014
4.6
1.3%
2.5%
31.8%
$11.02
The expected life is based upon historical exercise experience of the officers, other key employees and
members of the Board of Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds
with remaining terms equal to the expected life of the SARs and stock options. The assumed dividend yield
has been estimated based upon the Company’s historical results and expectations for changes in dividends
and stock prices. The volatility assumption is calculated based upon historical daily price observations of the
Company’s common stock for a period equal to the expected life.
SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be
settled by the holder with cash or by tendering Company common stock.
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Table of Contents
A summary of SARs and stock options activity is presented below:
Year Ended June 30, 2016
(Shares in thousands)
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable at end of year
Expected to vest at end of year
Shares
1,116
297
(171)
(6)
1,236
728
480
Weighted-
Average
Exercise
Price
35.86
39.08
27.95
44.15
37.69
34.09
42.87
$
$
$
$
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and
expected to vest at June 30, 2016 were 6.3, 4.8, and 8.5 years, respectively. The aggregate intrinsic values of
SARs and stock options outstanding, exercisable, and expected to vest at June 30, 2016 were $10,491
$8,546, and $1,827, respectively. The aggregate intrinsic value of the SARs and stock options exercised
during fiscal 2016, 2015, and 2014 was $2,422, $1,601, and $5,241, respectively.
The total fair value of shares vested during fiscal 2016, 2015, and 2014 was $1,291, $2,187, and $2,080,
respectively.
Performance Shares
Performance shares are paid in shares of Applied stock at the end of a three-year period provided the
Company achieves goals established by the committee. The number of Applied shares payable will vary
depending on the level of the goals achieved.
A summary of nonvested performance shares activity at June 30, 2016 is presented below:
Year Ended June 30, 2016
(Shares in thousands)
Nonvested, beginning of year
Awarded
Vested
Nonvested, end of year
Shares
38
12
(13)
37
Weighted-
Average
Grant-Date
Fair Value
46.66
38.34
40.75
46.01
$
$
The Committee set three one-year goals for each of the 2016, 2015 and 2014 grants. Each fiscal year during
the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax,
depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any
particular fiscal year is awarded and “banked” for payout at the end of the three-year term. Based upon the
outstanding grants as of June 30, 2016, the maximum number of shares which could be earned in future
periods was 96.
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Restricted Stock and Restricted Stock Units
Restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to
their respective shares, but are restricted from selling or transferring the shares prior to vesting. Restricted
stock awards vest over periods of one to four years. RSUs are grants valued in shares of Applied stock, but
shares are not issued until the grants vest one to four years from the award date, assuming continued
employment with Applied. Applied primarily pays dividend equivalents on RSUs on a current basis.
A summary of the status of the Company’s non-vested restricted stock and RSUs at June 30, 2016 is
presented below:
Year Ended June 30, 2016
(Share amounts in thousands)
Nonvested, beginning of year
Granted
Forfeitures
Vested
Nonvested, end of year
NOTE 10: BENEFIT PLANS
Retirement Savings Plan
Shares
90
62
(1)
(33)
118
$
Weighted-
Average
Grant-Date
Fair Value
46.18
38.68
46.36
41.47
43.56
$
Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan.
Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code
maximums. The Company partially matches 401(k) contributions by participants. The Company’s expense for
matching of employees’ 401(k) contributions was $2,535, $3,156 and $2,788 during fiscal 2016, 2015 and 2014,
respectively.
Deferred Compensation Plans
The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a
portion of their compensation. Non-employee directors were able to defer receipt of director fees until January 1,
2015. The Company 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.
Post-employment Benefit Plans
The Company provides the following post-employment 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 and determinable at retirement based upon a percentage of the participant’s
historical compensation. The Executive Organization and Compensation Committee of the Board of Directors
froze participant benefits (credited service and final average earnings) and entry into the Supplemental
Executive Retirement Benefits Plan (SERP) effective December 31, 2011.
Key Executive Restoration Plan
In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), an unfunded, non-qualified
deferred compensation plan, to replace the SERP. The Company recorded $268, $300, and $234 of expense
associated with this plan in fiscal 2016, 2015, and 2014, respectively.
Qualified Defined Benefit Retirement Plan
The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly
employees at retirement. These employees do not participate in the Retirement Savings Plan. The benefits
are based on length of service and date of retirement.
Salary Continuation Benefits
The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits
through fiscal 2020.
Retiree Health Care Benefits
The Company provides health care benefits, through third-party policies, to eligible retired employees who
pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of
coverage provided and are adjusted annually. Certain monthly health care premium payments are partially
52
52
Table of Contents
subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company
assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to
eligible retired employees at no cost to the individual.
The Company uses a June 30 measurement date for all plans.
The following table sets forth the changes in benefit obligations and plan assets during the year and the funded
status for the post-employment plans at June 30:
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 (loss) gain 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
2016
2015
2016
2015
$
$
$
$
$
29,994
91
879
—
(5,555)
—
1,196
26,605
$
$
$
7,185
(149)
5,256
—
(5,555)
6,737
$
(19,868) $
34,558
97
896
—
(6,697)
(8)
1,148
29,994
$
$
$
7,245
247
6,390
—
(6,697)
7,185
$
(22,809) $
2,144
22
75
60
(229)
—
163
2,235
$
$
— $
—
169
60
(229)
— $
(2,235) $
2,790
53
95
64
(238)
—
(620)
2,144
—
—
174
64
(238)
—
(2,144)
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive loss for the
post-employment plans were as follows:
June 30,
Amounts recognized in the consolidated balance sheets:
Other current liabilities
Post-employment benefits
Net amount recognized
Amounts recognized in accumulated other comprehensive loss:
Net actuarial (loss) gain
Prior service cost
Total amounts recognized in accumulated other comprehensive loss
Pension Benefits
Retiree Health Care
Benefits
2016
2015
2016
2015
$
$
$
$
741
19,127
19,868
$
$
5,256
17,553
22,809
$
$
(8,234) $
(121)
(8,355) $
(7,311) $
(208)
(7,519) $
220
2,015
2,235
1,119
948
2,067
$
$
$
$
220
1,924
2,144
1,492
1,219
2,711
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
5353
$
Pension Benefits
$
2016
26,605
26,605
6,737
2015
29,994
29,994
7,185
Table of Contents
The net periodic costs (benefits) are as follows:
Year Ended June 30,
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss (gain)
Amortization of prior service cost
Net periodic cost (benefits)
Pension Benefits
Retiree Health Care Benefits
2016
91
879
(491)
913
86
1,478
$
$
2015
97
896
(495)
559
86
1,143
$
$
2014
77
1,180
(416)
611
78
1,530
$
$
$
$
$
2016
22
75
—
(210)
(271)
(384) $
$
2015
53
95
—
(87)
(272)
(211) $
2014
48
139
—
(38)
(271)
(122)
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 $872 and $86,
respectively. The estimated net actuarial gain and income from prior service cost for the retiree health care benefits
that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the
next fiscal year are $181 and $271, respectively.
Assumptions
A discount rate is used to determine the present value of future payments. In general, the Company’s liability
increases as the discount rate decreases and decreases as the discount rate increases. The Company computes a
weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from
the Citigroup Pension Discount Yield Curve. During fiscal 2015, the Society of Actuaries released a series of updated
mortality tables resulting from recent studies measuring mortality rates for various groups of individuals. As of June
30, 2015, the Company adopted these mortality tables, which reflect improved trends in longevity and have the
effect of increasing the estimate of benefits to be received by plan participants.
The weighted-average actuarial assumptions used to determine benefit obligations and net periodic benefit cost for
the plans were as follows:
June 30,
Assumptions used to determine benefit obligations at year end:
Discount rate
Assumptions used to determine net periodic benefit cost:
Discount rate
Expected return on plan assets
Pension Benefits
Retiree Health Care
Benefits
2016
2015
2016
2015
2.3 %
3.0 %
7.0 %
3.0 %
2.8 %
7.0 %
3.3%
4.0%
N/A
4.0%
3.8%
N/A
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health
care benefits were 7.0% and 6.8% as of June 30, 2016 and 2015, respectively, decreasing to 5.0% by 2027.
A one-percentage point change in the assumed health care cost trend rates would have had the following effects as
of June 30, 2016 and for the year then ended:
Increase
One-Percentage Point
Decrease
$
13
255
(11)
(214)
Effect on total service and interest cost components of periodic expense
Effect on post-retirement benefit obligation
$
5454
Table of Contents
Plan Assets
The fair value of each major class of plan assets for the Company’s Qualified Benefit Retirement Plan is valued using
either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other
inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair
values and target allocation as of June 30:
Asset Class:
Equity* securities (Level 1)
Debt securities (Level 2)
Other (Level 1)
Total
Target Allocation
Fair Value
2016
40 – 70% $
20 – 50%
0 – 20%
100% $
3,843
2,759
135
6,737
$
$
2015
4,022
2,930
233
7,185
* 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 $750 to its pension benefit plans and $180 to its retiree health care
benefit plans in fiscal 2017. Contributions do not equal estimated future benefit payments as certain
payments are made from plan assets.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as applicable, are expected to be paid
in each of the next five years and in the aggregate for the subsequent five years:
During Fiscal Years
2017
2018
2019
2020
2021
2022 through 2026
$
Pension
Benefits
1,100
1,700
2,200
3,800
3,000
7,200
Retiree Health
Care Benefits
180
$
190
180
170
160
550
5555
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NOTE 11: LEASES
The Company leases many service center and distribution center facilities, vehicles and equipment under non-
cancelable lease agreements accounted for as operating leases. The Company leased its corporate headquarters
facility until purchasing it in April 2014. The minimum annual rental commitments under non-cancelable operating
leases as of June 30, 2016 are as follows:
During Fiscal Years
2017
2018
2019
2020
2021
Thereafter
Total minimum lease payments
$ 27,500
19,900
15,600
9,100
3,100
5,300
$ 80,500
Rental expense incurred for operating leases, principally from leases for real property, vehicles and computer
equipment was $37,300 in 2016, $39,300 in 2015 and $36,900 in 2014, and was classified within selling,
distribution and administrative expenses on the statements of consolidated income.
The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous
owners. In many cases, the previous owners of the business acquired, become employees of Applied and occupy
management positions within those businesses. The payments under lease agreements of this nature totaled
$3,800, $3,100 and $2,500 in fiscal 2016, 2015 and 2014, respectively.
NOTE 12: SEGMENT AND GEOGRAPHIC INFORMATION
The Company's reportable segments are: Service Center Based Distribution and Fluid Power Businesses. These
reportable segments contain the Company's various operating segments which have been aggregated based upon
similar economic and operating characteristics. The Service Center Based Distribution segment provides customers
with solutions to their maintenance, repair and original equipment manufacturing needs through the distribution of
industrial products including bearings, power transmission components, fluid power components and systems,
industrial rubber products, linear motion products, tools, safety products, and other industrial and maintenance
supplies. The Fluid Power Businesses segment distributes fluid power components and operates shops that assemble
fluid power systems and components, performs equipment repair, and offers technical advice to customers.
The accounting policies of the Company’s reportable segments are generally the same as those described in note 1.
Intercompany sales, primarily from the Fluid Power Businesses segment to the Service Center Based Distribution
segment of $21,485, $24,087, and $21,809, in fiscal 2016, 2015, and 2014, respectively, have been eliminated in
the following table.
56
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Segment Financial Information
Year Ended June 30, 2016
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures
Year Ended June 30, 2015
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures
Year Ended June 30, 2014
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
$
$
$
$
$
$
2,087,041
109,491
1,124,101
14,595
12,227
2,254,768
140,421
1,228,131
15,196
13,531
1,973,359
118,857
1,116,311
12,399
18,744
$
$
$
432,387
40,794
188,428
1,371
903
496,793
48,535
204,425
1,382
1,402
486,519
44,621
217,858
1,578
1,446
Total
2,519,428
150,285
1,312,529
15,966
13,130
2,751,561
188,956
1,432,556
16,578
14,933
2,459,878
163,478
1,334,169
13,977
20,190
ERP related assets are included in assets used in the business and capital expenditures within the Service Center
Based Distribution segment. Within the geographic disclosures, these assets are included in the United States.
Expenses associated with the ERP are included in the Corporate and other income, net, line in the reconciliation of
operating income for reportable segments to the consolidated income before income taxes table below.
A reconciliation of operating income for reportable segments to the consolidated income before income taxes
is as follows:
Year Ended June 30,
Operating income for reportable segments
Adjustments for:
Intangible amortization — Service Center Based Distribution
Intangible amortization — Fluid Power Businesses
Goodwill Impairment — Service Center Based Distribution
Corporate and other income, net
Total operating income
Interest expense, net
Other expense (income), net
Income before income taxes
2016
150,285
$
2015
188,956
$
2014
163,478
19,595
5,985
64,794
(28,890)
88,801
8,763
1,060
78,978
$
19,561
6,236
—
(21,460)
184,619
7,869
879
175,871
$
7,336
6,687
—
(14,903)
164,358
249
(2,153)
166,262
$
$
Fluctuations in corporate and other income, net, are due to changes in the levels and amounts of expenses being
allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics
support and other items.
Product Category
Net sales by product category are as follows:
Year Ended June 30,
Industrial
Fluid power
Net sales
2016
1,836,484
682,944
2,519,428
$
$
2015
2,013,447
738,114
2,751,561
$
$
2014
1,739,496
720,382
2,459,878
$
$
5757
Table of Contents
The fluid power product category includes sales of hydraulic, pneumatic, lubrication and filtration components and
systems, and repair services through the Company’s Fluid Power Businesses segment as well as the Service Center
Based Distribution segment.
Geographic Information
Net sales are presented in geographic areas based on the location of the facility shipping the product. Long-lived
assets are based on physical locations and are comprised of the net book value of property and intangible assets.
Information by geographic area is as follows:
Year Ended June 30,
Net Sales:
United States
Canada
Other Countries
Total
June 30,
Long-Lived Assets:
United States
Canada
Other Countries
Total
2016
2015
2014
$
$
$
$
2,117,485
257,797
144,146
2,519,428
2016
225,538
66,304
7,163
299,005
$
$
$
$
2,238,263
358,580
154,718
2,751,561
2015
217,597
76,565
9,113
303,275
$
$
$
$
2,031,142
291,117
137,619
2,459,878
2014
153,945
99,161
9,998
263,104
Other countries consist of Mexico, Australia and New Zealand.
NOTE 13: COMMITMENTS AND CONTINGENCIES
The Company is a party to various pending judicial and administrative proceedings. Based on circumstances
currently known, the Company believes the likelihood is remote that the ultimate resolution of any of these matters
will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial
position, results of operations, or cash flows.
NOTE 14: OTHER EXPENSE (INCOME), NET
Other expense (income), net, consists of the following:
Year Ended June 30,
2016
2015
2014
Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan
$
(87) $
(442) $ (1,683)
Elimination of one-month Canadian and Mexican reporting lag, effective July 1, 2013 and
January 1, 2014, respectively
Foreign currency transaction losses
Other, net
Total other expense (income), net
NOTE 15: SUBSEQUENT EVENTS
—
1,039
108
1,060
$
—
1,251
70
879
(1,342)
801
71
$ (2,153)
$
We have evaluated events and transactions occurring subsequent to June 30, 2016 through the date the financial
statements were issued.
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QUARTERLY OPERATING RESULTS
(In thousands, except per share amounts)
(UNAUDITED)
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Net Sales
Gross Profit
Operating
Income
Net Income Net Income
Cash
Dividend
Per Common Share
$
641,904
$
181,012
$
41,026
$
24,291
$
0.61
$
610,346
633,172
634,006
2,519,428
702,325
691,702
679,994
677,540
2,751,561
605,305
581,949
618,006
654,618
2,459,878
$
$
$
$
$
$
$
$
$
$
173,167
174,793
178,450
707,422
194,932
195,713
187,363
191,806
769,814
169,795
163,383
171,220
182,528
686,926
$
$
$
$
$
38,362
(33,032)
42,445
88,801
46,165
46,807
43,772
47,875
184,619
39,539
39,837
40,173
44,809
164,358
$
$
$
$
$
23,947
(44,728)
26,067
29,577
29,122
29,707
28,610
28,045
115,484
26,844
25,909
30,394
29,674
112,821
$
$
$
$
$
0.61
(1.14)
0.66
0.75
0.70
0.72
0.70
0.70
2.80
0.63
0.61
0.72
0.71
2.67
$
$
$
$
$
0.27
0.27
0.28
0.28
1.10
0.25
0.25
0.27
0.27
1.04
0.23
0.23
0.25
0.25
0.96
On August 5, 2016, there were 5,559 shareholders of record including 4,048 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,
2016 was $47.85 per share.
The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the
number of weighted shares outstanding and the effects of rounding for each period.
Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the
year based upon available information. Adjustments to actual cost are primarily made based on periodic physical inventory and the effect
of year-end inventory quantities on LIFO costs.
Fiscal 2016
During the third quarter of fiscal 2016, the Company recorded goodwill impairment of $64.8 million related to the Canada and Australia/
New Zealand service center reporting units within the Service Center Based Distribution reportable segment. After taxes, the impairment
had a negative impact on earnings of $63.8 million and reduced earnings per share by $1.62 per share.
During fiscal 2016, the Company incurred certain restructuring charges. During the third quarter, a reserve of $3.6 million was recorded
within cost of sales for potential non-salable, non-returnable and excess inventory due to declining demand, primarily for Canada oil and
gas operations. SD&A included expenses of $5.2 million during the fiscal year related to severance and facility consolidations, primarily
for oil and gas operations. Total restructuring charges reduced gross profit for the year by $3.6 million, operating income by $8.8 million,
net income by $6.2 million and earnings per share by $0.16.
During the fourth quarter of fiscal 2016, the Company realized LIFO layer liquidation benefits of $2.1 million from certain inventory
quantity levels decreasing.
Fiscal 2015
During the fourth quarter of fiscal 2015, the Company recorded severance of $1.8 million. Also, we sold a building recognizing a gain of
$1.5 million.
During the fourth quarter of fiscal 2015, income tax expense increased due to recording a valuation allowance against certain deferred
tax assets for foreign jurisdictions of $1.0 million. Also, an increase of tax rates in certain foreign jurisdictions at the end of the fiscal
period increased tax expense by $1.2 million during the quarter.
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No LIFO layer liquidations took place during the year ended June 30, 2015.
Fiscal 2014
During the first quarter of fiscal 2014, the Company aligned the consolidation of the Company's Canadian subsidiary which previously
included results on a month reporting lag. The elimination of this lag resulted in the recognition of $1.2 million of additional income which
was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, the Company aligned the consolidation of the Company's Mexican subsidiary which previously
included results on a month reporting lag. The elimination of this lag resulted in the recognition of $0.2 million of additional income which
was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, $2.8 million of tax reserves were reversed. The impact of this reversal was a reduction in income
tax expense of $2.8 million and a $0.07 increase in earnings per share.
No LIFO layer liquidations took place during the year ended June 30, 2014.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company's management, under the supervision and with the participation of the Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), evaluated the effectiveness of the Company's disclosure controls and procedures,
as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that
evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective.
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Management's Report on Internal Control over Financial Reporting
The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial reporting is a process designed by, or under
the supervision of, the President & Chief Executive Officer and the Vice President - Chief Financial Officer &
Treasurer, and effected by the Company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with accounting principles generally accepted in the United States of
America.
The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with accounting principles generally accepted in the
United States of America and that receipts and expenditures of the Company are being made only in accordance
with authorizations of the Company’s Management and Board of Directors; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets
that could have a material effect on the consolidated financial statements.
Because of inherent limitations, internal control over financial reporting can provide only reasonable, not absolute,
assurance with respect to the preparation and presentation of the consolidated financial statements and may not
prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over
financial reporting may vary over time.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting
as of June 30, 2016. This evaluation was based on the criteria set forth in the framework "Internal Control -
Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, Management determined that the Company’s internal control over financial reporting was
effective as of June 30, 2016.
The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche
LLP, an independent registered public accounting firm, as stated in their report which is included herein.
/s/ Neil A. Schrimsher
President & Chief Executive Officer
/s/ Mark O. Eisele
Vice President - Chief Financial Officer & Treasurer
August 24, 2016
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio
We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries
(the "Company") as of June 30, 2016, based on criteria established in "Internal Control - Integrated Framework
(2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons performing similar functions, and effected
by the company's board of directors, management, and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets
that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of June 30, 2016, based on the criteria established in "Internal Control - Integrated Framework (2013)" issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30,
2016 of the Company and our report dated August 24, 2016 expressed an unqualified opinion on those financial
statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 24, 2016
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Changes in Internal Control Over Financial Reporting
The Company has undertaken a multi-year ERP (SAP) project to transform the Company's technology platforms and
enhance its business information and transaction systems. The Company has completed its SAP implementation in
its Western Canadian and U.S. Service Center Based Businesses, excluding recent acquisitions. In fiscal 2014, the
Company initiated the transformation of its financial and accounting systems including fixed assets, general ledger
and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation
system, transitioned to SAP during fiscal 2015. In the first quarter of fiscal 2016, the Company converted to a new
consolidation process and system. During the third quarter of fiscal 2016, the Company determined that operations
in Eastern Canada will be transitioned onto SAP throughout fiscal 2017 and 2018. The Company will continue to
evaluate and consider an appropriate deployment schedule for other operations not on SAP, as well as refine our
current business and system processes. Changes in the Company's key business applications and financial processes
as a result of the continuing implementation of SAP and other business systems are being evaluated by
management. The Company is continuing to design and implement processes and internal controls to address
changes in the Company's internal control over financial reporting as a result of the SAP implementation and
consolidation system conversion. This ongoing implementation presents risks to maintaining adequate internal
controls over financial reporting.
Other than as described above, there have not been any changes in internal control over financial reporting during
the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item as to Applied's directors is incorporated by reference to Applied's proxy
statement relating to the annual meeting of shareholders to be held October 25, 2016, under the caption “Item 1 -
Election of Directors.” The information required by this Item as to Applied's executive officers has been furnished in
this report in Part I, after Item 4, under the caption “Executive Officers of the Registrant.”
The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of
1934 is incorporated by reference to Applied's proxy statement, under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance.”
Applied has a code of ethics, named the Code of Business Ethics, that applies to our employees, including our
principal executive officer, principal financial officer, and principal accounting officer. The Code of Business Ethics is
posted via hyperlink at the investor relations area of our www.applied.com website. In addition, amendments to
and waivers from the Code of Business Ethics will be disclosed promptly at the same location.
Information regarding the composition of Applied’s audit committee and the identification of audit committee
financial experts serving on the audit committee is incorporated by reference to Applied's proxy statement, under
the caption “Corporate Governance.”
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to Applied's proxy statement for the annual
meeting of shareholders to be held October 25, 2016, under the captions “Executive Compensation” and
“Compensation Committee Report.”
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
Applied's shareholders have approved the following equity compensation plans: the 1997 Long-Term Performance
Plan, the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term
Performance Plan, the Deferred Compensation Plan, and the Deferred Compensation Plan for Non-Employee
Directors. All of these plans are currently in effect.
The following table shows information regarding the number of shares of Applied common stock that may be issued
pursuant to equity compensation plans or arrangements of Applied as of June 30, 2016.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by
security holders
Total
Number of Securities
to be Issued upon
Exercise of
Outstanding Options,
Warrants and Rights
1,208,383
Weighted- Average
Exercise Price of
Outstanding Options,
Warrants and Rights
$37.58
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
*
—
1,208,383
—
$37.58
—
*
*
The 2015 Long-Term Performance Plan was adopted to replace the 2011 Long-Term Performance Plan, the 2011 Long-Term
Performance Plan was adopted to replace the 2007 Long-Term Performance Plan, and the 2007 Long-Term Performance Plan
replaced the 1997 Long-Term Performance Plan. Stock options and stock appreciation rights remain outstanding under each of the
1997, 2007 and 2011 plans, but no new awards are made under those plans. The aggregate number of shares that remained
available for awards under the 2015 Long-Term Performance Plan at June 30, 2016, was 2,449,408. The number of shares
issuable under the Deferred Compensation Plan for Non-Employee Directors and the Deferred Compensation Plan depends on the
dollar amount of participant contributions deemed invested in Applied common stock.
Information concerning the security ownership of certain beneficial owners and management is incorporated by
reference to Applied's proxy statement for the annual meeting of shareholders to be held October 25, 2016, under
the caption “Holdings of Major Shareholders, Officers, and Directors.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference to Applied's proxy statement for the annual
meeting of shareholders to be held October 25, 2016, under the caption “Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to Applied's proxy statement for the annual
meeting of shareholders to be held October 25, 2016, under the caption “Item 3 - Ratification of Auditors.”
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a)1. Financial Statements.
The following consolidated financial statements, notes thereto, the reports of independent registered public
accounting firm, and supplemental data are included in Item 8 of this report:
• Report of Independent Registered Public Accounting Firm
• Statements of Consolidated Income for the Years Ended June 30, 2016, 2015, and 2014
• Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2016, 2015, and 2014
• Consolidated Balance Sheets at June 30, 2016 and 2015
• Statements of Consolidated Cash Flows for the Years Ended June 30, 2016, 2015, and 2014
• Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2016, 2015, and 2014
• Notes to Consolidated Financial Statements for the Years Ended June 30, 2016, 2015, and 2014
• Supplementary Data:
• Quarterly Operating Results
(a)2. Financial Statement Schedule.
The following schedule is included in this Part IV, and is found in this report at the page indicated:
Page No.
Schedule II - Valuation and Qualifying Accounts: Pg. 69
All other schedules for which provision is made in the applicable accounting regulation of the Securities and
Exchange Commission have been omitted because they are not required under the related instructions, are not
applicable, or the required information is included in the consolidated financial statements and notes thereto.
(a)3. Exhibits.
* Asterisk indicates an executive compensation plan or arrangement.
Exhibit No.
Description
3.1
3.2
4.1
4.2
4.3
Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 25,
2005 (filed as Exhibit 3(a) to Applied's Form 10-Q for the quarter ended December 31, 2005, SEC File No. 1-2299, and
incorporated here by reference).
Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to
Applied's Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by
reference).
Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on
October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to
Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by
reference).
Private Shelf Agreement dated as of November 27, 1996, as amended through December 23, 2015, between Applied and
Prudential Investment Management, Inc. (assignee of The Prudential Insurance Company of America), conformed to
show all amendments (filed as Exhibit 4.2 to Applied's Form 10-Q for the quarter ended December 31, 2015, SEC File No.
1-2299, and incorporated here by reference).
Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement
dated November 27, 1996, as most recently amended on February 4, 2013, between Applied Industrial Technologies, Inc.
and Prudential Investment Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K dated July 1, 2014, SEC File No.
1-2299, and incorporated here by reference).
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4.4
4.5
*10.1
*10.2
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
*10.9
*10.10
*10.11
*10.12
*10.13
*10.14
*10.15
*10.16
*10.17
*10.18
*10.19
*10.20
Request for Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf
Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential
Investment Management, Inc. (filed as Exhibit 4.5 to Applied's Form 10-Q dated November 4, 2014, SEC File No. 1-2299,
and incorporated here by reference).
Credit Agreement dated as of December 22, 2015, among Applied Industrial Technologies, Inc., KeyBank National
Association as Agent, and various financial institutions (filed as Exhibit 10.1 to Applied's Form 8-K dated December 28,
2015, SEC File No. 1-2299, and incorporated here by reference).
A written description of Applied's director compensation program is incorporated by reference to Applied’s proxy statement
for the annual meeting of shareholders to be held October 25, 2016 under the caption “Director Compensation.”
Deferred Compensation Plan for Non-Employee Directors (September 1, 2003 Restatement), the terms of which govern
benefits vested as of December 31, 2004, for certain directors (filed as Exhibit 10(c) to Applied's Form 10-K for the year
ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference).
Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.2 to Applied's Form 10-Q
for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
Amendment to the Applied Industrial Technologies, Inc. Deferred Compensation Plan for Non-Employee Directors
(Post-2004 Terms) (filed as Exhibit 10.1 to Applied’s Form 10-Q for the quarter ended March 31, 2014, SEC File No.
1-2299, and incorporated here by reference).
Form of Director and Officer Indemnification Agreement entered into between Applied and each of its directors and
executive officers (filed as Exhibit 10(g) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration
No. 333-27801, and incorporated here by reference).
1997 Long-Term Performance Plan, as amended April 19, 2007 (filed as Exhibit 10(k) to Applied's Form 10-K for the year
ended June 30, 2007, SEC File No. 1-2299, and incorporated here by reference).
Section 409A Amendment to the 1997 Long-Term Performance Plan (filed as Exhibit 10.4 to Applied's Form 10-Q for the
quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
2007 Long-Term Performance Plan (filed as Exhibit 10 to Applied's Form 8-K dated October 23, 2007, SEC File No.
1-2299, and incorporated here by reference).
Section 409A Amendment to the 2007 Long-Term Performance Plan (filed as Exhibit 10.5 to Applied's Form 10-Q for the
quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
2011 Long-Term Performance Plan (filed as Appendix to Applied’s proxy statement for the annual meeting of shareholders
held on October 25, 2011, SEC File No. 1-2299, and incorporated here by reference).
2015 Long-Term Performance Plan (filed as Appendix to Applied's proxy statement for the annual meeting of shareholders
held on October 27, 2015, SEC File No. 1-2299, and incorporated here by reference).
Non-Statutory Stock Option Award Terms and Conditions (Directors) (filed as Exhibit 10 to Applied's Form 8-K dated
November 30, 2005, SEC File No. 1-2299, and incorporated here by reference).
Restricted Stock Award Terms and Conditions (Directors) (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter
ended March 31, 2012, SEC File No. 1-2299, and incorporated here by reference).
Stock Appreciation Rights Award Terms and Conditions (Officers) (August 2012 revision) (filed as Exhibit 10.02 to
Applied's Form 8-K dated August 9, 2012, SEC File No. 1-2299, and incorporated here by reference).
Performance Shares Terms and Conditions (filed as Exhibit 10.04 to Applied's Form 8-K dated August 9, 2012, SEC File
No. 1-2299, and incorporated here by reference).
Restricted Stock Units Terms and Conditions (filed as Exhibit 10.03 to Applied's Form 8-K dated August 9, 2012, SEC File
No. 1-2299, and incorporated here by reference).
Management Incentive Plan General Terms (filed as Exhibit 10.01 to Applied's Form 8-K dated August 9, 2012, SEC File
No. 1-2299, and incorporated here by reference).
Key Executive Restoration Plan, as amended and restated, for Applied's executive officers (filed as Exhibit 10.1 to
Applied's Form 8-K dated August 16, 2013, SEC File No. 1-2299, and incorporated here by reference).
Schedule of participants in the Key Executive Restoration Plan, as amended and restated.
Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) in which Thomas E. Armold, Todd A.
Barlett, Fred D. Bauer, and Mark O. Eisele participate (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended
December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
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*10.21
*10.22
*10.23
*10.24
*10.25
*10.26
*10.27
*10.28
*10.29
*10.30
*10.31
*10.32
*10.33
*10.34
*10.35
*10.36
21
23
24
31
32
95
First Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated
Post-2004 Terms) (filed as Exhibit 10.1 to Applied's Form 8-K dated December 22, 2011, SEC File No. 1-2299, and
incorporated here by reference).
Second Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan
(Restated Post-2004 Terms) (filed as Exhibit 10.1 to Applied's Form 8-K dated October 22, 2012, SEC File No. 1-2299,
and incorporated here by reference).
Deferred Compensation Plan (September 1, 2003 Restatement), the terms of which govern benefits vested as of
December 31, 2004, for Mark O. Eisele (filed as Exhibit 10(h) to Applied's Form 10-K for the year ended June 30, 2003,
SEC File No. 1-2299, and incorporated here by reference).
First Amendment to Deferred Compensation Plan (September 1, 2003 Restatement) (filed as Exhibit 10 to Applied's Form
10-Q for the quarter ended December 31, 2003, SEC File No. 1-2299, and incorporated here by reference).
Deferred Compensation Plan (Post-2004 Terms) (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended
December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
Supplemental Defined Contribution Plan (January 1, 1997 Restatement) the terms of which govern benefits vested as of
December 31, 2004, for certain executive officers (filed as Exhibit 10(m) to Applied’s Registration Statement on Form S-4
filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
First Amendment to Supplemental Defined Contribution Plan effective as of October 1, 2000 (filed as Exhibit 10(a) to
Applied’s Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by
reference).
Second Amendment to Supplemental Defined Contribution Plan effective as of January 16, 2001 (filed as Exhibit 10(a) to
Applied's Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299, and incorporated here by reference).
Supplemental Defined Contribution Plan (Post-2004 Terms) (filed as Exhibit 10.6 to Applied's Form 10-Q for the quarter
ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K dated October 31, 2011, SEC
File No. 1-2299, and incorporated here by reference).
Amendment to Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K dated October
22, 2012, SEC File No. 1-2299, and incorporated here by reference).
Change in Control Agreement for Neil A. Schrimsher (filed as Exhibit 10.3 to Applied's Form 8-K dated October 31, 2011,
SEC File No. 1-2299, and incorporated here by reference).
Form of Change in Control Agreement for each of Thomas E. Armold, Todd A. Barlett, Fred D. Bauer, and Mark O. Eisele
(filed as Exhibit 99.1 to Applied's Form 8-K dated April 25, 2008, SEC File No. 1-2299, and incorporated here by
reference).
Form of Change in Control Agreement for executive officers newly hired since 2012 (filed as Exhibit 10.3 to Applied's
Form 10-Q for the quarter ended September 30, 2013, SEC File No. 1-2299, and incorporated here by reference).
A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers (filed as
Exhibit 10(d) to Applied's Form 10-K for the year ended June 30, 2007, SEC File No. 1-2299, and incorporated here by
reference).
A written description of Applied's Long-Term Disability Insurance for executive officers (filed as Exhibit 10(c) to Applied's
Form 10-Q for the quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated here by reference).
Applied’s subsidiaries at June 30, 2016.
Consent of Independent Registered Public Accounting Firm.
Powers of attorney.
Rule 13a-14(a)/15d-14(a) certifications.
Section 1350 certifications.
Mine safety and health disclosure.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
67
67
Table of Contents
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Applied will furnish a copy of any exhibit described above and not contained herein upon payment of a specified
reasonable fee, which shall be limited to Applied's reasonable expenses in furnishing the exhibit.
Certain instruments with respect to long-term debt have not been filed as exhibits because the total amount of
securities authorized under any one of the instruments does not exceed 10 percent of the total assets of the Company
and its subsidiaries on a consolidated basis. The Company agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of each such instrument.
6868
Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2016, 2015, AND 2014
(in thousands)
COLUMN A
COLUMN B
COLUMN C
COLUMN D
COLUMN E
DESCRIPTION
Year Ended June 30, 2016
Reserve deducted from assets to which it applies —
accounts receivable allowances
Year Ended June 30, 2015
Reserve deducted from assets to which it applies —
accounts receivable allowances
Year Ended June 30, 2014
Reserve deducted from assets to which it applies —
accounts receivable allowances
$
$
$
Balance at
Beginning
of Period
Additions
Charged to
Cost and
Expenses
Additions
(Deductions)
Charged to
Other
Accounts
Deductions
from
Reserve
Balance at
End of
Period
10,621
$
4,303
$
(46) (A)
$
3,844 (B)
$
11,034
10,385
$
2,597
$
231 (A)
$
2,592 (B)
$
10,621
7,737
$
3,970
$
(129) (A)
$
1,193
$
10,385
(A) Amounts represent reserves for the return of merchandise by customers.
(B) Amounts represent uncollectible accounts charged off.
69
69
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
/s/ Neil A. Schrimsher
Neil A. Schrimsher
President & Chief Executive Officer
/s/ Christopher Macey
Christopher Macey
Corporate Controller
(Principal Accounting Officer)
Date: August 24, 2016
/s/ Mark O. Eisele
Mark O. Eisele
Vice President-Chief Financial Officer
& Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the date indicated.
*
*
Peter A. Dorsman, Director
L. Thomas Hiltz, Director
*
Edith Kelly-Green, Director
*
John F. Meier, Director
/s/ Neil A. Schrimsher
Neil A. Schrimsher, President & Chief Executive Officer
and Director
*
Peter C. Wallace, Director and Chairman
*
Dan P. Komnenovich, Director
*
Vincent K. Petrella, Director
*
Dr. Jerry Sue Thornton, Director
/s/ Fred D. Bauer
Fred D. Bauer, as attorney in fact
for persons indicated by “*”
Date: August 24, 2016
70
70
(This page intentionally left blank.)
Shareholder Information
Applied Industrial Technologies, Inc. common stock is listed on the New York Stock Exchange under the symbol AIT.
The Company is identified in most financial listings as “AppliedIndlTch.”
RESEARCH ON APPLIED INDUSTRIAL TECHNOLOGIES IS AVAILABLE THROUGH:
AVONDALE PARTNERS, LLC
Lawrence P. Pfeffer
314/218-4965
CLEVELAND RESEARCH
COMPANY
Adam Uhlman
216/649-7241
SHAREHOLDER INQUIRIES
Requests to transfer Applied Industrial
Technologies, Inc. shares and all
correspondence regarding address
change information, duplicate mailings,
missing certificates, 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
P.O. Box 30170
College Station, TX 77842-3170
800/988-5291
GREAT LAKES REVIEW –
Division of Wellington
Shields & Co.
Elliott Schlang
216/767-1340
KEYBANC CAPITAL MARKETS
Ryan Cieslak
216/689-0298
STEPHENS INC.
Matt Duncan
501/377-3723
LONGBOW RESEARCH
Chris Dankert
216/525-8486
WELLS FARGO SECURITIES, LLC
Allison Poliniak-Cusic
212/214-5062
INVESTOR RELATIONS INQUIRIES
SHOULD BE DIRECTED TO:
MARK O. EISELE
Vice President – Chief Financial
Officer & Treasurer
Applied Industrial Technologies
1 Applied Plaza
Cleveland, OH 44115-5014
Telephone: 216/426-4000
Fax: 216/426-4845
ANNUAL REPORT ON FORM 10-K
ANNUAL MEETING
The Annual Meeting of Shareholders
will be held at 10:00 a.m., Tuesday,
October 25, 2016, at the Corporate
Headquarters of Applied Industrial
Technologies, 1 Applied Plaza,
East 36th and Euclid Avenue,
Cleveland, Ohio 44115.
The Applied Industrial
Technologies, Inc. Annual Report
on Form 10-K for the fiscal year
ended June 30, 2016, including
the financial 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 Officer
& Treasurer at the address shown.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
Applied Industrial Technologies, Inc., Standard & Poor’s 500, and Peer Group (Performance Results from 7/1/2011 through 6/30/2016)
$200.00
$180.00
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0.00
Applied Industrial Technologies, Inc.
Standard & Poor’s 500
Peer Group
Assumes $100 invested at the close of trading 6/30/11 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.
2011
2012
2013
2014
2015
2016
Applied Industrial Technologies, Inc.
Standard & Poor’s 500
Peer Group
Source: Zacks Investment Research, Inc.
2011
100.00
100.00
100.00
2012
105.93
105.45
115.03
2013
141.85
127.17
145.75
2014
151.88
158.46
162.57
2015
121.47
170.22
149.46
2016
142.08
177.02
154.99
This report contains statements that are forward-looking, as that term is defined 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 identified on pages 1, 5-10 and 26 of Applied’s Form 10-K for
the fiscal year ended June 30, 2016 included herein. 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
will be achieved.
Corporate Headquarters1 Applied Plaza Cleveland, Ohio 44115216/426-4000Applied.com