APPLIED® at a Glance
Applied Industrial Technologies is a leading distributor of bearings, power
transmission products, engineered fluid power components and systems, specialty flow
control solutions, and other industrial supplies, 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,
fluid power, and flow control shop services. Applied also offers storeroom services and
inventory management solutions that provide added value to its customers.
DIRECTORS
OFFICERS
SENIOR MANAGEMENT
NEIL A. SCHRIMSHER
President & Chief Executive Officer
DAVID K. WELLS
Vice President – Chief Financial
Officer & Treasurer
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
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, LP
(Canada)
DAVID S. GREEN
Vice President – North Atlantic Area
THOMAS R. HAYES
Vice President – Southeast 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
DARREN B. “BEN” PADD
Vice President – Midwest Area
PAUL A. ROSSMAN
Assistant Controller
JASON W. VASQUEZ
Vice President – Sales & Marketing,
U.S. Service Centers
KURT J. WEINHEIMER
Vice President – Western Area
Headquarters:
Cleveland, Ohio, USA
Operating Facilities:
More than 600 in the
United States, Puerto Rico,
Canada, Mexico,
Australia, New Zealand
and Singapore
E-Commerce:
www.Applied.com
Distribution Centers:
11
Stock Keeping Units (SKUs)
Available to Customers:
More than 6.5 million
Product Manufacturers:
More than 4,000
Stock Ticker Symbol:
NYSE: AIT
Employee Associates:
More than 6,600
Data current as of
June 30, 2018
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 (1, 3, 4)
Former Executive Vice President, Services
NCR Corporation
(Self-Service Technology Solutions)
L. THOMAS HILTZ (2)
Attorney
EDITH KELLY-GREEN (2, 3)
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)
ROBERT J. PAGANO, JR. (1, 4)
President and Chief Executive Officer
Watts Water Technologies, Inc.
(Plumbing, Heating & Water Quality Solutions)
VINCENT K. PETRELLA (1, 3, 4)
Executive Vice President,
Chief Financial Officer and Treasurer
Lincoln Electric Holdings, Inc.
(Welding, Brazing Products Manufacturer)
JOE A. RAVER (1, 2)
President and Chief Executive Officer
Hillenbrand, Inc.
(Diversified Industrial Company)
NEIL A. SCHRIMSHER (3)
President & Chief Executive Officer
Applied Industrial Technologies, Inc.
JERRY SUE THORNTON, PH.D.
(2, 4)
President Emeritus
Cuyahoga Community College
(Two-Year Educational Institution)
COMMITTEES OF THE BOARD
(1) Audit Committee
Chair: Vincent K. Petrella
(2) Corporate Governance Committee
Chair: Edith Kelly-Green
(3) Executive Committee
Chair: Peter C. Wallace
(4) Executive Organization and
Compensation Committee
Chair: Peter A. Dorsman
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
2018 ANNUAL REPORT
SENIOR MANAGEMENT
IVAN J. BATISTA
General Director –
Rafael Benitez Carrillo, Inc.
(Puerto Rico)
BARBARA D. EMERY
Vice President – Human Resources
MARK P. GILK
(Canada)
President – Applied Industrial Technologies, LP
DAVID S. GREEN
Vice President – North Atlantic Area
THOMAS R. HAYES
Vice President – Southeast 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
DARREN B. “BEN” PADD
Vice President – Midwest Area
PAUL A. ROSSMAN
Assistant Controller
JASON W. VASQUEZ
Vice President – Sales & Marketing,
U.S. Service Centers
KURT J. WEINHEIMER
Vice President – Western Area
To Our Shareholders:
Fiscal 2018 provided many reasons to celebrate. We marked our 95th year of leadership in distribution, achieved record
fiscal-year financial performance, enhanced our differentiation in the marketplace, and continued building on our strong
foundation. Throughout the entire Applied organization, our anniversary celebration has been an exciting backdrop to a
successful year. I know that each and every Applied associate is proud to recognize our past, celebrate our present and
shape our future.
2018 Financial Highlights:
•• Record Sales of $3.1 Billion
•• Net Income of $141.6 Million; $3.61 Per Share
($3.74 Per Share Excluding $0.13 Per Share of One-Time
FCX Transaction Costs)
•• EBITDA of $278.1 Million; 9.0% of Sales (a)
Continued on next page
•• Cash Provided from Operating Activities
of $147.3 Million
•• Cash Returned to Shareholders of $68.6 Million
(Dividends + Share Repurchases)
(a) Please refer to the section entitled “Reconciliation of Net Income to EBITDA” on the inside back cover.
Net Sales
(Dollars in Billions)
Net Income (b) (c)
(Dollars in Millions)
Net Income Per Share (b) (c)
(Dollars)
Cash Returned to Shareholders
Dividends + Share Repurchases
(Dollars in Millions)
(b) The goodwill impairment charge in fiscal 2016 reduced net income by $63.8 million and net income per share by $1.62.
(c) The worthless stock tax deduction in fiscal 2017 increased net income by $22.2 million and net income per share by $0.56.
1
$2.5 $2.7 $2.5 $2.6 $3.1 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 14 15 16 17 18 $112.8 $115.5 $133.9 $141.6 $0 $25 $50 $75 $100 $125 $150 14 15 16 17 18 $29.6 $2.67 $2.80 $3.40 $3.61 $0.0 $1.0 $2.0 $3.0 $4.0 14 15 16 17 18 $0.75 $77.1 $119.2 $80.8 $52.9 $68.6 $0 $25 $50 $75 $100 $125 14 15 16 17 18 STRONG FOUNDATION
ACCELERATING MOMENTUM
1923
Founded as
The Ohio Ball
Bearing Company in
Cleveland, Ohio, by
Joseph M. Bruening
1927
Established branches in
Youngstown, Ohio, followed by
branches in Cincinnati, Akron &
Columbus, Ohio
1940
Company
operations totaled
6 stores &
50 employees
1952
Merged with Pennsylvania
Bearings, Indiana Bearings
& West Virginia Bearings;
became known as Bearing
Specialists, Inc.
1967
Completed new
building for the repair
of high-speed spindles
& live centers
1957
Acquired Dixie Bearings,
Inc., the fi rst subsidiary
of Bearings, Inc.
1972
Opened fi rst
distribution center in
Cleveland, Ohio; sales
exceeded $100 million
for the fi rst time
1990
Acquired
King Bearing, Inc.;
increased Company
size by nearly a third
1998
Expanded into
Puerto Rico
2000
Expanded into
Canada, followed
by Mexico (2001)
2008
Acquired 7
fl uid power distribution
businesses; continued
product line expansion
2012
Expanded into
Australia &
New Zealand
2016
Launched redesigned website
with enhanced e-commerce
capabilities
2018
APPLIED
CELEBRATES
95 YEARS!
1923
1924
1925
1926
1927
1937
1938
1939
1940
1947
1952
1953
1957
1965
1966
1967
1968
1972
1973
1974
1975
1983
1984
1985
1990
1997
1998
1999
2000
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1924
Company shifted focus from
auto & truck products to
broader market of bearings for
industrial products
1937
First branch outside
of Ohio established in
Indianapolis, Indiana
1947
Opened fi rst branch in
the South, known as
Tennessee Bearings
1953
Changed Company name
to Bearings, Inc.; began
trading on American
Stock Exchange
1965
Established subsidiary
Bruening Bearings, Inc.;
Company’s stock listed
on NYSE as BER
1973
Celebrated 50th
anniversary
1974
Opened
9 new service
centers bringing
total to 131
in 25 states
1968
Acquired Bearing Sales
& Service; increased
servicing locations
to 109
1997
Changed Company
name to Applied
Industrial Technologies;
acquired Invetech Co.,
increasing size by 30%
2007
Recorded more than
$2 billion in sales for
the fi rst time
2010
Initiated
Applied MSSSM
platform
2014
Acquired 4 oil & gas
businesses, expanding
value-added capabilities
and market participation
2018
Entered specialty
fl ow control market
with acquisition of
FCX Perfomance, Inc.
Strengthening
Our Differentiated Capabilities
Our fiscal 2018 results reflect broad-based execution
across our business groups and a productive economic
market environment. Supported by our dedicated
associates, enhanced business systems, strategic
investments and best-in-class suppliers, we continue
to strengthen our differentiated industrial distribution
capabilities, including our critical core products offering,
expanding value-added services, leadership in engineered
fluid power solutions, growing geographic reach, and
channels to market.
The acquisition of FCX Performance, Inc. in January 2018
is among the most significant achievements of the fiscal
year, bringing to Applied market leading, value-added
specialty flow control expertise with premier brands, high-
touch technical service, an extensive footprint, and strong
customer relationships. As a leading distributor of specialty
process flow control products and services,
FCX’s comprehensive value-added solutions help
customers improve cost productivity, reduce downtime,
increase efficiency, and effectively meet regulatory
compliance standards. Together, our combined resources
make Applied a leading technical solutions provider with
significant opportunities for growth.
Bolstering
Our Information & Technology
In addition to strategic acquisitions that bolster our
product and service offering, investments in information
and technology are vital to our growth, competitiveness,
and future success. We recognize the importance of
technology in managing operations and improving process
efficiencies, and our ongoing ERP consolidations
and business systems upgrades are paving the way
toward stronger customer experiences and operating
performance. Through digital applications, such as our
Applied.com website, and other external and internal online
portals including our mobile applications, we are providing
customers, suppliers and associates access to information
that deepens our business relationships, provides greater
engagement, and enhances our ability to serve.
In fiscal 2018 we introduced SAP® Jam – an internal
collaboration platform for social learning throughout
Applied. Jam provides relevant and searchable content
that is mobile-friendly, encourages sharing, and promotes
teamwork. Today, we utilize a Learning Management
System, a modern social learning platform, and strong
learning data analytics to provide a powerful online
connection to help manage talent. These data-driven
programs engage our associates and visualize metrics
to reinforce actions on key performance indicators and
operational excellence initiatives that increase productivity
and promote accountability.
Attracting
& Developing Great Talent
Together with our enhanced Human Resource information
system, we have improved insight into career development,
performance management and succession planning to
further develop our associates, link talent to business
strategy, and deliver on our business commitments.
We firmly believe The Best Team Wins... and to maintain
success, we will continue to attract and develop great talent.
We were proud to be recognized by Forbes as one of
America’s Best Mid-Size Employers for 2018, and for the
18th year, our headquarters was named one of the best
workplaces for top talent in Northeast Ohio. We enhanced
2
STRONG FOUNDATION
ACCELERATING MOMENTUM
1923
Founded as
The Ohio Ball
Bearing Company in
Cleveland, Ohio, by
Joseph M. Bruening
1927
Established branches in
Youngstown, Ohio, followed by
branches in Cincinnati, Akron &
Columbus, Ohio
1940
Company
operations totaled
6 stores &
50 employees
1952
Merged with Pennsylvania
Bearings, Indiana Bearings
& West Virginia Bearings;
became known as Bearing
Specialists, Inc.
1967
Completed new
building for the repair
of high-speed spindles
& live centers
1972
Opened fi rst
distribution center in
Cleveland, Ohio; sales
exceeded $100 million
for the fi rst time
1957
Acquired Dixie Bearings,
Inc., the fi rst subsidiary
of Bearings, Inc.
1982
Deployed OMNEX,
a fully operational
online information &
processing tool that
linked all locations
1990
Acquired
King Bearing, Inc.;
increased Company
size by nearly a third
2000
Expanded into
Canada, followed
by Mexico (2001)
2008
Acquired 7
fl uid power distribution
businesses; continued
product line expansion
1998
Expanded into
Puerto Rico
2012
Expanded into
Australia &
New Zealand
2016
Launched redesigned website
with enhanced e-commerce
capabilities
2018
APPLIED
CELEBRATES
95 YEARS!
1923
1924
1925
1926
1927
1937
1938
1939
1940
1947
1952
1953
1957
1965
1966
1967
1968
1972
1973
1974
1982
1983
1984
1985
1990
1997
1998
1999
2000
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1924
Company shifted focus from
auto & truck products to
broader market of bearings for
industrial products
1937
First branch outside
of Ohio established in
Indianapolis, Indiana
1947
Opened fi rst branch in
the South, known as
Tennessee Bearings
1965
Established subsidiary
Bruening Bearings, Inc.;
Company’s stock listed
on NYSE as BER
1973
Celebrated 50th
anniversary
1953
Changed Company name
to Bearings, Inc.; began
trading on American
Stock Exchange
1968
Acquired Bearing Sales
& Service; increased
servicing locations
to 109
1985
Electronic Data
Interchange (EDI)
introduced to deliver
transaction processing
effi ciency
1997
Changed Company
name to Applied
Industrial Technologies;
acquired Invetech Co.,
increasing size by 30%
2007
Recorded more than
$2 billion in sales for
the fi rst time
2010
Initiated
Applied MSSSM
platform
2014
Acquired 4 oil & gas
businesses, expanding
value-added capabilities
and market participation
2018
Entered specialty
fl ow control market
with acquisition of
FCX Perfomance, Inc.
our social media recruiting efforts in fiscal 2018 along
with the opportunity to benefit from our growing number
of followers. Our improved Careers website, now in its
second year, continues to attract numerous visitors and
also feed our Talent Network, which now exceeds 30,000
potential candidates.
Living
Our Core Values
At the center of our business advancements and accolades
is our founding philosophy: Taking Care of the Customer.
But as our associates have demonstrated, taking care of
our own is also a priority.
The intense hurricane activity in the fall of 2017 touched
numerous Applied locations and more than 200 of our
associates. The result was a Company-wide effort to
assist our fellow associates who experienced significant
hardship and personal loss. Hurricane Maria, in particular,
had a substantial impact on our Puerto Rico associates. In
true Applied fashion, our associates showed tremendous
generosity and care to help their fellow associates. The
Applied Core Values include integrity, respect, customer
focus, commitment to excellence, accountability,
innovation, continuous improvement, and teamwork, and
they continue to motivate us personally and professionally.
I would like to recognize Todd A. Barlett, Vice President –
Acquisitions and Global Business Development, who retired
at the end of fiscal 2018 after 43 years of dedicated service.
Todd’s leadership was instrumental to our growth and his
achievements have contributed greatly to our 95 years of
leadership in distribution. Todd lived our core values and
focused on serving every Applied stakeholder. We thank
him for his numerous contributions and extend our best
wishes for a well-deserved retirement.
Building
on Our Strong Foundation
At 95 years, Applied is well-positioned as the technical
MRO distribution leader, and we remain committed to
building on our strong foundation. We know there is
more to the Applied story and more work to be done to
realize our full potential. To that end, we will continue to
strengthen our position as an innovative business partner
for our customers and suppliers, and as a great workplace
for our associates.
Our founder, Joseph M. Bruening, once said,
“Our customers come to us because we have the brands
and the goods, we have complete inventories, we save
customers time and money, and we are good people to
deal with… so they tell me, time after time.”
All across our organization, we are energized and excited
to write the next chapter and extend the Applied legacy
for many years to come. I am confident we will continue
accelerating our momentum, leveraging our expanded
capabilities, and generating ongoing success and value for
all stakeholders.
Thank you for your continued support.
Neil A. Schrimsher
President & Chief Executive Officer
August 17, 2018
3
Celebrating 95 Years of Leadership in Industrial Distribution
Working Together, Winning Together!
“Applied’s rich heritage is built on a strong foundation of
dedicated associates committed to serving our customers,
partnering with leading manufacturers to provide innovative
solutions, and living our core values every day.”
– Neil A. Schrimsher
President & Chief Executive Officer
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, 2018, or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-2299
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Ohio
(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.
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
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.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to
be submitted 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 such files).
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated
filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer X
Non-accelerated filer __
Emerging growth company __
Accelerated filer __
Smaller reporting company __
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
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, 2017): $2,604,976,726.
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 10, 2018
38,721,431
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of shareholders of Applied Industrial Technologies, Inc., to
be held October 30, 2018, are incorporated by reference into Parts II, III, and IV of this Form 10-K.
3
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.
Item 16.
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
Form 10-K Summary
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SIGNATURES
Page
1
2
5
11
11
12
12
12
13
14
15
28
29
61
61
64
64
64
65
65
65
66
69
70
71
3
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 Industrial Technologies, Inc. ("Applied") and its management as to future occurrences and
trends. Applied intends that the forward-looking statements be subject to the safe harbors established in
the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its
rules, regulations, and releases.
Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking
statements are based on current expectations regarding important risk factors, many of which are outside
Applied's control. Accordingly, actual results may differ materially from those expressed in the forward-
looking statements, and the making of those statements should not be regarded as a representation by
Applied or another person that the results expressed in the statements will be achieved. In addition,
Applied assumes no obligation publicly to update or revise forward-looking statements, whether because
of new information or events, or otherwise, except as may be required by law.
Applied believes its primary risk factors include, but are not limited to, those identified in the following
sections of this annual report on Form 10-K: “Risk Factors” in Item 1A; “Narrative Description of Business,”
in Item 1, section (c); and “Management's Discussion and Analysis of Financial Condition and Results of
Operations” in Item 7. PLEASE READ THOSE DISCLOSURES CAREFULLY.
1
1
22
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 distributor of bearings, power transmission products, engineered fluid power components and
systems, specialty flow control solutions, and other industrial supplies, operating in North America, Australia, New
Zealand, and Singapore. We serve MRO (maintenance, repair, and operations) and OEM (original equipment
manufacturing) customers in virtually every industry. In addition, the Company provides engineering, design, and
systems integration for industrial, fluid power, and flow control applications, as well as customized mechanical,
fabricated rubber, fluid power, and flow control 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 and flow control.
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 and flow control segment consists of specialized companies
that distribute components, design and assemble equipment and systems, and perform equipment repair in their
respective fields of expertise.
Segment financial information can be found in note 12 to the consolidated financial statements, included in Item 8
under the caption “Financial Statements and Supplementary Data.” That information is incorporated here by
reference.
(c) Narrative Description of Business.
Overview. Our field operating structure is built on two platforms: service center based distribution; and fluid power
and flow control.
•
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 majority of our field operations and 76.3% of
our 2018 sales dollars.
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The service center based distribution segment also 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 and Flow Control. Our specialized fluid power and flow control businesses primarily market
products and services to customers within the businesses' geographic regions. We serve customers
purchasing for MRO needs as well as customers purchasing for OEM applications. In addition to distribution
services, the businesses offer technical advice, broader system solutions, and other value-added services. The
fluid power businesses design and assemble hydraulic and electro-hydraulic power units and control systems,
electronic control systems, pneumatic and electro-pneumatic panels and sub-assemblies, fabricated aluminum
assemblies, lubrication systems, hydraulic manifolds, and pump assemblies. They also perform equipment
repairs. Flow control capabilities include the following: flow control system integration; valve, actuator, and
pump repair; valve actuation; and process instrumentation.
Products. We are a leading distributor of products including bearings, power transmission products, engineered
fluid power components and systems, specialty flow control solutions, industrial rubber products, linear motion
components, tools, safety products, oilfield supplies, and other industrial and maintenance supplies.
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 and flow
control 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
storeroom inventory. We consider this advice and assistance to be an integral part of our product sales efforts.
Beyond logistical distribution services, we offer product and process solutions involving multiple technologies. These
solutions help customers minimize production downtime, improve machine performance, and reduce overall
procurement and maintenance costs. By providing high levels of service, product and industry expertise, and
technical support, while at the same time offering product breadth and competitive pricing, we believe we develop
stronger, longer-lasting, and more profitable customer relationships.
Our service center sales employees include customer sales and service representatives and account managers, as well
as product and industry specialists. Customer sales and service representatives receive, process, and expedite
customer orders, provide product information, and assist account managers in serving customers. Account
managers make onsite calls to customers to provide product information, identify customer requirements, make
recommendations, and assist in implementing equipment maintenance and storeroom management programs.
Account managers also measure and document the value of the cost savings and increased productivity we help
generate. Specialists assist with applications in their areas of expertise.
We maintain product inventory levels at each service center tailored to the local market. These inventories consist of
standard items as well as other items specific to local customer demand. Distribution centers replenish service center
inventories and also may ship products directly to customers. Having product in stock helps us satisfy customers'
immediate needs.
Timely delivery of products is an integral part of our service, particularly when customers require products for
emergency repairs. Service centers and distribution centers use the most effective method of transportation available
to meet customer needs. These methods include our own delivery vehicles, dedicated third-party transportation
providers, as well as surface and air common carrier and courier services. Customers can also pick up items at our
service centers.
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Our information systems enhance our customer service. Customers turn to our website at www.applied.com to
search for products in a comprehensive electronic catalog, research product attributes, view prices, check inventory
levels, place orders, and track order status. We also use electronic data interchange (EDI) and other electronic
interfaces with customers' technology platforms and plant maintenance systems.
In addition to our electronic capabilities, we publish a printed 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 and at our fluid power and flow control businesses) 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 and flow control 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.
Many of our fluid power and flow control businesses distinguish themselves from most component distributors by
offering engineering, design, fabrication, installation, and repair services for equipment or systems in their respective
fields of expertise. Our fluid power 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. Flow control services include the following: flow control system
integration; valve, actuator, and pump repair; valve actuation; and process instrumentation.
Each business has account managers with technical product and application knowledge, who handle sophisticated
projects. The businesses also may 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, cement, 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 4% 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 and flow control businesses, product manufacturer
authorizations are often more selective and can be a more significant competitive factor, along with market
reputation and product application knowledge.
Our principal competitors are specialist and general line distributors of bearings, power transmission products, fluid
power components and systems, flow control solutions, industrial rubber products, linear motion components, tools,
safety products, oilfield supplies, and other industrial and maintenance supplies. These competitors include local,
regional, national, and multinational operations, and can include catalog and e-commerce companies. We also
compete with original equipment manufacturers and their distributors in the sale of maintenance and replacement
components. The identity and number of our competitors vary throughout the geographic, industry, and product
markets we serve.
Although we may be one of the leading distributors in the geographic markets we serve for the primary product
categories we provide there, our market share in a given market may be relatively small compared to the portion of
the market served by original equipment manufacturers and other distributors.
Backlog Orders and Seasonality. Because of the type of industrial distribution services we provide, backlog orders
are not material to our business as a whole, although they are a more important factor for our fluid power and flow
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control 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 than during the second half due, in part, to the impact of
customer plant shutdowns, summer vacations and holidays.
Patents, Trademarks, Trade Names, and Licenses. Customer recognition of our service marks and trade names,
including Applied Industrial Technologies®, Applied®, and AIT®, is an important contributing factor to our sales.
Patents and licenses are not of material importance to our business.
Raw Materials and General Business Conditions. Our operations are dependent on general industrial and
economic conditions. We would be adversely affected by the unavailability of raw materials to our suppliers,
prolonged labor disputes experienced by suppliers or customers, or by events or conditions that have an adverse
effect on industrial activity generally in the markets we serve or on key customer industries.
Number of Employees. At June 30, 2018, we had 6,634 employees.
Working Capital. Our working capital position is discussed in Item 7 under the caption “Management's Discussion
and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference.
We require substantial working capital related to accounts receivable and inventories. Significant amounts of
inventory are carried to meet customers' delivery requirements. We generally require payments for sales on account
within 30 days. Returns are not considered to have a material effect on our working capital requirements. We
believe these practices are generally consistent among companies in our industry.
Environmental Laws. We believe that compliance with laws regulating the discharge of materials into the
environment or otherwise relating to environmental protection will not have a material adverse effect on our capital
expenditures, earnings, or competitive position.
(d) Financial Information about Geographic Areas.
Information regarding our foreign operations, including information about revenues and long-lived assets, is included
in note 12 to the consolidated financial statements, included in Item 8 under the caption “Financial Statements and
Supplementary Data,” as well as in Item 7A under the caption “Quantitative and Qualitative Disclosures about
Market Risk.” That information is incorporated here by reference.
ITEM 1A. RISK FACTORS.
In addition to other information set forth in this report, you should carefully consider the following factors that could
materially affect our business, financial condition, or results of operations. The risks described below are not the only
risks facing our Company. Certain risks are identified below in Item 7 under the caption “Management's Discussion
and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference.
Additional risks not currently known to us, risks that could apply broadly to issuers, or risks that we currently deem
immaterial, may also impact our business and operations. Risks can also change over time.
Our business depends heavily on the operating levels of our customers and the factors that affect them,
including general economic conditions. The markets for the products and services we sell are subject to
conditions or events that affect demand for goods and materials that our customers produce. Consequently,
demand for our products and services has been and will continue to be influenced by most of the same factors that
affect demand for and production of customers' goods and materials.
When customers or prospective customers reduce production levels because of lower demand, increased supply,
higher costs, tight credit conditions, unfavorable currency exchange rates, adverse trade policies, foreign
competition, other competitive disadvantage, offshoring of production, or other reasons, their need for our products
and services diminishes. Selling prices and terms of sale come under pressure, adversely affecting the profitability
and the durability of customer relationships, and credit losses may increase. Inventory management becomes more
difficult in times of economic uncertainty. Volatile economic and credit conditions also make it more difficult for us,
as well as our customers and suppliers, to forecast and plan future business activities.
Our business could be adversely affected if we do not successfully execute our initiatives to grow sales and
earnings. We have underway numerous initiatives to grow sales, enhance gross margins, manage costs, and
otherwise improve our earnings and competitive position. If we do not implement these initiatives effectively, or if
for other reasons they are unsuccessful, our business could be adversely affected.
Consolidation in our customers' and suppliers' industries could adversely affect our business and financial
results. Consolidation continues among our product suppliers and customers. As customer industries consolidate, a
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greater proportion of our sales could be derived from large volume contracts, which could adversely impact margins.
Consolidation among customers can trigger changes in their purchasing strategies, potentially shifting blocks of
business among competing distributors and contributing to volatility in our sales and pressure on prices. Similarly,
continued consolidation among our suppliers could reduce our ability to negotiate favorable pricing and other
commercial terms for our inventory purchases. There can be no assurance we will be able to take advantage of
consolidation trends.
Loss of key supplier authorizations, lack of product availability, or changes in distribution programs could
adversely affect our sales and earnings. Our business depends on maintaining an immediately available supply of
various products to meet customer demand. Many of our relationships with key product suppliers are longstanding,
but are terminable by either party. The loss of key supplier authorizations, or a substantial decrease in the availability
of their products, could put us at a competitive disadvantage and have a material adverse effect on our business.
Supply interruptions could arise from raw materials shortages, inadequate manufacturing capacity or utilization to
meet demand, financial problems, trade issues, labor disputes, or weather conditions affecting suppliers' production,
transportation disruptions, or other reasons beyond our control.
In addition, as a distributor, we face the risk of key product suppliers changing their relationships with distributors
generally, or us in particular, in a manner that adversely impacts us. For example, key suppliers could change the
following: the prices we must pay for their products relative to other distributors or relative to competing brands; the
geographic or product line breadth of distributor authorizations; supplier purchasing incentive or other support
programs; or product purchase or stocking expectations.
An increase in competition could decrease sales or earnings. We operate in a highly competitive industry. The
industry remains fragmented, but is consolidating. Our principal competitors are specialist and general line
distributors of bearings, power transmission products, fluid power components and systems, flow control solutions,
industrial rubber products, linear motion components, tools, safety products, oilfield supplies, and other industrial
and maintenance supplies. These competitors include local, regional, national, and multinational operations, and
can include catalog and e-commerce companies. Competition is largely focused in the local service area and is
generally based on product line breadth, product availability, service capabilities, and price. Existing competitors
have, and future competitors may have, greater financial or other resources than we do, broader product or service
offerings, greater market presence, stronger relationships with key suppliers or customers, or better name
recognition. If existing or future competitors seek to gain or to retain market share by aggressive pricing strategies
and sales methods, or otherwise through competitive advantage, our sales and profitability could be adversely
affected. Our success will also be affected by our ability to continue to provide competitive offerings as customer
preferences or demands evolve, for example with respect to our product and services portfolio or our e-commerce
and inventory management solutions.
The purchasing incentives we earn from product suppliers can be impacted if we reduce our purchases in
response to declining customer demand. Certain of our product suppliers have historically offered to their
distributors, including us, incentives for purchasing their products. In addition to market or customer account-
specific incentives, certain suppliers pay incentives to the distributor for attaining specific purchase volumes during a
program period. In some cases, to earn incentives, we must achieve year-over-year growth in purchases with the
supplier. When demand for our products declines, we may be less inclined to add inventory to take advantage of
certain incentive programs, thereby potentially adversely impacting our profitability.
Trade policies can have an adverse impact on industries we sell into, potentially negatively affecting our
net sales and profits. Changes to trade policies can disrupt geographic and industry demand trends. While
Applied primarily serves markets in the United States, a significant portion of our domestic customer base exports or
serves exporters. U.S. government-imposed tariffs or taxes that penalize imports can be met with countermeasures
by foreign governments, and it becomes difficult to predict what the net effect of such actions will be on Applied’s
net sales and profits. It is possible that such changes could adversely affect our financial results.
Volatility in product, energy, and other costs can affect our profitability. Product manufacturers may adjust
the prices of products we distribute for many reasons, including changes in their costs for raw materials,
components, energy, labor, and tariffs and taxes on imports. 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 in a timely manner to our customers depends on execution,
market conditions, and contractual limitations. Failing to pass along price increases timely in an inflationary
environment, or not maintaining sales volume while increasing prices, could significantly reduce our profitability.
While increases in the cost of products or energy 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
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margin to deteriorate. Changes in energy or raw materials costs can also adversely affect customers; for example,
declines in oil, gas, and coal prices may negatively impact customers operating in those industries and, consequently,
our sales to those customers.
Changes in customer or product mix and downward pressure on sales prices could cause our gross profit
percentage to fluctuate or decline. Because we serve thousands of customers in many end markets, and offer
millions of products, with varying profitability levels, changes in our customer or product mix could cause our gross
profit percentage to fluctuate or decline. Downward pressure on sales prices could also cause our gross profit
percentage to fluctuate or decline. We can experience downward pressure on sales prices as a result of deflation,
pressure from customers to reduce costs, or increased competition.
Our ability to transact business is highly reliant on information systems. A disruption or security breach
could materially affect our business, financial condition, or results of operation. We depend on information
systems to process customer orders, manage inventory and accounts receivable collections, purchase products,
manage accounts payable processes, ship products to customers on a timely basis, maintain cost-effective
operations, provide superior service to customers, and compile financial results. A serious, prolonged disruption of
our information systems, due to manmade or natural causes, including power or telecommunications outage, or
breach in security, could materially impair fundamental business processes and increase expenses, decrease sales, or
otherwise reduce earnings.
Because of our reliance on information systems, we may be vulnerable to the growing threat of damage or intrusion
from computer viruses or other cyber-attacks on our systems. Despite precautions taken to prevent or mitigate the
risks of such incidents, an attack on our systems could not only cause business disruption, but could also result in the
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 information system applications with newer software platforms, to
enhance our business information and transaction systems to support future growth. We continue with and
consider additional enterprise resource planning system conversions, on a smaller scale, in discrete business
operations. Despite extensive planning, we could experience disruptions related to the implementation because of
the projects' complexity. The potential adverse consequences could include delays, loss of information, diminished
management reporting capabilities, damage to our ability to process transactions timely, 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.
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 and future competitors, and private equity firms, increasingly compete with us for
acquisitions, which can increase prices and reduce the number of suitable opportunities; the acquisitions they make
can also adversely impact our market position.
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. For
example, 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; 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; and exposure to
unknown or contingent liabilities of the acquired company. In addition, acquisitions could place significant demand
on administrative, operational, and financial resources.
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We may not realize the growth opportunities and cost synergies that are anticipated from our recent
acquisition of FCX Performance, Inc. On January 31, 2018, we acquired FCX Performance, Inc. (“FCX”), a
distributor of specialty process flow control products and services, for an aggregate purchase price of $781.8 million.
The benefits that are expected to result from this sizable acquisition will depend, in part, on our ability to realize the
anticipated growth opportunities and cost synergies as a result of the acquisition. Our success in realizing these
growth opportunities and cost synergies, and the timing of this realization, depends on a number of factors. There is
a significant degree of difficulty and management distraction inherent in the process of integrating an acquisition as
large as FCX. While integration activities are well underway, the process of integrating operations could still cause
an interruption of, or loss of momentum in, our activities or the activities of the FCX business. Members of our
senior management may be required to devote considerable time to the integration process, which decreases the
time they will have to manage our other operations, service existing customers, and attract new business. If senior
management is not able to manage the integration process effectively, or if any significant business activities are
interrupted as a result of the integration process, our business could suffer. There can be no assurance that we will
successfully or cost-effectively integrate FCX. The failure to do so could have a material adverse effect on our
business, financial condition, or results of operations.
Even if we are able to integrate FCX successfully, this integration may not result in the realization of the full benefits
of the growth opportunities and cost synergies we currently expect from the acquisition, and we cannot guarantee
these benefits will be achieved within anticipated time frames or at all. For example, we may not be able to
eliminate duplicative costs. Moreover, we may incur substantial expenses in connection with the integration of FCX.
While it is anticipated that certain expenses will be incurred to achieve cost synergies, such expenses are difficult to
estimate accurately and may exceed current estimates. Accordingly, the benefits from the acquisition may be offset
by costs incurred to integrate the business or delays in the integration process. In addition, the overall integration
may result in unanticipated problems, expenses, liabilities, competitive responses, loss of customers and other
relationships, and loss of key employees, any of which may adversely affect our business, financial position or results
of operations and may cause our stock price to decline.
We incurred a substantial amount of debt to complete the acquisition of FCX. To service our debt, we will
require a significant amount of cash that may limit our ability to pay dividends, repurchase our shares, or
complete other acquisitions or strategic initiatives. In connection with the FCX acquisition, we entered into a
new credit facility pursuant to which we incurred approximately $780.0 million in term loan indebtedness and
approximately $250.0 million in revolving indebtedness. This indebtedness substantially increased our leverage and
requires substantial future principal and interest payments. Our ability to service our debt and fund our other
liquidity needs will depend on our ability to generate cash in the future. This additional leverage may (i) require us to
dedicate a substantial portion of our cash flows from operations to the payment of debt service, reducing the
availability of our cash flow to fund planned capital expenditures, pay dividends, repurchase our shares, complete
other acquisitions or strategic initiatives, and other general corporate purposes; (ii) limit our ability to obtain
additional financing in the future (either at all or on satisfactory terms) to enable us to react to changes in our
business or execute our growth strategies; and (iii) place us at a competitive disadvantage compared to businesses in
our industry that have lower levels of indebtedness. Additionally, any failure to comply with covenants in the
instruments governing our debt could result in an event of default. Any of the foregoing events or circumstances
relating to our additional indebtedness may adversely affect our business, financial position, or results of operations
and may cause our stock price to decline.
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, 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, 2018, we had $646.6 million of goodwill and $435.9 million of other intangible assets, net. We
assess all existing goodwill at least annually for impairment on a reporting unit basis. The techniques used in our
qualitative assessment and goodwill impairment tests incorporate a number of estimates and assumptions that are
subject to change. Although we believe these estimates and assumptions are reasonable and reflect market
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.
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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 a decade ago did not have a significant adverse impact
on our liquidity or borrowing costs, the availability of funds tightened and credit spreads on corporate debt
increased. If credit market volatility were to return, 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 be
materially misstated, which could adversely affect the trading price of our common stock.
If we are not able to maintain the adequacy of our internal control over financial reporting, including any failure to
implement required new or improved controls, or if we experience difficulties in their implementation, our business,
financial condition and operating results could be harmed. Any material weakness could affect investor confidence
in the accuracy and completeness of our financial statements. As a result, our ability to obtain any additional
financing, or additional financing on favorable terms, could be materially and adversely affected. This, in turn, could
materially and adversely affect our business, financial condition, and the market value of our stock and require us to
incur additional costs to improve our internal control systems and procedures. In addition, perceptions of the
Company among customers, suppliers, lenders, investors, securities analysts, and others could also be adversely
affected.
We cannot assure that any material weaknesses will not arise in the future due to our failure to implement and
maintain adequate internal control over financial reporting. In addition, although we have been successful
historically in strengthening our controls and procedures, those controls and procedures may not be adequate to
prevent or identify irregularities or ensure the fair presentation of our financial statements included in our periodic
reports filed with the SEC.
Our business depends on our ability to attract, develop, motivate, and retain qualified employees. Our
success depends on hiring, developing, motivating, and retaining key employees, including executive, managerial,
sales, professional, and other personnel. We may have difficulty identifying and hiring qualified personnel. In
addition, we may have difficulty retaining such personnel once hired, and key people may leave and compete against
us. With respect to sales and customer service positions in particular, we greatly benefit from having employees who
are familiar with the products we sell and their applications, as well as with our customer and supplier relationships.
The loss of key employees or our failure to attract and retain other qualified workers could disrupt or adversely affect
our business. In addition, our operating results could be adversely affected by increased competition for employees,
shortages of qualified workers, higher employee turnover (including through retirement as the workforce ages), or
increased employee compensation or benefit costs.
An interruption of operations at our headquarters or distribution centers, or in our means of transporting
product, could adversely impact our business. Our business depends on maintaining operating activity at our
headquarters and distribution centers, and being able to receive and deliver product in a timely manner. A serious,
prolonged interruption due to power or telecommunications outage, terrorist attack, earthquake, extreme weather
events, other natural disasters, fire, flood, or other interruption could have a material adverse effect on our business
and financial results.
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
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condition and results of operations, as well as applicable law and business considerations that our Board of Directors
considers relevant. There can be no assurance that we will continue to pay a quarterly dividend.
Additionally, if we cannot generate sufficient cash flow from operations to meet our debt payment obligations, then
our ability to pay dividends, if so determined by the Board of Directors, will be impaired and we may be required to
attempt to restructure or refinance our debt, raise additional capital, or take other actions such as selling assets,
reducing, or delaying capital expenditures, or reducing our dividend. There can be no assurance, however, that any
such actions could be effected on satisfactory terms, if at all, or would be permitted by the terms of our debt or our
other credit and contractual arrangements.
Our operations outside the United States increase our exposure to global economic and political conditions
and currency exchange volatility. Foreign operations contributed 14.9% of our sales in 2018. This presence
outside the U.S. increases risks associated with exposure to more volatile economic conditions, political instability,
cultural and legal differences in conducting business (including corrupt practices), economic and trade policy actions,
and currency exchange fluctuations.
Our foreign operations' results are reported in the local currency and then translated into U.S. dollars at applicable
exchange rates for inclusion in our consolidated financial statements. Fluctuations in currency exchange rates affect
our operating results and financial position, as well as the comparability of results between financial periods.
We are subject to litigation and regulatory risk due to the nature of our business, which may have a
material adverse effect on our business. From time to time, we are involved in lawsuits or other legal
proceedings that arise from our business. These may, for example, relate to product liability claims, commercial
disputes, personal injuries, or employment-related matters. In addition, we could face claims over other matters,
such as claims arising from our status as a public company or government contractor, or otherwise relating to our
compliance with a wide array of laws and regulations to which we are subject. The defense and ultimate outcome
of lawsuits or other legal proceedings or inquiries may result in higher operating expenses, which could have a
material adverse effect on our business, financial condition, or results of operations.
Our business is subject to risks, some for which we maintain third-party insurance and some for which we
self-insure. We may incur losses and be subject to liability claims that could have a material adverse effect
on our financial condition, results of operations, or cash flows. We maintain insurance policies that provide
limited coverage for some, but not all, of the potential risks and liabilities associated with our business. The policies
are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insured basis. For
some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks
presented. Because of market conditions, premiums and deductibles for certain insurance policies can increase
substantially, and in some instances, certain insurance may become unavailable or available only for reduced
amounts of coverage. As a result, we may not be able to renew existing insurance policies or procure other desirable
insurance on commercially reasonable terms, if at all. Even where insurance coverage applies, insurers may contest
their obligations to make payments. Our financial condition, results of operations, and cash flows could be
materially and adversely affected by losses and liabilities from uninsured or underinsured events, as well as by delays
in the payment of insurance proceeds, or the failure by insurers to make payments.
In addition to the risks identified above, other risks to our future performance include, but are not limited
to, the following:
changes in customer preferences for products and services of the nature, brands, quality, or cost sold by us;
changes in customer procurement policies and practices;
changes in the market prices for products and services relative to the costs of providing them;
changes in operating expenses;
•
•
•
•
• organizational changes within the Company;
• government regulation, legislation, or policies, including with respect to federal tax policy and international
trade, such as recent tariffs and proposed tariffs on imports, and countermeasures by foreign governments;
the variability and timing of new business opportunities including acquisitions, customer relationships, and
supplier authorizations;
the incurrence of debt and contingent liabilities in connection with acquisitions;
volatility of our stock price and the resulting impact on our consolidated financial statements; and changes in
accounting policies and practices that could impact our financial reporting and increase compliance costs.
•
•
•
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Table of Contents
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, 2018, we owned real
properties at 120 locations and leased 443 locations. Certain properties house more than one operation.
The following were our principal owned real properties (each of which has more than 50,000 square feet of floor
space) at June 30, 2018:
Location of Principal Owned
Real Property
Cleveland, Ohio
Atlanta, Georgia
Florence, Kentucky
Carlisle, Pennsylvania
Fort Worth, Texas
Type of Facility
Corporate headquarters
Distribution center, service center, hose shop
Distribution center
Distribution center
Distribution center and rubber shop
Our principal leased real properties (each of which has more than 50,000 square feet of floor space) at June 30,
2018 were:
Location of Principal Leased
Real Property
Fontana, California
Newark, California
Elyria, Ohio
Strongsville, Ohio
Portland, Oregon
Stafford, Texas
Longview, Washington
Nisku, Alberta
Winnipeg, Manitoba
Type of Facility
Distribution center, rubber shop, fluid power shop, and
service center
Fluid power shop
Product return center and service center
Offices and warehouse
Distribution center
Offices, warehouse, and flow control shop
Service center, rubber shop, and fluid power shop
Offices, service center, and shops
Distribution center and service center
The properties in Newark and Stafford are used in our fluid power and flow control segment. The Fontana and
Longview properties are used in both the service center based distribution segment and the fluid power and flow
control segment. The remaining properties are used in the service center based distribution segment.
We consider our properties generally sufficient to meet our requirements for office space and inventory stocking.
A service center's size is primarily influenced by the amount and types of inventory the service center requires to
meet customers' needs.
When opening new operations, we have tended to lease rather than purchase real property. We do not consider
any service center, distribution center, or shop property to be material, because we believe that, if it becomes
necessary or desirable to relocate an operation, other suitable property could be found.
In addition to operating locations, we own or lease certain properties which in the aggregate are not material and
are either for sale, lease, or sublease to third parties due to a relocation or closing. We also may lease or sublease to
others unused portions of buildings.
Additional information regarding our properties can be found in note 11 to the consolidated financial statements,
included below in Item 8 under the caption “Financial Statements and Supplementary Data.” That information is
incorporated here by reference.
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Table of Contents
ITEM 3. LEGAL PROCEEDINGS.
Applied and/or one of its subsidiaries is a party to pending legal proceedings with respect to product liability,
commercial, personal injury, employment, and other matters. Although it is not possible to predict the outcome of
these proceedings or the range of reasonably possible loss, we believe, based on circumstances currently known,
that the likelihood is remote that the ultimate resolution of any of these proceedings will have, either individually or
in the aggregate, a material adverse effect on Applied's consolidated financial position, results of operations, or cash
flows.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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 24, 2017:
Name
Neil A. Schrimsher
Fred D. Bauer
Warren E. Hoffner
Kurt W. Loring
David K. Wells
:
Positions and Experience
President since August 2013 and Chief Executive Officer since 2011.
Vice President-General Counsel & Secretary since 2002.
Vice President-General Manager, Fluid Power since 2003. The Board of
Directors designated Mr. Hoffner an executive officer in October 2015.
Vice President-Chief Human Resources Officer since July 2014. Prior to then
Mr. Loring was Vice President, Human Resources for the Forged Products
segment of Precision Castparts Corporation (formerly NYSE: PCP). The $4.3
billion segment, with greater than 5,000 employees, is a world-leading
producer of complex forgings and high-performance nickel-based alloys and
super alloys for aerospace, power generation, and general industrial
applications.
Vice President-Chief Financial Officer & Treasurer since September 2017. He
served as Vice President-Finance from May 2017 through August 2017. Prior
to joining Applied, from May 2015 to May 2017, Mr. Wells was Vice
President & Chief Financial Officer of ESAB, a manufacturer of welding and
material cutting products and a division of Colfax Corporation (NYSE: CFX).
Prior to then he was Vice President & Chief Financial Officer of Apex Tool
Group, a manufacturer of hand and power tools.
Age
54
52
58
49
55
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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, 2018, 2017,
and 2016 and the number of shareholders of record as of August 10, 2018 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
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
12,202,332
12,152,983
15,931,593
13,642,214
9,924,600
13,423,500
12,986,200
10,868,100
17,146,300
14,832,500
14,619,200
12,583,200
193,688
192,904
261,174
213,160
$
66.05
70.05
75.40
76.20
$
54.00
59.65
67.40
62.45
155,100
$
48.61
$
44.03
213,100
209,500
172,500
62.65
66.65
69.00
43.50
58.80
57.10
267,900
$
42.65
$
37.15
231,800
239,700
196,600
43.54
44.24
47.18
37.00
35.55
42.52
The following table summarizes Applied's repurchases of its common stock in the quarter ended June 30, 2018.
Period
April 1, 2018 to April 30, 2018
May 1, 2018 to May 31, 2018
June 1, 2018 to June 30, 2018
Total
(a) Total
Number of
Shares (1)
(b) Average
Price Paid per
Share ($)
87
—
319
406
65.07
—
75.45
73.23
(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)
1,056,700
1,056,700
1,056,700
1,056,700
(1) During the quarter ended June 30, 2018, Applied purchased 406 shares in connection with an employee deferred compensation
program. This purchase is not counted in the authorization in note (2).
(2) On October 24, 2016, the Board of Directors authorized the repurchase of up to 1.5 million shares of the Company's common
stock, replacing the prior authorization. We publicly announced the new authorization on October 26, 2016. Purchases can be
made in the open market or in privately negotiated transactions. The authorization is in effect until all shares are purchased, or the
Board revokes or amends the authorization.
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ITEM 6. SELECTED FINANCIAL DATA.
This selected financial data should be read in conjunction with Applied's consolidated financial statements and
related notes included elsewhere in this annual report as well as the section of the annual report titled Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
(In thousands, except per share amounts and statistical data)
Consolidated Operations — Year Ended June 30
Net sales
Depreciation and amortization of property
Amortization:
Intangible assets
SARs and stock options
Operating income (c)
Net income (b) (c)
Per share data:
Net income:
Basic
Diluted (b) (c)
Cash dividend
2018 (a)
2017
2016
2015
2014
$3,073,274
17,798
$ 2,593,746
15,306
$2,519,428
15,966
$2,751,561
16,578
$ 2,459,878
13,977
32,065
1,961
225,827
141,625
3.65
3.61
1.18
24,371
1,891
175,386
133,910
3.43
3.40
1.14
25,580
1,543
89,782
29,577
0.75
0.75
1.10
25,797
1,610
184,619
115,484
2.82
2.80
1.04
14,023
1,808
164,358
112,821
2.69
2.67
0.96
Year-End Position — June 30
Working capital
Long-term debt (including portion classified as current)
Total assets
Shareholders’ equity
$ 625,469
966,063
2,285,741
814,963
$ 572,789
291,982
1,387,595
745,256
$ 507,238
328,334
1,312,025
657,916
$ 535,938
320,995
1,432,556
741,328
$ 545,193
170,712
1,334,169
800,308
Year-End Statistics — June 30
Current ratio
Operating facilities
Shareholders of record (d)
Return on assets (b) (c) (e)
Return on equity (b) (c) (f)
Capital expenditures (g)
Cash Returned to Shareholders During the Year
Dividends paid
Purchases of treasury shares
Total
2.4
610
4,323
8.0%
18.2%
2.8
552
4,687
10.2%
19.1%
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%
$
$
$
23,230
45,858
22,778
68,636
$
$
$
17,045
44,619
8,242
52,861
$
$
$
13,130
$
14,933
43,330
37,465
80,795
$
42,663
76,515
$ 119,178
$
$
$
20,190
40,410
36,732
77,142
(a) FY 2018 includes the acquisition of FCX Performance, Inc. from the acquisition date of 1/31/2018.
(b) FY 2017 includes a tax benefit pertaining to a worthless stock tax deduction of $22.2 million, or $0.56 per share. Excluding the
worthless stock tax deduction, the fiscal 2017 return on assets would be 8.5% and return on equity would be 16.2%.
(c) A goodwill impairment charge in fiscal 2016 reduced operating income by $64.8 million, net income by $63.8 million, and diluted
earnings per share by $1.62. Excluding the goodwill impairment charge, the fiscal 2016 return on assets would be 6.7% and return
on equity would be 12.8%.
(d)
Includes participant-shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan and shareholders in the
Company's direct stock purchase program.
(e) Return on assets is calculated as net income divided by monthly average assets.
(f) 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).
(g) Capital expenditures for fiscal 2014 included the purchase of our headquarters facility which used $10.0 million of cash.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
With more than 6,600 employees across North America, Australia, New Zealand, and Singapore, Applied Industrial
Technologies (“Applied,” the “Company,” “We,” “Us” or “Our”) is a leading distributor of bearings, power
transmission products, engineered fluid power components and systems, specialty flow control solutions, and other
industrial supplies, serving MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer)
customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for
industrial, fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, fluid
power, and flow control shop services. Applied also offers storeroom services and inventory management solutions
that provide added value to its customers. We have a long tradition of growth dating back to 1923, the year our
business was founded in Cleveland, Ohio. At June 30, 2018, business was conducted in the United States, Puerto
Rico, Canada, Mexico, Australia, New Zealand, and Singapore from 610 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.
On January 31, 2018, Applied completed the acquisition of all of the outstanding shares of FCX Performance, Inc.
(“FCX”), a Columbus, Ohio based distributor of specialty process flow control products and services. At the time of
closing, FCX operated 68 locations with approximately 1,000 employees. The total consideration transferred was
approximately $781.8 million, which was financed by cash-on-hand and a new credit facility comprised of a $780
million Term Loan A and $250 million revolver, effective with the transaction closing.
Our fiscal 2018 consolidated sales were $3.1 billion, an increase of $479.5 million or 18.5% compared to the prior
year, with the acquisitions of FCX, Sentinel Fluid Controls, and Diseños, Construcciones y Fabricaciones
Hispanoamericanas, S.A. (DICOFASA) increasing sales by $264.7 million or 10.2% and favorable foreign currency
translation of $16.0 million increasing sales by 0.6%. Gross profit margin increased to 28.8% for fiscal 2018 from
28.4% for fiscal 2017 primarily due to the impact of the acquisition of FCX, which favorably impacted the gross
profit margin by 38 basis points in fiscal 2018. Operating margin increased to 7.3% in fiscal 2018 from 6.8% in
fiscal 2017.
During the fourth quarter of fiscal 2017, the Company recorded an income tax benefit of $22.2 million pertaining to
a worthless stock deduction based on the write-off of the Company's investment in one of its subsidiaries in Canada
for U.S. tax purposes.
Our earnings per share was $3.61 in fiscal 2018 versus $3.40 in fiscal year 2017. The current year results include a
positive impact on earnings per share of $0.15 per share related to U.S. tax reform from the enactment of the Tax
Cuts and Jobs Act in December 2017. The prior year results include a positive impact on earnings per share of $0.56
per share related to the worthless stock deduction.
Shareholders’ equity was $815.0 million at June 30, 2018 compared to $745.3 million at June 30, 2017. Working
capital increased $52.7 million from June 30, 2017 to $625.5 million at June 30, 2018. The current ratio was 2.4 to
1 at June 30, 2018 and 2.8 to 1 at June 30, 2017.
Applied monitors several economic indices that have been key indicators for industrial economic activity in the United
States. These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published
by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply
Management (ISM). Historically, our performance correlates well with the MCU, which measures productivity and
calculates a ratio of actual manufacturing output versus potential full capacity output. When manufacturing plants
are running at a high rate of capacity, they tend to wear out machinery and require replacement parts.
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The MCU (total industry) and IP indices gradually increased during fiscal 2018 correlating with the overall growth in
the industrial economy. The ISM PMI registered 60.2 in June 2018, an increase from the June 2017 revised reading
of 56.7. 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 2018
May 2018
April 2018
March 2018
December 2017
September 2017
June 2017
MCU
78.0
77.7
78.2
77.5
77.3
75.7
76.2
Index Reading
PMI
60.2
58.7
57.3
59.3
59.3
60.2
56.7
IP
103.9
103.1
104.2
103.6
102.8
101.3
101.9
YEAR ENDED JUNE 30, 2018 vs. 2017
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
2018
2017
% Change
100.0%
100.0%
28.8%
21.4%
7.3%
4.6%
28.4%
21.7%
6.8%
5.2%
18.5%
19.8%
17.0%
28.8%
5.8%
Sales in fiscal 2018 were $3.1 billion, which was $479.5 million or 18.5% above the prior year, with sales from
acquisitions accounting for $264.7 million or 10.2% of the increase, and favorable foreign currency translation
accounting for an increase of $16.0 million or 0.6%. There were 251.5 selling days in fiscal 2018 and 252.5 selling
days in fiscal 2017. Excluding the impact of businesses acquired and the impact of foreign currency translation, sales
were up $198.8 million or 7.7% during the year, of which 5.9% is from the Service Center Based Distribution
segment and 2.1% is from the Fluid Power & Flow Control segment, offset by a 0.3% decrease due to one less sales
day.
The following table shows changes in sales by reportable segment.
Amounts in millions
Amount of change due to
Sales by Reportable Segment
Service Center Based Distribution
Fluid Power & Flow Control
Total
Year ended June 30,
Sales
2018
2017
Increase Acquisitions
Foreign
Currency
Organic
Change
$
$
2,346.4 $
2,180.4 $
166.0 $
3.6 $
16.0 $
726.9
413.4
313.5
261.1
—
3,073.3 $
2,593.8 $
479.5 $
264.7 $
16.0 $
146.4
52.4
198.8
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $166.0
million, or 7.6%. Acquisitions within this segment increased sales by $3.6 million or 0.2%, and favorable foreign
currency translation increased sales by $16.0 million or 0.7%. Excluding the impact of businesses acquired and the
impact of foreign currency translation, sales increased $146.4 million or 6.7%, driven by an increase of 7.0% from
operations, offset by a 0.3% decrease due to one less sales day.
Sales of our Fluid Power & Flow Control segment increased $313.5 million or 75.8%. Acquisitions within this
segment increased sales $261.1 million or 63.2%. Excluding the impact of businesses acquired, sales increased
$52.4 million or 12.7%, driven by an increase of 13.1% from operations, offset by a 0.4% decrease due to one less
sales day.
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The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New
Zealand, and Singapore.
Amounts in millions
Sales by Geographic Area
United States
Canada
Other countries
Total
Amount of change due to
Year ended June 30,
Sales
2018
2017
Increase Acquisitions
Foreign
Currency
Organic
Change
$
2,615.1 $
2,182.6 $
432.5 $
261.1 $
— $
171.4
273.6
184.6
252.0
159.2
21.6
25.4
—
3.6
11.3
4.7
10.3
17.1
$
3,073.3 $
2,593.8 $
479.5 $
264.7 $
16.0 $
198.8
Sales in our U.S. operations increased $432.5 million or 19.8%, with acquisitions adding $261.1 million or 12.0%.
Excluding the impact of businesses acquired, U.S. sales were up $171.4 million or 7.8%, of which 8.2% is growth
from operations, offset by a 0.4% decrease due to one less sales day. Sales from our Canadian operations increased
$21.6 million or 8.6%, and favorable foreign currency translation increased Canadian sales by $11.3 million or
4.5%. Excluding the impact of foreign currency translation, Canadian sales were up $10.3 million or 4.1%, of
which 3.7% is growth from operations, and the remaining 0.4% increase is due to one additional sales day.
Consolidated sales from our other country operations increased $25.4 million or 16.0% compared to the prior year.
Acquisitions added sales of $3.6 million or 2.3% and favorable foreign currency translation increased other country
sales by $4.7 million or 2.9%. Excluding the impact of businesses acquired and the impact of foreign currency
translation, other country sales were up $17.1 million or 10.8% compared to the prior year, driven by an increase
from operations of 11.0%, offset by a decrease of 0.2% due to one less sales day in Australia, New Zealand, and
Singapore.
The sales product mix for fiscal 2018 was 67.9% industrial products and 32.1% fluid power/flow control products
compared to 71.5% and 28.5%, respectively, in the prior year.
Our gross profit margin increased to 28.8% in fiscal 2018 compared to 28.4% in fiscal 2017 due to the acquisition
of FCX, which favorably impacted the gross profit margin by 38 basis points in fiscal 2018.
The following table shows the changes in SD&A.
Amounts in millions
SD&A
Amount of change due to
Year ended June 30,
SD&A
2018
2017
Increase Acquisitions
Foreign
Currency
Organic
Change
$
658.2 $
562.3 $
95.9 $
74.7 $
3.9 $
17.3
Selling, distribution and administrative expense (SD&A) consists of associate compensation, benefits and other
expenses associated with selling, purchasing, warehousing, supply chain management, and providing marketing and
distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as
human resources, information technology, treasury, accounting, insurance, legal, facility related expenses and
expenses incurred with acquiring businesses. SD&A increased $95.9 million or 17.0% during fiscal 2018 compared
to the prior year, and as a percent of sales decreased to 21.4% from 21.7% in fiscal 2017. Changes in foreign
currency exchange rates had the effect of increasing SD&A by $3.9 million or 0.7% compared to the prior year.
SD&A from businesses acquired added $74.7 million or 13.3% of SD&A expenses, including $6.1 million of one-time
costs and $9.6 million of intangibles amortization related to the FCX acquisition. Excluding the impact of businesses
acquired and the unfavorable impact from foreign currency translation, SD&A increased $17.3 million or 3.0%
during fiscal 2018 compared to fiscal 2017. Excluding the impact of acquisitions, total compensation increased
$20.1 million during fiscal 2018 compared to the prior fiscal year as a result of merit increases and improved
Company performance. All other expenses within SD&A were down $2.8 million.
Operating income increased $50.4 million, or 28.8%, to $225.8 million during fiscal 2018 from $175.4 million
during fiscal 2017, and as a percent of sales, increased to 7.3% from 6.8% due to growth from operations and the
acquisition of FCX.
Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 5.8% in
fiscal 2018 from 5.3% in fiscal 2017. Operating income as a percentage of sales for the Fluid Power & Flow Control
segment increased to 11.4% in fiscal 2018 from 11.3% in fiscal 2017. These increases are due to the positive
leveraging impact from the increase in sales in the current year.
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Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits
and expenses allocated to the segments. The expense allocations include corporate charges for working capital,
logistics support and other items and impact segment gross profit and operating expense.
Other (income) expense, net, represents certain non-operating items of income and expense. This was $2.4 million
of income in fiscal 2018 compared to $0.1 million of income in fiscal 2017. Current year income primarily consists
of life insurance income of $1.6 million, unrealized gains on investments held by non-qualified deferred
compensation trusts of $0.8 million, and foreign currency transaction gains of $0.2 million, offset by net other
periodic post-employment costs of $0.2 million. Fiscal 2017 income consisted primarily of unrealized gains on
investments held by non-qualified deferred compensation trusts of $1.2 million, offset by net other periodic post-
employment costs of $0.8 million, foreign currency transaction losses of $0.2 million, and life insurance expense of
$0.1 million.
The effective income tax rate was 30.8% for fiscal 2018 compared to 19.8% for fiscal 2017. The fiscal 2018
effective tax rate was favorably impacted by the enactment of the Tax Cuts and Jobs Act (the "Act") in December
2017, which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. This
resulted in a blended statutory rate for the Company for fiscal 2018 of 28.06%. Overall, the Act resulted in a net
tax benefit of $5.8 million for fiscal 2018. The corporate income tax rate change had a favorable impact to the
Company of $12.1 million, which was offset by income tax expense of $3.9 million accounting for the one-time
transition tax related to the Company's undistributed foreign earnings and expense of $2.4 million related to the re-
measurement of deferred tax balances. The fiscal 2017 effective tax rate was favorably impacted by a $22.2 million
net tax benefit, pertaining to a worthless stock tax deduction which decreased the effective tax rate by 13.3%. The
tax benefit was net of a $1.0 million valuation allowance applicable to the related state deferred income tax asset.
This deduction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S.
tax purposes. The fiscal 2017 effective tax rate was favorably impacted further by $2.4 million of net excess tax
benefits, resulting from stock-based compensation awards vesting and exercises, that were recognized as a
reduction of income tax expense and decreased the effective income tax rate for fiscal 2017 by 1.4%.
We expect our income tax rate for fiscal 2019 to be in the range of 24.0% to 26.0%.
As a result of the factors addressed above, net income for fiscal 2018 increased $7.7 million from the prior year. Net
income per share was $3.61 per share for fiscal 2018 compared to $3.40 for fiscal 2017. Current year results were
favorably impacted by organic growth, as well as positive impacts on earnings per share of $0.15 per share related
to tax reform and $0.05 per share related to the results of FCX, offset by a negative impact of $0.13 per share for
one-time costs related to the acquisition of FCX. The prior year results include a positive impact on earnings per
share of $0.56 per share related to the tax benefit recorded for the worthless stock deduction. Net income per share
was favorably impacted by lower weighted average common shares outstanding in fiscal 2018 as a result of our
share repurchase program.
At June 30, 2018, we had a total of 610 operating facilities in the United States, Puerto Rico, Canada, Mexico,
Australia, New Zealand, and Singapore, versus 552 at June 30, 2017.
The number of Company employees was 6,634 at June 30, 2018 and 5,554 at June 30, 2017.
YEAR ENDED JUNE 30, 2017 vs. 2016
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
2017
2016
% Change
100.0%
100.0%
28.4%
21.7%
6.8%
5.2%
28.1%
22.0%
3.6%
1.2%
2.9%
4.3%
1.7%
95.3%
352.8%
Sales in fiscal 2017 were $2.6 billion, which was $74.3 million or 2.9% above fiscal 2016, with sales from
acquisitions accounting for $31.1 million or 1.2% of the increase, offset by a decrease due to unfavorable foreign
currency translation of $1.1 million or 0.1%. There were 252.5 selling days in fiscal 2017 and 253.5 selling days in
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fiscal 2016. Excluding the impact of businesses acquired and prior to the impact of foreign currency translation,
sales were up $44.3 million or 1.8% during fiscal 2017, driven by an increase of 1.6% from our traditional core
operations in addition to an increase of 0.6% from our upstream oil and gas-focused subsidiaries, offset by a 0.4%
decrease due to one less sales day.
The following table shows changes in sales by reportable segment.
Amounts in millions
Amount of change due to
Sales by Reportable Segment
Service Center Based Distribution
Fluid Power & Flow Control
Total
Year ended June 30,
Sales
2017
2016
Increase Acquisitions
Foreign
Currency
Organic
Change
$
$
2,180.4 $
2,150.5 $
29.9 $
413.4
369.0
44.4
2,593.8 $
2,519.5 $
74.3 $
19.8 $
11.3
31.1 $
(1.1) $
—
(1.1) $
11.2
33.1
44.3
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $29.9
million, or 1.4%. Acquisitions within this segment increased sales by $19.8 million or 0.9%, while unfavorable
foreign currency translation decreased sales by $1.1 million or 0.1%. Excluding the impact of businesses acquired
and unfavorable currency translation impact, sales increased $11.2 million or 0.6%, driven by an increase of 0.7%
from our upstream oil and gas-focused subsidiaries and an increase of 0.3% from within our traditional core
operations, offset by a 0.4% decrease due to one less sales day.
Sales of our Fluid Power & Flow Control segment increased $44.4 million or 12.0%. Acquisitions within this
segment increased sales $11.3 million or 3.1%. Excluding the impact of businesses acquired, sales increased $33.1
million or 8.9%, driven by an increase from operations, primarily in the U.S., of 9.3%, offset by a decrease of 0.4%
due to one less sales day.
The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New
Zealand, and Singapore.
Amounts in millions
Sales by Geographic Area
United States
Canada
Other countries
Total
Amount of change due to
Year ended June 30,
Sales
2017
2016
Increase Acquisitions
Foreign
Currency
Organic
Change
$
2,182.6 $
2,117.5 $
65.1 $
25.1 $
— $
252.0
159.2
257.8
144.2
(5.8)
15.0
6.0
—
(0.2)
(0.9)
$
2,593.8 $
2,519.5 $
74.3 $
31.1 $
(1.1) $
40.0
(11.6)
15.9
44.3
Sales in our U.S. operations increased $65.1 million or 3.1%, with acquisitions adding $25.1 million or 1.2%.
Excluding the impact of businesses acquired, U.S. sales were up $40.0 million or 1.9%, of which 1.4% was from our
traditional core operations and 0.9% was from our upstream oil and gas-focused subsidiaries, offset by a 0.4%
decrease due to one less sales day. Sales from our Canadian operations decreased $5.8 million or 2.2%, with
unfavorable foreign currency translation decreasing Canadian sales by $0.2 million or 0.1%. Acquisitions added
$6.0 million, or 2.3%. Excluding the impact of businesses acquired and unfavorable foreign currency translation
impact, Canadian sales were down $11.6 million or 4.4%, of which 2.0% related to the upstream oil and gas-
focused subsidiaries, 2.0% was from the traditional core operations, and the remaining 0.4% decrease due to one
less sales day. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand,
and Singapore, increased $15.0 million or 10.4% compared to fiscal 2016. Unfavorable foreign currency translation
decreased other country sales by $0.9 million or 0.7%. Prior to the impact of currency translation, other country
sales were up $15.9 million or 11.1% compared to the fiscal 2016, driven by an increase from operations of 13.0%,
primarily in Australia and Singapore, offset by a decrease of 1.9% due to fewer sales days.
The sales product mix for fiscal 2017 was 71.5% industrial products and 28.5% fluid power products compared to
72.9% industrial and 27.1% fluid power in fiscal 2016.
Our gross profit margin increased to 28.4% in fiscal 2017 compared to 28.1% in fiscal 2016. The increase was
primarily due to recording a more favorable impact from LIFO layer liquidations which increased gross profit by $9.4
million in fiscal 2017 and $2.1 million in fiscal 2016, offset by a $4.8 million increase in scrap expense in fiscal 2017
compared to fiscal 2016. Further, the gross profit margin for fiscal 2016 was negatively impacted by $3.6 million of
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restructuring expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for
the upstream oil and gas-focused operations.
The following table shows the changes in SD&A.
Amounts in millions
SD&A
Amount of change due to
Year ended June 30,
SD&A
2017
2016
Increase Acquisitions
Foreign
Currency
Organic
Change
$
562.3 $
552.8 $
9.5 $
8.2 $
0.1 $
1.2
Selling, distribution and administrative expenses (SD&A) consist of associate compensation, benefits and other
expenses associated with selling, purchasing, warehousing, supply chain management, and providing marketing and
distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as
human resources, information technology, treasury, accounting, legal, facility related expenses and expenses
incurred with acquiring businesses. SD&A increased $9.5 million or 1.7% during fiscal 2017 compared to fiscal
2016, and as a percent of sales decreased to 21.7% from 21.9% in fiscal 2016. Changes in foreign currency
exchange rates had the effect of increasing SD&A by $0.1 million or less than 0.1% compared to fiscal 2016.
Additional SD&A from businesses acquired in fiscal 2017 added $8.2 million or 1.5% of SD&A expenses including
$1.0 million associated with intangibles amortization. Excluding the impact of businesses acquired and the
unfavorable impact from foreign currency translation, SD&A increased $1.2 million or 0.2% during fiscal 2017
compared to fiscal 2016. Excluding the impact of acquisitions, total compensation increased $12.9 million during
fiscal 2017 compared to fiscal 2016 as a result of merit increases, improved Company performance, and increased
costs related to health care claims. These increases were offset by severance expense and other restructuring
charges related to consolidating facilities of $5.2 million of SD&A included in fiscal 2016 that did not reoccur during
fiscal 2017. Also, excluding the impact of acquisitions, bad debt expense decreased $2.3 million during fiscal 2017
compared to fiscal 2016, due to improvement in aged receivables. Further, the Company recorded a gain of $1.6
million in fiscal 2017 related to the sale of five buildings during the year. All other expenses within SD&A were
down $2.6 million.
During the third quarter of fiscal 2016, the Company performed its annual goodwill impairment test. As a result of
this test, the Company determined that all of the goodwill associated with the Australia/New Zealand Service Center
Based Distribution reporting unit was impaired as of January 1, 2016. This impairment was the result of the decline
in the mining and extraction industries in Australia and the resulting reduced customer spending due to a decline in
demand throughout Asia. Further, due to a sustained decline in oil prices and reduced customer spending in
Canada, the Company determined that a portion of the goodwill associated with the Canada Service Center Based
Distribution reporting unit was also impaired as of January 1, 2016. Accordingly, the Company recognized a
combined non-cash impairment charge of $64.8 million for goodwill during fiscal 2016, which decreased net income
by $63.8 million and earnings per share by $1.62. Changes in future results, assumptions, and estimates used in
calculating the goodwill impairment test could result in additional impairment charges in future periods.
Operating income increased $85.6 million, or 95.3%, to $175.4 million during fiscal 2017 from $89.8 million during
fiscal 2016, and as a percent of sales, increased to 6.8% from 3.6%. These increases were primarily due to the
Company recognizing a non-cash goodwill impairment charge of $64.8 million and restructuring charges of $8.8
million during fiscal 2016 that did not reoccur during fiscal 2017, as well as higher sales volume in fiscal 2017.
Operating income as a percentage of sales for the Service Center Based Distribution segment was 5.3% in fiscal
2017 and fiscal 2016, before the goodwill impairment charge.
Operating income as a percentage of sales for the Fluid Power & Flow Control segment increased to 11.3% in fiscal
2017 from 10.1% in fiscal 2016. This increase was due to the positive leveraging impact from the increase in sales,
primarily from our U.S. operations in this segment, in fiscal 2017.
Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits
and expenses allocated to the segments. The expense allocations include corporate charges for working capital,
logistics support and other items and impact segment gross profit and operating expense.
Other (income) expense, net, represents certain non-operating items of income and expense. This was $0.1 million
of income in fiscal 2017 compared to $2.0 million of expense in fiscal 2016. Fiscal 2017 income primarily consists of
unrealized gains on investments held by non-qualified deferred compensation trusts of $1.2 million, offset by net
other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.2 million, and life
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insurance expense of $0.1 million. Fiscal 2016 expense consisted primarily of foreign currency transaction losses of
$1.0 million and net other periodic post-employment costs of $1.0 million.
The effective income tax rate was 19.8% for fiscal 2017 compared to 62.6% for fiscal 2016. The fiscal 2017
effective tax rate was favorably impacted by a $22.2 million net tax benefit pertaining to a worthless stock tax
deduction, which decreased the effective tax rate by 13.3%. The tax benefit was net of a $1.0 million valuation
allowance applicable to the related state deferred income tax asset. This deduction was based on the write-off of
the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes. The fiscal 2016 effective tax
rate was unfavorably impacted due to the recording of $64.8 million of goodwill impairment during fiscal 2016, of
which $61.3 million was not tax deductible. The goodwill impairment increased the effective tax rate for fiscal 2016
by 27.1%. The remaining decrease in the effective tax rate was primarily due to the adoption of ASU 2016-09 in
the first quarter of fiscal 2017, which requires excess tax benefits and deficiencies resulting from stock-based
compensation awards vesting and exercises to be recognized in the income statement. During fiscal 2017, $2.4
million of net excess tax benefits were recognized as a reduction of income tax expense, which decreased the
effective income tax rate for fiscal 2017 by 1.4%. All undistributed earnings of our foreign subsidiaries were
considered to be permanently reinvested at June 30, 2017 and 2016.
As a result of the factors addressed above, net income for fiscal 2017 increased $104.3 million from fiscal 2016. Net
income per share was $3.40 per share for fiscal 2017 compared to $0.75 for fiscal 2016. Fiscal 2017 results
included a positive impact on earnings per share of $0.56 per share related to the tax benefit recorded for the
worthless stock deduction. Fiscal 2016 results included negative impacts on earnings per share of $1.62 per share
for goodwill impairment charges and $0.16 per share for restructuring charges. Net income per share was favorably
impacted by lower weighted average common shares outstanding in fiscal 2017 as a result of our share repurchase
program.
At June 30, 2017, we had a total of 552 operating facilities in the United States, Puerto Rico, Canada, Mexico,
Australia, New Zealand, and Singapore, versus 559 at June 30, 2016.
The number of Company employees was 5,554 at June 30, 2017 and 5,569 at June 30, 2016.
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, 2018 we had total debt obligations outstanding of $966.1 million compared to $292.0
million at June 30, 2017. Management expects that our existing cash, cash equivalents, funds available under the
revolving credit and uncommitted shelf facilities, and cash provided from operations, will be sufficient to finance
normal working capital needs in each of the countries we operate in, payment of dividends, investments in
properties, facilities and equipment, and the purchase of additional Company common stock. Management also
believes that additional long-term debt and line of credit financing could be obtained based on the Company’s credit
standing and financial strength.
The Company’s working capital at June 30, 2018 was $625.5 million compared to $572.8 million at June 30, 2017.
The current ratio was 2.4 to 1 at June 30, 2018 and 2.8 to 1 at June 30, 2017.
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.
Net Cash Provided by (Used in):
Operating Activities
Investing Activities
Financing Activities
Exchange Rate Effect
Increase (Decrease) in Cash and Cash Equivalents
Year Ended June 30,
2018
2017
2016
$ 147,304
$ 164,619
$ 162,014
(797,906)
(16,894)
600,284
(103,349)
(589)
820
$
(50,907) $
45,196
$
(75,031)
(93,007)
(3,585)
(9,609)
The decrease in cash provided by operating activities during fiscal 2018 is primarily due to increased working capital
levels to support increased sales compared to the prior year periods. The decrease in cash was further impacted by
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increased interest payments, and the payment of $7.1 million of one-time costs, both related to the FCX acquisition.
These decreases were partially offset by improved operating results, including the impact of the FCX acquisition.
Net cash used in investing activities in fiscal 2018 included $775.7 million used for the acquisitions of FCX and
DICOFASA, and $23.2 million used for capital expenditures. Net cash used in investing activities in fiscal 2017
included $17.0 million for capital expenditures and $2.8 million used for acquisitions. These were offset by $2.9
million of proceeds received from the sale of five buildings during fiscal 2017. Net cash used in investing activities in
fiscal 2016 included $13.1 million for capital expenditures and $62.5 million used for acquisitions.
Net cash provided by financing activities in fiscal 2018 included $780.0 million of cash from borrowings under the
new credit facility and $19.5 million of net borrowings under the revolving credit facility, offset by $125.4 million of
long-term debt repayments. Further uses of cash were $45.9 million for dividend payments, $22.8 million used to
repurchase 393,300 shares of treasury stock, and $3.3 million used for the payment of debt issuance costs.
Net cash used in financing activities in fiscal 2017 included $3.4 million of long-term debt repayments and $33.0
million of net repayments under the revolving credit facility. Further uses of cash were $44.6 million for dividend
payments, $8.2 million used to repurchase 162,500 shares of treasury stock, $11.3 million used for acquisition
holdback payments, and $3.5 million used to pay taxes for shares withheld.
Net cash used in financing activities in fiscal 2016 included $98.7 million of long-term debt repayments and $19.0
million of net repayments under the revolving credit facility, offset by $125.0 million of cash from borrowings under
the 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.
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 $1.18, $1.14, and $1.10 per share in fiscal 2018, 2017 and 2016, respectively.
Capital Expenditures
We expect capital expenditures for fiscal 2019 to be in the $26.0 million to $28.0 million range, primarily consisting
of capital associated with additional information technology equipment and infrastructure investments. Depreciation
for fiscal 2019 is expected to be in the range of $21.0 million to $22.0 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 first deployed our solution in
our Western Canadian operating locations and our traditional U.S. Service Center Based Distribution businesses,
excluding recent acquisitions. In fiscal 2014, the Company initiated the conversion to SAP of its related financial and
accounting systems, including the receivables, payables, treasury, inventory, fixed assets, general ledger and
consolidation systems. All of these underlying financial and accounting systems, except for the consolidation
process/system, were transitioned to SAP during fiscal 2015. At the beginning of fiscal 2016 the Company
converted to a new consolidation process and system. During the fourth quarter of fiscal 2017, operations in
Eastern Canada transitioned onto SAP, and the majority of the Company's upstream oil and gas-focused operations
transitioned onto SAP during fiscal 2018. The Company will continue to evaluate and consider an appropriate
deployment schedule for other operations not on SAP.
Share Repurchases
The Board of Directors has authorized the repurchase of shares of the Company’s stock. These purchases may
be made in open market and negotiated transactions, from time to time, depending upon market conditions.
At June 30, 2018, we had authorization to purchase an additional 1,056,700 shares.
In fiscal 2018, 2017 and 2016, we repurchased 393,300, 162,500, and 951,100 shares of the Company’s common
stock, respectively, at an average price per share of $57.92, $50.72, and $39.39, respectively.
Borrowing Arrangements
In January 2018, in conjunction with the acquisition of FCX, the Company refinanced its existing credit facility and
entered into a new five-year credit facility with a group of banks expiring in January 2023. This agreement provides
for a $780.0 million unsecured term loan and a $250.0 million unsecured revolving credit facility. Fees on this facility
range from 0.10% to 0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings
under this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. At
June 30, 2018, the Company had $775.1 million outstanding under the term loan and $19.5 million outstanding
under the revolver. Unused lines under this facility, net of outstanding letters of credit of $3.6 million to secure
certain insurance obligations, totaled $226.9 million at June 30, 2018, and were available to fund future acquisitions
or other capital and operating requirements. The interest rate on the term loan as of June 30, 2018 was 4.13%.
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The weighted average interest rate on the amount outstanding under the revolving credit facility as of June 30, 2018
was 3.93%.
At June 30, 2017, the Company had $120.3 million outstanding under the term loan in the previous credit facility
agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017. No amount was
outstanding under the revolver as of June 30, 2017. Unused lines under this facility, net of outstanding letters of
credit of $2.4 million to secure certain insurance obligations, totaled $247.6 million at June 30, 2017.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with either
revolving credit agreement, in the amount of $2.7 million as of June 30, 2018 and June 30, 2017, respectively, in
order to secure certain insurance obligations.
At June 30, 2018 and June 30, 2017, the Company had borrowings outstanding under its unsecured shelf facility
agreement with Prudential Investment Management of $170.0 million. Fees on this facility range from 0.25% to
1.25% per year based on the Company's leverage ratio at each quarter end. The "Series C" notes have a principal
amount of $120.0 million and carry a fixed interest rate of 3.19%, and are due in equal principal payments in July
2020, 2021, and 2022. The "Series D" notes have a principal amount of $50.0 million, carry a fixed interest rate of
3.21%, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2018, $50.0 million in
additional financing was available under this facility.
In 2014, the Company assumed $2.4 million of debt as a part of the headquarters facility acquisition. The 1.50%
fixed interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At
June 30, 2018 and 2017, $1.4 million and $1.7 million was outstanding, respectively.
The new credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth,
financial ratios, and other covenants. At June 30, 2018, the most restrictive of these covenants required that the
Company have net indebtedness less than 4.25 times consolidated income before interest, taxes, depreciation and
amortization. At June 30, 2018, the Company's indebtedness was less than 3.0 times consolidated income before
interest, taxes, depreciation and amortization. The Company was in compliance with all financial covenants at
June 30, 2018.
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
$
$
$
2018
562,377
13,566
548,811
2.4%
2018
2,803
0.09%
$
$
$
2017
400,559
9,628
390,931
2.4%
2017
2,071
0.08%
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 55.0 at June 30, 2018 versus 51.6 at June 30, 2017. The inclusion of FCX had no
impact on the Company's DSO at June 30, 2018. Accounts receivable increased 40.4% this year, of which 20.7% is
accounts receivable for FCX. The remaining increase is due to an increase in sales excluding FCX for the twelve
months ended June 30, 2018.
Approximately 2.4% of our accounts receivable balances are more than 90 days past due at June 30, 2018
compared to 1.7% at June 30, 2017. This increase primarily relates to our U.S. Service Center Based Distribution
businesses. On an overall basis, our provision for losses from uncollected receivables represents 0.09% of our sales
in the year ended June 30, 2018. Historically, this percentage is around 0.10% to 0.15%. Management believes
the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels.
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Inventory Analysis
Inventories are valued using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for
foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management
calculates this ratio on an annual as well as a quarterly basis and uses inventory valued at average costs. The
annualized inventory turnover (using average costs) for the period ended June 30, 2018 was 4.0 versus 3.7 at
June 30, 2017. We believe our inventory turnover ratio in fiscal 2019 will be slightly better than our fiscal 2018
levels.
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, 2018 (in thousands):
Operating leases
$ 111,400
$ 38,100
$ 45,300
$ 17,000
$ 11,000
Planned funding of post-retirement obligations
16,300
3,500
4,400
1,800
6,600
Total
Period Less
Than 1 yr
Period
2-3 yrs
Period
4-5 yrs
Period
Over 5 yrs
Other
—
—
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
4,700
966,100
84,300
3,365
—
19,700
18,300
2,592
—
—
—
4,700
128,900
792,300
25,200
40,800
25,000
698
—
200
75
—
—
—
$1,186,165
$ 82,192
$ 220,098
$ 836,100
$ 43,075
$
4,700
(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations. Rates in
effect as of June 30, 2018 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.
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 16.8% of our domestic inventory dollars relate to LIFO layers
added in the 1970s. The excess of average cost over LIFO cost is $139.2 million as reflected in our consolidated
balance sheet at June 30, 2018. 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.
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Allowances for Slow-Moving and Obsolete Inventories
We evaluate the recoverability of our slow-moving and inactive inventories at least quarterly. We estimate the
recoverable cost of such inventory by product type while considering factors such as its age, historic and current
demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. Our ability
to recover our cost for slow moving or obsolete inventory can be affected by such factors as general market
conditions, future customer demand and relationships with suppliers. A significant portion of the products we hold
in inventory have long shelf lives, are not highly susceptible to obsolescence and are eligible for return under various
supplier return programs.
As of June 30, 2018 and 2017, the Company's reserve for slow-moving or obsolete inventories was $38.1 million
and $28.8 million, respectively, recorded in inventories in the consolidated balance sheets. The increase is primarily
due to a $6.8 million reserve related to the inventory acquired with FCX.
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, 2018 and 2017, our allowance for doubtful accounts was 2.4% of gross receivables. Our provision
for losses on accounts receivable was $2.8 million, $2.1 million and $4.3 million in fiscal 2018, 2017 and 2016,
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 one-step approach. The fair value of a reporting unit is compared 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. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be
recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the
total amount of goodwill allocated to that reporting unit.
Goodwill on our consolidated financial statements relates to both the Service Center Based Distribution segment and
the Fluid Power & Flow Control segment. The Company has six reporting units for which an annual goodwill
impairment assessment was performed as of January 1, 2018. The Company concluded that all of the reporting
units’ fair value exceeded their carrying amounts by at least 30% as of January 1, 2018. However, for one of our
reporting units with goodwill of approximately $28.0 million, if we do not achieve our forecasted margin
improvements goodwill could be impaired.
The fair values of the reporting units in accordance with the goodwill impairment test were determined using the
Income and Market approaches. The Income approach employs the discounted cash flow method reflecting
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projected cash flows expected to be generated by market participants and then adjusted for time value of money
factors. The Market approach utilizes an analysis of comparable publicly traded companies.
The techniques used in the Company's impairment test have incorporated a number of assumptions that the
Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions
in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast
future cash flows as accurately as possible with the information available at the measurement date. The Company
evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming
years with actual results of preceding years. Key Level 3 based assumptions relate to pricing trends, inventory costs,
customer demand, and revenue growth. A number of benchmarks from independent industry and other economic
publications were also used. Changes in future results, assumptions, and estimates after the measurement date may
lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual
results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby
triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market
conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if
the Company determines that the fair values of its reporting units have fallen below their carrying values.
Income Taxes
Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and
liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. As of June 30,
2018, the Company had recognized $56.1 million of net deferred tax liabilities. Valuation allowances are provided
against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit
of such assets on a jurisdiction by jurisdiction basis. The remaining net deferred tax asset is the amount
management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be
impacted by changes to tax laws, statutory rates and future taxable income levels.
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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 and risks relating to the security of those
systems and the data stored in or transmitted through them; the impact of economic conditions on the
collectability of trade receivables; reduced demand for our products in targeted markets due to reasons
including consolidation in customer industries; our ability to retain and attract qualified sales and
customer service personnel and other skilled executives, managers and professionals; our ability to identify
and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability,
timing and nature of new business opportunities including acquisitions, alliances, customer relationships,
and supplier authorizations; the incurrence of debt and contingent liabilities in connection with
acquisitions; our ability to access capital markets as needed on reasonable terms; disruption of operations
at our headquarters or distribution centers; risks and uncertainties associated with our foreign operations,
including volatile economic conditions, political instability, cultural and legal differences, and currency
exchange fluctuations; the potential for goodwill and intangible asset impairment; changes in accounting
policies and practices; our ability to maintain effective internal control over financial reporting;
organizational changes within the Company; the volatility of our stock price and the resulting impact on
our consolidated financial statements; risks related to legal proceedings to which we are a party;
potentially adverse government regulation, legislation, or policies, both enacted and under consideration,
including with respect to federal tax policy, and international trade, such as recent tariffs and proposed
tariffs on imports; and the occurrence of extraordinary events (including prolonged labor disputes, power
outages, telecommunication outages, terrorist acts, earthquakes, extreme weather events, other natural
disasters, fires, floods, and accidents). Other factors and unanticipated events could also adversely affect
our business, financial condition or results of operations.
We discuss certain of these matters and other risk factors more fully throughout 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. As of June 30, 2018, we did not have any outstanding
derivative instruments.
Foreign Currency Exchange Rate Risk
Because we operate throughout North America, Australia and New Zealand and approximately 14.9% of our fiscal
year 2018 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 (income) expense, net. Applied does not currently hedge the net investments in our foreign
operations.
During the course of the fiscal year, the Canadian, Mexican, Australian, and New Zealand currency exchange rates
decreased in relation to the U.S. dollar by 2.0%, 9.2%, 4.1%, and 7.4%, respectively. In the twelve months ended
June 30, 2018, we experienced net foreign currency translation losses totaling $8.9 million, which were included in
other comprehensive income (loss). We utilize a sensitivity analysis to measure the potential impact on earnings
based on a hypothetical 10% change in foreign currency rates. A 10% strengthening of the U.S. dollar relative to
foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2018 would
have resulted in a $0.9 million decrease in net income for the year ended June 30, 2018. A 10% weakening of the
U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended
June 30, 2018 would have resulted in a $0.9 million increase in net income for the year ended June 30, 2018.
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 $19.5 million outstanding at June 30, 2018,
and a $780.0 million term loan, of which $775.1 million was outstanding at June 30, 2018. Fixed interest rate debt
facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $1.4 million of
assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank
borrowings of $431.7 million during fiscal 2018. 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 $4.3 million increase in interest expense.
Changes in market interest rates would also impact interest rates on these facilities.
For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of
“Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and note 5 to
the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition,
see Item 1A, “Risk Factors,” for additional risk factors relating to our business.
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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.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and
subsidiaries (the “Company”) as of June 30, 2018 and 2017, 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,
2018, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2018, 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 17, 2018 expressed an unqualified opinion on the
Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB (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, whether due to error or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 17, 2018
We have served as the Company's auditor since 1966.
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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 (Income) Expense, net
Income Before Income Taxes
Income Tax Expense
Net Income
Net Income Per Share — Basic
Net Income Per Share — Diluted
See notes to consolidated financial statements.
2018
2017
2016
$ 3,073,274
$ 2,593,746
$ 2,519,428
2,189,279
1,856,051
1,812,006
883,995
658,168
—
225,827
24,142
(657)
(2,376)
204,718
63,093
141,625
3.65
3.61
$
$
$
737,695
562,309
—
175,386
8,831
(290)
(121)
166,966
33,056
133,910
3.43
3.40
$
$
$
707,422
552,846
64,794
89,782
9,004
(241)
2,041
78,978
49,401
29,577
0.75
0.75
$
$
$
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Table of Contents
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In thousands)
Year Ended June 30,
Net income per the statements of consolidated income
2018
141,625
$
2017
133,910
$
$
2016
29,577
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments
Post-employment benefits:
Actuarial gain (loss) on re-measurement
Reclassification of actuarial losses and prior service cost into SD&A expense and
included in net periodic pension costs
Unrealized gain (loss) on investment securities available for sale
Total other comprehensive (loss) income, before tax
Income tax expense (benefit) related to items of other comprehensive income (loss)
Other comprehensive (loss) income, net of tax
Comprehensive income
See notes to consolidated financial statements.
(8,875)
2,238
(24,441)
709
2,038
(1,998)
(73)
37
(8,202)
319
(8,521)
133,104
$
506
91
4,873
1,029
3,844
137,754
$
518
(52)
(25,973)
(598)
(25,375)
4,202
$
31
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Table of Contents
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30,
Assets
Current assets
Cash and cash equivalents
Accounts receivable, less allowances of $13,566 and $9,628
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
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;
38,703 and 39,041 shares outstanding, respectively
Additional paid-in capital
Retained earnings
Treasury shares — at cost (15,510 and 15,172 shares), respectively
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See notes to consolidated financial statements.
32
32
2018
2017
$
54,150
548,811
422,069
32,990
1,058,020
$ 105,057
390,931
345,145
41,409
882,542
14,411
104,419
177,813
296,643
175,300
121,343
435,947
646,643
23,788
$ 2,285,741
14,250
97,529
162,432
274,211
166,143
108,068
163,562
206,135
27,288
$ 1,387,595
$ 256,886
19,183
73,370
83,112
432,551
944,522
11,985
81,720
1,470,778
$ 180,614
4,814
58,785
65,540
309,753
286,769
16,715
29,102
642,339
—
—
10,000
169,383
1,129,678
(403,875)
(90,223)
814,963
$ 2,285,741
10,000
164,655
1,033,751
(381,448)
(81,702)
745,256
$ 1,387,595
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:
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 (gains) losses
Other share-based compensation expense
(Gain) loss on sale of property
Other
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
Cash paid for acquisition of businesses, net of cash acquired
Cash used in Investing Activities
Cash Flows from Financing Activities
Net borrowings (repayments) under revolving credit facility, classified as long term
Borrowings under long-term debt facilities
Long-term debt repayments
Debt issuance costs
Purchases of treasury shares
Dividends paid
Excess tax benefits from share-based compensation
Acquisition holdback payments
Exercise of stock appreciation rights and options
Taxes paid for shares withheld
Cash provided by (used in) Financing Activities
Effect of exchange rate changes on cash
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year
Supplemental Cash Flow Information
Cash paid during the year for:
Income taxes
Interest
See notes to consolidated financial statements.
2018
2017
2016
$ 141,625
$ 133,910
$
29,577
—
17,798
32,065
1,961
1,615
2,803
(667)
4,666
(335)
—
(83,103)
(33,436)
6,947
50,345
5,020
147,304
(23,230)
978
(775,654)
(797,906)
19,500
780,000
(125,420)
(3,298)
(22,778)
(45,858)
—
(319)
102
(1,645)
600,284
(589)
(50,907)
105,057
54,150
$
—
15,306
24,371
1,891
(2,852)
2,071
(333)
3,629
(1,541)
103
(42,267)
(3,624)
(6,162)
32,076
8,041
164,619
(17,045)
2,924
(2,773)
(16,894)
(33,000)
—
(3,353)
—
(8,242)
(44,619)
—
(11,307)
656
(3,484)
(103,349)
820
45,196
59,861
$ 105,057
$
64,794
15,966
25,580
1,543
(6,581)
4,303
61
2,524
337
—
26,414
25,081
2,964
(28,644)
(1,905)
162,014
(13,130)
603
(62,504)
(75,031)
(19,000)
125,000
(98,662)
(719)
(37,465)
(43,330)
208
(18,913)
896
(1,022)
(93,007)
(3,585)
(9,609)
69,470
59,861
41,724
25,560
38,772
8,561
54,749
9,497
33
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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
39,905
$ 10,000
$ 160,072
$ 969,548
$ (338,121) $
(60,171) $
741,328
Purchases of common stock for treasury
(951)
For the Years Ended June 30, 2018, 2017 and 2016
Balance at July 1, 2015
Net income
Other comprehensive income (loss)
Cash dividends — $1.10 per share
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
Balance at June 30, 2016
Net income
Other comprehensive income (loss)
Cash dividends — $1.14 per share
Purchases of common stock for treasury
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
Balance at June 30, 2017
Net income
64
8
15
16
(391)
(308)
(530)
1,543
2,524
(381)
39,057
10,000
162,529
29,577
(54,266)
(25,375)
(37,465)
1,000
116
232
(38)
350
(373,888)
(85,546)
3,844
944,821
133,910
(45,005)
(163)
111
10
15
11
(8,242)
105
126
227
25
224
(2,218)
(360)
(624)
1,891
3,629
(192)
39,041
10,000
164,655
1,033,751
(381,448)
(81,702)
Other comprehensive income (loss)
Reclassifications of certain income tax effects from
accumulated other comprehensive loss
Cash dividends — $1.18 per share
Purchases of common stock for treasury
(393)
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
19
5
15
16
141,625
471
(46,162)
(8,050)
(471)
(22,778)
84
(24)
(56)
(7)
347
(482)
(273)
(740)
1,961
4,666
(404)
Balance at June 30, 2018
38,703
$ 10,000
$ 169,383
$1,129,678
$ (403,875) $
(90,223) $
814,963
See notes to consolidated financial statements.
34
34
29,577
(25,375)
(54,266)
(37,465)
609
(192)
(298)
1,543
2,524
(69)
657,916
133,910
3,844
(45,005)
(8,242)
(2,113)
(234)
(397)
1,891
3,629
57
745,256
141,625
(8,050)
—
(46,162)
(22,778)
(398)
(297)
(796)
1,961
4,666
(64)
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 distributor of
bearings, power transmission products, engineered fluid power components and systems, specialty flow control
solutions, and other industrial supplies, serving Maintenance Repair & Operations (MRO) and Original Equipment
Manufacturer (OEM) customers in virtually every industry. In addition, Applied provides engineering, design and
systems integration for industrial, fluid power, and flow control applications, as well as customized mechanical,
fabricated rubber, fluid power, and flow control shop services. Applied also offers storeroom services and inventory
management solutions that provide added value to its customers. Although the Company does not generally
manufacture the products it sells, it does assemble and repair certain products and systems.
Consolidation
The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its
subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency
The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are
measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at
current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and
losses are reported in other comprehensive (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 (income) expense, net.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the period. Actual results may differ from the estimates and
assumptions used in preparing the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with maturities of three months or less at the date
of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.
Marketable Securities
The primary marketable security investments of the Company include money market and mutual funds held in a
rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated
balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices.
Changes in the fair value of the investments during the period are recorded in other (income) expense, net in the
statements of consolidated income.
Concentration of Credit Risk
The Company has a broad customer base representing many diverse industries across North America, Australia, New
Zealand, and Singapore. As such, the Company does not believe that a significant concentration of credit risk exists
in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and
regulated non-bank subsidiaries. While the Company 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.
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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, 2018, approximately 16.8% 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 and inactive inventories at least quarterly. The
Company estimates the recoverable cost of such inventory by product type while considering factors such as its age,
historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future
demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such
factors as general market conditions, future customer demand, and relationships with suppliers. Historically, the
Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence, and, in certain
instances, can be eligible for return under supplier return programs.
Supplier Purchasing Programs
The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s
inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at
either the Company’s fiscal year end or the supplier’s year end; however, program length and ending dates can vary.
Incentives are received in the form of cash or credits against purchases upon attainment of specified purchase
volumes and are received either monthly, quarterly or annually. The incentives are generally a specified percentage
of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can
increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these
inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based
upon the estimated total volume of purchases expected during the life of the program. Supplier programs are
analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon
program completion, differences between estimates and actual incentives subsequently received have not been
material. Benefits under these supplier purchasing programs are recognized under the Company’s inventory
accounting methods as a reduction of cost of sales when the inventories representing these purchases are recorded
as cost of sales. Accrued incentives expected to be settled as a credit against future purchases are reported on the
consolidated balance sheets 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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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 or the expected cash flow 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 expense 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 expense in the accompanying statements of consolidated income. Internal delivery
costs in selling, distribution and administrative expenses were approximately $19,320, $20,060 and $21,480 for the
fiscal years ended June 30, 2018, 2017 and 2016, 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 Accounting Standards
Codification ("ASC") Topic 740 - Income Taxes. The Company recognizes accrued interest and penalties related to
unrecognized income tax benefits in the provision for income taxes.
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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.
Recently Adopted Accounting Guidance
Change in Accounting Principle - Net Periodic and Post-retirement Benefit Costs
In March 2017, the FASB issued its final standard on improving the presentation of net periodic pension and
postretirement benefit costs. This standard, issued as ASU 2017-07, requires that an employer report the service
cost component for defined benefit plans and postretirement plans in the same line item in the income statement as
other compensation costs arising from services rendered by the employees during the period. The other components
of net benefit cost are required to be presented in the income statement separately from the service cost component
and outside a subtotal of income from operations. This update is effective for annual financial statement periods
beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is
permitted as of the beginning of an annual period. The Company early adopted ASU 2017-07 in the first quarter of
fiscal 2018. The impact of the adoption of this guidance resulted in the reclassification of the other components of
net benefit cost from selling, distribution, and administrative expense to other (income) expense, net in the
statements of consolidated income, resulting in an increase to operating income. There is no impact to income
before income taxes, net income, or net income per share. Therefore, $143, $155, and $113 of service costs are
included in selling, distribution and administrative expense, and $245, $796, and $981 of net other periodic post-
employment costs are included in other (income) expense, net in the statements of consolidated income for the
years ended June 30, 2018, and 2017, and 2016, respectively. The Company used a practical expedient where the
amounts disclosed in our Benefit Plans footnote for the prior year comparative periods were the basis for the
estimation for applying the retrospective presentation requirements.
Accumulated Other Comprehensive Income
In January 2018, the FASB issued its final standard on reporting comprehensive income. The standard, issued as ASU
2018-02, allows a reclassification from accumulated other comprehensive income to retained earnings for stranded
tax effects resulting from the Tax Cuts and Jobs Act. This update is effective for annual and interim periods
beginning after December 15, 2018, with early adoption permitted. The Company early adopted ASU 2018-02 in
the fourth quarter of fiscal 2018 using the at the beginning of the period of adoption method. The impact of
adoption was a reclassification of $471 from accumulated other comprehensive loss to retained earnings.
Change in Accounting Principle - Simplifying the test for Goodwill Impairment
In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment. This standard,
issued as ASU 2017-04, eliminates step 2 from the goodwill impairment test and instead requires an entity to
perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its
carrying amount. An impairment charge would be recognized for the amount by which the carrying amount
exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15,
2019, with early adoption permitted. The Company early adopted ASU 2017-04 in the fourth quarter of fiscal 2018
and will apply this guidance prospectively to its annual and interim goodwill impairment tests.
Recently Issued Accounting Guidance
In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers. The
standard, issued as ASU 2014-09, outlines a single comprehensive model for entities to use in the accounting for
revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including
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industry specific guidance. The core principle of this model is that "an entity recognizes revenue to depict the
transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods and services." In August 2015, the FASB issued ASU 2015-14 to
delay the effective date of ASU 2014-09 by one year. In accordance with the delay, the update is effective for
financial statement periods beginning after December 15, 2017 and may be adopted either retrospectively or on a
modified retrospective basis. Early adoption is permitted, but not before financial statement periods beginning after
December 15, 2016. In March 2016 the FASB issued ASU 2016-08 and ASU 2016-10, and in May 2016 the FASB
issued ASU 2016-12, which clarify the guidance in ASU 2014-09 but do not change the core principle of the revenue
recognition model. The Company has evaluated the provisions of the new standard and is in the process of
assessing its impact on financial statements, information systems, business processes, and financial statement
disclosures. We have substantially completed an analysis of revenue streams at each of the business units and are
evaluating the impact the new standard will have on revenue recognition. The Company primarily sells purchased
products and recognizes revenue at point of sale or delivery and the majority of its revenue will continue to be
recognized at a point in time under the new standard. A small percentage of revenue will be recognized using an
over time revenue recognition model. The new standard will be adopted in the first quarter of fiscal 2019 using the
modified retrospective method of adoption, and the Company will recognize the cumulative effect of initially
applying the new standard as an adjustment to opening retained earnings as of July 1, 2018. The standard is not
expected to have a material impact on the Company's consolidated financial statements, except for expanded
disclosures on revenue in order to comply with the new guidance. The Company will continue to evaluate the
impacts of the adoption of the standard and these assessments are subject to change.
In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02,
requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases
and disclose key information about leasing arrangements. The core principle of this update is that a "lessee should
recognize the assets and liabilities that arise from leases." This update is effective for financial statement periods
beginning after December 15, 2018, with earlier application permitted. The Company has established a cross-
functional team to evaluate the new standard and has begun implementing new lease administration software.
The Company is still determining the financial impact that this standard update will have on its consolidated financial
statements, but anticipates it will have a material impact on its assets and liabilities due to the addition of right-of-
use assets and lease liabilities to the consolidated balance sheet. The Company will continue to evaluate the impacts
of the adoption of the standard and these assessments are subject to change.
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.
In August 2016, the FASB issued its final standard on the classification of certain cash receipts and cash payments
within the statement of cash flows. This standard, issued as ASU 2016-15, makes a number of changes meant to
add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows.
This update is effective for annual and interim financial statement periods beginning after December 15, 2018, with
early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial
statements and related disclosures.
In October 2016, the FASB issued its final standard on the income tax consequences of intra-entity transfers of assets
other than inventory. This standard, issued as ASU 2016-16, requires that an entity recognize the income tax
consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the
exception for an intra-entity transfer of an asset other than inventory. This update is effective for annual and interim
financial statement periods beginning after December 15, 2017, with early adoption permitted. The Company will
adopt this standard when it becomes effective in the first quarter of fiscal 2019, and it is not expected to have a
material impact on the Company’s financial statements and related disclosures.
In May 2017, the FASB issued its final standard on scope of modification accounting. This standard, issued as
2017-09, provides guidance about which change to the terms or conditions of a share-based payment award require
an entity to apply modification accounting. This update is effective for annual and interim financial statement
periods beginning after December 15, 2017, with early adoption permitted. The Company has not yet determined
the impact of this pronouncement on its financial statements and related disclosures.
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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.
FCX Acquisition
On January 31, 2018, the Company completed the acquisition of 100% of the outstanding shares of FCX
Performance, Inc. ("FCX"), a Columbus, Ohio based distributor of specialty process flow control products and
services. The total consideration transferred for the acquisition was $781,781, which was financed by cash-on-hand
and a new credit facility comprised of a $780,000 Term Loan A and a $250,000 revolver, effective with the
transaction closing. See note 5 Debt. As a distributor of highly engineered valves, instruments, pumps and lifecycle
services to MRO and OEM customers across diverse industrial and process end markets, this business will be included
in the Fluid Power & Flow Control Segment.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection
with the acquisition of FCX based on their preliminary estimated fair values at the acquisition date, which are subject
to adjustment. The purchase accounting will be finalized within one year from the acquisition date.
Cash
Accounts receivable
Inventories
Other current assets
Property
Identifiable intangible assets
Goodwill
Other assets
Total assets acquired
Accounts payable and accrued liabilities
Other liabilities
Deferred tax liabilities
Net assets acquired
Purchase price
Reconciliation of fair value transferred:
Working Capital Adjustments
Total Consideration
FCX Acquisition
2018
11,141
80,836
47,325
1,657
8,282
305,420
439,164
775
894,600
54,518
2,677
55,624
781,781
784,281
(2,500)
781,781
$
$
$
$
$
Goodwill acquired of $160,814 is expected to be deductible for income tax purposes.
Net sales, operating income and net income from the FCX acquisition included in the Company’s results since
January 31, 2018, the date of the acquisition, are as follows:
Net sales
Operating income
Net income
January 31, 2018
to June 30, 2018
249,752
$
16,845
8,758
The company incurred $2,849 in third-party costs during 2018 pertaining to the acquisition of FCX, which are
included in selling, distribution and administration expense in the statements of consolidated income for fiscal 2018.
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The following unaudited pro forma consolidated results of operations have been prepared as if the FCX acquisition
(including the related acquisition costs) had occurred at the beginning of fiscal 2017:
Pro forma, year ended June 30:
Net sales
Operating income
Net income
Diluted net income per share
2018
2017
$ 3,330,430 $ 2,943,583
234,603
158,181
$
4.03 $
196,194
126,270
3.20
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the
results to reflect additional amortization that would have been recorded assuming the fair value adjustments to
identified intangible assets had been applied as of July 1, 2016. In addition, pro forma adjustments have been made
for the interest expense that would have been incurred as a result of the indebtedness used to finance the
acquisitions. The pro forma net income amounts also incorporate an adjustment to the recorded income tax
expense for the income tax effect of the pro forma adjustments described above. These pro forma results of
operations do not include any anticipated synergies or other effects of the planned integration of FCX; accordingly,
such pro forma adjustments do not purport to be indicative of the results of operations that actually would have
resulted had the acquisitions occurred as of the date indicated or that may result in the future.
Other Fiscal 2018 Acquisition
On July 3, 2017, the Company acquired 100% of the outstanding stock of Diseños, Construcciones y Fabricaciones
Hispanoamericanas, S.A. ("DICOFASA"), a distributor of accessories and components for hydraulic systems and
lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment.
The purchase price for the acquisition was $5,920, net tangible assets acquired were $3,395, and goodwill was
$2,525 based upon estimated fair values at the acquisition date. The purchase price includes $906 of acquisition
holdback payments. Due to changes in foreign currency exchange rates, the balance of $842 is included in other
current liabilities and other liabilities on the consolidated balance sheets as of June 30, 2018, which will be paid on
the first three anniversaries of the acquisition with interest at a fixed rate of 1.5% per annum. The Company funded
this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are
not material in relation to the Company's consolidated financial statements.
Fiscal 2017 Acquisition
On March 3, 2017, the Company acquired substantially all of the net assets of Sentinel Fluid Controls ("Sentinel"), a
distributor of hydraulic and lubrication components, systems and solutions operating from four locations. Sentinel is
included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $3,755, net
tangible assets acquired were $3,130, and goodwill was $625 based upon estimated fair values at the acquisition
date. The purchase price included $982 of acquisition holdback payments, of which $328 and $175 were paid
during fiscal years 2018 and 2017, respectively. The remaining balance of $479 is included in other current liabilities
and other liabilities on the consolidated balance sheets, which will be paid plus interest at various times in the future.
The Company funded the amount paid for the acquisition at closing using available cash. The acquisition price and
the results of operations for the acquired entity are not material in relation to the Company's consolidated financial
statements.
Fiscal 2016 Acquisitions
On June 14, 2016, the Company acquired 100% of the outstanding stock of Seals Unlimited ("Seals"), a distributor
of sealing, fastener, and hose products located in Burlington, Ontario. On January 4, 2016, the Company acquired
substantially all of the net assets of HUB Industrial Supply ("HUB"), a distributor of consumable industrial products
operating from three locations - Lake City, FL, Indianapolis, IN, and Las Vegas, NV. On August 3, 2015, the
Company acquired substantially all of the net assets of Atlantic Fasteners Co., Inc. ("Atlantic Fasteners"), a
distributor of C-Class consumables including industrial fasteners and related industrial supplies located in Agawam,
MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. On
October 1, 2015, the Company acquired substantially all of the net assets of S.G. Morris Co. ("SGM"). SGM,
headquartered in Cleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania
and West Virginia and is included in the Fluid Power & Flow Control segment. The total combined consideration for
these acquisitions was approximately $65,900, net tangible assets acquired were $22,700, and intangibles including
goodwill were $43,200 based upon estimated fair values at the acquisition dates. The total combined consideration
includes $3,300 of acquisition holdback payments, of which $1,250 was paid during fiscal year 2017. The
remaining balance of $2,050 is included in other current liabilities on the consolidated balance sheets, which will be
paid plus interest in October 2018. The Company funded the amounts paid for the acquisitions at closing using
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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.
Holdback Liabilities for Acquisitions
Acquisition holdback payments of approximately $2,592, $283, $415 and $75 will be made in fiscal 2019, 2020,
2021, and 2024, respectively. The related liabilities for these payments are recorded in the consolidated balance
sheets in other current liabilities for the amounts due in fiscal year 2019 and other liabilities for the amounts due in
fiscal years 2020 through 2024.
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
$
$
2018
443,521
117,711
561,232
139,163
2017
373,984
108,734
482,718
137,573
$
422,069
$
345,145
The overall impact of LIFO layer liquidations increased gross profit by $579, $9,414, and $2,100 in fiscal 2018, fiscal
2017, and fiscal 2016, respectively. In fiscal 2017, reductions in U.S. inventories, primarily in the bearings pool
which included the scrapping of approximately $6,000 of product, resulted in liquidation of LIFO inventory quantities
carried at lower costs prevailing in prior years.
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 & Flow Control segment for the years ended June 30, 2018 and 2017 are as follows:
Balance at July 1, 2016
Goodwill added during the year
Other, primarily currency translation
Balance at June 30, 2017
Goodwill added during the year
Other, primarily currency translation
Balance at June 30, 2018
$
Service Center
Based
Distribution
198,486
3,220
34
201,740
2,525
(1,181)
203,084
$
Fluid Power &
Flow Control
4,214
625
(444)
4,395
439,164
—
443,559
$
$
Total
202,700
3,845
(410)
206,135
441,689
(1,181)
646,643
$
$
During the first quarter of fiscal 2017, the Company recorded an adjustment to the preliminary estimated fair value
of intangible assets related to the HUB acquisition. The fair values of the customer relationships and trade names
intangible assets were decreased by $2,636 and $584, respectively, with a corresponding total increase to goodwill
of $3,220. The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of
$156 during fiscal 2017, which is recorded in selling, distribution and administrative expense in the statements of
consolidated income.
On July 1, 2016, the Company enacted a change in its management reporting structure which changed the
composition of the Canada service center reporting unit. This triggering event required the Company to perform an
interim goodwill impairment test for the Canada service center reporting unit. The Company performed step one of
the goodwill impairment test for the Canada service center reporting unit as of July 1, 2016 and determined that the
reporting unit had excess fair value of approximately $8,000 or 5% when compared to its carrying amount of
approximately $163,000.
In conjunction with this management change, $2,628 of goodwill was reallocated from the Canada service center
reporting unit to the U.S. service center reporting unit based on the relative fair value as of July 1, 2016.
The Company has six (6) reporting units for which an annual goodwill impairment assessment was performed as of
January 1, 2018. The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts
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by at least 30% as of January 1, 2018. The fair values of the reporting units in accordance with the goodwill
impairment test were determined using the Income and Market approaches. The Income approach employs the
discounted cash flow method reflecting projected cash flows expected to be generated by market participants and
then adjusted for time value of money factors. The Market approach utilizes an analysis of comparable publicly
traded companies.
The Company had seven (7) reporting units for which an annual goodwill impairment assessment was performed as
of January 1, 2016. The Company concluded that five (5) of the reporting units’ fair value substantially exceeded
their carrying amounts. The carrying value for two (2) reporting units (Canada service center and Australia/New
Zealand service center) exceeded the fair value, indicating there may be goodwill impairment. The fair values of the
reporting units in accordance with step one of the goodwill impairment test were determined using the Income and
Market approaches.
Step two of the goodwill impairment test compares the fair value of the reporting unit goodwill with the carrying
amount of goodwill. The implied fair value of goodwill is determined in the same manner as in a business
combination. The fair value of the reporting unit from step one is allocated to all of the assets and liabilities of the
reporting unit, including unrecognized intangible assets, as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
Step two of the goodwill impairment test for the Canada service center reporting unit was completed in the third
quarter of fiscal 2016. The analysis resulted in a goodwill impairment of $56,022 for the Canada service center
reporting unit. The non-cash impairment charge was the result of the overall decline in the industrial economy in
Canada coupled with the substantial and sustained decline in the oil and gas sector during calendar year 2015. This
led to reduced spending by customers and reduced revenue expectations. The uncertainty regarding the oil and gas
industries and overall industrial economy in Canada also led the reporting unit to reduce expectations.
Step two of the goodwill impairment test for the Australia/New Zealand reporting unit was completed in the third
quarter of fiscal 2016. The analysis concluded that all of the Australia/New Zealand reporting unit’s goodwill was
impaired, and therefore the Company recorded a non-cash impairment expense of $8,772 in the third quarter of
fiscal 2016. The impairment charge was primarily the result of the decline in the mining and extraction industries in
Australia, reduced spending by customers, and the effects of reduced revenue expectations.
The techniques used in the Company's impairment tests have incorporated a number of assumptions that the
Company believes to be reasonable and to reflect known market conditions at the measurement dates.
Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to
forecast future cash flows as accurately as possible with the information available at the measurement date. The
Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of
upcoming years with actual results of preceding years. Key Level 3 based assumptions relate to pricing trends,
inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and
other economic publications were also used. Changes in future results, assumptions, and estimates after the
measurement date may lead to an outcome where additional impairment charges would be required in future
periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and
unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection
of prevailing market conditions.
At June 30, 2018 and 2017, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled
$64,794 related to the Service Center Based Distribution segment and $36,605 related to the Fluid Power & Flow
Control segment.
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, 2018
Finite-Lived Intangibles:
Customer relationships
Trade names
Vendor relationships
Non-competition agreements
Total Intangibles
Amount
Accumulated
Amortization
Net
Book Value
$
$
465,691
112,939
11,425
2,761
592,816
$
$
125,009
22,454
7,382
2,024
156,869
$
$
340,682
90,485
4,043
737
435,947
43
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June 30, 2017
Finite-Lived Intangibles:
Customer relationships
Trade names
Vendor relationships
Non-competition agreements
Total Intangibles
Amount
235,009
43,873
14,152
3,788
296,822
$
$
$
$
Accumulated
Amortization
Net
Book Value
102,414
19,295
9,141
2,410
133,260
$
$
132,595
24,578
5,011
1,378
163,562
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
During 2018, the Company acquired identifiable intangible assets with a preliminary acquisition cost allocation and
weighted-average life as follows:
Customer relationships
Trade names
Total Intangibles Acquired
Acquisition
Cost Allocation
234,370
$
71,050
305,420
$
Weighted-
Average Life
20.0 years
15.0 years
18.8 years
Amortization of identifiable intangibles totaled $32,065, $24,371 and $25,580 in fiscal 2018, 2017 and 2016,
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, 2018 is
estimated to be $44,000 for 2019, $42,500 for 2020, $40,200 for 2021, $37,800 for 2022 and $35,300 for 2023.
NOTE 5: DEBT
Revolving Credit Facility & Term Loan
In January 2018, in conjunction with the acquisition of FCX, the Company refinanced its existing credit facility and
entered into a new five-year credit facility with a group of banks expiring in January 2023. This agreement provides
for a $780,000 unsecured term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range
from 0.10% to 0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under
this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. At June 30,
2018, the Company had $775,125 outstanding under the term loan and $19,500 outstanding under the revolver.
Unused lines under this facility, net of outstanding letters of credit of $3,625 to secure certain insurance obligations,
totaled $226,875 at June 30, 2018, and were available to fund future acquisitions or other capital and operating
requirements. The interest rate on the term loan as of June 30, 2018 was 4.13%. The weighted average interest
rate on the amount outstanding under the revolving credit facility as of June 30, 2018 was 3.93%.
The new credit facility replaced the Company's previous credit facility agreement. At June 30, 2017, the Company
had $120,313 outstanding under the term loan in the previous credit facility agreement, which carried a variable
interest rate tied to LIBOR and was 2.25% as of June 30, 2017. No amount was outstanding under the revolver as
of June 30, 2017. Unused lines under this facility, net of outstanding letters of credit of $2,441 to secure certain
insurance obligations, totaled $247,559 at June 30, 2017.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with either
revolving credit agreement, in the amount of $2,698 as of June 30, 2018 and June 30, 2017, respectively, in order
to secure certain insurance obligations.
Other Long-Term Borrowings
At June 30, 2018 and June 30, 2017, the Company had borrowings outstanding under its unsecured shelf facility
agreement with Prudential Investment Management of $170,000. Fees on this facility range from 0.25% to 1.25%
per year based on the Company's leverage ratio at each quarter end. The "Series C" notes have a principal amount
of $120,000 and carry a fixed interest rate of 3.19%, and are due in equal principal payments in July 2020, 2021,
and 2022. The "Series D" notes have a principal amount of $50,000, carry a fixed interest rate of 3.21%, and are
due in equal principal payments in October 2019 and 2023. As of June 30, 2018, $50,000 in additional financing
was available under this facility.
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In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% fixed
interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At June 30,
2018 and 2017, $1,438 and $1,669 was outstanding, respectively.
Unamortized debt issue costs of $551 and $105 are included as a reduction of current portion of long-term debt on
the consolidated balance sheets as of June 30, 2018 and June 30, 2017, respectively. Unamortized debt issue costs
of $1,807 and $294 are included as a reduction of long-term debt on the consolidated balance sheets as of June 30,
2018 and June 30, 2017, respectively.
The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing
arrangements for each of the next five years:
Fiscal Year
2019
2020
2021
2022
2023
Thereafter
Covenants
Aggregate
Maturity
$
19,734
49,613
79,241
84,120
708,124
25,231
The new credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth,
financial ratios, and other covenants. At June 30, 2018, the most restrictive of these covenants required that the
Company have net indebtedness less than 4.25 times consolidated income before interest, taxes, depreciation and
amortization. At June 30, 2018, the Company's indebtedness was less than 3.0 times consolidated income before
interest, taxes, depreciation and amortization. The Company was in compliance with all financial covenants at
June 30, 2018.
NOTE 6: FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at June 30, 2018 and June 30, 2017 totaled $10,318 and $10,481,
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, 2018, 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).
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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
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
2018
186,874
17,844
204,718
$
$
2017
154,472
12,494
166,966
$
$
2016
139,960
(60,982)
78,978
$
$
2018
2017
2016
$
48,131
$
26,456
$
45,226
8,038
5,309
61,478
5,955
(586)
(3,754)
1,615
4,692
4,760
35,908
852
535
(4,239)
(2,852)
6,349
4,407
55,982
397
(30)
(6,948)
(6,581)
$
63,093
$
33,056
$
49,401
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes
to U.S. tax law. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies
to pay a one-time transition tax on certain un-remitted earnings of foreign subsidiaries that were previously tax
deferred, generally eliminates U.S. federal income tax on dividends from foreign subsidiaries, and creates new taxes
on certain foreign-sourced earnings. During fiscal 2018, the Company revised its estimated annual effective tax rate
to reflect the change in the federal statutory rate from 35% to 21%. The rate change was administratively effective
as of the beginning of our fiscal year, resulting in the Company using a blended statutory rate for the annual period
of 28.06%. The corporate income tax rate change had a favorable impact to the Company of $12,113 for fiscal
2018.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act for which the
accounting under ASC 740 is incomplete. To the extent that a company's accounting for certain income tax effects
of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the
financial statements. If a company cannot determine a provisional estimate to be included in the financial
statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect
immediately before enactment of the Act.
Accordingly, as of June 30, 2018 we have not completed our accounting for the tax effects of the Act. For fiscal
2018, we recognized a provisional tax liability of $3,877 related to the one-time transition tax on certain un-remitted
earnings of foreign subsidiaries, which is payable over eight years. We also re-measured the applicable deferred tax
assets and liabilities based on the rates at which they are expected to reverse. The Company recorded a provisional
amount of $2,414 of additional deferred income tax expense related to the re-measurement of our deferred tax
balance. However, we are still analyzing certain aspects of the Act and refining our calculations, which could
potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Overall,
considering the decrease in the corporate income tax rate and the expense related to the transition tax and deferred
tax re-measurement, the Act resulted in a net tax benefit of $5,822 for fiscal 2018, which is included as a
component of income tax expense in the statements of consolidated income.
During the fourth quarter of fiscal 2017, the Company recorded a net tax benefit of $22,246 pertaining to a
worthless stock deduction. The tax benefit of this deduction was based on the write-off of the Company's
investment in one of its Canadian subsidiaries for U.S. tax purposes reduced by $1,019 of tax provided for a
valuation allowance applicable to the related state deferred income tax asset.
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The exercise of non-qualified stock appreciation rights and options during fiscal 2018, 2017 and 2016 resulted in
$419, $1,921 and $212, 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 2018, 2017 and 2016 resulted in $430, $482 and
$(4), respectively, of incremental income tax benefits (expense) over the amounts previously reported for financial
reporting purposes. Due to the adoption of ASU 2016-09 in fiscal 2017, the tax benefits for fiscal 2018 and 2017
were recorded in income tax expense in the statements of consolidated income, while the fiscal 2016 tax expense
was 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
U.S. federal tax reform
Worthless stock deduction
Stock compensation
Goodwill impairment
Impact of foreign operations
Deductible dividend
Valuation allowance
Other, net
Effective income tax rate
2018
28.1%
2017
35.0%
2016
35.0%
3.1
3.1
—
(0.4)
—
(1.3)
(0.3)
(0.9)
(0.6)
2.8
—
(13.9)
(1.4)
—
(2.3)
(0.4)
0.3
(0.3)
5.2
—
—
—
27.1
(3.0)
(0.9)
0.5
(1.3)
30.8%
19.8%
62.6%
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 2023-2038)
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 (liabilities) assets
Net deferred tax (liabilities) assets are classified as follows:
Other assets
Other liabilities
Net deferred tax (liabilities) assets
2018
2017
$
19,334
13,169
3,197
413
11,315
199
47,627
(38)
47,589
(8,196)
(86,176)
(9,294)
(103,666)
(56,077) $
26,873
11,601
5,661
709
5,729
119
50,692
(1,831)
48,861
(7,447)
(30,482)
(10,122)
(48,051)
810
$
2,103
(58,180)
(56,077) $
8,985
(8,175)
810
$
$
$
$
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
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47
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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.
As a result of the Act, the Company’s net unremitted foreign earnings of $77,374 have been subject to U.S.
taxation. As of June 30, 2018, all such undistributed earnings of non-U.S. subsidiaries are considered permanently
reinvested. Therefore, no taxes have been provided that would result from the remittance of such earnings. The net
amount of the unrecognized tax liability with respect to the distribution of these earnings is estimated to be
approximately $1,986. In addition, we expect foreign tax credits would be available to either offset or partially
reduce the tax cost in the event of a distribution.
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,
2018, 2017 and 2016:
Year Ended June 30,
Unrecognized Income Tax Benefits at beginning of the year
2018
3,533
$
2017
2,915
$
$
Current year tax positions
Prior year tax positions
Expirations of statutes of limitations
Settlements
143
636
(324)
—
574
259
(189)
(26)
2016
2,604
539
—
(132)
(96)
Unrecognized Income Tax Benefits at end of year
$
3,988
$
3,533
$
2,915
Included in the balance of unrecognized income tax benefits at June 30, 2018, 2017 and 2016 are $3,725, $3,323
and $2,691, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
During 2018, 2017 and 2016, the Company recognized $(110) and $163 and $127 of (benefit) 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 $677 and $787 as of June 30, 2018 and 2017,
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 2015 through 2018 and to state
and local income tax examinations for the tax years 2012 through 2018. In addition, the Company is subject to
foreign income tax examinations for the tax years 2011 through 2018.
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.
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NOTE 8: SHAREHOLDERS’ EQUITY
Treasury Shares
At June 30, 2018, 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, 2018, 2017, and 2016,
are comprised of the following amounts, shown net of taxes:
Foreign
currency
translation
adjustment
Unrealized
(loss) gain on
securities
available
for sale
Total
accumulated
other
comprehensive
(loss) income
Post-
employment
benefits
Balance at July 1, 2015
$
(57,244) $
(4) $
(2,923) $
Other comprehensive loss
Amounts reclassified from accumulated other
comprehensive income (loss)
Net current-period other comprehensive loss
Balance at June 30, 2016
Other comprehensive income
Amounts reclassified from accumulated other
comprehensive income (loss)
Net current-period other comprehensive income
Balance at June 30, 2017
Other comprehensive (loss) income
Amounts reclassified from accumulated other
comprehensive income (loss)
Amounts reclassified for certain income tax effects to
retained earnings
Net current-period other comprehensive (loss) income
(24,441)
—
(24,441)
(81,685)
2,238
—
2,238
(79,447)
(8,549)
—
22
(8,527)
Balance at June 30, 2018
$
(87,974) $
(34)
—
(34)
(38)
59
—
59
21
20
—
9
29
50
(1,215)
315
(900)
(3,823)
1,239
308
1,547
(2,276)
524
(45)
(502)
(23)
(60,171)
(25,690)
315
(25,375)
(85,546)
3,536
308
3,844
(81,702)
(8,005)
(45)
(471)
(8,521)
$
(2,299) $
(90,223)
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Other Comprehensive Income (Loss)
Details of other comprehensive income (loss) are as follows:
Year Ended June 30,
2018
Tax
Expense
(Benefit)
Pre-Tax
Amount
2017
Net
Amount
Pre-Tax
Amount
Tax
Expense
Net
Amount
Pre-Tax
Amount
2016
Tax
(Benefit)
Expense
Net
Amount
Foreign currency translation
adjustments
$ (8,875) $
(326) $ (8,549) $ 2,238
$
— $ 2,238
$(24,441) $
— $(24,441)
Post-employment benefits:
Actuarial gain (loss) on
re-measurement
Reclassification of
actuarial losses and
prior service cost into
SD&A expense and
included in net periodic
pension costs
Unrealized gain (loss) on
investment securities
available for sale
Reclassification of certain
income tax effects to
retained earnings
Other comprehensive (loss)
709
185
524
2,038
799
1,239
(1,998)
(783)
(1,215)
(73)
(28)
(45)
506
198
308
518
203
315
37
—
17
20
471
(471)
91
—
32
—
59
—
(52)
(18)
(34)
—
—
—
income
$ (8,202) $
319
$ (8,521) $ 4,873
$
1,029
$ 3,844
$(25,973) $
(598) $(25,375)
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 Restricted
Stock Units ("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
2018
141,625
$
2017
133,910
$
2016
29,577
38,752
529
39,281
39,013
391
39,404
3.65
3.61
$
$
3.43
3.40
$
$
39,254
212
39,466
0.75
0.75
$
$
$
Stock appreciation rights and options relating to 66, 141 and 775 shares of common stock were outstanding at
June 30, 2018, 2017 and 2016, respectively, but were not included in the computation of diluted earnings per share
for the fiscal years then ended as they were anti-dilutive.
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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
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
$
2018
1,961
2,006
2,660
$
2017
1,891
1,331
2,298
$
2016
1,543
446
2,078
$
6,627
$
5,520
$
4,067
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 $1,923, $4,848 and $1,595 for fiscal years 2018, 2017 and 2016, 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, 2018 are summarized in the table below:
June 30,
SARs and options
Performance shares
Restricted stock and RSUs
Total unrecognized compensation costs under award programs
Average Expected
Period of Expected
Recognition (Years)
2.5
1.7
1.9
2.1
2018
$
3,729
3,282
2,173
$
9,184
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of
2.1 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, 2018 were 1,655.
Stock Appreciation Rights and Stock Options
The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2018, 2017
and 2016 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
2018
6.0
2.1%
2.5%
24.3%
$11.25
2017
4.8
1.2%
2.5%
24.1%
$7.97
2016
4.4
1.3%
2.5%
26.0%
$6.79
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.
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SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be
settled by the holder with cash or by tendering Company common stock.
A summary of SARs and stock options activity is presented below:
Year Ended June 30, 2018
(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
1,218
286
(58)
(45)
1,401
789
1,379
Weighted-
Average
Exercise
Price
42.26
58.40
37.55
55.64
45.32
41.08
45.22
$
$
$
$
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and
expected to vest at June 30, 2018 were 6.6, 5.3, and 6.6 years, respectively. The aggregate intrinsic values of
SARs and stock options outstanding, exercisable, and expected to vest at June 30, 2018 were $34,869
$22,927, and $34,440, respectively. The aggregate intrinsic value of the SARs and stock options exercised
during fiscal 2018, 2017, and 2016 was $1,765, $8,396, and $2,422, respectively.
The total fair value of shares vested during fiscal 2018, 2017, and 2016 was $2,149, $1,788, and $1,291,
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, 2018 is presented below:
Year Ended June 30, 2018
(Shares in thousands)
Nonvested, beginning of year
Awarded
Vested
Nonvested, end of year
Shares
52
51
(10)
93
Weighted-
Average
Grant-Date
Fair Value
43.99
47.13
48.76
45.16
$
$
The Committee set three one-year goals for each of the 2018, 2017 and 2016 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. For the
outstanding grants as of June 30, 2018, the maximum number of shares which could be earned in future
periods was 67.
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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 three 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, 2018 is
presented below:
Year Ended June 30, 2018
(Share amounts in thousands)
Nonvested, beginning of year
Granted
Forfeitures
Vested
Nonvested, end of year
NOTE 10: BENEFIT PLANS
Retirement Savings Plan
Shares
116
53
(10)
(43)
116
$
Weighted-
Average
Grant-Date
Fair Value
46.91
62.62
54.96
52.58
51.27
$
Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan.
Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code
maximums. The Company partially matches 401(k) contributions by participants. The Company’s expense for
matching of employees’ 401(k) contributions was $6,551, $6,677 and $2,535 during 2018, 2017 and 2016,
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. Assets held in these rabbi trusts consist of investments in money market and mutual
funds and Company common stock.
Post-employment Benefit Plans
The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit
Retirement Plan and Key Executive Restoration Plan, are unfunded:
Supplemental Executive Retirement Benefits Plan
The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain
officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s
historical compensation. The Executive Organization and Compensation Committee of the Board of Directors
froze participant benefits (credited service and final average earnings) and entry into the Supplemental
Executive Retirement Benefits Plan (SERP) effective December 31, 2011.
Key Executive Restoration Plan
In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualified
deferred compensation plan, to replace the SERP. The Company recorded $359, $289, and $268 of expense
associated with this plan in fiscal 2018, 2017, and 2016, 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. The plan accruals were frozen as of April 16, 2018
and employees are now permitted to participate in the Retirement Savings Plan subsequent to April 16, 2018.
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
53
53
5454
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coverage provided and are adjusted annually. Certain monthly health care premium payments are partially
subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company
assumed the obligation for a 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 gain during year
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual 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
2018
2017
2018
2017
$
$
$
$
$
24,411
124
729
—
(3,181)
—
(549)
21,534
$
$
$
6,530
516
3,837
—
(3,181)
7,702
$
(13,832) $
26,605
126
687
—
(1,562)
—
(1,445)
24,411
$
$
$
6,737
578
776
—
(1,561)
6,530
$
(17,881) $
1,684
19
52
68
(223)
—
(109)
1,491
$
$
— $
—
155
68
(223)
— $
(1,491) $
2,235
29
63
69
(237)
(245)
(230)
1,684
—
—
168
69
(237)
—
(1,684)
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
2018
2017
2018
2017
$
$
$
$
3,298
10,534
13,832
$
$
2,814
15,067
17,881
$
$
(4,781) $
—
(4,781) $
(5,798) $
(35)
(5,833) $
220
1,271
1,491
1,121
554
1,675
$
$
$
$
220
1,464
1,684
1,167
922
2,089
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
54
5454
$
Pension Benefits
$
2018
21,534
21,534
7,702
2017
24,411
24,411
6,530
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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
Recognition of prior service cost upon plan curtailment
Net periodic cost (benefits)
Pension Benefits
Retiree Health Care Benefits
2018
124
729
(472)
424
27
8
840
$
$
2017
126
687
(460)
872
86
—
1,311
$
$
2016
91
879
(491)
913
86
—
1,478
$
$
$
2018
19
52
—
(154)
(369)
—
(452) $
$
2017
29
63
—
(181)
(271)
—
(360) $
2016
22
75
—
(210)
(271)
—
(384)
$
$
In accordance with the Company's adoption of ASU 2017-07, the Company reports the service cost component of
the net periodic post-employment costs in the same line item in the income statement as other compensation costs
arising from services rendered by the employees during the period. The other components of net periodic post-
employment costs are presented in the income statement separately from the service cost component and outside a
subtotal of income from operations. Therefore, $143, $155, and $113 of service costs are included in selling,
distribution and administrative expense, and $245, $796, and $981 of net other periodic post-employment costs are
included in other (income) expense, net in the statements of consolidated income for the years ended June 30,
2018, 2017, and 2016, respectively.
The estimated net actuarial loss 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 $185. 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 $121 and $369, respectively.
Assumptions
A discount rate is used to determine the present value of future payments. In general, the Company’s liability
increases as the discount rate decreases and decreases as the discount rate increases. The Company computes a
weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from
the Citigroup Pension Discount Yield Curve and the Findley Discount Curve. During fiscal 2015, the Society of
Actuaries released a series of updated mortality tables resulting from recent studies measuring mortality rates for
various groups of individuals. As of June 30, 2015, the Company adopted these mortality tables, which reflect
improved trends in longevity and have the effect of increasing the estimate of benefits to be received by plan
participants.
The weighted-average actuarial assumptions used to determine benefit obligations and net periodic benefit cost for
the plans were as follows:
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
2018
2017
2018
2017
3.5 %
2.8 %
7.0 %
2.8 %
2.3 %
7.0 %
3.8%
3.3%
N/A
3.3%
2.9%
N/A
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health
care benefits were 7.0% as of June 30, 2018 and 2017, 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, 2018 and for the year then ended:
Effect on total service and interest cost components of periodic expense
Effect on post-retirement benefit obligation
$
9
152
(8)
(130)
Increase
One-Percentage Point
Decrease
$
55
55
56
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Plan Assets
The fair value of each major class of plan assets for the Company’s Qualified Defined Benefit Retirement Plan is
valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value
hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy.
Following are the fair values and target allocation as of June 30:
Asset Class:
Equity* securities (Level 1)
Debt securities (Level 2)
Other (Level 1)
Total
Target Allocation
Fair Value
2018
40 – 70% $
20 – 50%
0 – 20%
100% $
6,226
1,337
139
7,702
$
$
2017
3,880
2,538
112
6,530
* 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 $3,300 to its pension benefit plans and $130 to its retiree health care
benefit plans in fiscal 2019. 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
2019
2020
2021
2022
2023
2024 through 2028
$
Pension
Benefits
3,700
3,800
1,300
1,300
1,400
5,200
Retiree Health
Care Benefits
130
$
120
110
110
100
530
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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 minimum annual rental commitments under
non-cancelable operating leases as of June 30, 2018 are as follows:
During Fiscal Years
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$ 38,100
27,500
17,800
11,200
5,800
11,000
$ 111,400
Rental expense incurred for operating leases, principally from leases for real property, vehicles and computer
equipment was $41,000 in 2018, $35,900 in 2017 and $37,300 in 2016, and was classified within selling,
distribution and administrative expenses in the statements of consolidated income.
The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous
owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy
management positions within those businesses. The payments under lease agreements of this nature totaled
$2,400, $2,400, and $3,800 and in 2018, 2017, and 2016, respectively.
NOTE 12: SEGMENT AND GEOGRAPHIC INFORMATION
Effective July 1, 2017, the Company completed a number of changes to its organizational structure that resulted in
a change in how the Company manages its businesses, allocates resources and measures performance. As a result,
the Company has revised its reportable segments to reflect how management currently reviews financial information
and makes operating decisions. All Canadian and Mexican subsidiaries are now grouped under the Service Center
Based Distribution segment. All prior-period amounts have been adjusted to reflect the reportable segment change.
The Company's reportable segments are: Service Center Based Distribution and Fluid Power & Flow Control. 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 & Flow Control segment distributes engineered fluid power components and specialty
flow control solutions 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 & Flow Control segment to the Service Center Based Distribution
segment of $25,556, $22,719, and $20,261, in 2018, 2017, and 2016, respectively, have been eliminated in the
following table.
57
57
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Segment Financial Information
Year Ended June 30, 2018
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures
Year Ended June 30, 2017
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures
Year Ended June 30, 2016
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 &
Flow Control
$
$
$
$
$
$
2,346,418
136,718
1,198,296
15,336
18,492
2,180,358
115,794
1,187,054
14,375
14,566
2,150,478
113,111
1,132,222
15,049
12,500
$
$
$
726,856
83,194
1,087,445
2,462
4,738
413,388
46,569
200,541
931
2,479
368,950
37,174
179,803
917
630
Total
3,073,274
219,912
2,285,741
17,798
23,230
2,593,746
162,363
1,387,595
15,306
17,045
2,519,428
150,285
1,312,025
15,966
13,130
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 & Flow Control
Goodwill Impairment — Service Center Based Distribution
Corporate and other income, net
Total operating income
Interest expense, net
Other (income) expense, net
Income before income taxes
2018
219,912
$
2017
162,363
$
2016
150,285
17,375
14,690
—
(37,980)
225,827
23,485
(2,376)
204,718
$
18,954
5,417
—
(37,394)
175,386
8,541
(121)
166,966
$
19,913
5,667
64,794
(29,871)
89,782
8,763
2,041
78,978
$
$
Fluctuations in corporate and other income, net, are due to changes in corporate expenses, as well as in the
amounts and levels of certain supplier support benefits and expenses being allocated to the segments. The expenses
being allocated include corporate charges for working capital, logistics support and other items.
Product Category
Net sales by product category are as follows:
Year Ended June 30,
Industrial
Fluid power & flow control
Net sales
2018
2,085,571
987,703
3,073,274
$
$
2017
1,855,437
738,309
2,593,746
$
$
2016
1,836,484
682,944
2,519,428
$
$
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The fluid power & flow control product category includes sales of hydraulic, pneumatic, lubrication, filtration, and
flow control components and systems, and repair services through the Company’s Fluid Power & Flow Control
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
2018
2017
2016
$
$
$
$
2,615,041
273,622
184,611
3,073,274
2018
501,373
50,261
5,656
557,290
$
$
$
$
2,182,552
251,999
159,195
2,593,746
2017
207,126
57,947
6,558
271,631
$
$
$
$
2,117,485
257,797
144,146
2,519,428
2016
225,538
66,304
7,163
299,005
Other countries consist of Mexico, Australia, New Zealand, and Singapore.
NOTE 13: COMMITMENTS AND CONTINGENCIES
The Company is a party to various pending judicial and administrative proceedings. Based on circumstances
currently known, the Company believes the likelihood is remote that the ultimate resolution of any of these matters
will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial
position, results of operations, or cash flows.
NOTE 14: OTHER (INCOME) EXPENSE, NET
Other (income) expense, net, consists of the following:
Year Ended June 30,
Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan
Foreign currency transaction (gains) losses
Net other periodic post-employment costs
Life insurance (income) expense, net
Other, net
Total other (income) expense, net
2018
2017
2016
$
$
(785) $
(210)
245
(1,628)
2
(2,376) $
(87)
(1,188) $
1,039
209
981
796
108
107
—
(45)
(121) $ 2,041
59
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QUARTERLY OPERATING RESULTS
(In thousands, except per share amounts)
(UNAUDITED)
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Net Sales
Gross Profit
Operating
Income
Net Income Net Income
Cash
Dividend
Per Common Share
$
680,701
$
192,424
$
51,837
$
33,721
$
667,187
827,665
897,721
3,073,274
624,848
608,123
679,304
681,471
2,593,746
641,904
610,346
633,172
634,006
2,519,428
$
$
$
$
$
$
$
$
$
$
188,360
239,524
263,687
883,995
178,330
172,456
190,802
196,107
737,695
181,012
173,167
174,793
178,450
707,422
$
$
$
$
$
46,715
56,444
70,831
225,827
43,218
37,656
45,467
48,249
174,590
41,026
38,362
(33,032)
42,445
88,801
$
$
$
$
$
30,950
36,592
40,362
141,625
27,371
24,085
29,494
52,960
133,910
24,291
23,947
(44,728)
26,067
29,577
$
$
$
$
$
0.86
0.79
0.93
1.03
3.61
0.70
0.61
0.75
1.34
3.40
0.61
0.61
(1.14)
0.66
0.75
$
$
$
$
$
$
0.29
0.29
0.30
0.30
1.18
0.28
0.28
0.29
0.29
1.14
0.27
0.27
0.28
0.28
1.10
On August 10, 2018, there were 4,307 shareholders of record including 2,914 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 10,
2018 was $72.20 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 2018
During the second quarter of fiscal 2018, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to
U.S. tax law. The Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate to a blended
statutory rate for the annual period of 28.1%. The corporate income tax rate change had a favorable impact to the Company of $12.1
million for fiscal 2018. Further, we recognized provisional amounts for the one-time transition tax of $3.9 million and for the re-
measurement of the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse of $2.4 million.
Overall, the Act resulted in a net tax benefit of $5.8 million for fiscal 2018, which is included as a component of income tax expense in the
statements of consolidated income.
During the third quarter of fiscal 2018, the Company completed the acquisition of all of the outstanding shares of FCX Performance, Inc.
(FCX), a Columbus, Ohio based distributor of specialty process flow control products and services. At the time of closing, FCX operated
68 locations with approximately 1,000 employees. The total consideration transferred for the acquisition was approximately $782 million,
which was financed by cash-on-hand and a new credit facility comprised of a $780 million Term Loan A and $250 million revolver (the
Credit Facility), effective with the transaction closing. This Credit Facility was used to finance the transaction, as well as to repay the
Company's existing term loan outstanding prior to the acquisition date.
Fiscal 2017
During the fourth quarter of fiscal 2017, the Company recorded a tax benefit pertaining to a worthless stock tax deduction of $22.2 million,
or $0.56 per share. This deduction is based on the write-off of its investment in one of its Canadian subsidiaries for U.S. tax purposes.
60
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In fiscal 2017 reductions in U.S. inventories in the bearings pool resulted in liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years. A portion of these reductions resulted from the scrapping of $6.0 million of bearings inventory which resulted in a
similar amount of scrap expense being recognized in the fourth quarter of fiscal 2017. The overall impact of the fiscal 2017 LIFO layer
liquidations increased gross profit by $9.4 million in the fourth quarter of fiscal 2017. The net benefit of the bearings products LIFO layer
liquidation benefit, less the bearing product scrap expense was $3.4 million.
Fiscal 2016
During the third quarter of fiscal 2016, the Company recorded goodwill impairment of $64.8 million related to the Canada and Australia/
New Zealand service center reporting units within the Service Center Based Distribution reportable segment. After taxes, the impairment
had a negative impact on earnings of $63.8 million and reduced earnings per share by $1.62 per share.
During fiscal 2016, the Company incurred certain restructuring charges. During the third quarter, a reserve of $3.6 million was recorded
within cost of sales for potential non-salable, non-returnable and excess inventory due to declining demand, primarily for Canada oil and
gas operations. SD&A included expenses of $5.2 million during the fiscal year related to severance and facility consolidations, primarily
for oil and gas operations. Total restructuring charges reduced gross profit for the year by $3.6 million, operating income by $8.8 million,
net income by $6.2 million and earnings per share by $0.16.
During the fourth quarter of fiscal 2016, the Company realized LIFO layer liquidation benefits of $2.1 million from certain inventory
quantity levels decreasing.
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
On January 31, 2018, the Company completed the acquisition of FCX Performance, Inc ("FCX"). As permitted by
SEC guidance, the scope of management’s evaluation of internal control over financing reporting as of June 30,
2018 did not include the internal control over financial reporting of FCX. However, we are extending our oversight
and monitoring processes that support our internal control over financial reporting to include FCX's operations.
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, 2018. 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, 2018.
The Company acquired FCX Performance Inc. ("FCX") on January 31, 2018. Management has excluded FCX from
its assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2018.
FCX represents approximately 39.5% and 8.1% of total assets and net sales, respectively, of the consolidated
financial statement amounts as of and for the year ended June 30, 2018.
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/ David K. Wells
Vice President - Chief Financial Officer & Treasurer
August 17, 2018
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries
(the “Company”) as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018,
based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2018, of the Company
and our report dated August 17, 2018, expressed an unqualified opinion on those consolidated financial statements.
As described in Management’s Report on Internal Controls Over Financial Reporting, management excluded from its
assessment the internal control over financial reporting at FCX Performance Inc. ("FCX"), which was acquired on
January 31, 2018 and whose financial statements constitute 39.5% of total assets and 8.1% of net sales of the
consolidated financial statements as of and for the year ended June 30, 2018. Accordingly, our audit did not
include the internal control over financial reporting at FCX.
Basis for Opinion
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 Controls Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 17, 2018
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Changes in Internal Control Over Financial Reporting
There have not been any changes in internal control over financial reporting during the quarter ended June 30, 2018
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 30, 2018, 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 30, 2018, 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 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, 2018.
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
Weighted-
Average Exercise
Price of
Outstanding
Options, Warrants
and Rights
1,378,637
—
1,378,637
$45.22
—
$45.22
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans
*
—
*
* The 2015 Long-Term Performance Plan was adopted to replace the 2011 Long-Term Performance Plan and the
2011 Long-Term Performance Plan was adopted to replace the 2007 Long-Term Performance Plan. Stock
options and stock appreciation rights remain outstanding under each of the 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, 2018 was 1,665,033.
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 30, 2018, 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 30, 2018, 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 30, 2018, under the caption “Item 3 - Ratification of Auditors.”
65
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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, 2018, 2017, and 2016
• Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2018, 2017, and 2016
• Consolidated Balance Sheets at June 30, 2018 and 2017
• Statements of Consolidated Cash Flows for the Years Ended June 30, 2018, 2017, and 2016
• Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2018, 2017, and 2016
• Notes to Consolidated Financial Statements for the Years Ended June 30, 2018, 2017, and 2016
• Supplementary Data:
• Quarterly Operating Results
(a)2. Financial Statement Schedule.
The following schedule is included in this Part IV, and is found in this report at the page indicated:
Page No.
Schedule II - Valuation and Qualifying Accounts: Pg. 70
All other schedules for which provision is made in the applicable accounting regulation of the Securities and
Exchange Commission have been omitted because they are not required under the related instructions, are not
applicable, or the required information is included in the consolidated financial statements and notes thereto.
(a)3. Exhibits.
* Asterisk indicates an executive compensation plan or arrangement.
Exhibit No.
Description
3.1
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 June 29, 2018, between Applied and
PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), conformed to show all amendments.
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 amended, between Applied Industrial Technologies, Inc. and Prudential Investment
Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K filed July 2, 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
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 for the quarter ended September 30, 2014,
SEC File No. 1-2299, and incorporated here by reference).
Credit Agreement dated as of January 31, 2018, 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 filed February 6, 2018,
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 30, 2018 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 Peter A. Dorsman, an Applied director (filed as Exhibit 10(c) to Applied's
Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference).
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).
2007 Long-Term Performance Plan (filed as Exhibit 10 to Applied's Form 8-K filed 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 filed
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, 2018, SEC File No. 1-2299, and incorporated here by reference).
Stock Appreciation Rights Award Terms and Conditions (Officers) (August 2017 revision) (filed as Exhibit 10.1 to Applied's
Form 10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
Restricted Stock Units Terms and Conditions (filed as Exhibit 10.2 to Applied's Form 10-Q for the quarter ended
September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
Performance Shares Terms and Conditions (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended September
30, 2017, SEC File No. 1-2299, and incorporated here by reference).
Management Incentive Plan General Terms (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended September
30, 2016, SEC File No. 1-2299, and incorporated here by reference).
Key Executive Restoration Plan, as amended and restated, in which Applied's executive officers participate (filed as
Exhibit 10.1 to Applied's Form 8-K filed August 16, 2013, SEC File No. 1-2299, and incorporated here by reference).
Schedule of executive officer participants in the Key Executive Restoration Plan, as amended and restated (filed as
Exhibit 10.4 to Applied's Form 10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated
here by reference).
Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) in which Fred D. Bauer, as well as Todd A.
Barlett and Mark O. Eisele (executive officers who retired in the year ended June 30, 2018) 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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67
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Table of Contents
*10.19
*10.20
*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
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 filed 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 filed October 26, 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 Todd A. Barlett, Fred D. Bauer and Mark O. Eisele (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), restated effective as of January 1, 2017 (filed as Exhibit
10.27 to Applied's Form 10-K for the year ended June 30, 2017, 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 filed 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 filed October 26,
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 filed October 31, 2011,
SEC File No. 1-2299, and incorporated here by reference).
Change in Control Agreement for Fred D. Bauer (filed as Exhibit 99.1 to Applied's Form 8-K filed 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 10.33 to Applied's Form 10-K for the year ended June 30, 2017, 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 10.34 to Applied's
Form 10-K for the year ended June 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
A written description of Applied's Retiree Health Care Coverage for Neil A. Schrimsher, Todd A. Barlett, Fred D.Bauer and
Mark O. Eisele (filed as Exhibit 10.35 to Applied's Form 10-K for the year ended June 30, 2017, SEC File No. 1-2299, and
incorporated here by reference).
Agreement and Plan of Merger by and among Applied Industrial Technologies, Inc., Fortress Merger Sub Holding LLC,
Fortress Merger Sub LP, FCX Group Holdings, LP, FCX Group GP, LLC, and Harvest Partners, LP (filed as Exhibit 10.1 to
Applied's Form 8-K filed January 9, 2018, SEC File No. 1-2299, and incorporated here by reference).
Applied’s subsidiaries at June 30, 2018.
Consent of Independent Registered Public Accounting Firm.
Powers of attorney.
Rule 13a-14(a)/15d-14(a) certifications.
Section 1350 certifications.
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101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
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.
ITEM 16. FORM 1O-K SUMMARY.
Not applicable.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2018, 2017, AND 2016
(in thousands)
COLUMN A
COLUMN B
COLUMN C
COLUMN D
COLUMN E
DESCRIPTION
Year Ended June 30, 2018
Reserve deducted from assets to which it applies —
accounts receivable allowances
Year Ended June 30, 2017
Reserve deducted from assets to which it applies —
accounts receivable allowances
Year Ended June 30, 2016
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
9,628
$
2,803
$
4,578 (A)
$
3,443 (B)
$
13,566
11,034
$
2,071
$
(133) (A)
$
3,344 (B)
$
9,628
10,621
$
4,303
$
(46) (A)
$
3,844 (B)
$
11,034
(A) Amounts in the year ending June 30, 2018 represent reserves recorded through purchase accounting for acquisitions made during
the year of $3,549 and for the return of merchandise by customers of $1,029. Amounts in prior fiscal years represent reserves for
the return of merchandise by customers.
(B) Amounts represent uncollectible accounts charged off.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
/s/ Neil A. Schrimsher
Neil A. Schrimsher
President & Chief Executive Officer
/s/ Christopher Macey
Christopher Macey
Corporate Controller
(Principal Accounting Officer)
Date: August 17, 2018
/s/ David K. Wells
David K. Wells
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
Dan P. Komnenovich, Director
*
Robert J. Pagano, Jr., Director
*
Joe A. Raver, Director
*
Vincent K. Petrella, Director
/s/ Neil A. Schrimsher
Neil A. Schrimsher, President & Chief Executive Officer
and Director
*
*
Dr. Jerry Sue Thornton, Director
Peter C. Wallace, Director and Chairman
/s/ Fred D. Bauer
Fred D. Bauer, as attorney in fact
for persons indicated by “*”
Date: August 17, 2018
71
71
SHAREHOLDER INFORMATION
RECONCILIATION OF NET INCOME TO EBITDA
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:
CLEVELAND RESEARCH
COMPANY
Adam Uhlman
216/649-7241
GREAT LAKES REVIEW –
Division of Wellington
Shields & Co.
Elliott Schlang
216/767-1340
KEYBANC CAPITAL MARKETS
Steve Barger
216/689-0210
LONGBOW RESEARCH
Chris Dankert
216/525-8486
NORTHCOAST RESEARCH
Ryan Cieslak
216/468-6919
WELLS FARGO SECURITIES, LLC
Allison Poliniak-Cusic
212/214-5062
SHAREHOLDER INQUIRIES
ANNUAL REPORT ON FORM 10-K
The Applied Industrial
Technologies, Inc. Annual Report
on Form 10-K for the fiscal year
ended June 30, 2018, 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.
ANNUAL MEETING
The Annual Meeting of Shareholders
will be held at 10:00 a.m., Tuesday,
October 30, 2018, at the Corporate
Headquarters of Applied Industrial
Technologies, 1 Applied Plaza,
East 36th and Euclid Avenue,
Cleveland, Ohio 44115.
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 505000
Louisville, KY 40233-5000
800/988-5291
INVESTOR RELATIONS INQUIRIES
SHOULD BE DIRECTED TO:
DAVID K. WELLS
Vice President – Chief Financial
Officer & Treasurer
Applied Industrial Technologies
1 Applied Plaza
Cleveland, OH 44115-5014
Telephone: 216/426-4000
Fax: 216/426-4845
E-mail: ir@applied.com
($000)
FY2018
FY2017
Sales
$3,073,274
$2,593,746
Net Income
$141,625
$133,910
+ Interest Expense
+ Taxes
+ Depreciation
+ Amortization
23,485
63,093
17,798
32,065
8,541
33,056
15,306
24,371
EBITDA
$278,066
$215,184
EBITDA % of Sales
9.0%
8.3%
COMPARISON OF FIVE-YEAR CUMULATIVE
TOTAL RETURN
Applied Industrial Technologies, Inc., Standard & Poor’s 500, and Peer Group
(Performance Results from 7/1/2013 through 6/30/2018)
$200.00
$160.00
$120.00
$80.00
$40.00
Applied Industrial Technologies, Inc.
Standard and Poor's 500
Peer Group
$0.00
2013
2014
2015
2016
2017
2018
Assumes $100 invested at the close of trading 6/30/13 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.
Applied Industrial Technologies, Inc.
Standard & Poor’s 500
Peer Group
Source: Zacks Investment Research, Inc.
2013
100.00
100.00
100.00
2014
107.07
124.61
111.55
2015
85.63
133.86
102.55
2016
100.16
139.20
106.34
2017
133.70
164.11
103.04
2018
161.81
187.70
126.36
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 27 of Applied’s Form 10-K for the fiscal year ended June 30, 2018
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.
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