Edgar Filing: APPLIED INDUSTRIAL TECHNOLOGIES INC

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DEF 14A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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LOGO

1 APPLIED PLAZA

CLEVELAND, OHIO 44115

(216) 426-4000

www.applied.com

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

Tuesday, October 24, 2017

10:00 a.m. Eastern Time

Dear Shareholder:

We are pleased to invite you to the 2017 annual meeting of the shareholders of Applied Industrial Technologies, Inc. The meeting will be at our headquarters, 1 Applied Plaza, East 36th Street and Euclid Avenue, Cleveland, Ohio, 44115 on Tuesday, October 24, 2017, at 10:00 a.m. Eastern Time. The meeting will be held for the following purposes:

To elect three directors;

To approve, through a nonbinding advisory vote, the compensation of Applied’s named executive officers as disclosed in the attached proxy statement;

To approve, through a nonbinding advisory vote, the frequency of the advisory vote on the compensation of Applied’s named executive officers; and

To ratify the Audit Committee’s appointment of independent auditors for the fiscal year ending June 30, 2018.

Shareholders of record at the close of business on August 25, 2017, are entitled to vote at the meeting. The transfer books will not be closed. A list of shareholders as of the record date will be available for examination at the meeting.

The attached proxy statement describes the business of the meeting and provides information about our corporate governance.

Fred D. Bauer

Vice President-General Counsel

& Secretary

September 11, 2017

YOUR VOTE IS IMPORTANT! WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE PROMPTLY VOTE VIA THE INTERNET, BY PHONE, OR BY EXECUTING AND RETURNING THE ENCLOSED PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. VOTING EARLY WILL HELP AVOID ADDITIONAL SOLICITATION COSTS.

Important Notice Regarding the Availability of Proxy Materials for the

Shareholder Meeting to be Held on October 24, 2017.

The Proxy Statement and 2017 Annual Report to Shareholders are available at

www.applied.com/access-proxy

LOGO

PROXY STATEMENT

CONTENTS


Introduction and Voting Information		2
ITEM 1 — Election of Directors		4
Corporate Governance		8
Corporate Governance Documents		8
Director Independence		8
Director Attendance at Meetings		8
Meetings of Non-Management Directors		8
Board Leadership Structure		9
Committees		9
Board’s Role in Risk Oversight		10
Communications with Board of Directors		10
Director Nominations		10
Transactions with Related Persons		11
Director Compensation		11
Compensation Review		11
Components of Compensation Program		12
Stock Ownership Guideline		12
Director Compensation Table		12
Holdings of Major Shareholders, Officers, and Directors		13
Executive Compensation		14
Compensation Discussion and Analysis		14
Summary Compensation Table		28
Grants of Plan-Based Awards Table		30
Outstanding Equity Awards at Fiscal Year-End Table		31
Option Exercises and Stock Vested Table		32
Nonqualified Deferred Compensation		32
Pension Plans		34
Potential Payments upon Termination or Change in Control		35
Compensation Committee Report		44
ITEM 2 — Advisory Vote to Approve Executive Compensation		44
ITEM 3 — Advisory Vote on the Frequency of Votes to Approve Executive Compensation		46
ITEM 4 — Ratification of Auditors		47
Audit Committee Report		47
Section 16(a) Beneficial Ownership Reporting Compliance		48
Shareholder Proposals and Nominee Submissions for 2018 Annual Meeting		48
Householding Information		48
Other Matters		48

Applied Industrial Technologies, Inc. • 1

INTRODUCTION AND VOTING INFORMATION

In this statement, “we,” “our,” “us,” and “Applied” refer to Applied Industrial Technologies, Inc., an Ohio corporation. Our common stock, without par value, is listed on the New York Stock Exchange with the ticker symbol “AIT.”

What is the proxy statement’s purpose?

The proxy statement summarizes information you need to vote at our 2017 annual meeting of shareholders to be held on Tuesday, October 24, 2017, at 10:00 a.m. Eastern Time, at our headquarters, and any adjournment of the meeting. We are sending the proxy statement to you because Applied’s Board of Directors is soliciting your proxy to vote your shares at the meeting. The proxy statement and accompanying proxy card are being sent to record date shareholders on or about September 11, 2017.

On what matters are shareholders voting?

To elect three directors;

To approve, through a nonbinding advisory vote, the compensation of Applied’s named executive officers as disclosed in the proxy statement;

To approve, through a nonbinding advisory vote, the frequency of the advisory vote on the compensation of Applied’s named executive officers; and

To ratify the Audit Committee’s appointment of independent auditors for the fiscal year ending June 30, 2018.

Who may vote and what constitutes a quorum at the meeting?

Only shareholders of record at the close of business on August 25, 2017, may vote. As of that date, there were 38,867,064 outstanding shares of Applied common stock, without par value. The holders of a majority of those shares will constitute a quorum. A quorum is necessary for valid action to be taken at the meeting.

We have no class or series of shares outstanding other than our common stock.

How many votes do I have?

Each shareholder is entitled to one vote per share.

How do I vote?

The answer depends on whether you hold shares directly in your name, or through a broker, trustee, or other nominee, such as a bank.

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Shareholder of record. If your shares are registered in your name with our registrar,

Computershare Trust Company, N.A., you are the shareholder of record and these proxy materials have been sent directly to you. You may vote in person at the meeting. You may also grant us your proxy to vote your shares via the Internet, by phone, or by mailing your signed proxy card in the postage-paid envelope provided. The card provides voting instructions.

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Beneficial owner. If your shares are held in a brokerage account, or by a trustee or another nominee, then that other person is considered the shareholder of record. We sent these proxy materials to that person, and they were forwarded to you with a voting instructions card. As the shares’ beneficial owner, you may direct your broker, trustee, or other nominee how to vote, and you are also invited to attend the meeting. Please refer to the information your broker, trustee, or other nominee provided to determine what voting options are available to you.

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Beneficial owner of shares held in Applied’s Retirement Savings Plan. If you own shares in this plan, you may provide the plan trustee with instructions on how to vote your shares via the Internet, by phone, or by mailing in your signed voting instructions card.

Votes submitted online or by phone for shares held in the Retirement Savings Plan must be received by Thursday, October 19, 2017; votes online or by phone for other shares must be received by Monday, October 23, 2017.

If you attend the meeting and vote in person, a ballot will be available when you arrive. If, however, your shares are held in the name of your broker, trustee, or other nominee, you must bring a valid proxy from that party giving you the right to vote the shares.

What if I don’t indicate my voting choices?

If Applied receives your proxy in time to use at the meeting, your shares will be voted according to your instructions. If you have not indicated otherwise on the proxy, your shares will be voted as the Board of Directors recommends on the matters identified above. In addition, the proxies will vote your shares according to their judgment on other matters properly brought before the meeting.

Applied Industrial Technologies, Inc. • 2

What effect do abstentions and broker non-votes have?

Brokers holding shares for beneficial owners must vote the shares according to the owners’ instructions. If instructions are not received, then brokers may vote the shares at their discretion, except if New York Stock Exchange (“NYSE”) rules preclude brokers from exercising discretion relative to a specific type of proposal — in this case, the result is a “broker non-vote.”

Abstentions and broker non-votes will affect voting at the meeting as follows:

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Item 1. Broker non-votes will not impact the vote’s outcome because, pursuant to Ohio law, the properly nominated director candidates receiving the greatest number of votes will be elected.

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Item 2. Approval of the company’s executive compensation requires that more votes be cast for than against the proposal. Abstentions and broker non-votes will not affect the outcome.

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Item 3. The vote required to determine the frequency of the advisory vote regarding executive compensation is a plurality of the votes cast. Abstentions and broker non-votes will not affect the outcome.

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Item 4. The affirmative vote of a majority of the votes cast at the meeting is required to ratify the Audit Committee’s appointment of independent auditors. In determining votes cast on the item, abstentions will not count as votes cast and, accordingly, will not affect the outcome. Brokers have discretionary authority to vote on Item 4, so there will be no broker non-votes on that item.

What happens if a director candidate receives less than a majority of the votes cast?

Applied has adopted a policy applicable to uncontested director elections. If a nominee receives a greater number of votes “withheld” than votes “for” his or her election, then promptly following certification of the shareholder vote the nominee shall submit, in writing, to the Board’s Chairman, his or her resignation as a director. The Chairman shall promptly communicate the submission to the Board’s Corporate Governance Committee. Notwithstanding the resignation, the Corporate Governance Committee may recommend to the Board that the nominee be asked to serve as a director for his or her term of election and under such arrangements as are approved by the committee. If the committee fails to make such a recommendation within

30 days following certification of the shareholder vote, or if the committee earlier determines to accept the resignation, the director’s resignation shall be effective as of that date. If the Corporate Governance Committee recommends the director be asked to serve his or her term notwithstanding the majority withheld vote, the Board shall act promptly (and in any event, within 90 days following certification of the shareholder vote) on the recommendation.

Additional information about the policy is included in Applied’s Board of Directors Governance Principles and Practices, available via hyperlink from the investor relations area of Applied’s website at www.applied.com.

What does it mean if I receive multiple sets of proxy materials?

Receiving multiple sets usually means your shares are held in different names or different accounts. Please respond to all of the proxy solicitation requests to ensure your shares are voted.

May I revoke my proxy?

You may revoke your proxy before it is voted at the meeting by notifying Applied’s Secretary in writing, voting a second time by telephone or via the Internet, returning a later-dated proxy card, or voting in person. Your presence at the meeting will not by itself revoke the proxy.

Who pays the costs of soliciting proxies?

Applied pays these costs. We will also pay the standard charges and expenses of brokers or other nominees for forwarding these materials to, and obtaining proxies from, beneficial owners. Directors, officers, and other employees, acting on our behalf, may solicit proxies. We have also retained Morrow Sodali, LLC, at an estimated fee of $7,500 plus expenses, to aid in soliciting proxies from brokers and institutional holders. In addition to using the mail, proxies may be solicited personally and by telephone, facsimile, or other electronic means.

Who counts the votes?

Computershare Trust Company, N.A., will be the inspector of election and tabulate votes.

Applied Industrial Technologies, Inc. • 3

ITEM 1 — ELECTION OF DIRECTORS

Applied’s Code of Regulations divides our Board into three classes. The directors in each class are elected for three-year terms so that the term of one class expires at each annual meeting. At the 2017 annual meeting, the shareholders will elect directors for a three-year term expiring in 2020 or until their successors have been elected and qualified. Pursuant to Ohio law, the properly nominated candidates receiving the greatest number of votes will be elected.

The Corporate Governance Committee recommended, and the Board nominated, three incumbents for election as directors: Robert J. Pagano, Jr., Neil A. Schrimsher, and Peter C. Wallace. Messrs. Schrimsher and Wallace were most recently elected at the 2014 annual meeting. Mr. Pagano was elected by the Board in August 2017. Their terms expire this year and the Board renominated them following the Corporate Governance Committee’s review and evaluation of their performance. Directors serving for terms expiring in 2018 and 2019 will continue in office.

The proxies named on the proxy card accompanying the materials sent to shareholders of record intend to vote for the three nominees unless authority is withheld. If a nominee becomes unavailable to serve, the proxies will have authority to vote for any other person or persons who may be properly nominated and/or to reduce the number of directors. We are not aware of an existing circumstance that would cause a nominee to be unavailable to serve.

The Board of Directors recommends you vote FOR the director nominees.

Below is background information about the nominees and the continuing directors. Unless otherwise stated, the individuals have held the positions indicated for at least the last five years. We also include a summary of reasons our Board concluded that the respective director or nominee should serve as a director, in light of our business and governance structure. The summaries are not comprehensive, but describe the primary experiences, attributes, and skills that the Board believes qualify the individuals to continue as directors. In addition to the qualifications referred to below, we believe each individual has a reputation for integrity, honesty, and high ethical standards, and has demonstrated strong business judgment.

Nominees for Election as Directors with Terms Expiring in 2020

LOGO

Robert J. Pagano, Jr.

Director since August 2017

Business Experience. Mr. Pagano, age 54, has served as Chief Executive Officer and President of Watts Water Technologies, Inc. (NYSE: WTS) since May 2014. Watts Water Technologies, Inc. is a global supplier of products and solutions that manage and conserve the flow of fluids and energy into, through, and out of buildings in the residential and commercial markets. He also served as interim Chief Financial Officer from October 2014 to April 2015. Mr. Pagano previously was Senior Vice President of ITT Corporation and President, ITT Industrial Process from 2009 to May 2014. ITT Corporation is a diversified manufacturer of highly engineered critical components and customized technology solutions for the energy, transportation, and industrial markets. Mr. Pagano began his career with an international public accounting firm and he is a Certified Public Accountant.

Other Directorship in Previous 5 Years. Watts Water Technologies, Inc. (since 2014)

Qualifications. Mr. Pagano brings to Applied’s Board his broad management experience as a sitting chief executive officer and director of a NYSE-listed global manufacturing company. In addition, his career includes extensive leadership and operations experience, working with distributors to serve industrial markets throughout the world, as well as a strong background in finance and accounting.

Applied Industrial Technologies, Inc. • 4

LOGO

Neil A. Schrimsher

Director since 2011, member of Executive Committee

Business Experience. Mr. Schrimsher, age 53, joined Applied as our Chief Executive Officer in 2011 and was also elected President in August 2013. Before joining Applied, 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. Prior to that, he was President of Cooper Lighting, Inc.

Other Directorship in Previous 5 Years. Patterson Companies, Inc. (NASDAQ: PDCO; since 2014)

Qualifications. As the only Applied executive to serve on the Board, Mr. Schrimsher contributes a deep understanding of the company’s businesses, markets, and competitive landscape. From his prior employment, Mr. Schrimsher has brought to Applied and its Board broad leadership experience, including management of worldwide operations, distribution management, strategic planning and analysis, manufacturing, engineering, supply chain management, and sourcing.

LOGO

Peter C. Wallace

Director since 2005, Board Chairman since October 2014, member of Executive Organization & Compensation and Executive Committees

Business Experience. Mr. Wallace, age 63, most recently was Chief Executive Officer of Gardner Denver, Inc. from June 2014 until retiring in December 2015. Gardner Denver is a privately owned worldwide manufacturer of highly engineered products, including compressors, liquid ring pumps, and blowers for various industrial, medical, environmental, transportation, and process applications, pumps used in the petroleum and industrial market segments, and other fluid transfer equipment. Prior to joining Gardner Denver, Mr. Wallace was President and Chief Executive Officer, and a director, of Robbins & Myers, Inc. (formerly NYSE: RBN), from 2004 until it was acquired in February 2013 by National Oilwell Varco, Inc. Robbins & Myers was a leading designer, manufacturer, and marketer of highly engineered, application-critical equipment and systems for energy, chemical, pharmaceutical, and industrial markets worldwide.

Other Directorships in Previous 5 Years. Curtiss-Wright Corporation (NYSE: CW; since 2016), Rogers Corporation (NYSE: ROG), Robbins & Myers, Inc. (until 2013), Parker Drilling Company (NYSE: PKD; from 2013 to 2014)

Qualifications. Mr. Wallace has a wide and varied background as a senior executive in global industrial equipment manufacturing. He brings to the Board the perspective of someone familiar with all facets of worldwide business operations, including the experience of leading a NYSE-listed company. Mr. Wallace’s career includes positions with global responsibilities for equipment manufacturers with product lines that Applied (and others) represented as a distributor in the fluid power and power transmission component fields. In those roles, he developed significant knowledge about Applied’s industry, including the dynamics of the relationships between industrial product manufacturers and their distributors. These experiences and knowledge, along with his service on other NYSE-listed company boards, enhance Mr. Wallace’s contributions and value to our Board.

Applied Industrial Technologies, Inc. • 5

Continuing Directors with Terms Expiring in 2018


		Peter A. Dorsman Director since 2002, member of Executive Organization & Compensation and Executive Committees *Business Experience.* Mr. Dorsman, age 62, retired from NCR Corporation (NYSE: NCR) in April 2014. NCR is a global technology company providing assisted and self-service solutions and comprehensive support services that address the needs of retail, financial, hospitality, technology, and telecommunication organizations throughout the world. As Executive Vice President, Services since 2012, Mr. Dorsman led NCR Services, a leading global provider of outsourced and managed service offerings. He was also responsible for customer experience, continuous improvement, and quality throughout NCR, serving as Chief Quality Officer during this period. Prior to then, he served as NCR’s Executive Vice President, Industry Solutions Group and Global Operations, and as Senior Vice President, Global Operations. *Other Directorship in Previous 5 Years.* HD Supply Holdings, Inc. (NASDAQ: HDS; since March 2017) *Qualifications.* Mr. Dorsman has broad experience in marketing, sales, strategy, and operations. At NCR, a $6 billion dollar company, he led 11,000 service professionals serving customers in over 90 countries. He also led NCR’s efforts to provide consistent, world-class service delivery, products, and solutions. With his diverse background and expertise, he contributes insights about many aspects of our business operations and initiatives.
		Vincent K. Petrella Director since 2012, member of Audit, Executive Organization & Compensation, and Executive Committees *Business Experience.* Mr. Petrella, age 57, is Executive Vice President, Chief Financial Officer and Treasurer of Lincoln Electric Holdings, Inc. (NASDAQ: LECO). Lincoln Electric engages in the design, manufacture, and sale of welding, cutting, and brazing products worldwide. *Qualifications.* As one of Lincoln Electric’s top executives, Mr. Petrella has helped lead the company’s global expansion over the last decade. His leadership and operating experience, and his knowledge of industrial distribution in North America and abroad, make him a key contributor to discussions about Applied’s strategy. In addition, Mr. Petrella’s finance and accounting background (before joining Lincoln Electric he was a Certified Public Accountant with an international public accounting firm) and his service as Chief Financial Officer for a multi-billion dollar public company make him a valued member of the Board and chairman of the Audit Committee.
		Dr. Jerry Sue Thornton Director since 1994, member of Corporate Governance Committee *Business Experience. Dr. Thornton, age 70, retired in June 2013 after serving as President of Cuyahoga Community College, the largest multi-campus community college in Ohio, for more than 20 years. Upon her retirement, Cuyahoga Community College honored her with the title of President Emeritus. Other Directorships in Previous 5 Years. Barnes & Noble Education, Inc. (NYSE: BNED; since 2015), FirstEnergy Corp. (NYSE: FE; since 2015), RPM, Inc. (NYSE: RPM), American Greetings Corporation (formerly NYSE: AM; until 2013) Qualifications*. Dr. Thornton is a preeminent educator with significant experience in career training. Our workforce is our most important resource, and her background and skills help the Board monitor Applied’s efforts to maximize our associates’ potential. Having served as Cuyahoga Community College’s longtime President, overseeing a budget of over $330 million, she also contributes broad management skills to Applied’s Board. In addition, Dr. Thornton has extensive service as a director of other NYSE-listed companies, including participation on numerous key board committees.

Applied Industrial Technologies, Inc. • 6

Continuing Directors with Terms Expiring in 2019


		L. Thomas Hiltz Director since 1981, member of Audit and Corporate Governance Committees *Business Experience.* Mr. Hiltz, age 71, is an attorney in Covington, Kentucky and is one of five trustees of the H.C.S. Foundation, a charitable trust which has sole voting and dispositive power with respect to 300,000 shares (as of June 30, 2017) of Applied stock. *Qualifications.* Mr. Hiltz’s background as a practicing lawyer and fiduciary includes diverse experience with business transactions, including mergers and acquisitions, and board governance. In addition to service as a director of Great American Financial Resources, Inc., a public company prior to its acquisition by American Financial Group, Inc., he has served as a director of numerous private companies, some with significant minority shareholder bases, and led those boards in overseeing large corporate transactions.
		Edith Kelly-Green Director since 2002, member of Corporate Governance and Executive Committees *Business Experience.* Until retiring in 2003, Ms. Kelly-Green, age 64, was Vice President and Chief Sourcing Officer of FedEx Express, the world’s largest express transportation company and a subsidiary of FedEx Corporation (NYSE: FDX). *Qualifications.* Ms. Kelly-Green has significant procurement and logistics experience from her service with FedEx Express, where she was successful in designing and enhancing the company’s extensive internal supply chain processes. Because Applied is a distributor, the processes of buying, inventorying, and transporting products are critical to our business. In addition, her career began in the field of accounting as a Certified Public Accountant with an international public accounting firm and she served as Vice President-Internal Audit with FedEx Corporation. Ms. Kelly-Green’s skills and background in these areas make her well-suited for our company and Board.
		Dan P. Komnenovich Director since 2012, member of Audit and Corporate Governance Committees *Business Experience.* Until his retirement in August 2013, Mr. Komnenovich, age 65, was President and Chief Executive Officer of Aviall, Inc., a wholly owned subsidiary of The Boeing Company (NYSE: BA). Aviall is one of the world’s largest providers of new aviation parts and related aftermarket operations. It also provides maintenance for aviation batteries, wheels, and brakes, as well as hose assembly, kitting, and paint-mixing services, and offers a complete set of supply chain and logistics services, including order processing, stocking and fulfillment, automated inventory management, and reverse logistics to OEMs and customers. *Qualifications.* Mr. Komnenovich led a global multi-billion dollar distribution company which grew significantly during his service as a senior executive. He brings to our Board extensive experience with distribution sales, marketing, operations, supply chain management, and logistics. Earlier in his career, Mr. Komnenovich was a Certified Public Accountant and served in finance and accounting roles with various companies.

Applied Industrial Technologies, Inc. • 7

LOGO

Joe A. Raver

Director since August 2017

Business Experience. Mr. Raver, age 51, has served as President and Chief Executive Officer of Hillenbrand, Inc. (NYSE: HI) since September 2013. Before then, he served as President of Hillenbrand’s Process Equipment Group beginning in 2011 and, prior to that, his career included service in various other leadership and operational roles with Hillenbrand, including as President of Batesville Casket Company. Hillenbrand is a diversified industrial company with multiple brands that serve a range of industries across the globe. The company’s Process Equipment Group provides compounding, extrusion and material handling; size reduction; screening and separating, and flow control products and services for a range of manufacturing and other industrial processes.

Other Directorship in Previous 5 Years. Hillenbrand, Inc. (since 2013)

Qualifications. Mr. Raver brings to Applied’s Board his broad management experience as a sitting chief executive officer and director of a NYSE-listed global manufacturing company serving industrial markets worldwide. In addition, his career includes extensive leadership and operations experience in diverse business settings.

CORPORATE GOVERNANCE

Corporate Governance Documents

Applied’s Internet address is www.applied.com. The following corporate governance documents are available free of charge via hyperlink from the website’s investor relations area:

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Code of Business Ethics,

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Board of Directors Governance Principles and Practices,

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Director Independence Standards, and

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Charters for the Audit, Corporate Governance, and Executive Organization & Compensation Committees of our Board.

Director Independence

Under the NYSE corporate governance listing standards, a majority of Applied’s directors must satisfy the NYSE criteria for independence. In addition to having to satisfy stated minimum requirements, no director qualifies under the standards unless the Board affirmatively determines the director has no material relationship with Applied. In assessing a relationship’s materiality, the Board has adopted categorical standards, which may be found via hyperlink from our website’s investor relations area.

The Board has determined that all directors other than Mr. Schrimsher, our President & Chief Executive Officer, meet these independence standards.

Director Attendance at Meetings

During the fiscal year ended June 30, 2017, the Board held five meetings. Each incumbent director attended at least 75% of the total number of meetings of the Board and the committees on which he or she served.

Applied expects directors to attend the annual meeting of shareholders, just as they are expected to attend Board meetings. All the directors attended last year’s annual meeting.

Meetings of Non-Management Directors

At the Board’s regular meetings, the non-management directors meet in executive sessions without management. Mr. Wallace, the Board’s independent Chairman, calls and presides at the sessions. On the independent directors’ behalf, the Chairman provides feedback to management from the sessions, collaborates with management in developing Board meeting schedules and agendas, and performs other duties as determined by the Board or the Corporate Governance Committee.

Applied Industrial Technologies, Inc. • 8

Board Leadership Structure

The Board periodically evaluates its leadership structure under circumstances existing at the time. In 2011, the Board concluded it would be in the best interests of Applied and its shareholders to separate the positions of Chairman and Chief Executive Officer (“CEO”) and to have an independent director serve as Chairman. Mr. Wallace currently serves as Chairman.

The Board believes its current leadership structure best serves the Board’s oversight of management, the Board’s carrying out of its responsibilities on the shareholders’ behalf, and Applied’s overall corporate governance. The Board also believes the separation of the roles allows the CEO to focus his efforts on operating and managing the company.

Committees

The Board’s Audit, Corporate Governance, and Executive Organization & Compensation Committees are composed solely of independent directors, as defined in NYSE listing standards and Applied’s categorical standards, and, in the case of the Audit Committee, under federal securities laws.

The committee members’ names and number of meetings held in fiscal 2017 follow:


Audit Committee (4 meetings)	Corporate Governance Committee (5 meetings)	Executive Organization & Compensation Committee (5 meetings)
Vincent K. Petrella, Chair	Edith Kelly-Green, Chair	Peter A. Dorsman, Chair
L. Thomas Hiltz	L. Thomas Hiltz	Vincent K. Petrella
Dan P. Komnenovich	Dan P. Komnenovich	Peter C. Wallace
	Dr. Jerry Sue Thornton

Messrs. Pagano and Raver joined the Board in August 2017 and have not yet been appointed to committees.

We describe the committees below. Their charters, posted via hyperlink from the investor relations area of Applied’s website, contain more detailed descriptions. The Board also has a standing Executive Committee which, during intervals between Board meetings and subject to the Board’s control and direction, possesses and may exercise the Board’s powers. The Executive Committee, whose members include the Chairman, the CEO, and the committee chairs, did not meet in fiscal 2017.

Audit Committee. The Audit Committee assists the Board in fulfilling its oversight responsibility with respect to the integrity of Applied’s accounting, auditing, and reporting processes. The committee appoints, determines the compensation of, evaluates, and oversees the work of the independent auditor, reviews the auditor’s independence, and approves non-audit work to be performed by the auditor. The committee also reviews, with management and the auditor, annual and quarterly financial statements, the scope of the independent and internal audit programs, audit results, and the adequacy of Applied’s internal accounting and financial controls.

The Board has determined that each Audit Committee member is independent for purposes of section 10A of the Securities Exchange Act of 1934 and that Messrs. Petrella and Komnenovich are “audit committee financial experts,” as defined in Item 407(d)(5) of Securities and Exchange Commission (“SEC”) Regulation S-K.

The Audit Committee’s report is on pages 47-48 of this proxy statement.

Corporate Governance Committee. The Corporate Governance Committee assists the Board by reviewing and evaluating potential director nominees, Board and CEO performance, Board governance, director compensation, compliance with laws, public policy matters, and other issues. The committee also administers long-term incentive awards to directors under the 2015 Long-Term Performance Plan.

Executive Organization & Compensation Committee. The Executive Organization & Compensation Committee monitors and oversees Applied’s management succession planning and leadership development processes, nominates candidates for the slate of officers to be elected by the Board, and reviews, evaluates, and approves executive officers’ compensation and

Applied Industrial Technologies, Inc. • 9

benefits. The committee also administers incentive awards to executives under the 2015 Long-Term Performance Plan, including the annual Management Incentive Plan. Pay Governance LLC serves as the committee’s independent executive compensation consultant.

In approving executive officers’ compensation and benefits, the committee bases its decisions on a number of considerations, including the following: the committee’s own reasoned judgment; peer group and market survey information; recommendations provided by the independent consultant; and recommendations from Applied’s CEO as to the other executive officers’ compensation and benefits.

For more information on the committee, please read, beginning on page 14, the “Compensation Discussion and Analysis” portion of this proxy statement.

Board’s Role in Risk Oversight

Risk is inherent in every enterprise, and Applied faces many risks of varying size and intensity. While management is responsible for day-to-day management of those risks, the Board, as a whole and through its committees, oversees and monitors risk management. In this role, the Board is responsible for determining that the risk management processes designed and implemented by management are adequate and functioning as designed.

The Board believes that robust communication with management is essential for risk management oversight. Senior management attends quarterly Board meetings and responds to directors’ questions or concerns about risk management and other matters. At these meetings, management regularly presents to the Board on strategic matters involving our operations, and the directors and management engage in dialogue about the company’s strategies, challenges, risks, and opportunities. Each year, management reports more broadly on the company’s enterprise risk management process. The non-management directors also meet regularly in executive session without management to discuss a variety of topics, including risk.

While the Board is ultimately responsible for risk oversight, the committees assist the Board in the areas described below, with each committee chair presenting reports to the Board regarding the committee’s deliberations and actions.

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The Audit Committee assists with respect to risk management in the areas of financial reporting, internal controls, and compliance with legal and regulatory requirements.

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The Executive Organization & Compensation Committee assists with respect to management of risks related to executive succession and arising from our executive compensation policies and programs.

•

The Corporate Governance Committee assists with respect to management of risks associated with Board organization and membership, and other corporate governance matters, as well as company culture and ethical compliance.

We have assessed the risks arising from Applied’s compensation policies and practices for employees, including the executive officers. The findings were reviewed with the Executive Organization & Compensation Committee. Based on the assessment, we believe our compensation policies and practices do not encourage excessive risk-taking and are not reasonably likely to have a material adverse effect on Applied.

Communications with Board of Directors

Shareholders and other interested parties may communicate with a director by writing to that individual c/o Applied’s Secretary at 1 Applied Plaza, Cleveland, Ohio 44115. In addition, they may contact the non-management directors or key Board committees by e-mail, anonymously if desired, through a form located in the investor relations area of Applied’s website at www.applied.com. The Board has instructed Applied’s Secretary to review these communications and to exercise judgment not to forward correspondence such as routine business inquiries and complaints, business solicitations, and frivolous communications; the Secretary delivers summary reports on the nature of all of the communications to the Audit Committee and the Corporate Governance Committee.

Director Nominations

In identifying and evaluating director candidates, the Corporate Governance Committee first considers Applied’s developing needs and desired characteristics of a new director, as determined from time to time by the committee. The committee then considers various candidate attributes, including the following: business, strategic, and financial skills;

Applied Industrial Technologies, Inc. • 10

independence, integrity, and time availability; diversity of gender, race, and other personal characteristics; and overall experience in the context of the Board’s needs. From time to time, the committee engages a professional search firm, to which it pays a fee, to assist in identifying and evaluating potential nominees; most recently, such a firm assisted the committee with the selection of Messrs. Pagano and Raver.

The committee will also consider qualified director candidates recommended by shareholders. Shareholders can submit recommendations by writing to Applied’s Secretary at 1 Applied Plaza, Cleveland, Ohio 44115. For consideration by the committee in the annual director nominating process, shareholders must submit recommendations at least 120 days prior to the anniversary of the date on which our proxy statement was released to shareholders in connection with the previous year’s annual meeting. Shareholders must include appropriate detail regarding the shareholder’s identity and the candidate’s business, professional, and educational background, diversity considerations, and independence. The committee does not intend to evaluate candidates proposed by shareholders differently than other candidates.

Transactions with Related Persons

Applied’s Code of Business Ethics expresses the principle that situations presenting a conflict of interest must be avoided. In furtherance of this principle, the Board has adopted a written policy, administered by the Corporate Governance Committee, for the review and approval, or ratification, of transactions with related persons.

The related party transaction policy applies to a proposed transaction in which Applied is a participant, the aggregate amount involved exceeds $50,000 in a fiscal year, and a director, executive officer or significant shareholder, or an immediate family member of such a person, has a direct or indirect material interest. The policy provides that the Corporate Governance Committee will consider, among other things, whether the transaction is on terms no less favorable than those provided to unaffiliated third parties under similar circumstances, and the extent of the related person’s interest. No director may participate in discussion or approval of a transaction for which he or she is a related person.

In 2015, the Board designated Warren E. Hoffner, our Vice President-General Manager, Fluid Power, as an executive officer. Mr. Hoffner joined Applied in 1996 when we acquired a distribution business owned by him and his father. Two related party lease arrangements have survived from the acquisition and been renewed from time to time: (1) we lease a building from a company owned 50% by Mr. Hoffner’s father (who retired at the time of the acquisition) at a current rental rate of $154,176 per year, with a term expiring in 2019; and (2) we lease a second building from Mr. Hoffner’s father at a current rental rate of $127,879 per year, with a term expiring in 2019. Applied management, using a third-party broker, negotiates the rental rates and other lease terms and we consider them to be market competitive. Following a review, the Corporate Governance Committee ratified the lease transactions.

DIRECTOR COMPENSATION

Only non-employee directors receive compensation for service as directors. Mr. Schrimsher, our President & Chief Executive Officer, does not receive additional compensation for serving as a director.

Compensation Review

The Corporate Governance Committee reviews director compensation annually. The committee seeks to provide competitive compensation to assist with director retention and recruitment. If the committee believes a change is warranted to remain competitive considering the size and nature of our business, then the committee makes a recommendation to the Board of Directors.

The committee bases its recommendations on a number of considerations including market data, advice from outside experts, and the committee’s own reasoned judgment. In general, the committee targets median director compensation levels for comparably sized companies in similar industries, considering also the time commitments required of directors. A majority of the directors must approve a change.

Management assists the committee by preparing analyses at its request, but does not play a role in determining or recommending the amount or form of director compensation.

Applied Industrial Technologies, Inc. • 11

Components of Compensation Program

The director compensation program’s primary components, effective January 1, 2017, follow:

•

Quarterly Retainers.


Position		Quarterly Retainer ($)
Each Non-Employee Director		21,250
Board Chairman		Additional 12,500
Audit Committee Chair		Additional 4,375
Corporate Governance Committee Chair		Additional 2,500
Executive Org. & Comp. Committee Chair		Additional 3,125

•

Meeting Fees. Directors are not paid meeting fees for the first 17 meetings, including actions taken by unanimous written consent, attended each calendar year. For each meeting attended beyond the 17, directors earn (i) $1,500 for the first Board or committee meeting attended per day, and $500 for each additional meeting attended on the same day, up to a maximum of $2,500 per day, and (ii) $500 for an action taken by unanimous written consent. Directors may be similarly compensated if they attend other meetings or telephone conferences at the request of the Chairman or a committee chair.

•

Long-Term Incentives. Annually, the Corporate Governance Committee considers long-term incentive awards to directors. In 2017, the committee awarded each director 1,713 restricted shares under the 2015 Long-Term Performance Plan. The shares vest one year after the grant date, subject to conditions as to forfeiture and acceleration of vesting.

•

Other Benefits. Applied reimburses directors for travel expenses for attending meetings, as well as for attending director education seminars and conferences. The directors also participate in our travel accident insurance plan. Contributory health care coverage is available to directors who joined the Board before 2011; no directors participated in 2017.

Stock Ownership Guideline

Applied expects each non-employee director to own, within five years after joining the Board, Applied shares (not including unexercised stock options) valued at a minimum of five times the annual retainer fees, or $425,000. Directors may hold the shares directly or indirectly. At June 30, 2017, each director owned shares valued in excess of the $425,000 guideline.

Director Compensation — Fiscal Year 2017

The following table shows information about non-employee director compensation in 2017.


Name	Fees Earned or Paid in Cash ($)		Stock Awards ($) (1)		Option Awards ($) (2)		All Other Compensation ($)		Total ($)
Peter A. Dorsman		93,750		108,347		0		0		202,097
L. Thomas Hiltz		86,250		108,347		0		0		194,597
Edith Kelly-Green		87,500		108,347		0		0		195,847
Dan P. Komnenovich		82,500		108,347		0		0		190,847
John F. Meier (3)		60,000		0		0		0		60,000
Vincent K. Petrella		98,750		108,347		0		0		207,097
Dr. Jerry Sue Thornton		82,500		108,347		0		0		190,847
Peter C. Wallace		122,500		108,347		0		0		230,847

(1)

At June 30, 2017, each current non-employee director held 1,713 restricted shares. These shares vest in January 2018. Applied pays dividends on restricted stock at the same rate paid to all shareholders and the directors hold voting rights for the shares. The amounts in the table represent the aggregate grant date fair value of the 2017 awards computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation (“FASB ASC Topic 718”).

(2)

At June 30, 2017, the then-serving directors held the corresponding numbers of stock options: Mr. Dorsman, 17,950; Mr. Hiltz, 25,338; Ms. Kelly-Green, 25,338; Mr. Komnenovich, 0; Mr. Petrella, 9,510; Dr. Thornton, 25,338; and Mr. Wallace, 17,950.

(3)

Mr. Meier resigned from the Board in January 2017.

Applied Industrial Technologies, Inc. • 12

HOLDINGS OF MAJOR SHAREHOLDERS, OFFICERS, AND DIRECTORS

The following table shows beneficial ownership of Applied common stock, at June 30, 2017, by (i) persons believed by us to own beneficially more than 5% of Applied’s outstanding shares, based on our review of SEC filings, (ii) all directors and nominees, (iii) the executive officers named in the Summary Compensation Table on page 28, and (iv) all directors, nominees, and executive officers (at June 30, 2017) as a group.


Name of Beneficial Owner	Shares Beneficially Owned on June 30, 2017 (1)	Percent of Class (%) (2)
BlackRock, Inc. 55 East 52nd Street, New York, New York 10022	4,463,276 (3)	11.4
The Vanguard Group, Inc. P.O. Box 2600, Valley Forge, Pennsylvania 19482-2600	3,662,402 (4)	9.4
Todd A. Barlett	68,883 (5)
Fred D. Bauer	123,699
Peter A. Dorsman	58,119
Mark O. Eisele	216,651
L. Thomas Hiltz	352,273 (6)
Edith Kelly-Green	54,196
Dan P. Komnenovich	15,890
Kurt W. Loring	32,514
Robert J. Pagano, Jr. (7)	0
Vincent K. Petrella	19,974
Joe A. Raver (7)	0
Neil A. Schrimsher	303,649
Dr. Jerry Sue Thornton	89,129
Peter C. Wallace	52,104
All Directors, Nominees, and Executive Officers as a Group (15 Individuals)	1,449,968 (8)	3.7

(1)

We determined beneficial ownership in accordance with SEC rules; however, the holders may disclaim beneficial ownership. Except as otherwise indicated, the beneficial owner has sole voting and dispositive power over the shares. The directors’ and named executive officers’ totals include shares that could be acquired within 60 days after June 30, 2017, by exercising vested stock options and stock-settled stock appreciation rights (“SARs”): Mr. Barlett, 41,000; Mr. Bauer, 39,575; Mr. Dorsman, 17,950; Mr. Eisele, 41,125; Mr. Hiltz, 25,338; Ms. Kelly-Green, 25,338; Mr. Loring, 30,950; Mr. Petrella, 9,510; Mr. Schrimsher, 235,550; Dr. Thornton, 25,338; and Mr. Wallace, 17,950. The totals also include shares held in nonqualified deferred compensation plan accounts for which the beneficial owner has voting, but not dispositive power: Mr. Barlett, 9,907; Mr. Dorsman, 36,342; Mr. Eisele, 7,727; Dr. Thornton, 2,485; and Mr. Wallace, 15,452. Each non-employee director’s total also includes 1,713 restricted shares, for which the director has voting but not dispositive power. The executive officers’ totals do not include unvested restricted stock unit holdings.

(2)

Does not show percent of class if less than 1%.

(3)

BlackRock, Inc. reported its ownership, including shares beneficially owned by affiliated entities, in a Schedule 13G filed with the SEC on January 12, 2017, indicating it had sole voting power for 4,362,467 shares and no voting power for the remaining shares.

(4)

The Vanguard Group, Inc. reported its ownership, including shares beneficially owned by affiliated entities, in a Form 13F filed with the SEC on August 11, 2017, indicating it had sole voting and dispositive power for 2,361 shares, sole voting and shared dispositive power for 72,208 shares, shared voting and dispositive power for 5,016 shares, and no voting but sole dispositive power for 3,582,817 shares.

(5)

Includes 100 shares owned by Mr. Barlett’s wife, who has sole voting and dispositive power.

(6)

Includes 300,000 shares held by the H.C.S. Foundation, a charitable trust of which Mr. Hiltz is one of five trustees, with sole voting and dispositive power. Pursuant to a Schedule 13D filed by the H.C.S. Foundation in 1989, the trustees, including Mr. Hiltz, disclaimed beneficial ownership.

(7)

Elected to Board in August 2017.

(8)

Includes 566,474 shares that could be acquired by the individuals within 60 days after June 30, 2017, by exercising vested stock options and SARs. In determining ownership percentage, these stock option and SAR shares are added to both the denominator and the numerator.

Applied Industrial Technologies, Inc. • 13

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

This Compensation Discussion and Analysis section provides details about the compensation program for Applied’s executive officers. It describes the company’s compensation philosophy and objectives, roles and responsibilities in making compensation decisions, the components of compensation, and the reasons for compensation adjustments, incentive payments, and long-term incentive grants made in fiscal year 2017. It focuses in particular on arrangements for the following executive officers (the “named executive officers” or “NEOs”):


Name		Position
Neil A. Schrimsher		President & Chief Executive Officer (“CEO”)
Mark O. Eisele		Vice President-Chief Financial Officer & Treasurer (“CFO”)*
Fred D. Bauer		Vice President-General Counsel & Secretary
Todd A. Barlett		Vice President-Acquisitions and Global Business Development
Kurt W. Loring		Vice President-Chief Human Resources Officer

Mr. Eisele retired in August 2017 but served as CFO for the full fiscal year 2017.

This discussion and analysis should be read in conjunction with the Summary Compensation Table on page 28 and the additional tables and narrative disclosure that follow it.

Unless otherwise noted, references to years in the “Executive Compensation” section of this proxy statement mean Applied’s fiscal years ended on June 30.

2017 Compensation Program Highlights

The Board’s Executive Organization & Compensation Committee (the “Committee”) seeks to align overall compensation with performance in order to maximize Applied’s long-term shareholder return. With this objective, and maintaining consistent practices from year to year, the Committee took the following actions in 2017 relative to the primary pay elements:

•

Base salary and annual incentive pay. After considering competitive market data and subjective factors, the Committee approved small adjustments to three NEOs’ base salaries, with Mr. Schrimsher earning a 3% increase. The NEOs’ annual incentive target percentages were held at the same levels as in 2016.

•

Long-term incentives. Emphasizing performance in Applied’s incentive plans, the Committee awarded approximately half of each executive officer’s targeted long-term incentive value in performance shares, tied to key company performance metrics. Stock-settled stock appreciation rights (“SARs”) and restricted stock units (“RSUs”) each represented about one-quarter of the targeted long-term incentive value. Accordingly, all long-term incentive awards were equity-based. The Committee approved adjustments to the NEOs’ annual long-term incentive target values ranging from 0% to +6.8%.

These actions maintained the NEOs’ total compensation at levels approximating market medians, consistent with Applied’s pay philosophy.

Company performance strengthened in 2017, with improved sales and continued operational discipline producing above-plan bottom-line results:


	2017 Actual (1)	2017 Goal	2016 (2)
Sales	$2.59 billion	—	$2.52 billion
Net Income	$133.9 million	$98.2 million	$29.6 million
Earnings Before Interest, Tax, Depreciation, and Amortization (“EBITDA”)	$216.2 million	$202.3 million	$196.7 million
Cash Provided by Operating Activities	$164.6 million	$160.0 million	$161.0 million
After-Tax Return on Assets (“ROA”)	10.2%	7.5%	2.2%

Applied Industrial Technologies, Inc. • 14

(1)

2017 Net Income, Cash Provided by Operating Activities, and ROA were favorably impacted by a $22.2 million tax benefit from a worthless stock tax deduction relating to Applied’s investment in one of its Canadian subsidiaries; the benefit was excluded in determining the achievement of performance goals under the NEOs’ incentive plans.

(2)

2016 Net Income and ROA were negatively impacted by a $64.8 million non-cash goodwill impairment charge ($63.8 million after tax) related to our Canadian and Australian operations, and $8.8 million of restructuring charges primarily related to upstream oil and gas focused operations.

Applied’s 2017 results were above goals that had largely been set to exceed 2016 performance. As a result, the NEOs earned annual incentive pay at an average of 138.6% of their individual target values. Shares banked for 2017 under the three-year performance share programs, described in detail on pages 22-24, are shown below:


Performance Shares Program		Banked Award as % of Target Shares for 2017
2015-2017		0%
2016-2018		60.4%
2017-2019		133.7%

With gains in our stock price and reinvested dividends, shareholders earned a 33% total return in 2017 (following a 17% total return in 2016). The company returned $52.9 million of cash to shareholders through dividends and share repurchases during the year.

We believe that our compensation decisions, as described in this Compensation Discussion and Analysis, reflect a balanced and responsible pay approach. We also value shareholder opinion and, in performing its duties, the Committee considers the outcome of the annual advisory vote to approve the NEOs’ compensation. This vote is intended to provide an overall assessment of our executive compensation program rather than to focus on specific compensation items. We are pleased to have earned the shareholders’ affirmation last year, with 98% of the shares cast voting in favor.

Compensation Practices Highlights

We regularly review evolving best practices in executive compensation. Below are some of the more significant best practices we have adopted and practices we avoid:


What We Do		What We Don’t Do
☑	Pay for performance: in 2017, an average of 69% of the targeted primary compensation for the NEOs (78% for our CEO) was tied to performance.	☒	No payment of dividend equivalents on performance shares until earned.
☑	Committee members meet independence requirements under SEC rules and NYSE listing standards.	☒	No granting of stock options or SARs with an exercise price less than fair market value at grant.
☑	The Committee uses an independent compensation consultant.	☒	No repricing or replacing of underwater stock options or SARs.
☑	Balanced approach to compensation, combining fixed and variable, short-term and long-term, and cash and equity.	☒	No hedging of Applied stock is permitted.
☑	Pay philosophy targets market median compensation among distribution industry companies.	☒	No payment of guaranteed, above-market, or preferential interest or earnings on deferred compensation.
☑	Diverse incentive goals without steep payout cliffs. Equity award vesting periods encourage consistent behavior and reward long-term, sustained performance.	☒	No excise tax gross-up provisions in change in control agreements entered into after 2011, including our CEO’s agreement.
☑	Change in control agreements and equity plan include “double trigger” provisions for cash payment and equity vesting.	☒	No change in control agreements other than those with five executive officers.
☑	Limited perquisites and other benefits.	☒	No defined benefit pension plan, except for a legacy SERP frozen in 2012.
☑	Significant stock ownership guidelines for executive officers and directors.	☒	No excessive risk-taking, based on annual compensation risk assessment.

Applied Industrial Technologies, Inc. • 15

Compensation Philosophy and Objectives

Applied’s primary goal in compensating our executive officers is maximizing long-term shareholder return. In pursuing this goal, we seek to design and to maintain a program that will accomplish the following:

•

Attract and retain qualified and motivated executives by providing compensation that, at target performance, is competitive with a peer group of distribution industry companies,

•

Incent executives to achieve goals, and to take appropriate risks, consistent with Applied’s business strategies, and

•

Reward executives for results they influence that contribute to long-term shareholder value.

Applied is an industrial distributor in a mature market, with many companies offering the same or substantially similar products and services. In this environment, attracting and retaining talented key employees is critical to success. For this reason, while we aim to design the executive compensation program to support the successful execution of our strategy, we also examine our program’s competitiveness with other distributors’ programs. In addition, we consider trends and practices outside the industry to understand best practices and their potential implications for Applied.

Applied believes it is important for executives to focus on both short-term and long-term performance to maximize shareholder return. Accordingly, we provide annual and long-term incentive plans designed to align executives’ interests with shareholders’.

Roles and Responsibilities

Executive Organization & Compensation Committee. The Committee is composed solely of independent directors and is responsible for the executive compensation program’s design and implementation. The Committee’s duties include the following:

•

Setting compensation components and levels for the CEO and the other executive officers,

•

Overseeing Applied’s executive compensation and benefit plans, including approving incentive awards, and

•

Approving incentive plan goals that use performance metrics and evaluating performance to determine whether goals have been achieved.

The Committee routinely receives tally sheets displaying updated data with respect to material components of each executive’s compensation and benefits, and share retention analyses. These help the Committee make decisions with respect to each component in the context of total compensation.

Independent Compensation Consultant. Pay Governance LLC serves as the Committee’s independent compensation consultant, assisting the Committee in the following:

•

Establishing the executive compensation program’s components,

•

Analyzing the program’s competitiveness as well as alignment with the company’s performance,

•

Setting executive officers’ annual target compensation levels, overall and by pay component, and

•

Updating the Committee on prevailing market trends, best practices, and regulatory changes affecting Applied’s executive compensation program.

Pay Governance is engaged by and reports directly to the Committee. The firm’s representative directly interacts with the Committee chair between meetings, participates in meetings, and performs assignments as requested. He also communicates with management to obtain information for completing assignments for the Committee, as well as to understand how the program supports the company’s strategic plans and needs. The firm submits its invoices to the Committee chair for approval and payment by Applied.

Except for a director compensation review project for the Board’s Corporate Governance Committee, Pay Governance performed no other work for Applied during the year and received no other compensation from Applied outside its engagement by the Committee. The Committee concluded, following a review of existing facts and circumstances, including factors specified in the NYSE’s listing standards, that Pay Governance and its representative are independent from Applied’s management and directors.

Management. While the Committee is responsible for the program’s design and implementation, management assists the Committee in several ways.

Applied Industrial Technologies, Inc. • 16

Key executives attend portions of Committee meetings at its invitation. They prepare and present analyses at the Committee’s request, and regularly report on Applied’s performance. Our CEO also reports on the other executive officers’ individual performance and offers recommendations regarding their pay. The Committee sets the executive officers’ pay in executive session without management present.

Management assists the Committee’s consultant by providing compensation data and other input and helping the consultant understand Applied’s organizational structure, business plans, goals, and performance, and the competitive landscape. Management does not have its own executive compensation consultant.

Executive Compensation Program Overview

Structure. The compensation program for executive officers includes the following components:

•

Base salary,

•

Annual incentives,

•

Long-term incentives,

•

Qualified, nonqualified, and welfare plan benefits, and

•

Change in control and termination benefits.

Base salary, annual incentives, and long-term incentives are the primary components. The Committee sets base salaries to be competitive with market medians for similar positions in peer distribution companies. Annual incentive pay rewards the achievement of annual earnings and cash flow goals, and incorporates an assessment of individual performance. Longer-term financial goals (including EBITDA and ROA), stock price appreciation, and executive retention are promoted through long-term incentive awards including performance shares, SARs, and RSUs. Target annual and long-term incentives aim to reflect market median practices of peers in order to deliver total target compensation in line with the medians of distribution peers. Actual incentive pay depends in large part on how Applied performs relative to its target performance goals and how its stock price performs in response. As a result, actual compensation from annual and long-term incentives can vary significantly based on the company’s financial and stock price performance.

Applied’s compensation practices reflect a pay-for-performance philosophy. A majority of the NEOs’ compensation is “at risk” and tied to company-wide performance. Moreover, incentive pay generally makes up a greater share of the overall opportunity for executives in more senior positions.

Applied also believes programs leading to equity ownership help align executives’ interests with shareholders’. However, the long-term incentive program is structured to avoid excessive dilution, with annual share utilization approximating 1% of shares outstanding. The Committee periodically reviews share utilization in relation to market practices.

The Committee generally determines each executive officer’s base salary, annual incentive target compensation (expressed as a percentage of base salary), and long-term incentive target compensation independently from the other primary components of compensation. Nevertheless, the Committee also reviews data regarding total target cash compensation (salary plus annual incentive target compensation) and total target compensation (salary plus annual incentive target compensation plus long-term incentive target compensation) and considers the information contextually, with the company’s pay philosophy and desired pay position, when evaluating each component.

The result is a mix among base salary, annual incentive target compensation, and long-term incentive target compensation, as well as between cash and equity-based incentives, that is competitive with market median practices.

Applied Industrial Technologies, Inc. • 17

The charts below show the percentage allocation of opportunities provided in 2017 to Mr. Schrimsher and the other NEOs in the forms of base salary, annual incentive target opportunity, and long-term incentive target opportunity (awarded in equity-based instruments).

Neil A. Schrimsher

LOGO

Other Officers (Average)

LOGO

Mr. Schrimsher, our CEO, earns higher pay than the other officers, reflecting his role in establishing and achieving the company’s strategic goals, as well as market practices for his role. His overall compensation is, however, weighted more toward incentive pay, particularly long-term incentives. This distinction is appropriate considering his responsibility and influence over Applied’s performance and is typical among companies in the peer group described below.

Competitive Pay Review for 2017. To help evaluate Applied’s executive compensation, the Committee created a peer group of distribution companies, primarily industrial distributors, believing this group reflects the company’s principal market for senior executives. Distributor comparisons provide the Committee insight into executive pay and benefits at companies in similar market environments.

With assistance from Pay Governance, the Committee selected 20 companies with calendar year 2015 sales ranging from $0.8 billion to $7.5 billion, and median sales of $2.9 billion, compared with Applied’s sales of $2.6 billion. Each peer group company disclosed compensation for top officers in SEC filings. Management did not participate in selecting companies.

The 2017 peer group (the “Peer Group”) included the following companies, the same as those in the 2016 peer group:


2017 Peer Group
AAR Corp.	KLX Inc.	Park-Ohio Holdings Corp.
A. M. Castle & Co.	Kaman Corporation	Patterson Companies, Inc.
Airgas, Inc.	LKQ Corporation	ScanSource, Inc.
Anixter International Inc.	MRC Global Inc.	WESCO International, Inc.
DXP Enterprises, Inc.	MSC Industrial Direct Co., Inc.	Watsco, Inc.
Fastenal Company	NOW Inc.	Wesco Aircraft Holdings, Inc.
H&E Equipment Services, Inc.	Olympic Steel, Inc.

Pay Governance then prepared a compensation review and assessment, analyzing the competitiveness of the NEOs’ target compensation relative to comparable Peer Group data. The study identified Peer Group pay for each position at the 25th, 50^th, and 75th percentile levels. The 50th percentile is referred to here as the “market median” and represents Applied’s target pay objective.

Beyond the Peer Group data, Pay Governance presented other pay data from broad multi-industry surveys, produced by leading compensation consulting firms. The Committee requested this supplemental data as a secondary resource to help confirm the reliability of the Peer Group data.

Pay Governance analyzed base salary, annual incentive target compensation, total cash target compensation (base salary plus annual incentive target compensation), long-term incentive target compensation, and total direct target compensation (total cash target compensation plus long-term incentive target compensation).

The study also compared Applied’s financial performance, over one-, three-, and five-year periods, with the Peer Group companies’ performance, considering metrics such as sales growth, EBITDA growth, cash flow growth, EBITDA margin, net income margin, ROA, and total shareholder return. These comparisons assist the Committee in examining how Applied’s executive pay aligns with company performance relative to peers.

Applied Industrial Technologies, Inc. • 18

Using Pay Governance’s study, the Committee evaluated each primary compensation component. In most years, including 2017, the Committee seeks to compensate executives near the market median if Applied’s performance targets are met. Sustained performance below target levels should result in realized total compensation below market medians, and performance that exceeds target levels should result in realized total compensation above market medians.

However, market medians and ranges only represent beginning reference points; the Committee also uses its subjective judgment to adjust targeted compensation to reflect factors such as individual performance and skills, long-term potential, tenure in the position, internal equity, retention considerations, and the position’s importance in Applied’s organization.

Components of Compensation

Base Salary. The Committee observes a general policy that base salaries for executive officers who have been in their positions for at least three years and are meeting performance expectations should be near the market median for comparable positions. As with all pay components, however, the Committee, using its subjective judgment, sets salaries higher or lower to reward individual performance and skills and other considerations such as those mentioned above.

In 2017, after considering the Peer Group data, executive pay trends in the broader market, and the more subjective factors referenced above, the Committee approved small adjustments to three NEOs’ base salaries, with Mr. Schrimsher earning a 3% increase. The Committee’s actions maintained the officers’ competitive pay positions and reflected a discipline of managing base salaries within the framework of Applied’s pay philosophy and competitive data.

Annual Incentives. With the annual Management Incentive Plan, the Committee seeks to reward the executive officers, in cash, for achieving fiscal year goals. In general, the Committee seeks to pay total cash compensation near the market median when Applied meets its performance goals, and to pay above (or below) the median when Applied exceeds (or falls short of) its goals.

At the beginning of the fiscal year, after the Board reviews Applied’s annual business plan as prepared and presented by management, the Committee develops objective performance goals and targets for the Management Incentive Plan. The Committee considers the market outlook and the business plan, along with the available opportunities and attendant risks.

In 2017, consistent with historical practice, the Committee established performance goals based on company-wide performance measures. In addition, the Committee provided that Management Incentive Plan payouts be funded from a maximum aggregate cash bonus pool equal to 2% of EBITDA. EBITDA is calculated from our financial statements by starting with operating income, as shown in the statements of consolidated income, and adding the following items from the statements of consolidated cash flows: depreciation and amortization of property, amortization of intangibles, amortization of stock option and appreciation rights, and goodwill or intangibles impairment (if any). Our 2017 EBITDA was $216.2 million.

The Committee then assigned each executive officer a maximum participation percentage of the bonus pool. The NEOs’ percentages follow: Mr. Schrimsher, 40.6%; Mr. Eisele, 13.4%; Mr. Bauer, 10.0%; Mr. Barlett, 9.8%; and Mr. Loring, 8.4%.

For 2017, consistent with previous years, the Committee adopted goals to distribute the pool funded by Applied’s EBITDA results and tied them to the following company-wide performance measures, which it considers to be key indicators of shareholder value creation:

•

Net Income — bottom-line profitability; and

•

Cash Provided by Operating Activities — a cash-based measure of company performance.

Sixty percent of each executive officer’s Management Incentive Plan payout was determined based on the level of achievement of Net Income and 20% was determined based on the level of achievement of Cash Provided by Operating Activities, as well as each executive officer’s target incentive award value. The Committee sets goals for these performance measures that it believes are attainable, but that require executives to perform at a consistently high level to achieve target award values. The target and maximum incentive objectives for 2017 are shown in the table below:


Net Income (weighted 60%)	Under $83.5 million	$83.5 million	$98.2 million	$117.8 million
% of Prorated Portion of Target Award	0%	50%	100%	200%

Cash Provided by Operating Activities (weighted 20%)	Under $136.0 million	$136.0 million	$160.0 million	$200.0 million
% of Prorated Portion of Target Award	0%	50%	100%	200%

Applied Industrial Technologies, Inc. • 19

The payouts for these components could have ranged from 0% to 200% of the executive officers’ target award values. The Committee established this range, consistent with prior years, after considering Pay Governance’s report on market practices. Payouts for each performance measure are prorated on a straight-line basis for results falling between the threshold 50%, 100%, and maximum 200% payout levels.

The Committee assigned an annual incentive target, expressed as a percentage of salary, to each executive officer. The Committee assigned target percentages for 2017 to approximate market practices, as shown in Pay Governance’s review. The NEOs’ target percentages were maintained at the same levels as 2016. The 2017 targets follow:


Name	Base Salary ($)	Incentive Target (%)	Target Award Value ($)
N. Schrimsher	845,000	105	887,250
M. Eisele	451,500	65	293,475
F. Bauer	398,000	55	218,900
T. Barlett	356,000	60	213,600
K. Loring	335,000	55	184,250

Applied’s reported 2017 Net Income and Cash Provided by Operating Activities were favorably impacted by a $22.2 million tax benefit from a worthless stock tax deduction relating to Applied’s investment in one of its Canadian subsidiaries. Using its discretion, the Committee excluded this benefit from consideration when it evaluated achievement relative to the plan’s goals.

Accordingly, as a result of Applied’s 2017 performance, the Management Incentive Plan payouts for the Net Income and Cash Provided by Operating Activities components were as follows:


Goal	2017 Achievement ($)	Payout as % of Prorated Portion of Target Award
Net Income (weighted 60%)	111.7 million*	168.7%
Cash Provided by Operating Activities (weighted 20%)	151.6 million*	82.5%

Reduced to exclude the impact during the year of a $22.2 million tax benefit.

The remaining 20% component of each executive officer’s plan opportunity was determined based on Applied’s EBITDA, the aggregate size of the bonus pool remaining following deductions for the component payouts described above, the participant’s maximum portion of the bonus pool, and individual performance. After the Committee determined the dollar value of each participant’s maximum payout for this remaining component, the Committee could exercise discretion to reduce (but not increase) this portion of the incentive based on the Committee’s subjective evaluation of the participant’s individual performance during 2017, taking into account individual performance relative to strategic objectives.

After evaluating individual performance, the Committee approved the following payouts for this final component: Mr. Schrimsher, $195,195; Mr. Eisele, $58,695; Mr. Bauer, $43,780; Mr. Barlett, $42,720; and Mr. Loring, $40,535.

Shown below are the NEOs’ total 2017 Management Incentive Plan payouts:


Name		Annual Incentive Payout ($)
N. Schrimsher		1,240,376
M. Eisele		404,409
F. Bauer		301,644
T. Barlett		294,341
K. Loring		257,582

The average NEO payout, as a percentage of the target awards, was 138.6%, reflecting strong performance relative to 2017 goals. Management Incentive Plan payouts in 2016, as a percentage of the target awards, for the same officers averaged 54%.

Long-Term Incentives. The Committee made long-term incentive awards to the executive officers under the 2015 Long-Term Performance Plan. The plan seeks to reward executives for achieving long-term goals and authorizes incentive awards

Applied Industrial Technologies, Inc. • 20

in a variety of forms. The Committee typically makes awards annually, near the beginning of the year, after reviewing the previous fiscal year’s financial results.

As with the other primary compensation components, the Committee sets the awards’ value after reviewing the independent consultant’s target compensation study. In most years, the Committee seeks to provide awards with a targeted value near the market median for equivalent positions, with variation to reward individual performance and skills, as well as to reflect factors such as long-term potential, responsibility, tenure in the position, internal equity, retention considerations, and the position’s importance in Applied’s organization.

The Committee uses long-term incentive awards for purposes of motivation, alignment with long-term company goals, and retention. The Committee intends to pay total long-term compensation near the market median when Applied meets its goals and above when Applied exceeds its goals. If goals are not met, then long-term compensation should fall below the market median.

After considering the Pay Governance’s study and the subjective factors identified above, the Committee increased Mr. Schrimsher’s annual long-term incentive target value by 6.8%. The Committee approved adjustments ranging from 0% to +6.2% for the other NEOs.

Emphasizing operating performance, the Committee awarded the executives’ long-term incentive target value using three vehicles, all stock-settled, in the approximate weightings shown:

2017 Long-Term Incentive Awards

LOGO

The Committee believes this combination appropriately balances the vehicles’ distinct purposes. Reflecting Applied’s culture, the mix differs from the norm for the Peer Group companies, which tend to place greater emphasis on service-based restricted stock. The awards also reflect the Committee’s subjective judgment that long-term incentive earnings should be paid in shares.

In determining numbers of performance shares to be targeted and SARs and RSUs to be awarded, the Committee values Applied’s shares based on data provided by Pay Governance. To reduce the impact of short-term stock price volatility, the valuation methodology uses the average closing share price for 90 calendar days prior to the grant date. The Grants of Plan-Based Awards table on page 30 shows the threshold, target, and maximum payouts for the performance shares, as well as the number of SARs and RSUs awarded to the NEOs.

The following paragraphs describe the awards made to the executive officers in 2017, as well as performance for the year under outstanding performance share programs:

•

Stock Appreciation Rights (25% of Target Long-Term Incentive Value)

The Committee and management believe SARs are strong performance-based vehicles, as the awards’ value depends on Applied’s stock price growth; until Applied performs in a manner that is recognized by the stock market and creates gains for shareholders, SARs have no value to executives. The base stock price is the market closing price on the grant date. SARs have a ten-year term and vest 25% on each of the first four anniversaries of the grant date, subject to continuous employment with Applied, thereby promoting executive retention. In addition, unvested SARs vest on an executive officer’s retirement, but the remaining term for all the outstanding SARs is truncated to three years. The impact of other events on SARs and the other incentive vehicles is discussed in “Potential Payments upon Termination or Change in Control,” beginning on page 35.

Applied Industrial Technologies, Inc. • 21

The Committee intends for SARs to align the interests of management and shareholders in achieving long-term growth in the value of Applied’s stock by using a form of award the value of which is determined primarily by long-term stock price appreciation. The four-year vesting period, ten-year term, and stock-settled nature of the SARs are consistent with this objective. Moreover, SARs are less dilutive than stock options, further protecting shareholder interests.

•

Restricted Stock Units (25% of Target Long-Term Incentive Value)

RSUs are grants valued in shares of Applied stock, but shares are not issued to executives until the grants vest on the third anniversary of the award date, assuming continued employment with Applied. The Committee believes cliff vesting for restricted stock is more demanding than typical market practice, but appropriate considering the nature of the award. The RSUs do vest, albeit pro rata, if an executive retires during the three-year term. Applied pays dividend equivalents on RSUs on a current basis, which rewards management for total returns delivered to shareholders.

The Committee considers RSUs to be a good tool for retaining executives. Because their value will increase or decrease over the three-year vesting period along with Applied’s stock, RSUs also promote efforts to maximize long-term shareholder return.

•

2017-2019 Performance Shares (50% of Target Long-Term Incentive Value)

Performance shares provide incentives to achieve goals over a three-year period. At the beginning of a period, the Committee sets a target number of shares of Applied stock to be paid to each executive at the end of the period, assuming continued employment. The actual payout is then calculated, relative to the target, based on Applied’s achievement of objective performance goals. If an executive retires during the three years, the performance shares vest on a pro rata basis, tied to the period worked and actual performance during that period.

As a new three-year period begins, the Committee reviews the business plan and market outlook for each year of the period. Then, after also considering the independent consultant’s guidance as to market practices, the Committee determines performance measures and goal ranges at which payouts can be earned for each year of the period. The Committee sets goals it believes are attainable without inappropriate risk-taking, but that still require executives to perform on a sustained basis at a consistently high level to achieve the targeted payout.

Payouts can range from 0% to 200% of the target number of shares. The target payout is 100% of the target number assigned to the executive. The Grants of Plan-Based Awards table on page 30 shows the threshold, target, and maximum payouts for performance shares awarded in 2017.

Because the payout is measured in shares, the award’s value depends on both the company’s operating performance and its stock price, motivating executives throughout the performance period with regard to both.

For the 2017-2019 performance shares, consistent with prior years, the Committee set separate goals for each year of the period, with 75% of an award tied to Applied’s EBITDA and 25% to ROA. ROA is calculated by dividing annual net income by average monthly assets for the year. ROA improvements can be achieved by, among other things, increasing sales and margins, as well as improving working capital management, all of which are important objectives for industrial distributors.

The Committee considered these metrics to be appropriate measures of management’s impact on operating performance and efficiency over a three-year period. The metrics also balanced the Management Incentive Plan’s emphasis on bottom-line results and cash flow.

Each participant’s targeted number of shares for the three-year period is divided into one-third for each year. Shares awarded for achievement during a particular year are then “banked” for distribution at the end of the three-year term and do not affect the banking of shares for the other years.

Using individual years’ performance makes achieving maximum awards for the full three-year period more difficult because results exceeding maximum goals in any one year do not make up for shortfalls in other years.

Applied Industrial Technologies, Inc. • 22

The goals for the first year of the performance period, 2017, follow:


EBITDA (weighted 75%)	Under $161.8 million	$161.8 million	$202.3 million	$252.9 million
% of Prorated Portion of Target Share Award for 2017	0%	50%	100%	200%
% Change Compared with 2016 EBITDA	—	(17.7)%	2.8%	28.6%

ROA (weighted 25%)	Under 6.0%	6.0%	7.5%	9.4%
% of Prorated Portion of Target Share Award for 2017	0%	50%	100%	200%
% Change Compared with 2016 ROA	—	172%	241%	327%
% Change Compared with 2016 ROA Prior to Goodwill Impairment Charge and Restructuring Charges	—	(15.5)%	5.6%	32.4%

Banked awards could range from 0% to 200% of the executive officers’ target share award values. The Committee established this range after considering Pay Governance’s guidance as to market practices. Awards for each performance measure were to be prorated on a straight-line proportional basis for results between the threshold 50%, 100%, and maximum 200% payout levels.

As a result of 2017 achievements, the participants banked awards, to be distributed in shares of Applied stock following the end of 2019, as follow:


2017 Goal	Achievement	Banked Award as % of Target Performance Shares for 2017
EBITDA (weighted 75%)	$216.2 million	127.4%
ROA (weighted 25%)	8.5%*	152.6%
		Overall: 133.7%

* Reduced to exclude the impact of a $22.2 million tax benefit.

•

2016-2018 Performance Shares (2017 performance)

As described above, the Committee sets separate goals for each year of a three-year performance share program. So, while 2017 was the first year of the 2017-2019 performance period, it was also the second year of the 2016-2018 performance period and the third year of the 2015-2017 performance period. For the 2016-2018 program, the 2017 goals, adopted in August 2015, follow:


EBITDA (weighted 75%)	Under $208.96 million		$208.96 million		$261.20 million		$326.50 million
% of Prorated Portion of Target Share Award for 2017		0%		50%		100%		200%

ROA (weighted 25%)	Under 7.7%		7.7%		9.6%		12.0%
% of Prorated Portion of Target Share Award for 2017		0%		50%		100%		200%

As a result of 2017 achievements, the participants banked awards, to be distributed in shares of Applied stock following the end of 2018, as follow:


2017 Goal	Achievement	Banked Award as % of Target Performance Shares for 2017
EBITDA (weighted 75%)	$216.2 million	56.9%
ROA (weighted 25%)	8.5%*	71.1%
		Overall: 60.4%

* Reduced to exclude the impact of a $22.2 million tax benefit.

The award banked for the program’s first year, 2016, as a percentage of target performance shares, was 68.8%.

Applied Industrial Technologies, Inc. • 23

•

2015-2017 Performance Shares (2017 performance)

The goals for the final year of the 2015-2017 program, adopted in August 2014, follow:


EBITDA (weighted 75%)	Under $237.28 million		$237.28 million		$296.60 million		$370.75 million
% of Prorated Portion of Target Share Award for 2017		0%		50%		100%		200%

ROA (weighted 25%)	Under 9.0%		9.0%		11.2%		14.0%
% of Prorated Portion of Target Share Award for 2017		0%		50%		100%		200%

With 2017 performance falling short of threshold goals, the participants did not bank awards for 2017. The awards banked for the first two years of the program, as a percentage of target performance shares, were 81.1% in 2015 and 0% in 2016.

Qualified, Nonqualified, and Welfare Plan Benefits. Through the plans described below, we seek to provide benefits comparable to those available at Peer Group and other similarly sized companies. The Committee, with its independent consultant’s assistance, reviews executive-level benefits periodically and compares them with market survey information, considering executives’ positions and years of service.

•

Qualified savings plan

Applied maintains a defined contribution plan with a section 401(k) feature (the Retirement Savings Plan, or “RSP”) for eligible U.S. employees, including the NEOs.

•

Key Executive Restoration Plan and other nonqualified deferred compensation plans

The Committee believes that providing competitive supplemental retirement benefits is important for executive recruitment and retention. Statutory limits exist, however, on the value of benefits executives can receive under the company’s qualified savings plan.

Accordingly, in 2012 the Committee adopted the Key Executive Restoration Plan (the “KERP”), an unfunded, nonqualified deferred compensation plan. To participate in the KERP, an executive must be designated by the Committee or the Board. Applied credits a bookkeeping account for each participant with an amount equal to (i) 6.25% (unless the Committee or the Board specifies a different percentage) of the participant’s base salary and annual actual cash incentive pay for the calendar year, minus (ii) the amount of company contributions credited to the participant under the RSP. Account balances are deemed invested in mutual funds selected by the participant from a menu of diverse investment options. In this way, participants take responsibility for funding their own retirement benefits. Further, because of the use of incentive pay in the KERP formula, company contributions are tied in part to Applied’s annual performance results.

To be eligible for KERP account credits, participants must be employed on the last day of a year or have retired, died, or become disabled during the year. Unless otherwise determined by the Committee or the Board, credits to a participant’s account vest based on years of service with Applied, 25% per year. In addition, a participant will be 100% vested in the event of attainment of age 65, death, disability, or certain separations from service within one year after a change in control (as defined in the KERP).

The Committee has designated each NEO as a KERP participant. The Committee set the account credit percentage for Mr. Schrimsher at 10%. His account fully vested when he reached five years of service in October 2016.

Applied also maintains plans that permit highly compensated U.S. employees to defer receiving portions of base salary and cash incentive awards and to accumulate nonqualified savings. Applied does not contribute to these plans and participants are not provided above-market or guaranteed returns. We describe the plans, along with the KERP, more fully in “Nonqualified Deferred Compensation,” at page 32.

•

Supplemental Executive Retirement Benefits Plan

Applied maintains the Supplemental Executive Retirement Benefits Plan (the “SERP”), a nonqualified defined benefit plan that was frozen in 2012, for executive officers previously designated as participants by the Committee.

Applied Industrial Technologies, Inc. • 24

Messrs. Barlett and Bauer, the only remaining active participants, have historical benefits accrued, which are described in “Pension Plans,” beginning at page 34. Mr. Eisele, who retired in August 2017, also participated.

•

Welfare plans

Applied maintains a health care plan as well as life and disability insurance plans for U.S. employees. Executive officers may also participate in executive life and disability insurance programs.

Applied provides continuation health care coverage, at the active employee premium rate, to executive officers who retire after reaching age 55, with at least ten years of service, for the 18-month period under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”). In addition, when the retiree attains age 65, Applied provides Medicare supplement coverage through a third-party policy. Individuals first elected as executive officers after 2012 are not eligible for these benefits.

Perquisites and Other Personal Benefits. Applied does not offer perquisites such as company automobiles or allowances, financial planning and tax services, or country clubs to the NEOs.

Applied provides executive officers five weeks’ annual vacation per calendar year; other employees get five weeks when they reach 25 years of service. Unused vacation time is forfeited at the end of each calendar year.

Change in Control and Termination Benefits. Upon his hire, Applied and Mr. Schrimsher entered into a CEO-level severance agreement providing termination benefits as described in “Potential Payments upon Termination or Change in Control,” on page 36. Applied does not have employment contracts with the other NEOs, nor does it have an executive severance policy. The Committee retains discretion to determine severance benefits, if any, to be offered to the other NEOs if the company terminates their employment, other than in the circumstance of a change in control.

The company’s only change in control agreements are with five executive officers. These arrangements are designed to retain executives and to promote management continuity if an actual or threatened change in control occurs. The Board approved the agreements primarily because it believes that the executives’ continued attention and dedication to their duties under the adverse circumstances attendant to a change or potential change in control are ultimately in the best interests of Applied and its shareholders.

The agreements provide severance benefits if an executive’s employment is terminated by the officer for “Good Reason” or by Applied “Without Cause” (each as defined in the agreements), if the termination occurs within two years (three years under older agreements entered into with Messrs. Barlett and Bauer) after a change in control. These “double trigger” arrangements are believed to be consistent with typical market practices. The executive, in turn, must not compete with Applied for three years following termination (one year for Messrs. Barlett and Bauer). Change in control agreements entered into after 2011, including those with Messrs. Schrimsher and Loring, do not provide for a gross-up for excise taxes. We describe the agreements more fully on pages 37-38 of this proxy statement.

Stock Ownership and Retention Guidelines

The Committee believes executives should accumulate meaningful equity stakes in Applied to align their economic interests with shareholders’ interests, thereby promoting the objective of increasing shareholder value. Accordingly, we have adopted stock ownership guidelines, requiring that executive officers not dispose of stock unless their “owned” shares’ market value equals or exceeds the following annual base salary multiples immediately after the disposition:


Position		Stock Ownership Guideline
Chief Executive Officer		5x base salary
Other Executive Officers		3x base salary

“Owned” shares, per the guidelines, include those owned outright, those owned beneficially in Applied’s Retirement Savings Plan and other deferred compensation plans, and RSUs, but do not include SARs or performance shares.

The guidelines are not mandatory in the sense that they do not require an executive immediately to acquire shares if his or her ownership is below the applicable guideline.

Until the guideline is achieved, executives must retain net shares received from exercising SARs or the vesting of RSUs or performance shares. “Net shares” are the shares that remain after shares are sold or netted to pay withholding taxes.

Applied Industrial Technologies, Inc. • 25

At June 30, 2017, the value of the NEOs’ holdings (determined as described above) and their guidelines are shown below:


Name	Value of Applied Stock Holdings ($)	Stock Ownership Guideline ($)
N. Schrimsher	5,904,941	4,225,000
M. Eisele	10,819,436	1,354,500
F. Bauer	5,321,822	1,194,000
T. Barlett	1,971,266	1,068,000
K. Loring (hired in July 2014)	544,087	1,005,000

The Committee monitors compliance with the guidelines, interprets them, and must approve exceptions. The Committee also periodically reviews the guidelines and compares them with market data reported by the independent consultant and others.

Consistent with the objectives of the stock ownership guidelines, the company prohibits its insiders from engaging in:

•

Short sales of Applied’s stock;

•

Market transactions in puts, calls, warrants, or other derivative securities based on Applied stock; and

•

Certain hedging or monetization transactions, such as prepaid variable forward contracts, equity swaps, collars, and exchange funds.

Clawback Provisions

Because incentive awards are intended to motivate executives to act in Applied’s best interests, the Committee includes provisions in award terms to claw back compensation under certain circumstances:

•

The Committee may terminate or rescind an award and, if applicable, require an executive to repay cash or shares (and dividends, distributions, and dividend equivalents paid thereon) issued pursuant to the award within the previous 12 months (and proceeds thereof), if the Committee determines that, during the executive’s employment with Applied or during the period ending 12 months following separation from service, the executive competed with Applied or in certain other circumstances engaged in acts inimical to Applied’s interests.

•

The Committee may require an executive to repay cash or shares (and dividends, distributions, and dividend equivalents paid thereon) issued pursuant to an award within the previous 36 months (and proceeds thereof) if (i) Applied restates its historical consolidated financial statements and (ii) the Committee determines that (x) the restatement is a result of the executive’s, or another executive officer’s, willful misconduct that is unethical or illegal, and (y) the executive’s earnings pursuant to the award were based on materially inaccurate financial statements or materially inaccurate performance metrics that were invalidated by the restatement.

Tax Deductibility and Regulatory Considerations

Internal Revenue Code (the “Code”) section 162(m) limits the amount of compensation a publicly held corporation may deduct as a business expense for federal income tax purposes. The limit, which applies to the CEO and the three other most highly compensated executive officers (excluding the CFO), is $1 million per individual per year, subject to certain exceptions. The law provides an exception for performance-based compensation.

In general, the Committee seeks to preserve the tax deductibility of compensation without compromising the Committee’s flexibility in designing an effective, competitive compensation program. Applied has intended for most awards under executive incentive programs to qualify as performance-based compensation.

In making long-term incentive grants, the Committee considers executive retention to be one of the key objectives. Accordingly, the Committee uses RSUs as one of three award vehicles, although RSUs represent only about one-quarter of the target long-term incentive value. RSUs do not qualify as performance-based compensation, but the Committee believes that drawback is outweighed by their beneficial impact on executive retention.

Applied Industrial Technologies, Inc. • 26

Conclusion

The Committee reviews all components of Applied’s executive compensation program. When making a decision regarding any component of an executive officer’s compensation, the Committee takes into consideration the other components.

The Committee believes that the executive officers’ compensation is appropriate and that the program’s components are consistent with market standards. The program takes into account Applied’s performance compared to the Peer Group, and appropriately aligns executive compensation with Applied’s annual and long-term financial results and to long-term financial return to shareholders. The Committee believes the foregoing philosophy is consistent with Applied’s culture and objectives and will continue to serve as a reasonable basis for administering Applied’s total compensation program for the foreseeable future.

Applied Industrial Technologies, Inc. • 27

Summary Compensation Table — Fiscal Years 2017, 2016, and 2015

The following table summarizes information, for the years ended June 30, 2017, 2016, and 2015, regarding the compensation of Applied’s CEO, CFO, and the three other most highly compensated executive officers at June 30, 2017. Mr. Eisele retired in August 2017 but served as CFO for the full fiscal year 2017.


Name and Principal Position	Year		Salary ($)		Stock Awards ($) (1)		Option Awards ($) (1)		Non-Equity Incentive Plan Compensation ($) (2)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (3)	All Other Compensation ($) (4)	Total ($)
Neil A. Schrimsher President & Chief Executive Officer		2017		845,000		1,597,463		619,894	1,240,376	0	166,076		4,468,809
		2016		820,000		1,408,932		446,926	516,600	0	162,481		3,354,939
		2015		820,000		1,465,692		356,636	651,572	0	154,802		3,448,702
Mark O. Eisele Retired Vice President – Chief Financial Officer & Treasurer		2017		451,500		350,187		135,844	404,409	85,974	47,812		1,475,726
		2016		451,500		332,198		104,834	146,738	79,915	46,582		1,161,767
		2015		451,500		395,739		96,054	233,195	393,682	45,692		1,615,862
Fred D. Bauer Vice President – General Counsel & Secretary		2017		398,000		292,615		113,490	301,644	0	49,077		1,154,826
		2016		398,000		263,462		82,764	120,395	227,128	41,448		1,133,197
		2015		388,000		288,256		69,425	163,402	174,094	43,902		1,127,079
Todd A. Barlett Vice President – Acquisitions and Global Business Development		2017		356,000		273,435		105,752	294,341	65,432	39,756		1,134,716
		2016		346,000		252,006		79,316	103,800	19,603	34,907		835,632
		2015		336,000		254,063		61,817	146,842	230,050	33,955		1,062,727
Kurt W. Loring Vice President – Chief Human Resources Officer		2017		335,000		268,648		104,032	257,582	0	31,981		997,243
		2016		325,000		240,550		75,867	98,313	0	28,172		767,902
		2015		293,308		469,839		284,358	135,479	0	11,675		1,194,659

(1)

Amounts represent the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The assumptions used to determine the awards’ grant date fair values are described in the notes to Applied’s consolidated financial statements, included in our annual reports on Form 10-K for those years. The 2017 awards are described in the Compensation Discussion and Analysis at pages 21-23 and the Grants of Plan-Based Awards table at page 30. The amounts reported for 2017 in the Stock Awards column are totals of the following:


Name	RSUs ($)		Performance Shares ($)
N. Schrimsher		510,814	1,086,649
M. Eisele		110,837	239,350
F. Bauer		91,561	201,054
T. Barlett		86,742	186,693
K. Loring		86,742	181,906

Performance shares’ grant date fair values assume performance at the target achievement level. If instead it was assumed that the highest level of performance would be achieved, then the grant date fair values would be twice the amounts reported for the performance shares.

(2)

Amounts shown reflect Management Incentive Plan earnings.

(3)

Messrs. Barlett, Bauer, and Eisele participated in the Supplemental Executive Retirement Benefits Plan, a nonqualified defined benefit plan that was frozen in 2012. The amounts in this column reflect increases in the estimated actuarial present values of their historical accrued benefits. Mr. Barlett is fully vested in his benefits and Mr. Bauer is partially vested; Mr. Eisele was fully vested at the time of his retirement.

The 2017 figure is the difference between the number shown in the Pension Benefits table on page 35 for 2017 year-end and the same item calculated for July 1, 2016. See the notes to that table for information regarding how estimated amounts were calculated. In 2017 the present value of Mr. Bauer’s benefit decreased by $71,487 but, pursuant to SEC rule, the change in value is shown as $0.

Applied Industrial Technologies, Inc. • 28

In 2012, the Committee stopped the accrual of additional plan benefits by virtue of years of service and compensation levels. Accordingly, the values in this column relate to changes in the discount rate and the components of the three-segment interest rate structure, as well as to mortality factor adjustments, as described below.

The SERP uses interest rates and mortality tables imposed on tax-qualified pension plans by Code section 417(e). Values for 2017 reflect a 2.75% discount rate and a three-segment interest rate structure in effect for January 2017, with 2.00% for the first five years, 3.91% for the next 15 years, and 4.66% thereafter.

Values for 2016 reflect a 2.25% discount rate and a three-segment interest rate structure in effect for January 2016, with 1.78% for the first five years, 4.08% for the next 15 years, and 5.02% thereafter. Values for 2015 reflect a 3.00% discount rate and a three-segment interest rate structure in effect for January 2015, with 1.33% for the first five years, 3.46% for the next 15 years, and 4.40% thereafter.

In addition, in each successive year, the mortality table reflected adjustments pursuant to Code section 417(e). Present values were determined assuming no probability of termination, retirement, death, or disability before normal retirement age (age 65).

(4)

Amounts in this column for 2017 are totals of the following:

•

Retirement Savings Plan (section 401(k) plan) matching contributions,

•

KERP account credits,

•

Company contributions for executive life insurance, for a $300,000 benefit, and

•

Estimated values of perquisites and other personal benefits.

Amounts relating to the following perquisites and other personal benefits provided to NEOs are included: the annual expense related to post-retirement health care coverage; and company contributions for officer-level accident insurance benefits. No perquisite or personal benefit exceeded the greater of $25,000 or 10% of the total amount of perquisites and personal benefits in 2017, except that the annual expense incurred relating to Mr. Schrimsher’s post-retirement health care coverage was $26,500.

The following table itemizes “All Other Compensation” for 2017:


Name	Retirement Savings Plan Contributions ($)	Key Executive Restoration Plan Account Credits ($)	Life Insurance Benefits ($)	Perquisites and Other Personal Benefits ($)
N. Schrimsher	7,995	130,945	579	26,557
M. Eisele	8,247	33,415	1,393	4,757
F. Bauer	8,659	28,425	536	11,457
T. Barlett	9,048	24,433	1,718	4,557
K. Loring	8,760	22,771	393	57

Applied Industrial Technologies, Inc. • 29

Grants of Plan-Based Awards—Fiscal Year 2017

In 2017, the Executive Organization & Compensation Committee provided the following incentive opportunities and grants under the 2015 Long-Term Performance Plan to the NEOs:


Name	Grant Date	Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1)						Estimated Future Payouts Under Equity Incentive Plan Awards (2)						All Other Stock Awards: Number of Units (#) (3)		All Other Option Awards: Number of Securities Underlying Options (#)		Base Price of Option Awards ($/Share) (4)		Grant Date Fair Value of Stock and Option Awards ($)
Name	Grant Date	Threshold ($)		Target ($)		Maximum ($)		Threshold (#)		Target (#)		Maximum (#)						Base Price of Option Awards ($/Share) (4)
N. Schrimsher	8/11/2016														10,600						510,814
	8/11/2016																72,100		48.19		619,894
	8/11/2016 (Performance Shares)								11,350		22,700		45,400
	8/11/2016 (Management Incentive Plan)		443,625		887,250		1,774,500
M. Eisele	8/11/2016														2,300						110,837
	8/11/2016																15,800		48.19		135,844
	8/11/2016 (Performance Shares)								2,500		5,000		10,000
	8/11/2016 (Management Incentive Plan)		146,738		293,475		586,950
F. Bauer	8/11/2016														1,900						91,561
	8/11/2016																13,200		48.19		113,490
	8/11/2016 (Performance Shares)								2,100		4,200		8,400
	8/11/2016 (Management Incentive Plan)		109,450		218,900		437,800
T. Barlett	8/11/2016														1,800						86,742
	8/11/2016																12,300		48.19		105,752
	8/11/2016 (Performance Shares)								1,950		3,900		7,800
	8/11/2016 (Management Incentive Plan)		106,800		213,600		427,200
K. Loring	8/11/2016														1,800						86,742
	8/11/2016																12,100		48.19		104,032
	8/11/2016 (Performance Shares)								1,900		3,800		7,600
	8/11/2016 (Management Incentive Plan)		92,125		184,250		368,500

(1)	The 2017 Management Incentive Plan is described in the Compensation Discussion and Analysis at pages 19-20. Payouts under the plan are shown in the column marked “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table.

(2)	The 2017-2019 performance shares program is described in the Compensation Discussion and Analysis at pages 22-23.

(3)	RSUs are described in the Compensation Discussion and Analysis at page 22.

(4)	SARs are described in the Compensation Discussion and Analysis at pages 21-22. Their base price is our stock’s closing price on the NYSE on the grant date.

Applied Industrial Technologies, Inc. • 30

Outstanding Equity Awards at Fiscal 2017 Year-End

The following table presents information regarding the NEOs’ outstanding SARs, RSUs, and performance shares at June 30, 2017.


Name	Option Awards									Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable			Option Exercise Price ($/Share)		Option Expiration Date		Number of Units of Stock That Have Not Vested (#)			Market Value of Units of Stock That Have Not Vested ($)		Equity Incentive Plan Awards: Number of Unearned Shares That Have Not Vested (#)			Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares That Have Not Vested ($)
N. Schrimsher		27,600		0			32.30		10/25/2021
		60,000		0			32.30		10/25/2021
		34,400		0			41.29		8/9/2022
		26,250		8,750	(1)		50.74		8/13/2023
		18,750		18,750	(2)		49.04		8/12/2024
		16,200		48,600	(3)		38.36		8/11/2025
		0		72,100	(4)		48.19		8/11/2026
											9,600	(5)		566,880		5,515	(6)		325,661
											11,700	(7)		690,885		19,250	(8)		1,136,713
											10,600	(9)		625,930		25,250	(10)		1,491,013
M. Eisele (11)		11,500		0			41.29		8/9/2022
		7,875		2,625	(1)		50.74		8/13/2023
		5,050		5,050	(2)		49.04		8/12/2024
		3,800		11,400	(3)		38.36		8/11/2025
		0		15,800	(4)		48.19		8/11/2026
											2,600	(5)		153,530		1,487	(6)		87,807
											2,800	(7)		165,340		4,507	(8)		266,138
											2,300	(9)		135,815		5,562	(10)		328,436
F. Bauer		8,800		0			26.96		8/9/2021
		8,400		0			41.29		8/9/2022
		5,700		1,900	(1)		50.74		8/13/2023
		3,650		3,650	(2)		49.04		8/12/2024
		3,000		9,000	(3)		38.36		8/11/2025
		0		13,200	(4)		48.19		8/11/2026
											1,900	(5)		112,195		1,082	(6)		63,892
											2,200	(7)		129,910		3,589	(8)		211,930
											1,900	(9)		112,195		4,672	(10)		275,882
T. Barlett		7,300		0			29.27		9/3/2020
		6,800		0			26.96		8/9/2021
		6,600		0			41.29		8/9/2022
		4,950		1,650	(1)		50.74		8/13/2023
		3,250		3,250	(2)		49.04		8/12/2024
		2,875		8,625	(3)		38.36		8/11/2025
		0		12,300	(4)		48.19		8/11/2026
											1,700	(5)		100,385		946	(6)		55,861
											2,100	(7)		124,005		3,437	(8)		202,955
											1,800	(9)		106,290		4,338	(10)		256,159
K. Loring		14,950		14,950	(2)		49.04		8/12/2024
		2,750		8,250	(3)		38.36		8/11/2025
		0		12,100	(4)		48.19		8/11/2026
											3,850	(5)		227,343		946	(6)		55,861
											2,000	(7)		118,100		3,285	(8)		193,979
											1,800	(9)		106,290		4,227	(10)		249,604

Applied Industrial Technologies, Inc. • 31

(1)	These SARs vested on August 13, 2017.

(2)	Half of these SARs vested on August 12, 2017. The remaining SARs vest on August 12, 2018.

(3)	One third of these SARs vested on August 11, 2017. The remaining SARs vest in equal increments on August 11, 2018 and 2019.

(4)	One quarter of these SARs vested on August 11, 2017. The remaining SARs vest in equal increments on August 11, 2018, 2019, and 2020.

(5)	These RSUs vested on August 12, 2017 except, for Mr. Loring’s holdings, 2,725 vested on August 12, 2017 and 1,125 vest on August 12, 2018.

(6)	These awards are the 2015-2017 performance shares described in the Compensation Discussion and Analysis at page 24. The performance period ended on June 30, 2017 and performance for the final year was certified on August 10, 2017.

(7)	These RSUs vest on August 11, 2018.

(8)	These awards are the 2016-2018 performance shares described in the Compensation Discussion and Analysis at page 23. The performance period ends on June 30, 2018. The amounts shown include performance shares banked for 2016 and 2017, and targeted for 2018.

(9)	These RSUs vest on August 11, 2019.

(10)	These awards are the 2017-2019 performance shares described in the Compensation Discussion and Analysis at pages 22-23. The performance period ends on June 30, 2019. The amounts shown include performance shares banked for 2017 and targeted for 2018 and 2019.

(11)

Mr. Eisele retired from Applied on August 31, 2017. Pursuant to the award terms, his performance shares and RSUs vested on a prorated basis pegged to the portion of the three-year terms during which he worked (and company performance, in the case of the performance shares), and his unvested SARs vested in full. All of his SARs’ expiration dates accelerated to August 31, 2020.

Option Exercises and Stock Vested—Fiscal Year 2017

The following table shows the value realized in 2017 by the NEOs on the exercise of SARs and the vesting of RSUs and banked performance shares.


	Option Awards		Stock Awards
Name	Number of Shares Acquired on Exercise (#)	Value Realized on Exercise ($)	Number of Shares Acquired on Vesting (#)	Value Realized on Vesting ($)
N. Schrimsher	0	0	16,328	747,659
M. Eisele	65,625	1,633,213	4,935	225,974
F. Bauer	36,700	1,039,143	3,598	164,752
T. Barlett	9,300	369,117	3,044	139,385
K. Loring	0	0	1,125	51,514

Nonqualified Deferred Compensation

Applied maintains three nonqualified, unfunded defined contribution plans for key employees, including executive officers. Eligibility is limited to highly compensated or select management employees whose benefits under the Retirement Savings Plan (“RSP”) are subject to certain Code limitations.

Key Executive Restoration Plan (“KERP”)

The KERP is an unfunded, nonqualified deferred compensation plan adopted in 2012. To participate, an executive must be designated by the Committee or the Board. Applied credits a bookkeeping account for each participant with an amount equal to (i) 6.25% (unless the Committee or the Board specifies a different percentage) of the participant’s base salary and annual actual cash incentive pay minus (ii) the amount of company contributions credited to the participant under the RSP for the calendar year.

To be eligible for KERP account credits, participants must elect to make 401(k) contributions under the RSP of either 6% of compensation or the contribution limit applicable under the Code and must be employed on the last day of a year or have retired, died, or become disabled during the year. Unless otherwise determined by the Committee or the Board, credits to a participant’s account vest based on years of service with Applied, 25% per year. In addition, a participant will be 100% vested in the event of attainment of age 65, death, disability, or certain separations from service within one year after a change in control (as defined in the KERP).

Account balances are deemed invested in mutual funds selected by the participant from a menu of diverse investment options.

Applied Industrial Technologies, Inc. • 32

The Committee has designated each NEO as a participant. The Committee set the account credit percentage for Mr. Schrimsher at 10%. His account fully vested when he reached five years of service in October 2016.

Supplemental Defined Contribution Plan

The Supplemental Defined Contribution Plan permits highly compensated employees to defer a portion of their compensation that cannot be deferred under the RSP due to Code limitations.

Participants are always vested in their Supplemental Defined Contribution Plan deferrals and have a menu of diverse investment options. Applied does not contribute to the plan.

Participants may receive distributions in a lump sum or in installments, as specified in the deferral election form. Acceleration of distributions is prohibited and a distribution change must comply with Code section 409A. Other than a date specified in a deferral election form, the plan only permits withdrawals, while employed, due to an unforeseeable emergency as allowed under section 409A.

Four NEOs have plan accounts. Mr. Schrimsher made deferrals into the plan in 2017.

Deferred Compensation Plan

The Deferred Compensation Plan permits executive officers to defer a portion or all of the awards payable under an annual incentive plan or performance shares program. The plan’s purpose is to promote increased efforts on Applied’s behalf through increased investment in Applied stock.

The plan provides each Management Incentive Plan participant the opportunity to defer payment of his or her cash award. A participant who makes a deferral may have the amounts deemed invested in Applied stock and/or in a money market fund.

Participants may receive distributions in a lump sum or in installments, as specified in a deferral election form. Acceleration of distributions is prohibited and a distribution change must comply with Code section 409A. Other than a date specified in a deferral election form, the plan only permits withdrawals, while employed, due to an unforeseeable emergency under section 409A.

Although no NEO deferred pay into the Deferred Compensation Plan in 2017, Messrs. Barlett and Eisele have plan accounts due to past deferrals.

Applied Industrial Technologies, Inc. • 33

Nonqualified Deferred Compensation — Fiscal Year 2017

The following table presents contributions, earnings, distributions, and balance information for the NEOs’ Deferred Compensation Plan, Key Executive Restoration Plan, and Supplemental Defined Contribution Plan accounts for 2017.


Name and Plan	Executive Contributions in Last FY ($)		Registrant Contributions in Last FY ($) (1)		Aggregate Earnings (Losses) in Last FY ($)		Aggregate Withdrawals/ Distributions ($)		Aggregate Balance at Last FYE ($)
N. Schrimsher
Key Executive Restoration Plan		0		119,699		102,862		0		802,960
Supplemental Defined Contribution Plan		207,632		0		197,705		0		1,499,098
M. Eisele
Deferred Compensation Plan		0		0		114,326		0		456,293
Key Executive Restoration Plan		0		31,377		2,645		0		157,117
Supplemental Defined Contribution Plan		0		0		135,278		0		1,077,657
F. Bauer
Key Executive Restoration Plan		0		26,691		18,925		0		144,858
Supplemental Defined Contribution Plan		0		0		27,731		0		212,755
T. Barlett
Deferred Compensation Plan		0		0		147,827		49,958		585,001
Key Executive Restoration Plan		0		23,859		5,947		0		101,203
Supplemental Defined Contribution Plan		0		0		4,899		0		315,779
K. Loring
Key Executive Restoration Plan		0		21,936		7,775		0		64,065

(1)

Key Executive Restoration Plan credits are shown net of withholding for certain taxes. The gross amounts are shown as a component of “All Other Compensation” in note (4) to the Summary Compensation Table on page 28.

Pension Plans

The SERP, a nonqualified defined benefit plan, provides supplemental retirement benefits to designated executive officers. In 2012, the Committee froze participation in the SERP and stopped the accrual of additional plan benefits (by virtue of years of service and compensation levels) for existing participants. Messrs. Barlett and Bauer are the only remaining active participants. Mr. Eisele was a participant and retired in August 2017.

The SERP’s principal features follow:

Retirement Benefits. Except as described below, the annual normal retirement benefit, calculated in a single life annuity form, is 45% of a participant’s average base salary and annual incentive pay for the highest three calendar years during the last 10 calendar years of service prior to calendar 2012. To receive a normal retirement benefit, a participant must separate from service at or after age 65, with at least five years’ service as an executive officer. To receive an early retirement benefit prior to attainment of age 65, a participant must separate from service after reaching age 55 and completing at least 10 years’ service with Applied, of which at least five were as an executive officer; each participant has the requisite years of service. Mr. Barlett is eligible for early retirement but Mr. Bauer is 51 years old and, therefore, not yet eligible.

Normal and early retirement benefits are reduced by 5% for each year that a participant’s years of service are less than 20. In addition, early retirement benefits are reduced by 5% for each year that the commencement of benefits precedes age 65.

Disability Benefits. If a participant with at least five years of service as an executive officer becomes disabled, as defined in regulations under Code section 409A, the participant will receive a monthly SERP disability benefit until the earlier of age 65 or death. The monthly benefit, when added to other long-term disability benefits under Applied programs, will equal 1/12th of 60% of the average of the participant’s highest three calendar years of total compensation (base salary plus annual incentive pay) during the last 10 calendar years of service with Applied.

Applied Industrial Technologies, Inc. • 34

Deferred Vested Benefits. Deferred vested benefits will be paid at age 65 to a participant who separates from service for reasons other than cause or disability prior to attainment of age 55 with at least 10 years’ service, of which at least five were as an executive officer. The benefits will equal 25% of the participant’s accrued normal retirement benefit at the time of separation.

Payment Forms. Normal and early retirement benefits are paid as designated by the participant pursuant to Code section 409A. The active participants have elected to receive substantially equal annual installments for either three or five years. Deferred vested benefits are payable in three substantially equal annual installments following attainment of age 65.

Death Benefits. If a participant dies before receiving a SERP benefit, the participant’s designated beneficiary will receive the present value of the participant’s accrued benefit in a lump sum or installments, as the participant elects in advance.

Change in Control. If a SERP participant incurs a separation from service effected either by Applied without “cause” or by the participant for “good reason” within two years after a change in control, or is receiving, or is eligible to receive, a retirement benefit when the change in control occurs, the participant is entitled to receive the actuarial equivalent of the benefit in a lump sum. In addition, if such a separation follows a change in control, a participant under age 55 will be credited with additional years of age for benefit calculation purposes equal to the difference between the participant’s age and 55.

Noncompetition. Except if a change in control occurs, payment of SERP benefits is conditioned on the participant not competing with Applied.

Pension Benefits — Fiscal 2017 Year-End

The following table shows the present value of accumulated benefits payable to the NEOs and their years of credited service under the SERP.


Name	Plan Name	Number of Years Credited Service (#) (1)	Present Value of Accumulated Benefit ($) (2) (3)	Payments during Last Fiscal Year ($)
N. Schrimsher	—	—	—	—
M. Eisele (4)	SERP	20.6	4,748,800	0
F. Bauer	SERP	19.3	2,798,299	0
T. Barlett	SERP	36.2	2,673,963	0
K. Loring	—	—	—	—

(1)

In 2012, the Committee stopped the accrual of additional plan benefits by virtue of years of service and compensation levels.

(2)

This figure reflects the estimated present value of the annual pension benefit accrued through June 30, 2017, and payable at age 65. The plan’s actuary used the following key assumptions to determine the present values:

•

A discount rate of 2.75%, the FASB ASC 715 discount rate as of June 30, 2017,

•

The Code section 417(e) 2017 Optional Combined Unisex Mortality Table and a three-segment interest rate structure in effect for January 2017 with 2.00% for the first five years, 3.91% for the next 15 years, and 4.66% thereafter, and

•

No probability of termination, retirement, death, or disability before normal retirement age.

Actual payments after retirement are determined based on the Code section 417(e) interest rate and mortality table in effect at that time, along with the participant’s age.

(3)

SERP benefits are not subject to deductions for Social Security benefits or other material offset amounts. Mr. Barlett is fully vested in his benefits. Mr. Bauer is under 55 years of age but eligible for deferred vested benefits. Mr. Eisele was fully vested at the time of his retirement.

(4)

Mr. Eisele retired in August 2017. Subject to compliance with the SERP, Mr. Eisele will receive his benefit in three installments beginning in March 2018.

Potential Payments upon Termination or Change in Control

The summaries and tables in this section describe compensation and benefits that would have been payable to the NEOs at June 30, 2017, if, as of that date, there had occurred

•

A termination of the executive’s employment with Applied prior to a change in control,

•

A termination of employment due to death, disability, or retirement,

Applied Industrial Technologies, Inc. • 35

•

A change in control of Applied, or

•

A termination of employment following a change in control.

Compensation and benefits earned or accrued prior to the event, and not contingent on the event’s occurrence, are not included in the summaries or tables.

Payments in the Event of a Termination

Except for Mr. Schrimsher, Applied does not have a formal severance arrangement that provides payments to the NEOs if termination of employment occurs (other than in the circumstance of a change in control or by reason of death, disability, or retirement). The Board of Directors and its Executive Organization & Compensation Committee retain discretion to determine severance benefits, if any, to be offered.

Upon his hire, Applied and Mr. Schrimsher entered into an executive severance agreement providing that, if his service with Applied were terminated within a year of the agreement effective date by Applied “without cause” or by him “for good cause,” he would be entitled to severance in an amount equal to his base salary plus target annual incentive pay for a period running from his termination date to the second anniversary of the agreement effective date. He would not, however, be entitled to payment under the executive severance agreement if he received payment under his change in control agreement. The executive severance agreement automatically renews annually (as it did in October 2016) unless Applied elects not to renew it prior to expiration of the then-current term.

Regardless of reason, if an NEO’s employment terminates (other than in the circumstance of a change in control or by reason of death, disability or retirement) prior to the end of a vesting or performance period, then the following shall occur:

•

Awards under an annual cash incentive plan are forfeited, except as noted above under Mr. Schrimsher’s executive severance agreement.

•

Performance shares, RSUs, and unvested SARs are forfeited.

•

Unvested KERP account balances are forfeited.

•

Accrued SERP benefits are forfeited if the participant separates from service prior to becoming eligible for normal, early, or deferred vested retirement benefits.

•

The accrual of other compensation and benefits under Applied’s qualified and nonqualified benefit plans will cease.

Payments in the Event of Death, Disability, or Retirement

If an NEO’s employment terminates by reason of death, disability, or retirement (other than following a change in control), then the following shall occur:

•

Awards under an annual cash incentive plan are payable pro rata at the end of the performance period based on the portion of the period during which the executive worked and the actual achievement of performance targets.

•

Performance shares are payable at the end of the performance period based on the portion of the period during which the executive worked and tied to actual performance.

•

RSUs are payable pro rata, pegged to the portion of the three-year term during which the executive worked.

•

SARs that have not yet vested will vest, but the term for all the outstanding SARs is truncated to three years.

•

Unvested KERP account balances vest in the event of death, disability, or attainment of age 65. Accounts are also credited for the portion of the calendar year worked in the event of death, disability, or retirement after attaining age 55 with at least ten years of service.

•

SERP benefits payable on death, separation from service, or termination due to disability are more fully described in “Pension Plans.”

•

Upon retirement after attaining age 55 with at least ten years of service or termination due to disability after reaching age 55, Applied provides continuation health care coverage, at the active employee premium rate, for the 18-month COBRA period. In addition, when the retiree attains age 65, Applied provides Medicare supplement coverage through a third-party policy. Individuals first elected as executive officers after 2012 are not eligible for these benefits.

•

The accrual of other compensation and benefits under Applied’s qualified and nonqualified benefit plans will cease.

Applied Industrial Technologies, Inc. • 36

Payments in the Event of a Change in Control

Change in Control Agreements. The company’s only change in control agreements are with five executive officers. Agreements entered into after 2011 include more restrictive terms.

The agreements obligate Applied to provide severance benefits to an executive officer who incurs a separation from service effected either by the officer for “good reason” or by Applied “without cause” if the separation occurs within two years (three years in older agreements entered into with Messrs. Barlett and Bauer) after a change in control. The executive officer, in turn, is required not to compete with Applied for three years following the separation (one year for Messrs. Barlett and Bauer) and to hold in confidence Applied confidential information and trade secrets.

No compensation or benefits are payable under a change in control agreement on termination of the executive’s employment prior to a change in control, or following a change in control if the executive’s employment is terminated by Applied for cause or by reason of death, disability, or retirement.

The compensation and principal benefits to be provided under the outstanding agreements with the NEOs follow:

•

A lump sum severance payment equal to three times (one and one-half times for Mr. Loring) the aggregate amount of the executive’s annual base salary and target annual incentive pay, reduced proportionately if the officer would reach age 65 within three years after termination (Mr. Schrimsher’s agreement also entitles him to a prorated target annual incentive payment for the year in which termination occurs),

•

A cash payment for vested, unexercised SARs, equal to the difference between the exercise price and the higher of (i) the mean of the high and low trading prices on the NYSE on the termination date, and (ii) the highest price paid for Applied common stock in connection with the change in control,

•

Continued participation in Applied’s employee benefit plans, programs, and arrangements, or equivalent benefits for three years (one and one-half years for Mr. Loring) after termination at the levels in effect immediately before termination,

•

Outplacement services, and

•

In the older agreements, with Messrs. Barlett and Bauer, an additional payment in an amount sufficient, after payment of taxes on the additional payment, to pay any required “parachute” excise tax. This gross-up is not included in agreements entered into subsequent to 2011, including those with Messrs. Schrimsher and Loring; instead, these agreements provide that if the executive’s change in control payment would be subject to the excise tax, then the payment will be reduced as necessary to avoid application of the excise tax.

“Change in control” is generally defined as follows:

•

A merger of Applied with another entity or a sale of substantially all of Applied’s assets to a third party, following which Applied’s shareholders prior to the transaction hold less than a majority of the combined voting power of the merged entities or asset acquirer,

•

Acquisition of beneficial ownership by a person of 30% or more (20% or more in the agreements with Messrs. Barlett and Bauer) of Applied’s then-outstanding common stock, or

•

One half or more (one quarter or more in the agreements with Messrs. Barlett and Bauer) of the members of the Board of Directors being persons other than (i) directors who were in office on the agreement date, or (ii) directors who are elected after such date and whose nomination or election is approved by two-thirds of directors then in office or their successors approved by that proportion.

“Good reason” means the following:

•

Diminution of position or assigned duties, excluding an isolated, insubstantial, and inadvertent action not taken in bad faith,

•

Reduction of compensation, incentive compensation potential, or benefits following a change in control, other than an isolated, insubstantial, and inadvertent failure not occurring in bad faith,

•

Applied requiring the executive to change principal place of employment or to travel to a greater extent than required immediately prior to a change in control, or

•

Failure of a successor to Applied to assume Applied’s obligations under the agreement.

Applied Industrial Technologies, Inc. • 37

Applied may modify or terminate its obligations under the agreements prior to a change in control so long as the modification or termination is not made in anticipation of or in connection with a change in control.

2015 Long-Term Performance Plan. The 2015 Long-Term Performance Plan provides that if an executive officer incurs a separation from service effected either by Applied without “cause” or by the officer for “good reason” (as each term is defined in the plan) within one year following a change in control, then unvested SARs become exercisable and awards under a cash incentive plan become earned at the target amount. In addition, under the same circumstances, pursuant to the award terms and conditions, RSUs will vest in full, and performance shares will be payable at the target amount on a pro rata basis pegged to the timing of the separation in the three-year performance period.

Key Executive Restoration Plan. If a KERP participant incurs a separation from service effected either by Applied without “cause” or by the participant for “good reason” within one year after a change in control, unvested balances in the participant’s account will vest.

Supplemental Executive Retirement Benefits Plan. If a SERP participant incurs a separation from service effected either by Applied without “cause” or by the participant for “good reason” within two years after a change in control, or is receiving, or is eligible to receive, a retirement benefit when the change in control occurs, the participant is entitled to receive the benefit’s actuarial equivalent in a lump sum. In addition, if such a separation occurs following a change in control, a participant under age 55 will be credited with additional years of age equal to the difference between the participant’s age and 55.

Quantitative Disclosure. The following tables assume a termination or change in control occurred on June 30, 2017, the last day of our fiscal year, and Applied’s stock price for all calculations is $59.05, the closing price on the NYSE on that date. The tables include amounts earned through that time and estimates of amounts that would be paid on the occurrence of the events shown. The actual amounts can be determined only at the time of the event. The amounts shown do not include benefits and payments that are generally available to salaried employees on a nondiscriminatory basis. Also, as noted above, compensation and benefits earned by an executive prior to an event, and not contingent on the event’s occurrence, are not reflected in the tables.

Applied Industrial Technologies, Inc. • 38

Neil A. Schrimsher, President & Chief Executive Officer


Benefits and Payments	Termination (No Change in Control) ($)		Normal Retirement ($) (1)	Early Retirement ($) (2)	Termination for Cause Following Change in Control ($)	Termination Without Cause or for Good Reason Following Change in Control ($)		Change in Control (No Termination) ($)	Death ($)		Termination due to Disability ($)
Base Salary		1,099,658	0	0	0		2,535,000	0		0		0
Management Incentive Plan		1,154,641	0	0	0		2,661,750	0		0		0
Performance Shares		0	0	0	0		1,563,762	0		1,563,762		1,563,762
SARs		0	0	0	0		2,048,940	0		2,048,940		2,048,940
RSUs		0	0	0	0		1,883,695	0		1,177,167		1,177,167
KERP (3)		0	0	0	0		0	0		65,473		65,473
Health Care and Welfare Benefits (4)		0	0	0	0		57,267	0		0		0
Life/Disability Insurance Proceeds (5)		0	0	0	0		0	0		300,000			*
Outplacement Services		0	0	0	0		20,000	0		0		0
*Total*		2,254,299	0	0	0		10,770,414	0		5,155,342		4,855,342	*

(1)	“Normal retirement” under Applied’s plans is separation from service after attainment of age 65. Mr. Schrimsher is age 53 and therefore ineligible for normal retirement.

(2)	Mr. Schrimsher is ineligible for “early retirement” under Applied’s plans because he is only age 53 and has less than 10 years of service; early retirement is defined as separation from service after attainment of age 55 with at least 10 years of service, five of which are as an executive officer.

(3)	KERP estimates are based on value of company account credits for preceding calendar year.

(4)	Includes health care benefits and accidental death and dismemberment insurance.

(5)	Proceeds are payable from third-party insurance policies.

Applied Industrial Technologies, Inc. • 39

Mark O. Eisele, Retired Vice President — Chief Financial Officer & Treasurer


Benefits and Payments	Termination (No Change in Control) ($)	Normal Retirement ($) (1)	Early Retirement ($) (2)		Termination for Cause Following Change in Control ($)	Termination Without Cause or for Good Reason Following Change in Control ($)		Change in Control (No Termination) ($)		Death ($)		Termination due to Disability ($)
Base Salary	0	0		0	0		1,354,500		0		0		0
Management Incentive Plan	0	0		0	0		880,425		0		0		0
Performance Shares	0	0		369,476	0		369,476		0		369,476		369,476
SARs	0	0		479,818	0		479,818		0		479,818		479,818
RSUs	0	0		294,961	0		454,685		0		294,961		294,961
KERP (3)	0	0		16,708	0		0		0		16,708		16,708
SERP (4)	0	0		0	0		0		0		0		467,072	*
Welfare Benefits (5)	0	0		0	0		135		0		0		0
Life/Disability Insurance Proceeds (6)	0	0		0	0		0		0		300,000			*
Outplacement Services	0	0		0	0		20,000		0				0
Excise Tax Gross-Up	0	0		0	0		0		0				0
*Total*	0	0		1,160,963	0		3,559,039		0		1,460,963		1,628,035	*

(1)	“Normal retirement” under Applied’s plans is separation from service after attainment of age 65. Mr. Eisele is age 60 and was therefore ineligible for normal retirement.

(2)	“Early retirement” is defined as separation from service after attainment of age 55 with at least 10 years of service, five of which are as an executive officer. In August 2017, Mr. Eisele retired early from Applied.

(3)	KERP estimates are based on value of company account credits for preceding calendar year.

(4)

In determining the value of SERP disability benefits, the RP-2014 disability table for males without collar adjustment, with fully generational mortality improvement projection using scale MP-2014, is used for post-retirement mortality. A 2.75% interest rate is used for temporary annuity payments under the disability benefit provisions.

(5)	Includes accidental death and dismemberment insurance.

(6)	Proceeds are payable from third-party insurance policies and the SERP.

Applied’s supplemental long-term disability (“LTD”) insurance, with premiums paid by the executive, provides a monthly disability benefit equal to 60% of monthly total compensation (monthly base salary plus the average of the three most recent years’ annual incentive compensation divided by 12), minus the basic plan benefit of 60% of base salary, up to an additional $3,000 per month benefit. The aggregate maximum monthly LTD benefit, under the basic and supplemental programs, is $21,000. In addition, the SERP provides a monthly disability benefit to participants, which, when added to amounts payable under the basic and supplemental LTD programs, equals 1/12^th of 60% of the average of the highest three of the last 10 calendar years of total compensation (base salary plus annual incentive).

Applied Industrial Technologies, Inc. • 40

Fred D. Bauer, Vice President — General Counsel & Secretary


Benefits and Payments	Termination (No Change in Control) ($)	Normal Retirement ($) (1)	Early Retirement ($) (2)	Termination for Cause Following Change in Control ($)	Termination Without Cause or for Good Reason Following Change in Control ($)		Change in Control (No Termination) ($)	Death ($)	Termination due to Disability ($)
Base Salary	0	0	0	0		1,194,000	0	0		0
Management Incentive Plan	0	0	0	0		656,700	0	0		0
Performance Shares	0	0	0	0		293,892	0	293,892		293,892
SARs	0	0	0	0		381,887	0	381,887		381,887
RSUs	0	0	0	0		354,300	0	225,171		225,171
KERP (3)	0	0	0	0		0	0	14,213		14,213
SERP (4)	0	0	0	0		1,430,385	0	1,357,774		2,818,188	*
Health Care and Welfare Benefits (5)	0	0	0	0		45,495	0	0		0
Life/Disability Insurance Proceeds (6)	0	0	0	0		0	0	300,000			*
Outplacement Services	0	0	0	0		20,000	0	0		0
Excise Tax Gross-Up	0	0	0	0		0	0	0		0
*Total*	0	0	0	0		4,376,659	0	2,572,937		3,733,351	*

(1)	“Normal retirement” under Applied’s plans is separation from service after attainment of age 65. Mr. Bauer is age 51 and therefore ineligible for normal retirement.

(2)	Mr. Bauer is ineligible for “early retirement” under Applied’s plans because he is only age 51; early retirement is defined as separation from service after attainment of age 55 with at least 10 years of service, five of which are as an executive officer.

(3)	KERP estimates are based on value of company account credits for preceding calendar year.

(4)

Calculation of post-termination SERP benefits assumes the executive would receive benefits in the installment payment form at the earliest date he would be eligible. To calculate the estimated present value of the installments, a 2.75% discount rate and the three-segment interest rate structure in effect for January 2017 under Code section 417(e), with 2.00% for the first five years, 3.91% for the next 15 years, and 4.66% thereafter, is used. In determining the value of SERP disability benefits, the RP-2014 disability table for males without collar adjustment, with fully generational mortality improvement projection using scale MP-2014, is used for post-retirement mortality. A 2.75% interest rate is used for temporary annuity payments under the disability benefit provisions.

(5)	Includes health care benefits and accidental death and dismemberment insurance.

(6)	Proceeds are payable from third-party insurance policies and the SERP.

Applied’s supplemental long-term disability (“LTD”) insurance, with premiums paid by the executive, provides a monthly disability benefit equal to 60% of monthly total compensation (monthly base salary plus the average of the three most recent years’ annual incentive compensation divided by 12), minus the basic plan benefit of 60% of base salary, up to an additional $3,000 per month benefit. The aggregate maximum monthly LTD benefit, under the basic and supplemental programs, is $21,000. In addition, the SERP provides a monthly disability benefit to participants, which, when added to amounts payable under the basic and supplemental LTD programs, equals 1/12th of 60% of the average of the highest three of the last 10 calendar years of total compensation (base salary plus annual incentive).

Applied Industrial Technologies, Inc. • 41

Todd A. Barlett, Vice President — Acquisitions and Global Business Development


Benefits and Payments	Termination (No Change in Control) ($)	Normal Retirement ($) (1)	Early Retirement ($) (2)		Termination for Cause Following Change in Control ($)	Termination Without Cause or for Good Reason Following Change in Control ($)		Change in Control (No Termination) ($)	Death ($)	Termination due to Disability ($)
Base Salary	0	0		0	0		1,068,000	0	0		0
Management Incentive Plan	0	0		0	0		640,800	0	0		0
Performance Shares	0	0		272,870	0		272,870	0	272,870		272,870
SARs	0	0		358,273	0		358,273	0	358,273		358,273
RSUs	0	0		208,175	0		330,680	0	208,175		208,175
KERP (3)	0	0		12,217	0		0	0	12,217		12,217
SERP (4)	0	0		0	0		0	0	0		51,233	*
Welfare Benefits (5)	0	0		0	0		135	0	0		0
Life/Disability Insurance Proceeds (6)	0	0		0	0		0	0	300,000			*
Outplacement Services	0	0		0	0		20,000	0	0		0
Excise Tax Gross-Up	0	0		0	0		0	0	0		0
*Total*	0	0		851,535	0		2,690,758	0	1,151,535		902,768	*

(1)	“Normal retirement” under Applied’s plans is separation from service after attainment of age 65. Mr. Barlett is age 62 and therefore ineligible for normal retirement.

(2)	“Early retirement” is defined as separation from service after attainment of age 55 with at least 10 years of service, five of which are as an executive officer.

(3)	KERP estimates are based on value of company account credits for preceding calendar year.

(4)

(5)	Includes accidental death and dismemberment insurance.

(6)	Proceeds are payable from third-party insurance policies and the SERP.

Applied’s supplemental long-term disability (“LTD”) insurance, with premiums paid by the executive, provides a monthly disability benefit equal to 60% of monthly total compensation (monthly base salary plus the average of the three most recent years’ annual incentive compensation divided by 12), minus the basic plan benefit of 60% of base salary, up to an additional $3,000 per month benefit. The aggregate maximum monthly LTD benefit, under the basic and supplemental programs, is $21,000. In addition, the SERP provides a monthly disability benefit to participants, which, when added to amounts payable under the basic and supplemental LTD programs, equals 1/12th of 60% of the average of the highest three of the last 10 calendar years of total compensation (base salary plus annual incentive).

Applied Industrial Technologies, Inc. • 42

Kurt W. Loring, Vice President — Chief Human Resources Officer


Benefits and Payments	Termination (No Change in Control) ($)	Normal Retirement ($) (1)	Early Retirement ($) (2)	Termination for Cause Following Change in Control ($)	Termination Without Cause or for Good Reason Following Change in Control ($)		Change in Control (No Termination) ($)	Death ($)	Termination due to Disability ($)
Base Salary	0	0	0	0		502,500	0	0		0
Management Incentive Plan	0	0	0	0		276,375	0	0		0
Performance Shares	0	0	0	0		265,194	0	265,194		265,194
SARs	0	0	0	0		451,748	0	451,748		451,748
RSUs	0	0	0	0		451,733	0	311,686		311,686
KERP (3)	0	0	0	0		43,418	0	43,418		43,418
Welfare Benefits (4)	0	0	0	0		22,748	0	0		0
Life/Disability Insurance Proceeds (5)	0	0	0	0		0	0	300,000			*
Outplacement Services	0	0	0	0		20,000	0	0		0
*Total*	0	0	0	0		2,033,716	0	1,372,046		1,072,046	*

(1)	“Normal retirement” under Applied’s plans is separation from service after attainment of age 65. Mr. Loring is age 48 and therefore ineligible for normal retirement.

(2)	Mr. Loring is ineligible for “early retirement” under Applied’s plans because he is only age 48; early retirement is defined as separation from service after attainment of age 55 with at least 10 years of service, five of which are as an executive officer.

(3)	KERP estimates for death and disability columns include current year component based on value of company account credits for preceding calendar year.

(4)	Includes health care benefits and accidental death and dismemberment insurance.

(5)	Proceeds are payable from third-party insurance policies.

Applied Industrial Technologies, Inc. • 43

COMPENSATION COMMITTEE REPORT

The Executive Organization & Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis included in this proxy statement. Based on the review and discussions, the committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and the annual report on Form 10-K for the fiscal year ended June 30, 2017.

EXECUTIVE ORGANIZATION &

COMPENSATION COMMITTEE

Peter A. Dorsman, Chair

Vincent K. Petrella

Peter C. Wallace

ITEM 2 — ADVISORY (NONBINDING) VOTE TO APPROVE EXECUTIVE COMPENSATION

We believe our corporate governance policies, including our executive compensation program, should be responsive to shareholder concerns. This belief is reflected in a nonbinding, advisory vote that provides shareholders the opportunity to approve the NEOs’ compensation as disclosed in our proxy statement, including, among other things, our executive compensation objectives, policies, and practices. We hold this vote annually, which was our shareholders’ preference as expressed at the 2011 annual meeting.

The vote is intended to solicit an overall assessment of our executive compensation program rather than to focus on specific compensation items. The Board of Directors and its Executive Organization & Compensation Committee value shareholder opinion and take the vote’s outcome into account when considering executive compensation arrangements. However, because the vote is advisory, it will not directly affect existing compensation awards. We are pleased to have earned the shareholders’ approval in 2016, with 98% of the shares cast voting in favor, indicating strong support for our program.

As discussed in the “Compensation Discussion and Analysis” section, above, Applied’s executive compensation program aims to attract, retain, and motivate executives to maximize long-term shareholder return. The program uses a variety of elements including base salary, annual incentives, and long-term incentives in the form of performance shares to reward sustained financial results, SARs to reward stock price appreciation, and RSUs tied to service to help retain executives. Overall, the company targets pay to be in the range of market median levels.

In voting on our compensation program, please consider the following:

Our program has a pay-for-performance orientation.

•

The program aims to pay above median levels only for results that exceed target goals or because of growth in Applied’s stock price.

•

Compensation tied to incentives made up a majority of the NEOs’ targeted pay in 2017.

•

Approximately half of the value of long-term incentives awarded to NEOs in 2017 is tied to achievement of performance goals.

•

Incentive pay tied to financial results can range from 0% to 200% of target award levels, to motivate executives to exceed target goals and to penalize them for falling short.

•

Annual incentive pay includes a component that is subject to negative (but not positive) adjustment based on the Executive Organization & Compensation Committee’s subjective evaluation of a participant’s individual performance during the year, taking into account performance relative to strategic objectives.

•

The NEOs’ annual incentive payouts averaged 138.6% of target award levels, based on performance relative to target goals set at the beginning of the year.

Applied Industrial Technologies, Inc. • 44

The program is aligned with long-term value creation and shareholders’ interests.

•

Long-term incentives awarded in 2017 accounted for 38% to 54% of the NEOs’ targeted pay.

•

All long-term incentives are equity-based, whose ultimate value depends on the value of our stock.

•

RSU awards have three-year cliff vesting, which is more demanding than typical market practice.

•

As of June 30, 2017, except for Mr. Loring (who has less than five years of service with Applied), the NEOs met their stock ownership guidelines. Until they achieve the guideline, executives are required to retain net shares received as a result of the exercise of SARs or the vesting of RSUs or performance shares.

•

We prohibit executives from hedging their company shareholdings.

Applied’s executive benefits program is aligned with shareholders’ interests and best practices.

•

In 2012, the Executive Organization & Compensation Committee froze participation in a defined benefit SERP and stopped accruing additional benefits, by virtue of years of service and compensation levels, for existing participants. A more modest defined contribution plan was adopted as a replacement.

•

Our NEOs are not provided perquisites such as company automobiles or allowances, country club memberships, financial planning and tax return preparation services, and annual physical examinations. In 2013, the committee closed the retiree health care program to new executive officers.

•

The company’s only change in control agreements are with five executive officers. The agreements have “double triggers,” meaning they provide benefits only if employment is terminated under certain circumstances following a change in control, as described in “Potential Payments upon Termination or Change in Control” beginning on page 37. Agreements entered into subsequent to 2011, including Mr. Schrimsher’s, do not include a gross-up for excise taxes.

Applied has adopted best practices to govern the program and to mitigate risk taking.

•

The Board holds an annual shareholder advisory vote to approve Applied’s executive compensation, aligned with our shareholders’ preference.

•

The Executive Organization & Compensation Committee uses an independent outside specialist adviser that provides no other services to Applied, other than consulting on director compensation for the Board’s Corporate Governance Committee. The committee annually assesses the independence of the adviser’s representative.

•

The committee regularly holds sessions dedicated to updates on current and evolving trends in executive compensation.

•

Analytical tools such as tally sheets and share retention analyses keep the committee abreast of executives’ total compensation and equity holdings.

•

The committee maintains consistency in the time of year it grants equity awards.

•

Applied’s performance plans have limits on payouts or shares that can be earned.

•

The company includes clawback provisions in its incentive award terms.

We believe our program has been effective, consistent with its primary objectives, as demonstrated when one examines the program’s alignment with Applied’s recent financial results.

Company performance strengthened in 2017, with improved sales and continued operational discipline producing above-plan bottom-line results. As a result, the NEOs earned annual incentive pay above their individual target values, following several years of below-target incentive payouts for below-plan performance.

2017 achievements under the performance share programs were mixed, with 0% of target shares banked under one program and 60.4% and 133.7% under the other two.

With gains in our stock price and reinvested dividends, shareholders earned a 33% total return in 2017, following a 17% total return in 2016. The company returned $52.9 million of cash to shareholders through dividends and share repurchases during the year.

Applied Industrial Technologies, Inc. • 45

The Board asks that, after considering the information above, the “Compensation Discussion and Analysis,” and the compensation tables and related narrative discussion, you vote for the following advisory resolution:

RESOLVED, that Applied’s shareholders hereby approve, on an advisory, nonbinding basis, the compensation paid to Applied’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including in the Compensation Discussion and Analysis, compensation tables, and narrative discussion in this proxy statement.

This advisory resolution will be approved if it receives the affirmative vote of a majority of shares cast. Abstentions and broker non-votes will not affect the outcome. Except for broker non-votes, if no voting specification is made on a properly returned and signed proxy card, the proxies named on the proxy card will vote for this resolution. The Board and its Executive Organization & Compensation Committee will review the voting results and take them into account in making future executive compensation decisions.

The Board of Directors recommends you vote FOR this proposal approving

the compensation paid to Applied’s named executive officers.

ITEM 3 — ADVISORY (NONBINDING) VOTE ON THE FREQUENCY OF SHAREHOLDER VOTES REGARDING EXECUTIVE COMPENSATION

Applied’s shareholders are entitled to cast an advisory vote at the 2017 annual meeting regarding how frequently shareholders should consider and cast an advisory vote to approve the compensation of our NEOs. The choices are every year, every two years, or every three years. While this is an advisory vote that is not binding on Applied or the Board of Directors, Applied will consider the outcome of this vote when determining how frequently the advisory vote regarding executive compensation will be held.

We currently hold the advisory vote regarding executive compensation annually, which was our shareholders’ preference as expressed at the 2011 annual meeting.

An annual shareholder advisory vote on the compensation of Applied’s NEOs provides shareholders the most frequent opportunity to offer input on Applied’s executive compensation and, therefore, the Board and its Executive Organization & Compensation Committee recommend that you vote for an annual (one year) interval for the shareholder advisory vote.

If a majority of the votes are not cast for one option, the Board will consider the option of once every one, two or three years that receives the highest number of votes cast as the shareholders’ preferred voting frequency. While the Board and its Executive Organization & Compensation Committee value the opinions of Applied’s shareholders and will consider the outcome of the vote, because this vote is advisory and not binding, the Board and the Executive Organization & Compensation Committee may decide it is in the shareholders’ best interests to hold an advisory vote on the NEOS’ compensation at a different frequency than the option receiving the most votes.

You may cast your vote on your preferred choice of voting frequency by choosing the option of every one year, every two years, or every three years or you may abstain from voting, on the enclosed proxy card. Shareholders are not voting to approve or disapprove the Board’s recommendation.

Abstentions and broker non-votes will not affect the outcome. Except for broker non-votes, if no voting specification is made on a properly returned and signed proxy card, the proxies named on the proxy card will vote for every “ONE YEAR” as the voting frequency.

The Board of Directors recommends you vote for every “ONE YEAR” as the frequency for

shareholder advisory votes on the compensation of Applied’s named executive officers.

Applied Industrial Technologies, Inc. • 46

ITEM 4 — RATIFICATION OF AUDITORS

Subject to shareholder ratification, the Audit Committee has appointed Deloitte & Touche LLP to serve as independent auditors for the fiscal year ending June 30, 2018. The committee made the appointment after evaluating the firm and its performance. Deloitte & Touche has confirmed it is not aware of any relationship between the firm (and its affiliates) and Applied that may reasonably be thought to bear on its independence.

Deloitte & Touche, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates billed the following fees, including expenses, to Applied for fiscal years 2017 and 2016:


Type of Fees	Fiscal 2017 ($)	Fiscal 2016 ($)
Audit Fees	1,897,800	1,953,300
Audit-Related Fees	86,000	11,300
Tax Fees	441,200	369,900
All Other Fees	5,800	5,400

Audit-Related Fees in 2017 and 2016 included amounts for debt compliance reports and other agreed upon procedures.

Tax Fees in 2017 were for tax compliance and return preparation ($122,700) and consulting ($318,500) and in 2016 were for tax compliance and return preparation ($110,000) and consulting ($259,900).

All Other Fees in 2017 and 2016 reflect charges for an annual subscription to an accounting research tool.

The Audit Committee pre-approves services performed by the independent auditors to assure that the provision of the services does not impair the auditors’ independence. If a type of service to be provided is not included in the committee’s general pre-approval, then it requires specific pre-approval. In addition, services exceeding pre-approved cost levels require additional committee pre-approval. The committee has delegated pre-approval authority to its chair, provided that the committee reviews the chair’s action at its next regular meeting. The committee also reviews, at each regular meeting, reports summarizing services provided by the auditors.

Unless otherwise indicated, the accompanying proxy will be voted to ratify Deloitte & Touche’s appointment. Ratification requires the affirmative vote of a majority of shares cast at the meeting. If Deloitte & Touche withdraws or otherwise becomes unavailable for reasons not currently known, the proxies will vote for other independent auditors, as they deem appropriate.

We expect a Deloitte & Touche representative to attend the meeting and be available to respond to appropriate questions.

The Board of Directors recommends you vote FOR ratifying

the appointment of the independent auditors.

AUDIT COMMITTEE REPORT

The Audit Committee is composed solely of independent directors, as determined by the Board according to applicable laws and SEC and NYSE rules, and operates under a written charter. The charter is posted via hyperlink from the investor relations area of Applied’s website at www.applied.com. The committee’s responsibilities are summarized at page 9 of this proxy statement.

In performing its responsibilities relating to the audit of Applied’s consolidated financial statements for the fiscal year ended June 30, 2017, the committee reviewed and discussed the audited financial statements with management and Applied’s independent auditors, Deloitte & Touche. The committee also discussed with the independent auditors the matters required to be discussed under Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 16, Communications with Audit Committees.

The independent auditors also provided to the committee the letter and written disclosures required by applicable PCAOB requirements regarding the independent accountant’s communications with the audit committee concerning independence. The committee discussed with Deloitte & Touche their independence and considered whether their provision of non-audit services to Applied is compatible with maintaining their independence.

Applied Industrial Technologies, Inc. • 47

Based on the reviews and discussions described above, the committee recommended to the Board that the audited financial statements be included in Applied’s 2017 annual report on Form 10-K for filing with the SEC.

AUDIT COMMITTEE

Vincent K. Petrella, Chair

L. Thomas Hiltz

Dan P. Komnenovich

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Applied’s executive officers and directors, and persons who beneficially own more than 10% of Applied’s stock, must file initial reports of ownership and reports of changes in ownership with the SEC and furnish copies to Applied.

Based solely on a review of forms furnished to us and written representations from Applied’s executive officers and directors, we believe that during the fiscal year ended June 30, 2017, all filing requirements were satisfied on a timely basis, except that late reports were filed for the following transactions identified during the year: for Ms. Kelly-Green, a sale of 3,000 shares and a gift of 1,250 shares in fiscal 2016, and a sale of 1,500 shares in fiscal 2017; and for Mr. Hoffner, a gift of 100 shares in fiscal 2016.

SHAREHOLDER PROPOSALS AND NOMINEE SUBMISSIONS FOR 2018 ANNUAL MEETING

Shareholders’ proposals for inclusion in our 2018 annual meeting proxy statement must be received by Applied’s Secretary at 1 Applied Plaza, Cleveland, Ohio 44115, no later than May 14, 2018. Under Ohio law, only proposals included in the meeting notice may be raised at a meeting of shareholders. Accordingly, to nominate a director candidate or bring other business from the floor of the 2018 annual meeting, you must notify the Secretary in writing by August 31, 2018.

HOUSEHOLDING INFORMATION

Only one set of this proxy statement and annual report is being delivered to multiple shareholders sharing an address unless Applied received contrary instructions from one or more of the shareholders.

If a shareholder at a shared address to which a single set of the proxy statement and annual report was delivered wishes to receive a separate copy of either, he or she should contact Applied’s registrar and transfer agent, Computershare Trust Company, N.A., by telephoning 1-800-988-5291 or by writing to Computershare at P.O. Box 505000, Louisville, Kentucky 40233-5000. The shareholder will be delivered, without charge, a separate copy promptly on request.

If shareholders at a shared address currently receiving multiple copies of the proxy statement and annual report wish to receive only a single copy of these documents, they should contact Computershare in the manner described above.

OTHER MATTERS

The Board of Directors does not know of other matters to be presented at the meeting. If other matters requiring a shareholder vote arise, including the question of adjourning the meeting, the persons named on the accompanying proxy card will vote your shares according to their judgment in the interests of Applied.

By order of the Board of Directors,

Fred D. Bauer

Vice President-General Counsel

& Secretary

September 11, 2017

Applied Industrial Technologies, Inc. • 48

LOGO


*IMPORTANT ANNUAL MEETING INFORMATION*



		Electronic Voting Instructions Available 24 hours a day, 7 days a week!

		Instead of mailing your proxy, you may choose one of the voting methods outlined below to vote your proxy. VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR. Proxies submitted by the Internet or telephone must be received by Monday, October 23, 2017 (Thursday, October 19, 2017 for Retirement Savings Plan participants).
			Vote by Internet • Go to www.investorvote.com/AIT • Or scan the QR code with your smartphone • Follow the steps outlined on the secure website

Using a black ink pen, mark your votes with an X as shown in this example. Please do not write outside the designated areas.	☒	Vote by telephone • Call toll free 1-800-652-VOTE (8683) within the USA, US territories & Canada on a touch tone telephone • Follow the instructions provided by the recorded message

Annual Meeting Proxy Card/Instruction Card

LOGO

q IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q

Proposals — The Board of Directors recommends a vote FOR the listed nominees, FOR Proposals 2 and 4, and every

ONE YEAR on Proposal 3.

1. To elect Directors:

For

Withhold

For

Withhold

For

Withhold

01 - Robert J. Pagano, Jr.

☐

02 - Neil A. Schrimsher

☐

03 - Peter C. Wallace

☐

For

Against

Abstain

1 Year

2 Years

3 Years

Abstain

Say on Pay - To approve, through a nonbinding advisory vote, the compensation of Applied’s named executive officers.

☐

Say on Pay Frequency - To approve, through a nonbinding advisory vote, the frequency of the advisory vote on the compensation of Applied’s named executive officers.

☐

To ratify the Audit Committee’s appointment of independent auditors.

☐

In their discretion, the proxies are authorized to vote on such other business as may properly come before the meeting.

Authorized Signatures — This section must be completed for your vote to be counted. — Date and Sign Below

Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, corporate officer, trustee, guardian, or custodian, please give full title.

Date (mm/dd/yyyy) — Please print date below.

Signature 1 — Please keep signature within the box.

Signature 2 — Please keep signature within the box.

/ / 2017


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CONSIDER RECEIVING FUTURE APPLIED INDUSTRIAL TECHNOLOGIES, INC. PROXY MATERIALS VIA THE INTERNET!

Consider receiving future Applied Industrial Technologies, Inc. proxy notifications in electronic form rather than in print form. While voting via the Internet, just provide your e-mail address where indicated and click the box to give your consent. Electronic delivery saves Applied a significant portion of the costs associated with printing and mailing annual meeting materials. If you consent to electronic delivery of meeting materials, you will receive an e-mail with links to all annual meeting materials and to the online proxy voting site for every annual meeting. If you do not consent to electronic delivery, you will continue to receive the proxy notification in the mail.

Accessing the Applied Industrial Technologies, Inc. annual report and proxy materials via the Internet may result in charges to you from your Internet service provider and/or telephone companies.

DIRECTIONS TO MEETING

You may access directions to attend the meeting at www.investorvote.com/AIT.

q IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q

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Proxy/Instruction Card — Applied Industrial Technologies, Inc.

Proxy Solicited on Behalf of the Board of Directors

The undersigned appoints Neil A. Schrimsher and Fred D. Bauer, and each of them, as proxies, with full power of substitution, to attend the Annual Meeting of Shareholders of Applied Industrial Technologies, Inc., on October 24, 2017, and any adjournments, and to represent and vote the shares which the undersigned is entitled to vote on the following matters as directed on the reverse side.

When properly executed, these instructions will be voted in the manner directed on the reverse side of this card; if you do not provide direction, this proxy will be voted FOR all nominees, FOR Proposals 2 and 4, and every ONE YEAR on Proposal 3.

NOTICE TO PARTICIPANTS IN THE RETIREMENT SAVINGS PLAN

This card also constitutes voting instructions for participants in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The participant who signs on the reverse side hereby instructs Principal Trust Company, Trustee, to vote all the shares of Applied’s common stock allocated to the participant’s account in the plan and any shares not otherwise directed under the Retirement Savings Plan, at the Annual Meeting of Shareholders. If no voting instructions are provided on a properly executed card, the shares will be voted FOR all nominees, FOR Proposals 2 and 4, and every ONE YEAR on Proposal 3.

If you vote by telephone or the Internet, please DO NOT mail back this proxy card.

YOUR VOTE IS IMPORTANT!

PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE

OR VOTE BY TELEPHONE OR INTERNET PURSUANT TO THE INSTRUCTIONS ON THE REVERSE.

SEE REVERSE SIDE

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*IMPORTANT ANNUAL MEETING INFORMATION*

Using a black ink pen, mark your votes with an X as shown in
this example. Please do not write outside the designated areas.

☒

Annual Meeting Proxy Card/Instruction Card

q PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q


A		Proposals — The Board of Directors recommends a vote FOR the listed nominees, FOR Proposals 2 and 4,
		and every ONE YEAR on Proposal 3.
		+

1. To elect Directors:

For

Withhold

For

Withhold

For

Withhold

01 - Robert J. Pagano, Jr.

☐

02 - Neil A. Schrimsher

☐

03 - Peter C. Wallace

☐

For

Against

Abstain

1 Year

2 Years

3 Years

Abstain

2. Say on Pay - To approve, through a nonbinding advisory vote, the compensation of Applied’s named executive officers.

☐

3. Say on Pay Frequency - To approve, through a nonbinding advisory vote, the frequency of the advisory vote on the compensation of Applied’s named executive officers.

☐

4. To ratify the Audit Committee’s appointment of independent auditors.

☐

In their discretion, the proxies are authorized to vote on such other business as may properly come before the meeting.

Authorized Signatures — This section must be completed for your vote to be counted. — Date and Sign Below

Date (mm/dd/yyyy) — Please print date below.

Signature 1 — Please keep signature within the box.

Signature 2 — Please keep signature within the box.

/ / 2017


⬛		1 U P X	+
	02NF8B		+

CONSIDER RECEIVING FUTURE APPLIED INDUSTRIAL TECHNOLOGIES, INC. PROXY MATERIALS VIA THE INTERNET!

Accessing the Applied Industrial Technologies, Inc. annual report and proxy materials via the Internet may result in charges to you from your Internet service provider and/or telephone companies.

DIRECTIONS TO MEETING

You may access directions to attend the meeting at www.investorvote.com/AIT.

q PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q

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Proxy/Instruction Card — Applied Industrial Technologies, Inc.

Proxy Solicited on Behalf of the Board of Directors

NOTICE TO PARTICIPANTS IN THE RETIREMENT SAVINGS PLAN

YOUR VOTE IS IMPORTANT!

PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

SEE REVERSE SIDE


		+


*IMPORTANT ANNUAL MEETING INFORMATION*

IMPORTANT SHAREHOLDER MEETING INFORMATION

— YOUR VOTE COUNTS!

Vote by Internet

• Go to www.investorvote.com/AIT

• Or scan the QR code with your smartphone

• Follow the steps outlined on the secure website

Shareholder Meeting Notice

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Important Notice Regarding the Availability of Proxy Materials for the

Applied Industrial Technologies, Inc. Annual Meeting of Shareholders to be Held on October 24, 2017

Under Securities and Exchange Commission rules, you are receiving this notice that the proxy materials for the annual shareholders’ meeting are available on the Internet. Follow the instructions below to view the materials and vote online or request a copy. The items to be voted on and location of the annual meeting are on the reverse side. Your vote is important!

This communication presents only an overview of the more complete proxy materials that are available to you on the Internet. We encourage you to access and review all of the important information contained in the proxy materials before voting. The proxy statement and annual report to shareholders are available at:

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		Easy Online Access — A Convenient Way to View Proxy Materials and Vote
		When you go online to view materials, you can also vote your shares.
		Step 1: Go to www.investorvote.com/AIT.
		Step 2: Click the View button(s) to access the proxy materials.
		Step 3: Return to the investorvote.com window and follow the instructions on the screen to log in.
		Step 4: Make your selection as instructed on each screen to select delivery preferences and vote.

When you go online, you can also help the environment by consenting to receive electronic delivery of future materials.

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Obtaining a Copy of the Proxy Materials – If you want to receive a paper or e-mail copy of these documents, you must request one. There is no charge to you for requesting a copy. Please make your request for a copy as instructed on the reverse side on or before October 16, 2017 to facilitate timely delivery.

2 N O T


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Shareholder Meeting Notice

The Applied Industrial Technologies, Inc. Annual Meeting of Shareholders will be held on October 24, 2017, at 10:00 a.m. ET, at Applied’s corporate headquarters, 1 Applied Plaza, East 36th Street and Euclid Avenue, Cleveland, Ohio 44115.

Proposals to be voted on at the meeting, or any adjournments, are listed below along with the recommendations of the Board of Directors.

The Board of Directors recommends a vote FOR the listed nominees, FOR Proposals 2 and 4, and every ONE YEAR on Proposal 3.

1. To elect Directors:

01 - Robert J. Pagano, Jr., 02 - Neil A. Schrimsher, 03 - Peter C. Wallace

2. Say on Pay - To approve, through a nonbinding advisory vote, the compensation of Applied’s named executive officers.

3. Say on Pay Frequency - To approve, through a nonbinding advisory vote, the frequency of the advisory vote on the compensation of Applied’s named executive officers.

4. To ratify the Audit Committee’s appointment of independent auditors.

In their discretion, the proxies are authorized to vote on such other business as may properly come before the meeting.

PLEASE NOTE – YOU CANNOT VOTE BY RETURNING THIS NOTICE. To vote your shares you must vote online by Thursday, October 19, 2017, or request a paper copy of the proxy materials to receive a proxy card. If you wish to attend and vote at the meeting, please bring this notice with you.

You may access directions to attend the meeting at www.investorvote.com/AIT.

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Here’s how to order a copy of the proxy materials and select a future delivery preference:

Paper copies: Current and future paper delivery requests can be submitted via the telephone, Internet or e-mail options below.

E-mail copies: Current and future e-mail delivery requests must be submitted via the Internet following the instructions below. If you request an e-mail copy of current materials you will receive an e-mail with a link to the materials.

PLEASE NOTE: You must use the number in the shaded bar on the reverse side when requesting a set of proxy materials.


		g		Internet – Go to www.investorvote.com/AIT. Follow the instructions to log in and order a paper or e-mail copy of the current meeting materials and submit your preference for e-mail or paper delivery of future meeting materials.

		g		Telephone – Call us free of charge at 1-866-641-4276 using a touch-tone phone and follow the instructions to log in and order a paper copy of the materials by mail for the current meeting. You can also submit a preference to receive a paper copy for future meetings.

		g		Email – Send e-mail to investorvote@computershare.com with “Proxy Materials Applied Industrial Technologies, Inc.” in the subject line. Include in the message your full name and address, plus the number located in the shaded bar on the reverse, and state in the e-mail that you want a paper copy of current meeting materials. You can also state your preference to receive a paper copy for future meetings.

				To facilitate timely delivery, all requests for a paper copy of the proxy materials must be received by October 16, 2017.

		02NF9B