BENEFIT PLANS

Retirement Savings Plan

Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company’s expense for matching of employees’ 401(k) contributions was $2,535, $3,156 and $2,788 during fiscal 2016, 2015 and 2014, respectively.

Deferred Compensation Plans

The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Non-employee directors were able to defer receipt of director fees until January 1, 2015. The Company funds these deferred compensation liabilities by making contributions to rabbi trusts. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.

Post-employment Benefit Plans

The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan, are unfunded:

Supplemental Executive Retirement Benefits Plan

The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011.

Key Executive Restoration Plan

In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), an unfunded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $268, $300, and $234 of expense associated with this plan in fiscal 2016, 2015, and 2014, respectively.

Qualified Defined Benefit Retirement Plan

The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly employees at retirement. These employees do not participate in the Retirement Savings Plan. The benefits are based on length of service and date of retirement.

Salary Continuation Benefits

The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits through fiscal 2020.

Retiree Health Care Benefits

The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees at no cost to the individual.

The Company uses a June 30 measurement date for all plans.

The following table sets forth the changes in benefit obligations and plan assets during the year and the funded status for the post-employment plans at June 30:



	Pension Benefits						Retiree Health Care Benefits
	2016			2015			2016			2015
Change in benefit obligation:
Benefit obligation at beginning of the year	$	29,994		$	34,558		$	2,144		$	2,790
Service cost	91			97			22			53
Interest cost	879			896			75			95
Plan participants’ contributions	—			—			60			64
Benefits paid	(5,555		)	(6,697		)	(229		)	(238		)
Amendments	—			(8		)	—			—
Actuarial loss (gain) during year	1,196			1,148			163			(620		)
Benefit obligation at end of year	$	26,605		$	29,994		$	2,235		$	2,144
Change in plan assets:
Fair value of plan assets at beginning of year	$	7,185		$	7,245		$	—		$	—
Actual (loss) gain on plan assets	(149		)	247			—			—
Employer contributions	5,256			6,390			169			174
Plan participants’ contributions	—			—			60			64
Benefits paid	(5,555		)	(6,697		)	(229		)	(238		)
Fair value of plan assets at end of year	$	6,737		$	7,185		$	—		$	—
Funded status at end of year	$	(19,868	)	$	(22,809	)	$	(2,235	)	$	(2,144	)

The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive loss for the post-employment plans were as follows:



	Pension Benefits						Retiree Health Care Benefits
June 30,	2016			2015			2016		2015
Amounts recognized in the consolidated balance sheets:
Other current liabilities	$	741		$	5,256		$	220	$	220
Post-employment benefits	19,127			17,553			2,015		1,924
Net amount recognized	$	19,868		$	22,809		$	2,235	$	2,144
Amounts recognized in accumulated other comprehensive loss:
Net actuarial (loss) gain	$	(8,234	)	$	(7,311	)	$	1,119	$	1,492
Prior service cost	(121		)	(208		)	948		1,219
Total amounts recognized in accumulated other comprehensive loss	$	(8,355	)	$	(7,519	)	$	2,067	$	2,711

The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets:



	Pension Benefits
June 30,	2016		2015
Projected benefit obligations	$	26,605	$	29,994
Accumulated benefit obligations	26,605		29,994
Fair value of plan assets	6,737		7,185

The net periodic costs (benefits) are as follows:



	Pension Benefits									Retiree Health Care Benefits
Year Ended June 30,	2016			2015			2014			2016			2015			2014
Service cost	$	91		$	97		$	77		$	22		$	53		$	48
Interest cost	879			896			1,180			75			95			139
Expected return on plan assets	(491		)	(495		)	(416		)	—			—			—
Recognized net actuarial loss (gain)	913			559			611			(210		)	(87		)	(38		)
Amortization of prior service cost	86			86			78			(271		)	(272		)	(271		)
Net periodic cost (benefits)	$	1,478		$	1,143		$	1,530		$	(384	)	$	(211	)	$	(122	)

The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $872 and $86, respectively. The estimated net actuarial gain and income from prior service cost for the retiree health care benefits that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $181 and $271, respectively.

Assumptions

A discount rate is used to determine the present value of future payments. In general, the Company’s liability increases as the discount rate decreases and decreases as the discount rate increases. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the Citigroup Pension Discount Yield Curve. During fiscal 2015, the Society of Actuaries released a series of updated mortality tables resulting from recent studies measuring mortality rates for various groups of individuals. As of June 30, 2015, the Company adopted these mortality tables, which reflect improved trends in longevity and have the effect of increasing the estimate of benefits to be received by plan participants.

The weighted-average actuarial assumptions used to determine benefit obligations and net periodic benefit cost for the plans were as follows:



	Pension Benefits				Retiree Health Care Benefits
June 30,	2016		2015		2016		2015
Assumptions used to determine benefit obligations at year end:
Discount rate	2.3	%	3.0	%	3.3	%	4.0	%
Assumptions used to determine net periodic benefit cost:
Discount rate	3.0	%	2.8	%	4.0	%	3.8	%
Expected return on plan assets	7.0	%	7.0	%	N/A		N/A

The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 7.0% and 6.8% as of June 30, 2016 and 2015, respectively, decreasing to 5.0% by 2027.

A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 2016 and for the year then ended:



	One-Percentage Point
	Increase		Decrease
Effect on total service and interest cost components of periodic expense	$	13	$	(11	)
Effect on post-retirement benefit obligation	255		(214		)

Plan Assets

The fair value of each major class of plan assets for the Company’s Qualified Benefit Retirement Plan is valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair values and target allocation as of June 30:



	Target Allocation	Fair Value
		2016		2015
Asset Class:
Equity* securities (Level 1)	40 – 70%	$	3,843	$	4,022
Debt securities (Level 2)	20 – 50%	2,759		2,930
Other (Level 1)	0 – 20%	135		233
Total	100%	$	6,737	$	7,185

* Equity securities do not include any Company common stock.

The Company has established an investment policy and regularly monitors the performance of the assets of the trust maintained in conjunction with the Qualified Defined Benefit Retirement Plan. The strategy implemented by the trustee of the Qualified Defined Benefit Retirement Plan is to achieve long-term objectives and invest the pension assets in accordance with ERISA and fiduciary standards. The long-term primary objectives are to provide for a reasonable amount of long-term capital, without undue exposure to risk; to protect the Qualified Defined Benefit Retirement Plan assets from erosion of purchasing power; and to provide investment results that meet or exceed the actuarially assumed long-term rate of return. The expected long-term rate of return on assets assumption was developed by considering the historical returns and the future expectations for returns of each asset class as well as the target asset allocation of the pension portfolio.

Cash Flows

Employer Contributions

The Company expects to contribute $750 to its pension benefit plans and $180 to its retiree health care benefit plans in fiscal 2017. Contributions do not equal estimated future benefit payments as certain payments are made from plan assets.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as applicable, are expected to be paid in each of the next five years and in the aggregate for the subsequent five years:



During Fiscal Years	Pension Benefits		Retiree Health Care Benefits
2017	$	1,100	$	180
2018	1,700		190
2019	2,200		180
2020	3,800		170
2021	3,000		160
2022 through 2026	7,200		550