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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2015,2018, 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)

Ohio34-0117420
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)

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

Title of each className of each exchange on which registered
Common Stock, without par valueNew 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.xYes¨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 xNo

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.xYes¨No

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


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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨YesxNo

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, 2014)2017): $1,848,864,000.$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.

ClassOutstanding at August 14, 201510, 2018
Common Stock, without par value39,677,96938,721,431


DOCUMENTS INCORPORATED BY REFERENCE

Portions of Applied'sthe proxy statement for the annual meeting of shareholders of Applied Industrial Technologies, Inc., to be held October 27, 2015,30, 2018, are incorporated by reference into Parts II, III, and IV of this Form 10-K.


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  Page
   
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
1
   
PART I  
Item 1.
Business
2
Item 1A.
Risk Factors
5
Item 1B.
Unresolved Staff Comments
1011
Item 2.
Properties
1011
Item 3.
Legal Proceedings
1112
Item 4.
Mine Safety Disclosures
1112
   
EXECUTIVE OFFICERS OF THE REGISTRANT
1112
   
PART II  
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
1213
Item 6.
Selected Financial Data
1314
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
1415
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
2528
Item 8.
Financial Statements and Supplementary Data
2629
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
5861
Item 9A.
Controls and Procedures
5861
Item 9B.
Other Information
6064
   
PART III  
Item 10.
Directors, Executive Officers and Corporate Governance
6064
Item 11.
Executive Compensation
6064
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
6165
Item 13.
Certain Relationships and Related Transactions, and Director Independence
6165
Item 14.
Principal Accountant Fees and Services
6165
   
PART IV  
Item 15.
Exhibits and Financial Statement Schedules
6266
Item 16.
Form 10-K Summary
69
   
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
6670
  
SIGNATURES
6771
  


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



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PART I
ITEM 1. BUSINESS.
In this annual report on Form 10-K, “Applied” refers to Applied Industrial Technologies, Inc., an Ohio corporation. References to “we,” “us,” “our,” and “the company”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 distributorsupplies, operating in North America, Australia, and New Zealand, servingand Singapore. We serve MRO (maintenance, repair, and operations) and OEM (original equipment manufacturing) customers in virtually every industry. In addition, the companyCompany provides engineering, design, and systems integration for industrial, and fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, and fluid power, and flow control shop services. We also offer maintenance training and inventory management solutions that provide added value to our customers.
We offeradd value for our customers by providing product-related technical application support for our products and provide 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,segments: service center-based distributioncenter based distribution; and fluid power businesses.and flow control.
The service center-basedcenter based distribution segment provides customers with a wide range of industrial products primarily through a network of service centers. The fluid power businessesand flow control segment consists of specialized regional companies that distribute fluid power components, design and operate shops to assemble fluid powerequipment and systems, and perform equipment repair. The fluid power businesses primarily sell products and services directly to customers rather than through the service centers.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.

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(c) Narrative Description of Business.
OverviewOverview..Our field operating structure is built on two platforms -platforms: service center-based distributioncenter based distribution; and fluid power businesses:and flow control.
Ÿ

Service Center-Based Distribution.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-basedcenter based distribution business accounts for a substantial majority of our field operations and 81.9%76.3% of our 20152018 sales dollars.

The service center-basedcenter 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.
Ÿ
Fluid Power Businesses. Our specialized fluid power businesses primarily market products and services to customers within the businesses' geographic regions. In the United States, the businesses also market products and services through our service center network. In addition to distributing fluid power components, the businesses assemble fluid power systems and components, perform equipment repair, and offer technical advice to customers. Customers include firms purchasing for maintenance, repair, and operational needs, as well as for original equipment manufacturing applications.

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 components,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. Fluid power products include hydraulic, pneumatic, lubrication, and filtration components and systems.
These products are generally supplied to us by manufacturers whom we serve as a non-exclusive distributor. The suppliers also may provide us product training, as well as sales and marketing support. Authorizations to represent particular suppliers and product lines may vary by geographic region, particularly for our fluid power 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 on-siteonsite calls to customers to provide product information, identify customer requirements, make recommendations, and assist in implementing equipment maintenance and storeroom management programs, as well as automated supplies dispensing systems.programs. Account managers also measure and document the value of the cost savings and increased productivity we help generate. Product and industry specialistsSpecialists 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

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inventories and also may ship products directly to customers. Having product in stock helps us satisfy customers' immediate needs.
Timely delivery of products is an integral part of our service, particularly when customers require products for emergency repairs. Service centers and distribution centers use the most effective method of transportation available to meet customer needs. These methods include our own delivery vehicles, dedicated third-party transportation providers, as well as surface and air common carrier and courier services. Customers can also pick up items at our service centers.

Our information systems enhance our customer service. Customers 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 transact with customers throughuse electronic data interchange (EDI) and interfaceother electronic interfaces with customers' technology platforms and plant maintenance systems.
In addition to our electronic capabilities, we serve customers with our paperpublish a printed catalog, a comprehensive purchasing tool and resource guide for industrial and maintenance products (also available in a mobile-friendly digital version).
We supplement the service center product offering with our MaintenancePro® fee-based technical training seminars. These courses provide customer personnel with information on maintenance, troubleshooting, component application, and failure analysis in the areas of hydraulics and pneumatics, lubrication, bearings, and power transmission.
The Applied Maintenance Supplies & Solutions service offering provides traditional vendor managed inventory management(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)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.
TheMany of our fluid power and flow control businesses distinguish themselves from most component distributors by offering engineering, design, system fabrication, installation, and repair services.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 hydraulicshydraulic 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, including original equipment manufacturing applications.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, automotive,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 3%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.

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Our principal competitors are other bearing,specialist and general line distributors of bearings, power transmission products, fluid power components and systems, flow control solutions, industrial rubber fluid power,products, linear motion components, tools, and safety product distributors, as well as specializedproducts, oilfield supply distributorssupplies, and distributors of other industrial and maintenance supplies and catalog companies.supplies. These competitors include local, regional, national, and multinational operations.operations, and can include catalog and e-commerce companies. We also compete with original equipment manufacturers and their distributors in the sale of maintenance and replacement components. Some competitors have greater financial resources than we do.
The identity and number of our competitors vary throughout the geographic, industry, and product markets we serve.
Although we aremay be one of the leading distributors in North America, Australia, and New Zealandthe geographic markets we serve for the primary product categories of products we provide in those areas,there, our market share for those products in a given geographic market may be relatively small compared to the portion of the market served by original equipment manufacturers and other distributors.
Backlog Orders and Seasonality.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

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 compared withthan 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.Employees. At June 30, 2015,2018, we had 5,8396,634 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.Company. Certain risks are identified below in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference. Additional risks not currently known to us, risks that could apply broadly to issuers, or risks that we currently deem immaterial, may also impact our business and operations. Risks can also change over time.
Our business depends heavily on the operating levels of our customers and the economic factors that affect them, 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 economic factors that affect demand for and production of customers' goods and materials.

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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. In recent years, we have witnessed consolidationConsolidation continues among our product suppliers and customers. As customerscustomer industries consolidate, a

greater proportion of our sales could be derived from higherlarge volume contracts, which could adversely impact margins. Consolidation among customers can trigger changes in their purchasing strategies, potentially moving largeshifting 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 adequately take advantage of the consolidation trend.trends.
Loss of key supplier authorizations, lack of product availability, or changes in supplier 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 Appliedus in particular, in a manner that adversely impacts us. For example, key suppliers could change the following: the prices we must pay for their products relative to other distributors or relative to competing products;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 distributors of industrial machinery parts, equipment,operations, and supplies.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. Some existingExisting competitors have, and potential market entrantsfuture 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, we may need to loweror otherwise through competitive advantage, our prices for products or services, or increase our spending, therebysales and profitability could be adversely affecting financial results.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 thea program period. In some cases, in order to earn incentives, we must achieve year-over-year growth in purchases with the supplier. When demand for our products declines, we may be less willinginclined 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

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 declinedecline.. 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 operationoperation..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

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superior service to customers, and accumulatecompile 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.
We recentlyIn recent years, we replaced multiple legacy information system applications in our service center-based distribution business with an SAPnewer software platform,platforms, to enhance our business information and transaction systems to support future growth. OurWe 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 the new platformplatforms is not assured.
Volatility in product and energy costs can affect our profitability.Changes in costs of raw materials and energy can lead product manufacturers to adjust the prices of products we distribute. In addition, a portion of our own distribution costs is comprised of fuel for our sales and delivery vehicles, freight, and utility expenses for our facilities. Our ability to pass along increases in our product and distribution costs to our customers depends on market conditions. Raising our prices could result in decreased sales volume, which could significantly reduce our profitability. While increases in the cost of energy or products could be damaging to us, decreases in those costs, particularly if severe, could also adversely impact us by creating deflation in selling prices, which could cause our gross profit margin to deteriorate. Changes in energy or raw materials costs can also adversely affect customers; for example, recent declines in oil and gas prices have negatively impacted customers operating in those industries and, consequently, our sales to those customers.
Acquisitions are a key component of our anticipated growth. We may not be able to identify or to complete future acquisitions, to integrate them effectively into our operations, or to realize their anticipated benefits.benefits. Many industries we serve are mature. As a result, acquisitions of businesses have been important to our growth in recent years.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 orand future competitors, mayand private equity firms, increasingly seek to compete with us for acquisitions, which couldcan increase prices and reduce the number of suitable opportunities.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 into our operations could adversely affect our business or financial results. WeFor example, we could face significant challenges in consolidating functions, and integrating procedures, information systems, personnel, and operations, and implementing procedures and controls in a timely and efficient manner.
Further, even if we successfully integrate the acquisitions with our operations, we may not be able to realize cost savings, sales, profit levels, or other benefits that we anticipate from these acquisitions, either as to amount or in the time frame we expect. Our ability to realize anticipated benefits may be affected by a number of factors, including the following: our ability to achieve planned operating results, to reduce duplicative expenses and inventory effectively, and to consolidate facilities; economic and market factors; the incurrence of significant integration costs or charges in order to achieve those benefits; our ability to retain key product supplier authorizations, customer relationships, and employees; and our ability to address competitive, distribution, and regulatory challenges arising from entering into new markets, especially those in which we may have limited or no direct experience.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.

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, a significant underperformance relative to historical or projected future operating results, or a likely sale or disposal of the asset before the end of its estimated useful life. In 2016 we recorded a $64.8 million non-cash impairment charge for goodwill associated with the service center based distribution reporting units in Canada, Australia, and New Zealand.
As of June 30, 2015,2018, we had $254.4$646.6 million of goodwill.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 forecastforecasted at the assessment date, any

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changes to these assumptions and estimates due to market conditions or otherwise may lead to an outcome where impairment charges would be required in future periods.

Tight credit markets could impact our ability to obtain financing on reasonable terms or increase the cost of future financing. Although the credit market turmoil of several yearsa decade ago did not have a significant adverse impact on our liquidity or borrowing costs, the availability of funds tightened and credit spreads on corporate debt increased. If credit market volatility were to return, then obtaining additional or replacement financing could be more difficult and the cost of issuing new debt or replacing a credit facility could be higher than under our current facilities. Tight credit conditions could limit our ability to finance acquisitions on terms acceptable to us.
For more information relating to borrowing and interest rates, see the following sections below: “Liquidity and Capital Resources” in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations;” Item 7A under the caption “Quantitative and Qualitative Disclosures about Market Risk;” and note 5 to the consolidated financial statements, included below in Item 8 under the caption “Financial Statements and Supplementary Data.” That information is incorporated here by reference.
Our ability to maintain effective internal control over financial reporting may be insufficient to allow us to accurately report our financial results or prevent fraud, and this could cause our financial statements to become materially misleading and adversely affect the trading price of our common stock. We require effective internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we cannot provide reasonable assurance with respect to our financial statements and effectively prevent fraud, our financial statements could becomebe materially misleading,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 companyCompany among customers, suppliers, lenders, investors, securities analysts, and others could also be adversely affected.
We can give no assurancescannot 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.
There is no assurance that we will continue to pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends. The timing, declaration, amount, and payment of dividends to our shareholders fall within the discretion of our Board of Directors and depend on many factors, including our financial condition and results of operations, as well as applicable law and business considerations that our Board of Directors considers relevant. There can be no assurance that we will continue to pay a quarterly dividend.
Additionally, if we cannot generate sufficient cash flow from operations to meet our debt payment obligations, then our ability to pay dividends, if so determined by the Board of Directors, will be impaired and we may be required to attempt to restructure or refinance our debt, raise additional capital, or take other actions such as selling assets, reducing, or delaying capital expenditures, or reducing our dividend. There can be no assurance, however, that any such actions could be effected on satisfactory terms, if at all, or would be permitted by the terms of our debt or our other credit and contractual arrangements.
Our growth outside the United States increases our exposure to global economic and political conditions and currency exchange volatility.Foreign operations contributed 18.7% of our sales in 2015. If we continue to grow outside the U.S., the risks associated with exposure to more volatile economic conditions, political instability, cultural and legal differences in conducting business, and currency exchange fluctuations will increase.

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Our foreign operations' results are reported in the local currency and then translated into U.S. dollars at applicable exchange rates for inclusion in our consolidated financial statements. Fluctuations in currency exchange rates affect our operating results and financial position and affect the comparability of results between financial periods.
Our business depends on our ability to attract, develop, motivate, and retain qualified employees. Our success depends on hiring, developing, motivating, and retaining key employees, including executive, managerial, sales, professional, and other personnel. We may have difficulty identifying and hiring qualified personnel. In addition, we may have difficulty retaining such personnel once hired, and key people may leave and compete against us. With respect to sales and customer service positions in particular, we greatly benefit from having employees who are familiar with the products we sell and their applications, as well as with our customer and supplier relationships. The loss of key employees or our failure to attract and retain other qualified workers could disrupt or adversely affect our business. In addition, our operating results could be adversely affected by increased competition for employees, shortages of qualified workers, higher employee turnover (including through retirement as the workforce ages), or increased employee compensation or benefit costs.
An interruption of operations at our headquarters or distribution centers, or in our means of transporting product, could adversely impact our business.business. Our business depends on maintaining operating activity at our headquarters and distribution centers.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

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.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. As a resultBecause of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Even where insurance coverage applies, insurers may contest their obligations to make payments. Our financial condition, results of operations, and cash flows could be materially and adversely affected by losses and liabilities from uninsured or under-insuredunderinsured 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:
Ÿ
changes in customer preferences for products and services of the nature, brands, quality,
or cost sold by us;
Ÿchanges in customer procurement policies and practices;
Ÿchanges in the market prices for products and services relative to the costs of providing them;
Ÿchanges in operating expenses;
Ÿorganizational changes within the company;
Ÿadverse regulation and legislation, both enacted and under consideration, including with respect to
federal tax policy (e.g., affecting the use of the LIFO inventory accounting method and the taxation of
foreign-sourced income);
Ÿthe variability and timing of new business opportunities including acquisitions, alliances,
customer relationships, and supplier authorizations;
Ÿthe incurrence of debt and contingent liabilities in connection with acquisitions;
Ÿvolatility of our stock price and the resulting impact on our consolidated financial statements; and

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Table of Contentsthe 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.

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


ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.

ITEM 2. PROPERTIES.
We believe having a local presence is important to serving our customers, so we maintain service centers and other operations in local markets throughout the countries in which we operate. At June 30, 2015,2018, we owned real properties at 122120 locations and leased 409443 locations. Certain properties house more than one operation.
The following were our principal owned real properties (each of which has more than 30,00050,000 square feet of floor space) at June 30, 2015.2018:
Location of Principal Owned
Real Property
Type of Facility
Cleveland, OhioCorporate headquarters
Atlanta, GeorgiaDistribution center, and service center, hose shop
Florence, KentuckyDistribution center
Carlisle, PennsylvaniaDistribution center
Fort Worth, TexasDistribution center and rubber shop
Clairmont, AlbertaService center
Our principal leased real properties (each of which has more than 30,00050,000 square feet of floor space) at June 30, 20152018 were:
Location of Principal Leased
Real Property
Type of Facility
Fontana, CaliforniaDistribution center, rubber shop, fluid power shop, and service center
Newark, CaliforniaFluid power shop
Denver, ColoradoRubber shop and service center
Lenexa, KansasFluid power shop
Chanhassen, MinnesotaFluid power shop
Billings, MontanaFluid power shop
Cleveland, OhioOffices and warehouse
Elyria, OhioProduct return center and service center
Strongsville, OhioOffices and warehouse
Portland, OregonDistribution center
Kent, WashingtonStafford, TexasOffices, fluid powerwarehouse, and flow control shop and service center
Longview, WashingtonService center, rubber shop, and fluid power shop
Appleton, WisconsinNisku, AlbertaOffices, service center, and rubber shop
Edmonton, AlbertaService center and shopshops
Winnipeg, ManitobaDistribution center and service center
The properties in Newark Lenexa, Chanhassen, Billings and KentStafford are used in our fluid power businessesand flow control segment.
The Fontana and Longview properties are used in both the service center-basedcenter based distribution segment and the fluid power businessesand flow control segment. The remaining properties are used in the service center-basedcenter 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.
In recent years, whenWhen 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.

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In addition to operating locations, we own or lease certain properties which in the aggregate are not material and are either for sale, lease, or sublease to third parties due to a relocation or closing. We also may lease or sublease to others unused portions of buildings.
Additional information regarding our properties can be found in note 11 to the consolidated financial statements, included below in Item 8 under the caption “Financial Statements and Supplementary Data.” That information is incorporated here by reference.


ITEM 3. LEGAL PROCEEDINGS.
Applied and/or one of its subsidiaries is a party to pending legal proceedings with respect to product liability, commercial, personal injury, employment, and other matters. Although it is not possible to predict the outcome of these proceedings or the range of reasonably possible loss, we believe, based on circumstances currently known, that the likelihood is remote that the ultimate resolution of any of these proceedings will have, either individually or in the aggregate, a material adverse effect on Applied's consolidated financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
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 28, 2014:24, 2017:
:
NamePositions and ExperienceAge
Neil A. SchrimsherPresident (sincesince August 2013)2013 and Chief Executive Officer (since October 2011). From February 2010 to August 2011, Mr. Schrimsher was Executive Vice President of Cooper Industries plc (formerly NYSE: CBE), a global electrical products manufacturer, where he led Cooper's Electrical Products Group and headed numerous domestic and international growth initiatives. He was also President of Cooper Lighting, Inc. throughout the period from 2006 to December 2010.since 2011.51
Thomas E. ArmoldVice President-Sales since February 2015. Prior to that, he had served as Vice President-Marketing and Strategic Accounts since 2008.60
Todd A. BarlettVice President-Acquisitions and Global Business Development since 2004.6054
Fred D. BauerVice President-General Counsel & Secretary since 2002.4952
Mark O. EiseleWarren E. HoffnerVice President-Chief Financial Officer & TreasurerPresident-General Manager, Fluid Power since 2004.2003. The Board of Directors designated Mr. Hoffner an executive officer in October 2015.58
Kurt W. LoringVice President-Chief Human Resources Officer since July 2014. From October 2011Prior to July 2014 hethen Mr. Loring was Vice President, Human Resources for the Forged Products segment of Precision Castparts Corporation (NYSE:(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.49
David K. WellsVice President-Chief Financial Officer & Treasurer since September 2017. He served as Vice President-Finance from May 2017 through August 2017. Prior to that he served with Danaherjoining 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: DHR), most recently (from 2008CFX).  Prior to September 2011) as thethen he was Vice President Human Resources for its Fluke Corporation subsidiary,& Chief Financial Officer of Apex Tool Group, a leader in the manufacture, distribution,manufacturer of hand and service of electronic test tools and software worldwide.power tools.4655



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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESECURITIESS..
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, 2015, 2014,2018, 2017, and 20132016 and the number of shareholders of record as of August 14, 201510, 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.
           Price Range           Price Range
 Shares Traded
 Average Daily Volume
 High
 Low
 Shares Traded
 Average Daily Volume
 High
 Low
2015        
2018        
First Quarter 9,932,400
 155,200
 $52.62
 $45.54
 12,202,332
 193,688
 $66.05
 $54.00
Second Quarter 11,023,400
 172,200
 50.00
 42.92
 12,152,983
 192,904
 70.05
 59.65
Third Quarter 17,181,400
 281,700
 46.05
 39.76
 15,931,593
 261,174
 75.40
 67.40
Fourth Quarter 16,892,300
 268,100
 45.22
 39.54
 13,642,214
 213,160
 76.20
 62.45
2014        
2017        
First Quarter 9,157,400
 143,100
 $53.57
 $47.21
 9,924,600
 155,100
 $48.61
 $44.03
Second Quarter 12,634,700
 197,400
 53.45
 45.62
 13,423,500
 213,100
 62.65
 43.50
Third Quarter 10,107,300
 165,700
 52.27
 45.74
 12,986,200
 209,500
 66.65
 58.80
Fourth Quarter 12,799,900
 203,200
 51.44
 45.62
 10,868,100
 172,500
 69.00
 57.10
2013        
2016        
First Quarter 12,149,000
 196,000
 $44.86
 $34.67
 17,146,300
 267,900
 $42.65
 $37.15
Second Quarter 12,434,700
 201,600
 42.54
 36.52
 14,832,500
 231,800
 43.54
 37.00
Third Quarter 11,238,700
 187,300
 45.67
 42.02
 14,619,200
 239,700
 44.24
 35.55
Fourth Quarter 11,295,800
 176,500
 49.44
 40.39
 12,583,200
 196,600
 47.18
 42.52
The following table summarizes Applied's repurchases of its common stock in the quarter ended June 30, 2015.2018.
Period(a) Total Number of Shares (1)
 (b) Average Price Paid per Share ($)
 (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2)
April 1, 2015 to April 30, 2015156,714
 42.70
 153,300
 1,500,000
May 1, 2015 to May 31, 2015127,700
 42.51
 127,700
 1,372,300
June 1, 2015 to June 30, 2015125,000
 42.44
 125,000
 1,247,300
Total409,414
 42.56
 406,000
 1,247,300
Period(a) Total Number of Shares (1)
 (b) Average Price Paid per Share ($)
 (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2)
April 1, 2018 to April 30, 201887
 65.07
 —
 1,056,700
May 1, 2018 to May 31, 2018—
 —
 —
 1,056,700
June 1, 2018 to June 30, 2018319
 75.45
 —
 1,056,700
Total406
 73.23
 —
 1,056,700
(1)During the quarter ended June 30, 2015,2018, Applied purchased 3,414406 shares in connection with an employee deferred compensation program. This purchase is not counted in the authorization in note (2).
(2)
On April 28, 2015,October 24, 2016, the Board of Directors authorized the purchaserepurchase of up to 1.5 million shares of Applied'sthe Company's common stock.
stock, replacing the prior authorization. We publicly announced the new authorization on April 30, 2015.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.
Set forth below isThis selected financial data for eachshould 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 last five fiscal years.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)
(UNAUDITED)
 2015 2014 2013 2012 2011 
2018 (a)
 2017 2016 2015 2014
Consolidated Operations — Year Ended June 30                    
Net sales $2,751,561
 $2,459,878
 $2,462,171
 $2,375,445
 $2,212,849
 $3,073,274
 $2,593,746
 $2,519,428
 $2,751,561
 $2,459,878
Depreciation and amortization of property 16,578
 13,977
 12,501
 11,236
 11,234
 17,798
 15,306
 15,966
 16,578
 13,977
Amortization:                    
Intangible assets 25,797
 14,023
 13,233
 11,465
 11,382
 32,065
 24,371
 25,580
 25,797
 14,023
SARs and stock options 1,610
 1,808
 2,317
 2,058
 2,473
 1,961
 1,891
 1,543
 1,610
 1,808
Operating income(c) 184,619
 164,358
 176,399
 168,395
 150,763
 225,827
 175,386
 89,782
 184,619
 164,358
Net income 115,484
 112,821
 118,149
 108,779
 96,759
Net income (b) (c)
 141,625
 133,910
 29,577
 115,484
 112,821
Per share data:                    
Net income:                    
Basic 2.82
 2.69
 2.81
 2.58
 2.28
 3.65
 3.43
 0.75
 2.82
 2.69
Diluted 2.80
 2.67
 2.78
 2.54
 2.24
Diluted (b) (c)
 3.61
 3.40
 0.75
 2.80
 2.67
Cash dividend 1.04
 0.96
 0.88
 0.80
 0.70
 1.18
 1.14
 1.10
 1.04
 0.96
                    
Year-End Position — June 30                    
Working capital $549,233
 $545,193
 $491,380
 $435,593
 $404,226
 $625,469
 $572,789
 $507,238
 $535,938
 $545,193
Long-term debt (including portion classified as current) 320,995
 170,712
 —
 —
 —
 966,063
 291,982
 328,334
 320,995
 170,712
Total assets 1,434,968
 1,334,169
 1,058,706
 962,183
 914,931
 2,285,741
 1,387,595
 1,312,025
 1,432,556
 1,334,169
Shareholders’ equity 741,328
 800,308
 759,615
 672,131
 633,563
 814,963
 745,256
 657,916
 741,328
 800,308
                    
Year-End Statistics — June 30                    
Current ratio 2.8
 2.9
 3.0
 2.9
 2.9
 2.4
 2.8
 2.8
 2.7
 2.9
Operating facilities 565
 538
 522
 476
 474
 610
 552
 559
 565
 538
Shareholders of record (a)(d)
 6,016
 6,330
 6,319
 6,225
 6,208
 4,323
 4,687
 5,372
 6,016
 6,330
Return on assets (b)
 7.9% 10.2% 11.6% 11.8% 11.1%
Return on equity (c)
 15.0% 14.5% 16.5% 16.7% 16.3%
Return on assets (b) (c) (e)
 8.0% 10.2% 2.2% 7.9% 10.2%
Return on equity (b) (c) (f)
 18.2% 19.1% 4.2% 15.0% 14.5%
                    
Capital expenditures (d)(g)
 $14,933
 $20,190
 $12,214
 $26,021
 $20,431
 $23,230
 $17,045
 $13,130
 $14,933
 $20,190
                    
Cash Returned to Shareholders During the Year                    
Dividends Paid $42,663
 $40,410
 $37,194
 $33,800
 $29,751
Purchases of Treasury Shares 76,515
 36,732
 53
 31,032
 6,085
Dividends paid $45,858
 $44,619
 $43,330
 $42,663
 $40,410
Purchases of treasury shares 22,778
 8,242
 37,465
 76,515
 36,732
Total $119,178
 $77,142
 $37,247
 $64,832
 $35,836
 $68,636
 $52,861
 $80,795
 $119,178
 $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.
(b)(e)Return on assets is calculated as net income divided by monthly average assets.
(c)(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).
(d)(g)
Capital expenditures for fiscal 2014 included the purchase of our headquarters facility which used $10.0 million of cash.
Capital expenditures for 2013, 2012 and 2011 include $5.6 million, $16.7 million and $12.5 million related to Applied's Enterprise Resource Planning (ERP) system (SAP)project, respectively. See Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Resultsof Operations” for further description of the ERP (SAP) project.



13
Table of Contents

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
With more than 5,8006,600 employees across North America, Australia, and 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 distributorsupplies, serving MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for industrial, and fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, and fluid power, and flow control shop services. Applied also offers maintenance trainingstoreroom services and inventory management solutions that provide added value to ourits customers. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. At June 30, 2015,2018, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, and New Zealand, and Singapore from 565610 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".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 20152018 consolidated sales were $2.75$3.1 billion, an increase of $291.7$479.5 million or 11.9%18.5% compared to the prior year, with the acquisitions contributing $280.2of FCX, Sentinel Fluid Controls, and Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. (DICOFASA) increasing sales by $264.7 million or 11.4%10.2% and an unfavorablefavorable foreign currency translation of $43.3$16.0 million decreasingincreasing sales by 1.8%0.6%. Gross profit margin was 28.0% comparedincreased to 27.9%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 prior year. Our operating margin remained stable at 6.7% each year. 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 $2.80$3.61 in fiscal 2018 versus $2.67$3.40 in fiscal year 2014, an increase2017. The current year results include a positive impact on earnings per share of 4.9%.
During fiscal 2015,$0.15 per share related to U.S. tax reform from the Company acquired Knox Oil Field Supply Inc., Rodamientos y Derivados del Norte S.A. de C.V., Great Southern Bearings / Northam Bearingsenactment of the Tax Cuts and Ira Pump and Supply Inc. See the Business Combinations noteJobs Act in December 2017. The prior year results include a positive impact on earnings per share of $0.56 per share related to the consolidated financial statements in Item 8 under the caption "Financial Statements and Supplementary Data" for further information.worthless stock deduction.
Our consolidated balance sheet remains strong. Shareholders’ equity was $741.3 million, down from $800.3$815.0 million at June 30, 2014.2018 compared to $745.3 million at June 30, 2017. Working capital increased $4.0$52.7 million from June 30, 20142017 to $549.2$625.5 million at June 30, 2015. Our2018. The current ratio remains strong at 2.8 to 1, compared to 2.9was 2.4 to 1 at June 30, 2014.2018 and 2.8 to 1 atJune 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.
Industrial production
The MCU (total industry) and IP indices gradually increased 0.3%during fiscal 2018 correlating with the overall growth in June but fell at an annual rate of 1.4% for the second calendar quarter of 2015. In June, capacity utilization for manufacturing moved down 0.1% to 77.2% compared to May.industrial economy. The ISM PMI registered 53.560.2 in June 2015, a decrease2018, an increase from 55.3 inthe June 2014, but still2017 revised reading of 56.7. A reading above 50 (its expansionary threshold).generally indicates expansion. The index readings for the months during the current quarter, along with the revised indices for previous quarter ends, were as follows:
 Index Reading
MonthMCUPMIIP
June 201878.060.2103.9
May 201877.758.7103.1
April 201878.257.3104.2
March 201877.559.3103.6
December 201777.359.3102.8
September 201775.760.2101.3
June 201776.256.7101.9
YEAR ENDED JUNE 30, 20152018 vs. 20142017
The following table is included to aid in review of Applied’s statements of consolidated income.
Year Ended June 30,
As a % of Net Sales
 Change in
14

Sales in fiscal 20152018 were $2.75$3.1 billion, which was $291.7$479.5 million or 11.9%18.5% above the prior year, with sales from acquisitions accounting for $280.2$264.7 million or 11.4%. Unfavorable10.2% of the increase, and favorable foreign currency translation decreased sales by $43.3accounting for an increase of $16.0 million or 1.8%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 prior to the impact of foreign currency translation, sales were up $54.8$198.8 million or 2.3%7.7% during the year. We had 252.5 selling daysyear, 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 both fiscal 2015 and fiscal 2014.sales by reportable segment.
Amounts in millions   Amount of change due to
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Reportable Segment2018
2017
Service Center Based Distribution$2,346.4
$2,180.4
$166.0
$3.6
$16.0
$146.4
Fluid Power & Flow Control726.9
413.4
313.5
261.1
—
52.4
Total$3,073.3
$2,593.8
$479.5
$264.7
$16.0
$198.8
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $281.4$166.0 million, or 14.3%7.6%. Acquisitions within this segment increased sales by $280.2$3.6 million or 14.2%0.2%, and favorable foreign currency translation increased sales by $16.0 million or 0.7%. UnfavorableExcluding 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.

The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore.
Amounts in millions   Amount of change due to
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Geographic Area2018
2017
United States$2,615.1
$2,182.6
$432.5
$261.1
$—
$171.4
Canada273.6
252.0
21.6
—
11.3
10.3
Other countries184.6
159.2
25.4
3.6
4.7
17.1
Total$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   Amount of change due to
 Year ended June 30,SD&A Increase
Acquisitions
Foreign Currency
Organic Change
 2018
2017
SD&A$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.

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 deferredcompensation 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.
 
Year Ended June 30,
As a % of Net Sales
 Change in $'s Versus Prior Period
 2017
 2016
 % Change
Net Sales100.0% 100.0% 2.9%
Gross Profit Margin28.4% 28.1% 4.3%
Selling, Distribution & Administrative21.7% 22.0% 1.7%
Operating Income6.8% 3.6% 95.3%
Net Income5.2% 1.2% 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

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
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Reportable Segment2017
2016
Service Center Based Distribution$2,180.4
$2,150.5
$29.9
$19.8
$(1.1)$11.2
Fluid Power & Flow Control413.4
369.0
44.4
11.3
—
33.1
Total$2,593.8
$2,519.5
$74.3
$31.1
$(1.1)$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 $36.5$1.1 million or 1.8%0.1%. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales increased $37.7$11.2 million or 1.9%.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 Businesses& Flow Control segment which operatesincreased $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 OEM markets, increased $10.3 million or 2.1%the U.S., primarily attributedof 9.3%, offset by a decrease of 0.4% due to strongone less sales growth at several of our U.S. based Fluid Power businesses which added $17.1 million or 3.5%, while unfavorable foreign currency translation decreasedday.
The following table shows changes in sales by $6.8 million or 1.4%.geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore.
Amounts in millions   Amount of change due to
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Geographic Area2017
2016
United States$2,182.6
$2,117.5
$65.1
$25.1
$—
$40.0
Canada252.0
257.8
(5.8)6.0
(0.2)(11.6)
Other countries159.2
144.2
15.0
—
(0.9)15.9
Total$2,593.8
$2,519.5
$74.3
$31.1
$(1.1)$44.3
Sales in our U.S. operations were up $207.1increased $65.1 million or 10.2%3.1%, with acquisitions adding $175.8$25.1 million or 8.7%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 increased $67.5decreased $5.8 million or 23.2%2.2%, with acquisitions adding $86.4 million or 29.7%. Unfavorableunfavorable foreign currency translation decreaseddecreasing Canadian sales by $30.4$0.2 million or 10.4%0.1%. Acquisitions added $6.0 million, or 2.3%. Excluding the impact of businesses acquired and priorunfavorable foreign currency translation impact, Canadian sales were down $11.6 million or 4.4%, of which 2.0% related to the impact of currency translation,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 were up $11.5 million or 3.9% during the year.day. Consolidated sales from our other country operations, which include Mexico, Australia, and New Zealand, were $17.1and Singapore, increased $15.0 million or 12.4% above the prior year, with acquisitions adding sales of $18.0 million or 13.1%.10.4% compared to fiscal 2016. Unfavorable foreign currency translation decreased other country sales by $12.9$0.9 million or 9.4%0.7%. Excluding the impact of businesses acquired and priorPrior to the impact of currency translation, other country sales were up $12.0$15.9 million or 8.7% during11.1% compared to the year.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 20152017 was 73.2%71.5% industrial products and 26.8%28.5% fluid power products compared to 70.7%72.9% industrial and 29.3%27.1% fluid power in the prior year. These changes in product mix relate entirely to the product mix of our recent acquisitions being primarily industrial products.fiscal 2016.
Our gross profit margin was 28.0%increased to 28.4% in fiscal 2015 versus 27.9%2017 compared to 28.1% in fiscal 2014.2016. The increase was primarily due to recording a more favorable impact from LIFO layer liquidations which increased margins areattributablegross 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 impactgross profit margin for fiscal 2016 was negatively impacted by $3.6 million of relatively higher gross margins from acquired

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   Amount of change due to
 Year ended June 30,SD&A Increase
Acquisitions
Foreign Currency
Organic Change
 2017
2016
SD&A$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 $62.6$9.5 million or 12.0%1.7% during fiscal 20152017 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 prior year,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 21.3%6.8% from 21.2% in fiscal 2014. The acquired businesses added an incremental $69.4 million of SD&A expenses, which includes an additional $13.4 million associated with acquired identifiable intangibles amortization. Excluding the $11.0 million decline in SD&A from foreign currency translation, the remaining SD&A amounts3.6%. These increases were similarprimarily due to the prior year. The increase in SD&A asCompany recognizing a percentagenon-cash goodwill impairment charge of sales, was driven by additional intangible asset amortization from businesses acquired.
Operating income increased $20.3$64.8 million or 12.3%, to $184.6and restructuring charges of $8.8 million during fiscal 2015 from $164.4 million2016 that did not reoccur during 2014, andfiscal 2017, as a percent ofwell as higher sales remained stable at 6.7%. The increasevolume in operating income dollars is primarily attributable to our acquired businesses.fiscal 2017.
Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 6.2%was 5.3% in fiscal 2015 from 6.0% in2017 and fiscal 2014. This increase is primarily attributable to an increase in gross profit as a percentage of sales, as a result of our recent acquisitions which operate at higher gross profit margins, representing an increase of 0.1%, along with a decrease in SD&A as a percentage of sales of 0.1%.2016, before the goodwill impairment charge.
Operating income as a percentage of sales for the Fluid Power Businesses& Flow Control segment increased to 9.8%11.3% in fiscal 20152017 from 9.2%10.1% in fiscal 2014.2016. This increase is primarily attributablewas due to the positive leveraging of organicimpact from the increase in sales, growth inprimarily from our U.S. based Fluid Power Businesses, without a commensurate increaseoperations in SD&A expenses.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.
InterestOther (income) expense, net, increased to $7.9 million in fiscal 2015 entirely due to acquisition related borrowing.
Other expense (income), net, represents certain non-operating items of income and expense. This was $0.9$0.1 million of income in fiscal 2017 compared to $2.0 million of expense in fiscal 2015 compared to $2.2 million of2016. Fiscal 2017 income in fiscal 2014. Current year expense primarily consists of foreign currency transaction losses of $1.3 million offset by unrealized gains on investments held by non-qualified

15

deferred compensation trusts of $0.4 million. Fiscal 2014 consisted primarily of unrealized gains on investments held by non-qualified deferredcompensation trusts of $1.7$1.2 million, as well as $1.3 million of income associated with the elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption "Financial Statements and Supplementary Data"), offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.8$0.2 million, and life

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.
IncomeThe effective income tax expense as a percent of income before taxesrate was 34.3%19.8% for fiscal 2015 and 32.1%2017 compared to 62.6% for fiscal 2014.2016. 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 increasededuction 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 iswas primarily due to recordingthe adoption of valuation allowances against certain deferredASU 2016-09 in the first quarter of fiscal 2017, which requires excess tax assets for foreign jurisdictions in fiscal 2015 as well as the non-recurrence of a one-time favorable tax benefit in fiscal 2014 in accounting for undistributed earnings of non-U.S. subsidiaries. All undistributed earnings of our foreign subsidiaries are consideredbenefits and deficiencies resulting from stock-based compensation awards vesting and exercises to be permanently reinvested at June 30, 2015 and 2014.
We expect ourrecognized 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 2016 to be in the range of 34.0% to 34.5%.
As a result of the factors addressed above, net income for fiscal 2015 increased $2.7 million or 2.4% from the prior year. Net income per share increased at a slightly higher rate of 4.9% due to lower weighted-average shares outstanding in fiscal 2015.
At June 30, 2015, we had a total of 565 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia and New Zealand, versus 538 at June 30, 2014.
The number of Company employees was 5,839 at June 30, 2015 and 5,472 at June 30, 2014.
YEAR ENDED JUNE 30, 2014 vs. 2013
The following table is included to aid in review of Applied’s statements of consolidated income.
 
Year Ended June 30,
As a % of Net Sales
 Change in $'s Versus Prior Period
 2014
 2013
 % Increase
Net Sales100.0% 100.0% (0.1)%
Gross Profit Margin27.9% 27.7% 0.6 %
Selling, Distribution & Administrative21.2% 20.6% 3.2 %
Operating Income6.7% 7.2% (6.8)%
Net Income4.6% 4.8% (4.5)%
Sales in fiscal 2014 were $2.46 billion, which was $2.3 million or 0.1% below the 2013 fiscal year. We experienced overall declines in sales from our businesses not acquired in fiscal year 2014 of approximately $34.3 million or2017 by 1.4%. There was one additional selling day in fiscal 2014 as compared to fiscal 2013. Currency translation decreased fiscal year sales by approximately $26.2 million or 1.1%. Incremental sales from companies acquired since the 2013 fiscal year contributed $58.2 million or 2.4%.
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $30.1 million, or 1.5%. This decline was due to decreases in sales from businesses not acquired in fiscal year 2014 of $62.5 million or 3.1% coupled with an unfavorable impact of foreign currency translation of $23.1 million or 1.2%. Offseting these decreases was acquisitions, which added $55.5 million or 2.8%.
Sales of our Fluid Power Businesses segment, which operates primarily in OEM markets, increased $27.8 million or 6.1%. We experienced sales growth at several of our Fluid Power businesses which added $29.9 million or 6.6% along with acquisitions within this segment which added $2.8 million or 0.6%, while unfavorable foreign currency translation losses decreased sales by $4.9 million or 1.1%.
Sales in our U.S. operations were up $14.0 million or 0.7% with acquisitions adding $32.8 million or 1.6% offsetting declines in sales from our businesses not acquired in fiscal year 2014 of $18.8 million or 0.9%. Sales from our Canadian operations decreased $7.2 million or 2.4%. Acquisitions added $19.3 million or 6.5%, offset by unfavorable foreign currency translation losses which reduced sales by $17.5 million or 5.9% coupled with declines in sales from our businesses not acquired in fiscal year 2014 of $9.0 million or 3.0%, mostly as a result of weakness within the Canadian mining sector. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, were $9.1 million or 6.2% below the 2013 fiscal year. This decrease is primarily the result of unfavorable foreign currency translation losses of $8.7 million or 5.9%, coupled with declines in sales of $6.5 million or 4.4%, mostly within the mining sector, from our businesses not acquired in fiscal year 2014, while acquisitions added $6.1 million or 4.2% in fiscal 2014.

16

The sales product mix for fiscal 2014 was 70.7% industrial products and 29.3% fluid power products compared to 72.1% industrial and 27.9% fluid power in fiscal year 2013. The change in our product mix in fiscal year 2014 was due to sales growth within our Fluid Power Businesses segment coupled with sales declines in our Service Center Based Distribution segment.
Our gross profit margin was 27.9% in fiscal 2014 versus 27.7% in fiscal 2013. The increased margins wereattributable to the impact of relatively higher gross margins from acquired operations.
Selling, distribution and administrative expenses (SD&A) consist of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management, and providing marketing and distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $16.0 million or 3.2% during fiscal 2014 compared to fiscal 2013, and as a percent of sales increased to 21.2% from 20.6% in fiscal 2013. The acquired businesses added $19.3 million of SD&A expenses, which included an additional $2.5 million associated with acquired identifiable intangibles amortization. The increase in SD&A as a percentage of sales, was driven by relatively higher SD&A levels from businesses acquired in fiscal year 2014.
Operating income decreased $12.0 million, or 6.8%, to $164.4 million during fiscal 2014 from $176.4 million during 2013. As a percent of sales, operating income decreased to 6.7% in fiscal 2014 from 7.2% in 2013. The decrease in operating income was primarily attributable to relatively flat gross profit levels coupled with added levels of SD&A from businesses acquired in the 2014 fiscal year. The decrease in operating margin percentage was driven by the negative leverage resulting from decreasing sales from businesses not acquired in fiscal year 2014 without a similar level of SD&A reductions, which resulted in an increase in SD&A as a percentage of sales to 21.2% from 20.6% in fiscal year 2013, slightly offset by an increase in gross profit as a percentage of sales to 27.9% from 27.7%.
Operating income as a percentage of sales for the Service Center Based Distribution segment decreased to 6.0% in fiscal 2014 from 6.9% in fiscal 2013. This decrease was attributable to the negative leverage resulting from decreasing sales in businesses not acquired in fiscal year 2014 without a similar level of SD&A reductions, which resulted in an increase in SD&A as a percentage of sales. In addition, SD&A for acquisitions in fiscal year 2014 operated at a relatively higher SD&A level. The SD&A impacts represented an approximate 1.0% reduction in operating income as a percentage of sales and were slightly offset by an increase in gross profit margins also due to acquisitions in fiscal year 2014 (representing an increase of approximately 0.1%) representing the total net change in operating income as a percentage of sales.
Operating income as a percentage of sales for the Fluid Power Businesses segment increased to 9.2% in fiscal 2014 from 9.0% in fiscal 2013. This increase was due to the positive leverage provided by an increase in sales without a commensurate increase in SD&A levels at several of our Fluid Power Businesses (representing a 0.5% increase in operating income as a percentage of sales), offset by a slight decrease in gross profit margins (representing a 0.3 decrease in operating income as a percentage of sales).
Segment operating income was impacted by changes in the amounts and levels of expenses allocated to the segments. The expense allocations included corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.
Interest expense, net, remained relatively stable as compared to fiscal year 2013.
Other expense (income), net, represented certain non-operating items of income and expense. This was $2.2 million of income in fiscal 2014 compared to $1.4 million of income in fiscal 2013. Fiscal year 2014 income primarily consisted of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.7 million as well as $1.3 million of income associated with the elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption "Financial Statements and Supplementary Data"), offset by foreign currency transaction losses of $0.8 million. Fiscal 2013 consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.3 million.
Income tax expense as a percent of income before taxes was 32.1% for fiscal 2014 and 33.5% for fiscal 2013. The impact of lower effective tax rates in foreign jurisdictions favorably reduced our rate when compared to the U.S. federal statutory rate by 2.6%. Further reducing our rate compared to the U.S. federal statutory rate by 1.6% was the reversal of a deferred tax liability recorded in the years prior to fiscal 2014 on a portion of the undistributed earnings in Canada. All undistributed earnings of our foreign subsidiaries were considered to be permanently reinvested at June 30, 2014. The effective tax rate for fiscal 2014 was further reduced by 1.1% due to a favorable permanent dividend deduction along with other items. These reductions compared to the U.S. federal statutory rate were offset by the impact of state2017 and local taxes which increased the rate by 2.4%.2016.

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As a result of the factors addressed above, net income for fiscal 2014 decreased $5.32017 increased $104.3 million or 4.5% from fiscal year 2013.2016. Net income per share decreased atwas $3.40 per share for fiscal 2017 compared to $0.75 for fiscal 2016. Fiscal 2017 results included a slightlypositive 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 rate of 4.0% due to lower weighted-averageweighted average common shares outstanding in fiscal 2014.2017 as a result of our share repurchase program.
At June 30, 2014,2017, we had a total of 538552 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, and New Zealand, and Singapore, versus 522559 at June 30, 2013.2016.
The number of Company employees was 5,4725,554 at June 30, 20142017 and 5,1095,569 at June 30, 2013.2016.
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, 20152018 we had total debt obligations outstanding of $321.0$966.1 million compared to $170.7$292.0 million at June 30, 2014.2017. Management expects that our existing cash, cash equivalents, funds available under the revolving credit and uncommitted shelf facilities, and cash provided from operations, and the use of operating leases will be sufficient to finance normal working capital needs in each of the countries we operate in, payment of dividends, acquisitions, investments in properties, facilities and equipment, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company’s credit standing and financial strength.
The Company holds, from time to time, relatively significant cash and cash equivalent balances outside of the United States of America. The following table shows the Company's total cash as of June 30, 2015 by geographic location; all amounts are in thousands.
CountryAmount
United Sates$17,256
Canada40,325
Other Countries11,889
Total$69,470
To the extent cash in foreign countries is distributed to the U.S., it could become subject to U.S. income taxes. Foreign tax credits may be available to offset all or a portion of such taxes. At June 30, 2015, all foreign earnings are considered permanently reinvested.
The Company’s working capital at June 30, 20152018 was $549.2$625.5 million compared to $545.2$572.8 million at June 30, 2014.2017. The current ratio was 2.4 to 1 at June 30, 2018 and 2.8 to 1 at June 30, 2015 and 2.9 to 1 at June 30, 2014.2017.
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.
Year Ended June 30,Year Ended June 30,
2015
 2014
 2013
2018
 2017
 2016
Net Cash Provided by (Used in):          
Operating Activities$154,538
 $110,110
 $111,397
$147,304
 $164,619
 $162,014
Investing Activities(173,621) (203,637) (78,825)(797,906) (16,894) (75,031)
Financing Activities24,689
 92,142
 (38,025)600,284
 (103,349) (93,007)
Exchange Rate Effect(7,325) (590) 175
(589) 820
 (3,585)
Decrease in Cash and Cash Equivalents$(1,719) $(1,975) $(5,278)
Increase (Decrease) in Cash and Cash Equivalents$(50,907) $45,196
 $(9,609)
The increasedecrease in cash provided by operating activities resulted fromduring fiscal 2018 is primarily due to increased working capital levels to support increased sales compared to the operationsprior year periods. The decrease in cash was further impacted by

increased interest payments, and the payment of newly acquired businesses along with$7.1 million of one-time costs, both related to the FCX acquisition. These decreases were partially offset by improved cash collections on accounts receivable within our U.S. based businesses.operating results, including the impact of the FCX acquisition.
Net cash used in investing activities in fiscal 20152018 included $14.9 million for capital expenditures and $160.6$775.7 million used for acquisitions.the acquisitions of FCX and DICOFASA, and $23.2 million used for capital expenditures. Net cash used in investing activities in fiscal 20142017 included $20.2$17.0 million for capital expenditures $10.0and $2.8 million used for acquisitions. These were offset by $2.9 million of which wasproceeds received from the sale of five buildings during fiscal 2017. Net cash used for the purchase of our headquarters facility, and $184.3 million for acquisitions. Capital expenditures for fiscal 2014 included an insignificant amount related to the ERP project as the portion of that project pertaining to capital spending primarily endedin investing activities in fiscal 2013. Fiscal 2013 investing cash

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activities2016 included the use of $12.2$13.1 million for capital expenditures ($5.6and $62.5 million related to the ERP project), and $67.6 millionused for acquisitions.
Net cash provided by financing activities in fiscal 20152018 included $170.0$780.0 million of cash from borrowings under long term debt facilities used for the financing of acquisitions, offset by $17.0new credit facility and $19.5 million of repaymentsnet borrowings under ourthe revolving credit facility, and $2.7offset by $125.4 million of long termlong-term debt repayments. Further uses of cash were $42.7$45.9 million for dividend payments, $76.5$22.8 million used to repurchase 1,740,100393,300 shares of treasury stock, and $7.7$3.3 million of acquisition holdback payments. Net cash provided by financing activities in fiscal 2014 included $100.0 million from borrowings under long term debt facilities as well as $69.0 million in borrowings under our revolving credit facility, both of which were utilizedused for the financingpayment of acquisitions. These sources of cash were offset by $40.4 million for dividend payments and $36.7 million used to repurchase 759,900 shares of treasury stock. debt issuance costs.
Net cash used in financing activities in fiscal 20132017 included $37.2$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, and $3.8$8.2 million relatedused to repurchase 162,500 shares of treasury stock, $11.3 million used for acquisition holdback payments, partiallyand $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 $2.6$125.0 million of excess tax benefitscash from share-based compensation.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 $1.04, $0.96$1.18, $1.14, and $0.88$1.10 per share in fiscal 2015, 20142018, 2017 and 2013,2016, respectively.
Capital Expenditures
We expect capital expenditures for fiscal 20162019 to be in the $13.0$26.0 million to $15.0$28.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for fiscal 20162019 is expected to be in the range of $16.0$21.0 million to $17.0 million.$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 havefirst deployed our solution in our Western Canadian operating locations and our traditional U.S. Service Center Based Businesses,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, have beenwere transitioned to SAP during fiscal 2015. TheAt the beginning of fiscal 2016 the Company expects to convertconverted to a new consolidation process and system atsystem. During the beginningfourth quarter of fiscal 2016.2017, 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 determineconsider an appropriate deployment schedule for operations in Eastern Canada as well as 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, 2015,2018, we had authorization to purchase an additional 1,247,3001,056,700 shares.
In fiscal 2015, 20142018, 2017 and 2013,2016, we repurchased 1,740,100, 759,900393,300, 162,500, and 1,300951,100 shares of the Company’s common stock, respectively, at an average price per share of $43.97, $48.34$57.92, $50.72, and $40.96,$39.39, respectively.
Borrowing Arrangements
TheIn January 2018, in conjunction with the acquisition of FCX, the Company hasrefinanced its existing credit facility and entered into a revolvingnew five-year credit facility with a group of banks expiring in May 2017.January 2023. This agreement provides for a $780.0 million unsecured borrowings of up to $150.0 million.term loan and a $250.0 million unsecured revolving credit facility. Fees on this facility range from 0.09%0.10% to 0.175%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 prime, or the bank’s cost of fundsprime at the Company's discretion. This agreement also enables the Company to refinance this debt on a long term basis. As ofAt June 30, 2015 and 2014,2018, the Company had $52.0$775.1 million and $69.0 million in borrowings outstanding under this credit facility, respectively.the term loan and $19.5 million outstanding under the revolver. Unused lines under this facility, at June 30, 2015, net of outstanding letters of credit of $3.8$3.6 million to secure certain insurance obligations, totaled $94.2$226.9 million at June 30, 2018, and arewere available to fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the revolving credit facility borrowingsterm loan as of June 30, 20152018 was 1.15%4.13%.
Additionally
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, 2015,2017.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with either revolving credit agreement, in the amount of $1.8$2.7 million as of June 30, 2018 and June 30, 2017, respectively, in order to secure certain insurance obligations.
In April 2014 the Company entered into a $100.0 million unsecured five-year term loan with a group of banks with a final maturity date in April 2019. Borrowings under this agreement carry a variable interest rate tied to LIBOR, which at June 30, 2015 was 1.19%. The term loan had $96.9 million outstanding at June 30, 2015.
Also in April 2014, the Company assumed $2.4 million of debt as a part of the acquisition of our headquarters facility. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency and matures in May 2024. We had $2.1 million outstanding under this note at June 30, 2015.

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At June 30, 20152018 and June 30, 2017, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 million.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%; the principal is, and are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principal amount of $50.0 million, and carry a fixed interest rate of 3.21%; the principal is, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2015,2018, $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 revolvingnew credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2015,2018, the most restrictive of these covenants required that the Company have net indebtedness less than three4.25 times consolidated income before interest, taxes, depreciation and amortization. At June 30, 2015,2018, the Company's indebtedness was less than two3.0 times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all financial covenants at June 30, 2015 and expects to remain in compliance during the terms of the agreements.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 30,2015
 2014
2018
 2017
Accounts receivable, gross$386,926
 $386,117
$562,377
 $400,559
Allowance for doubtful accounts10,621
 10,385
13,566
 9,628
Accounts receivable, net$376,305
 $375,732
$548,811
 $390,931
Allowance for doubtful accounts, % of gross receivables2.7% 2.7%2.4% 2.4%
      
Year Ended June 30,2015
 2014
2018
 2017
Provision for losses on accounts receivable$2,597
 $3,970
$2,803
 $2,071
Provision as a % of net sales0.09% 0.16%0.09% 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 50.055.0 at June 30, 20152018 versus 51.451.6 at June 30, 2014.2017. The inclusion of FCX had no impact on the Company's DSO at June 30, 2018. Accounts receivable increased 0.2%40.4% this year, comparedof which 20.7% is accounts receivable for FCX. The remaining increase is due to an increase of 11.9%in sales inexcluding FCX for the twelve months ended June 30, 2015. Acquisitions added $29.3 million, or 7.8%, of accounts receivable, changes in foreign currency rates decreased receivables by $15.6 million and improved collections led to a decrease in receivables of $13.1 million. We primarily attribute the decrease in DSO to the improved timing of collections within our traditional U.S. Service Center Based Distribution Businesses. DSO and past due balances have declined now that all traditional U.S. Service Center Based Distribution Businesses have been fully operational on the new ERP system for all of fiscal 2015.2018.
Approximately 4.2%2.4% of our accounts receivable balances are more than 90 days past due at June 30, 20152018 compared to 5.7%1.7% at June 30, 2014.2017. This improvementincrease primarily relates to our U.S. Service Center Based Businesses.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, 2015.2018. Historically, this percentage is around 0.10% to 0.15%. Our experience with losses on accounts which have uncollected receivables was better than our historical averages in fiscal 2015. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels, and that past due balances will continue to decline in fiscal 2016.levels.


Inventory Analysis
Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis and uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the period ended June 30, 2015
2018 was 4.0 versus 3.7 versus 3.8 at June 30, 2014. This decrease is due to the impact of recent acquisitions which historically have had lower inventory turnover rates, coupled with strategic inventory investments that we believe will assist with future sales growth.2017. We believe our inventory turnover ratio in fiscal 20162019 will be slightly better than our fiscal 20152018 levels.

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CONTRACTUAL OBLIGATIONS
The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 20152018 (in thousands):
Total
 
Period Less
Than 1 yr

 
Period
2-3 yrs

 
Period
4-5 yrs

 
Period
Over 5 yrs

 Other
Total
 
Period Less
Than 1 yr

 
Period
2-3 yrs

 
Period
4-5 yrs

 
Period
Over 5 yrs

 Other
Operating leases$82,400
 $24,900
 $34,300
 $16,700
 $6,500
  $111,400
 $38,100
 $45,300
 $17,000
 $11,000
 —
Planned funding of post-retirement obligations27,200
 5,400
 3,800
 6,700
 11,300
  16,300
 3,500
 4,400
 1,800
 6,600
 —
Unrecognized income tax benefit liabilities, including interest and penalties3,100
         3,100
4,700
 —
 —
 —
 —
 4,700
Long term debt obligations321,000
 3,300
 63,100
 108,600
 146,000
  
Interest on long term debt obligations (1)37,100
 6,600
 13,000
 11,000
 6,500
  
Long-term debt obligations966,100
 19,700
 128,900
 792,300
 25,200
 —
Interest on long-term debt obligations (1)84,300
 18,300
 40,800
 25,000
 200
 —
Acquisition holdback payments29,600
 19,200
 10,400
      3,365
 2,592
 698
 —
 75
 —
Total Contractual Cash Obligations$500,400
 $59,400
 $124,600
 $143,000
 $170,300
 $3,100
$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, 20152018 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 as well as the balance outstanding under our revolving credit facility 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 or lenders.
SUBSEQUENT EVENTS
On August 3, 2015, the Company acquired all of the net assets of Atlantic Fasteners, located in Agawam, MA, for a purchase price of approximately $12.5 million. The Company funded this acquisition from borrowings under the revolving credit facility at a variable interest rate. As a a distributor of fasteners and industrial supplies, this business will be included in the Service Center Based Distribution Segment from August 3, 2015.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 22.1%16.8% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $151.8$139.2 million as reflected in our consolidated balance sheet at June 30, 2015.2018. 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.



Allowances for Slow-Moving and Obsolete Inventories
We evaluate the recoverability of our slow-moving or obsoleteand 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

21

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, 20152018 and 2014,2017, our allowance for doubtful accounts was 2.7%2.4% of gross receivables, for each period.receivables. Our provision for losses on accounts receivable was $2.6$2.8 million, $4.0$2.1 million and $2.3$4.3 million in fiscal 2015, 20142018, 2017 and 2013,2016, 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 two-stepone-step approach. Step one compares theThe 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, and the second step of goodwill impairment test is unnecessary.impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwillan impairment test is performed to measurecharge would be recognized for the amount of impairment loss (if any). Step two compares the implied fair value of the reporting unit goodwill withby which the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, meaning,exceeds the reporting unit's fair value, isnot to exceed the total amount of goodwill allocated to all the assets and liabilities of thethat reporting unit (including unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit is the price paid to acquire the reporting unit. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.
Goodwill on our consolidated financial statements is relatedrelates to both the Service Center Based Distribution segment and the Fluid Power Businesses& Flow Control segment. The Company has sevensix reporting units for which are U.S. Service Centers, MSS, Canada Service Centers, Mexico Service Centers, Australia and New Zealand, Puerto Rico, and Fluid Power. Foran 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 as of January 1, 2015,were determined using the Company performed a quantitative analysisIncome and estimated the fair value of each of the reporting units using a combination of the incomeMarket approaches. The Income approach (also known asemploys the discounted cash flow ("DCF") method which utilizes the presentreflecting

projected cash flows expected to be generated by market participants and then adjusted for time value of cash flows to estimate fair value) and the marketmoney factors. The Market approach which measures fair value through theutilizes an analysis of comparable publicly traded companies ("guideline company analysis"), giving equal weight to both methods. The Company concluded that five of the reporting units had material excesses of fair value compared to their carrying amounts. The Company concluded that two reportingcompanies.

22

units (Canada service center and Australia / New Zealand) had excess fair value of approximately $39.0 million and $4.0 million, or fifteen and fourteen percent, respectively when compared to the carrying amounts of approximately $258.0 million and $28.0 million, respectively. 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 forecast at the assessmentmeasurement date. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, themeasurement date.  The Company evaluates the appropriateness of its assumptions as well as itsand overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable.years.  Key assumptions, all of which are Level 3 inputs,based assumptions relate to pricing trends, inventory costs, discount rate, customer demand, and the long-term growth and foreign exchange rates.revenue growth.  A number of benchmarks from independent industry and other economic publications were also used.  Changes in future actual results, assumptions, and estimates after the assessmentmeasurement 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.
Self-Insurance Liabilities
We maintain business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. We accrue estimated losses using actuarial calculations, models and assumptions based on historical loss experience. We also maintain a partially self-insured health benefits plan, which provides medical benefits to U.S. based employees electing coverage. We maintain a reserve for all unpaid medical claims including those incurred but not reported based on historical experience and other assumptions. Although management believes that the estimated liabilities for self-insurance are adequate, the estimates described above may not be indicative of current and future losses. In addition, the actuarial calculations used to estimate self-insurance liabilities are based on numerous assumptions, some of which are subjective. We will continue to adjust our estimated liabilities for self-insurance, as deemed necessary, in the event that future loss experience differs from historical loss patterns.
Pension and Other Post-employment Benefit Plans
The measurement of liabilities related to pension plans and other post-employment benefit plans is based on management’s assumptions related to future events including interest rates, return on pension plan assets, and health care cost trend rates. We evaluate these assumptions and adjust them as necessary. Changes to these assumptions  Further, continued adverse market conditions could result in a material change to the Company’s pension obligation causing a related increase or decrease in reported net operating results inrecognition of additional impairment if the periodCompany determines that the fair values of change in the estimate. At June 30, 2015, a 1% point change wouldits reporting units have the following effects (in thousands):
 One-Percentage Point
Effect of change in:Increase
 Decrease
Discount rate on liability$(1,803) $2,172
Discount rate on net periodic benefit cost(86) 102
A 1% change in the return on assets is not material as most of the plans are non-qualified and unfunded.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, 2015,2018, the Company had recognized $6.8$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.assets on a jurisdiction by jurisdiction basis. The remaining net deferred tax asset is the amountmanagement believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future taxable income levels.
Income taxes on undistributed earnings of non-U.S. subsidiaries are not accrued for the portion of such earnings that management considers to be permanently reinvested. At June 30, 2015, management considered all undistributed earnings of non-U.S. subsidiaries to be permanently reinvested. Undistributed earnings of non-U.S. subsidiaries totaled $139.0 million for which no provision for U.S. income tax had been made.

23

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;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, and legislation, or policies, both enacted and under consideration, including with respect to health care and federal tax policy, (e.g., affecting the use of the LIFO inventory accounting method and the taxation of foreign-sourced income);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.


24

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates.
We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. We doAs of June 30, 2018, we did not currently have any outstanding derivative instruments.
Foreign Currency Exchange Rate Risk
Because we operate throughout North America, Australia and New Zealand and approximately 18.7%14.9% of our fiscal year 20152018 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, (income), net. Applied does not currently hedge the net investments in our foreign operations.
During the course of the fiscal year, the Canadian, Mexican, Australian, Mexican and New Zealand foreigncurrency exchange rates decreased in relation to the U.S. dollar by 13.7%2.0%, 18.9%9.2%, 17.0%4.1%, and 22.3%7.4%, respectively. In the twelve months ended June 30, 2015,2018, we experienced net foreign currency translation losses totaling $58.2$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 from the levels experienced during the year ended June 30, 2015 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 $1.4$0.9 million decrease in net income for the year ended June 30, 2015.2018. A 10% weakening from the levels experienced during the year ended June 30, 2015 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 $1.4$0.9 million increase in net income for the year ended June 30, 2015.2018.
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 $150.0$250.0 million in borrowings and $52.0$19.5 million outstanding at June 30, 2015, our $100.02018, and a $780.0 million five year term loan, facility, $96.9 million of which $775.1 million was outstanding at June 30, 2015,2018. Fixed interest rate debt facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $2.1$1.4 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $191.4$431.7 million during fiscal 2015.2018. 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 $1.9$4.3 million increase in interest expense. Changes in market interest rates would also impact interest rates on these facilities.
We monitor depository institutions that hold our cash and cash equivalents, primarily for safety of principal and secondarily for maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any of these entities.
For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and note 5 to the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business.


25

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

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

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the "Company"“Company”) as of June 30, 20152018 and 2014, and2017, 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, 2015. Our audits also included2018, and the financial statementrelated notes and the schedule listed in the Index at Item 15. 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 and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on
our audits. We 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 Public Company Accounting Oversight BoardPCAOB (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, 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 supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of theCompany at June 30, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2015, 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 26, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP
Cleveland, Ohio

August 26, 201517, 2018

We have served as the Company's auditor since 1966.
26

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

Year Ended June 30, 2015
 2014
 2013
 2018
 2017
 2016
Net Sales $2,751,561
 $2,459,878
 $2,462,171
 $3,073,274
 $2,593,746
 $2,519,428
Cost of Sales 1,981,747
 1,772,952
 1,779,209
 2,189,279
 1,856,051
 1,812,006
Gross Profit 769,814
 686,926
 682,962
 883,995
 737,695
 707,422
Selling, Distribution and Administrative, including depreciation
 585,195
 522,568
 506,563
 658,168
 562,309
 552,846
Goodwill Impairment —
 —
 64,794
Operating Income 184,619
 164,358
 176,399
 225,827
 175,386
 89,782
Interest Expense 8,121
 900
 621
 24,142
 8,831
 9,004
Interest Income (252) (651) (456) (657) (290) (241)
Other Expense (Income), net 879
 (2,153) (1,431)
Other (Income) Expense, net (2,376) (121) 2,041
Income Before Income Taxes 175,871
 166,262
 177,665
 204,718
 166,966
 78,978
Income Tax Expense 60,387
 53,441
 59,516
 63,093
 33,056
 49,401
Net Income $115,484
 $112,821
 $118,149
 $141,625
 $133,910
 $29,577
Net Income Per Share — Basic $2.82
 $2.69
 $2.81
 $3.65
 $3.43
 $0.75
Net Income Per Share — Diluted $2.80
 $2.67
 $2.78
 $3.61
 $3.40
 $0.75

See notes to consolidated financial statements.


27

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In thousands)

Year Ended June 30, 2015
 2014
 2013
 2018
 2017
 2016
Net income per the statements of consolidated income $115,484
 $112,821
 $118,149
 $141,625
 $133,910
 $29,577
            
Other comprehensive (loss) income, before tax:            
Foreign currency translation adjustments (58,233) 629
 (1,358) (8,875) 2,238
 (24,441)
Postemployment benefits:      
Actuarial (loss) gain on remeasurement (776) 1,402
 3,153
Post-employment benefits:      
Actuarial gain (loss) on re-measurement 709
 2,038
 (1,998)
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs 286
 382
 872
 (73) 506
 518
Unrealized (loss) gain on investment securities available for sale (38) 112
 10
Unrealized gain (loss) on investment securities available for sale 37
 91
 (52)
Total other comprehensive (loss) income, before tax (58,761) 2,525
 2,677
 (8,202) 4,873
 (25,973)
Income tax (benefit) expense related to items of other comprehensive income (loss) (205) 719
 1,529
Income tax expense (benefit) related to items of other comprehensive income (loss) 319
 1,029
 (598)
Other comprehensive (loss) income, net of tax (58,556) 1,806
 1,148
 (8,521) 3,844
 (25,375)
Comprehensive income $56,928
 $114,627
 $119,297
 $133,104
 $137,754
 $4,202

See notes to consolidated financial statements.

28

CONSOLIDATED BALANCE SHEETS
(In thousands)

June 30, 2015
 2014
 2018
 2017
Assets        
Current assets        
Cash and cash equivalents $69,470
 $71,189
 $54,150
 $105,057
Accounts receivable, less allowances of $10,621 and $10,385 376,305
 375,732
Accounts receivable, less allowances of $13,566 and $9,628 548,811
 390,931
Inventories 362,419
 335,747
 422,069
 345,145
Other current assets 51,111
 53,480
 32,990
 41,409
Total current assets 859,305
 836,148
 1,058,020
 882,542
Property — at cost        
Land 12,950
 13,212
 14,411
 14,250
Buildings 89,325
 89,886
 104,419
 97,529
Equipment, including computers and software 166,515
 157,370
 177,813
 162,432
Total property — at cost 268,790
 260,468
 296,643
 274,211
Less accumulated depreciation 164,343
 156,872
 175,300
 166,143
Property — net 104,447
 103,596
 121,343
 108,068
Identifiable intangibles, net 198,828
 159,508
 435,947
 163,562
Goodwill 254,406
 193,494
 646,643
 206,135
Deferred tax assets 97
 21,166
Other assets 17,885
 20,257
 23,788
 27,288
Total Assets $1,434,968
 $1,334,169
 $2,285,741
 $1,387,595
Liabilities        
Current liabilities        
Accounts payable $179,825
 $172,401
 $256,886
 $180,614
Current portion of long term debt 3,349
 2,720
Current portion of long-term debt 19,183
 4,814
Compensation and related benefits 63,780
 55,760
 73,370
 58,785
Other current liabilities 63,118
 60,074
 83,112
 65,540
Total current liabilities 310,072
 290,955
 432,551
 309,753
Long-term debt 317,646
 167,992
 944,522
 286,769
Post-employment benefits 19,627
 23,611
 11,985
 16,715
Other liabilities 46,295
 51,303
 81,720
 29,102
Total Liabilities 693,640
 533,861
 1,470,778
 642,339
Shareholders’ Equity        
Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding —
 —
 —
 —
Common stock — no par value; 80,000 shares authorized; 54,213 shares issued 10,000
 10,000
Common stock — no par value; 80,000 shares authorized; 54,213 shares issued;
38,703 and 39,041 shares outstanding, respectively
 10,000
 10,000
Additional paid-in capital 160,072
 156,999
 169,383
 164,655
Retained earnings 969,548
 896,776
 1,129,678
 1,033,751
Treasury shares — at cost (14,308 and 12,650 shares) (338,121) (261,852)
Accumulated other comprehensive income (loss) (60,171) (1,615)
Treasury shares — at cost (15,510 and 15,172 shares), respectively (403,875) (381,448)
Accumulated other comprehensive loss (90,223) (81,702)
Total Shareholders’ Equity 741,328
 800,308
 814,963
 745,256
Total Liabilities and Shareholders’ Equity $1,434,968
 $1,334,169
 $2,285,741
 $1,387,595

See notes to consolidated financial statements.

29

STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)

Year Ended June 30, 2015
 2014
 2013
 2018
 2017
 2016
Cash Flows from Operating Activities            
Net income $115,484
 $112,821
 $118,149
 $141,625
 $133,910
 $29,577
Adjustments to reconcile net income to net cash provided by operating activities:            
Goodwill impairment —
 —
 64,794
Depreciation and amortization of property 16,578
 13,977
 12,501
 17,798
 15,306
 15,966
Amortization of intangibles 25,797
 14,023
 13,233
 32,065
 24,371
 25,580
Amortization of stock appreciation rights and options 1,610
 1,808
 2,317
 1,961
 1,891
 1,543
Deferred income taxes (4,961) (8,209) 10,179
 1,615
 (2,852) (6,581)
Provision for losses on accounts receivable 2,597
 3,970
 2,267
 2,803
 2,071
 4,303
Unrealized foreign exchange transaction losses (gains) (727) 204
 (1,410)
Unrealized foreign exchange transaction (gains) losses (667) (333) 61
Other share-based compensation expense 2,851
 2,703
 3,444
 4,666
 3,629
 2,524
Shares issued for deferred compensation plans 45
 161
 241
Gain on sale of property (1,291) (53) (321)
(Gain) loss on sale of property (335) (1,541) 337
Other —
 103
 —
Changes in operating assets and liabilities, net of acquisitions:            
Accounts receivable 13,129
 (29,089) (15,721) (83,103) (42,267) 26,414
Inventories (15,704) (29,171) (26,745) (33,436) (3,624) 25,081
Other operating assets 797
 17,966
 (7,857) 6,947
 (6,162) 2,964
Accounts payable 1,040
 21,369
 12,206
 50,345
 32,076
 (28,644)
Other operating liabilities (2,707) (12,370) (11,086) 5,020
 8,041
 (1,905)
Cash provided by Operating Activities 154,538
 110,110
 111,397
 147,304
 164,619
 162,014
Cash Flows from Investing Activities            
Property purchases (14,933) (20,190) (12,214) (23,230) (17,045) (13,130)
Proceeds from property sales 1,932
 877
 979
 978
 2,924
 603
Net cash paid for acquisition of businesses, net of cash acquired of $0, $1,369, and $0 in 2015, 2014 and 2013, respectively (160,620) (184,324) (67,590)
Cash paid for acquisition of businesses, net of cash acquired (775,654) (2,773) (62,504)
Cash used in Investing Activities (173,621) (203,637) (78,825) (797,906) (16,894) (75,031)
Cash Flows from Financing Activities            
Net (repayments) borrowings under revolving credit facility, classified as long term (17,000) 69,000
 —
Borrowings under long term debt facilities 170,000
 100,000
 —
Long term debt repayments (2,717) (647) —
Net borrowings (repayments) under revolving credit facility, classified as long term 19,500
 (33,000) (19,000)
Borrowings under long-term debt facilities 780,000
 —
 125,000
Long-term debt repayments (125,420) (3,353) (98,662)
Debt issuance costs (3,298) —
 (719)
Purchases of treasury shares (76,515) (36,732) (53) (22,778) (8,242) (37,465)
Dividends paid (42,663) (40,410) (37,194) (45,858) (44,619) (43,330)
Excess tax benefits from share-based compensation 1,042
 2,674
 2,566
 —
 —
 208
Acquisition holdback payments (7,693) (1,839) (3,843) (319) (11,307) (18,913)
Exercise of stock appreciation rights and options 235
 96
 499
 102
 656
 896
Taxes paid for shares withheld (1,645) (3,484) (1,022)
Cash provided by (used in) Financing Activities 24,689
 92,142
 (38,025) 600,284
 (103,349) (93,007)
Effect of exchange rate changes on cash (7,325) (590) 175
 (589) 820
 (3,585)
Decrease in cash and cash equivalents (1,719) (1,975) (5,278)
(Decrease) increase in cash and cash equivalents (50,907) 45,196
 (9,609)
Cash and cash equivalents at beginning of year 71,189
 73,164
 78,442
 105,057
 59,861
 69,470
Cash and Cash Equivalents at End of Year $69,470
 $71,189
 $73,164
 $54,150
 $105,057
 $59,861
            
Supplemental Cash Flow Information            
Cash paid during the year for:            
Income taxes $69,272
 $51,548
 $51,816
 41,724
 38,772
 54,749
Interest 5,851
 1,026
 501
 25,560
 8,561
 9,497
See notes to consolidated financial statements.


30

STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands)

For the Years Ended June 30, 2015, 2014 and 2013 
Shares of
Common
Stock
Outstanding

 
Common
Stock

 
Additional
Paid-In
Capital

 

Retained
Earnings

 
Treasury
Shares-
at Cost

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Total
Shareholders'
Equity

Balance at July 1, 2012 41,967
 $10,000
 $150,070
 $743,360
 $(226,730) $(4,569) $672,131
For the Years Ended June 30, 2018, 2017 and 2016 
Shares of
Common
Stock
Outstanding

 
Common
Stock

 
Additional
Paid-In
Capital

 

Retained
Earnings

 
Treasury
Shares-
at Cost

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Total
Shareholders'
Equity

Balance at July 1, 2015 39,905
 $10,000
 $160,072
 $969,548
 $(338,121) $(60,171) $741,328
Net income       118,149
     118,149
       29,577
     29,577
Other comprehensive income (loss)           1,148
 1,148
           (25,375) (25,375)
Cash dividends — $0.88 per share       (37,194)     (37,194)
Purchases of common stock for treasury (1)       (53)   (53)
Treasury shares issued for:             
Exercise of stock appreciation rights and options 129
   (175)   1,086
   911
Performance share awards 53



(1,675)


74



(1,601)
Deferred compensation plans 5
   131
   110
   241
Compensation expense — stock appreciation rights and options     2,317
       2,317
Other share-based compensation expense     3,444
       3,444
Other 16
   (219) 47
 294
   122
Balance at June 30, 2013 42,169
 10,000
 153,893
 824,362
 (225,219) (3,421) 759,615
Net income       112,821
     112,821
Other comprehensive income (loss)           1,806
 1,806
Cash dividends — $0.96 per share       (40,410)     (40,410)
Cash dividends — $1.10 per share       (54,266)     (54,266)
Purchases of common stock for treasury (760)       (36,732)   (36,732) (951)       (37,465)   (37,465)
Treasury shares issued for:                           
Exercise of stock appreciation rights and options 76
   849
   324
   1,173
 64
   (391)   1,000
   609
Performance share awards 36
   (1,062)   (21)   (1,083) 8
 
 (308) 
 116
 
 (192)
Restricted stock units 31
   (1,110)   (247)   (1,357) 15
   (530)   232
   (298)
Deferred compensation plans 3
   98
   63
   161
Compensation expense — stock appreciation rights and options     1,808
   
   1,808
 
   1,543
   
   1,543
Other share-based compensation expense     2,703
       2,703
     2,524
       2,524
Other 8
   (180) 3
 (20)   (197) 16
   (381) (38) 350
   (69)
Balance at June 30, 2014 41,563
 10,000
 156,999
 896,776
 (261,852) (1,615) 800,308
Balance at June 30, 2016 39,057
 10,000
 162,529
 944,821
 (373,888) (85,546) 657,916
Net income       115,484
     115,484
       133,910
     133,910
Other comprehensive income (loss)           (58,556) (58,556)           3,844
 3,844
Cash dividends — $1.04 per share       (42,663)     (42,663)
Cash dividends — $1.14 per share       (45,005)     (45,005)
Purchases of common stock for treasury (1,740)       (76,515)   (76,515) (163)       (8,242)   (8,242)
Treasury shares issued for:                            
Exercise of stock appreciation rights and options 34
   552
   415
   967
 111
   (2,218)   105
   (2,113)
Performance share awards 12
   (425)   52
   (373) 10
   (360)   126
   (234)
Restricted stock units 36
   (1,312)   76
   (1,236) 15
   (624)   227
   (397)
Deferred compensation plans 1
   24
   21
   45
Compensation expense — stock appreciation rights and options     1,610
       1,610
     1,891
       1,891
Other share-based compensation expense     2,851
       2,851
     3,629
       3,629
Other (1)   (227) (49) (318)   (594) 11
   (192) 25
 224
   57
Balance at June 30, 2015 39,905
 $10,000
 $160,072
 $969,548
 $(338,121) $(60,171) $741,328
Balance at June 30, 2017 39,041
 10,000
 164,655
 1,033,751
 (381,448) (81,702) 745,256
Net income       141,625
     141,625
Other comprehensive income (loss)           (8,050) (8,050)
Reclassifications of certain income tax effects from accumulated other comprehensive loss       471
   (471) —
Cash dividends — $1.18 per share 
     (46,162)     (46,162)
Purchases of common stock for treasury (393)   
   (22,778)   (22,778)
Treasury shares issued for:              
Exercise of stock appreciation rights and options 19
   (482)   84
   (398)
Performance share awards 5
   (273)   (24)   (297)
Restricted stock units 15
   (740)   (56)   (796)
Compensation expense — stock appreciation rights and options     1,961
       1,961
Other share-based compensation expense     4,666
       4,666
Other 16
   (404) (7) 347
   (64)
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.


31

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 distributorsupplies, serving Maintenance Repair & Operations (MRO) and Original Equipment Manufacturer (OEM) customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for industrial, and fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, and fluid power, and flow control shop services. Applied also offers maintenance trainingstoreroom 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. For the year ended June 30, 2013 the financial results of the Company’s Canadian and Mexican subsidiaries were included in the consolidated financial statements for the twelve months ended May 31. During fiscal 2014, the Company eliminated the one month reporting lag for both the Canadian and Mexican subsidiaries in the first and third quarters respectively. See the "Change in Accounting Principle" section below for additional information related to the elimination of the reporting lag.
Foreign Currency
The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive (loss) income (loss) in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other (income) expense, (income), net.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.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, (income), net in the statements of consolidated income.
Concentration of Credit Risk
The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and New Zealand.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 Appliedthe 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.

32

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 theCompany 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, 2015,2018, approximately 22.1%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 or obsoleteand 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 LIFO inventory accounting methodmethods 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 sheetsheets 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.

33

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 expensesexpense 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 livedindefinite-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 expensesexpense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expenses were approximately $24,430, $16,230$19,320, $20,060 and $15,560$21,480 for the fiscal years ended June 30, 2015, 20142018, 2017 and 2013, respectively.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 the Accounting Standards Codification ("ASC") Topic 740 - Income Taxes topic of the ASC (Accounting Standards Codification). The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes.

34

Share-Based Compensation
Share-based compensation represents the cost related to share-based awards granted to employees under eitherthe 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-yearten-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.
ChangesRecently Adopted Accounting Guidance
Change in Accounting Principle - Net Periodic and Post-retirement Benefit Costs
U.S. Inventory Costing Methodology
From fiscal 2013 throughIn March 2017, the endFASB 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 2014, the Company implemented SAP as its new enterprise resource planning system (ERP) at its U.S. service centers. As implementation occurred at each service center, the method used to apply the link chain dollar value last-in first-out (LIFO) method of accounting changed for the inventories at that location.2018. The new inventory costing methodology utilizes the weighted-average cost method to determine the current year LIFO indices as well as any new LIFO layers established, whereas previously, current costs were used. Upon completion of the implementation, on July 1, 2014 the Company changed its accounting policy to the new method. Differences between amounts recognized in the financial statements during the implementation period and the previous accounting policy prior to July 1, 2014 were immaterial.
The Company believes that this change in accounting principle is preferable under the circumstances because weighted-average cost will provide a better reflection of actual transactions and inventory purchases, resulting in improved matching of actual costs and current revenues. This change will also result in greater consistency in inventory costing across the organization, as certain other U.S. locations were previously using weighted-average cost for similar LIFO calculations in their legacy inventory systems, and the new ERP system will make inventory costing a more efficient process within the U.S. ASC 250, "Accounting Changes and Error Corrections," requires that unless it is impracticable to do so, the voluntary adoption of a new accounting principle should be done retrospectively to all prior periods. Before July 1, 2014, the Company’s former ERP system did not capture weighted-average costs within the U.S. and the data needed to recalculate previous LIFO indices does not exist. Thus, the Company has concluded it is impracticable to recognize a cumulative effect or to retrospectively apply the effect of this change in accounting principle prior to July 1, 2014, but believes that those effects would be immaterial in all periods.
Alignment of Canadian Subsidiary Reporting
Effective July 1, 2013, the Company aligned the consolidation of the Company’s Canadian subsidiary in the consolidated financial statements, which previously included the results on a one month reporting lag. The Company believes that this change in accounting principle is preferable as it provides contemporaneous reporting within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of a one month reporting lag of a subsidiary is treated as a change in accounting principle and requires retrospective application. The Company determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the lag elimination was $1,200adoption 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, forresulting 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 month of June 2013 and has been included within “Other (Income) Expense, net” on the statementstatements of consolidated income for the yearyears ended June 30, 2014.2018, and 2017, and 2016, respectively. The statement of consolidated incomeCompany used a practical expedient where the amounts disclosed in our Benefit Plans footnote for the prior year ended June 30, 2014 reflectscomparative periods were the same results, had the financial statements been retrospectively adjusted, with the exception of net income which would have decreased by $1,200. Net sales, operating income and net incomebasis for the year ended June 30, 2013 would have decreased by $1,050, $600estimation 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 $500 hadJobs 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 financial statements been retrospectively adjusted.

35

Alignment of Mexican Subsidiary Reporting
Effective January 1, 2014,fiscal 2018 using the Company alignedat the consolidationbeginning of the Company’s Mexican subsidiaryperiod 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 consolidated financial statements, which previously included the results on a one month reporting lag. The Company believes thatfourth quarter of fiscal 2018 and will apply this change in accounting principle is preferable as it provides contemporaneous reporting within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of a one month reporting lag of a subsidiary is treated as a change in accounting principleguidance prospectively to its annual and requires retrospective application. The Company determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the lag elimination was $200 of income for the month of December 2013 and has been included within “Other (Income) Expense, net” on the statement of consolidated income for year ended June 30, 2014. Net sales, operating income and net income for the year ended June 30, 2014 would have decreased by $1,100, $100 and $250 had the financial statements been retrospectively adjusted. Net sales, operating income and net income for the year ended June 30, 2013 would have decreased by $900, $400 and $250 had the financial statements been retrospectively adjusted.interim goodwill impairment tests.
NewRecently Issued Accounting PronouncementsGuidance
In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers.
The standard, issued as Accounting Standards Update (ASU)ASU 2014-09, outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including

industry specific guidance. The core principle of this model is that "an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services." On July 9,In August 2015, the FASB agreedissued 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, 2017.2017 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 June 2014,August 2016, the FASB issued its final standard on accounting for share-basedthe classification of certain cash receipts and cash payments whenwithin the termsstatement of an award provide that a performance target could be achieved after the requisite service period. Thecash flows. This standard, issued as ASU 2014-12, clarifies that2016-15, makes a performance target that affects vestingnumber of changes meant to add or clarify guidance on the classification of certain cash receipts and that can be achieved afterpayments in the requisite service period, should be treated as a performance condition. Thestatement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2015,2018, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
In April 2015,October 2016, the FASB issued its final standard on simplifying the presentationincome tax consequences of debt issue costs.intra-entity transfers of assets other than inventory. This standard, issued as ASU 2015-03,2016-16, requires that all costs incurred to issue debt be presented inan entity recognize the balance sheet as a direct reduction fromincome tax consequences of an intra-entity transfer of an asset other than inventory when the carrying valuetransfer occurs and eliminates the exception for an intra-entity transfer of the debt, similar to the presentation of debt discounts.an asset other than inventory. This update is effective for annual and interim financial statement periods beginning after December 15, 2015, and interim periods within those fiscal years,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 the adoption of this guidance will result in the reclassification of the unamortized debt issuance costspronouncement on the consolidated balance sheets, which were $622its financial statements and $703 at June 30, 2015 and 2014, respectively.related disclosures.


NOTE 2: BUSINESS COMBINATIONS
The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition.
KnoxFCX Acquisition
On July 1, 2014,January 31, 2018, the Company acquiredcompleted the acquisition of 100% of the outstanding stockshares of Knox Oil Field SupplyFCX Performance, Inc. (“Knox”("FCX"), headquartered in San Angelo, Texas, fora Columbus, Ohio based distributor of specialty process flow control products and services. The total consideration of $132,000, including cash paid of $118,000 at closing. The primary reasontransferred for the acquisition was $781,781, which was financed by cash-on-hand and a new credit facility comprised of Knox is to complementa $780,000 Term Loan A and expanda $250,000 revolver, effective with the Company’s capabilities to serve the upstream oil and gas industry in the United States.transaction closing. See note 5 Debt. As a distributor of oilfield supplieshighly engineered valves, instruments, pumps and relatedlifecycle services to MRO and OEM customers across diverse industrial and process end markets, this business iswill be included in the Service Center Based DistributionFluid Power & Flow Control Segment. The Company funded the acquisition by drawing $120,000 from the previously uncommitted shelf facility with Prudential Investment Management at a fixed interest rate of 3.19% with an average seven year life. The remaining $14,000 purchase price will be paid as acquisition holdback payments on the first three anniversaries of the acquisition with interest at a fixed rate of 1.50% per annum.

36

The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of KnoxFCX based on their preliminary estimated fair values at the acquisition date:
date, which are subject to adjustment. The purchase accounting will be finalized within one year from the acquisition date.
Knox Acquisition
FCX Acquisition
2015
2018
Cash$11,141
Accounts receivable$19,100
80,836
Inventories18,800
47,325
Other current assets1,657
Property3,900
8,282
Identifiable intangible assets58,500
305,420
Goodwill63,200
439,164
Other assets775
Total assets acquired163,500
$894,600
Accounts payable and accrued liabilities7,200
54,518
Deferred income taxes24,300
Other liabilities2,677
Deferred tax liabilities55,624
Net assets acquired$132,000
$781,781
  
Purchase price$132,800
$784,281
Reconciliation of fair value transferred:  
Working Capital Adjustments(800)(2,500)
Total Consideration$132,000
$781,781
NoneGoodwill acquired of the goodwill acquired$160,814 is expected to be deductible for income tax purposes. The goodwill recognized is attributable primarily to expected synergies
Net sales, operating income and other benefits that the Company believes will resultnet income from the FCX acquisition of Knox.
Reliance Acquisition
On May 1, 2014, the Company acquired 100% of the outstanding stock of Reliance Industrial Products (“Reliance”), headquartered in Nisku, Alberta, Canada, with operations in Western Canada and the Western United States, for a total purchase priceincluded in the amountCompany’s results since January 31, 2018, the date of $188,500. The primary reasons for the acquisition, are to provide the Company enhanced capabilities to serve the upstream oil and gas industry in the United States and Canada. A distributor of fluid conveyance and oilfield supplies, this business is included in the Service Center Based Distribution Segment. The Company funded the acquisition by using available cash in Canada in the amount of $31,900, existing revolving credit facilities of $36,600 and a new $100,000 five year term loan facility, with the remainder of $20,000 to be paid in equal amounts as acquisition holdback payments on the first two anniversaries of the acquisition, plus interest at 2% per annum.

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The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of Reliance based on their estimated fair values at the acquisition date:
follows:
 Reliance Acquisition
 2014
Accounts receivable$20,600
Inventories22,900
Other current assets6,000
Property12,900
Identifiable intangible assets73,200
Goodwill79,500
Total assets acquired215,100
Accounts payable and accrued liabilities15,800
Deferred income taxes19,500
Net assets acquired$179,800
  
Purchase price$188,500
Reconciliation of fair value transferred: 
Cash acquired(1,400)
Working capital adjustments(8,200)
Debt assumed900
Total Consideration$179,800
None of the goodwill acquired is expected to be deductible for income tax purposes. The goodwill recognized is attributable primarily to expected synergies and other benefits that the Company believes will result from the acquisition of Reliance.
 January 31, 2018 to June 30, 2018
Net sales$249,752
Operating income16,845
Net income8,758
The Companycompany incurred $1,448$2,849 in third partythird-party costs during fiscal 20142018 pertaining to the acquisition of Reliance. These expensesFCX, which are included in the selling, distribution and administration expense line in the statementstatements of consolidated income for the year ended June 30, 2014.fiscal 2018.
Knox and Reliance Pro Forma Results (Unaudited)
The following unaudited pro forma consolidated results of operations have been prepared as if the RelianceFCX acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2013 and the Knox acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2014:
2017:
Pro forma, year ended June 30:2014
2013
2018
2017
Sales$2,687,903
$2,600,453
Net sales$3,330,430
$2,943,583
Operating income$184,164
$187,419
234,603
196,194
Net income$121,158
$128,779
158,181
126,270
Diluted net income per share$2.86
$3.03
$4.03
$3.20
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect additional depreciation and amortization that would have been chargedrecorded assuming the fair value adjustments to property, plant, and equipment, and amortizableidentified intangible assets had been applied as of July 1, 2013.2016. 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 Reliance and Knox;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.

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Other Fiscal 2015 Acquisitions
Other acquisitions during the year include the acquisition of substantially all of the net assets of Rodamientos y Derivados del Norte S.A. de C.V., a Mexican distributor of bearings and power transmission products and related products, and Great Southern Bearings / Northam Bearings, a Western Australia distributor of bearings and power transmission products on July 1, 2014 as well as Ira Pump and Supply Inc. (Ira Pump) a Texas distributor of oilfield pumps and supplies on November 3, 2014. These companies are included in the Service Center Based Distribution Segment. The total combined consideration for these acquisitions was approximately $54,900. Net tangible assets acquired were $21,200 and intangibles including goodwill were $33,700, based upon estimated fair values at the acquisition date. The estimated fair values related to Ira Pump are preliminary and subject to adjustment. The Company funded these acquisitions from borrowings under our existing debt facilities. Total acquisition holdback payments of $6,900 will be paid at various times through July 2017. The results of operations for the Mexican, Australian and Ira Pump acquisitions are not material for any period presented.future.
Other Fiscal 2014 Acquisitions2018 Acquisition
In December 2013,On July 3, 2017, the Company acquired substantially all100% of the net assetsoutstanding stock of Texas Oilpatch Services Corporation,Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a Texas distributor of bearings, oil seals, power transmission products,accessories and related replacement parts to the oilfield industry. The acquired businesscomponents for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment. The purchase price for thisthe acquisition was $17,000,$5,920, net tangible assets acquired was $3,863were $3,395, and intangibles, including goodwill was $13,137.$2,525 based upon estimated fair values at the acquisition date. The purchase price includes $2,550$906 of acquisition holdback paymentspayments. 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 have beenwill be paid into an escrow account controlled byon the first three anniversaries of the acquisition with interest at a third party.fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations offor the acquired entity are not material in relation to the Company’sCompany's consolidated financial statements.
Fiscal 2013 Acquisitions2017 Acquisition
In December 2012,On March 3, 2017, the Company acquired substantially all of the net assets of Norma Bearings, Inc.Sentinel Fluid Controls ("Sentinel"), a distributor of bearingshydraulic and power transmission products, located in Laval, Quebec. The acquired businesslubrication components, systems and solutions operating from four locations. Sentinel is included in the Service Center Based DistributionFluid Power & Flow Control segment. In December 2012,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 Parts Associates, Inc.HUB Industrial Supply ("HUB"), a distributor of maintenance suppliesconsumable industrial products operating from three locations - Lake City, FL, Indianapolis, IN, and solutions, headquartered in Cleveland, Ohio. The acquired business is included in the Service Center Based Distribution segment. In November 2012,Las Vegas, NV. On August 3, 2015, the Company acquired substantially all of the net assets of Hyquip,Atlantic Fasteners Co., Inc., a Wisconsin distributor of a broad line of hydraulic, rubber and plastic industrial hose and tubing, plus related accessories. The acquired business is included in the Fluid Power Businesses segment. In September 2012, the Company acquired 100% of the outstanding stock of Bearings & Oil Seals Specialists Inc. ("Atlantic Fasteners"), a distributor of gaskets, seals, bearingC-Class consumables including industrial fasteners and power transmission products,related industrial supplies located in Hamilton, Ontario. The acquired business isAgawam, MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. In August 2012,On October 1, 2015, the Company acquired 100%substantially all of the outstanding stocknet assets of SKF Group's company-owned distribution businessS.G. Morris Co. ("SGM"). SGM, headquartered in AustraliaCleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania and New Zealand ("Applied Australia"). As one of the largest bearing suppliers in these markets, Applied Australia also distributes seals, lubrication products,West Virginia and power transmission products. The acquired business is included in the Service Center Based DistributionFluid Power & Flow Control segment.
The following table summarizes thetotal 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 of assets acquired and liabilities assumed for these acquisitions:
 2013
Accounts receivable$7,500
Inventories23,700
Other current assets200
Property1,100
Identifiable Intangibles assets19,800
Goodwill24,400
Total assets acquired76,700
Accounts payable and accrued liabilities1,900
Other current liabilities6,200
Net assets acquired$68,600
  
Purchase price$68,600


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at the acquisition dates. The purchase price included $1,015 that was deferred, sometotal combined consideration includes $3,300 of which has been paid as acquisition holdback payments, of which $1,250 was paid during fiscal year 2017. The remaining balance of $2,050 is included in fiscal 2015other 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

available cash and 2014. Additional 2013 pro-forma information hasborrowings under the revolving credit facility at variable interest rates. The acquisition prices and the results of operations for the acquired entities are not been included as it is not material.material in relation to the Company's consolidated financial statements.
Holdback Liabilities for Acquisitions
Acquisition holdback payments of approximately $19,200, $6,500$2,592, $283, $415 and $3,900$75 will be made in fiscal 2016, 20172019, 2020, 2021, and 2018,2024, respectively. The related liabilities for these payments are recorded in the Consolidated Balance Sheetsconsolidated balance sheets in other current liabilities for the amounts due in fiscal year 20162019 and other liabilities for the amounts due in fiscal years 20172020 through 2018.2024.
NOTE 3: INVENTORIES
Inventories consist of the following:
June 30, 2015
 2014
 2018
 2017
U.S. inventories at average cost $397,524
 $363,692
 $443,521
 $373,984
Foreign inventories at average cost 116,674
 123,468
 117,711
 108,734
 514,198
 487,160
 561,232
 482,718
Less: Excess of average cost over LIFO cost for U.S. inventories 151,779
 151,413
 139,163
 137,573
Inventories on consolidated balance sheets $362,419
 $335,747
 $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 2013,2017, reductions in U.S. inventories, primarily in the bearings pool which included the scrapping of approximately $6,000 of product, resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The overall impact of LIFO layer liquidations increased gross profit by $6,300 in fiscal 2013. There were no LIFO layer liquidations in fiscal 2015 or 2014.
NOTE 4: GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for both the Service Center Based Distribution Segmentsegment and the Fluid Power Businesses& Flow Control segment for the years ended June 30, 20152018 and 20142017 are as follows:
 Service Center Based Distribution
 Fluid Power Businesses
 Total
Balance at July 1, 2013$105,920
 $929
 $106,849
Goodwill acquired during the year84,798
 —
 84,798
Other, primarily currency translation1,847
 —
 1,847
Balance at June 30, 2014192,565
 929
 193,494
Goodwill acquired during the year77,728
 —
 77,728
Other, primarily currency translation(16,816) —
 (16,816)
Balance at June 30, 2015$253,477
 $929
 $254,406
 Service Center Based Distribution
 Fluid Power & Flow Control
 Total
Balance at July 1, 2016$198,486
 $4,214
 $202,700
Goodwill added during the year3,220
 625
 3,845
Other, primarily currency translation34
 (444) (410)
Balance at June 30, 2017201,740
 4,395
 206,135
Goodwill added during the year2,525
 439,164
 441,689
Other, primarily currency translation(1,181) —
 (1,181)
Balance at June 30, 2018$203,084
 $443,559
 $646,643
At June 30, 2015, 2014During 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 2013, accumulatedtrade 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 losses subsequenttest 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 fiscal year 2002 totaled $36,605 and relate entirelyits 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 Fluid Power Businesses segment.U.S. service center reporting unit based on the relative fair value as of July 1, 2016.
The Company has sevensix (6) reporting units and performed itsfor which an annual goodwill impairment assessment was performed as of January 1, 2015.2018.  The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts

by at least 30% as of January 1, 2018. The fair values of the reporting units in accordance with the goodwill impairment test were determined using the Income and Market approaches.  The Income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors. The Market approach utilizes an analysis of comparable publicly traded companies. 
The 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 had material excesses ofunits’ fair value compared tosubstantially exceeded their carrying amounts. The Company concluded thatcarrying value for two (2) reporting units (Canada service center and Australia / Australia/New Zealand) had excessZealand 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 approximately $39,000 and $4,000 or 15% and 14%, respectively when compared tothe reporting unit goodwill with the carrying amountsamount of approximately $258,000goodwill.  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 $28,000, respectively. 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 testtests have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions forecast at the assessment date.measurement dates. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, themeasurement date.  The Company evaluates the appropriateness of its assumptions as well as itsand overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable.years.  Key assumptions, all of which are Level 3 inputs,based assumptions relate to pricing trends, inventory costs, discount rate, customer demand, and the long-term growth and foreign exchange rates.revenue growth.  A number of benchmarks from independent industry and other economic publications were also used.  Changes in future actual results, assumptions, and estimates after the assessmentmeasurement date may lead to an outcome where additional impairment charges would be required in future

40

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:following:
June 30, 2015Amount
 
Accumulated
Amortization

 
Net
Book Value

June 30, 2018Amount
 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:          
Customer relationships$225,332
 $65,789
 $159,543
$465,691
 $125,009
 $340,682
Trade names42,689
 13,187
 29,502
112,939
 22,454
 90,485
Vendor relationships14,465
 7,258
 7,207
11,425
 7,382
 4,043
Non-competition agreements4,578
 2,002
 2,576
2,761
 2,024
 737
Total Intangibles$287,064
 $88,236
 $198,828
$592,816
 $156,869
 $435,947

June 30, 2014Amount
 
Accumulated
Amortization

 
Net
Book Value

June 30, 2017Amount
 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:          
Customer relationships$170,395
 $48,285
 $122,110
$235,009
 $102,414
 $132,595
Trade names36,912
 10,394
 26,518
43,873
 19,295
 24,578
Vendor relationships15,446
 6,628
 8,818
14,152
 9,141
 5,011
Non-competition agreements3,322
 1,260
 2,062
3,788
 2,410
 1,378
Total Intangibles$226,075
 $66,567
 $159,508
$296,822
 $133,260
 $163,562
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
During 2015,2018, the Company acquired identifiable intangible assets with ana preliminary acquisition cost allocation and weighted-average life as follows:
Acquisition Cost Allocation
 Weighted-Average LifeAcquisition Cost Allocation
 Weighted-Average Life
Customer relationships$68,078
 19.5 years$234,370
 20.0 years
Trade names7,627
 14.7 years71,050
 15.0 years
Non-competition agreements1,664
 5.0 years
Total Intangibles Acquired$77,369
 18.7 years$305,420
 18.8 years
AmortizationAmortization of identifiable intangibles totaled $25,797, $14,023$32,065, $24,371 and $13,233$25,580 in fiscal 2015, 20142018, 2017 and 2013,2016, 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, 20152018 is estimated to be $24,600 for 2016, $23,000 for 2017, $20,900 for 2018, $19,200$44,000 for 2019, $42,500 for 2020, $40,200 for 2021, $37,800 for 2022 and $17,500$35,300 for 2020.2023.
A significant portion of our intangible assets relate to recent acquisitions that primarily operate in the oil and gas sectors. Considering the recent downturn in the energy market, a prolonged period of low oil and natural gas prices may result in asset impairments, including potential impairment of the carrying value of our goodwill and finite-lived intangible assets.


41

NOTE 5: DEBT
Revolving Credit Facility & Term Loan
TheIn January 2018, in conjunction with the acquisition of FCX, the Company hasrefinanced its existing credit facility and entered into a revolvingnew five-year credit facility with a group of banks expiring in May 2017.January 2023. This agreement provides for a $780,000 unsecured borrowings of up to $150,000.term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range from 0.09%0.10% to 0.175%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 prime, or the bank’s cost of fundsprime at the Company’sCompany's discretion. This agreement also enables the Company to refinance this debt on a long-term basis. At June 30, 2015 and 2014,2018, the Company had $52,000 and $69,000, respectively,$775,125 outstanding under this credit facility.the term loan and $19,500 outstanding under the revolver. Unused lines under this facility, net of outstanding letters of credit of $3,764$3,625 to secure certain insurance obligations, totaled $94,236$226,875 at June 30, 20152018, and arewere available to fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the loansterm loan as of June 30, 2018 was 4.13%. The weighted average interest rate on the amount outstanding onunder the revolving credit facility as of June 30, 20152018 was 1.15%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 theeither revolving credit agreement, in the amount of $1,841,$2,698 as of June 30, 2018 and June 30, 2017, respectively, in order to secure certain insurance obligations.
Other Long-Term Borrowings
The Company entered into a $100,000 unsecured five-year term loan with a group of banks in April2014 with a final maturity date in April2019. Borrowings under this agreement carry a variable interest rate tied to LIBOR, which at June 30, 2015 was a rate of 1.19%. The term loan has an outstanding amount of $96,875 and $99,375 at June 30, 2015 and 2014, respectively.
In April 2014 the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency with a remaining term of nine years, maturing in May 2024. At June 30, 2015 and 2014, $2,120 and $2,337 was outstanding, respectively.
At June 30, 2015,2018 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%, which isand are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principleprincipal amount of $50,000, and carry a fixed interest rate of 3.21% which is, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2015,2018, $50,000 in additional financing was available under this facility.

In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% 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 YearAggregate Maturity
Aggregate Maturity
2016$3,349
2017$57,227
2018$5,856
2019$83,359
$19,734
2020$25,238
49,613
202179,241
202284,120
2023708,124
Thereafter$145,966
25,231
Covenants
The revolvingnew credit facility the term loan agreement, and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2015,2018, the most restrictive of these covenants required that the Company have net indebtedness less than three4.25 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.


42

NOTE 6: FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at June 30, 20152018 and June 30, 20142017 totaled $9,330$10,318 and $11,011,$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, 2015,2018, 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).


NOTE 7: INCOME TAXES
Income Before Income Taxes
The components of income before income taxes are as follows:
Year Ended June 30,2015
 2014
 2013
2018
 2017
 2016
U.S.$152,618
 $147,980
 $153,546
$186,874
 $154,472
 $139,960
Foreign23,253
 18,282
 24,119
17,844
 12,494
 (60,982)
Income before income taxes$175,871
 $166,262
 $177,665
$204,718
 $166,966
 $78,978
Provision
The provision (benefit) for income taxes consists of:
Year Ended June 30,2015
 2014
 2013
2018
 2017
 2016
Current:          
Federal$52,861
 $50,455
 $38,859
$48,131
 $26,456
 $45,226
State and local6,884
 6,576
 5,736
8,038
 4,692
 6,349
Foreign5,603
 4,619
 4,742
5,309
 4,760
 4,407
Total current65,348
 61,650
 49,337
61,478
 35,908
 55,982
Deferred:          
Federal(3,799) (5,328) 10,277
5,955
 852
 397
State and local(153) (267) 346
(586) 535
 (30)
Foreign(1,009) (2,614) (444)(3,754) (4,239) (6,948)
Total deferred(4,961) (8,209) 10,179
1,615
 (2,852) (6,581)
Total$60,387
 $53,441
 $59,516
$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.

The exercise of non-qualified stock appreciation rights and options during fiscal 2015, 20142018, 2017 and 20132016 resulted in $352, $1,462$419, $1,921 and $1,675,$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 option price.fair value of the options on the grant date. Vesting of stock awards and other stock compensation in fiscal 2015, 20142018, 2017 and 20132016 resulted in $690, $1,211$430, $482 and $890,$(4), respectively, of incremental income tax benefits (expense) over the amounts previously reported for financial reporting purposes. TheseDue 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.

43

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 30,2015
 2014
 2013
2018
 2017
 2016
Statutory income tax rate35.0 % 35.0 % 35.0 %28.1 % 35.0 % 35.0 %
Effects of:          
State and local taxes2.5 % 2.4 % 2.3 %3.1
 2.8
 5.2
U.S. tax on foreign income, net— % (1.6)% — %
Foreign income taxes(2.5)% (2.6)% (2.3)%
U.S. federal tax reform3.1
 —
 —
Worthless stock deduction—
 (13.9) —
Stock compensation(0.4) (1.4) —
Goodwill impairment—
 —
 27.1
Impact of foreign operations(1.3) (2.3) (3.0)
Deductible dividend(0.5)% (0.5)% (0.5)%(0.3) (0.4) (0.9)
Valuation Allowance0.5 % — % — %
Valuation allowance(0.9) 0.3
 0.5
Other, net(0.7)% (0.6)% (1.0)%(0.6) (0.3) (1.3)
Effective income tax rate34.3 % 32.1 % 33.5 %30.8 % 19.8 % 62.6 %
Consolidated Balance Sheets
Significant components of the Company’s deferred tax assets and liabilities are as follows:
June 30,2015
 2014
2018
 2017
Deferred tax assets:      
Compensation liabilities not currently deductible$28,902
 $30,662
$19,334
 $26,873
Expenses and reserves not currently deductible9,115
 8,364
Other expenses and reserves not currently deductible13,169
 11,601
Goodwill and intangibles7,363
 8,294
3,197
 5,661
Foreign tax credit1,155
 —
Net operating loss carryforwards (expiring in years 2017-2034)860
 386
Foreign tax credit (expiring in years 2025-2026)413
 709
Net operating loss carryforwards (expiring in years 2023-2038)11,315
 5,729
Other289
 281
199
 119
Total deferred tax assets47,684
 47,987
47,627
 50,692
Less: Valuation allowance(917) —
(38) (1,831)
Deferred tax assets, net of valuation allowance46,767
 47,987
47,589
 48,861
Deferred tax liabilities:      
Inventories(5,499) (6,490)(8,196) (7,447)
Goodwill and intangibles(38,707) (23,254)(86,176) (30,482)
Depreciation and differences in property bases(9,328) (10,219)(9,294) (10,122)
Total deferred tax liabilities(53,534) (39,963)(103,666) (48,051)
Net deferred tax (liabilities) assets$(6,767) $8,024
$(56,077) $810
Net deferred tax (liabilities) assets are classified as follows:      
Other current assets$13,293
 $11,371
Deferred tax assets (long-term)97
 21,166
Other assets$2,103
 $8,985
Other liabilities(20,157) (24,513)(58,180) (8,175)
Net deferred tax (liabilities) assets$(6,767) $8,024
$(56,077) $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

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. federal income taxes are provided on the portiontaxation. As of non-U.S. subsidiaries' income that is not considered to be permanently reinvested outside the U.S. and may be remitted to the U.S. At June 30, 2015,2018, all such undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested and for whichreinvested.  Therefore, no U.S. tax hastaxes have been provided totaled approximately $139,042. Determinationthat would result from the remittance of thesuch earnings.  The net amount of the unrecognized tax liability with respect to the distribution of these earnings is not practicable; however,estimated to be approximately $1,986.  In addition, we expect foreign tax credits would be available to either offset or partially reduce U.S. income taxesthe tax cost in the event of a distribution.
In 2014, the Company recognized a tax benefit of $2,804 related to U.S. tax on foreign income which reduced the Company's effective tax rate by approximately 1.6%. This tax benefit was due to the reversal of taxes previously

44

accrued on a portion of the undistributed earnings of non-U.S. subsidiaries applicable to a change in the permanent reinvestment assertion. In 2015, $17,793 of cash was distributed by one of the Company's non-U.S. subsidiaries as a non-taxable return of capital. All undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested outside of the U.S. at June 30, 2015.
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, 2015, 20142018, 2017 and 2013:2016:
Year Ended June 30,2015
 2014
 2013
2018
 2017
 2016
Unrecognized Income Tax Benefits at beginning of the year$2,364
 $2,655
 $1,539
$3,533
 $2,915
 $2,604
Current year tax positions472
 730
 957
143
 574
 539
Prior year tax positions—
 —
 790
636
 259
 —
Expirations of statutes of limitations(160) (1,007) (565)(324) (189) (132)
Settlements(72) (14) (66)—
 (26) (96)
Unrecognized Income Tax Benefits at end of year$2,604
 $2,364
 $2,655
$3,988
 $3,533
 $2,915
Included in the balance of unrecognized income tax benefits at June 30, 2015, 20142018, 2017 and 20132016 are $2,377, $2,104$3,725, $3,323 and $2,342,$2,691, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
During 2015, 20142018, 2017 and 2013,2016, the Company recognized $49$(110) and $16$163 and $3$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 $497$677 and $449$787 as of June 30, 20152018 and 2014,2017, 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 20122015 through 20152018 and to state and local income tax examinations for the tax years 20092012 through 2015.2018. In addition, the Company is subject to foreign income tax examinations for the tax years 20082011 through 2015.2018.
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.


NOTE 8: SHAREHOLDERS’ EQUITY
Treasury Shares
At June 30, 2015,2018, 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.

45

Accumulated Other Comprehensive Income (Loss)
Changes in the accumulated other comprehensive income (loss) for the years ended June 30, 20152018, 2017, and 2014, is2016, are comprised of the following: amounts, shown net of taxes:
 Foreign currency translation adjustment
 Unrealized gain (loss) on securities available for sale
 Postemployment benefits
 Total Accumulated other comprehensive income (loss)
Balance at July 1, 2012$1,718
 $(58) $(6,229) $(4,569)
Other comprehensive income (loss)(1,358) 6
 1,967
 615
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 533
 533
Net current-period other comprehensive income (loss), net of taxes(1,358) 6
 2,500
 1,148
Balance at June 30, 2013$360
 $(52) $(3,729) $(3,421)
Other comprehensive income (loss)629
 73
 871
 1,573
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 233
 233
Net current-period other comprehensive income (loss), net of taxes629
 73
 1,104
 1,806
Balance at June 30, 2014$989
 $21
 $(2,625) $(1,615)
Other comprehensive income (loss)(58,233) (25) (472) (58,730)
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 174
 174
Net current-period other comprehensive income (loss), net of taxes(58,233) (25) (298) (58,556)
Balance at June 30, 2015$(57,244) $(4) $(2,923) $(60,171)
 Foreign currency translation adjustment
 Unrealized (loss) gain on securities available for sale
 Post-employment benefits
 Total accumulated other comprehensive (loss) income
Balance at July 1, 2015$(57,244) $(4) $(2,923) $(60,171)
Other comprehensive loss(24,441) (34) (1,215) (25,690)
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 315
 315
Net current-period other comprehensive loss(24,441) (34) (900) (25,375)
Balance at June 30, 2016(81,685) (38) (3,823) (85,546)
Other comprehensive income2,238
 59
 1,239
 3,536
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 308
 308
Net current-period other comprehensive income2,238
 59
 1,547
 3,844
Balance at June 30, 2017(79,447) 21
 (2,276) (81,702)
Other comprehensive (loss) income(8,549) 20
 524
 (8,005)
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 (45) (45)
Amounts reclassified for certain income tax effects to retained earnings22
 9
 (502) (471)
Net current-period other comprehensive (loss) income(8,527) 29
 (23) (8,521)
Balance at June 30, 2018$(87,974) $50
 $(2,299) $(90,223)

Other Comprehensive Income (Loss)
Details of other comprehensive income (loss) are as follows:
Year Ended June 30,2015 2014 20132018 2017 2016
Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
 Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
 Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
 Pre-Tax Amount
 Tax Expense
 Net Amount
 Pre-Tax Amount
 Tax (Benefit) Expense
 Net Amount
Foreign currency translation adjustments$(58,233) $—
 $(58,233) $629
 $—
 $629
 $(1,358) $—
 $(1,358)$(8,875) $(326) $(8,549) $2,238
 $—
 $2,238
 $(24,441) $—
 $(24,441)
Postemployment benefits:                 
Actuarial gain (loss) on remeasurement(776) (304) (472) 1,402
 531
 871
 3,153
 1,186
 1,967
Post-employment benefits:                 
Actuarial gain (loss) on re-measurement709
 185
 524
 2,038
 799
 1,239
 (1,998) (783) (1,215)
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs286
 112
 174
 382
 149
 233
 872
 339
 533
(73) (28) (45) 506
 198
 308
 518
 203
 315
Unrealized gain (loss) on investment securities available for sale(38) (13) (25) 112
 39
 73
 10
 4
 6
37
 17
 20
 91
 32
 59
 (52) (18) (34)
Other comprehensive income (loss)$(58,761) $(205) $(58,556) $2,525
 $719
 $1,806
 $2,677
 $1,529
 $1,148
Reclassification of certain income tax effects to retained earnings—
 471
 (471) —
 —
 —
 —
 —
 —
Other comprehensive (loss) income$(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 RSUsRestricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury

46

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 30,2015
 2014
 2013
2018
 2017
 2016
Net Income$115,484
 $112,821
 $118,149
$141,625
 $133,910
 $29,577
Average Shares Outstanding:          
Weighted-average common shares outstanding for basic computation40,892
 41,942
 42,060
38,752
 39,013
 39,254
Dilutive effect of potential common shares295
 389
 482
529
 391
 212
Weighted-average common shares outstanding for dilutive computation41,187
 42,331
 42,542
39,281
 39,404
 39,466
Net Income Per Share — Basic$2.82
 $2.69
 $2.81
$3.65
 $3.43
 $0.75
Net Income Per Share — Diluted$2.80
 $2.67
 $2.78
$3.61
 $3.40
 $0.75
Stock appreciation rights and options relating to 435, 28966, 141 and 212775 shares of common stock were outstanding at June 30, 2015, 20142018, 2017 and 2013,2016, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.


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 20112015 Plan, which expires in 2016,2020, 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 30,2015
 2014
 2013
2018
 2017
 2016
SARs and options$1,610
 $1,808
 $2,317
$1,961
 $1,891
 $1,543
Performance shares836
 309
 1,074
2,006
 1,331
 446
Restricted stock and RSUs2,015
 2,394
 2,370
2,660
 2,298
 2,078
Total compensation costs under award programs$4,461
 $4,511
 $5,761
$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 $1,749, $1,768$1,923, $4,848 and $2,241$1,595 for fiscal years 2015, 20142018, 2017 and 2013,2016, 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 paid (or with the potential to be paid)paid at June 30, 20152018 are summarized in the table below:
June 30,
(Shares in thousands)
2015
 Expected Period of Recognition (Years)
June 30,2018
 Average Expected Period of Expected Recognition (Years)
SARs and options$1,792
 2.4$3,729
 2.5
Performance shares3,701
 1.73,282
 1.7
Restricted stock and RSUs1,898
 2.32,173
 1.9
Total unrecognized compensation costs under award programs$7,391
 2.0$9,184
 2.1
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.02.1 years. The aggregate number of shares of common stock which may be awarded under the 20112015 Plan is 2,000;2,500; shares available for future grants at June 30, 20152018 were 1,107.1,655.

47

Stock Appreciation Rights and Stock Options
The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2015, 20142018, 2017
and and 20132016 are:
2015
 2014
 2013
2018
 2017
 2016
Expected life, in years4.7
 4.6
 5.5
6.0
 4.8
 4.4
Risk free interest rate1.4% 1.3% 0.9%2.1% 1.2% 1.3%
Dividend yield2.5% 2.5% 2.5%2.5% 2.5% 2.5%
Volatility29.0% 31.8% 43.3%24.3% 24.1% 26.0%
Per share fair value of SARs and stock options granted during the year$9.53 $11.02 $13.11$11.25 $7.97 $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.

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:
Shares
 
Weighted-Average
Exercise Price

Shares
 
Weighted-Average
Exercise Price

Year Ended June 30, 2015 
Year Ended June 30, 2018 
(Shares in thousands)Shares
 
Weighted-Average
Exercise Price

Shares
 
Weighted-Average
Exercise Price

Outstanding, beginning of year  
Granted  
Exercised(75) 25.23
(58) 37.55
Forfeited(56) 48.47
(45) 55.64
Outstanding, end of year1,116
 $35.86
1,401
 $45.32
Exercisable at end of year781
 $31.32
789
 $41.08
Expected to vest at end of year1,379
 $45.22
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and exercisableexpected to vest at June 30, 20152018 were 5.66.6, 5.3, and 4.56.6 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and exercisableexpected to vest at June 30, 20152018 were $7,559$34,869 $22,927, and $7,311,$34,440, respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2015, 20142018, 2017, and 20132016 was $1,601, $5,241$1,765, $8,396, and $7,135,$2,422, respectively.
The total fair value of shares vested during fiscal 2015, 20142018, 2017, and 20132016 was $2,187, $2,080$2,149, $1,788, and $2,135,$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, 20152018 is presented below:below:
Shares
 
Weighted-Average
Grant-Date  
Fair Value

Shares
 
Weighted-Average
Grant-Date  
Fair Value

Year Ended June 30, 2015 
Year Ended June 30, 2018 
(Shares in thousands)Shares
 
Weighted-Average
Grant-Date  
Fair Value

Shares
 
Weighted-Average
Grant-Date  
Fair Value

Nonvested, beginning of year  
Awarded  
Forfeitures(1) 50.40
Vested(20) 27.28
(10) 48.76
Nonvested, end of year38
 $46.66
93
 $45.16

48

The Committee set three one-year goals for each of the 2015, 20142018, 2017 and 20132016 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. Based uponFor the outstanding grants as of June 30, 2015,2018, the maximum number of shares which could be earned in future periods was 78.67.

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 onethree 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, 20152018 is
presented below:
Shares
 
Weighted-Average
Grant-Date  
Fair Value

Shares
 
Weighted-Average
Grant-Date  
Fair Value

Year Ended June 30, 2015 
Year Ended June 30, 2018 
(Share amounts in thousands)Shares
 
Weighted-Average
Grant-Date  
Fair Value

Shares
 
Weighted-Average
Grant-Date  
Fair Value

Nonvested, beginning of year  
Granted  
Forfeitures(7) 48.81
(10) 54.96
Vested(84) 32.54
(43) 52.58
Nonvested, end of year90
 $46.18
116
 $51.27

NOTE 10: BENEFIT PLANS
Retirement Savings Plan
Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company had also made discretionary profit-sharing contributions to the Retirement Savings Plan for fiscal 2013. The discretionary profit-sharing contribution was ended in fiscal 2014. The Company’s expense for profit sharing and matching of employees’ 401(k) contributions was $3,156, $2,788$6,551, $6,677 and $11,231$2,535 during fiscal 2015, 20142018, 2017 and 2013,2016, 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. Non-employee directors were able to defer receipt of director fees until January 1, 2015. The Company funds these deferred compensation liabilities by making contributions to rabbi trusts. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.
Post-employment Benefit Plans
The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan 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), an unfunded,a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $300 ,$234$359, $289, and $233$268 of expense associated with this plan in fiscal 2015, 20142018, 2017, and 2013,2016, 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.

49
Table The plan accruals were frozen as of ContentsApril 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

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:
Pension Benefits Retiree Health Care BenefitsPension Benefits Retiree Health Care Benefits
2015
 2014
 2015
 2014
2018
 2017
 2018
 2017
Change in benefit obligation:              
Benefit obligation at beginning of the year$34,558
 $40,664
 $2,790
 $3,719
$24,411
 $26,605
 $1,684
 $2,235
Service cost97
 77
 53
 48
124
 126
 19
 29
Interest cost896
 1,180
 95
 139
729
 687
 52
 63
Plan participants’ contributions—
 —
 64
 63
—
 —
 68
 69
Benefits paid(6,697) (7,251) (238) (246)(3,181) (1,562) (223) (237)
Amendments(8) 188
 
 —
—
 —
 —
 (245)
Actuarial (gain) loss during year1,148
 (300) (620) (933)
Actuarial gain during year(549) (1,445) (109) (230)
Benefit obligation at end of year$29,994
 $34,558
 $2,144
 $2,790
$21,534
 $24,411
 $1,491
 $1,684
Change in plan assets:              
Fair value of plan assets at beginning of year$7,245
 $6,697
 $—
 $—
$6,530
 $6,737
 $—
 $—
Actual gain (loss) on plan assets247
 763
 —
 —
Actual gain on plan assets516
 578
 —
 —
Employer contributions6,390
 7,036
 174
 183
3,837
 776
 155
 168
Plan participants’ contributions—
 —
 64
 63
—
 —
 68
 69
Benefits paid(6,697) (7,251) (238) (246)(3,181) (1,561) (223) (237)
Fair value of plan assets at end of year$7,185
 $7,245
 $—
 $—
$7,702
 $6,530
 $—
 $—
Funded status at end of year$(22,809) $(27,313) $(2,144) $(2,790)$(13,832) $(17,881) $(1,491) $(1,684)
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive income (loss)loss for the post-employment plans were as follows:
Pension Benefits Retiree Health Care BenefitsPension Benefits Retiree Health Care Benefits
June 30,2015
 2014
 2015
 2014
2018
 2017
 2018
 2017
Amounts recognized in the consolidated balance sheets:              
Other current liabilities$5,256
 $6,390
 $220
 $220
$3,298
 $2,814
 $220
 $220
Post-employment benefits17,553
 20,923
 1,924
 2,570
10,534
 15,067
 1,271
 1,464
Net amount recognized$22,809
 $27,313
 $2,144
 $2,790
$13,832
 $17,881
 $1,491
 $1,684
Amounts recognized in accumulated other comprehensive (loss) income:       
Amounts recognized in accumulated other comprehensive loss:       
Net actuarial (loss) gain$(7,311) $(6,474) $1,492
 $960
$(4,781) $(5,798) $1,121
 $1,167
Prior service cost(208) (293) 1,219
 1,490
—
 (35) 554
 922
Total amounts recognized in accumulated other comprehensive (loss) income$(7,519) $(6,767) $2,711
 $2,450
Total amounts recognized in accumulated other comprehensive loss$(4,781) $(5,833) $1,675
 $2,089

50

The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets:
Pension BenefitsPension Benefits
June 30,2015
 2014
2018
 2017
Projected benefit obligations$29,994
 $34,558
$21,534
 $24,411
Accumulated benefit obligations29,994
 34,558
21,534
 24,411
Fair value of plan assets7,185
 7,245
7,702
 6,530

The net periodic costs (benefits) are as follows:
Pension Benefits Retiree Health Care BenefitsPension Benefits Retiree Health Care Benefits
Year Ended June 30,2015
 2014
 2013
 2015
 2014
 2013
2018
 2017
 2016
 2018
 2017
 2016
Service cost$97
 $77
 $78
 $53
 $48
 $80
$124
 $126
 $91
 $19
 $29
 $22
Interest cost896
 1,180
 1,260
 95
 139
 188
729
 687
 879
 52
 63
 75
Expected return on plan assets(495) (416) (403) —
 —
 —
(472) (460) (491) —
 —
 —
Recognized net actuarial loss (gain)559
 611
 735
 (87) (38) (53)424
 872
 913
 (154) (181) (210)
Amortization of prior service cost86
 78
 83
 (272) (271) 107
27
 86
 86
 (369) (271) (271)
Recognition of prior service cost upon plan curtailment8
 —
 —
 —
 —
 —
Net periodic cost (benefits)$1,143
 $1,530
 $1,753
 $(211) $(122) $322
$840
 $1,311
 $1,478
 $(452) $(360) $(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 and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $914 and $86, respectively.$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 $211$121 and $271,$369, respectively.
Assumptions
TheA 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:
Pension Benefits Retiree Health Care BenefitsPension Benefits Retiree Health Care Benefits
June 30,2015
 2014
 2015
 2014
2018
 2017
 2018
 2017
Assumptions used to determine benefit obligations at year end:              
Discount rate3.0% 2.8% 4.0% 3.8%3.5% 2.8% 3.8% 3.3%
Assumptions used to determine net periodic benefit cost:              
Discount rate2.8% 3.0% 3.8% 4.0%2.8% 2.3% 3.3% 2.9%
Expected return on plan assets7.0% 7.0% N/A
 N/A
7.0% 7.0% N/A
 N/A
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 6.8% and 7.0% as of June 30, 20152018 and 2014,2017, respectively, decreasing to 5.0% by 2023.2027.
A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 20152018 and for the year then ended:
One-Percentage Point One-Percentage Point 
Increase
 Decrease
Increase Decrease
Effect on total service and interest cost components of periodic expense$20
 $(17)$9
 $(8)
Effect on post-retirement benefit obligation209
 (177)152
 (130)

51

Plan Assets
The fair value of each major class of plan assets for the Company’s Qualified Defined Benefit Retirement Plan areis valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair values and target allocation as of June 30:
Target Allocation Fair ValueTarget Allocation Fair Value
 2015
 2014
 2018
 2017
Asset Class:        
Equity* securities (Level 1)40 – 70% $4,022
 $3,813
40 – 70% $6,226
 $3,880
Debt securities (Level 2)20 – 50% 2,930
 3,155
20 – 50% 1,337
 2,538
Other (Level 1)0 – 20% 233
 277
0 – 20% 139
 112
Total100% $7,185
 $7,245
100% $7,702
 $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 $5,300$3,300 to its pension benefit plans and $170$130 to its retiree health care benefit plans in fiscal 2016.2019. Contributions do not equal estimated future benefit payments as certain payments are made from plan assets.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 YearsPension Benefits
 
Retiree Health  
 Care Benefits

2016$5,600
 $170
20171,800
 180
20182,300
 190
20194,000
 180
20203,300
 170
2021 through 20257,400
 620
During Fiscal YearsPension Benefits
 
Retiree Health  
 Care Benefits

2019$3,700
 $130
20203,800
 120
20211,300
 110
20221,300
 110
20231,400
 100
2024 through 20285,200
 530



52

NOTE 11: LEASES
The Company leases many service center and distribution center facilities, vehicles and equipment under non-cancelable lease agreements accounted for as operating leases. The Company leased its corporate headquarters facility until purchasing it in April 2014. The minimum annual rental commitments under non-cancelable operating leases as of June 30, 20152018 are as follows:
During Fiscal Years  
2016$24,900
201719,700
201814,600
201910,900
$38,100
20205,800
27,500
202117,800
202211,200
20235,800
Thereafter6,500
11,000
Total minimum lease payments$82,400
$111,400
Rental expense incurred for operating leases, principally from leases for real property, vehicles and computer equipment was $39,300$41,000 in 2015, $36,9002018, $35,900 in 20142017 and $36,300$37,300 in 2013,2016, and was classified within selling, distribution and administrative expenses onin the Statementsstatements of Consolidated Income.consolidated income.
The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $3,100, $2,500$2,400, $2,400, and $1,200$3,800 and in fiscal 2015, 20142018, 2017, and 2013.2016, 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 Businesses.& 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 Businesses& 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.

53

The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power Businesses& Flow Control segment to the Service Center Based Distribution segment of $24,087, $21,809$25,556, $22,719, and $20,217,$20,261, in fiscal 2015, 20142018, 2017, and 2013,2016, respectively, have been eliminated in
the following table.table.

Segment Financial Information
Service Center
Based Distribution

 
Fluid Power
Businesses

 Total
Service Center
Based Distribution

 Fluid Power & Flow Control
 Total
Year Ended June 30, 2015     
Year Ended June 30, 2018     
Net sales$2,254,768
 $496,793
 $2,751,561
$2,346,418
 $726,856
 $3,073,274
Operating income for reportable segments140,421
 48,535
 188,956
136,718
 83,194
 219,912
Assets used in the business1,230,543
 204,425
 1,434,968
1,198,296
 1,087,445
 2,285,741
Depreciation and amortization of property15,196
 1,382
 16,578
15,336
 2,462
 17,798
Capital expenditures13,531
 1,402
 14,933
18,492
 4,738
 23,230
Year Ended June 30, 2014     
Year Ended June 30, 2017     
Net sales$1,973,359
 $486,519
 $2,459,878
$2,180,358
 $413,388
 $2,593,746
Operating income for reportable segments118,857
 44,621
 163,478
115,794
 46,569
 162,363
Assets used in the business1,116,311
 217,858
 1,334,169
1,187,054
 200,541
 1,387,595
Depreciation and amortization of property12,399
 1,578
 13,977
14,375
 931
 15,306
Capital expenditures18,744
 1,446
 20,190
14,566
 2,479
 17,045
Year Ended June 30, 2013     
Year Ended June 30, 2016     
Net sales$2,003,440
 $458,731
 $2,462,171
$2,150,478
 $368,950
 $2,519,428
Operating income for reportable segments138,484
 41,083
 179,567
113,111
 37,174
 150,285
Assets used in the business859,547
 199,159
 1,058,706
1,132,222
 179,803
 1,312,025
Depreciation and amortization of property10,692
 1,809
 12,501
15,049
 917
 15,966
Capital expenditures10,415
 1,799
 12,214
12,500
 630
 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 30,2015
 2014
 2013
2018
 2017
 2016
Operating income for reportable segments$188,956
 $163,478
 $179,567
$219,912
 $162,363
 $150,285
Adjustments for:          
Intangible amortization — Service Center Based Distribution19,561
 7,336
 5,829
17,375
 18,954
 19,913
Intangible amortization — Fluid Power Businesses6,236
 6,687
 7,404
Intangible amortization — Fluid Power & Flow Control14,690
 5,417
 5,667
Goodwill Impairment — Service Center Based Distribution—
 —
 64,794
Corporate and other income, net(21,460) (14,903) (10,065)(37,980) (37,394) (29,871)
Total operating income184,619
 164,358
 176,399
225,827
 175,386
 89,782
Interest expense, net7,869
 249
 165
23,485
 8,541
 8,763
Other expense (income), net879
 (2,153) (1,431)
Other (income) expense, net(2,376) (121) 2,041
Income before income taxes$175,871
 $166,262
 $177,665
$204,718
 $166,966
 $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 amounts of expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.

54

Product Category
Net sales by product category are as follows:
Year Ended June 30,2015
 2014
 2013
2018
 2017
 2016
Industrial$2,013,447
 $1,739,496
 $1,776,172
$2,085,571
 $1,855,437
 $1,836,484
Fluid power738,114
 720,382
 685,999
Fluid power & flow control987,703
 738,309
 682,944
Net sales$2,751,561
 $2,459,878
 $2,462,171
$3,073,274
 $2,593,746
 $2,519,428

The fluid power & flow control product category includes sales of hydraulic, pneumatic, lubrication, filtration, and filtrationflow control components and systems, and repair services through the Company’s Fluid Power Businesses& 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 30,2015
 2014
 2013
2018
 2017
 2016
Net Sales:          
United States$2,238,263
 $2,031,142
 $2,017,168
$2,615,041
 $2,182,552
 $2,117,485
Canada358,580
 291,117
 298,269
273,622
 251,999
 257,797
Other Countries154,718
 137,619
 146,734
184,611
 159,195
 144,146
Total$2,751,561
 $2,459,878
 $2,462,171
$3,073,274
 $2,593,746
 $2,519,428
June 30,2015
 2014
 2013
2018
 2017
 2016
Long-Lived Assets:          
United States$217,597
 $153,945
 $144,289
$501,373
 $207,126
 $225,538
Canada76,565
 99,161
 19,038
50,261
 57,947
 66,304
Other Countries9,113
 9,998
 11,183
5,656
 6,558
 7,163
Total$303,275
 $263,104
 $174,510
$557,290
 $271,631
 $299,005
Other countries consist of Mexico, Australia, New Zealand, and New Zealand.Singapore.
NOTE 13: COMMITMENTS AND CONTINGENCIES
The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company believes the likelihood is remote that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
NOTE 14: OTHER (INCOME) EXPENSE, (INCOME), NET
Other (income) expense, (income), net, consists of the following:
Year Ended June 30,2015
 2014
 2013
2018
 2017
 2016
Unrealized (gain) loss on assets held in rabbi trust for a non-qualified deferred compensation plan$(442) $(1,683) $(1,280)
Elimination of one-month Canadian and Mexican reporting lag, effective July 1, 2013 and January 1, 2014, respectively—
 (1,342) —
Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan$(785) $(1,188) $(87)
Foreign currency transaction (gains) losses1,251
 801
 (143)(210) 209
 1,039
Net other periodic post-employment costs245
 796
 981
Life insurance (income) expense, net(1,628) 107
 108
Other, net70
 71
 (8)2
 (45) —
Total other expense (income), net$879
 $(2,153) $(1,431)
Total other (income) expense, net$(2,376) $(121) $2,041


55

NOTE 15: SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to June 30, 2015 through the date the financial statements were issued.
On August 3, 2015, the Company acquired all of the net assets of Atlantic Fasteners, located in Agawam, MA, for a purchase price of approximately $12,500. The Company funded this acquisition from borrowings under the revolving credit facility at a variable interest rate. As a distributor of fasteners and industrial supplies, this business will be included in the Service Center Based Distribution Segment from August 3, 2015.



56


QUARTERLY OPERATING RESULTS
(In thousands, except per share amounts)
(UNAUDITED)
        Per Common Share        Per Common Share
Net Sales
 Gross Profit
 Operating Income
 Net Income
 Net Income
 Cash Dividend
Net Sales
 Gross Profit
 Operating Income
 Net Income
 Net Income
 Cash Dividend
2015           
2018           
First Quarter$702,325
 $194,932
 $46,165
 $29,122
 $0.70
 $0.25
$680,701
 $192,424
 $51,837
 $33,721
 $0.86
 $0.29
Second Quarter691,702
 195,713
 46,807
 29,707
 0.72
 0.25
667,187
 188,360
 46,715
 30,950
 0.79
 0.29
Third Quarter679,994
 187,363
 43,772
 28,610
 0.70
 0.27
827,665
 239,524
 56,444
 36,592
 0.93
 0.30
Fourth Quarter677,540
 191,806
 47,875
 28,045
 0.70
 0.27
897,721
 263,687
 70,831
 40,362
 1.03
 0.30
$2,751,561
 $769,814
 $184,619
 $115,484
 $2.80
 $1.04
$3,073,274
 $883,995
 $225,827
 $141,625
 $3.61
 $1.18
2014           
2017           
First Quarter$605,305
 $169,795
 $39,539
 $26,844
 $0.63
 $0.23
$624,848
 $178,330
 $43,218
 $27,371
 $0.70
 $0.28
Second Quarter581,949
 163,383
 39,837
 25,909
 0.61
 0.23
608,123
 172,456
 37,656
 24,085
 0.61
 0.28
Third Quarter618,006
 171,220
 40,173
 30,394
 0.72
 0.25
679,304
 190,802
 45,467
 29,494
 0.75
 0.29
Fourth Quarter654,618
 182,528
 44,809
 29,674
 0.71
 0.25
681,471
 196,107
 48,249
 52,960
 1.34
 0.29
$2,459,878
 $686,926
 $164,358
 $112,821
 $2.67
 $0.96
$2,593,746
 $737,695
 $174,590
 $133,910
 $3.40
 $1.14
2013           
2016           
First Quarter$610,519
 $164,533
 $44,318
 $29,532
 $0.70
 $0.21
$641,904
 $181,012
 $41,026
 $24,291
 $0.61
 $0.27
Second Quarter589,517
 162,919
 40,569
 27,043
 0.64
 0.21
610,346
 173,167
 38,362
 23,947
 0.61
 0.27
Third Quarter621,654
 174,400
 43,477
 29,302
 0.69
 0.23
633,172
 174,793
 (33,032) (44,728) (1.14) 0.28
Fourth Quarter640,481
 181,110
 48,035
 32,272
 0.76
 0.23
634,006
 178,450
 42,445
 26,067
 0.66
 0.28
$2,462,171
 $682,962
 $176,399
 $118,149
 $2.78
 $0.88
$2,519,428
 $707,422
 $88,801
 $29,577
 $0.75
 $1.10
On August 14, 201510, 2018, there were 5,8934,307 shareholders of record including 4,3212,914 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 14, 201510, 2018 was $40.77$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 20152018
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 2015,2017, 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.  

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 of $1.8 million. Also, we sold a building recognizing a gain of $1.5 million.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 2015, income tax expense increased due to recording a valuation allowance against certain deferred tax assets for foreign jurisdictions of $1.0 million. Also, an increase of tax rates in certain foreign jurisdictions at the end of the fiscal period increased tax expense by $1.2 million during the quarter.
No LIFO layer liquidations took place during the year ended June 30, 2015.
Fiscal 2014
During the first quarter of fiscal 2014, the Company aligned the consolidation of the Company's Canadian subsidiary which previously included results on a month reporting lag. The elimination of this lag resulted in the recognition of $1.2 million of additional income which was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, the Company aligned the consolidation of the Company's Mexican subsidiary which previously included results on a month reporting lag. The elimination of this lag resulted in the recognition of $0.2 million of additional income which was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, $2.8 million of tax reserves were reversed. The impact of this reversal was a reduction in income tax expense of $2.8 million and a $0.07 increase in earnings per share.

57

No LIFO layer liquidations took place during the year ended June 30, 2014.
Fiscal 2013
During the fourth quarter of fiscal 2013,2016, the Company realized LIFO layer liquidation benefits of $6,300$2.1 million from certain inventory quantity levels decreasing. Additional scrap expense of $3.0 million above our normal scrap rate was also recorded in the June 30, 2013 quarter.
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.

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, 2015.2018. This evaluation was based on the criteria set forth in the framework Internal"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, 2015.2018.
The Company acquired Knox Oil Field SupplyFCX Performance Inc. (Knox)("FCX") on July 1, 2014.January 31, 2018. Management has excluded KnoxFCX from its assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2015. Knox2018. FCX represents approximately 11%39.5% and 4%8.1% of total assets and net sales, respectively, of the consolidated financial statement amounts as of and for the year ended June 30, 2015.2018.
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 /s/ Mark O. EiseleDavid K. Wells
President & Chief Executive Officer Vice President - Chief Financial Officer & Treasurer
August 26, 201517, 2018


58


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio
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"“Company”) as of June 30, 2015,2018, 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'sManagement’s Report on Internal Control overControls Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Knox Oil Field SupplyFCX Performance Inc. ("Knox"FCX"), which was acquired on July 1, 2014January 31, 2018 and whose financial statements constitute 11% and 4%39.5% of total assets and 8.1% of net sales respectively, of the consolidated financial statement amountsstatements as of and for the year ended June 30, 2015.2018. Accordingly, our audit did not include the internal control over financial reporting at Knox. FCX.
Basis for Opinion
The Company'sCompany’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'sManagement’s Report on Internal Control overControls Over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’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 Public Company Accounting Oversight Board (United States).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 by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2015 of the Company and our report dated August 26, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 26, 201517, 2018

59


Changes in Internal Control Over Financial Reporting
The Company has undertaken a multi-year ERP (SAP) project to transform the Company's technology platforms and enhance its business information and transaction systems. The Company has completed its SAP implementation in its Western Canadian and U.S. Service Center Based Businesses, excluding recent acquisitions. In fiscal 2014, the Company initiated the transformation of its financial and accounting systems including fixed assets, general ledger and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation system, have been transitioned to SAP during fiscal 2015. During fiscal year 2016 the Company will continue to evaluate and determine an appropriate deployment schedule for operations in Eastern Canada and other operations not on SAP, as well as refine our current business and system processes. The company expects to convert to a new consolidation process and system at the beginning of fiscal 2016. Changes in the Company's key business applications and financial processes as a result of the continuing implementation of SAP and other business systems are being evaluated by management. The Company is designing processes and internal controls to address changes in the Company's internal control over financial reporting as a result of the SAP implementation. This ongoing SAP implementation presents risks to maintaining adequate internal controls over financial reporting.
Other than as described above, thereThere have not been any changes in internal control over financial reporting during the quarter ended June 30, 20152018 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 27, 2015,30, 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 27, 2015,30, 2018, under the captions “Executive Compensation” and “Compensation Committee Report.”

60

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Applied's shareholders have approved the following equity compensation plans: the 1997 Long-Term Performance Plan, the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the Deferred Compensation Plan, and the Deferred Compensation Plan for Non-Employee Directors. All of these plans are currently in effect.
The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied as of June 30, 2015.2018.
Plan CategoryNumber of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights
 Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights
 Number of Securities Remaining Available for Future Issuance Under Equity Compensation PlansNumber of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders1,116,188
 $35.86
 *1,378,637
 $45.22 *
Equity compensation plans not approved by
security holders
0
 0
 0—
 —
 —
 
Total1,116,188
 $35.86
 *1,378,637
 $45.22
*
*
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, and the 2007 Long-Term Performance Plan replaced the 1997 Long-Term Performance Plan. Stock options and stock appreciation rights remain outstanding under each of the 19972007 and 20072011 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 20112015 Long-Term Performance Plan at June 30, 2015,2018 was 1,106,794. The number of shares issuable under the Deferred Compensation Plan for Non-Employee Directors and the Deferred Compensation Plan depends on the dollar amount of participant contributions deemed invested in Applied common stock.
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 27, 2015,30, 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 27, 2015,30, 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 27, 2015,30, 2018, under the caption “Item 43 - Ratification of Auditors.”


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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a)1. Financial Statements.
The following consolidated financial statements, notes thereto, the reports of independent registered public accounting firm, and supplemental data are included in Item 8 of this report:
•Report of Independent Registered Public Accounting Firm
   
•Statements of Consolidated Income for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Consolidated Balance Sheets at June 30, 20152018 and 20142017
   
•Statements of Consolidated Cash Flows for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Notes to Consolidated Financial Statements for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•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. 6670
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto.
(a)3. Exhibits.
* Asterisk indicates an executive compensation plan or arrangement.
Exhibit No.Description
  
3.1
Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit 3(a) to Applied's Form 10-Q for the quarter ended December 31, 2005, SEC File No. 1-2299, and incorporated here by reference).
  
3.2
Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference).
  
4.1
Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
  
4.2
Private Shelf Agreement dated as of November 27, 1996, as amended through October 30, 2014,June 29, 2018, between Applied and PGIM, Inc. (formerly known as Prudential Investment Management, Inc. (assignee of The Prudential Insurance Company of America)), conformed to show all amendments (filed as Exhibit 4.2 to Applied's Form 10-Q for the quarter ended March 31, 2015, SEC File No. 1-2299, and incorporated here by reference).amendments.
  
4.3
Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as most recently amended, on February 4, 2013, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K datedfiled July 1,2, 2014, SEC File No. 1-2299, and incorporated here by reference).
  

62

4.4
Request for Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 4.5 to Applied's Form 10-Q dated November 4,for the quarter ended September 30, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
4.5
Credit Agreement dated as of May 15, 2012,January 31, 2018, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 410.1 to Applied's Form 8-K dated May 17, 2012,filed February 6, 2018, SEC File No. 1-2299, and incorporated here by reference).
4.6Credit Agreement dated as of April 25, 2014, among Applied Industrial Technologies, Inc., Key Bank National Association, as Agent, and various financial institutions (filed as Exhibit 10.1 to Applied’s Form 8-K dated May 1, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1A 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 27, 201530, 2018 under the caption “Director Compensation.”
  
*10.2
Deferred Compensation Plan for Non-Employee Directors (September 1, 2003 Restatement), the terms of which govern benefits vested as of December 31, 2004, for certain directorsPeter A. Dorsman, an Applied director (filed as Exhibit 10(c) to Applied's Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3
Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.2 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.4Second
Amendment to the Applied Industrial Technologies, Inc. Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.1 to Applied’s Form 10-Q for the quarter ended March 31, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
*10.5
Form of Director and Officer Indemnification Agreement entered into between Applied and each of its directors and executive officers (filed as Exhibit 10(g) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
  
*10.61997 Long-Term Performance Plan, as amended April 19, 2007 (filed as Exhibit 10(k) to Applied's Form 10-K for the year ended June 30, 2007, SEC File No. 1-2299, and incorporated here by reference).
*10.7Section 409A Amendment to the 1997 Long-Term Performance Plan (filed as Exhibit 10.4 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
*10.8
2007 Long-Term Performance Plan (filed as Exhibit 10 to Applied's Form 8-K datedfiled October 23, 2007, SEC File No. 1-2299, and incorporated here by reference).
  
*10.910.7
Section 409A Amendment to the 2007 Long-Term Performance Plan (filed as Exhibit 10.5 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1010.8
2011 Long-Term Performance Plan (filed as Appendix to Applied’s proxy statement for the annual meeting of shareholders held on October 25, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1110.9
2015 Long-Term Performance Plan (filed as Appendix to Applied's proxy statement for the annual meeting of shareholders held on October 27, 2015, SEC File No. 1-2299, and incorporated here by reference).
*10.10
Non-Statutory Stock Option Award Terms and Conditions (Directors) (filed as Exhibit 10 to Applied's Form 8-K datedfiled November 30, 2005, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1210.11
Restricted Stock Award Terms and Conditions (Directors) (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended March 31, 2012,2018, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1310.12
Stock Appreciation Rights Award Terms and Conditions (Officers) (August 20122017 revision) (filed as Exhibit 10.0210.1 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1410.13Performance Shares
Restricted Stock Units Terms and Conditions (filed as Exhibit 10.0410.2 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1510.14Restricted Stock Units
Performance Shares Terms and Conditions (filed as Exhibit 10.0310.3 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1610.15
Management Incentive Plan General Terms (filed as Exhibit 10.0110.1 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2016, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1710.16
Key Executive Restoration Plan, as amended and restated, forin which Applied's executive officers participate (filed as Exhibit 10.1 to Applied's Form 8-K datedfiled August 16, 2013, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1810.17
Schedule of executive officer participants in the Key Executive Restoration Plan, as amended and restated.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).
  

63

*10.1910.18
Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) in which Thomas E. Armold,Fred D. Bauer, as well as Todd A. Barlett Fred D. Bauer, 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).
  

*10.2010.19
First Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to Applied's Form 8-K datedfiled December 22, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2110.20
Second Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to the Company'sApplied's Form 8-K datedfiled October 22,26, 2012, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2210.21
Deferred Compensation Plan (September 1, 2003 Restatement), the terms of which govern benefits vested as of December 31, 2004, for Mark O. Eisele (filed as Exhibit 10(h) to Applied's Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2310.22
First Amendment to Deferred Compensation Plan (September 1, 2003 Restatement) (filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31, 2003, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2410.23
Deferred Compensation Plan (Post-2004 Terms) (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2510.24
Supplemental Defined Contribution Plan (January 1, 1997 Restatement) the terms of which govern benefits vested as of December 31, 2004, for certain executive officersTodd 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).
  
*10.2610.25
First Amendment to Supplemental Defined Contribution Plan effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied’s Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2710.26
Second Amendment to Supplemental Defined Contribution Plan effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299, and incorporated here by reference).
*10.27
Supplemental Defined Contribution Plan (Post-2004 Terms), restated effective as of January 1, 2017 (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.)
  
*10.28Supplemental Defined Contribution Plan (Post-2004 Terms) (filed as Exhibit 10.6 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
*10.29
Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K datedfiled October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3010.29
Amendment to Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K datedfiled October 22,26, 2012, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3110.30
Change in Control Agreement for Neil A. Schrimsher (filed as Exhibit 10.3 to Applied's Form 8-K datedfiled October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3210.31Form of
Change in Control Agreement for each of Thomas E. Armold, Todd A. Barlett, Fred D. Bauer and Mark O. Eisele (filed as Exhibit 99.1 to Applied's Form 8-K datedfiled April 25, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3310.32
Form of Change in Control Agreement for executive officers newly hired since 2012 (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended September 30, 2013, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3410.33
A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers (filed as Exhibit 10(d)10.33 to Applied's Form 10-K for the year ended June 30, 2007,2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3510.34
A written description of Applied's Long-Term Disability Insurance for executive officers (filed as Exhibit 10(c)10.34 to Applied's Form 10-Q10-K for the quarteryear ended December 31, 1997,June 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3610.35Non-qualified Deferred Compensation Agreement between Applied
A written description of Applied's Retiree Health Care Coverage for Neil A. Schrimsher, Todd A. Barlett, Fred D.Bauer and J. Michael Moore effective as of December 31, 1997Mark O. Eisele (filed as Exhibit 10(a)10.35 to Applied's Form 10-Q10-K for the quarteryear ended March 31, 1998,June 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
10.3710.36Share Purchase
Agreement dated April 25, 2014,and Plan of Merger by and among Applied Industrial Technologies, Inc., Applied Alberta, Inc., Michael Sirois, Sirois Family Trust, Georg Eger, Eger Family Trust, Blair Hetlinger, Christopher Sirois, Kenneth Pacula, Grant Bechtloff, Ryan Farley, Dwayne Letawsky, Douglas Kilbach, Steven Vanderwater, 1562039 Alberta Ltd., 1561902 Alberta Ltd., 1614176 Alberta Ltd., 1814971 Alberta Ltd.Fortress Merger Sub Holding LLC, Fortress Merger Sub LP, FCX Group Holdings, LP, FCX Group GP, LLC, and 1814966 Alberta Ltd.Harvest Partners, LP (filed as Exhibit 10.1 to Applied’sApplied's Form 8-K dated May 1, 2014,filed January 9, 2018, SEC File No. 1-2299, and incorporated here by reference).

64

10.38Stock Purchase Agreement dated May 23, 2014, among Applied Industrial Technologies, Inc., Alex Dan Knox and Dayton Scott Knox (filed as Exhibit 10.1 to Applied’s Form 8-K dated May 27, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
21
Applied’s subsidiaries at June 30, 2015.2018.
  
23
Consent of Independent Registered Public Accounting Firm.
  
24
Powers of attorney.
  
31
Rule 13a-14(a)/15d-14(a) certifications.
  
32
Section 1350 certifications.

  
101.INSXBRL Instance Document
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRL 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.

65
ITEM 16. FORM 1O-K SUMMARY.
Table of Contents
Not applicable.


APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2015, 2014,2018, 2017, AND 20132016
(in thousands)
COLUMN A COLUMN B COLUMN C  COLUMN D  COLUMN E COLUMN B COLUMN C  COLUMN D  COLUMN E
DESCRIPTION Balance at Beginning of Period
 Additions Charged to Cost and Expenses
 Additions (Deductions) Charged to Other Accounts
  Deductions from Reserve
  Balance at End of Period
 Balance at Beginning of Period
 Additions Charged to Cost and Expenses
 Additions (Deductions) Charged to Other Accounts
  Deductions from Reserve
  Balance at End of Period
Year Ended June 30, 2015            
Year Ended June 30, 2018            
Reserve deducted from assets to which it applies — accounts receivable allowances $10,385
 $2,597
 $231
(A) $2,592
(B) $10,621
 $9,628
 $2,803
 $4,578
(A) $3,443
(B) $13,566
Year Ended June 30, 2014            
Year Ended June 30, 2017            
Reserve deducted from assets to which it applies — accounts receivable allowances $7,737
 $3,970
 $(129)(A) $1,193
(B) $10,385
 $11,034
 $2,071
 $(133)(A) $3,344
(B) $9,628
Year Ended June 30, 2013            
Year Ended June 30, 2016            
Reserve deducted from assets to which it applies — accounts receivable allowances $8,332
 $2,267
 $(104)(A) $2,758
(B) $7,737
 $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.


66

SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
/s/ Neil A. Schrimsher /s/ Mark O. EiseleDavid K. Wells
Neil A. Schrimsher
President & Chief Executive Officer
 
Mark O. EiseleDavid K. Wells
Vice President-Chief Financial Officer
& Treasurer
   
/s/ Christopher Macey (Principal financial officer and principal accounting officer)
Christopher Macey
Corporate Controller (Principal Accounting Officer)
Date: August 26, 201517, 2018


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
* *
John F. Meier,Robert J. Pagano, Jr., Director J. Michael Moore,Vincent K. Petrella, Director
* /s/ Neil A. Schrimsher
Vincent K. Petrella,Joe A. Raver, Director Neil A. Schrimsher, President & Chief Executive Officer and Director
* *
Dr. Jerry Sue Thornton, Director Peter C. Wallace, Director and Chairman
   
   
/s/ Fred D. Bauer  
Fred D. Bauer, as attorney in fact 
for persons indicated by “*” 
Date: August 26, 201517, 2018


6771
s Versus Prior Period

Year Ended June 30,
As a % of Net Sales
 Change in
14

Sales in fiscal 20152018 were $2.75$3.1 billion, which was $291.7$479.5 million or 11.9%18.5% above the prior year, with sales from acquisitions accounting for $280.2$264.7 million or 11.4%. Unfavorable10.2% of the increase, and favorable foreign currency translation decreased sales by $43.3accounting for an increase of $16.0 million or 1.8%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 prior to the impact of foreign currency translation, sales were up $54.8$198.8 million or 2.3%7.7% during the year. We had 252.5 selling daysyear, 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 both fiscal 2015 and fiscal 2014.sales by reportable segment.
Amounts in millions   Amount of change due to
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Reportable Segment2018
2017
Service Center Based Distribution$2,346.4
$2,180.4
$166.0
$3.6
$16.0
$146.4
Fluid Power & Flow Control726.9
413.4
313.5
261.1
—
52.4
Total$3,073.3
$2,593.8
$479.5
$264.7
$16.0
$198.8
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $281.4$166.0 million, or 14.3%7.6%. Acquisitions within this segment increased sales by $280.2$3.6 million or 14.2%0.2%, and favorable foreign currency translation increased sales by $16.0 million or 0.7%. UnfavorableExcluding 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.

The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore.
Amounts in millions   Amount of change due to
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Geographic Area2018
2017
United States$2,615.1
$2,182.6
$432.5
$261.1
$—
$171.4
Canada273.6
252.0
21.6
—
11.3
10.3
Other countries184.6
159.2
25.4
3.6
4.7
17.1
Total$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   Amount of change due to
 Year ended June 30,SD&A Increase
Acquisitions
Foreign Currency
Organic Change
 2018
2017
SD&A$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.

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 deferredcompensation 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.
 
Year Ended June 30,
As a % of Net Sales
 Change in $'s Versus Prior Period
 2017
 2016
 % Change
Net Sales100.0% 100.0% 2.9%
Gross Profit Margin28.4% 28.1% 4.3%
Selling, Distribution & Administrative21.7% 22.0% 1.7%
Operating Income6.8% 3.6% 95.3%
Net Income5.2% 1.2% 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

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
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Reportable Segment2017
2016
Service Center Based Distribution$2,180.4
$2,150.5
$29.9
$19.8
$(1.1)$11.2
Fluid Power & Flow Control413.4
369.0
44.4
11.3
—
33.1
Total$2,593.8
$2,519.5
$74.3
$31.1
$(1.1)$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 $36.5$1.1 million or 1.8%0.1%. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales increased $37.7$11.2 million or 1.9%.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 Businesses& Flow Control segment which operatesincreased $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 OEM markets, increased $10.3 million or 2.1%the U.S., primarily attributedof 9.3%, offset by a decrease of 0.4% due to strongone less sales growth at several of our U.S. based Fluid Power businesses which added $17.1 million or 3.5%, while unfavorable foreign currency translation decreasedday.
The following table shows changes in sales by $6.8 million or 1.4%.geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore.
Amounts in millions   Amount of change due to
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Geographic Area2017
2016
United States$2,182.6
$2,117.5
$65.1
$25.1
$—
$40.0
Canada252.0
257.8
(5.8)6.0
(0.2)(11.6)
Other countries159.2
144.2
15.0
—
(0.9)15.9
Total$2,593.8
$2,519.5
$74.3
$31.1
$(1.1)$44.3
Sales in our U.S. operations were up $207.1increased $65.1 million or 10.2%3.1%, with acquisitions adding $175.8$25.1 million or 8.7%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 increased $67.5decreased $5.8 million or 23.2%2.2%, with acquisitions adding $86.4 million or 29.7%. Unfavorableunfavorable foreign currency translation decreaseddecreasing Canadian sales by $30.4$0.2 million or 10.4%0.1%. Acquisitions added $6.0 million, or 2.3%. Excluding the impact of businesses acquired and priorunfavorable foreign currency translation impact, Canadian sales were down $11.6 million or 4.4%, of which 2.0% related to the impact of currency translation,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 were up $11.5 million or 3.9% during the year.day. Consolidated sales from our other country operations, which include Mexico, Australia, and New Zealand, were $17.1and Singapore, increased $15.0 million or 12.4% above the prior year, with acquisitions adding sales of $18.0 million or 13.1%.10.4% compared to fiscal 2016. Unfavorable foreign currency translation decreased other country sales by $12.9$0.9 million or 9.4%0.7%. Excluding the impact of businesses acquired and priorPrior to the impact of currency translation, other country sales were up $12.0$15.9 million or 8.7% during11.1% compared to the year.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 20152017 was 73.2%71.5% industrial products and 26.8%28.5% fluid power products compared to 70.7%72.9% industrial and 29.3%27.1% fluid power in the prior year. These changes in product mix relate entirely to the product mix of our recent acquisitions being primarily industrial products.fiscal 2016.
Our gross profit margin was 28.0%increased to 28.4% in fiscal 2015 versus 27.9%2017 compared to 28.1% in fiscal 2014.2016. The increase was primarily due to recording a more favorable impact from LIFO layer liquidations which increased margins areattributablegross 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 impactgross profit margin for fiscal 2016 was negatively impacted by $3.6 million of relatively higher gross margins from acquired

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   Amount of change due to
 Year ended June 30,SD&A Increase
Acquisitions
Foreign Currency
Organic Change
 2017
2016
SD&A$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 $62.6$9.5 million or 12.0%1.7% during fiscal 20152017 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 prior year,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 21.3%6.8% from 21.2% in fiscal 2014. The acquired businesses added an incremental $69.4 million of SD&A expenses, which includes an additional $13.4 million associated with acquired identifiable intangibles amortization. Excluding the $11.0 million decline in SD&A from foreign currency translation, the remaining SD&A amounts3.6%. These increases were similarprimarily due to the prior year. The increase in SD&A asCompany recognizing a percentagenon-cash goodwill impairment charge of sales, was driven by additional intangible asset amortization from businesses acquired.
Operating income increased $20.3$64.8 million or 12.3%, to $184.6and restructuring charges of $8.8 million during fiscal 2015 from $164.4 million2016 that did not reoccur during 2014, andfiscal 2017, as a percent ofwell as higher sales remained stable at 6.7%. The increasevolume in operating income dollars is primarily attributable to our acquired businesses.fiscal 2017.
Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 6.2%was 5.3% in fiscal 2015 from 6.0% in2017 and fiscal 2014. This increase is primarily attributable to an increase in gross profit as a percentage of sales, as a result of our recent acquisitions which operate at higher gross profit margins, representing an increase of 0.1%, along with a decrease in SD&A as a percentage of sales of 0.1%.2016, before the goodwill impairment charge.
Operating income as a percentage of sales for the Fluid Power Businesses& Flow Control segment increased to 9.8%11.3% in fiscal 20152017 from 9.2%10.1% in fiscal 2014.2016. This increase is primarily attributablewas due to the positive leveraging of organicimpact from the increase in sales, growth inprimarily from our U.S. based Fluid Power Businesses, without a commensurate increaseoperations in SD&A expenses.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.
InterestOther (income) expense, net, increased to $7.9 million in fiscal 2015 entirely due to acquisition related borrowing.
Other expense (income), net, represents certain non-operating items of income and expense. This was $0.9$0.1 million of income in fiscal 2017 compared to $2.0 million of expense in fiscal 2015 compared to $2.2 million of2016. Fiscal 2017 income in fiscal 2014. Current year expense primarily consists of foreign currency transaction losses of $1.3 million offset by unrealized gains on investments held by non-qualified

15

deferred compensation trusts of $0.4 million. Fiscal 2014 consisted primarily of unrealized gains on investments held by non-qualified deferredcompensation trusts of $1.7$1.2 million, as well as $1.3 million of income associated with the elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption "Financial Statements and Supplementary Data"), offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.8$0.2 million, and life

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.
IncomeThe effective income tax expense as a percent of income before taxesrate was 34.3%19.8% for fiscal 2015 and 32.1%2017 compared to 62.6% for fiscal 2014.2016. 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 increasededuction 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 iswas primarily due to recordingthe adoption of valuation allowances against certain deferredASU 2016-09 in the first quarter of fiscal 2017, which requires excess tax assets for foreign jurisdictions in fiscal 2015 as well as the non-recurrence of a one-time favorable tax benefit in fiscal 2014 in accounting for undistributed earnings of non-U.S. subsidiaries. All undistributed earnings of our foreign subsidiaries are consideredbenefits and deficiencies resulting from stock-based compensation awards vesting and exercises to be permanently reinvested at June 30, 2015 and 2014.
We expect ourrecognized 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 2016 to be in the range of 34.0% to 34.5%.
As a result of the factors addressed above, net income for fiscal 2015 increased $2.7 million or 2.4% from the prior year. Net income per share increased at a slightly higher rate of 4.9% due to lower weighted-average shares outstanding in fiscal 2015.
At June 30, 2015, we had a total of 565 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia and New Zealand, versus 538 at June 30, 2014.
The number of Company employees was 5,839 at June 30, 2015 and 5,472 at June 30, 2014.
YEAR ENDED JUNE 30, 2014 vs. 2013
The following table is included to aid in review of Applied’s statements of consolidated income.
 
Year Ended June 30,
As a % of Net Sales
 Change in $'s Versus Prior Period
 2014
 2013
 % Increase
Net Sales100.0% 100.0% (0.1)%
Gross Profit Margin27.9% 27.7% 0.6 %
Selling, Distribution & Administrative21.2% 20.6% 3.2 %
Operating Income6.7% 7.2% (6.8)%
Net Income4.6% 4.8% (4.5)%
Sales in fiscal 2014 were $2.46 billion, which was $2.3 million or 0.1% below the 2013 fiscal year. We experienced overall declines in sales from our businesses not acquired in fiscal year 2014 of approximately $34.3 million or2017 by 1.4%. There was one additional selling day in fiscal 2014 as compared to fiscal 2013. Currency translation decreased fiscal year sales by approximately $26.2 million or 1.1%. Incremental sales from companies acquired since the 2013 fiscal year contributed $58.2 million or 2.4%.
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $30.1 million, or 1.5%. This decline was due to decreases in sales from businesses not acquired in fiscal year 2014 of $62.5 million or 3.1% coupled with an unfavorable impact of foreign currency translation of $23.1 million or 1.2%. Offseting these decreases was acquisitions, which added $55.5 million or 2.8%.
Sales of our Fluid Power Businesses segment, which operates primarily in OEM markets, increased $27.8 million or 6.1%. We experienced sales growth at several of our Fluid Power businesses which added $29.9 million or 6.6% along with acquisitions within this segment which added $2.8 million or 0.6%, while unfavorable foreign currency translation losses decreased sales by $4.9 million or 1.1%.
Sales in our U.S. operations were up $14.0 million or 0.7% with acquisitions adding $32.8 million or 1.6% offsetting declines in sales from our businesses not acquired in fiscal year 2014 of $18.8 million or 0.9%. Sales from our Canadian operations decreased $7.2 million or 2.4%. Acquisitions added $19.3 million or 6.5%, offset by unfavorable foreign currency translation losses which reduced sales by $17.5 million or 5.9% coupled with declines in sales from our businesses not acquired in fiscal year 2014 of $9.0 million or 3.0%, mostly as a result of weakness within the Canadian mining sector. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, were $9.1 million or 6.2% below the 2013 fiscal year. This decrease is primarily the result of unfavorable foreign currency translation losses of $8.7 million or 5.9%, coupled with declines in sales of $6.5 million or 4.4%, mostly within the mining sector, from our businesses not acquired in fiscal year 2014, while acquisitions added $6.1 million or 4.2% in fiscal 2014.

16

The sales product mix for fiscal 2014 was 70.7% industrial products and 29.3% fluid power products compared to 72.1% industrial and 27.9% fluid power in fiscal year 2013. The change in our product mix in fiscal year 2014 was due to sales growth within our Fluid Power Businesses segment coupled with sales declines in our Service Center Based Distribution segment.
Our gross profit margin was 27.9% in fiscal 2014 versus 27.7% in fiscal 2013. The increased margins wereattributable to the impact of relatively higher gross margins from acquired operations.
Selling, distribution and administrative expenses (SD&A) consist of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management, and providing marketing and distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $16.0 million or 3.2% during fiscal 2014 compared to fiscal 2013, and as a percent of sales increased to 21.2% from 20.6% in fiscal 2013. The acquired businesses added $19.3 million of SD&A expenses, which included an additional $2.5 million associated with acquired identifiable intangibles amortization. The increase in SD&A as a percentage of sales, was driven by relatively higher SD&A levels from businesses acquired in fiscal year 2014.
Operating income decreased $12.0 million, or 6.8%, to $164.4 million during fiscal 2014 from $176.4 million during 2013. As a percent of sales, operating income decreased to 6.7% in fiscal 2014 from 7.2% in 2013. The decrease in operating income was primarily attributable to relatively flat gross profit levels coupled with added levels of SD&A from businesses acquired in the 2014 fiscal year. The decrease in operating margin percentage was driven by the negative leverage resulting from decreasing sales from businesses not acquired in fiscal year 2014 without a similar level of SD&A reductions, which resulted in an increase in SD&A as a percentage of sales to 21.2% from 20.6% in fiscal year 2013, slightly offset by an increase in gross profit as a percentage of sales to 27.9% from 27.7%.
Operating income as a percentage of sales for the Service Center Based Distribution segment decreased to 6.0% in fiscal 2014 from 6.9% in fiscal 2013. This decrease was attributable to the negative leverage resulting from decreasing sales in businesses not acquired in fiscal year 2014 without a similar level of SD&A reductions, which resulted in an increase in SD&A as a percentage of sales. In addition, SD&A for acquisitions in fiscal year 2014 operated at a relatively higher SD&A level. The SD&A impacts represented an approximate 1.0% reduction in operating income as a percentage of sales and were slightly offset by an increase in gross profit margins also due to acquisitions in fiscal year 2014 (representing an increase of approximately 0.1%) representing the total net change in operating income as a percentage of sales.
Operating income as a percentage of sales for the Fluid Power Businesses segment increased to 9.2% in fiscal 2014 from 9.0% in fiscal 2013. This increase was due to the positive leverage provided by an increase in sales without a commensurate increase in SD&A levels at several of our Fluid Power Businesses (representing a 0.5% increase in operating income as a percentage of sales), offset by a slight decrease in gross profit margins (representing a 0.3 decrease in operating income as a percentage of sales).
Segment operating income was impacted by changes in the amounts and levels of expenses allocated to the segments. The expense allocations included corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.
Interest expense, net, remained relatively stable as compared to fiscal year 2013.
Other expense (income), net, represented certain non-operating items of income and expense. This was $2.2 million of income in fiscal 2014 compared to $1.4 million of income in fiscal 2013. Fiscal year 2014 income primarily consisted of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.7 million as well as $1.3 million of income associated with the elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption "Financial Statements and Supplementary Data"), offset by foreign currency transaction losses of $0.8 million. Fiscal 2013 consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.3 million.
Income tax expense as a percent of income before taxes was 32.1% for fiscal 2014 and 33.5% for fiscal 2013. The impact of lower effective tax rates in foreign jurisdictions favorably reduced our rate when compared to the U.S. federal statutory rate by 2.6%. Further reducing our rate compared to the U.S. federal statutory rate by 1.6% was the reversal of a deferred tax liability recorded in the years prior to fiscal 2014 on a portion of the undistributed earnings in Canada. All undistributed earnings of our foreign subsidiaries were considered to be permanently reinvested at June 30, 2014. The effective tax rate for fiscal 2014 was further reduced by 1.1% due to a favorable permanent dividend deduction along with other items. These reductions compared to the U.S. federal statutory rate were offset by the impact of state2017 and local taxes which increased the rate by 2.4%.2016.

17

As a result of the factors addressed above, net income for fiscal 2014 decreased $5.32017 increased $104.3 million or 4.5% from fiscal year 2013.2016. Net income per share decreased atwas $3.40 per share for fiscal 2017 compared to $0.75 for fiscal 2016. Fiscal 2017 results included a slightlypositive 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 rate of 4.0% due to lower weighted-averageweighted average common shares outstanding in fiscal 2014.2017 as a result of our share repurchase program.
At June 30, 2014,2017, we had a total of 538552 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, and New Zealand, and Singapore, versus 522559 at June 30, 2013.2016.
The number of Company employees was 5,4725,554 at June 30, 20142017 and 5,1095,569 at June 30, 2013.2016.
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, 20152018 we had total debt obligations outstanding of $321.0$966.1 million compared to $170.7$292.0 million at June 30, 2014.2017. Management expects that our existing cash, cash equivalents, funds available under the revolving credit and uncommitted shelf facilities, and cash provided from operations, and the use of operating leases will be sufficient to finance normal working capital needs in each of the countries we operate in, payment of dividends, acquisitions, investments in properties, facilities and equipment, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company’s credit standing and financial strength.
The Company holds, from time to time, relatively significant cash and cash equivalent balances outside of the United States of America. The following table shows the Company's total cash as of June 30, 2015 by geographic location; all amounts are in thousands.
CountryAmount
United Sates$17,256
Canada40,325
Other Countries11,889
Total$69,470
To the extent cash in foreign countries is distributed to the U.S., it could become subject to U.S. income taxes. Foreign tax credits may be available to offset all or a portion of such taxes. At June 30, 2015, all foreign earnings are considered permanently reinvested.
The Company’s working capital at June 30, 20152018 was $549.2$625.5 million compared to $545.2$572.8 million at June 30, 2014.2017. The current ratio was 2.4 to 1 at June 30, 2018 and 2.8 to 1 at June 30, 2015 and 2.9 to 1 at June 30, 2014.2017.
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.
 Year Ended June 30,
 2015
 2014
 2013
Net Cash Provided by (Used in):     
Operating Activities$154,538
 $110,110
 $111,397
Investing Activities(173,621) (203,637) (78,825)
Financing Activities24,689
 92,142
 (38,025)
Exchange Rate Effect(7,325) (590) 175
Decrease in Cash and Cash Equivalents$(1,719) $(1,975) $(5,278)
 Year Ended June 30,
 2018
 2017
 2016
Net Cash Provided by (Used in):     
Operating Activities$147,304
 $164,619
 $162,014
Investing Activities(797,906) (16,894) (75,031)
Financing Activities600,284
 (103,349) (93,007)
Exchange Rate Effect(589) 820
 (3,585)
Increase (Decrease) in Cash and Cash Equivalents$(50,907) $45,196
 $(9,609)
The increasedecrease in cash provided by operating activities resulted fromduring fiscal 2018 is primarily due to increased working capital levels to support increased sales compared to the operationsprior year periods. The decrease in cash was further impacted by

increased interest payments, and the payment of newly acquired businesses along with$7.1 million of one-time costs, both related to the FCX acquisition. These decreases were partially offset by improved cash collections on accounts receivable within our U.S. based businesses.operating results, including the impact of the FCX acquisition.
Net cash used in investing activities in fiscal 20152018 included $14.9 million for capital expenditures and $160.6$775.7 million used for acquisitions.the acquisitions of FCX and DICOFASA, and $23.2 million used for capital expenditures. Net cash used in investing activities in fiscal 20142017 included $20.2$17.0 million for capital expenditures $10.0and $2.8 million used for acquisitions. These were offset by $2.9 million of which wasproceeds received from the sale of five buildings during fiscal 2017. Net cash used for the purchase of our headquarters facility, and $184.3 million for acquisitions. Capital expenditures for fiscal 2014 included an insignificant amount related to the ERP project as the portion of that project pertaining to capital spending primarily endedin investing activities in fiscal 2013. Fiscal 2013 investing cash

18

activities2016 included the use of $12.2$13.1 million for capital expenditures ($5.6and $62.5 million related to the ERP project), and $67.6 millionused for acquisitions.
Net cash provided by financing activities in fiscal 20152018 included $170.0$780.0 million of cash from borrowings under long term debt facilities used for the financing of acquisitions, offset by $17.0new credit facility and $19.5 million of repaymentsnet borrowings under ourthe revolving credit facility, and $2.7offset by $125.4 million of long termlong-term debt repayments. Further uses of cash were $42.7$45.9 million for dividend payments, $76.5$22.8 million used to repurchase 1,740,100393,300 shares of treasury stock, and $7.7$3.3 million of acquisition holdback payments. Net cash provided by financing activities in fiscal 2014 included $100.0 million from borrowings under long term debt facilities as well as $69.0 million in borrowings under our revolving credit facility, both of which were utilizedused for the financingpayment of acquisitions. These sources of cash were offset by $40.4 million for dividend payments and $36.7 million used to repurchase 759,900 shares of treasury stock. debt issuance costs.
Net cash used in financing activities in fiscal 20132017 included $37.2$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, and $3.8$8.2 million relatedused to repurchase 162,500 shares of treasury stock, $11.3 million used for acquisition holdback payments, partiallyand $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 $2.6$125.0 million of excess tax benefitscash from share-based compensation.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 $1.04, $0.96$1.18, $1.14, and $0.88$1.10 per share in fiscal 2015, 20142018, 2017 and 2013,2016, respectively.
Capital Expenditures
We expect capital expenditures for fiscal 20162019 to be in the $13.0$26.0 million to $15.0$28.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for fiscal 20162019 is expected to be in the range of $16.0$21.0 million to $17.0 million.$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 havefirst deployed our solution in our Western Canadian operating locations and our traditional U.S. Service Center Based Businesses,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, have beenwere transitioned to SAP during fiscal 2015. TheAt the beginning of fiscal 2016 the Company expects to convertconverted to a new consolidation process and system atsystem. During the beginningfourth quarter of fiscal 2016.2017, 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 determineconsider an appropriate deployment schedule for operations in Eastern Canada as well as 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, 2015,2018, we had authorization to purchase an additional 1,247,3001,056,700 shares.
In fiscal 2015, 20142018, 2017 and 2013,2016, we repurchased 1,740,100, 759,900393,300, 162,500, and 1,300951,100 shares of the Company’s common stock, respectively, at an average price per share of $43.97, $48.34$57.92, $50.72, and $40.96,$39.39, respectively.
Borrowing Arrangements
TheIn January 2018, in conjunction with the acquisition of FCX, the Company hasrefinanced its existing credit facility and entered into a revolvingnew five-year credit facility with a group of banks expiring in May 2017.January 2023. This agreement provides for a $780.0 million unsecured borrowings of up to $150.0 million.term loan and a $250.0 million unsecured revolving credit facility. Fees on this facility range from 0.09%0.10% to 0.175%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 prime, or the bank’s cost of fundsprime at the Company's discretion. This agreement also enables the Company to refinance this debt on a long term basis. As ofAt June 30, 2015 and 2014,2018, the Company had $52.0$775.1 million and $69.0 million in borrowings outstanding under this credit facility, respectively.the term loan and $19.5 million outstanding under the revolver. Unused lines under this facility, at June 30, 2015, net of outstanding letters of credit of $3.8$3.6 million to secure certain insurance obligations, totaled $94.2$226.9 million at June 30, 2018, and arewere available to fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the revolving credit facility borrowingsterm loan as of June 30, 20152018 was 1.15%4.13%.
Additionally
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, 2015,2017.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with either revolving credit agreement, in the amount of $1.8$2.7 million as of June 30, 2018 and June 30, 2017, respectively, in order to secure certain insurance obligations.
In April 2014 the Company entered into a $100.0 million unsecured five-year term loan with a group of banks with a final maturity date in April 2019. Borrowings under this agreement carry a variable interest rate tied to LIBOR, which at June 30, 2015 was 1.19%. The term loan had $96.9 million outstanding at June 30, 2015.
Also in April 2014, the Company assumed $2.4 million of debt as a part of the acquisition of our headquarters facility. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency and matures in May 2024. We had $2.1 million outstanding under this note at June 30, 2015.

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At June 30, 20152018 and June 30, 2017, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 million.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%; the principal is, and are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principal amount of $50.0 million, and carry a fixed interest rate of 3.21%; the principal is, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2015,2018, $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 revolvingnew credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2015,2018, the most restrictive of these covenants required that the Company have net indebtedness less than three4.25 times consolidated income before interest, taxes, depreciation and amortization. At June 30, 2015,2018, the Company's indebtedness was less than two3.0 times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all financial covenants at June 30, 2015 and expects to remain in compliance during the terms of the agreements.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 30,2015
 2014
Accounts receivable, gross$386,926
 $386,117
Allowance for doubtful accounts10,621
 10,385
Accounts receivable, net$376,305
 $375,732
Allowance for doubtful accounts, % of gross receivables2.7% 2.7%
    
Year Ended June 30,2015
 2014
Provision for losses on accounts receivable$2,597
 $3,970
Provision as a % of net sales0.09% 0.16%
June 30,2018
 2017
Accounts receivable, gross$562,377
 $400,559
Allowance for doubtful accounts13,566
 9,628
Accounts receivable, net$548,811
 $390,931
Allowance for doubtful accounts, % of gross receivables2.4% 2.4%
    
Year Ended June 30,2018
 2017
Provision for losses on accounts receivable$2,803
 $2,071
Provision as a % of net sales0.09% 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 50.055.0 at June 30, 20152018 versus 51.451.6 at June 30, 2014.2017. The inclusion of FCX had no impact on the Company's DSO at June 30, 2018. Accounts receivable increased 0.2%40.4% this year, comparedof which 20.7% is accounts receivable for FCX. The remaining increase is due to an increase of 11.9%in sales inexcluding FCX for the twelve months ended June 30, 2015. Acquisitions added $29.3 million, or 7.8%, of accounts receivable, changes in foreign currency rates decreased receivables by $15.6 million and improved collections led to a decrease in receivables of $13.1 million. We primarily attribute the decrease in DSO to the improved timing of collections within our traditional U.S. Service Center Based Distribution Businesses. DSO and past due balances have declined now that all traditional U.S. Service Center Based Distribution Businesses have been fully operational on the new ERP system for all of fiscal 2015.2018.
Approximately 4.2%2.4% of our accounts receivable balances are more than 90 days past due at June 30, 20152018 compared to 5.7%1.7% at June 30, 2014.2017. This improvementincrease primarily relates to our U.S. Service Center Based Businesses.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, 2015.2018. Historically, this percentage is around 0.10% to 0.15%. Our experience with losses on accounts which have uncollected receivables was better than our historical averages in fiscal 2015. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels, and that past due balances will continue to decline in fiscal 2016.levels.


Inventory Analysis
Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis and uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the period ended June 30, 2015
2018 was 4.0 versus 3.7 versus 3.8 at June 30, 2014. This decrease is due to the impact of recent acquisitions which historically have had lower inventory turnover rates, coupled with strategic inventory investments that we believe will assist with future sales growth.2017. We believe our inventory turnover ratio in fiscal 20162019 will be slightly better than our fiscal 20152018 levels.

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CONTRACTUAL OBLIGATIONS
The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 20152018 (in thousands):
 Total
 
Period Less
Than 1 yr

 
Period
2-3 yrs

 
Period
4-5 yrs

 
Period
Over 5 yrs

 Other
Operating leases$82,400
 $24,900
 $34,300
 $16,700
 $6,500
  
Planned funding of post-retirement obligations27,200
 5,400
 3,800
 6,700
 11,300
  
Unrecognized income tax benefit liabilities, including interest and penalties3,100
         3,100
Long term debt obligations321,000
 3,300
 63,100
 108,600
 146,000
  
Interest on long term debt obligations (1)37,100
 6,600
 13,000
 11,000
 6,500
  
Acquisition holdback payments29,600
 19,200
 10,400
      
Total Contractual Cash Obligations$500,400
 $59,400
 $124,600
 $143,000
 $170,300
 $3,100
 Total
 
Period Less
Than 1 yr

 
Period
2-3 yrs

 
Period
4-5 yrs

 
Period
Over 5 yrs

 Other
Operating leases$111,400
 $38,100
 $45,300
 $17,000
 $11,000
 —
Planned funding of post-retirement obligations16,300
 3,500
 4,400
 1,800
 6,600
 —
Unrecognized income tax benefit liabilities, including interest and penalties4,700
 —
 —
 —
 —
 4,700
Long-term debt obligations966,100
 19,700
 128,900
 792,300
 25,200
 —
Interest on long-term debt obligations (1)84,300
 18,300
 40,800
 25,000
 200
 —
Acquisition holdback payments3,365
 2,592
 698
 —
 75
 —
Total Contractual Cash Obligations$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, 20152018 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 as well as the balance outstanding under our revolving credit facility 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 or lenders.
SUBSEQUENT EVENTS
On August 3, 2015, the Company acquired all of the net assets of Atlantic Fasteners, located in Agawam, MA, for a purchase price of approximately $12.5 million. The Company funded this acquisition from borrowings under the revolving credit facility at a variable interest rate. As a a distributor of fasteners and industrial supplies, this business will be included in the Service Center Based Distribution Segment from August 3, 2015.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 22.1%16.8% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $151.8$139.2 million as reflected in our consolidated balance sheet at June 30, 2015.2018. 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.



Allowances for Slow-Moving and Obsolete Inventories
We evaluate the recoverability of our slow-moving or obsoleteand 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

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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, 20152018 and 2014,2017, our allowance for doubtful accounts was 2.7%2.4% of gross receivables, for each period.receivables. Our provision for losses on accounts receivable was $2.6$2.8 million, $4.0$2.1 million and $2.3$4.3 million in fiscal 2015, 20142018, 2017 and 2013,2016, 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 two-stepone-step approach. Step one compares theThe 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, and the second step of goodwill impairment test is unnecessary.impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwillan impairment test is performed to measurecharge would be recognized for the amount of impairment loss (if any). Step two compares the implied fair value of the reporting unit goodwill withby which the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, meaning,exceeds the reporting unit's fair value, isnot to exceed the total amount of goodwill allocated to all the assets and liabilities of thethat reporting unit (including unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit is the price paid to acquire the reporting unit. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.
Goodwill on our consolidated financial statements is relatedrelates to both the Service Center Based Distribution segment and the Fluid Power Businesses& Flow Control segment. The Company has sevensix reporting units for which are U.S. Service Centers, MSS, Canada Service Centers, Mexico Service Centers, Australia and New Zealand, Puerto Rico, and Fluid Power. Foran 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 as of January 1, 2015,were determined using the Company performed a quantitative analysisIncome and estimated the fair value of each of the reporting units using a combination of the incomeMarket approaches. The Income approach (also known asemploys the discounted cash flow ("DCF") method which utilizes the presentreflecting

projected cash flows expected to be generated by market participants and then adjusted for time value of cash flows to estimate fair value) and the marketmoney factors. The Market approach which measures fair value through theutilizes an analysis of comparable publicly traded companies ("guideline company analysis"), giving equal weight to both methods. The Company concluded that five of the reporting units had material excesses of fair value compared to their carrying amounts. The Company concluded that two reportingcompanies.

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units (Canada service center and Australia / New Zealand) had excess fair value of approximately $39.0 million and $4.0 million, or fifteen and fourteen percent, respectively when compared to the carrying amounts of approximately $258.0 million and $28.0 million, respectively. 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 forecast at the assessmentmeasurement date. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, themeasurement date.  The Company evaluates the appropriateness of its assumptions as well as itsand overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable.years.  Key assumptions, all of which are Level 3 inputs,based assumptions relate to pricing trends, inventory costs, discount rate, customer demand, and the long-term growth and foreign exchange rates.revenue growth.  A number of benchmarks from independent industry and other economic publications were also used.  Changes in future actual results, assumptions, and estimates after the assessmentmeasurement 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.
Self-Insurance Liabilities
We maintain business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. We accrue estimated losses using actuarial calculations, models and assumptions based on historical loss experience. We also maintain a partially self-insured health benefits plan, which provides medical benefits to U.S. based employees electing coverage. We maintain a reserve for all unpaid medical claims including those incurred but not reported based on historical experience and other assumptions. Although management believes that the estimated liabilities for self-insurance are adequate, the estimates described above may not be indicative of current and future losses. In addition, the actuarial calculations used to estimate self-insurance liabilities are based on numerous assumptions, some of which are subjective. We will continue to adjust our estimated liabilities for self-insurance, as deemed necessary, in the event that future loss experience differs from historical loss patterns.
Pension and Other Post-employment Benefit Plans
The measurement of liabilities related to pension plans and other post-employment benefit plans is based on management’s assumptions related to future events including interest rates, return on pension plan assets, and health care cost trend rates. We evaluate these assumptions and adjust them as necessary. Changes to these assumptions  Further, continued adverse market conditions could result in a material change to the Company’s pension obligation causing a related increase or decrease in reported net operating results inrecognition of additional impairment if the periodCompany determines that the fair values of change in the estimate. At June 30, 2015, a 1% point change wouldits reporting units have the following effects (in thousands):
 One-Percentage Point
Effect of change in:Increase
 Decrease
Discount rate on liability$(1,803) $2,172
Discount rate on net periodic benefit cost(86) 102
A 1% change in the return on assets is not material as most of the plans are non-qualified and unfunded.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, 2015,2018, the Company had recognized $6.8$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.assets on a jurisdiction by jurisdiction basis. The remaining net deferred tax asset is the amountmanagement believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future taxable income levels.
Income taxes on undistributed earnings of non-U.S. subsidiaries are not accrued for the portion of such earnings that management considers to be permanently reinvested. At June 30, 2015, management considered all undistributed earnings of non-U.S. subsidiaries to be permanently reinvested. Undistributed earnings of non-U.S. subsidiaries totaled $139.0 million for which no provision for U.S. income tax had been made.

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CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
This Form 10-K, including Management’s Discussion and Analysis, contains statements that are forward-looking based on management’s current expectations about the future. Forward-looking statements are often identified by qualifiers, such as “guidance”, “expect”, “believe”, “plan”, “intend”, “will”, “should”, “could”, “would”, “anticipate”, “estimate”, “forecast”, “may”, "optimistic" and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’s control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law.
Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability, or changes in supplier distribution programs; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems;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, and legislation, or policies, both enacted and under consideration, including with respect to health care and federal tax policy, (e.g., affecting the use of the LIFO inventory accounting method and the taxation of foreign-sourced income);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. We doAs of June 30, 2018, we did not currently have any outstanding derivative instruments.
Foreign Currency Exchange Rate Risk
Because we operate throughout North America, Australia and New Zealand and approximately 18.7%14.9% of our fiscal year 20152018 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, (income), net. Applied does not currently hedge the net investments in our foreign operations.
During the course of the fiscal year, the Canadian, Mexican, Australian, Mexican and New Zealand foreigncurrency exchange rates decreased in relation to the U.S. dollar by 13.7%2.0%, 18.9%9.2%, 17.0%4.1%, and 22.3%7.4%, respectively. In the twelve months ended June 30, 2015,2018, we experienced net foreign currency translation losses totaling $58.2$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 from the levels experienced during the year ended June 30, 2015 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 $1.4$0.9 million decrease in net income for the year ended June 30, 2015.2018. A 10% weakening from the levels experienced during the year ended June 30, 2015 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 $1.4$0.9 million increase in net income for the year ended June 30, 2015.2018.
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 $150.0$250.0 million in borrowings and $52.0$19.5 million outstanding at June 30, 2015, our $100.02018, and a $780.0 million five year term loan, facility, $96.9 million of which $775.1 million was outstanding at June 30, 2015,2018. Fixed interest rate debt facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $2.1$1.4 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $191.4$431.7 million during fiscal 2015.2018. 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 $1.9$4.3 million increase in interest expense. Changes in market interest rates would also impact interest rates on these facilities.
We monitor depository institutions that hold our cash and cash equivalents, primarily for safety of principal and secondarily for maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any of these entities.
For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and note 5 to the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business.


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

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

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the "Company"“Company”) as of June 30, 20152018 and 2014, and2017, 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, 2015. Our audits also included2018, and the financial statementrelated notes and the schedule listed in the Index at Item 15. 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 and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on
our audits. We 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 Public Company Accounting Oversight BoardPCAOB (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, 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 supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of theCompany at June 30, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2015, 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 26, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP
Cleveland, Ohio

August 26, 201517, 2018

We have served as the Company's auditor since 1966.
26

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

Year Ended June 30, 2015
 2014
 2013
Net Sales $2,751,561
 $2,459,878
 $2,462,171
Cost of Sales 1,981,747
 1,772,952
 1,779,209
Gross Profit 769,814
 686,926
 682,962
Selling, Distribution and Administrative, including depreciation
 585,195
 522,568
 506,563
Operating Income 184,619
 164,358
 176,399
Interest Expense 8,121
 900
 621
Interest Income (252) (651) (456)
Other Expense (Income), net 879
 (2,153) (1,431)
Income Before Income Taxes 175,871
 166,262
 177,665
Income Tax Expense 60,387
 53,441
 59,516
Net Income $115,484
 $112,821
 $118,149
Net Income Per Share — Basic $2.82
 $2.69
 $2.81
Net Income Per Share — Diluted $2.80
 $2.67
 $2.78
Year Ended June 30, 2018
 2017
 2016
Net Sales $3,073,274
 $2,593,746
 $2,519,428
Cost of Sales 2,189,279
 1,856,051
 1,812,006
Gross Profit 883,995
 737,695
 707,422
Selling, Distribution and Administrative, including depreciation 658,168
 562,309
 552,846
Goodwill Impairment —
 —
 64,794
Operating Income 225,827
 175,386
 89,782
Interest Expense 24,142
 8,831
 9,004
Interest Income (657) (290) (241)
Other (Income) Expense, net (2,376) (121) 2,041
Income Before Income Taxes 204,718
 166,966
 78,978
Income Tax Expense 63,093
 33,056
 49,401
Net Income $141,625
 $133,910
 $29,577
Net Income Per Share — Basic $3.65
 $3.43
 $0.75
Net Income Per Share — Diluted $3.61
 $3.40
 $0.75

See notes to consolidated financial statements.


27

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In thousands)

Year Ended June 30, 2015
 2014
 2013
Net income per the statements of consolidated income $115,484
 $112,821
 $118,149
       
Other comprehensive (loss) income, before tax:      
Foreign currency translation adjustments (58,233) 629
 (1,358)
Postemployment benefits:      
  Actuarial (loss) gain on remeasurement (776) 1,402
 3,153
  Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs 286
 382
 872
Unrealized (loss) gain on investment securities available for sale (38) 112
 10
Total other comprehensive (loss) income, before tax (58,761) 2,525
 2,677
Income tax (benefit) expense related to items of other comprehensive income (loss) (205) 719
 1,529
Other comprehensive (loss) income, net of tax (58,556) 1,806
 1,148
Comprehensive income $56,928
 $114,627
 $119,297
Year Ended June 30, 2018
 2017
 2016
Net income per the statements of consolidated income $141,625
 $133,910
 $29,577
       
Other comprehensive (loss) income, before tax:      
Foreign currency translation adjustments (8,875) 2,238
 (24,441)
Post-employment benefits:      
  Actuarial gain (loss) on re-measurement 709
 2,038
 (1,998)
  Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs (73) 506
 518
Unrealized gain (loss) on investment securities available for sale 37
 91
 (52)
Total other comprehensive (loss) income, before tax (8,202) 4,873
 (25,973)
Income tax expense (benefit) related to items of other comprehensive income (loss) 319
 1,029
 (598)
Other comprehensive (loss) income, net of tax (8,521) 3,844
 (25,375)
Comprehensive income $133,104
 $137,754
 $4,202

See notes to consolidated financial statements.

28

CONSOLIDATED BALANCE SHEETS
(In thousands)

June 30, 2015
 2014
Assets    
Current assets    
Cash and cash equivalents $69,470
 $71,189
Accounts receivable, less allowances of $10,621 and $10,385 376,305
 375,732
Inventories 362,419
 335,747
Other current assets 51,111
 53,480
Total current assets 859,305
 836,148
Property — at cost    
Land 12,950
 13,212
Buildings 89,325
 89,886
Equipment, including computers and software 166,515
 157,370
Total property — at cost 268,790
 260,468
Less accumulated depreciation 164,343
 156,872
Property — net 104,447
 103,596
Identifiable intangibles, net 198,828
 159,508
Goodwill 254,406
 193,494
Deferred tax assets 97
 21,166
Other assets 17,885
 20,257
Total Assets $1,434,968
 $1,334,169
Liabilities    
Current liabilities    
Accounts payable $179,825
 $172,401
Current portion of long term debt 3,349
 2,720
Compensation and related benefits 63,780
 55,760
Other current liabilities 63,118
 60,074
Total current liabilities 310,072
 290,955
Long-term debt 317,646
 167,992
Post-employment benefits 19,627
 23,611
Other liabilities 46,295
 51,303
Total Liabilities 693,640
 533,861
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 10,000
 10,000
Additional paid-in capital 160,072
 156,999
Retained earnings 969,548
 896,776
Treasury shares — at cost (14,308 and 12,650 shares) (338,121) (261,852)
Accumulated other comprehensive income (loss) (60,171) (1,615)
Total Shareholders’ Equity 741,328
 800,308
Total Liabilities and Shareholders’ Equity $1,434,968
 $1,334,169
June 30, 2018
 2017
Assets    
Current assets    
Cash and cash equivalents $54,150
 $105,057
Accounts receivable, less allowances of $13,566 and $9,628 548,811
 390,931
Inventories 422,069
 345,145
Other current assets 32,990
 41,409
Total current assets 1,058,020
 882,542
Property — at cost    
Land 14,411
 14,250
Buildings 104,419
 97,529
Equipment, including computers and software 177,813
 162,432
Total property — at cost 296,643
 274,211
Less accumulated depreciation 175,300
 166,143
Property — net 121,343
 108,068
Identifiable intangibles, net 435,947
 163,562
Goodwill 646,643
 206,135
Other assets 23,788
 27,288
Total Assets $2,285,741
 $1,387,595
Liabilities    
Current liabilities    
Accounts payable $256,886
 $180,614
Current portion of long-term debt 19,183
 4,814
Compensation and related benefits 73,370
 58,785
Other current liabilities 83,112
 65,540
Total current liabilities 432,551
 309,753
Long-term debt 944,522
 286,769
Post-employment benefits 11,985
 16,715
Other liabilities 81,720
 29,102
Total Liabilities 1,470,778
 642,339
Shareholders’ Equity    
Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding —
 —
Common stock — no par value; 80,000 shares authorized; 54,213 shares issued;
38,703 and 39,041 shares outstanding, respectively
 10,000
 10,000
Additional paid-in capital 169,383
 164,655
Retained earnings 1,129,678
 1,033,751
Treasury shares — at cost (15,510 and 15,172 shares), respectively (403,875) (381,448)
Accumulated other comprehensive loss (90,223) (81,702)
Total Shareholders’ Equity 814,963
 745,256
Total Liabilities and Shareholders’ Equity $2,285,741
 $1,387,595

See notes to consolidated financial statements.

29

STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)

Year Ended June 30, 2015
 2014
 2013
Cash Flows from Operating Activities      
Net income $115,484
 $112,821
 $118,149
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization of property 16,578
 13,977
 12,501
Amortization of intangibles 25,797
 14,023
 13,233
Amortization of stock appreciation rights and options 1,610
 1,808
 2,317
Deferred income taxes (4,961) (8,209) 10,179
Provision for losses on accounts receivable 2,597
 3,970
 2,267
Unrealized foreign exchange transaction losses (gains) (727) 204
 (1,410)
Other share-based compensation expense 2,851
 2,703
 3,444
Shares issued for deferred compensation plans 45
 161
 241
Gain on sale of property (1,291) (53) (321)
Changes in operating assets and liabilities, net of acquisitions:      
Accounts receivable 13,129
 (29,089) (15,721)
Inventories (15,704) (29,171) (26,745)
Other operating assets 797
 17,966
 (7,857)
Accounts payable 1,040
 21,369
 12,206
Other operating liabilities (2,707) (12,370) (11,086)
Cash provided by Operating Activities 154,538
 110,110
 111,397
Cash Flows from Investing Activities      
Property purchases (14,933) (20,190) (12,214)
Proceeds from property sales 1,932
 877
 979
Net cash paid for acquisition of businesses, net of cash acquired of $0, $1,369, and $0 in 2015, 2014 and 2013, respectively (160,620) (184,324) (67,590)
Cash used in Investing Activities (173,621) (203,637) (78,825)
Cash Flows from Financing Activities      
Net (repayments) borrowings under revolving credit facility, classified as long term (17,000) 69,000
 —
Borrowings under long term debt facilities 170,000
 100,000
 —
Long term debt repayments (2,717) (647) —
Purchases of treasury shares (76,515) (36,732) (53)
Dividends paid (42,663) (40,410) (37,194)
Excess tax benefits from share-based compensation 1,042
 2,674
 2,566
Acquisition holdback payments (7,693) (1,839) (3,843)
Exercise of stock appreciation rights and options 235
 96
 499
Cash provided by (used in) Financing Activities 24,689
 92,142
 (38,025)
Effect of exchange rate changes on cash (7,325) (590) 175
Decrease in cash and cash equivalents (1,719) (1,975) (5,278)
Cash and cash equivalents at beginning of year 71,189
 73,164
 78,442
Cash and Cash Equivalents at End of Year $69,470
 $71,189
 $73,164
       
Supplemental Cash Flow Information      
Cash paid during the year for:      
Income taxes $69,272
 $51,548
 $51,816
Interest 5,851
 1,026
 501
Year Ended June 30, 2018
 2017
 2016
Cash Flows from Operating Activities      
Net income $141,625
 $133,910
 $29,577
Adjustments to reconcile net income to net cash provided by operating activities:      
Goodwill impairment —
 —
 64,794
Depreciation and amortization of property 17,798
 15,306
 15,966
Amortization of intangibles 32,065
 24,371
 25,580
Amortization of stock appreciation rights and options 1,961
 1,891
 1,543
Deferred income taxes 1,615
 (2,852) (6,581)
Provision for losses on accounts receivable 2,803
 2,071
 4,303
Unrealized foreign exchange transaction (gains) losses (667) (333) 61
Other share-based compensation expense 4,666
 3,629
 2,524
(Gain) loss on sale of property (335) (1,541) 337
Other —
 103
 —
Changes in operating assets and liabilities, net of acquisitions:      
Accounts receivable (83,103) (42,267) 26,414
Inventories (33,436) (3,624) 25,081
Other operating assets 6,947
 (6,162) 2,964
Accounts payable 50,345
 32,076
 (28,644)
Other operating liabilities 5,020
 8,041
 (1,905)
Cash provided by Operating Activities 147,304
 164,619
 162,014
Cash Flows from Investing Activities      
Property purchases (23,230) (17,045) (13,130)
Proceeds from property sales 978
 2,924
 603
Cash paid for acquisition of businesses, net of cash acquired (775,654) (2,773) (62,504)
Cash used in Investing Activities (797,906) (16,894) (75,031)
Cash Flows from Financing Activities      
Net borrowings (repayments) under revolving credit facility, classified as long term 19,500
 (33,000) (19,000)
Borrowings under long-term debt facilities 780,000
 —
 125,000
Long-term debt repayments (125,420) (3,353) (98,662)
Debt issuance costs (3,298) —
 (719)
Purchases of treasury shares (22,778) (8,242) (37,465)
Dividends paid (45,858) (44,619) (43,330)
Excess tax benefits from share-based compensation —
 —
 208
Acquisition holdback payments (319) (11,307) (18,913)
Exercise of stock appreciation rights and options 102
 656
 896
Taxes paid for shares withheld (1,645) (3,484) (1,022)
Cash provided by (used in) Financing Activities 600,284
 (103,349) (93,007)
Effect of exchange rate changes on cash (589) 820
 (3,585)
(Decrease) increase in cash and cash equivalents (50,907) 45,196
 (9,609)
Cash and cash equivalents at beginning of year 105,057
 59,861
 69,470
Cash and Cash Equivalents at End of Year $54,150
 $105,057
 $59,861
       
Supplemental Cash Flow Information      
Cash paid during the year for:      
Income taxes 41,724
 38,772
 54,749
Interest 25,560
 8,561
 9,497
See notes to consolidated financial statements.


30

STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands)

For the Years Ended June 30, 2015, 2014 and 2013 
Shares of
Common
Stock
Outstanding

 
Common
Stock

 
Additional
Paid-In
Capital

 

Retained
Earnings

 
Treasury
Shares-
at Cost

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Total
Shareholders'
Equity

Balance at July 1, 2012 41,967
 $10,000
 $150,070
 $743,360
 $(226,730) $(4,569) $672,131
Net income       118,149
     118,149
Other comprehensive income (loss)           1,148
 1,148
Cash dividends — $0.88 per share       (37,194)     (37,194)
Purchases of common stock for treasury (1)       (53)   (53)
Treasury shares issued for:             
Exercise of stock appreciation rights and options 129
   (175)   1,086
   911
Performance share awards 53



(1,675)


74



(1,601)
Deferred compensation plans 5
   131
   110
   241
Compensation expense — stock appreciation rights and options     2,317
       2,317
Other share-based compensation expense     3,444
       3,444
Other 16
   (219) 47
 294
   122
Balance at June 30, 2013 42,169
 10,000
 153,893
 824,362
 (225,219) (3,421) 759,615
Net income       112,821
     112,821
Other comprehensive income (loss)           1,806
 1,806
Cash dividends — $0.96 per share       (40,410)     (40,410)
Purchases of common stock for treasury (760)       (36,732)   (36,732)
Treasury shares issued for:              
Exercise of stock appreciation rights and options 76
   849
   324
   1,173
Performance share awards 36
   (1,062)   (21)   (1,083)
Restricted stock units 31
   (1,110)   (247)   (1,357)
Deferred compensation plans 3
   98
   63
   161
Compensation expense — stock appreciation rights and options     1,808
   
   1,808
Other share-based compensation expense     2,703
       2,703
Other 8
   (180) 3
 (20)   (197)
Balance at June 30, 2014 41,563
 10,000
 156,999
 896,776
 (261,852) (1,615) 800,308
Net income       115,484
     115,484
Other comprehensive income (loss)           (58,556) (58,556)
Cash dividends — $1.04 per share       (42,663)     (42,663)
Purchases of common stock for treasury (1,740)       (76,515)   (76,515)
Treasury shares issued for:              
Exercise of stock appreciation rights and options 34
   552
   415
   967
Performance share awards 12
   (425)   52
   (373)
Restricted stock units 36
   (1,312)   76
   (1,236)
Deferred compensation plans 1
   24
   21
   45
Compensation expense — stock appreciation rights and options     1,610
       1,610
Other share-based compensation expense     2,851
       2,851
Other (1)   (227) (49) (318)   (594)
Balance at June 30, 2015 39,905
 $10,000
 $160,072
 $969,548
 $(338,121) $(60,171) $741,328
For the Years Ended June 30, 2018, 2017 and 2016 
Shares of
Common
Stock
Outstanding

 
Common
Stock

 
Additional
Paid-In
Capital

 

Retained
Earnings

 
Treasury
Shares-
at Cost

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Total
Shareholders'
Equity

Balance at July 1, 2015 39,905
 $10,000
 $160,072
 $969,548
 $(338,121) $(60,171) $741,328
Net income       29,577
     29,577
Other comprehensive income (loss)           (25,375) (25,375)
Cash dividends — $1.10 per share       (54,266)     (54,266)
Purchases of common stock for treasury (951)       (37,465)   (37,465)
Treasury shares issued for:             
Exercise of stock appreciation rights and options 64
   (391)   1,000
   609
Performance share awards 8
 
 (308) 
 116
 
 (192)
Restricted stock units 15
   (530)   232
   (298)
Compensation expense — stock appreciation rights and options 
   1,543
   
   1,543
Other share-based compensation expense     2,524
       2,524
Other 16
   (381) (38) 350
   (69)
Balance at June 30, 2016 39,057
 10,000
 162,529
 944,821
 (373,888) (85,546) 657,916
Net income       133,910
     133,910
Other comprehensive income (loss)           3,844
 3,844
Cash dividends — $1.14 per share       (45,005)     (45,005)
Purchases of common stock for treasury (163)       (8,242)   (8,242)
Treasury shares issued for:              
Exercise of stock appreciation rights and options 111
   (2,218)   105
   (2,113)
Performance share awards 10
   (360)   126
   (234)
Restricted stock units 15
   (624)   227
   (397)
Compensation expense — stock appreciation rights and options     1,891
       1,891
Other share-based compensation expense     3,629
       3,629
Other 11
   (192) 25
 224
   57
Balance at June 30, 2017 39,041
 10,000
 164,655
 1,033,751
 (381,448) (81,702) 745,256
Net income       141,625
     141,625
Other comprehensive income (loss)           (8,050) (8,050)
Reclassifications of certain income tax effects from accumulated other comprehensive loss       471
   (471) —
Cash dividends — $1.18 per share 
     (46,162)     (46,162)
Purchases of common stock for treasury (393)   
   (22,778)   (22,778)
Treasury shares issued for:              
Exercise of stock appreciation rights and options 19
   (482)   84
   (398)
Performance share awards 5
   (273)   (24)   (297)
Restricted stock units 15
   (740)   (56)   (796)
Compensation expense — stock appreciation rights and options     1,961
       1,961
Other share-based compensation expense     4,666
       4,666
Other 16
   (404) (7) 347
   (64)
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.


31

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 distributorsupplies, serving Maintenance Repair & Operations (MRO) and Original Equipment Manufacturer (OEM) customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for industrial, and fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, and fluid power, and flow control shop services. Applied also offers maintenance trainingstoreroom 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. For the year ended June 30, 2013 the financial results of the Company’s Canadian and Mexican subsidiaries were included in the consolidated financial statements for the twelve months ended May 31. During fiscal 2014, the Company eliminated the one month reporting lag for both the Canadian and Mexican subsidiaries in the first and third quarters respectively. See the "Change in Accounting Principle" section below for additional information related to the elimination of the reporting lag.
Foreign Currency
The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive (loss) income (loss) in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other (income) expense, (income), net.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.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, (income), net in the statements of consolidated income.
Concentration of Credit Risk
The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and New Zealand.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 Appliedthe 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 theCompany 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, 2015,2018, approximately 22.1%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 or obsoleteand 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 LIFO inventory accounting methodmethods 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 sheetsheets 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 expensesexpense 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 livedindefinite-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 expensesexpense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expenses were approximately $24,430, $16,230$19,320, $20,060 and $15,560$21,480 for the fiscal years ended June 30, 2015, 20142018, 2017 and 2013, respectively.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 the Accounting Standards Codification ("ASC") Topic 740 - Income Taxes topic of the ASC (Accounting Standards Codification). The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes.

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Share-Based Compensation
Share-based compensation represents the cost related to share-based awards granted to employees under eitherthe 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-yearten-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.
ChangesRecently Adopted Accounting Guidance
Change in Accounting Principle - Net Periodic and Post-retirement Benefit Costs
U.S. Inventory Costing Methodology
From fiscal 2013 throughIn March 2017, the endFASB 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 2014, the Company implemented SAP as its new enterprise resource planning system (ERP) at its U.S. service centers. As implementation occurred at each service center, the method used to apply the link chain dollar value last-in first-out (LIFO) method of accounting changed for the inventories at that location.2018. The new inventory costing methodology utilizes the weighted-average cost method to determine the current year LIFO indices as well as any new LIFO layers established, whereas previously, current costs were used. Upon completion of the implementation, on July 1, 2014 the Company changed its accounting policy to the new method. Differences between amounts recognized in the financial statements during the implementation period and the previous accounting policy prior to July 1, 2014 were immaterial.
The Company believes that this change in accounting principle is preferable under the circumstances because weighted-average cost will provide a better reflection of actual transactions and inventory purchases, resulting in improved matching of actual costs and current revenues. This change will also result in greater consistency in inventory costing across the organization, as certain other U.S. locations were previously using weighted-average cost for similar LIFO calculations in their legacy inventory systems, and the new ERP system will make inventory costing a more efficient process within the U.S. ASC 250, "Accounting Changes and Error Corrections," requires that unless it is impracticable to do so, the voluntary adoption of a new accounting principle should be done retrospectively to all prior periods. Before July 1, 2014, the Company’s former ERP system did not capture weighted-average costs within the U.S. and the data needed to recalculate previous LIFO indices does not exist. Thus, the Company has concluded it is impracticable to recognize a cumulative effect or to retrospectively apply the effect of this change in accounting principle prior to July 1, 2014, but believes that those effects would be immaterial in all periods.
Alignment of Canadian Subsidiary Reporting
Effective July 1, 2013, the Company aligned the consolidation of the Company’s Canadian subsidiary in the consolidated financial statements, which previously included the results on a one month reporting lag. The Company believes that this change in accounting principle is preferable as it provides contemporaneous reporting within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of a one month reporting lag of a subsidiary is treated as a change in accounting principle and requires retrospective application. The Company determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the lag elimination was $1,200adoption 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, forresulting 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 month of June 2013 and has been included within “Other (Income) Expense, net” on the statementstatements of consolidated income for the yearyears ended June 30, 2014.2018, and 2017, and 2016, respectively. The statement of consolidated incomeCompany used a practical expedient where the amounts disclosed in our Benefit Plans footnote for the prior year ended June 30, 2014 reflectscomparative periods were the same results, had the financial statements been retrospectively adjusted, with the exception of net income which would have decreased by $1,200. Net sales, operating income and net incomebasis for the year ended June 30, 2013 would have decreased by $1,050, $600estimation 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 $500 hadJobs 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 financial statements been retrospectively adjusted.

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Alignment of Mexican Subsidiary Reporting
Effective January 1, 2014,fiscal 2018 using the Company alignedat the consolidationbeginning of the Company’s Mexican subsidiaryperiod 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 consolidated financial statements, which previously included the results on a one month reporting lag. The Company believes thatfourth quarter of fiscal 2018 and will apply this change in accounting principle is preferable as it provides contemporaneous reporting within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of a one month reporting lag of a subsidiary is treated as a change in accounting principleguidance prospectively to its annual and requires retrospective application. The Company determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the lag elimination was $200 of income for the month of December 2013 and has been included within “Other (Income) Expense, net” on the statement of consolidated income for year ended June 30, 2014. Net sales, operating income and net income for the year ended June 30, 2014 would have decreased by $1,100, $100 and $250 had the financial statements been retrospectively adjusted. Net sales, operating income and net income for the year ended June 30, 2013 would have decreased by $900, $400 and $250 had the financial statements been retrospectively adjusted.interim goodwill impairment tests.
NewRecently Issued Accounting PronouncementsGuidance
In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers.
The standard, issued as Accounting Standards Update (ASU)ASU 2014-09, outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including

industry specific guidance. The core principle of this model is that "an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services." On July 9,In August 2015, the FASB agreedissued 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, 2017.2017 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 June 2014,August 2016, the FASB issued its final standard on accounting for share-basedthe classification of certain cash receipts and cash payments whenwithin the termsstatement of an award provide that a performance target could be achieved after the requisite service period. Thecash flows. This standard, issued as ASU 2014-12, clarifies that2016-15, makes a performance target that affects vestingnumber of changes meant to add or clarify guidance on the classification of certain cash receipts and that can be achieved afterpayments in the requisite service period, should be treated as a performance condition. Thestatement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2015,2018, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
In April 2015,October 2016, the FASB issued its final standard on simplifying the presentationincome tax consequences of debt issue costs.intra-entity transfers of assets other than inventory. This standard, issued as ASU 2015-03,2016-16, requires that all costs incurred to issue debt be presented inan entity recognize the balance sheet as a direct reduction fromincome tax consequences of an intra-entity transfer of an asset other than inventory when the carrying valuetransfer occurs and eliminates the exception for an intra-entity transfer of the debt, similar to the presentation of debt discounts.an asset other than inventory. This update is effective for annual and interim financial statement periods beginning after December 15, 2015, and interim periods within those fiscal years,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 the adoption of this guidance will result in the reclassification of the unamortized debt issuance costspronouncement on the consolidated balance sheets, which were $622its financial statements and $703 at June 30, 2015 and 2014, respectively.related disclosures.


NOTE 2: BUSINESS COMBINATIONS
The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition.
KnoxFCX Acquisition
On July 1, 2014,January 31, 2018, the Company acquiredcompleted the acquisition of 100% of the outstanding stockshares of Knox Oil Field SupplyFCX Performance, Inc. (“Knox”("FCX"), headquartered in San Angelo, Texas, fora Columbus, Ohio based distributor of specialty process flow control products and services. The total consideration of $132,000, including cash paid of $118,000 at closing. The primary reasontransferred for the acquisition was $781,781, which was financed by cash-on-hand and a new credit facility comprised of Knox is to complementa $780,000 Term Loan A and expanda $250,000 revolver, effective with the Company’s capabilities to serve the upstream oil and gas industry in the United States.transaction closing. See note 5 Debt. As a distributor of oilfield supplieshighly engineered valves, instruments, pumps and relatedlifecycle services to MRO and OEM customers across diverse industrial and process end markets, this business iswill be included in the Service Center Based DistributionFluid Power & Flow Control Segment. The Company funded the acquisition by drawing $120,000 from the previously uncommitted shelf facility with Prudential Investment Management at a fixed interest rate of 3.19% with an average seven year life. The remaining $14,000 purchase price will be paid as acquisition holdback payments on the first three anniversaries of the acquisition with interest at a fixed rate of 1.50% per annum.

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The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of KnoxFCX based on their preliminary estimated fair values at the acquisition date:
date, which are subject to adjustment. The purchase accounting will be finalized within one year from the acquisition date.
 Knox Acquisition
 2015
Accounts receivable$19,100
Inventories18,800
Property3,900
Identifiable intangible assets58,500
Goodwill63,200
Total assets acquired163,500
Accounts payable and accrued liabilities7,200
Deferred income taxes24,300
Net assets acquired$132,000
  
Purchase price$132,800
Reconciliation of fair value transferred: 
Working Capital Adjustments(800)
Total Consideration$132,000
 FCX Acquisition
 2018
Cash$11,141
Accounts receivable80,836
Inventories47,325
Other current assets1,657
Property8,282
Identifiable intangible assets305,420
Goodwill439,164
Other assets775
Total assets acquired$894,600
Accounts payable and accrued liabilities54,518
Other liabilities2,677
Deferred tax liabilities55,624
Net assets acquired$781,781
  
Purchase price$784,281
Reconciliation of fair value transferred: 
Working Capital Adjustments(2,500)
Total Consideration$781,781
NoneGoodwill acquired of the goodwill acquired$160,814 is expected to be deductible for income tax purposes. The goodwill recognized is attributable primarily to expected synergies
Net sales, operating income and other benefits that the Company believes will resultnet income from the FCX acquisition of Knox.
Reliance Acquisition
On May 1, 2014, the Company acquired 100% of the outstanding stock of Reliance Industrial Products (“Reliance”), headquartered in Nisku, Alberta, Canada, with operations in Western Canada and the Western United States, for a total purchase priceincluded in the amountCompany’s results since January 31, 2018, the date of $188,500. The primary reasons for the acquisition, are to provide the Company enhanced capabilities to serve the upstream oil and gas industry in the United States and Canada. A distributor of fluid conveyance and oilfield supplies, this business is included in the Service Center Based Distribution Segment. The Company funded the acquisition by using available cash in Canada in the amount of $31,900, existing revolving credit facilities of $36,600 and a new $100,000 five year term loan facility, with the remainder of $20,000 to be paid in equal amounts as acquisition holdback payments on the first two anniversaries of the acquisition, plus interest at 2% per annum.

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The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of Reliance based on their estimated fair values at the acquisition date:
follows:
 Reliance Acquisition
 2014
Accounts receivable$20,600
Inventories22,900
Other current assets6,000
Property12,900
Identifiable intangible assets73,200
Goodwill79,500
Total assets acquired215,100
Accounts payable and accrued liabilities15,800
Deferred income taxes19,500
Net assets acquired$179,800
  
Purchase price$188,500
Reconciliation of fair value transferred: 
Cash acquired(1,400)
Working capital adjustments(8,200)
Debt assumed900
Total Consideration$179,800
None of the goodwill acquired is expected to be deductible for income tax purposes. The goodwill recognized is attributable primarily to expected synergies and other benefits that the Company believes will result from the acquisition of Reliance.
 January 31, 2018 to June 30, 2018
Net sales$249,752
Operating income16,845
Net income8,758
The Companycompany incurred $1,448$2,849 in third partythird-party costs during fiscal 20142018 pertaining to the acquisition of Reliance. These expensesFCX, which are included in the selling, distribution and administration expense line in the statementstatements of consolidated income for the year ended June 30, 2014.fiscal 2018.
Knox and Reliance Pro Forma Results (Unaudited)
The following unaudited pro forma consolidated results of operations have been prepared as if the RelianceFCX acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2013 and the Knox acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2014:
2017:
Pro forma, year ended June 30:2014
2013
    Sales$2,687,903
$2,600,453
    Operating income$184,164
$187,419
    Net income$121,158
$128,779
    Diluted net income per share$2.86
$3.03
Pro forma, year ended June 30:2018
2017
Net sales$3,330,430
$2,943,583
Operating income234,603
196,194
Net income158,181
126,270
Diluted net income per share$4.03
$3.20
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect additional depreciation and amortization that would have been chargedrecorded assuming the fair value adjustments to property, plant, and equipment, and amortizableidentified intangible assets had been applied as of July 1, 2013.2016. 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 Reliance and Knox;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.

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Other Fiscal 2015 Acquisitions
Other acquisitions during the year include the acquisition of substantially all of the net assets of Rodamientos y Derivados del Norte S.A. de C.V., a Mexican distributor of bearings and power transmission products and related products, and Great Southern Bearings / Northam Bearings, a Western Australia distributor of bearings and power transmission products on July 1, 2014 as well as Ira Pump and Supply Inc. (Ira Pump) a Texas distributor of oilfield pumps and supplies on November 3, 2014. These companies are included in the Service Center Based Distribution Segment. The total combined consideration for these acquisitions was approximately $54,900. Net tangible assets acquired were $21,200 and intangibles including goodwill were $33,700, based upon estimated fair values at the acquisition date. The estimated fair values related to Ira Pump are preliminary and subject to adjustment. The Company funded these acquisitions from borrowings under our existing debt facilities. Total acquisition holdback payments of $6,900 will be paid at various times through July 2017. The results of operations for the Mexican, Australian and Ira Pump acquisitions are not material for any period presented.future.
Other Fiscal 2014 Acquisitions2018 Acquisition
In December 2013,On July 3, 2017, the Company acquired substantially all100% of the net assetsoutstanding stock of Texas Oilpatch Services Corporation,Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a Texas distributor of bearings, oil seals, power transmission products,accessories and related replacement parts to the oilfield industry. The acquired businesscomponents for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment. The purchase price for thisthe acquisition was $17,000,$5,920, net tangible assets acquired was $3,863were $3,395, and intangibles, including goodwill was $13,137.$2,525 based upon estimated fair values at the acquisition date. The purchase price includes $2,550$906 of acquisition holdback paymentspayments. 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 have beenwill be paid into an escrow account controlled byon the first three anniversaries of the acquisition with interest at a third party.fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations offor the acquired entity are not material in relation to the Company’sCompany's consolidated financial statements.
Fiscal 2013 Acquisitions2017 Acquisition
In December 2012,On March 3, 2017, the Company acquired substantially all of the net assets of Norma Bearings, Inc.Sentinel Fluid Controls ("Sentinel"), a distributor of bearingshydraulic and power transmission products, located in Laval, Quebec. The acquired businesslubrication components, systems and solutions operating from four locations. Sentinel is included in the Service Center Based DistributionFluid Power & Flow Control segment. In December 2012,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 Parts Associates, Inc.HUB Industrial Supply ("HUB"), a distributor of maintenance suppliesconsumable industrial products operating from three locations - Lake City, FL, Indianapolis, IN, and solutions, headquartered in Cleveland, Ohio. The acquired business is included in the Service Center Based Distribution segment. In November 2012,Las Vegas, NV. On August 3, 2015, the Company acquired substantially all of the net assets of Hyquip,Atlantic Fasteners Co., Inc., a Wisconsin distributor of a broad line of hydraulic, rubber and plastic industrial hose and tubing, plus related accessories. The acquired business is included in the Fluid Power Businesses segment. In September 2012, the Company acquired 100% of the outstanding stock of Bearings & Oil Seals Specialists Inc. ("Atlantic Fasteners"), a distributor of gaskets, seals, bearingC-Class consumables including industrial fasteners and power transmission products,related industrial supplies located in Hamilton, Ontario. The acquired business isAgawam, MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. In August 2012,On October 1, 2015, the Company acquired 100%substantially all of the outstanding stocknet assets of SKF Group's company-owned distribution businessS.G. Morris Co. ("SGM"). SGM, headquartered in AustraliaCleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania and New Zealand ("Applied Australia"). As one of the largest bearing suppliers in these markets, Applied Australia also distributes seals, lubrication products,West Virginia and power transmission products. The acquired business is included in the Service Center Based DistributionFluid Power & Flow Control segment.
The following table summarizes thetotal 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 of assets acquired and liabilities assumed for these acquisitions:
 2013
Accounts receivable$7,500
Inventories23,700
Other current assets200
Property1,100
Identifiable Intangibles assets19,800
Goodwill24,400
Total assets acquired76,700
Accounts payable and accrued liabilities1,900
Other current liabilities6,200
Net assets acquired$68,600
  
Purchase price$68,600


39

at the acquisition dates. The purchase price included $1,015 that was deferred, sometotal combined consideration includes $3,300 of which has been paid as acquisition holdback payments, of which $1,250 was paid during fiscal year 2017. The remaining balance of $2,050 is included in fiscal 2015other 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

available cash and 2014. Additional 2013 pro-forma information hasborrowings under the revolving credit facility at variable interest rates. The acquisition prices and the results of operations for the acquired entities are not been included as it is not material.material in relation to the Company's consolidated financial statements.
Holdback Liabilities for Acquisitions
Acquisition holdback payments of approximately $19,200, $6,500$2,592, $283, $415 and $3,900$75 will be made in fiscal 2016, 20172019, 2020, 2021, and 2018,2024, respectively. The related liabilities for these payments are recorded in the Consolidated Balance Sheetsconsolidated balance sheets in other current liabilities for the amounts due in fiscal year 20162019 and other liabilities for the amounts due in fiscal years 20172020 through 2018.2024.
NOTE 3: INVENTORIES
Inventories consist of the following:
June 30, 2015
 2014
U.S. inventories at average cost $397,524
 $363,692
Foreign inventories at average cost 116,674
 123,468
  514,198
 487,160
Less: Excess of average cost over LIFO cost for U.S. inventories 151,779
 151,413
Inventories on consolidated balance sheets $362,419
 $335,747
June 30, 2018
 2017
U.S. inventories at average cost $443,521
 $373,984
Foreign inventories at average cost 117,711
 108,734
  561,232
 482,718
Less: Excess of average cost over LIFO cost for U.S. inventories 139,163
 137,573
Inventories on consolidated balance sheets $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 2013,2017, reductions in U.S. inventories, primarily in the bearings pool which included the scrapping of approximately $6,000 of product, resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The overall impact of LIFO layer liquidations increased gross profit by $6,300 in fiscal 2013. There were no LIFO layer liquidations in fiscal 2015 or 2014.
NOTE 4: GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for both the Service Center Based Distribution Segmentsegment and the Fluid Power Businesses& Flow Control segment for the years ended June 30, 20152018 and 20142017 are as follows:
 Service Center Based Distribution
 Fluid Power Businesses
 Total
Balance at July 1, 2013$105,920
 $929
 $106,849
Goodwill acquired during the year84,798
 —
 84,798
Other, primarily currency translation1,847
 —
 1,847
Balance at June 30, 2014192,565
 929
 193,494
Goodwill acquired during the year77,728
 —
 77,728
Other, primarily currency translation(16,816) —
 (16,816)
Balance at June 30, 2015$253,477
 $929
 $254,406
 Service Center Based Distribution
 Fluid Power & Flow Control
 Total
Balance at July 1, 2016$198,486
 $4,214
 $202,700
Goodwill added during the year3,220
 625
 3,845
Other, primarily currency translation34
 (444) (410)
Balance at June 30, 2017201,740
 4,395
 206,135
Goodwill added during the year2,525
 439,164
 441,689
Other, primarily currency translation(1,181) —
 (1,181)
Balance at June 30, 2018$203,084
 $443,559
 $646,643
At June 30, 2015, 2014During 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 2013, accumulatedtrade 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 losses subsequenttest 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 fiscal year 2002 totaled $36,605 and relate entirelyits 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 Fluid Power Businesses segment.U.S. service center reporting unit based on the relative fair value as of July 1, 2016.
The Company has sevensix (6) reporting units and performed itsfor which an annual goodwill impairment assessment was performed as of January 1, 2015.2018.  The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts

by at least 30% as of January 1, 2018. The fair values of the reporting units in accordance with the goodwill impairment test were determined using the Income and Market approaches.  The Income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors. The Market approach utilizes an analysis of comparable publicly traded companies. 
The 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 had material excesses ofunits’ fair value compared tosubstantially exceeded their carrying amounts. The Company concluded thatcarrying value for two (2) reporting units (Canada service center and Australia / Australia/New Zealand) had excessZealand 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 approximately $39,000 and $4,000 or 15% and 14%, respectively when compared tothe reporting unit goodwill with the carrying amountsamount of approximately $258,000goodwill.  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 $28,000, respectively. 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 testtests have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions forecast at the assessment date.measurement dates. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, themeasurement date.  The Company evaluates the appropriateness of its assumptions as well as itsand overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable.years.  Key assumptions, all of which are Level 3 inputs,based assumptions relate to pricing trends, inventory costs, discount rate, customer demand, and the long-term growth and foreign exchange rates.revenue growth.  A number of benchmarks from independent industry and other economic publications were also used.  Changes in future actual results, assumptions, and estimates after the assessmentmeasurement date may lead to an outcome where additional impairment charges would be required in future

40

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:following:
June 30, 2015Amount
 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:     
Customer relationships$225,332
 $65,789
 $159,543
Trade names42,689
 13,187
 29,502
Vendor relationships14,465
 7,258
 7,207
Non-competition agreements4,578
 2,002
 2,576
Total Intangibles$287,064
 $88,236
 $198,828
June 30, 2018Amount
 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:     
Customer relationships$465,691
 $125,009
 $340,682
Trade names112,939
 22,454
 90,485
Vendor relationships11,425
 7,382
 4,043
Non-competition agreements2,761
 2,024
 737
Total Intangibles$592,816
 $156,869
 $435,947

June 30, 2014Amount
 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:     
Customer relationships$170,395
 $48,285
 $122,110
Trade names36,912
 10,394
 26,518
Vendor relationships15,446
 6,628
 8,818
Non-competition agreements3,322
 1,260
 2,062
Total Intangibles$226,075
 $66,567
 $159,508
June 30, 2017Amount
 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:     
Customer relationships$235,009
 $102,414
 $132,595
Trade names43,873
 19,295
 24,578
Vendor relationships14,152
 9,141
 5,011
Non-competition agreements3,788
 2,410
 1,378
Total Intangibles$296,822
 $133,260
 $163,562
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
During 2015,2018, the Company acquired identifiable intangible assets with ana preliminary acquisition cost allocation and weighted-average life as follows:
 Acquisition Cost Allocation
 Weighted-Average Life
Customer relationships$68,078
 19.5 years
Trade names7,627
 14.7 years
Non-competition agreements1,664
 5.0 years
Total Intangibles Acquired$77,369
 18.7 years
 Acquisition Cost Allocation
 Weighted-Average Life
Customer relationships$234,370
 20.0 years
Trade names71,050
 15.0 years
Total Intangibles Acquired$305,420
 18.8 years
AmortizationAmortization of identifiable intangibles totaled $25,797, $14,023$32,065, $24,371 and $13,233$25,580 in fiscal 2015, 20142018, 2017 and 2013,2016, 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, 20152018 is estimated to be $24,600 for 2016, $23,000 for 2017, $20,900 for 2018, $19,200$44,000 for 2019, $42,500 for 2020, $40,200 for 2021, $37,800 for 2022 and $17,500$35,300 for 2020.2023.
A significant portion of our intangible assets relate to recent acquisitions that primarily operate in the oil and gas sectors. Considering the recent downturn in the energy market, a prolonged period of low oil and natural gas prices may result in asset impairments, including potential impairment of the carrying value of our goodwill and finite-lived intangible assets.


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NOTE 5: DEBT
Revolving Credit Facility & Term Loan
TheIn January 2018, in conjunction with the acquisition of FCX, the Company hasrefinanced its existing credit facility and entered into a revolvingnew five-year credit facility with a group of banks expiring in May 2017.January 2023. This agreement provides for a $780,000 unsecured borrowings of up to $150,000.term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range from 0.09%0.10% to 0.175%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 prime, or the bank’s cost of fundsprime at the Company’sCompany's discretion. This agreement also enables the Company to refinance this debt on a long-term basis. At June 30, 2015 and 2014,2018, the Company had $52,000 and $69,000, respectively,$775,125 outstanding under this credit facility.the term loan and $19,500 outstanding under the revolver. Unused lines under this facility, net of outstanding letters of credit of $3,764$3,625 to secure certain insurance obligations, totaled $94,236$226,875 at June 30, 20152018, and arewere available to fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the loansterm loan as of June 30, 2018 was 4.13%. The weighted average interest rate on the amount outstanding onunder the revolving credit facility as of June 30, 20152018 was 1.15%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 theeither revolving credit agreement, in the amount of $1,841,$2,698 as of June 30, 2018 and June 30, 2017, respectively, in order to secure certain insurance obligations.
Other Long-Term Borrowings
The Company entered into a $100,000 unsecured five-year term loan with a group of banks in April2014 with a final maturity date in April2019. Borrowings under this agreement carry a variable interest rate tied to LIBOR, which at June 30, 2015 was a rate of 1.19%. The term loan has an outstanding amount of $96,875 and $99,375 at June 30, 2015 and 2014, respectively.
In April 2014 the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency with a remaining term of nine years, maturing in May 2024. At June 30, 2015 and 2014, $2,120 and $2,337 was outstanding, respectively.
At June 30, 2015,2018 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%, which isand are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principleprincipal amount of $50,000, and carry a fixed interest rate of 3.21% which is, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2015,2018, $50,000 in additional financing was available under this facility.

In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% 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 YearAggregate Maturity
2016$3,349
2017$57,227
2018$5,856
2019$83,359
2020$25,238
Thereafter$145,966
 Fiscal YearAggregate Maturity
2019$19,734
202049,613
202179,241
202284,120
2023708,124
Thereafter25,231
Covenants
The revolvingnew credit facility the term loan agreement, and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2015,2018, the most restrictive of these covenants required that the Company have net indebtedness less than three4.25 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.


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NOTE 6: FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at June 30, 20152018 and June 30, 20142017 totaled $9,330$10,318 and $11,011,$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, 2015,2018, 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).


NOTE 7: INCOME TAXES
Income Before Income Taxes
The components of income before income taxes are as follows:
Year Ended June 30,2015
 2014
 2013
U.S.$152,618
 $147,980
 $153,546
Foreign23,253
 18,282
 24,119
Income before income taxes$175,871
 $166,262
 $177,665
Year Ended June 30,2018
 2017
 2016
U.S.$186,874
 $154,472
 $139,960
Foreign17,844
 12,494
 (60,982)
Income before income taxes$204,718
 $166,966
 $78,978
Provision
The provision (benefit) for income taxes consists of:
Year Ended June 30,2015
 2014
 2013
Current:     
Federal$52,861
 $50,455
 $38,859
State and local6,884
 6,576
 5,736
Foreign5,603
 4,619
 4,742
Total current65,348
 61,650
 49,337
Deferred:     
Federal(3,799) (5,328) 10,277
State and local(153) (267) 346
Foreign(1,009) (2,614) (444)
Total deferred(4,961) (8,209) 10,179
Total$60,387
 $53,441
 $59,516
Year Ended June 30,2018
 2017
 2016
Current:     
Federal$48,131
 $26,456
 $45,226
State and local8,038
 4,692
 6,349
Foreign5,309
 4,760
 4,407
Total current61,478
 35,908
 55,982
Deferred:     
Federal5,955
 852
 397
State and local(586) 535
 (30)
Foreign(3,754) (4,239) (6,948)
Total deferred1,615
 (2,852) (6,581)
Total$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.

The exercise of non-qualified stock appreciation rights and options during fiscal 2015, 20142018, 2017 and 20132016 resulted in $352, $1,462$419, $1,921 and $1,675,$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 option price.fair value of the options on the grant date. Vesting of stock awards and other stock compensation in fiscal 2015, 20142018, 2017 and 20132016 resulted in $690, $1,211$430, $482 and $890,$(4), respectively, of incremental income tax benefits (expense) over the amounts previously reported for financial reporting purposes. TheseDue 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.

43

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 30,2015
 2014
 2013
Statutory income tax rate35.0 % 35.0 % 35.0 %
Effects of:     
State and local taxes2.5 % 2.4 % 2.3 %
U.S. tax on foreign income, net— % (1.6)% — %
Foreign income taxes(2.5)% (2.6)% (2.3)%
Deductible dividend(0.5)% (0.5)% (0.5)%
Valuation Allowance0.5 % — % — %
Other, net(0.7)% (0.6)% (1.0)%
Effective income tax rate34.3 % 32.1 % 33.5 %
Year Ended June 30,2018
 2017
 2016
Statutory income tax rate28.1 % 35.0 % 35.0 %
Effects of:     
State and local taxes3.1
 2.8
 5.2
U.S. federal tax reform3.1
 —
 —
Worthless stock deduction—
 (13.9) —
Stock compensation(0.4) (1.4) —
Goodwill impairment—
 —
 27.1
Impact of foreign operations(1.3) (2.3) (3.0)
Deductible dividend(0.3) (0.4) (0.9)
Valuation allowance(0.9) 0.3
 0.5
Other, net(0.6) (0.3) (1.3)
Effective income tax rate30.8 % 19.8 % 62.6 %
Consolidated Balance Sheets
Significant components of the Company’s deferred tax assets and liabilities are as follows:
June 30,2015
 2014
Deferred tax assets:   
Compensation liabilities not currently deductible$28,902
 $30,662
Expenses and reserves not currently deductible9,115
 8,364
Goodwill and intangibles7,363
 8,294
Foreign tax credit1,155
 —
Net operating loss carryforwards (expiring in years 2017-2034)860
 386
Other289
 281
Total deferred tax assets47,684
 47,987
Less: Valuation allowance(917) —
Deferred tax assets, net of valuation allowance46,767
 47,987
Deferred tax liabilities:   
Inventories(5,499) (6,490)
Goodwill and intangibles(38,707) (23,254)
Depreciation and differences in property bases(9,328) (10,219)
Total deferred tax liabilities(53,534) (39,963)
Net deferred tax (liabilities) assets$(6,767) $8,024
Net deferred tax (liabilities) assets are classified as follows:   
Other current assets$13,293
 $11,371
Deferred tax assets (long-term)97
 21,166
Other liabilities(20,157) (24,513)
Net deferred tax (liabilities) assets$(6,767) $8,024
June 30,2018
 2017
Deferred tax assets:   
Compensation liabilities not currently deductible$19,334
 $26,873
Other expenses and reserves not currently deductible13,169
 11,601
Goodwill and intangibles3,197
 5,661
Foreign tax credit (expiring in years 2025-2026)413
 709
Net operating loss carryforwards (expiring in years 2023-2038)11,315
 5,729
Other199
 119
Total deferred tax assets47,627
 50,692
Less: Valuation allowance(38) (1,831)
Deferred tax assets, net of valuation allowance47,589
 48,861
Deferred tax liabilities:   
Inventories(8,196) (7,447)
Goodwill and intangibles(86,176) (30,482)
Depreciation and differences in property bases(9,294) (10,122)
Total deferred tax liabilities(103,666) (48,051)
Net deferred tax (liabilities) assets$(56,077) $810
Net deferred tax (liabilities) assets are classified as follows:   
Other assets$2,103
 $8,985
Other liabilities(58,180) (8,175)
Net deferred tax (liabilities) assets$(56,077) $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

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. federal income taxes are provided on the portiontaxation. As of non-U.S. subsidiaries' income that is not considered to be permanently reinvested outside the U.S. and may be remitted to the U.S. At June 30, 2015,2018, all such undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested and for whichreinvested.  Therefore, no U.S. tax hastaxes have been provided totaled approximately $139,042. Determinationthat would result from the remittance of thesuch earnings.  The net amount of the unrecognized tax liability with respect to the distribution of these earnings is not practicable; however,estimated to be approximately $1,986.  In addition, we expect foreign tax credits would be available to either offset or partially reduce U.S. income taxesthe tax cost in the event of a distribution.
In 2014, the Company recognized a tax benefit of $2,804 related to U.S. tax on foreign income which reduced the Company's effective tax rate by approximately 1.6%. This tax benefit was due to the reversal of taxes previously

44

accrued on a portion of the undistributed earnings of non-U.S. subsidiaries applicable to a change in the permanent reinvestment assertion. In 2015, $17,793 of cash was distributed by one of the Company's non-U.S. subsidiaries as a non-taxable return of capital. All undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested outside of the U.S. at June 30, 2015.
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, 2015, 20142018, 2017 and 2013:2016:
Year Ended June 30,2015
 2014
 2013
Unrecognized Income Tax Benefits at beginning of the year$2,364
 $2,655
 $1,539
Current year tax positions472
 730
 957
Prior year tax positions—
 —
 790
Expirations of statutes of limitations(160) (1,007) (565)
Settlements(72) (14) (66)
Unrecognized Income Tax Benefits at end of year$2,604
 $2,364
 $2,655
Year Ended June 30,2018
 2017
 2016
Unrecognized Income Tax Benefits at beginning of the year$3,533
 $2,915
 $2,604
Current year tax positions143
 574
 539
Prior year tax positions636
 259
 —
Expirations of statutes of limitations(324) (189) (132)
Settlements—
 (26) (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, 2015, 20142018, 2017 and 20132016 are $2,377, $2,104$3,725, $3,323 and $2,342,$2,691, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
During 2015, 20142018, 2017 and 2013,2016, the Company recognized $49$(110) and $16$163 and $3$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 $497$677 and $449$787 as of June 30, 20152018 and 2014,2017, 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 20122015 through 20152018 and to state and local income tax examinations for the tax years 20092012 through 2015.2018. In addition, the Company is subject to foreign income tax examinations for the tax years 20082011 through 2015.2018.
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.


NOTE 8: SHAREHOLDERS’ EQUITY
Treasury Shares
At June 30, 2015,2018, 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.

45

Accumulated Other Comprehensive Income (Loss)
Changes in the accumulated other comprehensive income (loss) for the years ended June 30, 20152018, 2017, and 2014, is2016, are comprised of the following: amounts, shown net of taxes:
 Foreign currency translation adjustment
 Unrealized gain (loss) on securities available for sale
 Postemployment benefits
 Total Accumulated other comprehensive income (loss)
Balance at July 1, 2012$1,718
 $(58) $(6,229) $(4,569)
Other comprehensive income (loss)(1,358) 6
 1,967
 615
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 533
 533
Net current-period other comprehensive income (loss), net of taxes(1,358) 6
 2,500
 1,148
Balance at June 30, 2013$360
 $(52) $(3,729) $(3,421)
Other comprehensive income (loss)629
 73
 871
 1,573
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 233
 233
Net current-period other comprehensive income (loss), net of taxes629
 73
 1,104
 1,806
Balance at June 30, 2014$989
 $21
 $(2,625) $(1,615)
Other comprehensive income (loss)(58,233) (25) (472) (58,730)
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 174
 174
Net current-period other comprehensive income (loss), net of taxes(58,233) (25) (298) (58,556)
Balance at June 30, 2015$(57,244) $(4) $(2,923) $(60,171)
 Foreign currency translation adjustment
 Unrealized (loss) gain on securities available for sale
 Post-employment benefits
 Total accumulated other comprehensive (loss) income
Balance at July 1, 2015$(57,244) $(4) $(2,923) $(60,171)
Other comprehensive loss(24,441) (34) (1,215) (25,690)
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 315
 315
Net current-period other comprehensive loss(24,441) (34) (900) (25,375)
Balance at June 30, 2016(81,685) (38) (3,823) (85,546)
Other comprehensive income2,238
 59
 1,239
 3,536
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 308
 308
Net current-period other comprehensive income2,238
 59
 1,547
 3,844
Balance at June 30, 2017(79,447) 21
 (2,276) (81,702)
Other comprehensive (loss) income(8,549) 20
 524
 (8,005)
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 (45) (45)
Amounts reclassified for certain income tax effects to retained earnings22
 9
 (502) (471)
Net current-period other comprehensive (loss) income(8,527) 29
 (23) (8,521)
Balance at June 30, 2018$(87,974) $50
 $(2,299) $(90,223)

Other Comprehensive Income (Loss)
Details of other comprehensive income (loss) are as follows:
Year Ended June 30,2015 2014 2013
 Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
 Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
 Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
Foreign currency translation adjustments$(58,233) $—
 $(58,233) $629
 $—
 $629
 $(1,358) $—
 $(1,358)
Postemployment benefits:                 
Actuarial gain (loss) on remeasurement(776) (304) (472) 1,402
 531
 871
 3,153
 1,186
 1,967
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs286
 112
 174
 382
 149
 233
 872
 339
 533
Unrealized gain (loss) on investment securities available for sale(38) (13) (25) 112
 39
 73
 10
 4
 6
Other comprehensive income (loss)$(58,761) $(205) $(58,556) $2,525
 $719
 $1,806
 $2,677
 $1,529
 $1,148
Year Ended June 30,2018 2017 2016
 Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
 Pre-Tax Amount
 Tax Expense
 Net Amount
 Pre-Tax Amount
 Tax (Benefit) Expense
 Net Amount
Foreign currency translation adjustments$(8,875) $(326) $(8,549) $2,238
 $—
 $2,238
 $(24,441) $—
 $(24,441)
Post-employment benefits:                 
Actuarial gain (loss) on re-measurement709
 185
 524
 2,038
 799
 1,239
 (1,998) (783) (1,215)
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs(73) (28) (45) 506
 198
 308
 518
 203
 315
Unrealized gain (loss) on investment securities available for sale37
 17
 20
 91
 32
 59
 (52) (18) (34)
Reclassification of certain income tax effects to retained earnings—
 471
 (471) —
 —
 —
 —
 —
 —
Other comprehensive (loss) income$(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 RSUsRestricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury

46

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 30,2015
 2014
 2013
Net Income$115,484
 $112,821
 $118,149
Average Shares Outstanding:     
Weighted-average common shares outstanding for basic computation40,892
 41,942
 42,060
Dilutive effect of potential common shares295
 389
 482
Weighted-average common shares outstanding for dilutive computation41,187
 42,331
 42,542
Net Income Per Share — Basic$2.82
 $2.69
 $2.81
Net Income Per Share — Diluted$2.80
 $2.67
 $2.78
Year Ended June 30,2018
 2017
 2016
Net Income$141,625
 $133,910
 $29,577
Average Shares Outstanding:     
Weighted-average common shares outstanding for basic computation38,752
 39,013
 39,254
Dilutive effect of potential common shares529
 391
 212
Weighted-average common shares outstanding for dilutive computation39,281
 39,404
 39,466
Net Income Per Share — Basic$3.65
 $3.43
 $0.75
Net Income Per Share — Diluted$3.61
 $3.40
 $0.75
Stock appreciation rights and options relating to 435, 28966, 141 and 212775 shares of common stock were outstanding at June 30, 2015, 20142018, 2017 and 2013,2016, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.


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 20112015 Plan, which expires in 2016,2020, 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 30,2015
 2014
 2013
SARs and options$1,610
 $1,808
 $2,317
Performance shares836
 309
 1,074
Restricted stock and RSUs2,015
 2,394
 2,370
Total compensation costs under award programs$4,461
 $4,511
 $5,761
Year Ended June 30,2018
 2017
 2016
SARs and options$1,961
 $1,891
 $1,543
Performance shares2,006
 1,331
 446
Restricted stock and RSUs2,660
 2,298
 2,078
Total compensation costs under award programs$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 $1,749, $1,768$1,923, $4,848 and $2,241$1,595 for fiscal years 2015, 20142018, 2017 and 2013,2016, 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 paid (or with the potential to be paid)paid at June 30, 20152018 are summarized in the table below:
June 30,
(Shares in thousands)
2015
 Expected Period of Recognition (Years)
SARs and options$1,792
 2.4
Performance shares3,701
 1.7
Restricted stock and RSUs1,898
 2.3
Total unrecognized compensation costs under award programs$7,391
 2.0
June 30,2018
 Average Expected Period of Expected Recognition (Years)
SARs and options$3,729
 2.5
Performance shares3,282
 1.7
Restricted stock and RSUs2,173
 1.9
Total unrecognized compensation costs under award programs$9,184
 2.1
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.02.1 years. The aggregate number of shares of common stock which may be awarded under the 20112015 Plan is 2,000;2,500; shares available for future grants at June 30, 20152018 were 1,107.1,655.

47

Stock Appreciation Rights and Stock Options
The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2015, 20142018, 2017
and and 20132016 are:
 2015
 2014
 2013
Expected life, in years4.7
 4.6
 5.5
Risk free interest rate1.4% 1.3% 0.9%
Dividend yield2.5% 2.5% 2.5%
Volatility29.0% 31.8% 43.3%
Per share fair value of SARs and stock options granted during the year$9.53 $11.02 $13.11
 2018
 2017
 2016
Expected life, in years6.0
 4.8
 4.4
Risk free interest rate2.1% 1.2% 1.3%
Dividend yield2.5% 2.5% 2.5%
Volatility24.3% 24.1% 26.0%
Per share fair value of SARs and stock options granted during the year$11.25 $7.97 $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.

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:
 Shares
 
Weighted-Average
Exercise Price

Year Ended June 30, 2015 
(Shares in thousands) 
Outstanding, beginning of year1,039
 $33.40
Granted208
 47.69
Exercised(75) 25.23
Forfeited(56) 48.47
Outstanding, end of year1,116
 $35.86
Exercisable at end of year781
 $31.32
 Shares
 
Weighted-Average
Exercise Price

Year Ended June 30, 2018 
(Shares in thousands) 
Outstanding, beginning of year1,218
 $42.26
Granted286
 58.40
Exercised(58) 37.55
Forfeited(45) 55.64
Outstanding, end of year1,401
 $45.32
Exercisable at end of year789
 $41.08
Expected to vest at end of year1,379
 $45.22
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and exercisableexpected to vest at June 30, 20152018 were 5.66.6, 5.3, and 4.56.6 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and exercisableexpected to vest at June 30, 20152018 were $7,559$34,869 $22,927, and $7,311,$34,440, respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2015, 20142018, 2017, and 20132016 was $1,601, $5,241$1,765, $8,396, and $7,135,$2,422, respectively.
The total fair value of shares vested during fiscal 2015, 20142018, 2017, and 20132016 was $2,187, $2,080$2,149, $1,788, and $2,135,$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, 20152018 is presented below:below:
 Shares
 
Weighted-Average
Grant-Date  
Fair Value

Year Ended June 30, 2015 
(Shares in thousands) 
Nonvested, beginning of year41
 $35.97
Awarded18
 49.43
Forfeitures(1) 50.40
Vested(20) 27.28
Nonvested, end of year38
 $46.66
 Shares
 
Weighted-Average
Grant-Date  
Fair Value

Year Ended June 30, 2018 
(Shares in thousands) 
Nonvested, beginning of year52
 $43.99
Awarded51
 47.13
Vested(10) 48.76
Nonvested, end of year93
 $45.16

48

The Committee set three one-year goals for each of the 2015, 20142018, 2017 and 20132016 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. Based uponFor the outstanding grants as of June 30, 2015,2018, the maximum number of shares which could be earned in future periods was 78.67.

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 onethree 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, 20152018 is
presented below:
 Shares
 
Weighted-Average
Grant-Date  
Fair Value

Year Ended June 30, 2015 
(Share amounts in thousands) 
Nonvested, beginning of year133
 $37.60
Granted48
 46.48
Forfeitures(7) 48.81
Vested(84) 32.54
Nonvested, end of year90
 $46.18
 Shares
 
Weighted-Average
Grant-Date  
Fair Value

Year Ended June 30, 2018 
(Share amounts in thousands) 
Nonvested, beginning of year116
 $46.91
Granted53
 62.62
Forfeitures(10) 54.96
Vested(43) 52.58
Nonvested, end of year116
 $51.27

NOTE 10: BENEFIT PLANS
Retirement Savings Plan
Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company had also made discretionary profit-sharing contributions to the Retirement Savings Plan for fiscal 2013. The discretionary profit-sharing contribution was ended in fiscal 2014. The Company’s expense for profit sharing and matching of employees’ 401(k) contributions was $3,156, $2,788$6,551, $6,677 and $11,231$2,535 during fiscal 2015, 20142018, 2017 and 2013,2016, 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. Non-employee directors were able to defer receipt of director fees until January 1, 2015. The Company funds these deferred compensation liabilities by making contributions to rabbi trusts. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.
Post-employment Benefit Plans
The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan 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), an unfunded,a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $300 ,$234$359, $289, and $233$268 of expense associated with this plan in fiscal 2015, 20142018, 2017, and 2013,2016, 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.

49
Table The plan accruals were frozen as of ContentsApril 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

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:
 Pension Benefits Retiree Health Care Benefits
 2015
 2014
 2015
 2014
Change in benefit obligation:       
Benefit obligation at beginning of the year$34,558
 $40,664
 $2,790
 $3,719
Service cost97
 77
 53
 48
Interest cost896
 1,180
 95
 139
Plan participants’ contributions—
 —
 64
 63
Benefits paid(6,697) (7,251) (238) (246)
Amendments(8) 188
 
 —
Actuarial (gain) loss during year1,148
 (300) (620) (933)
Benefit obligation at end of year$29,994
 $34,558
 $2,144
 $2,790
Change in plan assets:       
Fair value of plan assets at beginning of year$7,245
 $6,697
 $—
 $—
Actual gain (loss) on plan assets247
 763
 —
 —
Employer contributions6,390
 7,036
 174
 183
Plan participants’ contributions—
 —
 64
 63
Benefits paid(6,697) (7,251) (238) (246)
Fair value of plan assets at end of year$7,185
 $7,245
 $—
 $—
Funded status at end of year$(22,809) $(27,313) $(2,144) $(2,790)
 Pension Benefits Retiree Health Care Benefits
 2018
 2017
 2018
 2017
Change in benefit obligation:       
Benefit obligation at beginning of the year$24,411
 $26,605
 $1,684
 $2,235
Service cost124
 126
 19
 29
Interest cost729
 687
 52
 63
Plan participants’ contributions—
 —
 68
 69
Benefits paid(3,181) (1,562) (223) (237)
Amendments—
 —
 —
 (245)
Actuarial gain during year(549) (1,445) (109) (230)
Benefit obligation at end of year$21,534
 $24,411
 $1,491
 $1,684
Change in plan assets:       
Fair value of plan assets at beginning of year$6,530
 $6,737
 $—
 $—
Actual gain on plan assets516
 578
 —
 —
Employer contributions3,837
 776
 155
 168
Plan participants’ contributions—
 —
 68
 69
Benefits paid(3,181) (1,561) (223) (237)
Fair value of plan assets at end of year$7,702
 $6,530
 $—
 $—
Funded status at end of year$(13,832) $(17,881) $(1,491) $(1,684)
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive income (loss)loss for the post-employment plans were as follows:
 Pension Benefits Retiree Health Care Benefits
June 30,2015
 2014
 2015
 2014
Amounts recognized in the consolidated balance sheets:       
Other current liabilities$5,256
 $6,390
 $220
 $220
Post-employment benefits17,553
 20,923
 1,924
 2,570
Net amount recognized$22,809
 $27,313
 $2,144
 $2,790
Amounts recognized in accumulated other comprehensive (loss) income:       
Net actuarial (loss) gain$(7,311) $(6,474) $1,492
 $960
Prior service cost(208) (293) 1,219
 1,490
Total amounts recognized in accumulated other comprehensive (loss) income$(7,519) $(6,767) $2,711
 $2,450
 Pension Benefits Retiree Health Care Benefits
June 30,2018
 2017
 2018
 2017
Amounts recognized in the consolidated balance sheets:       
Other current liabilities$3,298
 $2,814
 $220
 $220
Post-employment benefits10,534
 15,067
 1,271
 1,464
Net amount recognized$13,832
 $17,881
 $1,491
 $1,684
Amounts recognized in accumulated other comprehensive loss:       
Net actuarial (loss) gain$(4,781) $(5,798) $1,121
 $1,167
Prior service cost—
 (35) 554
 922
Total amounts recognized in accumulated other comprehensive loss$(4,781) $(5,833) $1,675
 $2,089

50

The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets:
 Pension Benefits
June 30,2015
 2014
Projected benefit obligations$29,994
 $34,558
Accumulated benefit obligations29,994
 34,558
Fair value of plan assets7,185
 7,245
 Pension Benefits
June 30,2018
 2017
Projected benefit obligations$21,534
 $24,411
Accumulated benefit obligations21,534
 24,411
Fair value of plan assets7,702
 6,530

The net periodic costs (benefits) are as follows:
 Pension Benefits Retiree Health Care Benefits
Year Ended June 30,2015
 2014
 2013
 2015
 2014
 2013
Service cost$97
 $77
 $78
 $53
 $48
 $80
Interest cost896
 1,180
 1,260
 95
 139
 188
Expected return on plan assets(495) (416) (403) —
 —
 —
Recognized net actuarial loss (gain)559
 611
 735
 (87) (38) (53)
Amortization of prior service cost86
 78
 83
 (272) (271) 107
Net periodic cost (benefits)$1,143
 $1,530
 $1,753
 $(211) $(122) $322
 Pension Benefits Retiree Health Care Benefits
Year Ended June 30,2018
 2017
 2016
 2018
 2017
 2016
Service cost$124
 $126
 $91
 $19
 $29
 $22
Interest cost729
 687
 879
 52
 63
 75
Expected return on plan assets(472) (460) (491) —
 —
 —
Recognized net actuarial loss (gain)424
 872
 913
 (154) (181) (210)
Amortization of prior service cost27
 86
 86
 (369) (271) (271)
Recognition of prior service cost upon plan curtailment8
 —
 —
 —
 —
 —
Net periodic cost (benefits)$840
 $1,311
 $1,478
 $(452) $(360) $(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 and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $914 and $86, respectively.$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 $211$121 and $271,$369, respectively.
Assumptions
TheA 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:
 Pension Benefits Retiree Health Care Benefits
June 30,2015
 2014
 2015
 2014
Assumptions used to determine benefit obligations at year end:       
Discount rate3.0% 2.8% 4.0% 3.8%
Assumptions used to determine net periodic benefit cost:       
Discount rate2.8% 3.0% 3.8% 4.0%
Expected return on plan assets7.0% 7.0% N/A
 N/A
 Pension Benefits Retiree Health Care Benefits
June 30,2018
 2017
 2018
 2017
Assumptions used to determine benefit obligations at year end:       
Discount rate3.5% 2.8% 3.8% 3.3%
Assumptions used to determine net periodic benefit cost:       
Discount rate2.8% 2.3% 3.3% 2.9%
Expected return on plan assets7.0% 7.0% N/A
 N/A
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 6.8% and 7.0% as of June 30, 20152018 and 2014,2017, respectively, decreasing to 5.0% by 2023.2027.
A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 20152018 and for the year then ended:
 One-Percentage Point 
 Increase
 Decrease
Effect on total service and interest cost components of periodic expense$20
 $(17)
Effect on post-retirement benefit obligation209
 (177)
 One-Percentage Point 
 Increase Decrease
Effect on total service and interest cost components of periodic expense$9
 $(8)
Effect on post-retirement benefit obligation152
 (130)

51

Plan Assets
The fair value of each major class of plan assets for the Company’s Qualified Defined Benefit Retirement Plan areis valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair values and target allocation as of June 30:
 Target Allocation Fair Value
   2015
 2014
Asset Class:     
Equity* securities (Level 1)40 – 70% $4,022
 $3,813
Debt securities (Level 2)20 – 50% 2,930
 3,155
Other (Level 1)0 – 20% 233
 277
Total100% $7,185
 $7,245
 Target Allocation Fair Value
   2018
 2017
Asset Class:     
Equity* securities (Level 1)40 – 70% $6,226
 $3,880
Debt securities (Level 2)20 – 50% 1,337
 2,538
Other (Level 1)0 – 20% 139
 112
Total100% $7,702
 $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 $5,300$3,300 to its pension benefit plans and $170$130 to its retiree health care benefit plans in fiscal 2016.2019. Contributions do not equal estimated future benefit payments as certain payments are made from plan assets.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 YearsPension Benefits
 
Retiree Health  
 Care Benefits

2016$5,600
 $170
20171,800
 180
20182,300
 190
20194,000
 180
20203,300
 170
2021 through 20257,400
 620
During Fiscal YearsPension Benefits
 
Retiree Health  
 Care Benefits

2019$3,700
 $130
20203,800
 120
20211,300
 110
20221,300
 110
20231,400
 100
2024 through 20285,200
 530



52

NOTE 11: LEASES
The Company leases many service center and distribution center facilities, vehicles and equipment under non-cancelable lease agreements accounted for as operating leases. The Company leased its corporate headquarters facility until purchasing it in April 2014. The minimum annual rental commitments under non-cancelable operating leases as of June 30, 20152018 are as follows:
During Fiscal Years 
2016$24,900
201719,700
201814,600
201910,900
20205,800
Thereafter6,500
Total minimum lease payments$82,400
During Fiscal Years 
2019$38,100
202027,500
202117,800
202211,200
20235,800
Thereafter11,000
Total minimum lease payments$111,400
Rental expense incurred for operating leases, principally from leases for real property, vehicles and computer equipment was $39,300$41,000 in 2015, $36,9002018, $35,900 in 20142017 and $36,300$37,300 in 2013,2016, and was classified within selling, distribution and administrative expenses onin the Statementsstatements of Consolidated Income.consolidated income.
The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $3,100, $2,500$2,400, $2,400, and $1,200$3,800 and in fiscal 2015, 20142018, 2017, and 2013.2016, 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 Businesses.& 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 Businesses& 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.

53

The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power Businesses& Flow Control segment to the Service Center Based Distribution segment of $24,087, $21,809$25,556, $22,719, and $20,217,$20,261, in fiscal 2015, 20142018, 2017, and 2013,2016, respectively, have been eliminated in
the following table.table.

Segment Financial Information
 
Service Center
Based Distribution

 
Fluid Power
Businesses

 Total
Year Ended June 30, 2015     
Net sales$2,254,768
 $496,793
 $2,751,561
Operating income for reportable segments140,421
 48,535
 188,956
Assets used in the business1,230,543
 204,425
 1,434,968
Depreciation and amortization of property15,196
 1,382
 16,578
Capital expenditures13,531
 1,402
 14,933
Year Ended June 30, 2014     
Net sales$1,973,359
 $486,519
 $2,459,878
Operating income for reportable segments118,857
 44,621
 163,478
Assets used in the business1,116,311
 217,858
 1,334,169
Depreciation and amortization of property12,399
 1,578
 13,977
Capital expenditures18,744
 1,446
 20,190
Year Ended June 30, 2013     
Net sales$2,003,440
 $458,731
 $2,462,171
Operating income for reportable segments138,484
 41,083
 179,567
Assets used in the business859,547
 199,159
 1,058,706
Depreciation and amortization of property10,692
 1,809
 12,501
Capital expenditures10,415
 1,799
 12,214
 
Service Center
Based Distribution

 Fluid Power & Flow Control
 Total
Year Ended June 30, 2018     
Net sales$2,346,418
 $726,856
 $3,073,274
Operating income for reportable segments136,718
 83,194
 219,912
Assets used in the business1,198,296
 1,087,445
 2,285,741
Depreciation and amortization of property15,336
 2,462
 17,798
Capital expenditures18,492
 4,738
 23,230
Year Ended June 30, 2017     
Net sales$2,180,358
 $413,388
 $2,593,746
Operating income for reportable segments115,794
 46,569
 162,363
Assets used in the business1,187,054
 200,541
 1,387,595
Depreciation and amortization of property14,375
 931
 15,306
Capital expenditures14,566
 2,479
 17,045
Year Ended June 30, 2016     
Net sales$2,150,478
 $368,950
 $2,519,428
Operating income for reportable segments113,111
 37,174
 150,285
Assets used in the business1,132,222
 179,803
 1,312,025
Depreciation and amortization of property15,049
 917
 15,966
Capital expenditures12,500
 630
 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 30,2015
 2014
 2013
Operating income for reportable segments$188,956
 $163,478
 $179,567
Adjustments for:     
Intangible amortization — Service Center Based Distribution19,561
 7,336
 5,829
Intangible amortization — Fluid Power Businesses6,236
 6,687
 7,404
Corporate and other income, net(21,460) (14,903) (10,065)
Total operating income184,619
 164,358
 176,399
Interest expense, net7,869
 249
 165
Other expense (income), net879
 (2,153) (1,431)
Income before income taxes$175,871
 $166,262
 $177,665
Year Ended June 30,2018
 2017
 2016
Operating income for reportable segments$219,912
 $162,363
 $150,285
Adjustments for:     
Intangible amortization — Service Center Based Distribution17,375
 18,954
 19,913
Intangible amortization — Fluid Power & Flow Control14,690
 5,417
 5,667
Goodwill Impairment — Service Center Based Distribution—
 —
 64,794
Corporate and other income, net(37,980) (37,394) (29,871)
Total operating income225,827
 175,386
 89,782
Interest expense, net23,485
 8,541
 8,763
Other (income) expense, net(2,376) (121) 2,041
Income before income taxes$204,718
 $166,966
 $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 amounts of expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.

54

Product Category
Net sales by product category are as follows:
Year Ended June 30,2015
 2014
 2013
Industrial$2,013,447
 $1,739,496
 $1,776,172
Fluid power738,114
 720,382
 685,999
Net sales$2,751,561
 $2,459,878
 $2,462,171
Year Ended June 30,2018
 2017
 2016
Industrial$2,085,571
 $1,855,437
 $1,836,484
Fluid power & flow control987,703
 738,309
 682,944
Net sales$3,073,274
 $2,593,746
 $2,519,428

The fluid power & flow control product category includes sales of hydraulic, pneumatic, lubrication, filtration, and filtrationflow control components and systems, and repair services through the Company’s Fluid Power Businesses& 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 30,2015
 2014
 2013
Net Sales:     
United States$2,238,263
 $2,031,142
 $2,017,168
Canada358,580
 291,117
 298,269
Other Countries154,718
 137,619
 146,734
Total$2,751,561
 $2,459,878
 $2,462,171
Year Ended June 30,2018
 2017
 2016
Net Sales:     
United States$2,615,041
 $2,182,552
 $2,117,485
Canada273,622
 251,999
 257,797
Other Countries184,611
 159,195
 144,146
Total$3,073,274
 $2,593,746
 $2,519,428
June 30,2015
 2014
 2013
Long-Lived Assets:     
United States$217,597
 $153,945
 $144,289
Canada76,565
 99,161
 19,038
Other Countries9,113
 9,998
 11,183
Total$303,275
 $263,104
 $174,510
June 30,2018
 2017
 2016
Long-Lived Assets:     
United States$501,373
 $207,126
 $225,538
Canada50,261
 57,947
 66,304
Other Countries5,656
 6,558
 7,163
Total$557,290
 $271,631
 $299,005
Other countries consist of Mexico, Australia, New Zealand, and New Zealand.Singapore.
NOTE 13: COMMITMENTS AND CONTINGENCIES
The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company believes the likelihood is remote that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
NOTE 14: OTHER (INCOME) EXPENSE, (INCOME), NET
Other (income) expense, (income), net, consists of the following:
Year Ended June 30,2015
 2014
 2013
Unrealized (gain) loss on assets held in rabbi trust for a non-qualified deferred compensation plan$(442) $(1,683) $(1,280)
Elimination of one-month Canadian and Mexican reporting lag, effective July 1, 2013 and January 1, 2014, respectively—
 (1,342) —
Foreign currency transaction (gains) losses1,251
 801
 (143)
Other, net70
 71
 (8)
Total other expense (income), net$879
 $(2,153) $(1,431)
Year Ended June 30,2018
 2017
 2016
Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan$(785) $(1,188) $(87)
Foreign currency transaction (gains) losses(210) 209
 1,039
Net other periodic post-employment costs245
 796
 981
Life insurance (income) expense, net(1,628) 107
 108
Other, net2
 (45) —
Total other (income) expense, net$(2,376) $(121) $2,041


55

NOTE 15: SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to June 30, 2015 through the date the financial statements were issued.
On August 3, 2015, the Company acquired all of the net assets of Atlantic Fasteners, located in Agawam, MA, for a purchase price of approximately $12,500. The Company funded this acquisition from borrowings under the revolving credit facility at a variable interest rate. As a distributor of fasteners and industrial supplies, this business will be included in the Service Center Based Distribution Segment from August 3, 2015.



56


QUARTERLY OPERATING RESULTS
(In thousands, except per share amounts)
(UNAUDITED)
         Per Common Share
 Net Sales
 Gross Profit
 Operating Income
 Net Income
 Net Income
 Cash Dividend
2015           
  First Quarter$702,325
 $194,932
 $46,165
 $29,122
 $0.70
 $0.25
  Second Quarter691,702
 195,713
 46,807
 29,707
 0.72
 0.25
  Third Quarter679,994
 187,363
 43,772
 28,610
 0.70
 0.27
  Fourth Quarter677,540
 191,806
 47,875
 28,045
 0.70
 0.27
 $2,751,561
 $769,814
 $184,619
 $115,484
 $2.80
 $1.04
2014           
  First Quarter$605,305
 $169,795
 $39,539
 $26,844
 $0.63
 $0.23
  Second Quarter581,949
 163,383
 39,837
 25,909
 0.61
 0.23
  Third Quarter618,006
 171,220
 40,173
 30,394
 0.72
 0.25
  Fourth Quarter654,618
 182,528
 44,809
 29,674
 0.71
 0.25
 $2,459,878
 $686,926
 $164,358
 $112,821
 $2.67
 $0.96
2013           
First Quarter$610,519
 $164,533
 $44,318
 $29,532
 $0.70
 $0.21
Second Quarter589,517
 162,919
 40,569
 27,043
 0.64
 0.21
Third Quarter621,654
 174,400
 43,477
 29,302
 0.69
 0.23
Fourth Quarter640,481
 181,110
 48,035
 32,272
 0.76
 0.23
 $2,462,171
 $682,962
 $176,399
 $118,149
 $2.78
 $0.88
         Per Common Share
 Net Sales
 Gross Profit
 Operating Income
 Net Income
 Net Income
 Cash Dividend
2018           
  First Quarter$680,701
 $192,424
 $51,837
 $33,721
 $0.86
 $0.29
  Second Quarter667,187
 188,360
 46,715
 30,950
 0.79
 0.29
  Third Quarter827,665
 239,524
 56,444
 36,592
 0.93
 0.30
  Fourth Quarter897,721
 263,687
 70,831
 40,362
 1.03
 0.30
 $3,073,274
 $883,995
 $225,827
 $141,625
 $3.61
 $1.18
2017           
  First Quarter$624,848
 $178,330
 $43,218
 $27,371
 $0.70
 $0.28
  Second Quarter608,123
 172,456
 37,656
 24,085
 0.61
 0.28
  Third Quarter679,304
 190,802
 45,467
 29,494
 0.75
 0.29
  Fourth Quarter681,471
 196,107
 48,249
 52,960
 1.34
 0.29
 $2,593,746
 $737,695
 $174,590
 $133,910
 $3.40
 $1.14
2016           
First Quarter$641,904
 $181,012
 $41,026
 $24,291
 $0.61
 $0.27
Second Quarter610,346
 173,167
 38,362
 23,947
 0.61
 0.27
Third Quarter633,172
 174,793
 (33,032) (44,728) (1.14) 0.28
Fourth Quarter634,006
 178,450
 42,445
 26,067
 0.66
 0.28
 $2,519,428
 $707,422
 $88,801
 $29,577
 $0.75
 $1.10
On August 14, 201510, 2018, there were 5,8934,307 shareholders of record including 4,3212,914 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 14, 201510, 2018 was $40.77$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 20152018
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 2015,2017, 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.  

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 of $1.8 million. Also, we sold a building recognizing a gain of $1.5 million.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 2015, income tax expense increased due to recording a valuation allowance against certain deferred tax assets for foreign jurisdictions of $1.0 million. Also, an increase of tax rates in certain foreign jurisdictions at the end of the fiscal period increased tax expense by $1.2 million during the quarter.
No LIFO layer liquidations took place during the year ended June 30, 2015.
Fiscal 2014
During the first quarter of fiscal 2014, the Company aligned the consolidation of the Company's Canadian subsidiary which previously included results on a month reporting lag. The elimination of this lag resulted in the recognition of $1.2 million of additional income which was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, the Company aligned the consolidation of the Company's Mexican subsidiary which previously included results on a month reporting lag. The elimination of this lag resulted in the recognition of $0.2 million of additional income which was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, $2.8 million of tax reserves were reversed. The impact of this reversal was a reduction in income tax expense of $2.8 million and a $0.07 increase in earnings per share.

57

No LIFO layer liquidations took place during the year ended June 30, 2014.
Fiscal 2013
During the fourth quarter of fiscal 2013,2016, the Company realized LIFO layer liquidation benefits of $6,300$2.1 million from certain inventory quantity levels decreasing. Additional scrap expense of $3.0 million above our normal scrap rate was also recorded in the June 30, 2013 quarter.
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.

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, 2015.2018. This evaluation was based on the criteria set forth in the framework Internal"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, 2015.2018.
The Company acquired Knox Oil Field SupplyFCX Performance Inc. (Knox)("FCX") on July 1, 2014.January 31, 2018. Management has excluded KnoxFCX from its assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2015. Knox2018. FCX represents approximately 11%39.5% and 4%8.1% of total assets and net sales, respectively, of the consolidated financial statement amounts as of and for the year ended June 30, 2015.2018.
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 /s/ Mark O. EiseleDavid K. Wells
President & Chief Executive Officer Vice President - Chief Financial Officer & Treasurer
August 26, 201517, 2018


58


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio
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"“Company”) as of June 30, 2015,2018, 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'sManagement’s Report on Internal Control overControls Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Knox Oil Field SupplyFCX Performance Inc. ("Knox"FCX"), which was acquired on July 1, 2014January 31, 2018 and whose financial statements constitute 11% and 4%39.5% of total assets and 8.1% of net sales respectively, of the consolidated financial statement amountsstatements as of and for the year ended June 30, 2015.2018. Accordingly, our audit did not include the internal control over financial reporting at Knox. FCX.
Basis for Opinion
The Company'sCompany’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'sManagement’s Report on Internal Control overControls Over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’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 Public Company Accounting Oversight Board (United States).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 by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2015 of the Company and our report dated August 26, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 26, 201517, 2018

59


Changes in Internal Control Over Financial Reporting
The Company has undertaken a multi-year ERP (SAP) project to transform the Company's technology platforms and enhance its business information and transaction systems. The Company has completed its SAP implementation in its Western Canadian and U.S. Service Center Based Businesses, excluding recent acquisitions. In fiscal 2014, the Company initiated the transformation of its financial and accounting systems including fixed assets, general ledger and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation system, have been transitioned to SAP during fiscal 2015. During fiscal year 2016 the Company will continue to evaluate and determine an appropriate deployment schedule for operations in Eastern Canada and other operations not on SAP, as well as refine our current business and system processes. The company expects to convert to a new consolidation process and system at the beginning of fiscal 2016. Changes in the Company's key business applications and financial processes as a result of the continuing implementation of SAP and other business systems are being evaluated by management. The Company is designing processes and internal controls to address changes in the Company's internal control over financial reporting as a result of the SAP implementation. This ongoing SAP implementation presents risks to maintaining adequate internal controls over financial reporting.
Other than as described above, thereThere have not been any changes in internal control over financial reporting during the quarter ended June 30, 20152018 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 27, 2015,30, 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 27, 2015,30, 2018, under the captions “Executive Compensation” and “Compensation Committee Report.”

60

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Applied's shareholders have approved the following equity compensation plans: the 1997 Long-Term Performance Plan, the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the Deferred Compensation Plan, and the Deferred Compensation Plan for Non-Employee Directors. All of these plans are currently in effect.
The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied as of June 30, 2015.2018.
Plan CategoryNumber of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights
 Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights
 Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders1,116,188
 $35.86
 *
Equity compensation plans not approved by  
security holders
0
 0
 0
Total1,116,188
 $35.86
 *
Plan CategoryNumber of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders1,378,637
  $45.22 *
Equity compensation plans not approved by
security holders
—
  —
  —
 
Total1,378,637
  $45.22
*
*
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, and the 2007 Long-Term Performance Plan replaced the 1997 Long-Term Performance Plan. Stock options and stock appreciation rights remain outstanding under each of the 19972007 and 20072011 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 20112015 Long-Term Performance Plan at June 30, 2015,2018 was 1,106,794. The number of shares issuable under the Deferred Compensation Plan for Non-Employee Directors and the Deferred Compensation Plan depends on the dollar amount of participant contributions deemed invested in Applied common stock.
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 27, 2015,30, 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 27, 2015,30, 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 27, 2015,30, 2018, under the caption “Item 43 - Ratification of Auditors.”


61


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, 2015, 2014,2018, 2017, and 20132016
   
•Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Consolidated Balance Sheets at June 30, 20152018 and 20142017
   
•Statements of Consolidated Cash Flows for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Notes to Consolidated Financial Statements for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•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. 6670
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto.
(a)3. Exhibits.
* Asterisk indicates an executive compensation plan or arrangement.
Exhibit No.Description
  
3.1
Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit 3(a) to Applied's Form 10-Q for the quarter ended December 31, 2005, SEC File No. 1-2299, and incorporated here by reference).
  
3.2
Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference).
  
4.1
Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
  
4.2
Private Shelf Agreement dated as of November 27, 1996, as amended through October 30, 2014,June 29, 2018, between Applied and PGIM, Inc. (formerly known as Prudential Investment Management, Inc. (assignee of The Prudential Insurance Company of America)), conformed to show all amendments (filed as Exhibit 4.2 to Applied's Form 10-Q for the quarter ended March 31, 2015, SEC File No. 1-2299, and incorporated here by reference).amendments.
  
4.3
Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as most recently amended, on February 4, 2013, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K datedfiled July 1,2, 2014, SEC File No. 1-2299, and incorporated here by reference).
  

62

4.4
Request for Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 4.5 to Applied's Form 10-Q dated November 4,for the quarter ended September 30, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
4.5
Credit Agreement dated as of May 15, 2012,January 31, 2018, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 410.1 to Applied's Form 8-K dated May 17, 2012,filed February 6, 2018, SEC File No. 1-2299, and incorporated here by reference).
4.6Credit Agreement dated as of April 25, 2014, among Applied Industrial Technologies, Inc., Key Bank National Association, as Agent, and various financial institutions (filed as Exhibit 10.1 to Applied’s Form 8-K dated May 1, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1A 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 27, 201530, 2018 under the caption “Director Compensation.”
  
*10.2
Deferred Compensation Plan for Non-Employee Directors (September 1, 2003 Restatement), the terms of which govern benefits vested as of December 31, 2004, for certain directorsPeter A. Dorsman, an Applied director (filed as Exhibit 10(c) to Applied's Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3
Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.2 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.4Second
Amendment to the Applied Industrial Technologies, Inc. Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.1 to Applied’s Form 10-Q for the quarter ended March 31, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
*10.5
Form of Director and Officer Indemnification Agreement entered into between Applied and each of its directors and executive officers (filed as Exhibit 10(g) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
  
*10.61997 Long-Term Performance Plan, as amended April 19, 2007 (filed as Exhibit 10(k) to Applied's Form 10-K for the year ended June 30, 2007, SEC File No. 1-2299, and incorporated here by reference).
*10.7Section 409A Amendment to the 1997 Long-Term Performance Plan (filed as Exhibit 10.4 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
*10.8
2007 Long-Term Performance Plan (filed as Exhibit 10 to Applied's Form 8-K datedfiled October 23, 2007, SEC File No. 1-2299, and incorporated here by reference).
  
*10.910.7
Section 409A Amendment to the 2007 Long-Term Performance Plan (filed as Exhibit 10.5 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1010.8
2011 Long-Term Performance Plan (filed as Appendix to Applied’s proxy statement for the annual meeting of shareholders held on October 25, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1110.9
2015 Long-Term Performance Plan (filed as Appendix to Applied's proxy statement for the annual meeting of shareholders held on October 27, 2015, SEC File No. 1-2299, and incorporated here by reference).
*10.10
Non-Statutory Stock Option Award Terms and Conditions (Directors) (filed as Exhibit 10 to Applied's Form 8-K datedfiled November 30, 2005, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1210.11
Restricted Stock Award Terms and Conditions (Directors) (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended March 31, 2012,2018, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1310.12
Stock Appreciation Rights Award Terms and Conditions (Officers) (August 20122017 revision) (filed as Exhibit 10.0210.1 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1410.13Performance Shares
Restricted Stock Units Terms and Conditions (filed as Exhibit 10.0410.2 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1510.14Restricted Stock Units
Performance Shares Terms and Conditions (filed as Exhibit 10.0310.3 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1610.15
Management Incentive Plan General Terms (filed as Exhibit 10.0110.1 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2016, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1710.16
Key Executive Restoration Plan, as amended and restated, forin which Applied's executive officers participate (filed as Exhibit 10.1 to Applied's Form 8-K datedfiled August 16, 2013, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1810.17
Schedule of executive officer participants in the Key Executive Restoration Plan, as amended and restated.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).
  

63

*10.1910.18
Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) in which Thomas E. Armold,Fred D. Bauer, as well as Todd A. Barlett Fred D. Bauer, 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).
  

*10.2010.19
First Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to Applied's Form 8-K datedfiled December 22, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2110.20
Second Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to the Company'sApplied's Form 8-K datedfiled October 22,26, 2012, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2210.21
Deferred Compensation Plan (September 1, 2003 Restatement), the terms of which govern benefits vested as of December 31, 2004, for Mark O. Eisele (filed as Exhibit 10(h) to Applied's Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2310.22
First Amendment to Deferred Compensation Plan (September 1, 2003 Restatement) (filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31, 2003, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2410.23
Deferred Compensation Plan (Post-2004 Terms) (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2510.24
Supplemental Defined Contribution Plan (January 1, 1997 Restatement) the terms of which govern benefits vested as of December 31, 2004, for certain executive officersTodd 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).
  
*10.2610.25
First Amendment to Supplemental Defined Contribution Plan effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied’s Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2710.26
Second Amendment to Supplemental Defined Contribution Plan effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299, and incorporated here by reference).
*10.27
Supplemental Defined Contribution Plan (Post-2004 Terms), restated effective as of January 1, 2017 (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.)
  
*10.28Supplemental Defined Contribution Plan (Post-2004 Terms) (filed as Exhibit 10.6 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
*10.29
Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K datedfiled October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3010.29
Amendment to Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K datedfiled October 22,26, 2012, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3110.30
Change in Control Agreement for Neil A. Schrimsher (filed as Exhibit 10.3 to Applied's Form 8-K datedfiled October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3210.31Form of
Change in Control Agreement for each of Thomas E. Armold, Todd A. Barlett, Fred D. Bauer and Mark O. Eisele (filed as Exhibit 99.1 to Applied's Form 8-K datedfiled April 25, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3310.32
Form of Change in Control Agreement for executive officers newly hired since 2012 (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended September 30, 2013, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3410.33
A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers (filed as Exhibit 10(d)10.33 to Applied's Form 10-K for the year ended June 30, 2007,2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3510.34
A written description of Applied's Long-Term Disability Insurance for executive officers (filed as Exhibit 10(c)10.34 to Applied's Form 10-Q10-K for the quarteryear ended December 31, 1997,June 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3610.35Non-qualified Deferred Compensation Agreement between Applied
A written description of Applied's Retiree Health Care Coverage for Neil A. Schrimsher, Todd A. Barlett, Fred D.Bauer and J. Michael Moore effective as of December 31, 1997Mark O. Eisele (filed as Exhibit 10(a)10.35 to Applied's Form 10-Q10-K for the quarteryear ended March 31, 1998,June 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
10.3710.36Share Purchase
Agreement dated April 25, 2014,and Plan of Merger by and among Applied Industrial Technologies, Inc., Applied Alberta, Inc., Michael Sirois, Sirois Family Trust, Georg Eger, Eger Family Trust, Blair Hetlinger, Christopher Sirois, Kenneth Pacula, Grant Bechtloff, Ryan Farley, Dwayne Letawsky, Douglas Kilbach, Steven Vanderwater, 1562039 Alberta Ltd., 1561902 Alberta Ltd., 1614176 Alberta Ltd., 1814971 Alberta Ltd.Fortress Merger Sub Holding LLC, Fortress Merger Sub LP, FCX Group Holdings, LP, FCX Group GP, LLC, and 1814966 Alberta Ltd.Harvest Partners, LP (filed as Exhibit 10.1 to Applied’sApplied's Form 8-K dated May 1, 2014,filed January 9, 2018, SEC File No. 1-2299, and incorporated here by reference).

64

10.38Stock Purchase Agreement dated May 23, 2014, among Applied Industrial Technologies, Inc., Alex Dan Knox and Dayton Scott Knox (filed as Exhibit 10.1 to Applied’s Form 8-K dated May 27, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
21
Applied’s subsidiaries at June 30, 2015.2018.
  
23
Consent of Independent Registered Public Accounting Firm.
  
24
Powers of attorney.
  
31
Rule 13a-14(a)/15d-14(a) certifications.
  
32
Section 1350 certifications.

  
101.INSXBRL Instance Document
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRL 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.

65
ITEM 16. FORM 1O-K SUMMARY.
Table of Contents
Not applicable.


APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2015, 2014,2018, 2017, AND 20132016
(in thousands)
COLUMN A COLUMN B COLUMN C  COLUMN D  COLUMN E
DESCRIPTION Balance at Beginning of Period
 Additions Charged to Cost and Expenses
 Additions (Deductions) Charged to Other Accounts
  Deductions from Reserve
  Balance at End of Period
Year Ended June 30, 2015            
Reserve deducted from assets to which it applies — accounts receivable allowances $10,385
 $2,597
 $231
(A) $2,592
(B) $10,621
Year Ended June 30, 2014            
Reserve deducted from assets to which it applies — accounts receivable allowances $7,737
 $3,970
 $(129)(A) $1,193
(B) $10,385
Year Ended June 30, 2013            
Reserve deducted from assets to which it applies — accounts receivable allowances $8,332
 $2,267
 $(104)(A) $2,758
(B) $7,737
COLUMN A COLUMN B COLUMN C  COLUMN D  COLUMN E
DESCRIPTION Balance at Beginning of Period
 Additions Charged to Cost and Expenses
 Additions (Deductions) Charged to Other Accounts
  Deductions from Reserve
  Balance at End of Period
Year Ended June 30, 2018            
Reserve deducted from assets to which it applies — accounts receivable allowances $9,628
 $2,803
 $4,578
(A) $3,443
(B) $13,566
Year Ended June 30, 2017            
Reserve deducted from assets to which it applies — accounts receivable allowances $11,034
 $2,071
 $(133)(A) $3,344
(B) $9,628
Year Ended June 30, 2016            
Reserve deducted from assets to which it applies — accounts receivable allowances $10,621
 $4,303
 $(46)(A) $3,844
(B) $11,034
(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.


66

SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
/s/ Neil A. Schrimsher /s/ Mark O. EiseleDavid K. Wells
Neil A. Schrimsher
President & Chief Executive Officer
 
Mark O. EiseleDavid K. Wells
Vice President-Chief Financial Officer
& Treasurer
   
/s/ Christopher Macey (Principal financial officer and principal accounting officer)
Christopher Macey
Corporate Controller (Principal Accounting Officer)
Date: August 26, 201517, 2018


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
* *
John F. Meier,Robert J. Pagano, Jr., Director J. Michael Moore,Vincent K. Petrella, Director
* /s/ Neil A. Schrimsher
Vincent K. Petrella,Joe A. Raver, Director Neil A. Schrimsher, President & Chief Executive Officer and Director
* *
Dr. Jerry Sue Thornton, Director Peter C. Wallace, Director and Chairman
   
   
/s/ Fred D. Bauer  
Fred D. Bauer, as attorney in fact 
for persons indicated by “*” 
Date: August 26, 201517, 2018


6771
s Versus Prior Period

2015 2014
 % Increase
2018
 2017
 % Change
Net Sales100.0% 100.0% 11.9%100.0% 100.0% 18.5%
Gross Profit Margin28.0% 27.9% 12.1%28.8% 28.4% 19.8%
Selling, Distribution & Administrative21.3% 21.2% 12.0%21.4% 21.7% 17.0%
Operating Income6.7% 6.7% 12.3%7.3% 6.8% 28.8%
Net Income4.2% 4.6% 2.4%4.6% 5.2% 5.8%

14
Table of Contents

Sales in fiscal 20152018 were $2.75$3.1 billion, which was $291.7$479.5 million or 11.9%18.5% above the prior year, with sales from acquisitions accounting for $280.2$264.7 million or 11.4%. Unfavorable10.2% of the increase, and favorable foreign currency translation decreased sales by $43.3accounting for an increase of $16.0 million or 1.8%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 prior to the impact of foreign currency translation, sales were up $54.8$198.8 million or 2.3%7.7% during the year. We had 252.5 selling daysyear, 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 both fiscal 2015 and fiscal 2014.sales by reportable segment.
Amounts in millions   Amount of change due to
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Reportable Segment2018
2017
Service Center Based Distribution$2,346.4
$2,180.4
$166.0
$3.6
$16.0
$146.4
Fluid Power & Flow Control726.9
413.4
313.5
261.1
—
52.4
Total$3,073.3
$2,593.8
$479.5
$264.7
$16.0
$198.8
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $281.4$166.0 million, or 14.3%7.6%. Acquisitions within this segment increased sales by $280.2$3.6 million or 14.2%0.2%, and favorable foreign currency translation increased sales by $16.0 million or 0.7%. UnfavorableExcluding 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.

The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore.
Amounts in millions   Amount of change due to
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Geographic Area2018
2017
United States$2,615.1
$2,182.6
$432.5
$261.1
$—
$171.4
Canada273.6
252.0
21.6
—
11.3
10.3
Other countries184.6
159.2
25.4
3.6
4.7
17.1
Total$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   Amount of change due to
 Year ended June 30,SD&A Increase
Acquisitions
Foreign Currency
Organic Change
 2018
2017
SD&A$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.

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 deferredcompensation 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.
 
Year Ended June 30,
As a % of Net Sales
 Change in $'s Versus Prior Period
 2017
 2016
 % Change
Net Sales100.0% 100.0% 2.9%
Gross Profit Margin28.4% 28.1% 4.3%
Selling, Distribution & Administrative21.7% 22.0% 1.7%
Operating Income6.8% 3.6% 95.3%
Net Income5.2% 1.2% 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

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
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Reportable Segment2017
2016
Service Center Based Distribution$2,180.4
$2,150.5
$29.9
$19.8
$(1.1)$11.2
Fluid Power & Flow Control413.4
369.0
44.4
11.3
—
33.1
Total$2,593.8
$2,519.5
$74.3
$31.1
$(1.1)$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 $36.5$1.1 million or 1.8%0.1%. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales increased $37.7$11.2 million or 1.9%.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 Businesses& Flow Control segment which operatesincreased $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 OEM markets, increased $10.3 million or 2.1%the U.S., primarily attributedof 9.3%, offset by a decrease of 0.4% due to strongone less sales growth at several of our U.S. based Fluid Power businesses which added $17.1 million or 3.5%, while unfavorable foreign currency translation decreasedday.
The following table shows changes in sales by $6.8 million or 1.4%.geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore.
Amounts in millions   Amount of change due to
 Year ended June 30,Sales Increase
Acquisitions
Foreign Currency
Organic Change
Sales by Geographic Area2017
2016
United States$2,182.6
$2,117.5
$65.1
$25.1
$—
$40.0
Canada252.0
257.8
(5.8)6.0
(0.2)(11.6)
Other countries159.2
144.2
15.0
—
(0.9)15.9
Total$2,593.8
$2,519.5
$74.3
$31.1
$(1.1)$44.3
Sales in our U.S. operations were up $207.1increased $65.1 million or 10.2%3.1%, with acquisitions adding $175.8$25.1 million or 8.7%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 increased $67.5decreased $5.8 million or 23.2%2.2%, with acquisitions adding $86.4 million or 29.7%. Unfavorableunfavorable foreign currency translation decreaseddecreasing Canadian sales by $30.4$0.2 million or 10.4%0.1%. Acquisitions added $6.0 million, or 2.3%. Excluding the impact of businesses acquired and priorunfavorable foreign currency translation impact, Canadian sales were down $11.6 million or 4.4%, of which 2.0% related to the impact of currency translation,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 were up $11.5 million or 3.9% during the year.day. Consolidated sales from our other country operations, which include Mexico, Australia, and New Zealand, were $17.1and Singapore, increased $15.0 million or 12.4% above the prior year, with acquisitions adding sales of $18.0 million or 13.1%.10.4% compared to fiscal 2016. Unfavorable foreign currency translation decreased other country sales by $12.9$0.9 million or 9.4%0.7%. Excluding the impact of businesses acquired and priorPrior to the impact of currency translation, other country sales were up $12.0$15.9 million or 8.7% during11.1% compared to the year.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 20152017 was 73.2%71.5% industrial products and 26.8%28.5% fluid power products compared to 70.7%72.9% industrial and 29.3%27.1% fluid power in the prior year. These changes in product mix relate entirely to the product mix of our recent acquisitions being primarily industrial products.fiscal 2016.
Our gross profit margin was 28.0%increased to 28.4% in fiscal 2015 versus 27.9%2017 compared to 28.1% in fiscal 2014.2016. The increase was primarily due to recording a more favorable impact from LIFO layer liquidations which increased margins areattributablegross 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 impactgross profit margin for fiscal 2016 was negatively impacted by $3.6 million of relatively higher gross margins from acquired

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   Amount of change due to
 Year ended June 30,SD&A Increase
Acquisitions
Foreign Currency
Organic Change
 2017
2016
SD&A$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 $62.6$9.5 million or 12.0%1.7% during fiscal 20152017 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 prior year,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 21.3%6.8% from 21.2% in fiscal 2014. The acquired businesses added an incremental $69.4 million of SD&A expenses, which includes an additional $13.4 million associated with acquired identifiable intangibles amortization. Excluding the $11.0 million decline in SD&A from foreign currency translation, the remaining SD&A amounts3.6%. These increases were similarprimarily due to the prior year. The increase in SD&A asCompany recognizing a percentagenon-cash goodwill impairment charge of sales, was driven by additional intangible asset amortization from businesses acquired.
Operating income increased $20.3$64.8 million or 12.3%, to $184.6and restructuring charges of $8.8 million during fiscal 2015 from $164.4 million2016 that did not reoccur during 2014, andfiscal 2017, as a percent ofwell as higher sales remained stable at 6.7%. The increasevolume in operating income dollars is primarily attributable to our acquired businesses.fiscal 2017.
Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 6.2%was 5.3% in fiscal 2015 from 6.0% in2017 and fiscal 2014. This increase is primarily attributable to an increase in gross profit as a percentage of sales, as a result of our recent acquisitions which operate at higher gross profit margins, representing an increase of 0.1%, along with a decrease in SD&A as a percentage of sales of 0.1%.2016, before the goodwill impairment charge.
Operating income as a percentage of sales for the Fluid Power Businesses& Flow Control segment increased to 9.8%11.3% in fiscal 20152017 from 9.2%10.1% in fiscal 2014.2016. This increase is primarily attributablewas due to the positive leveraging of organicimpact from the increase in sales, growth inprimarily from our U.S. based Fluid Power Businesses, without a commensurate increaseoperations in SD&A expenses.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.
InterestOther (income) expense, net, increased to $7.9 million in fiscal 2015 entirely due to acquisition related borrowing.
Other expense (income), net, represents certain non-operating items of income and expense. This was $0.9$0.1 million of income in fiscal 2017 compared to $2.0 million of expense in fiscal 2015 compared to $2.2 million of2016. Fiscal 2017 income in fiscal 2014. Current year expense primarily consists of foreign currency transaction losses of $1.3 million offset by unrealized gains on investments held by non-qualified

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deferred compensation trusts of $0.4 million. Fiscal 2014 consisted primarily of unrealized gains on investments held by non-qualified deferredcompensation trusts of $1.7$1.2 million, as well as $1.3 million of income associated with the elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption "Financial Statements and Supplementary Data"), offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.8$0.2 million, and life

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.
IncomeThe effective income tax expense as a percent of income before taxesrate was 34.3%19.8% for fiscal 2015 and 32.1%2017 compared to 62.6% for fiscal 2014.2016. 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 increasededuction 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 iswas primarily due to recordingthe adoption of valuation allowances against certain deferredASU 2016-09 in the first quarter of fiscal 2017, which requires excess tax assets for foreign jurisdictions in fiscal 2015 as well as the non-recurrence of a one-time favorable tax benefit in fiscal 2014 in accounting for undistributed earnings of non-U.S. subsidiaries. All undistributed earnings of our foreign subsidiaries are consideredbenefits and deficiencies resulting from stock-based compensation awards vesting and exercises to be permanently reinvested at June 30, 2015 and 2014.
We expect ourrecognized 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 2016 to be in the range of 34.0% to 34.5%.
As a result of the factors addressed above, net income for fiscal 2015 increased $2.7 million or 2.4% from the prior year. Net income per share increased at a slightly higher rate of 4.9% due to lower weighted-average shares outstanding in fiscal 2015.
At June 30, 2015, we had a total of 565 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia and New Zealand, versus 538 at June 30, 2014.
The number of Company employees was 5,839 at June 30, 2015 and 5,472 at June 30, 2014.
YEAR ENDED JUNE 30, 2014 vs. 2013
The following table is included to aid in review of Applied’s statements of consolidated income.
 
Year Ended June 30,
As a % of Net Sales
 Change in $'s Versus Prior Period
 2014
 2013
 % Increase
Net Sales100.0% 100.0% (0.1)%
Gross Profit Margin27.9% 27.7% 0.6 %
Selling, Distribution & Administrative21.2% 20.6% 3.2 %
Operating Income6.7% 7.2% (6.8)%
Net Income4.6% 4.8% (4.5)%
Sales in fiscal 2014 were $2.46 billion, which was $2.3 million or 0.1% below the 2013 fiscal year. We experienced overall declines in sales from our businesses not acquired in fiscal year 2014 of approximately $34.3 million or2017 by 1.4%. There was one additional selling day in fiscal 2014 as compared to fiscal 2013. Currency translation decreased fiscal year sales by approximately $26.2 million or 1.1%. Incremental sales from companies acquired since the 2013 fiscal year contributed $58.2 million or 2.4%.
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $30.1 million, or 1.5%. This decline was due to decreases in sales from businesses not acquired in fiscal year 2014 of $62.5 million or 3.1% coupled with an unfavorable impact of foreign currency translation of $23.1 million or 1.2%. Offseting these decreases was acquisitions, which added $55.5 million or 2.8%.
Sales of our Fluid Power Businesses segment, which operates primarily in OEM markets, increased $27.8 million or 6.1%. We experienced sales growth at several of our Fluid Power businesses which added $29.9 million or 6.6% along with acquisitions within this segment which added $2.8 million or 0.6%, while unfavorable foreign currency translation losses decreased sales by $4.9 million or 1.1%.
Sales in our U.S. operations were up $14.0 million or 0.7% with acquisitions adding $32.8 million or 1.6% offsetting declines in sales from our businesses not acquired in fiscal year 2014 of $18.8 million or 0.9%. Sales from our Canadian operations decreased $7.2 million or 2.4%. Acquisitions added $19.3 million or 6.5%, offset by unfavorable foreign currency translation losses which reduced sales by $17.5 million or 5.9% coupled with declines in sales from our businesses not acquired in fiscal year 2014 of $9.0 million or 3.0%, mostly as a result of weakness within the Canadian mining sector. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, were $9.1 million or 6.2% below the 2013 fiscal year. This decrease is primarily the result of unfavorable foreign currency translation losses of $8.7 million or 5.9%, coupled with declines in sales of $6.5 million or 4.4%, mostly within the mining sector, from our businesses not acquired in fiscal year 2014, while acquisitions added $6.1 million or 4.2% in fiscal 2014.

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The sales product mix for fiscal 2014 was 70.7% industrial products and 29.3% fluid power products compared to 72.1% industrial and 27.9% fluid power in fiscal year 2013. The change in our product mix in fiscal year 2014 was due to sales growth within our Fluid Power Businesses segment coupled with sales declines in our Service Center Based Distribution segment.
Our gross profit margin was 27.9% in fiscal 2014 versus 27.7% in fiscal 2013. The increased margins wereattributable to the impact of relatively higher gross margins from acquired operations.
Selling, distribution and administrative expenses (SD&A) consist of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management, and providing marketing and distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $16.0 million or 3.2% during fiscal 2014 compared to fiscal 2013, and as a percent of sales increased to 21.2% from 20.6% in fiscal 2013. The acquired businesses added $19.3 million of SD&A expenses, which included an additional $2.5 million associated with acquired identifiable intangibles amortization. The increase in SD&A as a percentage of sales, was driven by relatively higher SD&A levels from businesses acquired in fiscal year 2014.
Operating income decreased $12.0 million, or 6.8%, to $164.4 million during fiscal 2014 from $176.4 million during 2013. As a percent of sales, operating income decreased to 6.7% in fiscal 2014 from 7.2% in 2013. The decrease in operating income was primarily attributable to relatively flat gross profit levels coupled with added levels of SD&A from businesses acquired in the 2014 fiscal year. The decrease in operating margin percentage was driven by the negative leverage resulting from decreasing sales from businesses not acquired in fiscal year 2014 without a similar level of SD&A reductions, which resulted in an increase in SD&A as a percentage of sales to 21.2% from 20.6% in fiscal year 2013, slightly offset by an increase in gross profit as a percentage of sales to 27.9% from 27.7%.
Operating income as a percentage of sales for the Service Center Based Distribution segment decreased to 6.0% in fiscal 2014 from 6.9% in fiscal 2013. This decrease was attributable to the negative leverage resulting from decreasing sales in businesses not acquired in fiscal year 2014 without a similar level of SD&A reductions, which resulted in an increase in SD&A as a percentage of sales. In addition, SD&A for acquisitions in fiscal year 2014 operated at a relatively higher SD&A level. The SD&A impacts represented an approximate 1.0% reduction in operating income as a percentage of sales and were slightly offset by an increase in gross profit margins also due to acquisitions in fiscal year 2014 (representing an increase of approximately 0.1%) representing the total net change in operating income as a percentage of sales.
Operating income as a percentage of sales for the Fluid Power Businesses segment increased to 9.2% in fiscal 2014 from 9.0% in fiscal 2013. This increase was due to the positive leverage provided by an increase in sales without a commensurate increase in SD&A levels at several of our Fluid Power Businesses (representing a 0.5% increase in operating income as a percentage of sales), offset by a slight decrease in gross profit margins (representing a 0.3 decrease in operating income as a percentage of sales).
Segment operating income was impacted by changes in the amounts and levels of expenses allocated to the segments. The expense allocations included corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.
Interest expense, net, remained relatively stable as compared to fiscal year 2013.
Other expense (income), net, represented certain non-operating items of income and expense. This was $2.2 million of income in fiscal 2014 compared to $1.4 million of income in fiscal 2013. Fiscal year 2014 income primarily consisted of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.7 million as well as $1.3 million of income associated with the elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption "Financial Statements and Supplementary Data"), offset by foreign currency transaction losses of $0.8 million. Fiscal 2013 consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.3 million.
Income tax expense as a percent of income before taxes was 32.1% for fiscal 2014 and 33.5% for fiscal 2013. The impact of lower effective tax rates in foreign jurisdictions favorably reduced our rate when compared to the U.S. federal statutory rate by 2.6%. Further reducing our rate compared to the U.S. federal statutory rate by 1.6% was the reversal of a deferred tax liability recorded in the years prior to fiscal 2014 on a portion of the undistributed earnings in Canada. All undistributed earnings of our foreign subsidiaries were considered to be permanently reinvested at June 30, 2014. The effective tax rate for fiscal 2014 was further reduced by 1.1% due to a favorable permanent dividend deduction along with other items. These reductions compared to the U.S. federal statutory rate were offset by the impact of state2017 and local taxes which increased the rate by 2.4%.2016.

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As a result of the factors addressed above, net income for fiscal 2014 decreased $5.32017 increased $104.3 million or 4.5% from fiscal year 2013.2016. Net income per share decreased atwas $3.40 per share for fiscal 2017 compared to $0.75 for fiscal 2016. Fiscal 2017 results included a slightlypositive 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 rate of 4.0% due to lower weighted-averageweighted average common shares outstanding in fiscal 2014.2017 as a result of our share repurchase program.
At June 30, 2014,2017, we had a total of 538552 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, and New Zealand, and Singapore, versus 522559 at June 30, 2013.2016.
The number of Company employees was 5,4725,554 at June 30, 20142017 and 5,1095,569 at June 30, 2013.2016.
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, 20152018 we had total debt obligations outstanding of $321.0$966.1 million compared to $170.7$292.0 million at June 30, 2014.2017. Management expects that our existing cash, cash equivalents, funds available under the revolving credit and uncommitted shelf facilities, and cash provided from operations, and the use of operating leases will be sufficient to finance normal working capital needs in each of the countries we operate in, payment of dividends, acquisitions, investments in properties, facilities and equipment, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company’s credit standing and financial strength.
The Company holds, from time to time, relatively significant cash and cash equivalent balances outside of the United States of America. The following table shows the Company's total cash as of June 30, 2015 by geographic location; all amounts are in thousands.
CountryAmount
United Sates$17,256
Canada40,325
Other Countries11,889
Total$69,470
To the extent cash in foreign countries is distributed to the U.S., it could become subject to U.S. income taxes. Foreign tax credits may be available to offset all or a portion of such taxes. At June 30, 2015, all foreign earnings are considered permanently reinvested.
The Company’s working capital at June 30, 20152018 was $549.2$625.5 million compared to $545.2$572.8 million at June 30, 2014.2017. The current ratio was 2.4 to 1 at June 30, 2018 and 2.8 to 1 at June 30, 2015 and 2.9 to 1 at June 30, 2014.2017.
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.
 Year Ended June 30,
 2015
 2014
 2013
Net Cash Provided by (Used in):     
Operating Activities$154,538
 $110,110
 $111,397
Investing Activities(173,621) (203,637) (78,825)
Financing Activities24,689
 92,142
 (38,025)
Exchange Rate Effect(7,325) (590) 175
Decrease in Cash and Cash Equivalents$(1,719) $(1,975) $(5,278)
 Year Ended June 30,
 2018
 2017
 2016
Net Cash Provided by (Used in):     
Operating Activities$147,304
 $164,619
 $162,014
Investing Activities(797,906) (16,894) (75,031)
Financing Activities600,284
 (103,349) (93,007)
Exchange Rate Effect(589) 820
 (3,585)
Increase (Decrease) in Cash and Cash Equivalents$(50,907) $45,196
 $(9,609)
The increasedecrease in cash provided by operating activities resulted fromduring fiscal 2018 is primarily due to increased working capital levels to support increased sales compared to the operationsprior year periods. The decrease in cash was further impacted by

increased interest payments, and the payment of newly acquired businesses along with$7.1 million of one-time costs, both related to the FCX acquisition. These decreases were partially offset by improved cash collections on accounts receivable within our U.S. based businesses.operating results, including the impact of the FCX acquisition.
Net cash used in investing activities in fiscal 20152018 included $14.9 million for capital expenditures and $160.6$775.7 million used for acquisitions.the acquisitions of FCX and DICOFASA, and $23.2 million used for capital expenditures. Net cash used in investing activities in fiscal 20142017 included $20.2$17.0 million for capital expenditures $10.0and $2.8 million used for acquisitions. These were offset by $2.9 million of which wasproceeds received from the sale of five buildings during fiscal 2017. Net cash used for the purchase of our headquarters facility, and $184.3 million for acquisitions. Capital expenditures for fiscal 2014 included an insignificant amount related to the ERP project as the portion of that project pertaining to capital spending primarily endedin investing activities in fiscal 2013. Fiscal 2013 investing cash

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activities2016 included the use of $12.2$13.1 million for capital expenditures ($5.6and $62.5 million related to the ERP project), and $67.6 millionused for acquisitions.
Net cash provided by financing activities in fiscal 20152018 included $170.0$780.0 million of cash from borrowings under long term debt facilities used for the financing of acquisitions, offset by $17.0new credit facility and $19.5 million of repaymentsnet borrowings under ourthe revolving credit facility, and $2.7offset by $125.4 million of long termlong-term debt repayments. Further uses of cash were $42.7$45.9 million for dividend payments, $76.5$22.8 million used to repurchase 1,740,100393,300 shares of treasury stock, and $7.7$3.3 million of acquisition holdback payments. Net cash provided by financing activities in fiscal 2014 included $100.0 million from borrowings under long term debt facilities as well as $69.0 million in borrowings under our revolving credit facility, both of which were utilizedused for the financingpayment of acquisitions. These sources of cash were offset by $40.4 million for dividend payments and $36.7 million used to repurchase 759,900 shares of treasury stock. debt issuance costs.
Net cash used in financing activities in fiscal 20132017 included $37.2$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, and $3.8$8.2 million relatedused to repurchase 162,500 shares of treasury stock, $11.3 million used for acquisition holdback payments, partiallyand $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 $2.6$125.0 million of excess tax benefitscash from share-based compensation.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 $1.04, $0.96$1.18, $1.14, and $0.88$1.10 per share in fiscal 2015, 20142018, 2017 and 2013,2016, respectively.
Capital Expenditures
We expect capital expenditures for fiscal 20162019 to be in the $13.0$26.0 million to $15.0$28.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for fiscal 20162019 is expected to be in the range of $16.0$21.0 million to $17.0 million.$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 havefirst deployed our solution in our Western Canadian operating locations and our traditional U.S. Service Center Based Businesses,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, have beenwere transitioned to SAP during fiscal 2015. TheAt the beginning of fiscal 2016 the Company expects to convertconverted to a new consolidation process and system atsystem. During the beginningfourth quarter of fiscal 2016.2017, 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 determineconsider an appropriate deployment schedule for operations in Eastern Canada as well as 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, 2015,2018, we had authorization to purchase an additional 1,247,3001,056,700 shares.
In fiscal 2015, 20142018, 2017 and 2013,2016, we repurchased 1,740,100, 759,900393,300, 162,500, and 1,300951,100 shares of the Company’s common stock, respectively, at an average price per share of $43.97, $48.34$57.92, $50.72, and $40.96,$39.39, respectively.
Borrowing Arrangements
TheIn January 2018, in conjunction with the acquisition of FCX, the Company hasrefinanced its existing credit facility and entered into a revolvingnew five-year credit facility with a group of banks expiring in May 2017.January 2023. This agreement provides for a $780.0 million unsecured borrowings of up to $150.0 million.term loan and a $250.0 million unsecured revolving credit facility. Fees on this facility range from 0.09%0.10% to 0.175%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 prime, or the bank’s cost of fundsprime at the Company's discretion. This agreement also enables the Company to refinance this debt on a long term basis. As ofAt June 30, 2015 and 2014,2018, the Company had $52.0$775.1 million and $69.0 million in borrowings outstanding under this credit facility, respectively.the term loan and $19.5 million outstanding under the revolver. Unused lines under this facility, at June 30, 2015, net of outstanding letters of credit of $3.8$3.6 million to secure certain insurance obligations, totaled $94.2$226.9 million at June 30, 2018, and arewere available to fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the revolving credit facility borrowingsterm loan as of June 30, 20152018 was 1.15%4.13%.
Additionally
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, 2015,2017.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with either revolving credit agreement, in the amount of $1.8$2.7 million as of June 30, 2018 and June 30, 2017, respectively, in order to secure certain insurance obligations.
In April 2014 the Company entered into a $100.0 million unsecured five-year term loan with a group of banks with a final maturity date in April 2019. Borrowings under this agreement carry a variable interest rate tied to LIBOR, which at June 30, 2015 was 1.19%. The term loan had $96.9 million outstanding at June 30, 2015.
Also in April 2014, the Company assumed $2.4 million of debt as a part of the acquisition of our headquarters facility. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency and matures in May 2024. We had $2.1 million outstanding under this note at June 30, 2015.

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At June 30, 20152018 and June 30, 2017, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 million.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%; the principal is, and are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principal amount of $50.0 million, and carry a fixed interest rate of 3.21%; the principal is, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2015,2018, $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 revolvingnew credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2015,2018, the most restrictive of these covenants required that the Company have net indebtedness less than three4.25 times consolidated income before interest, taxes, depreciation and amortization. At June 30, 2015,2018, the Company's indebtedness was less than two3.0 times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all financial covenants at June 30, 2015 and expects to remain in compliance during the terms of the agreements.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 30,2015
 2014
Accounts receivable, gross$386,926
 $386,117
Allowance for doubtful accounts10,621
 10,385
Accounts receivable, net$376,305
 $375,732
Allowance for doubtful accounts, % of gross receivables2.7% 2.7%
    
Year Ended June 30,2015
 2014
Provision for losses on accounts receivable$2,597
 $3,970
Provision as a % of net sales0.09% 0.16%
June 30,2018
 2017
Accounts receivable, gross$562,377
 $400,559
Allowance for doubtful accounts13,566
 9,628
Accounts receivable, net$548,811
 $390,931
Allowance for doubtful accounts, % of gross receivables2.4% 2.4%
    
Year Ended June 30,2018
 2017
Provision for losses on accounts receivable$2,803
 $2,071
Provision as a % of net sales0.09% 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 50.055.0 at June 30, 20152018 versus 51.451.6 at June 30, 2014.2017. The inclusion of FCX had no impact on the Company's DSO at June 30, 2018. Accounts receivable increased 0.2%40.4% this year, comparedof which 20.7% is accounts receivable for FCX. The remaining increase is due to an increase of 11.9%in sales inexcluding FCX for the twelve months ended June 30, 2015. Acquisitions added $29.3 million, or 7.8%, of accounts receivable, changes in foreign currency rates decreased receivables by $15.6 million and improved collections led to a decrease in receivables of $13.1 million. We primarily attribute the decrease in DSO to the improved timing of collections within our traditional U.S. Service Center Based Distribution Businesses. DSO and past due balances have declined now that all traditional U.S. Service Center Based Distribution Businesses have been fully operational on the new ERP system for all of fiscal 2015.2018.
Approximately 4.2%2.4% of our accounts receivable balances are more than 90 days past due at June 30, 20152018 compared to 5.7%1.7% at June 30, 2014.2017. This improvementincrease primarily relates to our U.S. Service Center Based Businesses.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, 2015.2018. Historically, this percentage is around 0.10% to 0.15%. Our experience with losses on accounts which have uncollected receivables was better than our historical averages in fiscal 2015. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels, and that past due balances will continue to decline in fiscal 2016.levels.


Inventory Analysis
Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis and uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the period ended June 30, 2015
2018 was 4.0 versus 3.7 versus 3.8 at June 30, 2014. This decrease is due to the impact of recent acquisitions which historically have had lower inventory turnover rates, coupled with strategic inventory investments that we believe will assist with future sales growth.2017. We believe our inventory turnover ratio in fiscal 20162019 will be slightly better than our fiscal 20152018 levels.

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CONTRACTUAL OBLIGATIONS
The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 20152018 (in thousands):
 Total
 
Period Less
Than 1 yr

 
Period
2-3 yrs

 
Period
4-5 yrs

 
Period
Over 5 yrs

 Other
Operating leases$82,400
 $24,900
 $34,300
 $16,700
 $6,500
  
Planned funding of post-retirement obligations27,200
 5,400
 3,800
 6,700
 11,300
  
Unrecognized income tax benefit liabilities, including interest and penalties3,100
         3,100
Long term debt obligations321,000
 3,300
 63,100
 108,600
 146,000
  
Interest on long term debt obligations (1)37,100
 6,600
 13,000
 11,000
 6,500
  
Acquisition holdback payments29,600
 19,200
 10,400
      
Total Contractual Cash Obligations$500,400
 $59,400
 $124,600
 $143,000
 $170,300
 $3,100
 Total
 
Period Less
Than 1 yr

 
Period
2-3 yrs

 
Period
4-5 yrs

 
Period
Over 5 yrs

 Other
Operating leases$111,400
 $38,100
 $45,300
 $17,000
 $11,000
 —
Planned funding of post-retirement obligations16,300
 3,500
 4,400
 1,800
 6,600
 —
Unrecognized income tax benefit liabilities, including interest and penalties4,700
 —
 —
 —
 —
 4,700
Long-term debt obligations966,100
 19,700
 128,900
 792,300
 25,200
 —
Interest on long-term debt obligations (1)84,300
 18,300
 40,800
 25,000
 200
 —
Acquisition holdback payments3,365
 2,592
 698
 —
 75
 —
Total Contractual Cash Obligations$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, 20152018 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 as well as the balance outstanding under our revolving credit facility 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 or lenders.
SUBSEQUENT EVENTS
On August 3, 2015, the Company acquired all of the net assets of Atlantic Fasteners, located in Agawam, MA, for a purchase price of approximately $12.5 million. The Company funded this acquisition from borrowings under the revolving credit facility at a variable interest rate. As a a distributor of fasteners and industrial supplies, this business will be included in the Service Center Based Distribution Segment from August 3, 2015.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 22.1%16.8% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $151.8$139.2 million as reflected in our consolidated balance sheet at June 30, 2015.2018. 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.



Allowances for Slow-Moving and Obsolete Inventories
We evaluate the recoverability of our slow-moving or obsoleteand 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

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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, 20152018 and 2014,2017, our allowance for doubtful accounts was 2.7%2.4% of gross receivables, for each period.receivables. Our provision for losses on accounts receivable was $2.6$2.8 million, $4.0$2.1 million and $2.3$4.3 million in fiscal 2015, 20142018, 2017 and 2013,2016, 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 two-stepone-step approach. Step one compares theThe 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, and the second step of goodwill impairment test is unnecessary.impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwillan impairment test is performed to measurecharge would be recognized for the amount of impairment loss (if any). Step two compares the implied fair value of the reporting unit goodwill withby which the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, meaning,exceeds the reporting unit's fair value, isnot to exceed the total amount of goodwill allocated to all the assets and liabilities of thethat reporting unit (including unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit is the price paid to acquire the reporting unit. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.
Goodwill on our consolidated financial statements is relatedrelates to both the Service Center Based Distribution segment and the Fluid Power Businesses& Flow Control segment. The Company has sevensix reporting units for which are U.S. Service Centers, MSS, Canada Service Centers, Mexico Service Centers, Australia and New Zealand, Puerto Rico, and Fluid Power. Foran 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 as of January 1, 2015,were determined using the Company performed a quantitative analysisIncome and estimated the fair value of each of the reporting units using a combination of the incomeMarket approaches. The Income approach (also known asemploys the discounted cash flow ("DCF") method which utilizes the presentreflecting

projected cash flows expected to be generated by market participants and then adjusted for time value of cash flows to estimate fair value) and the marketmoney factors. The Market approach which measures fair value through theutilizes an analysis of comparable publicly traded companies ("guideline company analysis"), giving equal weight to both methods. The Company concluded that five of the reporting units had material excesses of fair value compared to their carrying amounts. The Company concluded that two reportingcompanies.

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units (Canada service center and Australia / New Zealand) had excess fair value of approximately $39.0 million and $4.0 million, or fifteen and fourteen percent, respectively when compared to the carrying amounts of approximately $258.0 million and $28.0 million, respectively. 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 forecast at the assessmentmeasurement date. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, themeasurement date.  The Company evaluates the appropriateness of its assumptions as well as itsand overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable.years.  Key assumptions, all of which are Level 3 inputs,based assumptions relate to pricing trends, inventory costs, discount rate, customer demand, and the long-term growth and foreign exchange rates.revenue growth.  A number of benchmarks from independent industry and other economic publications were also used.  Changes in future actual results, assumptions, and estimates after the assessmentmeasurement 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.
Self-Insurance Liabilities
We maintain business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. We accrue estimated losses using actuarial calculations, models and assumptions based on historical loss experience. We also maintain a partially self-insured health benefits plan, which provides medical benefits to U.S. based employees electing coverage. We maintain a reserve for all unpaid medical claims including those incurred but not reported based on historical experience and other assumptions. Although management believes that the estimated liabilities for self-insurance are adequate, the estimates described above may not be indicative of current and future losses. In addition, the actuarial calculations used to estimate self-insurance liabilities are based on numerous assumptions, some of which are subjective. We will continue to adjust our estimated liabilities for self-insurance, as deemed necessary, in the event that future loss experience differs from historical loss patterns.
Pension and Other Post-employment Benefit Plans
The measurement of liabilities related to pension plans and other post-employment benefit plans is based on management’s assumptions related to future events including interest rates, return on pension plan assets, and health care cost trend rates. We evaluate these assumptions and adjust them as necessary. Changes to these assumptions  Further, continued adverse market conditions could result in a material change to the Company’s pension obligation causing a related increase or decrease in reported net operating results inrecognition of additional impairment if the periodCompany determines that the fair values of change in the estimate. At June 30, 2015, a 1% point change wouldits reporting units have the following effects (in thousands):
 One-Percentage Point
Effect of change in:Increase
 Decrease
Discount rate on liability$(1,803) $2,172
Discount rate on net periodic benefit cost(86) 102
A 1% change in the return on assets is not material as most of the plans are non-qualified and unfunded.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, 2015,2018, the Company had recognized $6.8$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.assets on a jurisdiction by jurisdiction basis. The remaining net deferred tax asset is the amountmanagement believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future taxable income levels.
Income taxes on undistributed earnings of non-U.S. subsidiaries are not accrued for the portion of such earnings that management considers to be permanently reinvested. At June 30, 2015, management considered all undistributed earnings of non-U.S. subsidiaries to be permanently reinvested. Undistributed earnings of non-U.S. subsidiaries totaled $139.0 million for which no provision for U.S. income tax had been made.

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CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
This Form 10-K, including Management’s Discussion and Analysis, contains statements that are forward-looking based on management’s current expectations about the future. Forward-looking statements are often identified by qualifiers, such as “guidance”, “expect”, “believe”, “plan”, “intend”, “will”, “should”, “could”, “would”, “anticipate”, “estimate”, “forecast”, “may”, "optimistic" and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’s control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law.
Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability, or changes in supplier distribution programs; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems;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, and legislation, or policies, both enacted and under consideration, including with respect to health care and federal tax policy, (e.g., affecting the use of the LIFO inventory accounting method and the taxation of foreign-sourced income);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. We doAs of June 30, 2018, we did not currently have any outstanding derivative instruments.
Foreign Currency Exchange Rate Risk
Because we operate throughout North America, Australia and New Zealand and approximately 18.7%14.9% of our fiscal year 20152018 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, (income), net. Applied does not currently hedge the net investments in our foreign operations.
During the course of the fiscal year, the Canadian, Mexican, Australian, Mexican and New Zealand foreigncurrency exchange rates decreased in relation to the U.S. dollar by 13.7%2.0%, 18.9%9.2%, 17.0%4.1%, and 22.3%7.4%, respectively. In the twelve months ended June 30, 2015,2018, we experienced net foreign currency translation losses totaling $58.2$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 from the levels experienced during the year ended June 30, 2015 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 $1.4$0.9 million decrease in net income for the year ended June 30, 2015.2018. A 10% weakening from the levels experienced during the year ended June 30, 2015 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 $1.4$0.9 million increase in net income for the year ended June 30, 2015.2018.
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 $150.0$250.0 million in borrowings and $52.0$19.5 million outstanding at June 30, 2015, our $100.02018, and a $780.0 million five year term loan, facility, $96.9 million of which $775.1 million was outstanding at June 30, 2015,2018. Fixed interest rate debt facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $2.1$1.4 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $191.4$431.7 million during fiscal 2015.2018. 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 $1.9$4.3 million increase in interest expense. Changes in market interest rates would also impact interest rates on these facilities.
We monitor depository institutions that hold our cash and cash equivalents, primarily for safety of principal and secondarily for maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any of these entities.
For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and note 5 to the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business.


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

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

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the "Company"“Company”) as of June 30, 20152018 and 2014, and2017, 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, 2015. Our audits also included2018, and the financial statementrelated notes and the schedule listed in the Index at Item 15. 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 and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on
our audits. We 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 Public Company Accounting Oversight BoardPCAOB (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, 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 supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of theCompany at June 30, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2015, 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 26, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP
Cleveland, Ohio

August 26, 201517, 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, 2015
 2014
 2013
Net Sales $2,751,561
 $2,459,878
 $2,462,171
Cost of Sales 1,981,747
 1,772,952
 1,779,209
Gross Profit 769,814
 686,926
 682,962
Selling, Distribution and Administrative, including depreciation
 585,195
 522,568
 506,563
Operating Income 184,619
 164,358
 176,399
Interest Expense 8,121
 900
 621
Interest Income (252) (651) (456)
Other Expense (Income), net 879
 (2,153) (1,431)
Income Before Income Taxes 175,871
 166,262
 177,665
Income Tax Expense 60,387
 53,441
 59,516
Net Income $115,484
 $112,821
 $118,149
Net Income Per Share — Basic $2.82
 $2.69
 $2.81
Net Income Per Share — Diluted $2.80
 $2.67
 $2.78
Year Ended June 30, 2018
 2017
 2016
Net Sales $3,073,274
 $2,593,746
 $2,519,428
Cost of Sales 2,189,279
 1,856,051
 1,812,006
Gross Profit 883,995
 737,695
 707,422
Selling, Distribution and Administrative, including depreciation 658,168
 562,309
 552,846
Goodwill Impairment —
 —
 64,794
Operating Income 225,827
 175,386
 89,782
Interest Expense 24,142
 8,831
 9,004
Interest Income (657) (290) (241)
Other (Income) Expense, net (2,376) (121) 2,041
Income Before Income Taxes 204,718
 166,966
 78,978
Income Tax Expense 63,093
 33,056
 49,401
Net Income $141,625
 $133,910
 $29,577
Net Income Per Share — Basic $3.65
 $3.43
 $0.75
Net Income Per Share — Diluted $3.61
 $3.40
 $0.75

See notes to consolidated financial statements.


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STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In thousands)

Year Ended June 30, 2015
 2014
 2013
Net income per the statements of consolidated income $115,484
 $112,821
 $118,149
       
Other comprehensive (loss) income, before tax:      
Foreign currency translation adjustments (58,233) 629
 (1,358)
Postemployment benefits:      
  Actuarial (loss) gain on remeasurement (776) 1,402
 3,153
  Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs 286
 382
 872
Unrealized (loss) gain on investment securities available for sale (38) 112
 10
Total other comprehensive (loss) income, before tax (58,761) 2,525
 2,677
Income tax (benefit) expense related to items of other comprehensive income (loss) (205) 719
 1,529
Other comprehensive (loss) income, net of tax (58,556) 1,806
 1,148
Comprehensive income $56,928
 $114,627
 $119,297
Year Ended June 30, 2018
 2017
 2016
Net income per the statements of consolidated income $141,625
 $133,910
 $29,577
       
Other comprehensive (loss) income, before tax:      
Foreign currency translation adjustments (8,875) 2,238
 (24,441)
Post-employment benefits:      
  Actuarial gain (loss) on re-measurement 709
 2,038
 (1,998)
  Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs (73) 506
 518
Unrealized gain (loss) on investment securities available for sale 37
 91
 (52)
Total other comprehensive (loss) income, before tax (8,202) 4,873
 (25,973)
Income tax expense (benefit) related to items of other comprehensive income (loss) 319
 1,029
 (598)
Other comprehensive (loss) income, net of tax (8,521) 3,844
 (25,375)
Comprehensive income $133,104
 $137,754
 $4,202

See notes to consolidated financial statements.

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CONSOLIDATED BALANCE SHEETS
(In thousands)

June 30, 2015
 2014
Assets    
Current assets    
Cash and cash equivalents $69,470
 $71,189
Accounts receivable, less allowances of $10,621 and $10,385 376,305
 375,732
Inventories 362,419
 335,747
Other current assets 51,111
 53,480
Total current assets 859,305
 836,148
Property — at cost    
Land 12,950
 13,212
Buildings 89,325
 89,886
Equipment, including computers and software 166,515
 157,370
Total property — at cost 268,790
 260,468
Less accumulated depreciation 164,343
 156,872
Property — net 104,447
 103,596
Identifiable intangibles, net 198,828
 159,508
Goodwill 254,406
 193,494
Deferred tax assets 97
 21,166
Other assets 17,885
 20,257
Total Assets $1,434,968
 $1,334,169
Liabilities    
Current liabilities    
Accounts payable $179,825
 $172,401
Current portion of long term debt 3,349
 2,720
Compensation and related benefits 63,780
 55,760
Other current liabilities 63,118
 60,074
Total current liabilities 310,072
 290,955
Long-term debt 317,646
 167,992
Post-employment benefits 19,627
 23,611
Other liabilities 46,295
 51,303
Total Liabilities 693,640
 533,861
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 10,000
 10,000
Additional paid-in capital 160,072
 156,999
Retained earnings 969,548
 896,776
Treasury shares — at cost (14,308 and 12,650 shares) (338,121) (261,852)
Accumulated other comprehensive income (loss) (60,171) (1,615)
Total Shareholders’ Equity 741,328
 800,308
Total Liabilities and Shareholders’ Equity $1,434,968
 $1,334,169
June 30, 2018
 2017
Assets    
Current assets    
Cash and cash equivalents $54,150
 $105,057
Accounts receivable, less allowances of $13,566 and $9,628 548,811
 390,931
Inventories 422,069
 345,145
Other current assets 32,990
 41,409
Total current assets 1,058,020
 882,542
Property — at cost    
Land 14,411
 14,250
Buildings 104,419
 97,529
Equipment, including computers and software 177,813
 162,432
Total property — at cost 296,643
 274,211
Less accumulated depreciation 175,300
 166,143
Property — net 121,343
 108,068
Identifiable intangibles, net 435,947
 163,562
Goodwill 646,643
 206,135
Other assets 23,788
 27,288
Total Assets $2,285,741
 $1,387,595
Liabilities    
Current liabilities    
Accounts payable $256,886
 $180,614
Current portion of long-term debt 19,183
 4,814
Compensation and related benefits 73,370
 58,785
Other current liabilities 83,112
 65,540
Total current liabilities 432,551
 309,753
Long-term debt 944,522
 286,769
Post-employment benefits 11,985
 16,715
Other liabilities 81,720
 29,102
Total Liabilities 1,470,778
 642,339
Shareholders’ Equity    
Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding —
 —
Common stock — no par value; 80,000 shares authorized; 54,213 shares issued;
38,703 and 39,041 shares outstanding, respectively
 10,000
 10,000
Additional paid-in capital 169,383
 164,655
Retained earnings 1,129,678
 1,033,751
Treasury shares — at cost (15,510 and 15,172 shares), respectively (403,875) (381,448)
Accumulated other comprehensive loss (90,223) (81,702)
Total Shareholders’ Equity 814,963
 745,256
Total Liabilities and Shareholders’ Equity $2,285,741
 $1,387,595

See notes to consolidated financial statements.

29

STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)

Year Ended June 30, 2015
 2014
 2013
Cash Flows from Operating Activities      
Net income $115,484
 $112,821
 $118,149
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization of property 16,578
 13,977
 12,501
Amortization of intangibles 25,797
 14,023
 13,233
Amortization of stock appreciation rights and options 1,610
 1,808
 2,317
Deferred income taxes (4,961) (8,209) 10,179
Provision for losses on accounts receivable 2,597
 3,970
 2,267
Unrealized foreign exchange transaction losses (gains) (727) 204
 (1,410)
Other share-based compensation expense 2,851
 2,703
 3,444
Shares issued for deferred compensation plans 45
 161
 241
Gain on sale of property (1,291) (53) (321)
Changes in operating assets and liabilities, net of acquisitions:      
Accounts receivable 13,129
 (29,089) (15,721)
Inventories (15,704) (29,171) (26,745)
Other operating assets 797
 17,966
 (7,857)
Accounts payable 1,040
 21,369
 12,206
Other operating liabilities (2,707) (12,370) (11,086)
Cash provided by Operating Activities 154,538
 110,110
 111,397
Cash Flows from Investing Activities      
Property purchases (14,933) (20,190) (12,214)
Proceeds from property sales 1,932
 877
 979
Net cash paid for acquisition of businesses, net of cash acquired of $0, $1,369, and $0 in 2015, 2014 and 2013, respectively (160,620) (184,324) (67,590)
Cash used in Investing Activities (173,621) (203,637) (78,825)
Cash Flows from Financing Activities      
Net (repayments) borrowings under revolving credit facility, classified as long term (17,000) 69,000
 —
Borrowings under long term debt facilities 170,000
 100,000
 —
Long term debt repayments (2,717) (647) —
Purchases of treasury shares (76,515) (36,732) (53)
Dividends paid (42,663) (40,410) (37,194)
Excess tax benefits from share-based compensation 1,042
 2,674
 2,566
Acquisition holdback payments (7,693) (1,839) (3,843)
Exercise of stock appreciation rights and options 235
 96
 499
Cash provided by (used in) Financing Activities 24,689
 92,142
 (38,025)
Effect of exchange rate changes on cash (7,325) (590) 175
Decrease in cash and cash equivalents (1,719) (1,975) (5,278)
Cash and cash equivalents at beginning of year 71,189
 73,164
 78,442
Cash and Cash Equivalents at End of Year $69,470
 $71,189
 $73,164
       
Supplemental Cash Flow Information      
Cash paid during the year for:      
Income taxes $69,272
 $51,548
 $51,816
Interest 5,851
 1,026
 501
Year Ended June 30, 2018
 2017
 2016
Cash Flows from Operating Activities      
Net income $141,625
 $133,910
 $29,577
Adjustments to reconcile net income to net cash provided by operating activities:      
Goodwill impairment —
 —
 64,794
Depreciation and amortization of property 17,798
 15,306
 15,966
Amortization of intangibles 32,065
 24,371
 25,580
Amortization of stock appreciation rights and options 1,961
 1,891
 1,543
Deferred income taxes 1,615
 (2,852) (6,581)
Provision for losses on accounts receivable 2,803
 2,071
 4,303
Unrealized foreign exchange transaction (gains) losses (667) (333) 61
Other share-based compensation expense 4,666
 3,629
 2,524
(Gain) loss on sale of property (335) (1,541) 337
Other —
 103
 —
Changes in operating assets and liabilities, net of acquisitions:      
Accounts receivable (83,103) (42,267) 26,414
Inventories (33,436) (3,624) 25,081
Other operating assets 6,947
 (6,162) 2,964
Accounts payable 50,345
 32,076
 (28,644)
Other operating liabilities 5,020
 8,041
 (1,905)
Cash provided by Operating Activities 147,304
 164,619
 162,014
Cash Flows from Investing Activities      
Property purchases (23,230) (17,045) (13,130)
Proceeds from property sales 978
 2,924
 603
Cash paid for acquisition of businesses, net of cash acquired (775,654) (2,773) (62,504)
Cash used in Investing Activities (797,906) (16,894) (75,031)
Cash Flows from Financing Activities      
Net borrowings (repayments) under revolving credit facility, classified as long term 19,500
 (33,000) (19,000)
Borrowings under long-term debt facilities 780,000
 —
 125,000
Long-term debt repayments (125,420) (3,353) (98,662)
Debt issuance costs (3,298) —
 (719)
Purchases of treasury shares (22,778) (8,242) (37,465)
Dividends paid (45,858) (44,619) (43,330)
Excess tax benefits from share-based compensation —
 —
 208
Acquisition holdback payments (319) (11,307) (18,913)
Exercise of stock appreciation rights and options 102
 656
 896
Taxes paid for shares withheld (1,645) (3,484) (1,022)
Cash provided by (used in) Financing Activities 600,284
 (103,349) (93,007)
Effect of exchange rate changes on cash (589) 820
 (3,585)
(Decrease) increase in cash and cash equivalents (50,907) 45,196
 (9,609)
Cash and cash equivalents at beginning of year 105,057
 59,861
 69,470
Cash and Cash Equivalents at End of Year $54,150
 $105,057
 $59,861
       
Supplemental Cash Flow Information      
Cash paid during the year for:      
Income taxes 41,724
 38,772
 54,749
Interest 25,560
 8,561
 9,497
See notes to consolidated financial statements.


30

STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands)

For the Years Ended June 30, 2015, 2014 and 2013 
Shares of
Common
Stock
Outstanding

 
Common
Stock

 
Additional
Paid-In
Capital

 

Retained
Earnings

 
Treasury
Shares-
at Cost

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Total
Shareholders'
Equity

Balance at July 1, 2012 41,967
 $10,000
 $150,070
 $743,360
 $(226,730) $(4,569) $672,131
Net income       118,149
     118,149
Other comprehensive income (loss)           1,148
 1,148
Cash dividends — $0.88 per share       (37,194)     (37,194)
Purchases of common stock for treasury (1)       (53)   (53)
Treasury shares issued for:             
Exercise of stock appreciation rights and options 129
   (175)   1,086
   911
Performance share awards 53



(1,675)


74



(1,601)
Deferred compensation plans 5
   131
   110
   241
Compensation expense — stock appreciation rights and options     2,317
       2,317
Other share-based compensation expense     3,444
       3,444
Other 16
   (219) 47
 294
   122
Balance at June 30, 2013 42,169
 10,000
 153,893
 824,362
 (225,219) (3,421) 759,615
Net income       112,821
     112,821
Other comprehensive income (loss)           1,806
 1,806
Cash dividends — $0.96 per share       (40,410)     (40,410)
Purchases of common stock for treasury (760)       (36,732)   (36,732)
Treasury shares issued for:              
Exercise of stock appreciation rights and options 76
   849
   324
   1,173
Performance share awards 36
   (1,062)   (21)   (1,083)
Restricted stock units 31
   (1,110)   (247)   (1,357)
Deferred compensation plans 3
   98
   63
   161
Compensation expense — stock appreciation rights and options     1,808
   
   1,808
Other share-based compensation expense     2,703
       2,703
Other 8
   (180) 3
 (20)   (197)
Balance at June 30, 2014 41,563
 10,000
 156,999
 896,776
 (261,852) (1,615) 800,308
Net income       115,484
     115,484
Other comprehensive income (loss)           (58,556) (58,556)
Cash dividends — $1.04 per share       (42,663)     (42,663)
Purchases of common stock for treasury (1,740)       (76,515)   (76,515)
Treasury shares issued for:              
Exercise of stock appreciation rights and options 34
   552
   415
   967
Performance share awards 12
   (425)   52
   (373)
Restricted stock units 36
   (1,312)   76
   (1,236)
Deferred compensation plans 1
   24
   21
   45
Compensation expense — stock appreciation rights and options     1,610
       1,610
Other share-based compensation expense     2,851
       2,851
Other (1)   (227) (49) (318)   (594)
Balance at June 30, 2015 39,905
 $10,000
 $160,072
 $969,548
 $(338,121) $(60,171) $741,328
For the Years Ended June 30, 2018, 2017 and 2016 
Shares of
Common
Stock
Outstanding

 
Common
Stock

 
Additional
Paid-In
Capital

 

Retained
Earnings

 
Treasury
Shares-
at Cost

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Total
Shareholders'
Equity

Balance at July 1, 2015 39,905
 $10,000
 $160,072
 $969,548
 $(338,121) $(60,171) $741,328
Net income       29,577
     29,577
Other comprehensive income (loss)           (25,375) (25,375)
Cash dividends — $1.10 per share       (54,266)     (54,266)
Purchases of common stock for treasury (951)       (37,465)   (37,465)
Treasury shares issued for:             
Exercise of stock appreciation rights and options 64
   (391)   1,000
   609
Performance share awards 8
 
 (308) 
 116
 
 (192)
Restricted stock units 15
   (530)   232
   (298)
Compensation expense — stock appreciation rights and options 
   1,543
   
   1,543
Other share-based compensation expense     2,524
       2,524
Other 16
   (381) (38) 350
   (69)
Balance at June 30, 2016 39,057
 10,000
 162,529
 944,821
 (373,888) (85,546) 657,916
Net income       133,910
     133,910
Other comprehensive income (loss)           3,844
 3,844
Cash dividends — $1.14 per share       (45,005)     (45,005)
Purchases of common stock for treasury (163)       (8,242)   (8,242)
Treasury shares issued for:              
Exercise of stock appreciation rights and options 111
   (2,218)   105
   (2,113)
Performance share awards 10
   (360)   126
   (234)
Restricted stock units 15
   (624)   227
   (397)
Compensation expense — stock appreciation rights and options     1,891
       1,891
Other share-based compensation expense     3,629
       3,629
Other 11
   (192) 25
 224
   57
Balance at June 30, 2017 39,041
 10,000
 164,655
 1,033,751
 (381,448) (81,702) 745,256
Net income       141,625
     141,625
Other comprehensive income (loss)           (8,050) (8,050)
Reclassifications of certain income tax effects from accumulated other comprehensive loss       471
   (471) —
Cash dividends — $1.18 per share 
     (46,162)     (46,162)
Purchases of common stock for treasury (393)   
   (22,778)   (22,778)
Treasury shares issued for:              
Exercise of stock appreciation rights and options 19
   (482)   84
   (398)
Performance share awards 5
   (273)   (24)   (297)
Restricted stock units 15
   (740)   (56)   (796)
Compensation expense — stock appreciation rights and options     1,961
       1,961
Other share-based compensation expense     4,666
       4,666
Other 16
   (404) (7) 347
   (64)
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.


31

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 distributorsupplies, serving Maintenance Repair & Operations (MRO) and Original Equipment Manufacturer (OEM) customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for industrial, and fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, and fluid power, and flow control shop services. Applied also offers maintenance trainingstoreroom 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. For the year ended June 30, 2013 the financial results of the Company’s Canadian and Mexican subsidiaries were included in the consolidated financial statements for the twelve months ended May 31. During fiscal 2014, the Company eliminated the one month reporting lag for both the Canadian and Mexican subsidiaries in the first and third quarters respectively. See the "Change in Accounting Principle" section below for additional information related to the elimination of the reporting lag.
Foreign Currency
The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive (loss) income (loss) in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other (income) expense, (income), net.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.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, (income), net in the statements of consolidated income.
Concentration of Credit Risk
The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and New Zealand.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 Appliedthe 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.

32

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 theCompany 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, 2015,2018, approximately 22.1%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 or obsoleteand 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 LIFO inventory accounting methodmethods 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 sheetsheets 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.

33

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 expensesexpense 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 livedindefinite-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 expensesexpense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expenses were approximately $24,430, $16,230$19,320, $20,060 and $15,560$21,480 for the fiscal years ended June 30, 2015, 20142018, 2017 and 2013, respectively.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 the Accounting Standards Codification ("ASC") Topic 740 - Income Taxes topic of the ASC (Accounting Standards Codification). The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes.

34

Share-Based Compensation
Share-based compensation represents the cost related to share-based awards granted to employees under eitherthe 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-yearten-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.
ChangesRecently Adopted Accounting Guidance
Change in Accounting Principle - Net Periodic and Post-retirement Benefit Costs
U.S. Inventory Costing Methodology
From fiscal 2013 throughIn March 2017, the endFASB 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 2014, the Company implemented SAP as its new enterprise resource planning system (ERP) at its U.S. service centers. As implementation occurred at each service center, the method used to apply the link chain dollar value last-in first-out (LIFO) method of accounting changed for the inventories at that location.2018. The new inventory costing methodology utilizes the weighted-average cost method to determine the current year LIFO indices as well as any new LIFO layers established, whereas previously, current costs were used. Upon completion of the implementation, on July 1, 2014 the Company changed its accounting policy to the new method. Differences between amounts recognized in the financial statements during the implementation period and the previous accounting policy prior to July 1, 2014 were immaterial.
The Company believes that this change in accounting principle is preferable under the circumstances because weighted-average cost will provide a better reflection of actual transactions and inventory purchases, resulting in improved matching of actual costs and current revenues. This change will also result in greater consistency in inventory costing across the organization, as certain other U.S. locations were previously using weighted-average cost for similar LIFO calculations in their legacy inventory systems, and the new ERP system will make inventory costing a more efficient process within the U.S. ASC 250, "Accounting Changes and Error Corrections," requires that unless it is impracticable to do so, the voluntary adoption of a new accounting principle should be done retrospectively to all prior periods. Before July 1, 2014, the Company’s former ERP system did not capture weighted-average costs within the U.S. and the data needed to recalculate previous LIFO indices does not exist. Thus, the Company has concluded it is impracticable to recognize a cumulative effect or to retrospectively apply the effect of this change in accounting principle prior to July 1, 2014, but believes that those effects would be immaterial in all periods.
Alignment of Canadian Subsidiary Reporting
Effective July 1, 2013, the Company aligned the consolidation of the Company’s Canadian subsidiary in the consolidated financial statements, which previously included the results on a one month reporting lag. The Company believes that this change in accounting principle is preferable as it provides contemporaneous reporting within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of a one month reporting lag of a subsidiary is treated as a change in accounting principle and requires retrospective application. The Company determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the lag elimination was $1,200adoption 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, forresulting 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 month of June 2013 and has been included within “Other (Income) Expense, net” on the statementstatements of consolidated income for the yearyears ended June 30, 2014.2018, and 2017, and 2016, respectively. The statement of consolidated incomeCompany used a practical expedient where the amounts disclosed in our Benefit Plans footnote for the prior year ended June 30, 2014 reflectscomparative periods were the same results, had the financial statements been retrospectively adjusted, with the exception of net income which would have decreased by $1,200. Net sales, operating income and net incomebasis for the year ended June 30, 2013 would have decreased by $1,050, $600estimation 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 $500 hadJobs 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 financial statements been retrospectively adjusted.

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Alignment of Mexican Subsidiary Reporting
Effective January 1, 2014,fiscal 2018 using the Company alignedat the consolidationbeginning of the Company’s Mexican subsidiaryperiod 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 consolidated financial statements, which previously included the results on a one month reporting lag. The Company believes thatfourth quarter of fiscal 2018 and will apply this change in accounting principle is preferable as it provides contemporaneous reporting within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of a one month reporting lag of a subsidiary is treated as a change in accounting principleguidance prospectively to its annual and requires retrospective application. The Company determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the lag elimination was $200 of income for the month of December 2013 and has been included within “Other (Income) Expense, net” on the statement of consolidated income for year ended June 30, 2014. Net sales, operating income and net income for the year ended June 30, 2014 would have decreased by $1,100, $100 and $250 had the financial statements been retrospectively adjusted. Net sales, operating income and net income for the year ended June 30, 2013 would have decreased by $900, $400 and $250 had the financial statements been retrospectively adjusted.interim goodwill impairment tests.
NewRecently Issued Accounting PronouncementsGuidance
In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers.
The standard, issued as Accounting Standards Update (ASU)ASU 2014-09, outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including

industry specific guidance. The core principle of this model is that "an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services." On July 9,In August 2015, the FASB agreedissued 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, 2017.2017 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 June 2014,August 2016, the FASB issued its final standard on accounting for share-basedthe classification of certain cash receipts and cash payments whenwithin the termsstatement of an award provide that a performance target could be achieved after the requisite service period. Thecash flows. This standard, issued as ASU 2014-12, clarifies that2016-15, makes a performance target that affects vestingnumber of changes meant to add or clarify guidance on the classification of certain cash receipts and that can be achieved afterpayments in the requisite service period, should be treated as a performance condition. Thestatement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2015,2018, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
In April 2015,October 2016, the FASB issued its final standard on simplifying the presentationincome tax consequences of debt issue costs.intra-entity transfers of assets other than inventory. This standard, issued as ASU 2015-03,2016-16, requires that all costs incurred to issue debt be presented inan entity recognize the balance sheet as a direct reduction fromincome tax consequences of an intra-entity transfer of an asset other than inventory when the carrying valuetransfer occurs and eliminates the exception for an intra-entity transfer of the debt, similar to the presentation of debt discounts.an asset other than inventory. This update is effective for annual and interim financial statement periods beginning after December 15, 2015, and interim periods within those fiscal years,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 the adoption of this guidance will result in the reclassification of the unamortized debt issuance costspronouncement on the consolidated balance sheets, which were $622its financial statements and $703 at June 30, 2015 and 2014, respectively.related disclosures.


NOTE 2: BUSINESS COMBINATIONS
The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition.
KnoxFCX Acquisition
On July 1, 2014,January 31, 2018, the Company acquiredcompleted the acquisition of 100% of the outstanding stockshares of Knox Oil Field SupplyFCX Performance, Inc. (“Knox”("FCX"), headquartered in San Angelo, Texas, fora Columbus, Ohio based distributor of specialty process flow control products and services. The total consideration of $132,000, including cash paid of $118,000 at closing. The primary reasontransferred for the acquisition was $781,781, which was financed by cash-on-hand and a new credit facility comprised of Knox is to complementa $780,000 Term Loan A and expanda $250,000 revolver, effective with the Company’s capabilities to serve the upstream oil and gas industry in the United States.transaction closing. See note 5 Debt. As a distributor of oilfield supplieshighly engineered valves, instruments, pumps and relatedlifecycle services to MRO and OEM customers across diverse industrial and process end markets, this business iswill be included in the Service Center Based DistributionFluid Power & Flow Control Segment. The Company funded the acquisition by drawing $120,000 from the previously uncommitted shelf facility with Prudential Investment Management at a fixed interest rate of 3.19% with an average seven year life. The remaining $14,000 purchase price will be paid as acquisition holdback payments on the first three anniversaries of the acquisition with interest at a fixed rate of 1.50% per annum.

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The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of KnoxFCX based on their preliminary estimated fair values at the acquisition date:
date, which are subject to adjustment. The purchase accounting will be finalized within one year from the acquisition date.
 Knox Acquisition
 2015
Accounts receivable$19,100
Inventories18,800
Property3,900
Identifiable intangible assets58,500
Goodwill63,200
Total assets acquired163,500
Accounts payable and accrued liabilities7,200
Deferred income taxes24,300
Net assets acquired$132,000
  
Purchase price$132,800
Reconciliation of fair value transferred: 
Working Capital Adjustments(800)
Total Consideration$132,000
 FCX Acquisition
 2018
Cash$11,141
Accounts receivable80,836
Inventories47,325
Other current assets1,657
Property8,282
Identifiable intangible assets305,420
Goodwill439,164
Other assets775
Total assets acquired$894,600
Accounts payable and accrued liabilities54,518
Other liabilities2,677
Deferred tax liabilities55,624
Net assets acquired$781,781
  
Purchase price$784,281
Reconciliation of fair value transferred: 
Working Capital Adjustments(2,500)
Total Consideration$781,781
NoneGoodwill acquired of the goodwill acquired$160,814 is expected to be deductible for income tax purposes. The goodwill recognized is attributable primarily to expected synergies
Net sales, operating income and other benefits that the Company believes will resultnet income from the FCX acquisition of Knox.
Reliance Acquisition
On May 1, 2014, the Company acquired 100% of the outstanding stock of Reliance Industrial Products (“Reliance”), headquartered in Nisku, Alberta, Canada, with operations in Western Canada and the Western United States, for a total purchase priceincluded in the amountCompany’s results since January 31, 2018, the date of $188,500. The primary reasons for the acquisition, are to provide the Company enhanced capabilities to serve the upstream oil and gas industry in the United States and Canada. A distributor of fluid conveyance and oilfield supplies, this business is included in the Service Center Based Distribution Segment. The Company funded the acquisition by using available cash in Canada in the amount of $31,900, existing revolving credit facilities of $36,600 and a new $100,000 five year term loan facility, with the remainder of $20,000 to be paid in equal amounts as acquisition holdback payments on the first two anniversaries of the acquisition, plus interest at 2% per annum.

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The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of Reliance based on their estimated fair values at the acquisition date:
follows:
 Reliance Acquisition
 2014
Accounts receivable$20,600
Inventories22,900
Other current assets6,000
Property12,900
Identifiable intangible assets73,200
Goodwill79,500
Total assets acquired215,100
Accounts payable and accrued liabilities15,800
Deferred income taxes19,500
Net assets acquired$179,800
  
Purchase price$188,500
Reconciliation of fair value transferred: 
Cash acquired(1,400)
Working capital adjustments(8,200)
Debt assumed900
Total Consideration$179,800
None of the goodwill acquired is expected to be deductible for income tax purposes. The goodwill recognized is attributable primarily to expected synergies and other benefits that the Company believes will result from the acquisition of Reliance.
 January 31, 2018 to June 30, 2018
Net sales$249,752
Operating income16,845
Net income8,758
The Companycompany incurred $1,448$2,849 in third partythird-party costs during fiscal 20142018 pertaining to the acquisition of Reliance. These expensesFCX, which are included in the selling, distribution and administration expense line in the statementstatements of consolidated income for the year ended June 30, 2014.fiscal 2018.
Knox and Reliance Pro Forma Results (Unaudited)
The following unaudited pro forma consolidated results of operations have been prepared as if the RelianceFCX acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2013 and the Knox acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2014:
2017:
Pro forma, year ended June 30:2014
2013
    Sales$2,687,903
$2,600,453
    Operating income$184,164
$187,419
    Net income$121,158
$128,779
    Diluted net income per share$2.86
$3.03
Pro forma, year ended June 30:2018
2017
Net sales$3,330,430
$2,943,583
Operating income234,603
196,194
Net income158,181
126,270
Diluted net income per share$4.03
$3.20
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect additional depreciation and amortization that would have been chargedrecorded assuming the fair value adjustments to property, plant, and equipment, and amortizableidentified intangible assets had been applied as of July 1, 2013.2016. 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 Reliance and Knox;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.

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Other Fiscal 2015 Acquisitions
Other acquisitions during the year include the acquisition of substantially all of the net assets of Rodamientos y Derivados del Norte S.A. de C.V., a Mexican distributor of bearings and power transmission products and related products, and Great Southern Bearings / Northam Bearings, a Western Australia distributor of bearings and power transmission products on July 1, 2014 as well as Ira Pump and Supply Inc. (Ira Pump) a Texas distributor of oilfield pumps and supplies on November 3, 2014. These companies are included in the Service Center Based Distribution Segment. The total combined consideration for these acquisitions was approximately $54,900. Net tangible assets acquired were $21,200 and intangibles including goodwill were $33,700, based upon estimated fair values at the acquisition date. The estimated fair values related to Ira Pump are preliminary and subject to adjustment. The Company funded these acquisitions from borrowings under our existing debt facilities. Total acquisition holdback payments of $6,900 will be paid at various times through July 2017. The results of operations for the Mexican, Australian and Ira Pump acquisitions are not material for any period presented.future.
Other Fiscal 2014 Acquisitions2018 Acquisition
In December 2013,On July 3, 2017, the Company acquired substantially all100% of the net assetsoutstanding stock of Texas Oilpatch Services Corporation,Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a Texas distributor of bearings, oil seals, power transmission products,accessories and related replacement parts to the oilfield industry. The acquired businesscomponents for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment. The purchase price for thisthe acquisition was $17,000,$5,920, net tangible assets acquired was $3,863were $3,395, and intangibles, including goodwill was $13,137.$2,525 based upon estimated fair values at the acquisition date. The purchase price includes $2,550$906 of acquisition holdback paymentspayments. 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 have beenwill be paid into an escrow account controlled byon the first three anniversaries of the acquisition with interest at a third party.fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations offor the acquired entity are not material in relation to the Company’sCompany's consolidated financial statements.
Fiscal 2013 Acquisitions2017 Acquisition
In December 2012,On March 3, 2017, the Company acquired substantially all of the net assets of Norma Bearings, Inc.Sentinel Fluid Controls ("Sentinel"), a distributor of bearingshydraulic and power transmission products, located in Laval, Quebec. The acquired businesslubrication components, systems and solutions operating from four locations. Sentinel is included in the Service Center Based DistributionFluid Power & Flow Control segment. In December 2012,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 Parts Associates, Inc.HUB Industrial Supply ("HUB"), a distributor of maintenance suppliesconsumable industrial products operating from three locations - Lake City, FL, Indianapolis, IN, and solutions, headquartered in Cleveland, Ohio. The acquired business is included in the Service Center Based Distribution segment. In November 2012,Las Vegas, NV. On August 3, 2015, the Company acquired substantially all of the net assets of Hyquip,Atlantic Fasteners Co., Inc., a Wisconsin distributor of a broad line of hydraulic, rubber and plastic industrial hose and tubing, plus related accessories. The acquired business is included in the Fluid Power Businesses segment. In September 2012, the Company acquired 100% of the outstanding stock of Bearings & Oil Seals Specialists Inc. ("Atlantic Fasteners"), a distributor of gaskets, seals, bearingC-Class consumables including industrial fasteners and power transmission products,related industrial supplies located in Hamilton, Ontario. The acquired business isAgawam, MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. In August 2012,On October 1, 2015, the Company acquired 100%substantially all of the outstanding stocknet assets of SKF Group's company-owned distribution businessS.G. Morris Co. ("SGM"). SGM, headquartered in AustraliaCleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania and New Zealand ("Applied Australia"). As one of the largest bearing suppliers in these markets, Applied Australia also distributes seals, lubrication products,West Virginia and power transmission products. The acquired business is included in the Service Center Based DistributionFluid Power & Flow Control segment.
The following table summarizes thetotal 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 of assets acquired and liabilities assumed for these acquisitions:
 2013
Accounts receivable$7,500
Inventories23,700
Other current assets200
Property1,100
Identifiable Intangibles assets19,800
Goodwill24,400
Total assets acquired76,700
Accounts payable and accrued liabilities1,900
Other current liabilities6,200
Net assets acquired$68,600
  
Purchase price$68,600


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at the acquisition dates. The purchase price included $1,015 that was deferred, sometotal combined consideration includes $3,300 of which has been paid as acquisition holdback payments, of which $1,250 was paid during fiscal year 2017. The remaining balance of $2,050 is included in fiscal 2015other 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

available cash and 2014. Additional 2013 pro-forma information hasborrowings under the revolving credit facility at variable interest rates. The acquisition prices and the results of operations for the acquired entities are not been included as it is not material.material in relation to the Company's consolidated financial statements.
Holdback Liabilities for Acquisitions
Acquisition holdback payments of approximately $19,200, $6,500$2,592, $283, $415 and $3,900$75 will be made in fiscal 2016, 20172019, 2020, 2021, and 2018,2024, respectively. The related liabilities for these payments are recorded in the Consolidated Balance Sheetsconsolidated balance sheets in other current liabilities for the amounts due in fiscal year 20162019 and other liabilities for the amounts due in fiscal years 20172020 through 2018.2024.
NOTE 3: INVENTORIES
Inventories consist of the following:
June 30, 2015
 2014
U.S. inventories at average cost $397,524
 $363,692
Foreign inventories at average cost 116,674
 123,468
  514,198
 487,160
Less: Excess of average cost over LIFO cost for U.S. inventories 151,779
 151,413
Inventories on consolidated balance sheets $362,419
 $335,747
June 30, 2018
 2017
U.S. inventories at average cost $443,521
 $373,984
Foreign inventories at average cost 117,711
 108,734
  561,232
 482,718
Less: Excess of average cost over LIFO cost for U.S. inventories 139,163
 137,573
Inventories on consolidated balance sheets $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 2013,2017, reductions in U.S. inventories, primarily in the bearings pool which included the scrapping of approximately $6,000 of product, resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The overall impact of LIFO layer liquidations increased gross profit by $6,300 in fiscal 2013. There were no LIFO layer liquidations in fiscal 2015 or 2014.
NOTE 4: GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for both the Service Center Based Distribution Segmentsegment and the Fluid Power Businesses& Flow Control segment for the years ended June 30, 20152018 and 20142017 are as follows:
 Service Center Based Distribution
 Fluid Power Businesses
 Total
Balance at July 1, 2013$105,920
 $929
 $106,849
Goodwill acquired during the year84,798
 —
 84,798
Other, primarily currency translation1,847
 —
 1,847
Balance at June 30, 2014192,565
 929
 193,494
Goodwill acquired during the year77,728
 —
 77,728
Other, primarily currency translation(16,816) —
 (16,816)
Balance at June 30, 2015$253,477
 $929
 $254,406
 Service Center Based Distribution
 Fluid Power & Flow Control
 Total
Balance at July 1, 2016$198,486
 $4,214
 $202,700
Goodwill added during the year3,220
 625
 3,845
Other, primarily currency translation34
 (444) (410)
Balance at June 30, 2017201,740
 4,395
 206,135
Goodwill added during the year2,525
 439,164
 441,689
Other, primarily currency translation(1,181) —
 (1,181)
Balance at June 30, 2018$203,084
 $443,559
 $646,643
At June 30, 2015, 2014During 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 2013, accumulatedtrade 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 losses subsequenttest 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 fiscal year 2002 totaled $36,605 and relate entirelyits 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 Fluid Power Businesses segment.U.S. service center reporting unit based on the relative fair value as of July 1, 2016.
The Company has sevensix (6) reporting units and performed itsfor which an annual goodwill impairment assessment was performed as of January 1, 2015.2018.  The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts

by at least 30% as of January 1, 2018. The fair values of the reporting units in accordance with the goodwill impairment test were determined using the Income and Market approaches.  The Income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors. The Market approach utilizes an analysis of comparable publicly traded companies. 
The 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 had material excesses ofunits’ fair value compared tosubstantially exceeded their carrying amounts. The Company concluded thatcarrying value for two (2) reporting units (Canada service center and Australia / Australia/New Zealand) had excessZealand 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 approximately $39,000 and $4,000 or 15% and 14%, respectively when compared tothe reporting unit goodwill with the carrying amountsamount of approximately $258,000goodwill.  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 $28,000, respectively. 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 testtests have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions forecast at the assessment date.measurement dates. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, themeasurement date.  The Company evaluates the appropriateness of its assumptions as well as itsand overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable.years.  Key assumptions, all of which are Level 3 inputs,based assumptions relate to pricing trends, inventory costs, discount rate, customer demand, and the long-term growth and foreign exchange rates.revenue growth.  A number of benchmarks from independent industry and other economic publications were also used.  Changes in future actual results, assumptions, and estimates after the assessmentmeasurement date may lead to an outcome where additional impairment charges would be required in future

40

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:following:
June 30, 2015Amount
 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:     
Customer relationships$225,332
 $65,789
 $159,543
Trade names42,689
 13,187
 29,502
Vendor relationships14,465
 7,258
 7,207
Non-competition agreements4,578
 2,002
 2,576
Total Intangibles$287,064
 $88,236
 $198,828
June 30, 2018Amount
 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:     
Customer relationships$465,691
 $125,009
 $340,682
Trade names112,939
 22,454
 90,485
Vendor relationships11,425
 7,382
 4,043
Non-competition agreements2,761
 2,024
 737
Total Intangibles$592,816
 $156,869
 $435,947

June 30, 2014Amount
 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:     
Customer relationships$170,395
 $48,285
 $122,110
Trade names36,912
 10,394
 26,518
Vendor relationships15,446
 6,628
 8,818
Non-competition agreements3,322
 1,260
 2,062
Total Intangibles$226,075
 $66,567
 $159,508
June 30, 2017Amount
 
Accumulated
Amortization

 
Net
Book Value

Finite-Lived Intangibles:     
Customer relationships$235,009
 $102,414
 $132,595
Trade names43,873
 19,295
 24,578
Vendor relationships14,152
 9,141
 5,011
Non-competition agreements3,788
 2,410
 1,378
Total Intangibles$296,822
 $133,260
 $163,562
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
During 2015,2018, the Company acquired identifiable intangible assets with ana preliminary acquisition cost allocation and weighted-average life as follows:
 Acquisition Cost Allocation
 Weighted-Average Life
Customer relationships$68,078
 19.5 years
Trade names7,627
 14.7 years
Non-competition agreements1,664
 5.0 years
Total Intangibles Acquired$77,369
 18.7 years
 Acquisition Cost Allocation
 Weighted-Average Life
Customer relationships$234,370
 20.0 years
Trade names71,050
 15.0 years
Total Intangibles Acquired$305,420
 18.8 years
AmortizationAmortization of identifiable intangibles totaled $25,797, $14,023$32,065, $24,371 and $13,233$25,580 in fiscal 2015, 20142018, 2017 and 2013,2016, 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, 20152018 is estimated to be $24,600 for 2016, $23,000 for 2017, $20,900 for 2018, $19,200$44,000 for 2019, $42,500 for 2020, $40,200 for 2021, $37,800 for 2022 and $17,500$35,300 for 2020.2023.
A significant portion of our intangible assets relate to recent acquisitions that primarily operate in the oil and gas sectors. Considering the recent downturn in the energy market, a prolonged period of low oil and natural gas prices may result in asset impairments, including potential impairment of the carrying value of our goodwill and finite-lived intangible assets.


41

NOTE 5: DEBT
Revolving Credit Facility & Term Loan
TheIn January 2018, in conjunction with the acquisition of FCX, the Company hasrefinanced its existing credit facility and entered into a revolvingnew five-year credit facility with a group of banks expiring in May 2017.January 2023. This agreement provides for a $780,000 unsecured borrowings of up to $150,000.term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range from 0.09%0.10% to 0.175%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 prime, or the bank’s cost of fundsprime at the Company’sCompany's discretion. This agreement also enables the Company to refinance this debt on a long-term basis. At June 30, 2015 and 2014,2018, the Company had $52,000 and $69,000, respectively,$775,125 outstanding under this credit facility.the term loan and $19,500 outstanding under the revolver. Unused lines under this facility, net of outstanding letters of credit of $3,764$3,625 to secure certain insurance obligations, totaled $94,236$226,875 at June 30, 20152018, and arewere available to fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the loansterm loan as of June 30, 2018 was 4.13%. The weighted average interest rate on the amount outstanding onunder the revolving credit facility as of June 30, 20152018 was 1.15%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 theeither revolving credit agreement, in the amount of $1,841,$2,698 as of June 30, 2018 and June 30, 2017, respectively, in order to secure certain insurance obligations.
Other Long-Term Borrowings
The Company entered into a $100,000 unsecured five-year term loan with a group of banks in April2014 with a final maturity date in April2019. Borrowings under this agreement carry a variable interest rate tied to LIBOR, which at June 30, 2015 was a rate of 1.19%. The term loan has an outstanding amount of $96,875 and $99,375 at June 30, 2015 and 2014, respectively.
In April 2014 the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency with a remaining term of nine years, maturing in May 2024. At June 30, 2015 and 2014, $2,120 and $2,337 was outstanding, respectively.
At June 30, 2015,2018 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%, which isand are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principleprincipal amount of $50,000, and carry a fixed interest rate of 3.21% which is, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2015,2018, $50,000 in additional financing was available under this facility.

In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% 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 YearAggregate Maturity
2016$3,349
2017$57,227
2018$5,856
2019$83,359
2020$25,238
Thereafter$145,966
 Fiscal YearAggregate Maturity
2019$19,734
202049,613
202179,241
202284,120
2023708,124
Thereafter25,231
Covenants
The revolvingnew credit facility the term loan agreement, and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2015,2018, the most restrictive of these covenants required that the Company have net indebtedness less than three4.25 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.


42

NOTE 6: FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at June 30, 20152018 and June 30, 20142017 totaled $9,330$10,318 and $11,011,$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, 2015,2018, 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).


NOTE 7: INCOME TAXES
Income Before Income Taxes
The components of income before income taxes are as follows:
Year Ended June 30,2015
 2014
 2013
U.S.$152,618
 $147,980
 $153,546
Foreign23,253
 18,282
 24,119
Income before income taxes$175,871
 $166,262
 $177,665
Year Ended June 30,2018
 2017
 2016
U.S.$186,874
 $154,472
 $139,960
Foreign17,844
 12,494
 (60,982)
Income before income taxes$204,718
 $166,966
 $78,978
Provision
The provision (benefit) for income taxes consists of:
Year Ended June 30,2015
 2014
 2013
Current:     
Federal$52,861
 $50,455
 $38,859
State and local6,884
 6,576
 5,736
Foreign5,603
 4,619
 4,742
Total current65,348
 61,650
 49,337
Deferred:     
Federal(3,799) (5,328) 10,277
State and local(153) (267) 346
Foreign(1,009) (2,614) (444)
Total deferred(4,961) (8,209) 10,179
Total$60,387
 $53,441
 $59,516
Year Ended June 30,2018
 2017
 2016
Current:     
Federal$48,131
 $26,456
 $45,226
State and local8,038
 4,692
 6,349
Foreign5,309
 4,760
 4,407
Total current61,478
 35,908
 55,982
Deferred:     
Federal5,955
 852
 397
State and local(586) 535
 (30)
Foreign(3,754) (4,239) (6,948)
Total deferred1,615
 (2,852) (6,581)
Total$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.

The exercise of non-qualified stock appreciation rights and options during fiscal 2015, 20142018, 2017 and 20132016 resulted in $352, $1,462$419, $1,921 and $1,675,$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 option price.fair value of the options on the grant date. Vesting of stock awards and other stock compensation in fiscal 2015, 20142018, 2017 and 20132016 resulted in $690, $1,211$430, $482 and $890,$(4), respectively, of incremental income tax benefits (expense) over the amounts previously reported for financial reporting purposes. TheseDue 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.

43

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 30,2015
 2014
 2013
Statutory income tax rate35.0 % 35.0 % 35.0 %
Effects of:     
State and local taxes2.5 % 2.4 % 2.3 %
U.S. tax on foreign income, net— % (1.6)% — %
Foreign income taxes(2.5)% (2.6)% (2.3)%
Deductible dividend(0.5)% (0.5)% (0.5)%
Valuation Allowance0.5 % — % — %
Other, net(0.7)% (0.6)% (1.0)%
Effective income tax rate34.3 % 32.1 % 33.5 %
Year Ended June 30,2018
 2017
 2016
Statutory income tax rate28.1 % 35.0 % 35.0 %
Effects of:     
State and local taxes3.1
 2.8
 5.2
U.S. federal tax reform3.1
 —
 —
Worthless stock deduction—
 (13.9) —
Stock compensation(0.4) (1.4) —
Goodwill impairment—
 —
 27.1
Impact of foreign operations(1.3) (2.3) (3.0)
Deductible dividend(0.3) (0.4) (0.9)
Valuation allowance(0.9) 0.3
 0.5
Other, net(0.6) (0.3) (1.3)
Effective income tax rate30.8 % 19.8 % 62.6 %
Consolidated Balance Sheets
Significant components of the Company’s deferred tax assets and liabilities are as follows:
June 30,2015
 2014
Deferred tax assets:   
Compensation liabilities not currently deductible$28,902
 $30,662
Expenses and reserves not currently deductible9,115
 8,364
Goodwill and intangibles7,363
 8,294
Foreign tax credit1,155
 —
Net operating loss carryforwards (expiring in years 2017-2034)860
 386
Other289
 281
Total deferred tax assets47,684
 47,987
Less: Valuation allowance(917) —
Deferred tax assets, net of valuation allowance46,767
 47,987
Deferred tax liabilities:   
Inventories(5,499) (6,490)
Goodwill and intangibles(38,707) (23,254)
Depreciation and differences in property bases(9,328) (10,219)
Total deferred tax liabilities(53,534) (39,963)
Net deferred tax (liabilities) assets$(6,767) $8,024
Net deferred tax (liabilities) assets are classified as follows:   
Other current assets$13,293
 $11,371
Deferred tax assets (long-term)97
 21,166
Other liabilities(20,157) (24,513)
Net deferred tax (liabilities) assets$(6,767) $8,024
June 30,2018
 2017
Deferred tax assets:   
Compensation liabilities not currently deductible$19,334
 $26,873
Other expenses and reserves not currently deductible13,169
 11,601
Goodwill and intangibles3,197
 5,661
Foreign tax credit (expiring in years 2025-2026)413
 709
Net operating loss carryforwards (expiring in years 2023-2038)11,315
 5,729
Other199
 119
Total deferred tax assets47,627
 50,692
Less: Valuation allowance(38) (1,831)
Deferred tax assets, net of valuation allowance47,589
 48,861
Deferred tax liabilities:   
Inventories(8,196) (7,447)
Goodwill and intangibles(86,176) (30,482)
Depreciation and differences in property bases(9,294) (10,122)
Total deferred tax liabilities(103,666) (48,051)
Net deferred tax (liabilities) assets$(56,077) $810
Net deferred tax (liabilities) assets are classified as follows:   
Other assets$2,103
 $8,985
Other liabilities(58,180) (8,175)
Net deferred tax (liabilities) assets$(56,077) $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

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. federal income taxes are provided on the portiontaxation. As of non-U.S. subsidiaries' income that is not considered to be permanently reinvested outside the U.S. and may be remitted to the U.S. At June 30, 2015,2018, all such undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested and for whichreinvested.  Therefore, no U.S. tax hastaxes have been provided totaled approximately $139,042. Determinationthat would result from the remittance of thesuch earnings.  The net amount of the unrecognized tax liability with respect to the distribution of these earnings is not practicable; however,estimated to be approximately $1,986.  In addition, we expect foreign tax credits would be available to either offset or partially reduce U.S. income taxesthe tax cost in the event of a distribution.
In 2014, the Company recognized a tax benefit of $2,804 related to U.S. tax on foreign income which reduced the Company's effective tax rate by approximately 1.6%. This tax benefit was due to the reversal of taxes previously

44

accrued on a portion of the undistributed earnings of non-U.S. subsidiaries applicable to a change in the permanent reinvestment assertion. In 2015, $17,793 of cash was distributed by one of the Company's non-U.S. subsidiaries as a non-taxable return of capital. All undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested outside of the U.S. at June 30, 2015.
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, 2015, 20142018, 2017 and 2013:2016:
Year Ended June 30,2015
 2014
 2013
Unrecognized Income Tax Benefits at beginning of the year$2,364
 $2,655
 $1,539
Current year tax positions472
 730
 957
Prior year tax positions—
 —
 790
Expirations of statutes of limitations(160) (1,007) (565)
Settlements(72) (14) (66)
Unrecognized Income Tax Benefits at end of year$2,604
 $2,364
 $2,655
Year Ended June 30,2018
 2017
 2016
Unrecognized Income Tax Benefits at beginning of the year$3,533
 $2,915
 $2,604
Current year tax positions143
 574
 539
Prior year tax positions636
 259
 —
Expirations of statutes of limitations(324) (189) (132)
Settlements—
 (26) (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, 2015, 20142018, 2017 and 20132016 are $2,377, $2,104$3,725, $3,323 and $2,342,$2,691, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
During 2015, 20142018, 2017 and 2013,2016, the Company recognized $49$(110) and $16$163 and $3$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 $497$677 and $449$787 as of June 30, 20152018 and 2014,2017, 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 20122015 through 20152018 and to state and local income tax examinations for the tax years 20092012 through 2015.2018. In addition, the Company is subject to foreign income tax examinations for the tax years 20082011 through 2015.2018.
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.


NOTE 8: SHAREHOLDERS’ EQUITY
Treasury Shares
At June 30, 2015,2018, 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.

45

Accumulated Other Comprehensive Income (Loss)
Changes in the accumulated other comprehensive income (loss) for the years ended June 30, 20152018, 2017, and 2014, is2016, are comprised of the following: amounts, shown net of taxes:
 Foreign currency translation adjustment
 Unrealized gain (loss) on securities available for sale
 Postemployment benefits
 Total Accumulated other comprehensive income (loss)
Balance at July 1, 2012$1,718
 $(58) $(6,229) $(4,569)
Other comprehensive income (loss)(1,358) 6
 1,967
 615
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 533
 533
Net current-period other comprehensive income (loss), net of taxes(1,358) 6
 2,500
 1,148
Balance at June 30, 2013$360
 $(52) $(3,729) $(3,421)
Other comprehensive income (loss)629
 73
 871
 1,573
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 233
 233
Net current-period other comprehensive income (loss), net of taxes629
 73
 1,104
 1,806
Balance at June 30, 2014$989
 $21
 $(2,625) $(1,615)
Other comprehensive income (loss)(58,233) (25) (472) (58,730)
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 174
 174
Net current-period other comprehensive income (loss), net of taxes(58,233) (25) (298) (58,556)
Balance at June 30, 2015$(57,244) $(4) $(2,923) $(60,171)
 Foreign currency translation adjustment
 Unrealized (loss) gain on securities available for sale
 Post-employment benefits
 Total accumulated other comprehensive (loss) income
Balance at July 1, 2015$(57,244) $(4) $(2,923) $(60,171)
Other comprehensive loss(24,441) (34) (1,215) (25,690)
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 315
 315
Net current-period other comprehensive loss(24,441) (34) (900) (25,375)
Balance at June 30, 2016(81,685) (38) (3,823) (85,546)
Other comprehensive income2,238
 59
 1,239
 3,536
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 308
 308
Net current-period other comprehensive income2,238
 59
 1,547
 3,844
Balance at June 30, 2017(79,447) 21
 (2,276) (81,702)
Other comprehensive (loss) income(8,549) 20
 524
 (8,005)
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 (45) (45)
Amounts reclassified for certain income tax effects to retained earnings22
 9
 (502) (471)
Net current-period other comprehensive (loss) income(8,527) 29
 (23) (8,521)
Balance at June 30, 2018$(87,974) $50
 $(2,299) $(90,223)

Other Comprehensive Income (Loss)
Details of other comprehensive income (loss) are as follows:
Year Ended June 30,2015 2014 2013
 Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
 Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
 Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
Foreign currency translation adjustments$(58,233) $—
 $(58,233) $629
 $—
 $629
 $(1,358) $—
 $(1,358)
Postemployment benefits:                 
Actuarial gain (loss) on remeasurement(776) (304) (472) 1,402
 531
 871
 3,153
 1,186
 1,967
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs286
 112
 174
 382
 149
 233
 872
 339
 533
Unrealized gain (loss) on investment securities available for sale(38) (13) (25) 112
 39
 73
 10
 4
 6
Other comprehensive income (loss)$(58,761) $(205) $(58,556) $2,525
 $719
 $1,806
 $2,677
 $1,529
 $1,148
Year Ended June 30,2018 2017 2016
 Pre-Tax Amount
 Tax Expense (Benefit)
 Net Amount
 Pre-Tax Amount
 Tax Expense
 Net Amount
 Pre-Tax Amount
 Tax (Benefit) Expense
 Net Amount
Foreign currency translation adjustments$(8,875) $(326) $(8,549) $2,238
 $—
 $2,238
 $(24,441) $—
 $(24,441)
Post-employment benefits:                 
Actuarial gain (loss) on re-measurement709
 185
 524
 2,038
 799
 1,239
 (1,998) (783) (1,215)
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs(73) (28) (45) 506
 198
 308
 518
 203
 315
Unrealized gain (loss) on investment securities available for sale37
 17
 20
 91
 32
 59
 (52) (18) (34)
Reclassification of certain income tax effects to retained earnings—
 471
 (471) —
 —
 —
 —
 —
 —
Other comprehensive (loss) income$(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 RSUsRestricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury

46

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 30,2015
 2014
 2013
Net Income$115,484
 $112,821
 $118,149
Average Shares Outstanding:     
Weighted-average common shares outstanding for basic computation40,892
 41,942
 42,060
Dilutive effect of potential common shares295
 389
 482
Weighted-average common shares outstanding for dilutive computation41,187
 42,331
 42,542
Net Income Per Share — Basic$2.82
 $2.69
 $2.81
Net Income Per Share — Diluted$2.80
 $2.67
 $2.78
Year Ended June 30,2018
 2017
 2016
Net Income$141,625
 $133,910
 $29,577
Average Shares Outstanding:     
Weighted-average common shares outstanding for basic computation38,752
 39,013
 39,254
Dilutive effect of potential common shares529
 391
 212
Weighted-average common shares outstanding for dilutive computation39,281
 39,404
 39,466
Net Income Per Share — Basic$3.65
 $3.43
 $0.75
Net Income Per Share — Diluted$3.61
 $3.40
 $0.75
Stock appreciation rights and options relating to 435, 28966, 141 and 212775 shares of common stock were outstanding at June 30, 2015, 20142018, 2017 and 2013,2016, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.


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 20112015 Plan, which expires in 2016,2020, 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 30,2015
 2014
 2013
SARs and options$1,610
 $1,808
 $2,317
Performance shares836
 309
 1,074
Restricted stock and RSUs2,015
 2,394
 2,370
Total compensation costs under award programs$4,461
 $4,511
 $5,761
Year Ended June 30,2018
 2017
 2016
SARs and options$1,961
 $1,891
 $1,543
Performance shares2,006
 1,331
 446
Restricted stock and RSUs2,660
 2,298
 2,078
Total compensation costs under award programs$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 $1,749, $1,768$1,923, $4,848 and $2,241$1,595 for fiscal years 2015, 20142018, 2017 and 2013,2016, 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 paid (or with the potential to be paid)paid at June 30, 20152018 are summarized in the table below:
June 30,
(Shares in thousands)
2015
 Expected Period of Recognition (Years)
SARs and options$1,792
 2.4
Performance shares3,701
 1.7
Restricted stock and RSUs1,898
 2.3
Total unrecognized compensation costs under award programs$7,391
 2.0
June 30,2018
 Average Expected Period of Expected Recognition (Years)
SARs and options$3,729
 2.5
Performance shares3,282
 1.7
Restricted stock and RSUs2,173
 1.9
Total unrecognized compensation costs under award programs$9,184
 2.1
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.02.1 years. The aggregate number of shares of common stock which may be awarded under the 20112015 Plan is 2,000;2,500; shares available for future grants at June 30, 20152018 were 1,107.1,655.

47

Stock Appreciation Rights and Stock Options
The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2015, 20142018, 2017
and and 20132016 are:
 2015
 2014
 2013
Expected life, in years4.7
 4.6
 5.5
Risk free interest rate1.4% 1.3% 0.9%
Dividend yield2.5% 2.5% 2.5%
Volatility29.0% 31.8% 43.3%
Per share fair value of SARs and stock options granted during the year$9.53 $11.02 $13.11
 2018
 2017
 2016
Expected life, in years6.0
 4.8
 4.4
Risk free interest rate2.1% 1.2% 1.3%
Dividend yield2.5% 2.5% 2.5%
Volatility24.3% 24.1% 26.0%
Per share fair value of SARs and stock options granted during the year$11.25 $7.97 $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.

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:
 Shares
 
Weighted-Average
Exercise Price

Year Ended June 30, 2015 
(Shares in thousands) 
Outstanding, beginning of year1,039
 $33.40
Granted208
 47.69
Exercised(75) 25.23
Forfeited(56) 48.47
Outstanding, end of year1,116
 $35.86
Exercisable at end of year781
 $31.32
 Shares
 
Weighted-Average
Exercise Price

Year Ended June 30, 2018 
(Shares in thousands) 
Outstanding, beginning of year1,218
 $42.26
Granted286
 58.40
Exercised(58) 37.55
Forfeited(45) 55.64
Outstanding, end of year1,401
 $45.32
Exercisable at end of year789
 $41.08
Expected to vest at end of year1,379
 $45.22
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and exercisableexpected to vest at June 30, 20152018 were 5.66.6, 5.3, and 4.56.6 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and exercisableexpected to vest at June 30, 20152018 were $7,559$34,869 $22,927, and $7,311,$34,440, respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2015, 20142018, 2017, and 20132016 was $1,601, $5,241$1,765, $8,396, and $7,135,$2,422, respectively.
The total fair value of shares vested during fiscal 2015, 20142018, 2017, and 20132016 was $2,187, $2,080$2,149, $1,788, and $2,135,$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, 20152018 is presented below:below:
 Shares
 
Weighted-Average
Grant-Date  
Fair Value

Year Ended June 30, 2015 
(Shares in thousands) 
Nonvested, beginning of year41
 $35.97
Awarded18
 49.43
Forfeitures(1) 50.40
Vested(20) 27.28
Nonvested, end of year38
 $46.66
 Shares
 
Weighted-Average
Grant-Date  
Fair Value

Year Ended June 30, 2018 
(Shares in thousands) 
Nonvested, beginning of year52
 $43.99
Awarded51
 47.13
Vested(10) 48.76
Nonvested, end of year93
 $45.16

48

The Committee set three one-year goals for each of the 2015, 20142018, 2017 and 20132016 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. Based uponFor the outstanding grants as of June 30, 2015,2018, the maximum number of shares which could be earned in future periods was 78.67.

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 onethree 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, 20152018 is
presented below:
 Shares
 
Weighted-Average
Grant-Date  
Fair Value

Year Ended June 30, 2015 
(Share amounts in thousands) 
Nonvested, beginning of year133
 $37.60
Granted48
 46.48
Forfeitures(7) 48.81
Vested(84) 32.54
Nonvested, end of year90
 $46.18
 Shares
 
Weighted-Average
Grant-Date  
Fair Value

Year Ended June 30, 2018 
(Share amounts in thousands) 
Nonvested, beginning of year116
 $46.91
Granted53
 62.62
Forfeitures(10) 54.96
Vested(43) 52.58
Nonvested, end of year116
 $51.27

NOTE 10: BENEFIT PLANS
Retirement Savings Plan
Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company had also made discretionary profit-sharing contributions to the Retirement Savings Plan for fiscal 2013. The discretionary profit-sharing contribution was ended in fiscal 2014. The Company’s expense for profit sharing and matching of employees’ 401(k) contributions was $3,156, $2,788$6,551, $6,677 and $11,231$2,535 during fiscal 2015, 20142018, 2017 and 2013,2016, 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. Non-employee directors were able to defer receipt of director fees until January 1, 2015. The Company funds these deferred compensation liabilities by making contributions to rabbi trusts. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.
Post-employment Benefit Plans
The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan 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), an unfunded,a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $300 ,$234$359, $289, and $233$268 of expense associated with this plan in fiscal 2015, 20142018, 2017, and 2013,2016, 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.

49
Table The plan accruals were frozen as of ContentsApril 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

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:
 Pension Benefits Retiree Health Care Benefits
 2015
 2014
 2015
 2014
Change in benefit obligation:       
Benefit obligation at beginning of the year$34,558
 $40,664
 $2,790
 $3,719
Service cost97
 77
 53
 48
Interest cost896
 1,180
 95
 139
Plan participants’ contributions—
 —
 64
 63
Benefits paid(6,697) (7,251) (238) (246)
Amendments(8) 188
 
 —
Actuarial (gain) loss during year1,148
 (300) (620) (933)
Benefit obligation at end of year$29,994
 $34,558
 $2,144
 $2,790
Change in plan assets:       
Fair value of plan assets at beginning of year$7,245
 $6,697
 $—
 $—
Actual gain (loss) on plan assets247
 763
 —
 —
Employer contributions6,390
 7,036
 174
 183
Plan participants’ contributions—
 —
 64
 63
Benefits paid(6,697) (7,251) (238) (246)
Fair value of plan assets at end of year$7,185
 $7,245
 $—
 $—
Funded status at end of year$(22,809) $(27,313) $(2,144) $(2,790)
 Pension Benefits Retiree Health Care Benefits
 2018
 2017
 2018
 2017
Change in benefit obligation:       
Benefit obligation at beginning of the year$24,411
 $26,605
 $1,684
 $2,235
Service cost124
 126
 19
 29
Interest cost729
 687
 52
 63
Plan participants’ contributions—
 —
 68
 69
Benefits paid(3,181) (1,562) (223) (237)
Amendments—
 —
 —
 (245)
Actuarial gain during year(549) (1,445) (109) (230)
Benefit obligation at end of year$21,534
 $24,411
 $1,491
 $1,684
Change in plan assets:       
Fair value of plan assets at beginning of year$6,530
 $6,737
 $—
 $—
Actual gain on plan assets516
 578
 —
 —
Employer contributions3,837
 776
 155
 168
Plan participants’ contributions—
 —
 68
 69
Benefits paid(3,181) (1,561) (223) (237)
Fair value of plan assets at end of year$7,702
 $6,530
 $—
 $—
Funded status at end of year$(13,832) $(17,881) $(1,491) $(1,684)
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive income (loss)loss for the post-employment plans were as follows:
 Pension Benefits Retiree Health Care Benefits
June 30,2015
 2014
 2015
 2014
Amounts recognized in the consolidated balance sheets:       
Other current liabilities$5,256
 $6,390
 $220
 $220
Post-employment benefits17,553
 20,923
 1,924
 2,570
Net amount recognized$22,809
 $27,313
 $2,144
 $2,790
Amounts recognized in accumulated other comprehensive (loss) income:       
Net actuarial (loss) gain$(7,311) $(6,474) $1,492
 $960
Prior service cost(208) (293) 1,219
 1,490
Total amounts recognized in accumulated other comprehensive (loss) income$(7,519) $(6,767) $2,711
 $2,450
 Pension Benefits Retiree Health Care Benefits
June 30,2018
 2017
 2018
 2017
Amounts recognized in the consolidated balance sheets:       
Other current liabilities$3,298
 $2,814
 $220
 $220
Post-employment benefits10,534
 15,067
 1,271
 1,464
Net amount recognized$13,832
 $17,881
 $1,491
 $1,684
Amounts recognized in accumulated other comprehensive loss:       
Net actuarial (loss) gain$(4,781) $(5,798) $1,121
 $1,167
Prior service cost—
 (35) 554
 922
Total amounts recognized in accumulated other comprehensive loss$(4,781) $(5,833) $1,675
 $2,089

50

The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets:
 Pension Benefits
June 30,2015
 2014
Projected benefit obligations$29,994
 $34,558
Accumulated benefit obligations29,994
 34,558
Fair value of plan assets7,185
 7,245
 Pension Benefits
June 30,2018
 2017
Projected benefit obligations$21,534
 $24,411
Accumulated benefit obligations21,534
 24,411
Fair value of plan assets7,702
 6,530

The net periodic costs (benefits) are as follows:
 Pension Benefits Retiree Health Care Benefits
Year Ended June 30,2015
 2014
 2013
 2015
 2014
 2013
Service cost$97
 $77
 $78
 $53
 $48
 $80
Interest cost896
 1,180
 1,260
 95
 139
 188
Expected return on plan assets(495) (416) (403) —
 —
 —
Recognized net actuarial loss (gain)559
 611
 735
 (87) (38) (53)
Amortization of prior service cost86
 78
 83
 (272) (271) 107
Net periodic cost (benefits)$1,143
 $1,530
 $1,753
 $(211) $(122) $322
 Pension Benefits Retiree Health Care Benefits
Year Ended June 30,2018
 2017
 2016
 2018
 2017
 2016
Service cost$124
 $126
 $91
 $19
 $29
 $22
Interest cost729
 687
 879
 52
 63
 75
Expected return on plan assets(472) (460) (491) —
 —
 —
Recognized net actuarial loss (gain)424
 872
 913
 (154) (181) (210)
Amortization of prior service cost27
 86
 86
 (369) (271) (271)
Recognition of prior service cost upon plan curtailment8
 —
 —
 —
 —
 —
Net periodic cost (benefits)$840
 $1,311
 $1,478
 $(452) $(360) $(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 and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $914 and $86, respectively.$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 $211$121 and $271,$369, respectively.
Assumptions
TheA 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:
 Pension Benefits Retiree Health Care Benefits
June 30,2015
 2014
 2015
 2014
Assumptions used to determine benefit obligations at year end:       
Discount rate3.0% 2.8% 4.0% 3.8%
Assumptions used to determine net periodic benefit cost:       
Discount rate2.8% 3.0% 3.8% 4.0%
Expected return on plan assets7.0% 7.0% N/A
 N/A
 Pension Benefits Retiree Health Care Benefits
June 30,2018
 2017
 2018
 2017
Assumptions used to determine benefit obligations at year end:       
Discount rate3.5% 2.8% 3.8% 3.3%
Assumptions used to determine net periodic benefit cost:       
Discount rate2.8% 2.3% 3.3% 2.9%
Expected return on plan assets7.0% 7.0% N/A
 N/A
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 6.8% and 7.0% as of June 30, 20152018 and 2014,2017, respectively, decreasing to 5.0% by 2023.2027.
A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 20152018 and for the year then ended:
 One-Percentage Point 
 Increase
 Decrease
Effect on total service and interest cost components of periodic expense$20
 $(17)
Effect on post-retirement benefit obligation209
 (177)
 One-Percentage Point 
 Increase Decrease
Effect on total service and interest cost components of periodic expense$9
 $(8)
Effect on post-retirement benefit obligation152
 (130)

51

Plan Assets
The fair value of each major class of plan assets for the Company’s Qualified Defined Benefit Retirement Plan areis valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair values and target allocation as of June 30:
 Target Allocation Fair Value
   2015
 2014
Asset Class:     
Equity* securities (Level 1)40 – 70% $4,022
 $3,813
Debt securities (Level 2)20 – 50% 2,930
 3,155
Other (Level 1)0 – 20% 233
 277
Total100% $7,185
 $7,245
 Target Allocation Fair Value
   2018
 2017
Asset Class:     
Equity* securities (Level 1)40 – 70% $6,226
 $3,880
Debt securities (Level 2)20 – 50% 1,337
 2,538
Other (Level 1)0 – 20% 139
 112
Total100% $7,702
 $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 $5,300$3,300 to its pension benefit plans and $170$130 to its retiree health care benefit plans in fiscal 2016.2019. Contributions do not equal estimated future benefit payments as certain payments are made from plan assets.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 YearsPension Benefits
 
Retiree Health  
 Care Benefits

2016$5,600
 $170
20171,800
 180
20182,300
 190
20194,000
 180
20203,300
 170
2021 through 20257,400
 620
During Fiscal YearsPension Benefits
 
Retiree Health  
 Care Benefits

2019$3,700
 $130
20203,800
 120
20211,300
 110
20221,300
 110
20231,400
 100
2024 through 20285,200
 530



52

NOTE 11: LEASES
The Company leases many service center and distribution center facilities, vehicles and equipment under non-cancelable lease agreements accounted for as operating leases. The Company leased its corporate headquarters facility until purchasing it in April 2014. The minimum annual rental commitments under non-cancelable operating leases as of June 30, 20152018 are as follows:
During Fiscal Years 
2016$24,900
201719,700
201814,600
201910,900
20205,800
Thereafter6,500
Total minimum lease payments$82,400
During Fiscal Years 
2019$38,100
202027,500
202117,800
202211,200
20235,800
Thereafter11,000
Total minimum lease payments$111,400
Rental expense incurred for operating leases, principally from leases for real property, vehicles and computer equipment was $39,300$41,000 in 2015, $36,9002018, $35,900 in 20142017 and $36,300$37,300 in 2013,2016, and was classified within selling, distribution and administrative expenses onin the Statementsstatements of Consolidated Income.consolidated income.
The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $3,100, $2,500$2,400, $2,400, and $1,200$3,800 and in fiscal 2015, 20142018, 2017, and 2013.2016, 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 Businesses.& 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 Businesses& 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.

53

The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power Businesses& Flow Control segment to the Service Center Based Distribution segment of $24,087, $21,809$25,556, $22,719, and $20,217,$20,261, in fiscal 2015, 20142018, 2017, and 2013,2016, respectively, have been eliminated in
the following table.table.

Segment Financial Information
 
Service Center
Based Distribution

 
Fluid Power
Businesses

 Total
Year Ended June 30, 2015     
Net sales$2,254,768
 $496,793
 $2,751,561
Operating income for reportable segments140,421
 48,535
 188,956
Assets used in the business1,230,543
 204,425
 1,434,968
Depreciation and amortization of property15,196
 1,382
 16,578
Capital expenditures13,531
 1,402
 14,933
Year Ended June 30, 2014     
Net sales$1,973,359
 $486,519
 $2,459,878
Operating income for reportable segments118,857
 44,621
 163,478
Assets used in the business1,116,311
 217,858
 1,334,169
Depreciation and amortization of property12,399
 1,578
 13,977
Capital expenditures18,744
 1,446
 20,190
Year Ended June 30, 2013     
Net sales$2,003,440
 $458,731
 $2,462,171
Operating income for reportable segments138,484
 41,083
 179,567
Assets used in the business859,547
 199,159
 1,058,706
Depreciation and amortization of property10,692
 1,809
 12,501
Capital expenditures10,415
 1,799
 12,214
 
Service Center
Based Distribution

 Fluid Power & Flow Control
 Total
Year Ended June 30, 2018     
Net sales$2,346,418
 $726,856
 $3,073,274
Operating income for reportable segments136,718
 83,194
 219,912
Assets used in the business1,198,296
 1,087,445
 2,285,741
Depreciation and amortization of property15,336
 2,462
 17,798
Capital expenditures18,492
 4,738
 23,230
Year Ended June 30, 2017     
Net sales$2,180,358
 $413,388
 $2,593,746
Operating income for reportable segments115,794
 46,569
 162,363
Assets used in the business1,187,054
 200,541
 1,387,595
Depreciation and amortization of property14,375
 931
 15,306
Capital expenditures14,566
 2,479
 17,045
Year Ended June 30, 2016     
Net sales$2,150,478
 $368,950
 $2,519,428
Operating income for reportable segments113,111
 37,174
 150,285
Assets used in the business1,132,222
 179,803
 1,312,025
Depreciation and amortization of property15,049
 917
 15,966
Capital expenditures12,500
 630
 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 30,2015
 2014
 2013
Operating income for reportable segments$188,956
 $163,478
 $179,567
Adjustments for:     
Intangible amortization — Service Center Based Distribution19,561
 7,336
 5,829
Intangible amortization — Fluid Power Businesses6,236
 6,687
 7,404
Corporate and other income, net(21,460) (14,903) (10,065)
Total operating income184,619
 164,358
 176,399
Interest expense, net7,869
 249
 165
Other expense (income), net879
 (2,153) (1,431)
Income before income taxes$175,871
 $166,262
 $177,665
Year Ended June 30,2018
 2017
 2016
Operating income for reportable segments$219,912
 $162,363
 $150,285
Adjustments for:     
Intangible amortization — Service Center Based Distribution17,375
 18,954
 19,913
Intangible amortization — Fluid Power & Flow Control14,690
 5,417
 5,667
Goodwill Impairment — Service Center Based Distribution—
 —
 64,794
Corporate and other income, net(37,980) (37,394) (29,871)
Total operating income225,827
 175,386
 89,782
Interest expense, net23,485
 8,541
 8,763
Other (income) expense, net(2,376) (121) 2,041
Income before income taxes$204,718
 $166,966
 $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 amounts of expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.

54

Product Category
Net sales by product category are as follows:
Year Ended June 30,2015
 2014
 2013
Industrial$2,013,447
 $1,739,496
 $1,776,172
Fluid power738,114
 720,382
 685,999
Net sales$2,751,561
 $2,459,878
 $2,462,171
Year Ended June 30,2018
 2017
 2016
Industrial$2,085,571
 $1,855,437
 $1,836,484
Fluid power & flow control987,703
 738,309
 682,944
Net sales$3,073,274
 $2,593,746
 $2,519,428

The fluid power & flow control product category includes sales of hydraulic, pneumatic, lubrication, filtration, and filtrationflow control components and systems, and repair services through the Company’s Fluid Power Businesses& 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 30,2015
 2014
 2013
Net Sales:     
United States$2,238,263
 $2,031,142
 $2,017,168
Canada358,580
 291,117
 298,269
Other Countries154,718
 137,619
 146,734
Total$2,751,561
 $2,459,878
 $2,462,171
Year Ended June 30,2018
 2017
 2016
Net Sales:     
United States$2,615,041
 $2,182,552
 $2,117,485
Canada273,622
 251,999
 257,797
Other Countries184,611
 159,195
 144,146
Total$3,073,274
 $2,593,746
 $2,519,428
June 30,2015
 2014
 2013
Long-Lived Assets:     
United States$217,597
 $153,945
 $144,289
Canada76,565
 99,161
 19,038
Other Countries9,113
 9,998
 11,183
Total$303,275
 $263,104
 $174,510
June 30,2018
 2017
 2016
Long-Lived Assets:     
United States$501,373
 $207,126
 $225,538
Canada50,261
 57,947
 66,304
Other Countries5,656
 6,558
 7,163
Total$557,290
 $271,631
 $299,005
Other countries consist of Mexico, Australia, New Zealand, and New Zealand.Singapore.
NOTE 13: COMMITMENTS AND CONTINGENCIES
The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company believes the likelihood is remote that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
NOTE 14: OTHER (INCOME) EXPENSE, (INCOME), NET
Other (income) expense, (income), net, consists of the following:
Year Ended June 30,2015
 2014
 2013
Unrealized (gain) loss on assets held in rabbi trust for a non-qualified deferred compensation plan$(442) $(1,683) $(1,280)
Elimination of one-month Canadian and Mexican reporting lag, effective July 1, 2013 and January 1, 2014, respectively—
 (1,342) —
Foreign currency transaction (gains) losses1,251
 801
 (143)
Other, net70
 71
 (8)
Total other expense (income), net$879
 $(2,153) $(1,431)
Year Ended June 30,2018
 2017
 2016
Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan$(785) $(1,188) $(87)
Foreign currency transaction (gains) losses(210) 209
 1,039
Net other periodic post-employment costs245
 796
 981
Life insurance (income) expense, net(1,628) 107
 108
Other, net2
 (45) —
Total other (income) expense, net$(2,376) $(121) $2,041


55

NOTE 15: SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to June 30, 2015 through the date the financial statements were issued.
On August 3, 2015, the Company acquired all of the net assets of Atlantic Fasteners, located in Agawam, MA, for a purchase price of approximately $12,500. The Company funded this acquisition from borrowings under the revolving credit facility at a variable interest rate. As a distributor of fasteners and industrial supplies, this business will be included in the Service Center Based Distribution Segment from August 3, 2015.



56


QUARTERLY OPERATING RESULTS
(In thousands, except per share amounts)
(UNAUDITED)
         Per Common Share
 Net Sales
 Gross Profit
 Operating Income
 Net Income
 Net Income
 Cash Dividend
2015           
  First Quarter$702,325
 $194,932
 $46,165
 $29,122
 $0.70
 $0.25
  Second Quarter691,702
 195,713
 46,807
 29,707
 0.72
 0.25
  Third Quarter679,994
 187,363
 43,772
 28,610
 0.70
 0.27
  Fourth Quarter677,540
 191,806
 47,875
 28,045
 0.70
 0.27
 $2,751,561
 $769,814
 $184,619
 $115,484
 $2.80
 $1.04
2014           
  First Quarter$605,305
 $169,795
 $39,539
 $26,844
 $0.63
 $0.23
  Second Quarter581,949
 163,383
 39,837
 25,909
 0.61
 0.23
  Third Quarter618,006
 171,220
 40,173
 30,394
 0.72
 0.25
  Fourth Quarter654,618
 182,528
 44,809
 29,674
 0.71
 0.25
 $2,459,878
 $686,926
 $164,358
 $112,821
 $2.67
 $0.96
2013           
First Quarter$610,519
 $164,533
 $44,318
 $29,532
 $0.70
 $0.21
Second Quarter589,517
 162,919
 40,569
 27,043
 0.64
 0.21
Third Quarter621,654
 174,400
 43,477
 29,302
 0.69
 0.23
Fourth Quarter640,481
 181,110
 48,035
 32,272
 0.76
 0.23
 $2,462,171
 $682,962
 $176,399
 $118,149
 $2.78
 $0.88
         Per Common Share
 Net Sales
 Gross Profit
 Operating Income
 Net Income
 Net Income
 Cash Dividend
2018           
  First Quarter$680,701
 $192,424
 $51,837
 $33,721
 $0.86
 $0.29
  Second Quarter667,187
 188,360
 46,715
 30,950
 0.79
 0.29
  Third Quarter827,665
 239,524
 56,444
 36,592
 0.93
 0.30
  Fourth Quarter897,721
 263,687
 70,831
 40,362
 1.03
 0.30
 $3,073,274
 $883,995
 $225,827
 $141,625
 $3.61
 $1.18
2017           
  First Quarter$624,848
 $178,330
 $43,218
 $27,371
 $0.70
 $0.28
  Second Quarter608,123
 172,456
 37,656
 24,085
 0.61
 0.28
  Third Quarter679,304
 190,802
 45,467
 29,494
 0.75
 0.29
  Fourth Quarter681,471
 196,107
 48,249
 52,960
 1.34
 0.29
 $2,593,746
 $737,695
 $174,590
 $133,910
 $3.40
 $1.14
2016           
First Quarter$641,904
 $181,012
 $41,026
 $24,291
 $0.61
 $0.27
Second Quarter610,346
 173,167
 38,362
 23,947
 0.61
 0.27
Third Quarter633,172
 174,793
 (33,032) (44,728) (1.14) 0.28
Fourth Quarter634,006
 178,450
 42,445
 26,067
 0.66
 0.28
 $2,519,428
 $707,422
 $88,801
 $29,577
 $0.75
 $1.10
On August 14, 201510, 2018, there were 5,8934,307 shareholders of record including 4,3212,914 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 14, 201510, 2018 was $40.77$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 20152018
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 2015,2017, 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.  

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 of $1.8 million. Also, we sold a building recognizing a gain of $1.5 million.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 2015, income tax expense increased due to recording a valuation allowance against certain deferred tax assets for foreign jurisdictions of $1.0 million. Also, an increase of tax rates in certain foreign jurisdictions at the end of the fiscal period increased tax expense by $1.2 million during the quarter.
No LIFO layer liquidations took place during the year ended June 30, 2015.
Fiscal 2014
During the first quarter of fiscal 2014, the Company aligned the consolidation of the Company's Canadian subsidiary which previously included results on a month reporting lag. The elimination of this lag resulted in the recognition of $1.2 million of additional income which was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, the Company aligned the consolidation of the Company's Mexican subsidiary which previously included results on a month reporting lag. The elimination of this lag resulted in the recognition of $0.2 million of additional income which was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, $2.8 million of tax reserves were reversed. The impact of this reversal was a reduction in income tax expense of $2.8 million and a $0.07 increase in earnings per share.

57

No LIFO layer liquidations took place during the year ended June 30, 2014.
Fiscal 2013
During the fourth quarter of fiscal 2013,2016, the Company realized LIFO layer liquidation benefits of $6,300$2.1 million from certain inventory quantity levels decreasing. Additional scrap expense of $3.0 million above our normal scrap rate was also recorded in the June 30, 2013 quarter.
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.

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, 2015.2018. This evaluation was based on the criteria set forth in the framework Internal"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, 2015.2018.
The Company acquired Knox Oil Field SupplyFCX Performance Inc. (Knox)("FCX") on July 1, 2014.January 31, 2018. Management has excluded KnoxFCX from its assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2015. Knox2018. FCX represents approximately 11%39.5% and 4%8.1% of total assets and net sales, respectively, of the consolidated financial statement amounts as of and for the year ended June 30, 2015.2018.
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 /s/ Mark O. EiseleDavid K. Wells
President & Chief Executive Officer Vice President - Chief Financial Officer & Treasurer
August 26, 201517, 2018


58


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio
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"“Company”) as of June 30, 2015,2018, 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'sManagement’s Report on Internal Control overControls Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Knox Oil Field SupplyFCX Performance Inc. ("Knox"FCX"), which was acquired on July 1, 2014January 31, 2018 and whose financial statements constitute 11% and 4%39.5% of total assets and 8.1% of net sales respectively, of the consolidated financial statement amountsstatements as of and for the year ended June 30, 2015.2018. Accordingly, our audit did not include the internal control over financial reporting at Knox. FCX.
Basis for Opinion
The Company'sCompany’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'sManagement’s Report on Internal Control overControls Over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’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 Public Company Accounting Oversight Board (United States).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 by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2015 of the Company and our report dated August 26, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 26, 201517, 2018

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Changes in Internal Control Over Financial Reporting
The Company has undertaken a multi-year ERP (SAP) project to transform the Company's technology platforms and enhance its business information and transaction systems. The Company has completed its SAP implementation in its Western Canadian and U.S. Service Center Based Businesses, excluding recent acquisitions. In fiscal 2014, the Company initiated the transformation of its financial and accounting systems including fixed assets, general ledger and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation system, have been transitioned to SAP during fiscal 2015. During fiscal year 2016 the Company will continue to evaluate and determine an appropriate deployment schedule for operations in Eastern Canada and other operations not on SAP, as well as refine our current business and system processes. The company expects to convert to a new consolidation process and system at the beginning of fiscal 2016. Changes in the Company's key business applications and financial processes as a result of the continuing implementation of SAP and other business systems are being evaluated by management. The Company is designing processes and internal controls to address changes in the Company's internal control over financial reporting as a result of the SAP implementation. This ongoing SAP implementation presents risks to maintaining adequate internal controls over financial reporting.
Other than as described above, thereThere have not been any changes in internal control over financial reporting during the quarter ended June 30, 20152018 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 27, 2015,30, 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 27, 2015,30, 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 1997 Long-Term Performance Plan, the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the Deferred Compensation Plan, and the Deferred Compensation Plan for Non-Employee Directors. All of these plans are currently in effect.
The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied as of June 30, 2015.2018.
Plan CategoryNumber of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights
 Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights
 Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders1,116,188
 $35.86
 *
Equity compensation plans not approved by  
security holders
0
 0
 0
Total1,116,188
 $35.86
 *
Plan CategoryNumber of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders1,378,637
  $45.22 *
Equity compensation plans not approved by
security holders
—
  —
  —
 
Total1,378,637
  $45.22
*
*
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, and the 2007 Long-Term Performance Plan replaced the 1997 Long-Term Performance Plan. Stock options and stock appreciation rights remain outstanding under each of the 19972007 and 20072011 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 20112015 Long-Term Performance Plan at June 30, 2015,2018 was 1,106,794. The number of shares issuable under the Deferred Compensation Plan for Non-Employee Directors and the Deferred Compensation Plan depends on the dollar amount of participant contributions deemed invested in Applied common stock.
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 27, 2015,30, 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 27, 2015,30, 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 27, 2015,30, 2018, under the caption “Item 43 - Ratification of Auditors.”


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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a)1. Financial Statements.
The following consolidated financial statements, notes thereto, the reports of independent registered public accounting firm, and supplemental data are included in Item 8 of this report:
•Report of Independent Registered Public Accounting Firm
   
•Statements of Consolidated Income for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Consolidated Balance Sheets at June 30, 20152018 and 20142017
   
•Statements of Consolidated Cash Flows for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•Notes to Consolidated Financial Statements for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016
   
•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. 6670
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto.
(a)3. Exhibits.
* Asterisk indicates an executive compensation plan or arrangement.
Exhibit No.Description
  
3.1
Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit 3(a) to Applied's Form 10-Q for the quarter ended December 31, 2005, SEC File No. 1-2299, and incorporated here by reference).
  
3.2
Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference).
  
4.1
Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
  
4.2
Private Shelf Agreement dated as of November 27, 1996, as amended through October 30, 2014,June 29, 2018, between Applied and PGIM, Inc. (formerly known as Prudential Investment Management, Inc. (assignee of The Prudential Insurance Company of America)), conformed to show all amendments (filed as Exhibit 4.2 to Applied's Form 10-Q for the quarter ended March 31, 2015, SEC File No. 1-2299, and incorporated here by reference).amendments.
  
4.3
Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as most recently amended, on February 4, 2013, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K datedfiled July 1,2, 2014, SEC File No. 1-2299, and incorporated here by reference).
  

62

4.4
Request for Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 4.5 to Applied's Form 10-Q dated November 4,for the quarter ended September 30, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
4.5
Credit Agreement dated as of May 15, 2012,January 31, 2018, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 410.1 to Applied's Form 8-K dated May 17, 2012,filed February 6, 2018, SEC File No. 1-2299, and incorporated here by reference).
4.6Credit Agreement dated as of April 25, 2014, among Applied Industrial Technologies, Inc., Key Bank National Association, as Agent, and various financial institutions (filed as Exhibit 10.1 to Applied’s Form 8-K dated May 1, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1A 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 27, 201530, 2018 under the caption “Director Compensation.”
  
*10.2
Deferred Compensation Plan for Non-Employee Directors (September 1, 2003 Restatement), the terms of which govern benefits vested as of December 31, 2004, for certain directorsPeter A. Dorsman, an Applied director (filed as Exhibit 10(c) to Applied's Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3
Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.2 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.4Second
Amendment to the Applied Industrial Technologies, Inc. Deferred Compensation Plan for Non-Employee Directors (Post-2004 Terms) (filed as Exhibit 10.1 to Applied’s Form 10-Q for the quarter ended March 31, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
*10.5
Form of Director and Officer Indemnification Agreement entered into between Applied and each of its directors and executive officers (filed as Exhibit 10(g) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
  
*10.61997 Long-Term Performance Plan, as amended April 19, 2007 (filed as Exhibit 10(k) to Applied's Form 10-K for the year ended June 30, 2007, SEC File No. 1-2299, and incorporated here by reference).
*10.7Section 409A Amendment to the 1997 Long-Term Performance Plan (filed as Exhibit 10.4 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
*10.8
2007 Long-Term Performance Plan (filed as Exhibit 10 to Applied's Form 8-K datedfiled October 23, 2007, SEC File No. 1-2299, and incorporated here by reference).
  
*10.910.7
Section 409A Amendment to the 2007 Long-Term Performance Plan (filed as Exhibit 10.5 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1010.8
2011 Long-Term Performance Plan (filed as Appendix to Applied’s proxy statement for the annual meeting of shareholders held on October 25, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1110.9
2015 Long-Term Performance Plan (filed as Appendix to Applied's proxy statement for the annual meeting of shareholders held on October 27, 2015, SEC File No. 1-2299, and incorporated here by reference).
*10.10
Non-Statutory Stock Option Award Terms and Conditions (Directors) (filed as Exhibit 10 to Applied's Form 8-K datedfiled November 30, 2005, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1210.11
Restricted Stock Award Terms and Conditions (Directors) (filed as Exhibit 10.1 to Applied's Form 10-Q for the quarter ended March 31, 2012,2018, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1310.12
Stock Appreciation Rights Award Terms and Conditions (Officers) (August 20122017 revision) (filed as Exhibit 10.0210.1 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1410.13Performance Shares
Restricted Stock Units Terms and Conditions (filed as Exhibit 10.0410.2 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1510.14Restricted Stock Units
Performance Shares Terms and Conditions (filed as Exhibit 10.0310.3 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1610.15
Management Incentive Plan General Terms (filed as Exhibit 10.0110.1 to Applied's Form 8-K dated August 9, 2012,10-Q for the quarter ended September 30, 2016, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1710.16
Key Executive Restoration Plan, as amended and restated, forin which Applied's executive officers participate (filed as Exhibit 10.1 to Applied's Form 8-K datedfiled August 16, 2013, SEC File No. 1-2299, and incorporated here by reference).
  
*10.1810.17
Schedule of executive officer participants in the Key Executive Restoration Plan, as amended and restated.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).
  

63

*10.1910.18
Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) in which Thomas E. Armold,Fred D. Bauer, as well as Todd A. Barlett Fred D. Bauer, 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).
  

*10.2010.19
First Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to Applied's Form 8-K datedfiled December 22, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2110.20
Second Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to the Company'sApplied's Form 8-K datedfiled October 22,26, 2012, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2210.21
Deferred Compensation Plan (September 1, 2003 Restatement), the terms of which govern benefits vested as of December 31, 2004, for Mark O. Eisele (filed as Exhibit 10(h) to Applied's Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2310.22
First Amendment to Deferred Compensation Plan (September 1, 2003 Restatement) (filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31, 2003, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2410.23
Deferred Compensation Plan (Post-2004 Terms) (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2510.24
Supplemental Defined Contribution Plan (January 1, 1997 Restatement) the terms of which govern benefits vested as of December 31, 2004, for certain executive officersTodd 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).
  
*10.2610.25
First Amendment to Supplemental Defined Contribution Plan effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied’s Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference).
  
*10.2710.26
Second Amendment to Supplemental Defined Contribution Plan effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299, and incorporated here by reference).
*10.27
Supplemental Defined Contribution Plan (Post-2004 Terms), restated effective as of January 1, 2017 (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.)
  
*10.28Supplemental Defined Contribution Plan (Post-2004 Terms) (filed as Exhibit 10.6 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference).
*10.29
Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K datedfiled October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3010.29
Amendment to Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.2 to Applied's Form 8-K datedfiled October 22,26, 2012, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3110.30
Change in Control Agreement for Neil A. Schrimsher (filed as Exhibit 10.3 to Applied's Form 8-K datedfiled October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3210.31Form of
Change in Control Agreement for each of Thomas E. Armold, Todd A. Barlett, Fred D. Bauer and Mark O. Eisele (filed as Exhibit 99.1 to Applied's Form 8-K datedfiled April 25, 2008, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3310.32
Form of Change in Control Agreement for executive officers newly hired since 2012 (filed as Exhibit 10.3 to Applied's Form 10-Q for the quarter ended September 30, 2013, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3410.33
A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers (filed as Exhibit 10(d)10.33 to Applied's Form 10-K for the year ended June 30, 2007,2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3510.34
A written description of Applied's Long-Term Disability Insurance for executive officers (filed as Exhibit 10(c)10.34 to Applied's Form 10-Q10-K for the quarteryear ended December 31, 1997,June 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
*10.3610.35Non-qualified Deferred Compensation Agreement between Applied
A written description of Applied's Retiree Health Care Coverage for Neil A. Schrimsher, Todd A. Barlett, Fred D.Bauer and J. Michael Moore effective as of December 31, 1997Mark O. Eisele (filed as Exhibit 10(a)10.35 to Applied's Form 10-Q10-K for the quarteryear ended March 31, 1998,June 30, 2017, SEC File No. 1-2299, and incorporated here by reference).
  
10.3710.36Share Purchase
Agreement dated April 25, 2014,and Plan of Merger by and among Applied Industrial Technologies, Inc., Applied Alberta, Inc., Michael Sirois, Sirois Family Trust, Georg Eger, Eger Family Trust, Blair Hetlinger, Christopher Sirois, Kenneth Pacula, Grant Bechtloff, Ryan Farley, Dwayne Letawsky, Douglas Kilbach, Steven Vanderwater, 1562039 Alberta Ltd., 1561902 Alberta Ltd., 1614176 Alberta Ltd., 1814971 Alberta Ltd.Fortress Merger Sub Holding LLC, Fortress Merger Sub LP, FCX Group Holdings, LP, FCX Group GP, LLC, and 1814966 Alberta Ltd.Harvest Partners, LP (filed as Exhibit 10.1 to Applied’sApplied's Form 8-K dated May 1, 2014,filed January 9, 2018, SEC File No. 1-2299, and incorporated here by reference).

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10.38Stock Purchase Agreement dated May 23, 2014, among Applied Industrial Technologies, Inc., Alex Dan Knox and Dayton Scott Knox (filed as Exhibit 10.1 to Applied’s Form 8-K dated May 27, 2014, SEC File No. 1-2299, and incorporated here by reference).
  
21
Applied’s subsidiaries at June 30, 2015.2018.
  
23
Consent of Independent Registered Public Accounting Firm.
  
24
Powers of attorney.
  
31
Rule 13a-14(a)/15d-14(a) certifications.
  
32
Section 1350 certifications.

  
101.INSXBRL Instance Document
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRL 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.

65
ITEM 16. FORM 1O-K SUMMARY.
Table of Contents
Not applicable.


APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2015, 2014,2018, 2017, AND 20132016
(in thousands)
COLUMN A COLUMN B COLUMN C  COLUMN D  COLUMN E
DESCRIPTION Balance at Beginning of Period
 Additions Charged to Cost and Expenses
 Additions (Deductions) Charged to Other Accounts
  Deductions from Reserve
  Balance at End of Period
Year Ended June 30, 2015            
Reserve deducted from assets to which it applies — accounts receivable allowances $10,385
 $2,597
 $231
(A) $2,592
(B) $10,621
Year Ended June 30, 2014            
Reserve deducted from assets to which it applies — accounts receivable allowances $7,737
 $3,970
 $(129)(A) $1,193
(B) $10,385
Year Ended June 30, 2013            
Reserve deducted from assets to which it applies — accounts receivable allowances $8,332
 $2,267
 $(104)(A) $2,758
(B) $7,737
COLUMN A COLUMN B COLUMN C  COLUMN D  COLUMN E
DESCRIPTION Balance at Beginning of Period
 Additions Charged to Cost and Expenses
 Additions (Deductions) Charged to Other Accounts
  Deductions from Reserve
  Balance at End of Period
Year Ended June 30, 2018            
Reserve deducted from assets to which it applies — accounts receivable allowances $9,628
 $2,803
 $4,578
(A) $3,443
(B) $13,566
Year Ended June 30, 2017            
Reserve deducted from assets to which it applies — accounts receivable allowances $11,034
 $2,071
 $(133)(A) $3,344
(B) $9,628
Year Ended June 30, 2016            
Reserve deducted from assets to which it applies — accounts receivable allowances $10,621
 $4,303
 $(46)(A) $3,844
(B) $11,034
(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 /s/ Mark O. EiseleDavid K. Wells
Neil A. Schrimsher
President & Chief Executive Officer
 
Mark O. EiseleDavid K. Wells
Vice President-Chief Financial Officer
& Treasurer
   
/s/ Christopher Macey (Principal financial officer and principal accounting officer)
Christopher Macey
Corporate Controller (Principal Accounting Officer)
Date: August 26, 201517, 2018


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
* *
John F. Meier,Robert J. Pagano, Jr., Director J. Michael Moore,Vincent K. Petrella, Director
* /s/ Neil A. Schrimsher
Vincent K. Petrella,Joe A. Raver, Director Neil A. Schrimsher, President & Chief Executive Officer and Director
* *
Dr. Jerry Sue Thornton, Director Peter C. Wallace, Director and Chairman
   
   
/s/ Fred D. Bauer  
Fred D. Bauer, as attorney in fact 
for persons indicated by “*” 
Date: August 26, 201517, 2018


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