Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________ 
FORM 10-Q

 __________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

SECURITIESEXCHANGE ACT OF 1934

For the quarterly period ended SEPTEMBER 30,DECEMBER 31, 2011

OR

¨
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

SECURITIESEXCHANGE ACT OF 1934

For the transition period from                 to                 

Commission File Number 1-2299

___________________________________________ 
APPLIED INDUSTRIAL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

___________________________________________ 
Ohio 34-0117420

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

One Applied Plaza, Cleveland, Ohio 44115
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (216) 426-4000

(Former name, former address and former fiscal year, if changed since last report)

__________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x     No  ¨o

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

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

Large accelerated filer x  Accelerated filer ¨o
Non-accelerated filer 
o¨  (Do not check if a smaller reporting company)
  Smaller reporting company ¨o

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

Shares41,998,285 (no par value) shares of common stock outstanding onOctober 14, 2011 41,977,758 (No par value)

January 13, 2012.


Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX

Page
No.
Part I:
FINANCIAL INFORMATION
     
 

Page

No.

Item 1:
Financial Statements
 
Part I: FINANCIAL INFORMATION

Item 1:

Financial Statements

Condensed Statements of Consolidated Income—Three and Six Months Ended September 30,December 31, 2011 and 2010

2
  2
Condensed Consolidated Balance Sheets—September 30,December 31, 2011 and June 30, 2011
3
  3

Condensed Statements of Consolidated Cash Flows—ThreeSix Months Ended September 30,December 31, 2011 and 2010

4
  4

Notes to Condensed Consolidated Financial Statements

5
  5

Report of Independent Registered Public Accounting Firm

 12
11

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations
 13
12

Item 3:

Quantitative and Qualitative Disclosures About Market Risk
18
Item 4:
Controls and Procedures
19
  20
Part II:
OTHER INFORMATION
 

Item 4:

Controls and Procedures  21 
Item 1:

Part II:

Legal Proceedings
 

OTHER INFORMATION20

 

Item 1:

Legal Proceedings22

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds
20
Item 6:
Exhibits
20
Signatures
22
Exhibit Index
  22

Item 6:

Exhibits  23

1
Table of Contents

Signatures

25

Exhibit Index

Exhibits

PART I:		FINANCIAL INFORMATION

ITEM I:FINANCIAL STATEMENTS


PART I: FINANCIAL INFORMATION

ITEM I: Financial Statements

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

(In thousands, except per share amounts)

   Three Months Ended
September 30,		 
   2011   2010 

Net Sales

  $579,574    $527,501  

Cost of Sales

   420,870     384,381  
  

 

 

   

 

 

 

Gross Profit

   158,704     143,120  

Selling, Distribution and Administrative, including depreciation

   115,437     108,229  
  

 

 

   

 

 

 

Operating Income

   43,267     34,891  

Interest Expense, net

   47     1,124  

Other Expense (Income), net

   1,932     (343) 
  

 

 

   

 

 

 

Income Before Income Taxes

   41,288     34,110  

Income Tax Expense

   14,906     13,355  
  

 

 

   

 

 

 

Net Income

  $26,382    $20,755  
  

 

 

   

 

 

 

Net Income Per Share - Basic

  $0.62    $0.49  
  

 

 

   

 

 

 

Net Income Per Share - Diluted

  $0.61    $0.48  
  

 

 

   

 

 

 

Cash dividends per common share

  $0.19    $0.17  
  

 

 

   

 

 

 

Weighted average common shares outstanding for basic computation

   42,397     42,370  

Dilutive effect of potential common shares

   564     716  
  

 

 

   

 

 

 

Weighted average common shares outstanding for diluted computation

   42,961     43,086  
  

 

 

   

 

 

 

  Three Months Ended Six Months Ended
  December 31, December 31,
  2011 2010 2011 2010
Net Sales $570,397
 $529,517
 $1,149,971
 $1,057,018
Cost of Sales 414,928
 385,236
 835,798
 769,617
Gross Profit 155,469
 144,281
 314,173
 287,401
Selling, Distribution and Administrative, including depreciation 122,134
 111,225
 237,571
 219,454
Operating Income 33,335
 33,056
 76,602
 67,947
Interest Expense, net 10
 458
 57
 1,582
Other Expense (Income), net 778
 (421) 2,710
 (764)
Income Before Income Taxes 32,547
 33,019
 73,835
 67,129
Income Tax Expense 11,612
 11,826
 26,518
 25,181
Net Income $20,935
 $21,193
 $47,317
 $41,948
Net Income Per Share - Basic $0.50
 $0.50
 $1.12
 $0.99
Net Income Per Share - Diluted $0.49
 $0.49
 $1.11
 $0.97
Cash dividends per common share $0.19
 $0.17
 $0.38
 $0.34
Weighted average common shares outstanding for basic computation 41,965
 42,411
 42,181
 42,391
Dilutive effect of potential common shares 669
 887
 620
 826
Weighted average common shares outstanding for diluted computation 42,634
 43,298
 42,801
 43,217
See notes to condensed consolidated financial statements.



2
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

   September 30,
2011		  June 30,
2011		 
ASSETS   

Current assets

   

Cash and cash equivalents

  $73,218   $91,092  

Accounts receivable, less allowances of $7,428 and $7,016

   289,450    290,751  

Inventories

   215,013    204,066  

Other current assets

   27,532    33,005  
  

 

 

  

 

 

 

Total current assets

   605,213    618,914  

Property, less accumulated depreciation of $144,532 and $143,930

   73,079    69,014  

Intangibles, net

   86,661    89,551  

Goodwill

   76,783    76,981  

Deferred tax assets

   42,437    43,447  

Other assets

   16,054    17,024  
  

 

 

  

 

 

 

TOTAL ASSETS

  $900,227   $914,931  
  

 

 

  

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current liabilities

   

Accounts payable

  $109,928   $108,509  

Compensation and related benefits

   44,443    65,413  

Other current liabilities

   52,582    40,766  
  

 

 

  

 

 

 

Total current liabilities

   206,953    214,688  

Postemployment benefits

   43,911    47,730  

Other liabilities

   16,549    18,950  
  

 

 

  

 

 

 

TOTAL LIABILITIES

   267,413    281,368  
  

 

 

  

 

 

 

Shareholders’ Equity

   

Preferred stock—no par value; 2,500 shares authorized; none issued or outstanding

   

Common stock—no par value; 80,000 shares authorized; 54,213 shares issued

   10,000    10,000  

Additional paid-in capital

   150,153    148,307  

Income retained for use in the business

   686,687    668,421  

Treasury shares—at cost (12,236 and 11,611 shares)

   (216,190)   (198,224) 

Accumulated other comprehensive income

   2,164    5,059  
  

 

 

  

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

   632,814    633,563  
  

 

 

  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $900,227   $914,931  
  

 

 

  

 

 

 

  December 31,
2011		 June 30,
2011
ASSETS    
Current assets    
Cash and cash equivalents $70,512
 $91,092
Accounts receivable, less allowances of $7,376 and $7,016 280,700
 290,751
Inventories 222,626
 204,066
Other current assets 36,113
 33,005
Total current assets 609,951
 618,914
Property, less accumulated depreciation of $146,132 and $143,930 76,659
 69,014
Intangibles, net 82,968
 89,551
Goodwill 75,517
 76,981
Deferred tax assets 36,604
 43,447
Other assets 16,314
 17,024
TOTAL ASSETS $898,013
 $914,931
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Current liabilities    
Accounts payable $105,591
 $108,509
Compensation and related benefits 51,930
 65,413
Other current liabilities 41,443
 40,766
Total current liabilities 198,964
 214,688
Postemployment benefits 36,238
 47,730
Other liabilities 16,625
 18,950
TOTAL LIABILITIES 251,827
 281,368
Shareholders’ Equity    
Preferred stock—no par value; 2,500 shares authorized; none issued or outstanding 
 
Common stock—no par value; 80,000 shares authorized; 54,213 shares issued 10,000
 10,000
Additional paid-in capital 151,704
 148,307
Income retained for use in the business 699,612
 668,421
Treasury shares—at cost (12,220 and 11,611 shares) (216,557) (198,224)
Accumulated other comprehensive income 1,427
 5,059
TOTAL SHAREHOLDERS’ EQUITY 646,186
 633,563
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $898,013
 $914,931
See notes to condensed consolidated financial statements.



3
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

(In thousands)

   Three Months Ended
September 30,		 
   2011  2010 

Cash Flows from Operating Activities

   

Net income

  $26,382   $20,755  

Adjustments to reconcile net income to net cash provided by operating activities:

   

Depreciation and amortization of property

   2,818    2,713  

Amortization of intangibles

   2,809    2,787  

Amortization of stock options and appreciation rights

   633    1,259  

Gain on sale of property

   (386)   (10) 

Other share-based compensation expense

   1,260    996  

Changes in assets and liabilities, net of acquisitions

   (17,371)   (24,301) 

Other, net

   256    317  
  

 

 

  

 

 

 

Net Cash provided by Operating Activities

   16,401    4,516  
  

 

 

  

 

 

 

Cash Flows from Investing Activities

   

Property purchases

   (7,142)   (873) 

Proceeds from property sales

   637    41  

Net cash paid for acquisition of businesses, net of cash acquired

   (1,241)   (27,697) 
  

 

 

  

 

 

 

Net Cash used in Investing Activities

   (7,746)   (28,529) 
  

 

 

  

 

 

 

Cash Flows from Financing Activities

   

Repayments under revolving credit facility

    (50,000) 

Purchases of treasury shares

   (18,178)  

Dividends paid

   (8,099)   (7,206) 

Excess tax benefits from share-based compensation

   149    392  

Exercise of stock options and appreciation rights

   84    143  
  

 

 

  

 

 

 

Net Cash used in Financing Activities

   (26,044)   (56,671) 
  

 

 

  

 

 

 

Effect of Exchange Rate Changes on Cash

   (485)   (500) 
  

 

 

  

 

 

 

Decrease in cash and cash equivalents

   (17,874)   (81,184) 

Cash and cash equivalents at beginning of period

   91,092    175,777  
  

 

 

  

 

 

 

Cash and Cash Equivalents at End of Period

  $73,218   $94,593  
  

 

 

  

 

 

 

Non-cash Investing Activities:

   

Property purchases, unpaid at September 30

   $10,000  

  Six Months Ended
  December 31,
  2011 2010
Cash Flows from Operating Activities    
Net income $47,317
 $41,948
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization of property 5,598
 5,496
Amortization of intangibles 5,544
 5,678
Amortization of stock options and appreciation rights 1,139
 1,569
Gain on sale of property (492) (20)
Other share-based compensation expense 2,523
 2,110
Changes in assets and liabilities, net of acquisitions (33,246) (37,934)
Other, net 1,833
 1,119
Net Cash provided by Operating Activities 30,216
 19,966
Cash Flows from Investing Activities    
Property purchases (14,022) (13,804)
Proceeds from property sales 981
 124
Net cash paid for acquisition of businesses, net of cash acquired (1,241) (27,739)
Net Cash used in Investing Activities (14,282) (41,419)
Cash Flows from Financing Activities    
Repayments under revolving credit facility 
 (50,000)
Long-term debt repayment 
 (25,000)
Settlements of cross-currency swap agreements 
 (12,752)
Purchases of treasury shares (18,990) 
Dividends paid (16,077) (14,422)
Excess tax benefits from share-based compensation 569
 778
Exercise of stock options and appreciation rights 154
 338
Net Cash used in Financing Activities (34,344) (101,058)
Effect of Exchange Rate Changes on Cash (2,170) 649
Decrease in cash and cash equivalents (20,580) (121,862)
Cash and cash equivalents at beginning of period 91,092
 175,777
Cash and Cash Equivalents at End of Period $70,512
 $53,915
     
See notes to condensed consolidated financial statements.



4
Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)


1.BASIS OF PRESENTATION


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position of Applied Industrial Technologies, Inc. (the “Company”, or “Applied”) as of September 30,December 31, 2011, and the results of its operations for the three and six month periods ended September 30,December 31, 2011 and 2010 and its cash flows for the threesix months ended September 30,December 31, 2011 and 2010, have been included. The condensed consolidated balance sheet as of June 30, 2011 has been derived from the audited consolidated financial statements at that date. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2011.

2011.


Operating results for the three and six month periodperiods ended September 30,December 31, 2011 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, 2012.

2012.


Inventory


The Company uses the last-in, first-out (LIFO) method of valuing U.S. inventories. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory determination.


During the three monthsand six month periods ended September 30,December 31, 2010, the Company recorded overall LIFO benefits of $301$1,823 and $2,124, respectively, and the LIFO reserves were reduced by the same amounts. No comparable benefits were recorded in the three monthsand six month periods ended September 30, 2011.

December 31, 2011.

2.GOODWILL AND INTANGIBLES


The changes in the carrying amount of goodwill for the Service Center Based Distribution segment for the period ended September 30,December 31, 2011 are as follows:

Balance at July 1, 2011

 $ 76,981  
 

 

 

 

Goodwill acquired during the period

  336  

Other, primarily currency translation

  (534) 
 

 

 

 

Balance at September 30, 2011

 $76,783  
 

 

 

 


Balance at July 1, 2011$76,981
Goodwill acquired during the period336
Other, primarily currency translation(1,800)
Balance at December 31, 2011$75,517

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

At September 30,December 31, 2011, accumulated goodwill impairment losses, subsequent to fiscal year 2002, totaled $36,605$36,605 and related to the Fluid Power Businesses segment.



5
Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)


The Company’s intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:

September 30, 2011

  Amount   Accumulated
Amortization		   Net Book
Value		 

Finite-Lived Intangibles:

      

Customer relationships

  $78,029    $24,731    $53,298  

Trade names

   25,796     6,084     19,712  

Vendor relationships

   13,999     3,887     10,112  

Non-competition agreements

   4,836     2,587     2,249  
  

 

 

   

 

 

   

 

 

 

Total Finite-Lived Intangibles

   122,660     37,289     85,371  
  

 

 

   

 

 

   

 

 

 

Indefinite-Lived Trade Names

   1,290       1,290  
  

 

 

   

 

 

   

 

 

 

Total Intangibles

  $123,950    $37,289    $86,661  
  

 

 

   

 

 

   

 

 

 

December 31, 2011 Amount 
Accumulated
Amortization
 
Net Book
Value
Finite-Lived Intangibles:      
Customer relationships $77,160
 $26,105
 $51,055
Trade names 25,480
 6,439
 19,041
Vendor relationships 13,638
 4,004
 9,634
Non-competition agreements 4,654
 2,706
 1,948
Total Finite-Lived Intangibles 120,932
 39,254
 81,678
Indefinite-Lived Trade Names 1,290
   1,290
Total Intangibles $122,222
 $39,254
 $82,968

June 30, 2011 Amount 
Accumulated
Amortization
 
Net Book
Value
Finite-Lived Intangibles:      
Customer relationships $78,084
 $23,111
 $54,973
Trade names 25,944
 5,666
 20,278
Vendor relationships 14,211
 3,696
 10,515
Non-competition agreements 5,127
 2,632
 2,495
Total Finite-Lived Intangibles 123,366
 35,105
 88,261
Indefinite-Lived Trade Names 1,290
   1,290
Total Intangibles $124,656
 $35,105
 $89,551

\


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

Estimated future amortization expense by fiscal year (based on the Company’s intangible assets as of September 30, 2011)December 31, 2011) is as follows: $8,400$5,500 for the remainder of 2012, $10,100$10,000 for 2013, $8,900$8,800 for 2014, $8,200$8,100 for 2015, $7,600$7,500 for 2016 and $7,000$6,900 for 2017.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)


3.FAIR VALUE MEASUREMENTS


Marketable securities measured at fair value at September 30,December 31, 2011 and June 30, 2011 totaled $9,608$10,156 and $10,881.$10,881. These marketable securities are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable securities are included in other assets on the condensed consolidated balance sheets and their fair values were derived using quoted market prices (Level 1 in the fair value hierarchy).



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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

4.SHAREHOLDERS’SHAREHOLDERS' EQUITY


Comprehensive Income (Loss)

The components of comprehensive income (loss) are as follows:

    Three Months Ended
September 30,		 
   2011  2010 

Net income

  $26,382   $20,755  

Other comprehensive income (loss):

   

Foreign currency translation adjustment

   (3,042)   (1,797) 

Unrealized (loss) gain on investment securities available for sale, net of income tax of $(82) and $25

   (140)   45  

Reclassification of pension and postemployment expense into income, net of income tax of $180 and $135

   287    419  

Cash flow hedging activity, net of income tax of $(426) in the quarter ended 9/30/10

    (1,030) 

Reclassification of interest expense into income, net of income tax of $116 in the quarter ended 9/30/10

    200  
  

 

 

  

 

 

 

Total comprehensive income

  $23,487   $18,592  
  

 

 

  

 

 

 

  
 Three Months Ended December 31,
  2011 2010
Net income $20,935
 $21,193
Other comprehensive (loss) income:    
Foreign currency translation adjustment (8,117) 3,088
Unrealized gain on investment securities available for sale, net of income tax of $18 and $43 29
 59
Postemployment benefits:    
Reclassification of actuarial losses and prior service cost into selling, distribution and administrative expense (included in net periodic pension costs), net of income tax of $180 and $212 287
 341
Actuarial loss on remeasurement, net of income tax of $(190) (302)  
Impact of reduction in postemployment benefit liability (as forecasted salary increases will not be realized) due to the plan curtailment, net of income tax of $3,411 5,449
  
Reclassification of prior service cost into selling, distribution and administrative expense upon plan curtailment, net of income tax of $1,200 1,917
  
Cash flow hedging activity, net of income tax of $344   846
Total comprehensive income $20,198
 $25,527

  Six Months Ended December 31,
  2011 2010
Net income $47,317
 $41,948
Other comprehensive (loss) income:    
Foreign currency translation adjustment (11,159) 1,291
Unrealized (loss) gain on investment securities available for sale, net of income tax of $(64) and $68 (111) 104
Postemployment benefits:    
Reclassification of actuarial losses and prior service cost into selling, distribution and administrative expense (included in net periodic pension costs), net of income tax of $360 and $347 574
 760
Actuarial loss on remeasurement, net of income tax of $(190) (302)  
Impact of reduction in postemployment benefit liability (as forecasted salary increases will not be realized) due to the plan curtailment, net of income tax of $3,411 5,449
  
Reclassification of prior service cost into selling, distribution and administrative expense upon plan curtailment, net of income tax of $1,200 1,917
  
Cash flow hedging activity, net of income tax of $(82) 
 (184)
Reclassification of interest expense into income, net of income tax of $116 
 200
Total comprehensive income $43,685
 $44,119
Antidilutive Common Stock Equivalents

In the three and six month periods ended September 30,December 31, 2011 and 2010, respectively, stock options and stock appreciation rights related to the acquisition of 30251 and 451102 shares of common stock in the three month periods and 276 and 297 shares of common stock in the six month periods were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive.


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)



5.BENEFIT PLANS


On December 19, 2011, the Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011. This action constitutes a plan curtailment.
The plan liability was remeasured in conjunction with the curtailment using a 3.5% discount rate and participant final average earnings through the curtailment date. The plan was last remeasured at June 30, 2011, using a 4.5% discount rate. This latest remeasurement resulted in an actuarial loss (recorded in other comprehensive income) of $302 ($492 loss, net of income tax of $190).
The curtailment is reflected in the Company's condensed consolidated balance sheets as: 1) a reduction to the overall SERP liability (included in postemployment benefits) of $8,860, 2) a reduction to deferred tax assets of $3,411 and 3) an increase in accumulated other comprehensive income of $5,449. Prior service costs previously recorded through accumulated other comprehensive income were reclassified into the condensed statements of consolidated income ($3,117 gross expense, net of income tax of $1,200). The gross expense is recorded in selling, distribution and administrative expense in the second quarter of fiscal 2012.
The following table provides summary disclosures of the net periodic postemployment costs recognized for the Company’s postemployment benefit plans:

   Pension Benefits  Retiree Health Care
Benefits		 
   2011  2010  2011  2010 

Three Months Ended September 30,

     

Components of net periodic cost:

     

Service cost

  $127   $115   $7   $10  

Interest cost

   588    565    59    59  

Expected return on plan assets

   (99)   (96)   

Recognized net actuarial loss (gain)

   264    362    (18)   (21) 

Amortization of prior service cost

   185    177    35    35  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic cost

  $1,065   $1,123   $83   $83  
  

 

 

  

 

 

  

 

 

  

 

 

 

  Pension Benefits 
Retiree Health Care
Benefits
Three Months Ended December 31, 2011 2010 2011 2010
Components of net periodic cost:        
Service cost $127
 $115
 $8
 $10
Interest cost 588
 564
 59
 59
Expected return on plan assets (99) (96)    
Recognized net actuarial loss (gain) 265
 362
 (18) (21)
Amortization of prior service cost 185
 178
 35
 35
Curtailment loss 3,117
 

 

 

Net periodic cost $4,183
 $1,123
 $84
 $83

  Pension Benefits 
Retiree Health Care
Benefits
Six Months Ended December 31, 2011 2010 2011 2010
Components of net periodic cost:        
Service cost $254
 $230
 $15
 $20
Interest cost 1,176
 1,129
 118
 118
Expected return on plan assets (198) (192)    
Recognized net actuarial loss (gain) 529
 724
 (36) (42)
Amortization of prior service cost 370
 355
 70
 69
Curtailment loss 3,117
 

 

 

Net periodic cost $5,248
 $2,246
 $167
 $165

The Company contributed $171$370 to its pension benefit plans and $91$103 to its retiree health care plans in the threesix months ended September 30, 2011.December 31, 2011. Expected contributions for the remainder of fiscal 2012 are $4,050$3,850 for the pension benefit plans to fund scheduled retirement payments and $150$150 for retiree health care plans.



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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)


6.SEGMENT AND GEOGRAPHIC INFORMATION


The accounting policies of the Company’s reportable segments are the same as those used to prepare the condensed consolidated financial statements. Sales primarily from the Fluid Power Businesses segment to the Service Center Based Distribution segment of $4,247$3,708 and $4,396,$4,202, in the three months ended September 30,December 31, 2011 and 2010, respectively, and $7,955 and $8,598 in the six months ended December 31, 2011 and 2010, respectively, have been eliminated in the tabletables below.

Segment Financial Information for the three months ended:

   Service Center   Fluid     
   Based
Distribution		   Power
Businesses		   Total 

September 30, 2011

      

Net sales

  $463,857    $115,717    $579,574  

Operating income for reportable segments

   29,394     11,236     40,630  

Assets used in the business

   681,977     218,250     900,227  

Depreciation and amortization of property

   2,299     519     2,818  

Capital expenditures

   6,800     342     7,142  
  

 

 

   

 

 

   

 

 

 

September 30, 2010

      

Net sales

  $423,953    $103,548    $527,501  

Operating income for reportable segments

   26,068     9,434     35,502  

Assets used in the business

   666,871     205,838     872,709  

Depreciation and amortization of property

   2,177     536     2,713  

Capital expenditures

   717     156     873  
  

 

 

   

 

 

   

 

 

 

  Service Center Based Distribution Fluid Power Businesses Total
December 31, 2011      
Net sales $458,315
 $112,082
 $570,397
Operating income for reportable segments 29,280
 10,151
 39,431
Depreciation and amortization of property 2,353
 427
 2,780
Capital expenditures 6,546
 334
 6,880
December 31, 2010      
Net sales $426,161
 $103,356
 $529,517
Operating income for reportable segments 25,288
 9,875
 35,163
Depreciation and amortization of property 2,286
 497
 2,783
Capital expenditures 12,832
 99
 12,931

Segment Financial Information for the six months ended:
  Service Center Based Distribution Fluid Power Businesses Total
December 31, 2011      
Net sales $922,173
 $227,798
 $1,149,971
Operating income for reportable segments 58,674
 21,388
 80,062
Assets used in the business 681,019
 216,994
 898,013
Depreciation and amortization of property 4,651
 947
 5,598
Capital expenditures 13,346
 676
 14,022
December 31, 2010      
Net sales $850,114
 $206,904
 $1,057,018
Operating income for reportable segments 51,356
 19,309
 70,665
Assets used in the business 630,572
 199,058
 829,630
Depreciation and amortization of property 4,463
 1,033
 5,496
Capital expenditures 13,549
 255
 13,804


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)



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

   Three Months Ended
September 30,		 
   2011  2010 

Operating income for reportable segments

  $40,630   $35,502  

Adjustment for:

   

Intangible amortization—Service Center Based Distribution

   877    781  

Intangible amortization—Fluid Power Businesses

   1,932    2,006  

Corporate and other income, net

   (5,446)   (2,176) 
  

 

 

  

 

 

 

Total operating income

   43,267    34,891  

Interest expense, net

   47    1,124  

Other expense (income), net

   1,932    (343) 
  

 

 

  

 

 

 

Income before income taxes

  $41,288   $34,110  
  

 

 

  

 

 

 

The change

  Three Months Ended Six Months Ended
  December 31, December 31,
  2011 2010 2011 2010
Operating income for reportable segments $39,431
 $35,163
 $80,062
 $70,665
Adjustment for:        
Intangible amortization—Service Center Based Distribution 841
 905
 1,718
 1,686
Intangible amortization—Fluid Power Businesses 1,894
 1,986
 3,826
 3,992
Corporate and other expense (income), net 3,361
 (784) (2,084) (2,960)
Total operating income 33,335
 33,056
 76,602
 67,947
Interest expense, net 10
 458
 57
 1,582
Other expense (income), net 778
 (421) 2,710
 (764)
Income before income taxes $32,547
 $33,019
 $73,835
 $67,129

Corporate and other expense (income), net includes the SERP curtailment loss of $3,117 recognized in the second quarter of fiscal 2012. Additional fluctuations in corporate and other income,expense (income), net isare due to changes in the levels and amounts of expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.


Net sales are presented in geographic areas based on the location of the company making the sale and are as follows:

   Three Months Ended
September 30,		 
   2011   2010 

Geographic Areas:

    

United States

  $487,428    $459,053  

Canada

   73,573     54,321  

Mexico

   18,573     14,127  
  

 

 

   

 

 

 

Total

  $579,574    $527,501  
  

 

 

   

 

 

 

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)

  Three Months Ended Six Months Ended
  December 31, December 31,
  2011 2010 2011 2010
Geographic Areas:        
United States $478,222
 $450,951
 $965,650
 $910,244
Canada 73,502
 63,329
 147,075
 117,410
Mexico 18,673
 15,237
 37,246
 29,364
Total $570,397
 $529,517
 $1,149,971
 $1,057,018

7.OTHER EXPENSE (INCOME), NET


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

   Three Months Ended
September  30,		 
   2011   2010 

Unrealized loss (gain) on assets held in rabbi trust for a nonqualified deferred compensation plan

  $1,380    $(809) 

Foreign currency transaction losses

   510     117  

Loss on cross-currency swap

     207  

Other, net

   42     142  
  

 

 

   

 

 

 

Total other expense (income), net

  $1,932    $(343) 
  

 

 

   

 

 

 

  Three Months Ended Six Months Ended
  December 31, December 31,
  2011 2010 2011 2010
Unrealized (gain) loss on assets held in rabbi trust for a nonqualified deferred compensation plan $(374) $(696) $1,006
 $(1,505)
Foreign currency transaction losses 1,047
 31
 1,556
 149
Loss on cross-currency swap 
 162
 
 368
Other, net 105
 82
 148
 224
Total other expense (income), net $778
 $(421) $2,710
 $(764)




10


APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The accompanying condensed consolidated financial statements of the Company have been reviewed by the Company’s independent registered public accounting firm, Deloitte & Touche LLP, whose report covering their reviews of the condensed consolidated financial statements follows.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of

Applied Industrial Technologies, Inc.

Cleveland, Ohio


We have reviewed the accompanying condensed consolidated balance sheet of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of September 30,December 31, 2011, and the related condensed statements of consolidated income for the three-month and six-month periods ended December 31, 2011 and 2010, and of consolidated cash flows for the three-monthsix-month periods ended September 30,December 31, 2011 and 2010.2010. These interim financial statements are the responsibility of the Company’s management.


We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.


We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of June 30, 2011, and the related statements of consolidated income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated August 17, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP         
Cleveland, Ohio
NovemberFebruary 2, 20112012




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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



ITEM 2:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Applied Industrial Technologies (“Applied,” the “Company,” “We,” “Us” or “Our”) is one of North America’sAmerica's largest industrial distributors serving MRO, OEM and Government markets. Applied is an authorized source for a diverse range of products, including bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion components, tools, safety products, and general maintenance and mill supply products.  The Company also provides customized shop services for mechanical, fabricated rubber and fluid power products, as well as services to meet storeroom management and maintenance training needs. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During the firstsecond quarter of fiscal 2012, business was conducted in the United States, Canada, Mexico and Puerto Rico from 474475 facilities.


The following is Management’sManagement's Discussion and Analysis of significant factors which have affected our financial condition, results of operations and cash flows during the periods included in the accompanying condensed statements of consolidated income and consolidated cash flows.Whenflows.When reviewing the discussion and analysis set forth below, please note that the majority of SKUs we sell in any given period were not sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used comparative metrics analyzing sales, such as changes in product mix and volume.


Overview
Overview

Consolidated net sales for the quarter ended September 30,December 31, 2011 increased $52.1$40.9 million or 9.9%7.7% compared to the prior year quarter, with acquisitions contributing $6.7$1.5 million or 0.3% and favorablewith unfavorable foreign currency translation accounting for $5.9of $0.9 million of or 0.2% partially offsetting the increase. Operating margin increaseddecreased to 7.5%5.8% of net sales from 6.6%6.2% for the prior year quarter and netlargely driven by increases in SD&A expenses. Net income increased $5.6of $20.9 million or 27.1% declined 1.2% compared to the prior year quarter. Shareholders’Shareholders' equity was $632.8$646.2 million at SeptemberDecember 31, 2011 up from the June 30, 2011.2011 level of $633.6 million. The current ratio was 2.93.1 to 1 at September 30,December 31, 2011 and2.9 to 1 at June 30, 2011. Since November 30, 2010, we have had no borrowings outstanding under our existing credit facilities.


Applied monitors several economic indices that have been key indicators for industrial economic activity. These include the Manufacturing Capacity Utilization (MCU) index published by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply Management (ISM). Historically, our performance correlates well with the MCU, which measures productivity and calculates a ratio of actual manufacturing output versus potential full capacity output. When manufacturing plants are running at a high rate of capacity, they tend to wear out machinery and require replacement parts. Our sales tend to lag the MCU on the upswing by up to six months and move closer in alignment with the declines.


These indices showed continued moderate growthimprovement in the industrial economy during the firstsecond quarter of fiscal 2012.  The MCU for SeptemberDecember 2011 was 75.1,75.9, compared to 75.1 in September 2011 and 74.4 in June of 2011.  The ISM PMI was 53.9 in December 2011 versus 51.6 in September versus2011 and 55.3 in June of 2011,2011. While the index is still above 50, butit is down from its year-long high of 61.4 in February of 2011.  We believe that the U.S. industrial economy has settled into a moderate pace of growth which will continue throughout fiscal 2012.


APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The number of Company associates was 4,6864,682 at September 30,December 31, 2011, 4,640 at June 30, 2011, and 4,6524,655 at September 30,December 31, 2010. The number of operating facilities totaled 474475 at September 30,December 31, 2011 and 475473 at September 30,December 31, 2010.


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



Results of Operations


Three Months Ended September 30,December 31, 2011 and 2010


The following table is included to aid in review of Applied’sApplied's condensed statements of consolidated income. The percent increase (decrease) column is comparativerepresents the change in dollars compared to the same period in the prior year.

   Three Months Ended September 30, 
    As a Percent of Net Sales  

Percent
Increase

(Decrease)

 
    2011  2010  

Net Sales

   100.0%   100.0%   9.9% 

Gross Profit

   27.4%   27.1%   10.9% 

Selling, Distribution & Administrative

   19.9%   20.5%   6.7% 

Operating Income

   7.5%   6.6%   24.0% 

Net Income

   4.6%   3.9%   27.1% 

  Three Months Ended December 31,
      Percent
  As a Percent of Net Sales Increase
  2011 2010 (Decrease)
Net Sales 100.0% 100.0% 7.7 %
Gross Profit 27.3% 27.2% 7.8 %
Selling, Distribution & Administrative 21.4% 21.0% 9.8 %
Operating Income 5.8% 6.2% 0.8 %
Net Income 3.7% 4.0% (1.2)%

During the quarter ended September 30,December 31, 2011, net sales increased $52.1$40.9 million or 9.9%7.7% compared to the prior year quarter, with acquisitions accounting for $6.7$1.5 million or 1.3%0.3%, and favorable foreign currency translation adding $5.9unfavorably reducing sales by $0.9 million or 1.1%0.2%. There were 6461 selling days in both the 2011 and 2010 quarters.


Net sales from our Service Center Based Distribution segment, which is heavily focused on the MRO market, increased $39.9$32.2 million or 9.4%7.5% during the quarter from the same period in the prior year, primarily attributed to improvement in the industrial economy. Acquisitions within this segment increased sales by $6.7$1.5 million, or 1.6%0.4%.


Net sales from our Fluid Power Businesses segment, which is heavily focused on the OEM market, increased $12.2$8.7 million or 11.8%8.4% during the quarter from the same period in the prior year, primarily attributed to improvements in the industrial economy.


Improvements in the industrial economy helped drive sales increases in all of the geographic areas of the Company. Sales in our U.S. operations were up $28.4$27.3 million or 6.2%6.0%, with acquisitions accounting for $2.8$1.0 million or 0.6%0.2% of the U.S. increase. Sales from our Canadian operations increased $19.3$10.2 million or 35.4%16.1%. This increase consists of $3.9includes $0.5 million from acquisitions and $4.6$0.4 million due to favorable foreign currency translation. OurSales from our Mexican operations increased $4.4$3.4 million or 31.5%22.6%, with $1.3 million due to favorabledespite unfavorable foreign currency translation.

translation of APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES$1.3 million

ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

.


During the quarter ended September 30,December 31, 2011, industrial products and fluid power products accounted for 70.6%70.9% and 29.4%29.1%, respectively, of net sales as compared to 71.5%71.4% and 28.5%28.6%, respectively, for the same period in the prior year.


Our gross profit margin for the quarter increased to 27.4%27.3% compared to the prior year quarter’s 27.1%quarter's 27.2%. The improvement can be largely attributed to increased contribution from our U.S. service center point-of-sale margins, higher margins in our Canadian business,purchasing incentives, and lower scrap expense.

These favorable impacts offset the non-recurrence of favorable LIFO benefits recorded in the second quarter of fiscal 2011.


Selling, distribution and administrative expense (SD&A) consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company’sCompany's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, legal, and facility related expenses. SD&A was 19.9%21.4% of net sales in the quarter ended September 30,December 31, 2011 compared to 20.5%21.0% in the prior year quarter. On an absolute basis, SD&A increased $7.2$10.9 million or 6.7%9.8% compared to the prior year quarter. Incremental expenses associated with theThe ERP project totaled $3.8expenses were $4.2 million in the quarter ($3.5 million above the prior year quarter) and acquisitions added $2.4$0.5 million.

Additionally, the Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011. As a result, we incurred a curtailment loss of $3.1 million in the second quarter of fiscal 2012. Also increasing expenses were one time costs associated with our CEO transition of $1.3 million.


Operating income increased 24.0%was up $0.3 million, but as a percent of sales decreased to $43.3 million during the quarter compared to $34.9 million5.8% from 6.2% during the prior year quarter. Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 6.3%6.4% in the current

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


year quarter, from 5.9% in the prior year quarter due to improved operating leverage on sales increases. The Fluid Power Businesses operating margins decreased to 9.1% in the current year quarter from 6.1%9.6% in the prior year quarter. The Fluid Power Businesses operating margins increasedThis reduction can be attributed to 9.7%lower sales volume in the current year quarter from 9.1% in the prior year quarter. These increases as comparedone of its businesses. Higher SD&A expenses including ERP project expenses, a curtailment loss, and CEO transition related expenses contributed to the prior year quarter reflect improveddecline in total company operating leverage on the increases in sales.

income.


Interest, net, is down $1.1$0.4 million due to repayment in the first half of fiscal 2011 of all borrowings under our credit facilities.


Other expense was $1.9$0.8 million in the quarter and included $1.4driven by foreign currency transaction losses of $1.0 million ($0.9 million of which are unrealized). These losses were partially offset by $0.4 million of unrealized lossesgains on investments held by non-qualified deferred compensation trusts.


The effective income tax rate was 36.1%35.7% for the quarter ended September 30,December 31, 2011 compared to 39.2%35.8% for the quarter ended September 30,December 31, 2010. AccrualIn the second quarter of fiscal 2011, we reversed a valuation allowance which reduced the effective income tax rate by 4%. This was partially offset by accrual of U.S. income taxes on Canadian subsidiaries’subsidiaries' earnings accounted for 2.0% ofwhich increased last year’s firstyear's second quarter effective tax rate.rate by 2.3%. These items did not recur in fiscal 2012. The remaining variance in the effective tax rate this quarter is due toimpacted by a larger portion of pretax income coming from foreign jurisdictions taxed at lower rates, as well as lower effective state tax rates.


As a result of the factors addressed above, net income decreased $0.3 million or 1.2% compared to the prior year quarter. Net income per share was $0.49 per share for the quarter ended December 31, 2011, compared to $0.49 in the prior year quarter.

Six Months Ended December 31, 2011 and 2010

The following table is included to aid in review of Applied's condensed statements of consolidated income. The percent increase (decrease) column represents the change in dollars compared to the same period in the prior year.
  Six Months Ended December 31,
      Percent
  As a Percent of Net Sales Increase
  2011 2010 (Decrease)
Net Sales 100.0% 100.0% 8.8%
Gross Profit 27.3% 27.2% 9.3%
Selling, Distribution & Administrative 20.7% 20.8% 8.3%
Operating Income 6.7% 6.4% 12.7%
Net Income 4.1% 4.0% 12.8%

During the six months ended December 31, 2011, net sales increased $93.0 million or 8.8% compared to the same period in the prior year, with acquisitions accounting for $8.3 million or 0.8%, and favorable foreign currency translation adding $5.0 million or 0.5%. There were 125 selling days in both 2011 and 2010.

Net sales from our Service Center Based Distribution segment, which is heavily focused on the MRO market, increased $72.1 million or 8.5% during the same period in the prior year, primarily attributed to improvement in the industrial economy. Acquisitions within this segment increased sales by $8.3 million, or 1.0%.

Net sales from our Fluid Power Businesses segment, which is heavily focused on the OEM market, increased $20.9 million or 10.1% during the six months ended December 31, 2011 from the same period in the prior year, primarily attributed to improvements in the industrial economy.

Improvements in the industrial economy helped drive sales increases in all of the geographic areas of the Company. Sales in our U.S. operations were up $55.4 million or 6.1%, with acquisitions accounting for $3.8 million or 0.4% of the U.S. increase. Sales from our Canadian operations increased $29.7 million or 25.3%. This increase includes $5.0 million due to favorable foreign currency translation and $4.4 million from acquisitions. Sales from our Mexican operations increased $7.9 million or 26.8%, with a minimal year-to-date foreign currency translation impact.

During the six months ended December 31, 2011, industrial products and fluid power products accounted for 70.7% and 29.3%, respectively, of net sales as compared to 71.4% and 28.6%, respectively, for the same period in the prior year.


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Our gross profit margin for the period increased to 27.3% compared to the prior year period's 27.2%. The improvement can be largely attributed to increased contribution from our U.S. service center point-of-sale margins, higher purchasing incentives, and lower scrap expense. These favorable impacts offset the non-recurrence of favorable LIFO benefits recorded in the prior year.

SD&A was 20.7% of net sales in the six months ended December 31, 2011 compared to 20.8% in the prior year period. On an absolute basis, SD&A increased $18.1 million or 8.3% compared to the prior period. The ERP project expenses were $8.0 million in the six months ended December 31, 2011 ($7.2 million above the prior year period) and acquisitions added $3.2 million. Additionally, the Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the SERP effective December 31, 2011. As a result, we incurred a curtailment loss of $3.1 million in the second quarter of fiscal 2012. Also unfavorably increasing expenses were one time expenses associated with our CEO transition of $1.4 million.

Operating income increased $8.7 million to 6.7% during the period compared to 6.4% during the prior year period. Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 6.4% in the current year period, from 6.0% in the prior year period. The Fluid Power Businesses operating margins increased to 9.4% in the current year period from 9.3% in the prior year period. These increases as compared to the prior year period reflect improved operating leverage on the increases in sales, although the Fluid Power Businesses segment is experiencing some sales volume declines in one of its businesses.

Interest, net, is down $1.5 million due to repayment in the first half of fiscal 2011 of all borrowings under our credit facilities.

Other expense was $2.7 million in the period and included $1.6 million of foreign currency transaction losses ($1.4 million of which are unrealized) and $1.0 million of unrealized losses on investments held by non-qualified deferred compensation trusts.

The effective income tax rate was 35.9% for the six months ended December 31, 2011 compared to 37.5% for the same period in the prior year. In fiscal 2011, we accrued U.S. income taxes on Canadian subsidiaries' earnings which increased the effective tax rate; this was partially offset by reversal of a valuation allowance in the second quarter of fiscal 2011. These items did not recur in fiscal 2012. The rate this year is impacted by a larger portion of pretax income coming from foreign jurisdictions taxed at lower rates, as well as lower effective state tax rates.

As a result of the factors addressed above, net income increased $5.6$5.4 million or 27.1%12.8% compared to the prior year quarter.period. Net income per share was $0.61$1.11 per share for the quartersix months ended September 30,December 31, 2011, compared to $0.48$0.97 in the prior year quarter.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Liquidity and Capital Resources


Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At September 30,December 31, 2011, we have no outstanding borrowings, whereas at September 30, 2010, we had $25.0 million outstanding on private placement borrowings. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, cash provided from operations, and the use of operating leases will be sufficient to finance normal working capital needs in each of the countries we operate in, payment of dividends, acquisitions, investments in properties, facilities and equipment, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company’sCompany's credit standing and financial strength.


The Company’sCompany's working capital at September 30,December 31, 2011 was $398.3$411.0 million, compared to $404.2 million at June 30, 2011. The current ratio was 2.93.1 to 1 at September 30,December 31, 2011 and2.9 to 1 at June 30, 2011.


The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the SERP effective December 31, 2011. This reduced postemployment benefits by $8.9 million and deferred tax assets by $3.4 million in the condensed consolidated balance sheet.


15
Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



Net Cash Flows

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

   Three Months Ended
September 30,		 
Net Cash Provided by (Used in):  2011  2010 

Operating Activities

  $16,401   $4,516  

Investing Activities

   (7,746)   (28,529) 

Financing Activities

   (26,044)   (56,671) 

Exchange Rate Effect

   (485)   (500) 
  

 

 

  

 

 

 

(Decrease) Increase in Cash and Cash Equivalents

  $(17,874)  $(81,184) 
  

 

 

  

 

 

 

Net cash provided by operating activities for the three months ended September 30, 2011 was $16.4 million compared to $4.5 million provided by operating activities in the same period a year ago.

  Six Months Ended December 31,
Net Cash Provided by (Used in): 2011 2010
Operating Activities $30,216
 $19,966
Investing Activities (14,282) (41,419)
Financing Activities (34,344) (101,058)
Exchange Rate Effect (2,170) 649
Decrease in Cash and Cash Equivalents $(20,580) $(121,862)

Improved net income generated approximately half of the increase in net cash provided by operating activities over the prior year with quarterly variability in working capital contributing the rest.


Net cash used in investing activities during the current year was $7.7 million; $7.1$14.3 million; $14.0 million was used for capital expenditures and $1.2$1.2 million for acquisitions. These uses of cash were partially offset by $0.6$1.0 million of cash received forproceeds from property sales. In the threesix months ended September 30,December 31, 2010, we used $28.5$41.4 million; $27.7 million was used for acquisitions and $0.9$13.8 million for capital expenditures. The increase in capital expenditures primarily relates to spending on our ERP project.


Net cash used in financing activities was $26.0$34.3 million for the threesix months ended September 30,December 31, 2011. We used $18.2$19.0 million to repurchase 640,000664,100 shares of treasury stock and $8.1$16.1 million to pay dividends. In the prior year quarter,first half of fiscal 2011, financing activities used $56.7$101.1 million of cash; we

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

repaid $50.0 million under our revolving credit facility, $25.0 million under our private placement debt and $12.8 million related to the associated cross-currency swaps. Additionally, we paid dividends of $7.2$14.4 million. The increase in the dividend payments relates to our increased dividend rate to $0.19 per share versus $0.17 per share in the prior year quarter.


ERP Project

In the second quarter of fiscal 2011, Applied commenced its ERP project to transform the Company’sCompany's technology platforms and enhance its business information and transaction systems for future growth. We expect the total implementation costsspend related to this project will be in the upper end of our previously stated range of $70.0 million to $75.0 million over a three to four year period. In fiscal 2011, project spend totaled $21.1 million ($12.5 million capital and $8.6 million expense). During the current quarter, spending on the project totaled $9.5$9.0 million ($5.7 ($4.8 million capital and $3.8$4.2 million expense). On a year-to-date basis, spending on the project for fiscal 2012 totaled $18.5 million ($10.5 million capital and $8.0 million expense). We expect spending in fiscal year 2012 to reach $34.0$36.0 million to $37.0$40.5 million ($19.0 million to $21.0$21.5 million capital and $15.0$17.0 million to $16.0$19.0 million expense). The project is nearing the deployment phase forWe have deployed our solution in a portion of our Canadian operations and we are preparing for further deployments in Canada during this fiscal year. U.S. deployment indeployments are planned for fiscal 2013 and 2014.


Share Repurchases

The

In October 2011, the Board of Directors has authorized the repurchase of 1.5 million shares of the Company’sCompany's common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. We acquired 640,00024,100 shares of treasury stock on the open market in the three months ended September 30,December 31, 2011 for $18.2 million.$0.8 million under this new authorization. At September 30,December 31, 2011, we had authorization to repurchase an additional 7,6001,475,900 shares. In OctoberThrough the six months ended December 31, 2011, the Board authorized the Company to repurchase an additional 1.5 millionwe acquired 664,100 shares of common stock.

treasury stock on the open market for $19.0 million.


Borrowing Arrangements

We have a $150.0 million revolving credit facility with a group of banks expiring in June 2012, which we intend to renew. There are no borrowings outstanding under this facility at September 30,December 31, 2011. At September 30,December 31, 2011, unused lines under this facility, net of outstanding letters of credit, total $143.1 million and are available to fund future acquisitions or other capital and operating requirements.


We also have an uncommitted long-term financing shelf facility which expires in February 2013 and enables us to borrow up to $100.0 million with terms of up to fifteen years. At September 30,December 31, 2011, there were no outstanding borrowings under this agreement.



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Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Cautionary Statement Under Private Securities Litigation Reform Act

Management’s


Management's Discussion and Analysis and other sections of this report, including documents incorporated by reference, contain statements that are forward-looking, based on management’smanagement's current expectations about the future. Forward-looking statements are often identified by qualifiers, such as “guidance,” “expect,” “believe,” “plan,” “intend,” “will,” “should,” “could,” “would,” “anticipate,” “estimate,” “forecast,” “may,”"guidance," "expect," "believe," "plan," "intend," "will," "should," "could," "would," "anticipate," "estimate," "forecast," "may," and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases.


Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’sCompany's control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law.


Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability, or changes in supplier distribution programs; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; the potential for product shortages if suppliers are unable to fulfill in a timely manner increased demand in the economic recovery; competitive pressures; our reliance on information systems; our ability to implement our ERP system in a timely, cost-effective, and competent manner, and to capture its planned benefits while maintaining an adequate internal control environment; the impact of economic conditions on the collectability of trade receivables; reduced demand for our products in targeted markets due to reasons including consolidation in customer industries and the transfer of manufacturing capacity to foreign countries; our ability to retain and attract qualified sales and customer service personnel; our ability to identify and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability and timing of new business opportunities including acquisitions, alliances, customer relationships, and supplier authorizations; the incurrence of debt and contingent liabilities in connection with acquisitions; our ability to access capital markets as needed on reasonable terms; disruption of operations at our headquarters or

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

distribution centers; risks and uncertainties associated with our foreign operations, including volatile economic conditions, political instability, cultural and legal differences, and currency exchange fluctuations; the potential for goodwill and intangible asset impairment; changes in accounting policies and practices; organizational changes within the Company; the volatility of our stock price and the resulting impact on our consolidated financial statements; risks related to legal proceedings to which we are a party; adverse regulation and legislation, including potential changes in tax regulations (e.g., those affecting the use of the LIFO inventory accounting method and the taxation of foreign-sourced income); and the occurrence of extraordinary events (including prolonged labor disputes, natural events and acts of God, terrorist acts, fires, floods, and accidents). Other factors and unanticipated events could also adversely affect our business, financial condition or results of operations. We discuss certain of these matters more fully in our Annual Report on Form 10-K for the year ended June 30, 2011.




17
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company has evaluated its exposure to various market risk factors, including its primary market risk exposure through the effects of changes in exchange rates. We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes.


For quantitative and qualitative disclosures about market risk, see Item 7A “Quantitative"Quantitative and Qualitative Disclosures About Market Risk”Risk" in our Annual Report on Form 10-K for the year ended June 30, 2011.



18
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 4:CONTROLS AND PROCEDURES

ITEM 4: CONTROLS AND PROCEDURES



The Company’sCompany's management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the Company’sCompany's disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company’sCompany's disclosure controls and procedures are effective.


During the firstsecond quarter of fiscal 2012, there were no changes in the Company’sCompany's internal controls or in other factors that materially affected, or are reasonably likely to materially affect, the Company’sCompany's internal controls over financial reporting.



19
Table of Contents

PART II.OTHER INFORMATION


ITEM 1.Legal Proceedings.


The Company is a party to pending legal proceedings with respect to various product liability, negligence, and other matters. Although it is not possible to predict the outcome of these proceedings or the range of possible loss, the Company believes, based on circumstances currently known, that the likelihood is remote that the ultimate resolution of any of these proceedings will have, either individually or in the aggregate, a material adverse effect on the Company’sCompany's consolidated financial position, results of operations, or cash flows.



ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds.


Repurchases in the quarter ended December 31, 2011 were as follows:

Period(a) Total Number of Shares(b) Average Price Paid per Share ($)(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2011 to
October 31, 2011
—
—
—
1,500,000
November 1, 2011 to November 30, 2011400
33.87
400
1,499,600
December 1, 2011 to December 31, 201123,700
33.62
23,700
1,475,900
Total24,100
33.63
24,100
1,475,900


Repurchasesin the quarter ended September 30, 2011 were as follows:

Period

  (a) Total
Number of
Shares		   (b) Average
Price Paid per
Share ($)		   (c) Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs		   (d) Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs (1) (2)		 

July 1, 2011 to July 31, 2011

   -0-     -0-     -0-     647,600  

August 1, 2011 to August 31, 2011

   280,000     28.25     280,000     367,600  

September 1, 2011 to September 30, 2011

   360,000     28.52     360,000     7,600  

Total

   640,000     28.40     640,000     7,600  

(1)On January 23, 2008,October 25, 2011, the Board of Directors authorized the purchase of up to 1.5 million shares of the Company’sCompany's common stock. The Company publicly announced the authorization that day. Purchases couldcan be made in the open market or in privately negotiated transactions. On October 25, 2011, after quarter-end, this authorization was superseded by a new authorization adopted by the Board of Directors, to purchase up to an additional 1.5 million shares.


(2)During the quarter the Company purchased 182 shares in connection with the deferred compensation program and the vesting of stock awards.
ITEM 6.Exhibits


ITEM 6.Exhibits.

Exhibit No.

  

Description

3.1  Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit 3(a) to the Company’s Form 10-Q for the quarter ended December 31, 2005, SEC File No. 1-2299, and incorporated here by reference).
3.2  Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to the Company’s Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference).
4.1  Certificate of Merger of Bearings, Inc. (Ohio) (now named Applied Industrial Technologies, Inc.) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to the Company’s Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
4.2  Private Shelf Agreement dated as of November 27, 1996, between the Company and Prudential Investment Management, Inc. (assignee of The Prudential Insurance Company of America), conformed to show all amendments (filed as Exhibit 4.2 to the Company’s Form 10-Q for the Quarterquarter ended March 31, 2010, SEC File No. 1-2299, and incorporated here by reference).
4.3  Credit Agreement dated as of June 3, 2005 among the Company, KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 4.7 to the Company’s Form 10-Q dated February 9, 2010, SEC File No. 1-2299, and incorporated here by reference).

20
Table of Contents

4.4  First Amendment Agreement dated as of June 6, 2007, among the Company, KeyBank National Association as

Agent, and various financial institutions, amending June 3, 2005 Credit Agreement (filed as Exhibit 4 to the Company’s Form 8-K dated June 11, 2007, SEC File No. 1-2299, and incorporated here by reference).
10.1 Management Incentive Plan General Terms (AugustOffer of Employment dated October 14, 2011 revision)for Neil A. Schrimsher (filed as Exhibit 10.0110.1 to the Company’sCompany's Form 8-K dated August 12,October 17, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.2 Executive ManagementGeneral Terms for Annual Incentive Plan General Termsfor Neil A. Schrimsher (filed as Exhibit 10.0210.1 to the Company’sCompany's Form 8-K dated August 12,October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.3 Stock Appreciation Rights Award Terms and Conditions (Officers) (August 2011 revision)Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.0310.2 to the Company’sCompany's Form 8-K dated August 12,October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.4 Restricted Stock Units Terms and ConditionsChange in Control Agreement for Neil A. Schrimsher (filed as Exhibit 10.0410.3 to the Company’sCompany's Form 8-K dated August 12,October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.5 Performance Shares Terms and Conditions for Inducement Restricted Stock Units Award for Neil A. Schrimsher (filed as Exhibit 10.0510.4 to the Company’sCompany's Form 8-K dated August 12,October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.6Terms and Conditions for Inducement Stock Appreciation Rights Award for Neil A. Schrimsher (filed as Exhibit 10.5 to the Company's Form 8-K dated October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.7First Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to the Company's Form 8-K dated December 22, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.8Applied Industrial Technologies, Inc. Key Executive Restoration Plan (Effective January 1, 2012) and List of Participants (filed as Exhibit 10.2 to the Company's Form 8-K dated December 22, 2011, SEC File No. 1-2299, and incorporated here by reference).
15  Independent Registered Public Accounting Firm’s Awareness Letter.
31  Rule 13a-14(a)/15d-14(a) certifications.
32  Section 1350 certifications.
101.INS  XBRL Instance Document
101.SCH  XBRL Taxonomy Extension Schema Document
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF  XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document



The Company will furnish a copy of any exhibit described above and not contained herein upon payment of a specified reasonable fee which shall be limited to the Company’s reasonable expenses in furnishing the exhibit.


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Table of Contents

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



 

APPLIED INDUSTRIAL TECHNOLOGIES, INC.

(Company)

(Company)
Date: NovemberFebruary 2, 20112012 
By:
/s/  /s/ Neil A. Schrimsher
 Neil A. Schrimsher
 Chief Executive Officer
Date: NovemberFebruary 2, 20112012 
By:
/s/  /s/ Mark O. Eisele
 Mark O. Eisele
 Vice President-Chief Financial Officer & Treasurer



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Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC.


EXHIBIT INDEX

TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,DECEMBER 31, 2011

EXHIBIT NO.  DESCRIPTION
3.1  Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit 3(a) to the Company’s Form 10-Q for the quarter ended December 31, 2005, SEC File No. 1-2299, and incorporated here by reference).
3.2  Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to the Company’s Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference).
4.1  Certificate of Merger of Bearings, Inc. (Ohio) (now named Applied Industrial Technologies, Inc.) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to the Company’s Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
4.2  Private Shelf Agreement dated as of November 27, 1996, between the Company and Prudential Investment Management, Inc. (assignee of The Prudential Insurance Company of America), conformed to show all amendments (filed as Exhibit 4.2 to the Company’s Form 10-Q for the Quarterquarter ended March 31, 2010, SEC File No. 1-2299, and incorporated here by reference).
4.3  Credit Agreement dated as of June 3, 2005 among the Company, KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 4.7 to the Company’s Form 10-Q dated February 9, 2010, SEC File No. 1-2299, and incorporated here by reference).

4.4  First Amendment Agreement dated as of June 6, 2007, among the Company, KeyBank National Association as Agent, and various financial institutions, amending June 3, 2005 Credit Agreement (filed as Exhibit 4 to the Company’s Form 8-K dated June 11, 2007, SEC File No. 1-2299, and incorporated here by reference).
10.1 Management Incentive Plan General Terms (AugustOffer of Employment dated October 14, 2011 revision)for Neil A. Schrimsher (filed as Exhibit 10.0110.1 to the Company’sCompany's Form 8-K dated August 12,October 17, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.2 Executive ManagementGeneral Terms for Annual Incentive Plan General Termsfor Neil A. Schrimsher (filed as Exhibit 10.0210.1 to the Company’sCompany's Form 8-K dated August 12,October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.3 Stock Appreciation Rights Award Terms and Conditions (Officers) (August 2011 revision)Severance Agreement for Neil A. Schrimsher (filed as Exhibit 10.0310.2 to the Company’sCompany's Form 8-K dated August 12,October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.4 Restricted Stock Units Terms and ConditionsChange in Control Agreement for Neil A. Schrimsher (filed as Exhibit 10.0410.3 to the Company’sCompany's Form 8-K dated August 12,October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.5 Performance Shares Terms and Conditions for Inducement Restricted Stock Units Award for Neil A. Schrimsher (filed as Exhibit 10.0510.4 to the Company’sCompany's Form 8-K dated August 12,October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.6Terms and Conditions for Inducement Stock Appreciation Rights Award for Neil A. Schrimsher (filed as Exhibit 10.5 to the Company's Form 8-K dated October 31, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.7First Amendment to the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Plan (Restated Post-2004 Terms) (filed as Exhibit 10.1 to the Company's Form 8-K dated December 22, 2011, SEC File No. 1-2299, and incorporated here by reference).
10.8Applied Industrial Technologies, Inc. Key Executive Restoration Plan (Effective January 1, 2012) and List of Participants (filed as Exhibit 10.2 to the Company's Form 8-K dated December 22, 2011, SEC File No. 1-2299, and incorporated here by reference).

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15      Independent Registered Public Accounting Firm’s Awareness Letter.  Attached
31  Rule 13a-14(a)/15d-14(a) certifications.  Attached
32  Section 1350 certifications.  Attached

101.INS  XBRL Instance Document
101.SCH  XBRL Taxonomy Extension Schema Document
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document





24