DEF 14A 1 d922255ddef14a.htm DEF 14A DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

(RULE 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.     )

Filed by the Registrant ☑

Filed by a Party other than the Registrant ☐

Check the appropriate box:

Preliminary Proxy Statement

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

Definitive Proxy Statement

Definitive Additional Materials

Soliciting Material Pursuant to Section 240.14a-12

APPLIED INDUSTRIAL TECHNOLOGIES, INC.

 

(Name of Registrant as Specified In Its Charter)

 

          

 

(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

 

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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

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Table of Contents

LOGO

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

TUESDAY, OCTOBER 27, 2020

 

9:00 A.M. EASTERN TIME

 

HEADQUARTERS OF APPLIED INDUSTRIAL TECHNOLOGIES, INC.

1 Applied Plaza

East 36th Street and Euclid Avenue

Cleveland, Ohio, 44115

 

(216) 426-4000

www.applied.com

 

   

HOW TO VOTE

 

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.

 

TO THE SHAREHOLDERS OF APPLIED INDUSTRIAL TECHNOLOGIES, INC.:

We are pleased to invite you to our 2020 annual meeting of shareholders. The meeting will be at our headquarters, 1 Applied Plaza, East 36th Street and Euclid Avenue, Cleveland, Ohio, 44115, on Tuesday, October 27, 2020, at 9:00 a.m. Eastern Time. The meeting will be held for the following purposes:

 

 

1.  To elect three directors.

 

 

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

 

 

3.  To ratify the Audit Committee’s appointment of independent auditors for the fiscal year ending June 30, 2021.

 

 

Shareholders of record at the close of business on August 28, 2020, 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.

   

 

VOTING FOR REGISTERED AND RETIREMENT SAVINGS PLAN HOLDERS:

 

  LOGO  

By Internet Using Your Tablet or Smart Phone

Scan the QR code on your proxy card to vote with your mobile device

 

  LOGO  

By Phone

Call 1-800-652-VOTE (8683) in the U.S. or Canada to vote

 

 

 

LOGO

 

 

By Internet Using Your Computer

Visit www.investorvote.com/AIT

 

 

LOGO

 

 

By Mail

Cast your ballot, sign your proxy card, and return by free post

 

   

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON OCTOBER 27, 2020.

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, 2020

   

The Proxy Statement and 2020 Annual Report to Shareholders are available at

WWW.APPLIED.COM/ACCESS-PROXY


Table of Contents

Table of Contents

 

 

TABLE OF CONTENTS

 

  
   
    

Notice of 2020 Annual Meeting of Shareholders and Proxy Statement

 

02   

Proxy Statement Highlights

 

04   

Introduction and Voting Information

 

06   

ITEM 1: Election of Directors

 

12    Corporate Governance
12    Corporate Governance Documents
12    Director Independence
12    Director Attendance at Meetings
12    Meetings of Non-Management Directors
12    Board Leadership Structure
12    Committees
14    Board’s Role in Risk Oversight
14    Communications with Board of Directors
14    Director Nominations
15   

Transactions with Related Persons

 

16    Director Compensation
16    Compensation Review
16    Components of Compensation Program
17    Stock Ownership Guideline
17   

Director Compensation Table

 

18   

Holdings of Major Shareholders, Officers, and Directors

 

  
   
19    Executive Compensation
19    Compensation Discussion and Analysis
35    Summary Compensation Table
37    Grants of Plan-Based Awards Table
38    Outstanding Equity Awards at Fiscal Year-End Table
39    Option Exercises and Stock Vested Table
39    Nonqualified Deferred Compensation
40    Pension Plans
41    Potential Payments upon Termination or Change in Control
50   

CEO Pay Ratio Disclosure

 

50   

Compensation Committee Report

 

51   

ITEM 2:  Advisory (Nonbinding) Vote to Approve Executive Compensation

 

53   

ITEM 3:  Vote to Ratify Appointment of Independent Auditors

 

54   

Audit Committee Report

 

55   

Delinquent Section 16(a) Reports

 

55   

Shareholder Proposals and Nominee Submissions for 2021 Annual Meeting

 

55   

Householding Information

 

55   

Other Matters 

 

 

 

 
Applied Industrial Technologies 2020 Proxy Statement       1


Table of Contents

Proxy Statement Highlights

 

 

PROXY STATEMENT HIGHLIGHTS

The highlights below include information that you will find elsewhere in this proxy statement. The highlights do not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting. Information regarding the logistics of the annual meeting is provided beginning on page 4.

Proposals and Board Recommendations

The Board of Directors makes the following voting recommendations to shareholders for the annual meeting:

 

Proposal    Board’s Voting
Recommendation    
       Page        
     

Item 1: Election of Directors

   FOR each Nominee          6      
     

Item 2: Advisory (Nonbinding) Vote to Approve Executive Compensation

   FOR      51  
     

Item 3: Vote to Ratify Appointment of Independent Auditors

   FOR      53  

Director Nominees

 

Nominee

 

 

 

  Age    

 

 

 

Director Since  

 

  

Principal Occupation

 

  

Independent   

 

         

Robert J. Pagano, Jr.

  57   2017    Chief Executive Officer & President, Watts Water Technologies, Inc.    Yes
         

Neil A. Schrimsher

  56   2011    President & Chief Executive Officer, Applied Industrial Technologies, Inc.    No
         

Peter C. Wallace

  66   2005    Former Chief Executive Officer, Gardner Denver, Inc.    Yes

Additional information about the nominees and the other continuing directors is provided on pages 6-11.

Corporate Governance Highlights

 

Independence   

·  The Board Chairman is an independent director.

·  All of the directors are independent, except for our Chief Executive Officer.

·  The independent directors meet regularly in private executive sessions without management.

·  The Board’s Audit Committee, Corporate Governance Committee, and Executive Organization & Compensation Committee are each composed solely of independent directors.

Board Oversight of

Risk Management

  

·  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.

Board Evaluations, Refreshment, and Composition   

·  Our Board and its key committees perform annual self-evaluations.

·  The evaluations contribute to efforts to ensure that the Board continues to be composed of members with diverse experiences, attributes, and skills.

·  Most recently, in 2019, following a search, the Board elected Madhuri A. Andrews and Mary Dean Hall as new independent directors.

·  Five directors are actively employed public company executives.

·  Director tenures: range from 1 to 18 years, average of 7 years.

·  Director ages: range from 53 to 68 years, average of 60 years.

Stock Ownership

Guidelines

  

·  We expect each non-employee director to own, within five years after joining the Board, Applied shares valued at a minimum of five times the annual retainer fees.

·  Executive officers are expected not to dispose of stock unless their “owned” shares’ market value equals or exceeds the following annual base salary multiples immediately after the disposition: 5x for the CEO, 3x for other executive officers.

Additional information about our corporate governance is provided on pages 12-15.

 

 
2      Applied Industrial Technologies 2020 Proxy Statement


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Proxy Statement Highlights

 

 

Business Performance Highlights

In 2020, financial results were mixed amid the sharp economic downturn that arose out of the COVID-19 pandemic and the responsive actions of governmental authorities and businesses.

 

 

NET SALES

 

$3.25

BILLION

 

    

 

CASH PROVIDED BY

OPERATING ACTIVITIES

 

$296.7

MILLION

 

    

 

NET INCOME

 

$24.0

 

MILLION

    

 

CASH RETURNED TO

SHAREHOLDERS

 

$48.9

 

MILLION

 

While net sales were 6.5% lower than the prior year, cash provided by operating activities increased by 64.3%.

Net income was unfavorably impacted by a $131.0 million noncash goodwill impairment charge ($118.8 million net of tax) associated with our 2018 acquisition of FCX Performance, Inc. The third quarter charge was the result of end-market softness in our Flow Control operations and changes in growth projections from the macroeconomic backdrop.

Total shareholder return, considering the change in our stock price and reinvested dividends, rose 4% for the year.

For a detailed review of our performance, see Applied’s 2020 Annual Report on Form 10-K.

Executive Compensation Highlights

Our executive pay is targeted to be competitive with market medians for similar positions in peer distribution industry companies. Actual pay depends in large part on performance relative to goals and how our stock price performs in response.

The chart below shows the mix of targeted opportunities provided in 2020 to our Chief Executive Officer, Neil A. Schrimsher, in the forms of base salary, annual incentive pay, and long-term incentive pay (awarded in equity-based instruments).

 

 

LOGO

As we prioritized cost control and cash generation in the challenging economic environment, management temporarily reduced its salaries beginning in mid-April and continuing into fiscal 2021, with Mr. Schrimsher’s reduced by 20%; the Board’s Executive Organization & Compensation Committee ratified these reductions.

The named executive officers earned annual incentive pay at an average of 100.2% of their individual target values. 2020 achievements under the three-year performance share programs averaged 43.9% of target shares.

For a detailed review of our executive compensation program, see pages 19-50 of this proxy statement.

 

 

Approval of the Compensation of the Named Executive Officers

We provide shareholders the opportunity to approve, through a nonbinding, advisory vote, the compensation of our named executive officers as disclosed in our proxy statement, including, among other things, our executive compensation objectives, policies, and practices. The proposal is described on pages 51-52.

Ratification of Appointment of Independent Auditors

Subject to shareholder ratification, the Board’s Audit Committee appointed Deloitte & Touche LLP to serve as independent auditors for the fiscal year ending June 30, 2021. The committee made the appointment after evaluating the firm and its performance. We seek the shareholders’ ratification of the appointment as described on page 53.

 

 
Applied Industrial Technologies 2020 Proxy Statement       3


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Introduction and Voting Information

 

 

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.”

 

 

 

Q:    What is the proxy statement’s purpose?

 

A:

The proxy statement summarizes information you need to vote at our 2020 annual meeting of shareholders to be held on Tuesday, October 27, 2020, at 9:00 a.m. ET, 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, 2020.

 

 

Q:     On what matters are shareholders voting?

A:     1.  To elect three directors;

 

  2.

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

 

  3.

To ratify the Audit Committee’s appointment of independent auditors for the fiscal year ending June 30, 2020.

 

 

 

Q:

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

 

A:

Only shareholders of record at the close of business on August 28, 2020, may vote. As of that date, there were 38,758,928 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.

 

 

Q:     How many votes do I have?

 

A:

Each shareholder is entitled to one vote per share.

 

 

Q:    How do I vote?

 

A:

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

 

  ·   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.

 

  ·   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.

 

  ·   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 22, 2020; votes online or by phone for other shares must be received by Monday, October 26, 2020.

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.

 

 

Q:    What if I don’t indicate my voting choices?

 

A:

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.

 

 

 

 

 
4      Applied Industrial Technologies 2020 Proxy Statement


Table of Contents

    Introduction and Voting Information

 

 

Q:

What effect do abstentions and broker non-votes have?

 

A:

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:

 

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

 

  ·   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.

 

  ·   Item 3. 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 3, so there should be no broker non-votes on that item.

 

 

 

Q:

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

 

A:

Applied has adopted a policy applicable to uncontested director elections. If a nominee receives a greater number of votes “withheld” than votes “for” election, then promptly following certification of the shareholder vote the nominee shall submit, in writing, to the Board’s Chairman, the nominee’s 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 the 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 committee

 

recommends the director be asked to serve the 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.

 

 

 

Q:

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

 

A:

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.

 

 

 

Q:

May I revoke my proxy?

 

A:

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

 

 

 

Q:

Who pays the costs of soliciting proxies?

 

A:

Applied pays the 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.

 

 

 

Q:

Who counts the votes?

 

A:

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

 

 

 
Applied Industrial Technologies 2020 Proxy Statement       5


Table of Contents

Election of Directors

 

 

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 2020 annual meeting, the shareholders will elect directors for a three-year term expiring in 2023 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. Each nominee was most recently elected at the 2017 annual meeting. Their terms expire this year and the Board renominated them following the Corporate Governance Committee’s review and evaluation of their performance. Directors serving terms expiring in 2021 and 2022 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.

 

Following 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 director or nominee should serve as a director, considering 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.

 

 
6      Applied Industrial Technologies 2020 Proxy Statement


Table of Contents

    Election of Directors

 

 

Nominees for Election as Directors with Terms Expiring in 2023

 

 

    

 

LOGO   

 

Robert J. Pagano, Jr.

Chief Executive Officer and President,
Watts Water Technologies, Inc.

 

Age: 57

Director since: 2017

Committees:

      Audit

      Corporate Governance

      Executive Organization &

        Compensation

 

       LOGO   

 

Neil A. Schrimsher

President & Chief Executive Officer,

Applied Industrial Technologies, Inc.

 

Age: 56

Director since: 2011

Committee:

      Executive

 

 

    

 

 

Business Experience: Mr. Pagano has served as Chief Executive Officer and President of Watts Water Technologies, Inc. (NYSE: WTS) since 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 April to July 2018. 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.

 

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.

    

 

Business Experience: Mr. Schrimsher joined Applied as our Chief Executive Officer in 2011 and was also elected President in 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.

 

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

 

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 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.

 

 
Applied Industrial Technologies 2020 Proxy Statement       7


Table of Contents

Election of Directors

 

 

    Nominees for Election as Directors with

    Terms Expiring in 2023 (continued)

 

      

    Continuing Directors with Terms

    Expiring in 2021

 

 

    

 

LOGO   

 

Peter C. Wallace

Former Chief Executive Officer, Gardner Denver, Inc.

 

Age: 66

Director since: 2005

Chairman since: 2014

Committees:

      Corporate Governance

      Executive Organization &

        Compensation

      Executive

 

     LOGO   

 

Madhuri A. Andrews

Senior Vice President, Chief Digital and Information Officer, Jacobs Engineering Group Inc.

 

Age: 53

Director since: 2019

Committees:

      Audit

      Corporate Governance

 

 

    

 

 

Business Experience: Mr. Wallace most recently was Chief Executive Officer of Gardner Denver, Inc. from 2014 until retiring in December 2015. Gardner Denver is a 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 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)

 

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.

    

 

Business Experience: Ms. Andrews has served as Senior Vice President, Chief Digital and Information Officer for Jacobs Engineering Group Inc. (NYSE: J) since June 2019 and had been Senior Vice President and Chief Information Officer from August 2018 to June 2019. Jacobs Engineering Group is one of the largest technical professional services firms in the world, providing a diverse range of technical, professional, and construction services to a large number of industrial, commercial, and governmental clients. From 2015 to August 2018, she was Chief Information Officer at DynCorp International LLC, a global aviation, logistics, intelligence, and field operations service provider. Prior to then, she was Senior Vice President and Chief Information Officer at CompuCom Systems, Inc., an information technology managed services company.

 

Qualifications: Ms. Andrews is a business-focused technology executive with broad experience leading business and information technology transformation as well as global digital strategies for major firms across a variety of industries. She has led operational business continuity and technology-related transformation projects for organizations through acquisitions and divestitures, achieving synergies and eliminating stranded costs. Ms. Andrews also has practical experience optimizing and integrating governance, risk, and compliance (GRC) frameworks, processes, and technologies in complex regulatory and industry environments. Her skills and experience in these areas position her to be an important contributor to Applied’s Board.

 

 
8      Applied Industrial Technologies 2020 Proxy Statement


Table of Contents

Election of Directors

 

 

Continuing Directors with Terms Expiring in 2021 (continued)

 

    

 

LOGO  

 

 

Peter A. Dorsman

Former Executive Vice President,

Services,

NCR Corporation

 

Age: 65

Director since: 2002

Committees:

·  Corporate Governance

·  Executive Organization & Compensation

·  Executive

     LOGO   

 

Vincent K. Petrella

Former Executive Vice President,

Chief Financial Officer and Treasurer,

Lincoln Electric Holdings, Inc.

 

Age: 60

Director since: 2012

Committees:

·  Audit

·  Corporate Governance

·  Executive Organization & Compensation

·  Executive

 

                 

 

Business Experience: Mr. Dorsman retired from NCR Corporation (NYSE: NCR) in 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, 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 2017)

 

Qualifications: Mr. Dorsman has broad experience in marketing, sales, strategy, and operations. At NCR, a multibillion-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.

    

 

Business Experience: Mr. Petrella retired from Lincoln Electric Holdings, Inc. (NASDAQ: LECO) in August 2020 as Executive Vice President. He also served as Chief Financial Officer and Treasurer until April 2020. Lincoln Electric engages in the design, manufacture, and sale of welding, cutting, and brazing products worldwide.

 

Other Directorship in Previous 5 Years: The Gorman-Rupp Company (NYSE: GRC; since 2020)

 

Qualifications: As one of Lincoln Electric’s top executives, Mr. Petrella helped lead the company’s global expansion in recent decades. 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 multibillion-dollar public company make him a valued member of the Board and chairman of the Audit Committee.

 

 
Applied Industrial Technologies 2020 Proxy Statement       9


Table of Contents

Election of Directors

 

 

Continuing Directors with Terms Expiring in 2022

 

    

 

LOGO

 

    

 

 

 

Mary Dean Hall

Senior Vice President, Chief Financial Officer and Treasurer,

Quaker Houghton

 

Age: 63

Director since: 2019

Committees:

·  Audit

·  Corporate Governance

     LOGO   

 

Dan P. Komnenovich

Former President and Chief

Executive Officer,

Aviall, Inc.

 

Age: 68

Director since: 2012

Committees:

·  Audit

·  Corporate Governance

 

                 

 

Business Experience: Ms. Hall has served as Senior Vice President, Chief Financial Officer and Treasurer of Quaker Houghton (NYSE: KWR) since August 2019 and had served as Vice President, Chief Financial Officer and Treasurer prior to then, since November 2015. Quaker Houghton is the global leader in industrial process fluids for the primary metals and metalworking markets. Before then, she served in various finance and treasury roles of increasing responsibility with Eastman Chemical Company (NYSE: EMN), a global manufacturer of advanced materials, specialty chemicals, plastics, and fibers, most recently as Vice President and Treasurer.

 

Qualifications: Ms. Hall brings to Applied a well-rounded background in public company accounting and reporting, financial planning and analysis, tax, treasury, corporate development/M&A, investor relations, and enterprise risk management. In addition, her career began in the banking industry, where she developed expertise in M&A, capital markets, and financing. Ms. Hall’s skills and experience in these areas position her to be an important contributor to Applied’s Board.

    

 

Business Experience: Until retiring in 2013, Mr. Komnenovich was President and Chief Executive Officer of Aviall, Inc., a wholly owned subsidiary of The Boeing Company (NYSE: BA). Aviall, now operating under the Boeing brand, 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 multibillion-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.

 

 

 
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Table of Contents

Election of Directors

 

 

Continuing Directors with Terms Expiring in 2022 (continued)

 

       
    

LOGO

 

    

 

 

 

Joe A. Raver

President and Chief Executive Officer, Hillenbrand, Inc.

 

Age: 54

Director since: 2017

Committees:

·  Corporate Governance

·  Executive Organization & Compensation

                
             

 

Business Experience: Mr. Raver has served as President and Chief Executive Officer of Hillenbrand, Inc. (NYSE: HI) since 2013. 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.

 

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.

    

 

 
Applied Industrial Technologies 2020 Proxy Statement       11


Table of Contents

Corporate Governance

 

 

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:

 

 

Code of Business Ethics,

 

 

Board of Directors Governance Principles and Practices,

 

 

Director Independence Standards, and

 

 

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, 2020, 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 the director 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.

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.

 

 
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The committee members’ names and number of meetings held in fiscal 2020 follow:

 

 

Audit

Committee

4 meetings

  

Corporate Governance

Committee

4 meetings

  

Executive Organization &

Compensation Committee

6 meetings

Vincent K. Petrella, Chair

   Peter C. Wallace, Chair    Peter A. Dorsman, Chair

Madhuri A. Andrews

   Madhuri A. Andrews    Robert J. Pagano, Jr.

Mary Dean Hall

   Peter A. Dorsman    Vincent K. Petrella

Dan P. Komnenovich

   Mary Dean Hall    Joe A. Raver

Robert J. Pagano, Jr.

   Dan P. Komnenovich    Peter C. Wallace
     Robert J. Pagano, Jr.     
     Vincent K. Petrella     
     Joe A. Raver     

We describe the committees below. Their charters, posted via hyperlink from the investor relations area of Applied’s website, contain descriptions that are more detailed. 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 2020.

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 Ms. Hall and Messrs. Petrella, Komnenovich, and Pagano 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 page 54 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 2019 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 benefits. The committee also administers incentive awards to executives under the 2019 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 19, the “Compensation Discussion and Analysis” portion of this proxy statement.

 

 
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Table of Contents

Corporate Governance

 

 

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.

 

·  

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

 

·  

The Executive Organization & Compensation Committee assists with respect to management of risks related to executive succession and retention, 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 the 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; 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; in 2019, such a firm assisted the committee with the selection of Ms. Andrews and Ms. Hall.

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

 

 
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Corporate Governance

 

 

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 the director is a related person.

Warren E. Hoffner, our Vice President, General Manager – Fluid Power & Flow Control, is an executive officer. Mr. Hoffner joined the company 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 $150,308 per year, with a term expiring in 2026; and (2) we lease a second building from Mr. Hoffner’s father at a current rental rate of $124,258 per year, also with a term expiring in 2026. Applied management, using a third-party broker, negotiates the rental rates and other lease terms and we consider them market competitive. Following a review, the Corporate Governance Committee ratified the lease transactions.

 

 
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Table of Contents

Director Compensation

 

 

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 on director compensation, as reported in other companies’ SEC filings, 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.

The 2019 Long-Term Performance Plan limits director compensation (cash and equity) to $750,000 per annum per director, consistent with evolving best practices.

Components of Compensation Program

The director compensation program’s primary components follow:

Quarterly Retainers.

 

Position    Quarterly Retainer ($)

Each Non-Employee Director

   23,750

Board Chairman

   Additional 17,500

Audit Committee Chair

   Additional 5,000

Corporate Governance Committee Chair

   Additional 3,125 (1)

Executive Org. & Comp. Committee Chair

   Additional 3,750

 

(1)

The Board discontinued the Corporate Governance Committee chair retainer in October 2019 when the committee roster was reconstituted to include all of the independent directors, with Mr. Wallace, the Board Chairman, serving as committee chair.

In April 2020, in support of Applied’s response to the impacts of the COVID-19 pandemic, the Board temporarily reduced the quarterly retainer amounts referenced above by 20%. The table on page 17 reflects actual fees earned during the year. The temporary reductions have continued into fiscal 2021.

Long-Term Incentives. Annually, the Corporate Governance Committee considers long-term incentive awards to directors. In January 2020, the committee awarded each director 1,881 restricted shares under the 2019 Long-Term Performance Plan. To reduce the impact of short-term stock price volatility, the method for determining the shares’ targeted value uses an average closing share price for 90 trading days prior to the grant. The targeted value represented a little more than half of each director’s total compensation (excluding retainers paid to directors with extra duties), approximating typical practices of other companies. 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.

 

 
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Director Compensation

 

 

Contributory health care coverage is available to directors who joined the Board before 2011; Mr. Wallace is the only director who participated in 2020.

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 $475,000, excluding the impact of the temporary retainer reductions. The Board believes this ownership guideline is consistent with the practices of peers and other companies, and is a good governance practice. Directors may hold the shares directly or indirectly.

At June 30, 2020, each director owned shares valued in excess of the $475,000 guideline except for three directors who have not reached five years of service: Ms. Andrews and Ms. Hall, who joined the Board in 2019, and Mr. Pagano, who joined the Board in 2017.

The average non-employee director share ownership value at June 30, 2020, was 12 times the annual retainer fees.

Director Compensation — Fiscal Year 2020

The following table shows information about non-employee director compensation in 2020.

 

Name  

Fees Earned

    or Paid in Cash    

($) (1)

 

    Stock Awards    

($) (2)

 

    Option Awards    

($) (3)

 

All Other

    Compensation    

($)

 

Total

($)

           

Madhuri A. Andrews (4)

    82,333                 177,949               0     0                             260,282               
           

Peter A. Dorsman

    104,500                 125,049               0     0                             229,549               
           

Mary Dean Hall (4)

    82,333                 177,949               0     0                             260,282               
           

Edith Kelly-Green (5)

    53,750                 0               0     0                             53,750               
           

Dan P. Komnenovich

    90,250                 125,049               0     0                             215,299               
           

Robert J. Pagano, Jr.

    90,250                 125,049               0     0                             215,299               
           

Vincent K. Petrella

    109,250                 125,049               0     0                             234,299               
           

Joe A. Raver

    90,250                 125,049               0     0                             215,299               
           

Dr. Jerry Sue Thornton (5)

    47,500                 0               0     0                             47,500               
           

Peter C. Wallace

    156,750                 125,049               0     14,729 (6)                       296,528               

 

(1)

Amid the sharp economic downturn that arose out of the COVID-19 pandemic and the responsive actions of governmental authorities and businesses, the directors’ quarterly retainers were temporarily reduced beginning in April 2020 and continuing into fiscal 2021.

 

(2)

At June 30, 2020, each non-employee director held 1,881 restricted shares that vest in January 2021, and Ms. Andrews and Ms. Hall each held an additional 982 shares (partial year awards granted upon their election to the Board) that vested in August 2020. Applied pays dividends on restricted stock at the same rate paid to all shareholders, but awards made under the 2019 Long-Term Performance Plan, adopted in October 2019, provide for the accrual of dividends and payment at vesting. Directors hold voting rights for the shares. The amounts in the table represent the awards’ grant date fair value computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation (“FASB ASC Topic 718”).

 

(3)

At June 30, 2020, the following then-current directors held the corresponding numbers of stock options from previous years’ awards: Mr. Dorsman, 13,513; Mr. Petrella, 9,510; and Mr. Wallace, 10,789.

 

(4)

Ms. Andrews and Ms. Hall were elected to the Board in August 2019.

 

(5)

Ms. Kelly-Green and Dr. Thornton retired from the Board in October 2019.

 

(6)

Reflects the value of health care benefits.

 

 
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Table of Contents

Beneficial Ownership

 

 

HOLDINGS OF MAJOR SHAREHOLDERS,

OFFICERS, AND DIRECTORS

The following table shows beneficial ownership of Applied common stock, at June 30, 2020, 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 35, and (iv) all directors, nominees, and executive officers (at June 30, 2020) as a group.

 

Name of Beneficial Owner  

        Shares Beneficially Owned    

  on June 30, 2020 (1)

 

Percent of

  Class (%) (2)  

BlackRock, Inc.

55 East 52nd Street, New York, New York 10055

    6,390,233  (3)    16.5

The Vanguard Group, Inc.

P.O. Box 2600, Valley Forge, Pennsylvania 19482-2600

    4,308,711  (4)    11.1

JPMorgan Chase & Co.

383 Madison Avenue, New York, New York 10017

    2,304,272  (5)      6.0

Madhuri A. Andrews

    2,863       

Fred D. Bauer

    158,567       

Peter A. Dorsman

    64,159       

Mary Dean Hall

    2,863       

Warren E. Hoffner

    77,110       

Dan P. Komnenovich

    21,186       

Kurt W. Loring

    76,311       

Robert J. Pagano, Jr.

    6,224       

Vincent K. Petrella

    25,271       

Joe A. Raver

    7,738       

Neil A. Schrimsher

    530,001        1.4

Peter C. Wallace

    51,005       

David K. Wells

    43,410       

All Directors, Nominees, and Executive Officers as a Group (13 Individuals)

    1,066,708  (6)      2.7

 

  (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, 2020, by exercising vested stock options and stock-settled stock appreciation rights: Mr. Bauer, 69,625; Mr. Dorsman, 13,513; Mr. Hoffner, 55,125; Mr. Loring, 64,425; Mr. Petrella, 9,510; Mr. Schrimsher, 407,475; Mr. Wallace, 10,789; and Mr. Wells, 40,550. The totals also include shares held in nonqualified deferred compensation plan accounts for which the beneficial owner has voting, but not dispositive power: Mr. Dorsman, 38,557; and Mr. Wallace, 11,954. Each non-employee director’s total also includes 1,881 restricted shares, for which the director has voting but not dispositive power, except that the totals for Ms. Andrews and Ms. Hall include 2,863 restricted shares. 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 February 4, 2020, indicating it had sole voting power for 6,211,101 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 14, 2020, indicating it had shared voting and sole dispositive power for 242 shares, shared voting and dispositive power for 61,285 shares, no voting but sole dispositive power for 4,218,484 shares, and no voting but shared dispositive power for 28,700 shares.

 

  (5)

JPMorgan Chase & Co. reported its ownership, including shares beneficially owned by affiliated entities, in a Form 13F filed with the SEC on August 11, 2020, indicating it had sole voting and shared dispositive power for 2,158,524 shares, and no voting but shared dispositive power for 145,748 shares.

 

  (6)

Includes 671,012 shares that could be acquired by the individuals within 60 days after June 30, 2020, 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.

 

 
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Executive Compensation

 

 

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

This Compensation Discussion and Analysis section (“CD&A”) 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 2020.

This discussion and analysis should be read in conjunction with the Summary Compensation Table on page 35 and the additional tables and narrative disclosure that follow it.

As required by SEC rules, the proxy statement includes disclosures regarding the compensation of the following executive officers (the “named executive officers” or “NEOs”):

 

 

Name

 

  

 

Position

 

Neil A. Schrimsher

       President & Chief Executive Officer (“CEO”)

David K. Wells

       Vice President – Chief Financial Officer & Treasurer (“CFO”)

Fred D. Bauer

       Vice President – General Counsel & Secretary

Warren E. Hoffner

       Vice President, General Manager – Fluid Power & Flow Control

Kurt W. Loring

       Vice President – Chief Human Resources Officer

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

2020 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 after considering competitive market data and subjective factors, the Committee took the following actions in 2020 relative to the primary pay elements:

Base Salary and Target Annual Incentive Pay

 

·  

At the beginning of the year, the Committee approved adjustments to two NEOs’ base salaries of less than 4%. Mr. Schrimsher’s salary was not changed from 2019.

 

·  

Amid the sharp economic downturn that arose out of the COVID-19 pandemic and the responsive actions of governmental authorities and businesses, management temporarily reduced its salaries beginning in mid-April and continuing into fiscal 2021, with Mr. Schrimsher’s reduced by 20%; the Committee ratified these reductions.

 

·  

The Committee held the NEOs’ annual incentive targets, as a percentage of salary, at the same levels as in 2019 and 2018.

Long-Term Incentives

 

·  

Emphasizing performance in Applied’s incentive plans, the Committee awarded approximately 50% (55% for Mr. Schrimsher) of each NEO’s targeted long-term incentive value in performance shares, tied to key company metrics.

 

·  

Stock-settled stock appreciation rights (“SARs”) and restricted stock units (“RSUs”) made up the remainder of the targeted long-term incentive value. Accordingly, all long-term incentives were equity-based.

 

 
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Executive Compensation

 

 

·  

The Committee approved adjustments to annual long-term incentive target values reflecting market data and subjective factors. When considered with its actions on base salaries and target annual incentive pay, the Committee increased the weighting in total NEO pay to programs intended to drive long-term performance.

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

In 2020, financial results were mixed in the economic downturn. Cost control and cash generation were prioritized in this challenging environment, but net income, earnings before interest, tax, depreciation, and amortization (“EBITDA”), and after-tax-return on assets (“ROA”) were lower than in 2019:

 

     

 

2020

 

 

  2020 Adjusted (1)  

 

 

    2020 Goal    

 

 

2019

 

Sales

   $3.2 billion       $3.5 billion

Net Income

   $24.0 million       $153.5 million   $170.8 million       $144.0 million    

EBITDA (2)

   $153.5 million       $298.5 million   $328.4 million       $328.4 million    

Cash Provided by Operating Activities

   $296.7 million         $226.6 million       $180.6 million    

ROA (3)

   1.0%   6.4%   7.3%   6.3%

 

(1)

2020 financial results were unfavorably impacted by a $131.0 million noncash goodwill impairment charge ($118.8 million net of tax) associated with our 2018 acquisition of FCX Performance, Inc. The third quarter charge was the result of end-market softness in our Flow Control operations and changes in growth projections from the macroeconomic backdrop. The Committee believed that the reported financial results did not reflect the company’s underlying operating performance and management’s achievements for the year. Following a review, the Committee excluded the goodwill impairment charge from the achievement calculations under the NEOs’ incentive programs and also made certain other adjustments for one-time items, the largest of which was to exclude $7.9 million of restructuring costs ($6.1 million net of tax) incurred to position the business more favorably in the market environment. The “2020 Adjusted” column reflects results net of the adjustments.

 

(2)

For purposes of the NEOs’ three-year performance share program beginning with the 2020-2022 program, EBITDA is calculated by adding net income, interest expense, income taxes, depreciation, and intangibles amortization. The 2019 EBITDA figure is also calculated in this manner for comparability.

 

(3)

ROA is calculated, for purposes of the performance share program, by dividing annual net income by average monthly assets for the year.

Net income, adjusted as described above, was lower than the 2020 goal, while cash provided by operating activities exceeded the goal. The NEOs earned annual incentive pay for 2020 at an average of 100.2% of their individual target values, as compared with 69.4% in 2019.

Shares banked for 2020 under the performance share programs, described in detail on pages 29-31, are shown below:

 

Performance Shares Program

 

  

Banked Award as % of 2020 Target Shares

 

2020-2022

   75.4%

2019-2021

   0.0%

2018-2020

   56.2%
     Average: 43.9%

Total shareholder return, considering the change in our stock price and reinvested dividends, rose 4% for the year. The company returned $48.9 million of cash to shareholders through dividends during the year.

We believe that our compensation decisions, as described in this CD&A, 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 97% of the shares cast voting in favor; as a result, the Committee made no material changes to the program.

 

 
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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:

 

       

LOGO

What We Do

 

 

 

    

LOGO

What We Don’t Do

 

  Pay for performance: in 2020, an average of 72% of the targeted primary compensation for the NEOs (81% for our CEO) was tied to performance.

 

  Committee members meet independence requirements under SEC rules and NYSE listing standards.

 

  The Committee uses an independent compensation consultant.

 

  Balanced approach to compensation, combining fixed and variable, short-term and long-term, cash and equity, and performance and time-based shares.

 

  Pay philosophy targets market median compensation among distribution industry companies.

 

  The Committee sets reasonably demanding incentive plan goals that are regularly reviewed for difficulty and analyzes the alignment of our pay program outcomes with our financial results.

 

  Diverse incentive goals without steep payout cliffs. Equity award vesting periods encourage consistent behavior and reward long-term, sustained performance.

 

  Change in control agreements and equity plan include “double trigger” provisions for cash payment and equity vesting.

 

  Limited perquisites and other benefits.

 

  Significant stock ownership guidelines for executive officers and directors, with requirement of holding net shares from equity awards until guideline is met.

 

  Provisions in plans and award terms to claw back compensation under defined circumstances.

     

LOGO

 

 

LOGO

 

LOGO

 

LOGO

 

LOGO

 

LOGO

 

LOGO

 

LOGO

 

LOGO

 

LOGO

 

LOGO

 

  

 

No payment of dividend equivalents on performance shares, or on restricted stock units granted under new 2019 Long-Term Performance Plan, until earned.

 

No granting of stock options or SARs with an exercise price less than fair market value at grant.

 

No duplication of metrics in the goals for our short and long-term incentive plans.

 

No equity award vesting periods of less than one year.

 

No repricing or replacing of underwater stock options or SARs.

 

No hedging or short sales of Applied stock are permitted.

 

No payment of guaranteed, above-market, or preferential interest or earnings on deferred compensation.

 

No change in control agreements other than those with four executive officers.

 

No excise tax gross-up provisions in change in control agreements entered into after 2011, including our CEO’s agreement.

 

No defined benefit pension plan, except for a legacy SERP frozen in 2012, with one remaining active participant.

 

No excessive risk-taking, based on annual compensation risk assessment.

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.

 

 
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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 with the following:

 

·  

Establishing the executive compensation program’s components,

 

·  

Identifying and reviewing peer group companies,

 

·  

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 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.

Pay Governance performed no other work for Applied during the year and received no other compensation from Applied outside its engagement by the Committee. Following a review of existing facts and circumstances, including factors specified in the NYSE’s listing standards, the Committee concluded 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.

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.

 

 
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Executive Compensation Program Overview

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

 

·  

Base salary,

 

·  

Annual incentive pay,

 

·  

Long-term incentives,

 

·  

Qualified, nonqualified, and welfare plan benefits, and

 

·  

Change in control and termination benefits.

Base salary, annual incentive pay, and long-term incentives are the primary components and are summarized below.

 

 

 

Component

 

  

 

Description

 

  

 

Rationale

 

Base Salary

   Fixed compensation paid in cash for service during year    To provide base amount of market competitive pay

Annual Incentive Pay:

Management Incentive Plan

   Variable compensation paid annually in cash based on performance relative to annual company goals as well as individual performance    To motivate and reward executives with respect to fiscal year company and individual performance

 

Long-Term Incentives

  

 

Performance Shares

(55% weighting for CEO, 50% for other NEOs)

  

 

Shares earned based on achievement of company goals over a three-year period

  

 

To promote

·   Achievement of longer-term company goals

·   Stock price appreciation through use of stock-based and stock-settled instruments

·   Executive retention through time-based vesting

  

 

Stock Appreciation Rights (SARs)

(22.5% weighting for CEO, 25% for other NEOs)

   Stock-settled awards that provide realizable compensation only to the extent our stock price appreciates
  

 

Restricted Stock Units (RSUs)

(22.5% weighting for CEO, 25% for other NEOs)

   Shares earned after three years of continued service

The Committee sets base salaries to be competitive with market medians for similar positions in peer distribution companies. 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 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 operating 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 and individual 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 in an effort to ensure Applied’s equity plan is not unduly diluting shareholders’ interests.

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

 

 

 
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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.

The charts below show the percentage allocation of opportunities provided in 2020 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).

2020 TARGET COMPENSATION MIX

 

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. His overall compensation is weighted, however, 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 2020. To help evaluate Applied’s executive compensation, the Committee created a peer group of distribution companies, primarily industrial distributors. 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 18 companies with annual sales ranging from $1.6 billion to $11.9 billion, and median sales of $4.0 billion, as compared with Applied’s annual sales of $3.5 billion for the same period. Each peer group company disclosed compensation for top officers in SEC filings. Management did not participate in selecting companies.

The 2020 peer group (the “Peer Group”) included the companies shown in the table below, all of which had also been in the 2019 peer group. KLX Inc., the other member of the 2019 peer group, was removed after being acquired.

 

 

2020 Peer Group

 

     

AAR Corp.

   HD Supply Holdings, Inc.    Patterson Companies, Inc.
     

Anixter International Inc.

   Kaman Corporation    Pool Corporation
     

BMC Stock Holdings, Inc.

   LKQ Corporation    ScanSource, Inc.
     

Beacon Roofing Supply, Inc.

   MRC Global Inc.    WESCO International, Inc.
     

Fastenal Company

   MSC Industrial Direct Co., Inc.    Watsco, Inc.
     

GMS Inc.

   NOW Inc.    Wesco Aircraft Holdings, Inc.

Pay Governance then prepared a compensation review and assessment, analyzing the competitiveness of target compensation for Applied’s CEO and CFO positions relative to comparable Peer Group data. Pay Governance did not analyze Peer Group data for other officer positions for 2020 (although it had done so for 2019), but reported on broader compensation trends to assist the Committee in evaluating target pay levels.

 

 
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The study identified Peer Group pay for each position at the 25th, 50th, 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 several broad industrial company surveys. The Committee requested this supplemental data to help confirm the reliability of the Peer Group data.

Pay Governance analyzed base salary, annual incentive target compensation as a percentage of base salary, 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 performance in the past one, three, and five years with the Peer Group companies’ performance, considering metrics such as sales growth, EBITDA growth, cash flow growth, EBITDA margin, cash flow margin, net income margin, ROA, and total shareholder return. The comparisons assist the Committee in examining how Applied’s executive pay aligns with company performance relative to peers.

Using Pay Governance’s study, the Committee evaluated each primary compensation component. In most years, including 2020, the Committee seeks to compensate executives near the market median if Applied’s performance targets are achieved. 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.

Detailed Review of Compensation Components

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 approximate 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 2020, after considering the Peer Group data, executive pay trends in the broader market, and the more subjective factors referenced above, the Committee approved increases of less than 4% to two NEOs’ base salaries. Mr. Schrimsher’s base salary was not adjusted. The Committee’s actions maintained the officers’ pay at competitive levels relative to market medians and reflected a discipline of managing base salaries within the framework of Applied’s pay philosophy and competitive data.

Amid the economic downturn that arose out of the COVID-19 pandemic and the responsive actions of governmental authorities and businesses, management temporarily reduced its salaries beginning in mid-April and continuing into fiscal 2021, with Mr. Schrimsher’s reduced by 20%; the Committee ratified these reductions.

Annual Incentive Pay. 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 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 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 2020, consistent with historical practice, the Committee established goals based on company-wide measures that it considers key indicators of shareholder value creation:

 

 
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·  

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 the performance measures that it believes are attainable, but that require executives to perform at a consistently high level to achieve target award values. Target and maximum incentive objectives for 2020 are shown in the table below:

 

Net Income

(weighted 60%)

  

    Under $145.2    

million

 

      $145.2      

million

 

      $170.8      

million

 

      $205.0      

million

% of Prorated Portion of Target Award

   0%   50%   100%   200%

% Change Compared with 2019 Net Income

     0.8%   18.6%   42.4%
              

Cash Provided by Operating Activities

(weighted 20%)

   Under $192.6

million

  $192.6

million

  $226.6

million

  $283.3

million

% of Prorated Portion of Target Award

   0%   50%   100%   200%

% Change Compared with 2019 Cash Provided by Operating Activities

     6.6%   25.5%   56.9%

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 2020 to approximate market practices, as shown in Pay Governance’s review, resulting in maintaining the percentages at the same levels as in 2019 and 2018. The 2020 targets follow:

 

 

Name

 

  

Base Salary ($) (1)

 

  

Incentive Target (%)

 

  

Target Award Value ($)

 

N. Schrimsher

   900,000    105    945,000

D. Wells

   440,000    65    286,000

F. Bauer

   420,000    55    231,000

W. Hoffner

   385,000    60    231,000

K. Loring

   360,000    55    198,000

 

(1)

Base salaries exclude impact of temporary salary reductions.

Actual 2020 financial results were unfavorably impacted by a $131.0 million noncash goodwill impairment charge ($118.8 million net of tax) associated with our 2018 acquisition of FCX Performance, Inc. The third quarter charge was the result of end-market softness in our Flow Control operations and changes in growth projections from the macroeconomic backdrop. After reviewing the reported financial results, the Committee concluded they did not reflect the company’s underlying operating performance and management’s achievements for the year.

The Management Incentive Plan terms provide the Committee the authority, in its sole discretion, to make adjustments in order to prevent diminution or enlargement of the benefits intended to be conferred, in a manner the Committee determines is equitably required by changes or events such as those specified above. After deliberation, the Committee excluded the goodwill impairment charge from the achievement calculations and also made certain other adjustments for one-time items, the largest of which was to exclude $7.9 million of restructuring costs ($6.1 million net of tax) incurred to position the business more favorably in the market environment.

 

 
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As a result of Applied’s 2020 performance, as adjusted, the Management Incentive Plan payouts for the net income and cash provided by operating activities components were as follows:

 

Goal                    2020 Achievement ($)                    

        Payout as % of Prorated Portion        

of Target Award

Net Income

(weighted 60%)

   153.5 million (1)    66.3%

Cash Provided by Operating Activities

(weighted 20%)

   296.7 million    200.0%

 

(1)

Net income amount reflects adjusted achievement.

The remaining 20% of each executive officer’s plan opportunity was tied to the Committee’s evaluation of individual performance relative to strategic objectives approved by the Committee.

After evaluating individual performance, with Mr. Schrimsher reporting on the other officers’ performance, the Committee approved the following payouts for this final component: Mr. Schrimsher, $189,000; Mr. Wells, $57,200; Mr. Bauer, $46,200; Mr. Hoffner, $46,200; and Mr. Loring, $43,560.

Shown below are the NEOs’ total 2020 Management Incentive Plan payouts:

 

   
Name    Annual Incentive Payout ($)
   

N. Schrimsher

   942,921
   

D. Wells

   285,371
   

F. Bauer

   230,492
   

W. Hoffner

   230,492
   

K. Loring

   201,524

The average NEO payout, as a percentage of the target awards, was 100.2%.

Considering company goals only, Management Incentive Plan achievements for the most recent five years, as a percentage of targeted achievement, were as follows:

 

Year   

Achievement of Company

Goals (Blended %)

   
2020      99.7
   
2019      61.3
   
2018    154.1
   
2017    147.2
   
2016      50.0

Long-Term Incentives. In the first quarter, the Committee made long-term incentive awards to the executive officers under the 2015 Long-Term Performance Plan. Subsequent to those awards, at the 2019 annual meeting, the shareholders adopted the 2019 Long-Term Performance Plan to replace the 2015 plan.

The plans reward executives for achieving long-term goals and authorize incentive awards in a variety of forms. The Committee makes awards annually, near the start 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

 

 
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meets its goals and above when Applied exceeds its goals. If goals are not achieved, 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 approved adjustments to the NEOs’ annual long-term incentive target values, including increasing Mr. Schrimsher’s target value by 12.5%. Because Mr. Schrimsher did not earn increases to his base salary and annual incentive target in 2020, the effect was to weight his overall pay more to programs intended to drive long-term performance.

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

2020 LONG-TERM INCENTIVE AWARDS

 

LOGO

The Committee believes these combinations appropriately balance the vehicles’ distinct purposes, with Mr. Schrimsher’s weighting, as befits his broad responsibilities, tilted more toward the operating performance-driven performance shares. Reflecting Applied’s culture, the mix differs from the norm for the Peer Group companies, which tend to place greater emphasis on options/SARs and 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 method uses an average closing share price for 90 trading days prior to the grant. The Grants of Plan-Based Awards table on page 37 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 executive officers’ 2020 awards, as well as performance for the year under the performance share programs:

 

·  

Stock Appreciation Rights (22.5% of CEO’s 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. Unvested SARs vest on an executive officer’s retirement, but the remaining term for all the outstanding SARs is truncated to three years. The effect of other events on SARs and the other incentive vehicles is discussed in “Potential Payments upon Termination or Change in Control,” beginning on page 41.

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.

 

 
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·  

Restricted Stock Units (22.5% of CEO’s 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 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. RSU grants under the 2015 Long-Term Performance Plan paid dividend equivalents on a current basis, but grants under the 2019 Long-Term Performance Plan, adopted in October 2019, provide for the accrual of dividend equivalents and payment on vesting.

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.

 

·  

2020-2022 Performance Shares (55% of CEO’s 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 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; i.e., the goals for each year of a three-year period are established and approved at the start of the three-year period.

Applied’s approach, as opposed to setting goals covering the full three-year period, reduces the risk that any given year of over or under-performance unduly influences payouts for the full three years.

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 37 shows the threshold, target, and maximum payouts for performance shares awarded in 2020.

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 2020-2022 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 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.

 

 
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The goals for the first year of the performance period, 2020, follow:

 

EBITDA

(weighted 75%)

 

  

  Under $262.7  

million

 

 

    $262.7    

million

 

 

    $328.4    

million

 

 

    $410.5    

million

 

% of Prorated Portion of Target Share Award for 2020

   0%   50%   100%   200%

% Change Compared with 2019 EBITDA

     (20.0)%   0%   25%
            

ROA

(weighted 25%)

 

   Under

5.8%

 

  5.8%

 

  7.3%

 

  9.1%

 

% of Prorated Portion of Target Share Award for 2020

   0%   50%   100%   200%

% Change Compared with 2019 ROA

     (7.9)%   15.9%   44.4%

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.

The Committee set the performance shares’ goals near the beginning of the year. Actual 2020 financial results were unfavorably impacted by a $131.0 million noncash goodwill impairment charge ($118.8 million net of tax) associated with our 2018 acquisition of FCX Performance, Inc. The third quarter charge was the result of end-market softness in our Flow Control operations and changes in growth projections from the macroeconomic backdrop. After reviewing the reported financial results, the Committee concluded they did not reflect the company’s underlying operating performance and management’s achievements for the year.

The performance shares’ terms provide the Committee the authority, in its sole discretion, to make adjustments in order to prevent diminution or enlargement of the benefits intended to be conferred, in a manner the Committee determines is equitably required by changes or events such as those specified above. After deliberation, the Committee excluded the goodwill impairment charge from the achievement calculations and also made certain other adjustments for one-time items, the largest of which was to exclude $7.9 million of restructuring costs ($6.1 million net of tax) incurred to position the business more favorably in the market environment.

As a result of 2020 achievements, as adjusted, participants banked awards, to be distributed in shares of Applied stock following the end of 2022, as follows:

 

2020 Goal  

2020 Adjusted

Achievement

 

Banked Award as % of        

        Target Performance Shares for 2020         

     

EBITDA (weighted 75%)

 

 

$298.5 million

 

 

77.2%

 

     

ROA (weighted 25%)

 

 

6.4%

 

 

70.0%

 

     
        Overall: 75.4%

 

·  

2019-2021 Performance Shares (2020 performance)

As described above, the Committee sets separate goals for each year of a three-year performance share program at the time the program is adopted. So, while 2020 was the first year of the 2020-2022 performance period, it was also the second year of the 2019-2021 performance period and the third year of the 2018-2020 performance period. For the 2019-2021 performance shares, the 2020 goals, adopted in August 2018, follow:

 

         

EBITDA

(weighted 75%)

 

  

Under $321.7    

million    

 

 

$321.7    

million    

 

 

$402.1    

million    

 

 

$502.6    

million    

 

         

% of Prorated Portion of Target Share Award for 2020

 

   0%

 

  50%

 

  100%

 

  200%

 

        
            

ROA

(weighted 25%)

 

   Under

7.5%

 

  7.5%

 

  9.4%

 

  11.8%

 

         

% of Prorated Portion of Target Share Award for 2020

 

   0%

 

  50%

 

  100%

 

  200%

 

 

 
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The 2019-2021 performance share programs, and prior programs, calculated EBITDA by adding to operating income (i) depreciation and amortization of property, (ii) amortization of stock options and SARs, and (iii) goodwill and intangibles amortization and impairment. The calculation was changed beginning with the 2020-2022 program to reflect a more commonly used calculation, which is adding net income, interest expense, income taxes, depreciation, and intangibles amortization.

With 2020 performance falling short of threshold goals, the participants did not bank awards for 2020. The award banked for the program’s first year, 2019, as a percentage of target performance shares, was 76.3%.

 

·  

2018-2020 Performance Shares (2020 performance)

The goals for the final year of the 2018-2020 performance shares program, adopted in August 2017, prior to the FCX Performance, Inc. acquisition in January 2018 and the Tax Cuts and Jobs Act of 2017, follow:

 

         


EBITDA

(weighted 75%)

  

Under $217.7    

million    

  

$217.7        

million        

  

$272.1        

million        

  

$340.1        

million        

         

% of Prorated Portion of Target Share Award for 2020

   0%    50%    100%    200%
           
         

ROA

(weighted 25%)

   Under    

8.2%    

   8.2%            10.2%            12.8%        
         

% of Prorated Portion of Target Share Award for 2020

   0%    50%    100%    200%

Similar to the 2019-2021 performance shares, the 2018-2020 program calculated EBITDA by adding to operating income (i) depreciation and amortization of property, (ii) amortization of stock options and SARs, and (iii) goodwill and intangibles amortization and impairment.

When the Committee set the performance goals at the beginning of the period, the goals did not contemplate the FCX acquisition and the Tax Cuts and Jobs Act. The performance shares’ terms provide the Committee the authority, in its sole discretion, to make adjustments in order to prevent diminution or enlargement of the benefits intended to be conferred, in a manner the Committee determines is equitably required by changes or events such as these. After deliberations, the Committee exercised this authority and adjusted achievements for purposes of the 2018-2020 performance shares to exclude the impact of the two developments.

As a result of 2020 achievements, as adjusted relative to the FCX acquisition and the Tax Cuts and Jobs Act, as well as the goodwill impairment charge and certain other one-time items, participants were awarded shares of Applied stock as follows:

 

     
2020 Goal  

2020 Adjusted

Achievement

 

Award as % of

Target Performance Shares for 2020

     

EBITDA (weighted 75%)

 

 

$223.0 million

 

 

54.9%

 

     

ROA (weighted 25%)

 

 

8.6%

 

 

60.0%

 

     
       

Overall: 56.2%

 

The awards banked for the program’s first two years, as a percentage of target performance shares, were 149.2% in 2018 and 114.6% in 2019. The average payout for the full three-year period was 106.7%.

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 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 NEOs.

 

 
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·  

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).

Each NEO participates in the KERP. The Committee set Mr. Schrimsher’s account credit percentage at 10%.

Applied also maintains the Supplemental Defined Contribution Plan, which permits highly compensated U.S. employees to defer portions of their pay and to accumulate nonqualified savings. Applied does not contribute to the plan and participants are not provided above-market or guaranteed returns. We describe the plan, along with the KERP, more fully in “Nonqualified Deferred Compensation,” at pages 39-40.

 

·  

Welfare plans

Applied maintains a contributory 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 employee contribution rate, to executive officers who retire after reaching age 55, with at least ten years’ 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; Messrs. Schrimsher and Bauer are the only remaining active eligible executives.

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’ 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,” beginning on page 41. 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 Messrs. Schrimsher, Wells, Bauer, and Loring. The 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.

 

 
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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) and the termination occurs within two years (three years under an older agreement with Mr. Bauer) after a change in control. These “double trigger” arrangements are consistent with typical market practices. The executive, in turn, must not compete with Applied for three years following termination (one year under the older agreement). Change in control agreements entered into after 2011, including with Messrs. Schrimsher, Wells, and Loring, do not provide for a gross-up for excise taxes. We describe the agreements more fully on pages 42-43 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 RSUs, but do not include SARs or performance shares.

The guidelines do not require an executive immediately to acquire shares if the executive’s 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 shares that remain after shares are sold or netted to pay withholding taxes.

At June 30, 2020, 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 ($) (1)

 

     

N. Schrimsher

   9,497,380                                 4,500,000
     

D. Wells (hired in May 2017)

   515,341                                1,320,000
     

F. Bauer

   5,848,563                                 1,260,000
     

W. Hoffner

   1,608,726                                 1,155,000
     

K. Loring (hired in July 2014)

   1,022,323                                 1,080,000

 

(1)

Based on salaries excluding the impact of the temporary salary reductions.

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 (including directors, officers, and other employees with access to material inside information about Applied) from engaging in:

 

·  

Short sales of Applied’s stock;

 

·  

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

 

·  

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

 

 
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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 principal executive officer, the principal financial officer, and the three other most highly compensated executive officers, as well as certain former executive officers, is $1 million per individual per year, subject to certain exceptions.

Prior to January 1, 2018, the law provided an exception for performance-based compensation. Effective with The Tax Cuts and Jobs Act of 2017, this exception was repealed; accordingly, new performance-based awards under executive incentive programs are subject, like other compensation, to the limit on deductibility.

In general, the Committee has sought to preserve the tax deductibility of compensation without compromising the Committee’s flexibility in designing an effective, competitive compensation program. The Committee has paid, and reserves the right to continue to pay, nondeductible compensation if it is in Applied’s best interests.

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.

 

 
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Summary Compensation Table — Fiscal Years 2020, 2019, and 2018

The following table summarizes information, for the years ended June 30, 2020, 2019, and 2018, regarding the compensation of Applied’s CEO, CFO, and the three other most highly compensated executive officers at June 30, 2020.

 

Name and

Principal Position

        Year         

    Salary      

($) (1)  

  

Stock      

  Awards      

($) (2)      

  

   Option      

   Awards      

   ($) (2)      

  

Non-Equity  

Incentive Plan  

  Compensation  

($) (3)  

  

Change in  

Pension  

Value and  

Nonqualified  

Deferred  

  Compensation  

Earnings  

($) (4)  

  

All Other  

  Compensation  

($) (5)  

  

  Total  

($)  

Neil A. Schrimsher

President & Chief Executive Officer

  2020      864,275        2,131,751        609,782        942,921        0        159,075        4,707,804  
  2019      900,000        2,000,363        696,010        652,239        0        244,765        4,493,377  
  2018      875,000        1,604,070        562,330        1,371,014        0        228,898        4,641,312  
       

David K. Wells

Vice President –

Chief Financial Officer & Treasurer

  2020      433,887        354,462        118,088        285,371        0        38,029        1,229,837  
  2019      425,000        353,943        122,250        196,193        0        51,279        1,148,665  
    2018      410,000        278,730        97,612        392,357        0        214,218        1,392,917  
       

Fred D. Bauer

Vice President – General Counsel & Secretary

  2020      414,165        306,123        99,764        230,492        926,654        43,204        2,020,402  
  2019      420,000        310,589        109,210        159,436        171,316        54,767        1,225,318  
  2018      410,000        262,940        92,307        327,485        0        51,375        1,144,107  
       

Warren E. Hoffner

Vice President, General Manager – Fluid Power & Flow Control

  2020      379,651        268,534        88,566        230,492        0        32,842        1,000,085  
  2019      375,000        252,669        88,020        155,295        0        41,908        912,892  
  2018      342,500        183,990        65,782        290,543        0        37,422        920,237  

Kurt W. Loring

Vice President – Chief Human Resources Officer

  2020      354,999        284,647        94,674        201,524        0        29,518        965,362  
  2019      360,000        288,912        101,060        136,660        0        39,986        926,618  
  2018      348,000        242,000        84,880        281,791        0        36,105        992,776  

 

(1)

Amid the economic downturn that arose out of the COVID-19 pandemic and the responsive actions of governmental authorities and businesses, base salaries were temporarily reduced beginning in mid-April 2020 and continuing into fiscal 2021.

 

(2)

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 2020 awards are described in the Compensation Discussion and Analysis at pages 27-30 and the Grants of Plan-Based Awards table at page 37. The amounts reported for 2020 in the Stock Awards column are totals of the following:

 

     

 

Name

 

  

RSUs ($)

 

  

Performance Shares ($)

 

     

N. Schrimsher

   592,570    1,539,181
     

D. Wells

   113,127       241,335
     

F. Bauer

     96,966       209,157
     

W. Hoffner

     86,192       182,342
     

K. Loring

     91,579       193,068

 

  

Performance shares’ grant date fair values assume performance at the target achievement level. If instead it were 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.

 

 
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(3)

Amounts shown reflect Management Incentive Plan earnings.

 

(4)

Mr. Bauer participates in the Supplemental Executive Retirement Benefits Plan, a nonqualified defined benefit plan that was frozen in 2012. He is the only remaining active participant. The amounts in this column reflect increases in the estimated actuarial present values of his historical accrued benefits. Mr. Bauer is partially vested in his benefits.

The 2020 figure is the difference between the number shown in the Pension Benefits table on page 41 for 2020 year-end and the same item calculated for July 1, 2019. See the notes to that table for information regarding how estimated amounts were calculated.

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). The value for 2020 reflects a 1.50% discount rate and a three-segment interest rate structure in effect for January 2020, with 1.91% for the first five years, 2.93% for the next 15 years, and 3.54% thereafter.

The value for 2019 reflects a 2.75% discount rate and a three-segment interest rate structure in effect for January 2019, with 3.19% for the first five years, 4.25% for the next 15 years, and 4.60% thereafter. The value for 2018 reflect a 3.50% discount rate and a three-segment interest rate structure in effect for January 2018, with 2.48% for the first five years, 3.65% for the next 15 years, and 4.15% thereafter.

In addition, in each successive year, the mortality table reflects adjustments pursuant to Code section 417(e). Present values were determined assuming zero probability of termination, retirement, death, or disability before normal retirement age (age 65).

 

(5)

Amounts in this column for 2020 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: annual expense related to post-retirement health care coverage for Messrs. Schrimsher and Bauer (the only remaining active executives eligible for this benefit), 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 2020.

The following table itemizes “All Other Compensation” for 2020:

 

Name  

Retirement Savings

 Plan Contributions ($) 

 

 

Key Executive

Restoration Plan

 Account Credits ($) 

  Gross-up
  Payments ($)  
 

 Life Insurance 

Benefits ($)

 

 Perquisites and Other 

Personal Benefits ($)

           

N. Schrimsher

  7,269   146,935   0      814   4,057
           

D. Wells

  6,069     30,875   0   1,028         57
           

F. Bauer

  5,977     27,815   0      755   8,657
           

W. Hoffner

  5,110     26,252   0   1,423         57
           

K. Loring

  6,323     22,641   0      497         57

 

 
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Grants of Plan-Based Awards — Fiscal Year 2020

In 2020, the Executive Organization & Compensation Committee awarded 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 ($)  

 

 
 

Threshold

($)

 

    

Target

($)

 

    

Maximum

($)

 

    

Threshold

(#)

 

    

Target

(#)

 

    

Maximum

(#)

 

 

N. Schrimsher

   8/13/2019                                                           11,000                          592,570    
   8/13/2019                                                                    59,900          53.87        609,782    
   9/13/2019

(Perf. Shares)

                               14,350        28,700        57,400                                      
   9/13/2019

(Management

Incentive Plan)

    472,500        945,000        1,890,000                                                                 

D. Wells

   8/13/2019                                                           2,100                          113,127    
   8/13/2019                                                                    11,600          53.87        118,088    
   9/13/2019

(Perf. Shares)

                               2,250        4,500        9,000                                      
   9/13/2019

(Management

Incentive Plan)

    143,000        286,000        572,000                                                                 

F. Bauer

   8/13/2019                                                           1,800                          96,966    
   8/13/2019                                                                    9,800          53.87        99,764    
   9/13/2019

(Perf. Shares)

                               1,950        3,900        7,800                                      
   9/13/2019

(Management

Incentive Plan)

    115,500        231,000        462,000                                                                 

W. Hoffner

   8/13/2019                                                           1,600                          86,192    
   8/13/2019                                                                    8,700          53.87        88,566    
   9/13/2019

(Perf. Shares)

                               1,700        3,400        6,800                                      
   9/13/2019

(Management

Incentive Plan)

    115,500        231,000        462,000                                                                 

K. Loring

   8/13/2019                                                           1,700                          91,579    
   8/13/2019                                                                    9,300          53.87        94,674    
   9/13/2019

(Perf. Shares)

                               1,800        3,600        7,200                                      
   9/13/2019

(Management

Incentive Plan)

    99,000        198,000        396,000                                                                 

 

(1)

The 2020 Management Incentive Plan is described in the Compensation Discussion and Analysis at pages 25-27. Payouts under the plan are shown in the column marked “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table.

(2)

The 2020-2022 performance shares program is described in the Compensation Discussion and Analysis at pages 29-30.

(3)

RSUs are described in the Compensation Discussion and Analysis at page 29.

(4)

SARs are described in the Compensation Discussion and Analysis at page 28. Their base price is our stock’s closing price on the NYSE on the grant date.

 

 
Applied Industrial Technologies 2020 Proxy Statement       37


Table of Contents

Executive Compensation

 

 

Outstanding Equity Awards at Fiscal 2020 Year-End

The table below presents information about the NEOs’ outstanding SARs, RSUs, and performance shares at June 30, 2020.

 

Name   Option Awards   Stock Awards
 

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

      87,600       0       32.30       10/25/2021                                        
      34,400       0       41.29       8/9/2022                                        
      35,000       0       50.74       8/13/2023                                        
      37,500       0       49.04       8/12/2024                                        
      64,800       0       38.36       8/11/2025                                        
      54,075       18,025  (1)       48.19       8/11/2026                                        
      26,500       26,500  (2)       54.90       8/10/2027                                        
      10,675       32,025  (3)       74.55       8/9/2028                                        
      0       59,900  (4)       53.87       8/13/2029                                        
                                              9,800  (5)       611,422       22,082  (6)       1,377,696
                                              8,900  (7)       555,271       11,048  (8)       689,285
                                                11,000  (9)       686,290       26,347  (10)       1,643,789

D. Wells

      27,000       0       57.85       6/21/2027                                        
      4,600       4,600  (2)       54.90       8/10/2027                                        
      1,875       5,625  (3)       74.55       8/9/2028                                        
      0       11,600  (4)       53.87       8/13/2029                                        
                                              1,700  (5)       106,063       3,840  (6)       239,578
                                              1,600  (7)       99,824       1,939  (8)       120,974
                                                2,100  (9)       131,019       4,131  (10)       257,733

F. Bauer

      8,800       0       26.96       8/9/2021                                        
      8,400       0       41.29       8/9/2022                                        
      7,600       0       50.74       8/13/2023                                        
      7,300       0       49.04       8/12/2024                                        
      12,000       0       38.36       8/11/2025                                        
      9,900       3,300  (1)       48.19       8/11/2026                                        
      4,350       4,350  (2)       54.90       8/10/2027                                        
      1,675       5,025  (3)       74.55       8/9/2028                                        
      0       9,800  (4)       53.87       8/13/2029                                        
                                              1,600  (5)       99,824       3,627  (6)       226,289
                                              1,400  (7)       87,346       1,704  (8)       106,313
                                                1,800  (9)       112,302       3,580  (10)       223,356

W. Hoffner

      12,200       0       41.29       8/9/2022                                        
      8,200       0       50.74       8/13/2023                                        
      9,300       0       49.04       8/12/2024                                        
      7,100       0       38.36       8/11/2025                                        
      6,600       2,200  (1)       48.19       8/11/2026                                        
      3,100       3,100  (2)       54.90       8/10/2027                                        
      1,350       4,050  (3)       74.55       8/9/2028                                        
      0       8,700  (4)       53.87       8/13/2029                                        
                                              1,100  (5)       68,629       2,561  (6)       159,781
                                              1,100  (7)       68,629       1,410  (8)       87,970
                                                1,600  (9)       99,824       3,121  (10)       194,719

K. Loring

      29,900       0       49.04       8/12/2024                                        
      11,000       0       38.36       8/11/2025                                        
      9,075       3,025  (1)       48.19       8/11/2026                                        
      4,000       4,000  (2)       54.90       8/10/2027                                        
      1,550       4,650  (3)       74.55       8/9/2028                                        
      0       9,300  (4)       53.87       8/13/2029                                        
                                              1,500  (5)       93,585       3,308  (6)       206,386
                                              1,300  (7)       81,107       1,587  (8)       99,013
                                              1,700  (9)       106,063       3,305  (10)       206,199

 

 
38      Applied Industrial Technologies 2020 Proxy Statement


Table of Contents

Executive Compensation

 

 

(1)

These SARs vested on August 11, 2020.

(2)

Half of these SARs vested on August 10, 2020. The remaining SARs vest on August 10, 2021.

(3)

One third of these SARs vested on August 9, 2020. The remaining SARs vest in equal increments on August 9, 2021 and 2022.

(4)

One quarter of these SARs vested on August 13, 2020. The remaining SARs vest in equal increments on August 13, 2021, 2022, and 2023.

(5)

These RSUs vested on August 10, 2020.

(6)

These awards are the 2018-2020 performance shares described in the Compensation Discussion and Analysis at page 31. The performance period ended on June 30, 2020, and performance for the final year was certified on August 11, 2020.

(7)

These RSUs vest on August 9, 2021.

(8)

These awards are the 2019-2021 performance shares described in the Compensation Discussion and Analysis at pages 30-31. The performance period ends on June 30, 2021. The amounts shown include performance shares banked for 2019 and 2020, and targeted for 2021.

(9)

These RSUs vest on August 13, 2022.

(10)

These awards are the 2020-2022 performance shares described in the Compensation Discussion and Analysis at pages 29-30. The performance period ends on June 30, 2022. The amounts shown include performance shares banked for 2020 and targeted for 2021 and 2022.

Option Exercises and Stock Vested — Fiscal Year 2020

The following table shows the value realized in 2020 by the NEOs on the exercise of SARs and the vesting of RSUs and banked performance shares.

 

Name  

Option Awards

 

 

Stock Awards

 

 

Number of Shares

  Acquired on Exercise (#)  

 

        Value Realized        

        on Exercise ($)        

 

Number of Shares

  Acquired on Vesting (#)  

 

        Value Realized        

        on Vesting ($)        

         

N. Schrimsher

    0       0       44,821       2,430,089  
         

D. Wells

    0       0       1,486       89,323  
         

F. Bauer

    0       0       8,232       446,251  
         

W. Hoffner

    21,375       851,135       5,521       299,327  
         

K. Loring

    0           0            7,529           408,233        

Nonqualified Deferred Compensation

Applied maintains two 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. 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 applicable Code contribution limit 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 the participant selects from among diverse investment options.

Each NEO participates in the KERP. The Committee has set Mr. Schrimsher’s account credit percentage at 10%.

 

 
Applied Industrial Technologies 2020 Proxy Statement       39


Table of Contents

Executive Compensation

 

 

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. Applied does not contribute to the plan.

Participants are always vested in their deferrals. Account balances are deemed invested in mutual funds the participant selects from a menu of diverse investment options.

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.

Messrs. Schrimsher, Wells, Bauer, and Loring have plan accounts and made deferrals into the plan in 2020.

Nonqualified Deferred Compensation — Fiscal Year 2020

The following table presents contributions, earnings, distributions, and balance information for the NEOs’ Key Executive Restoration Plan and Supplemental Defined Contribution Plan accounts for 2020.

 

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        139,809        (71,808 )       0        1,433,869

 Supplemental Defined Contribution Plan

       244,969        0        148,648       0        2,999,119
         

 D. Wells

                                                     

 Key Executive Restoration Plan

       0        29,426        1,558       0        93,210

 Supplemental Defined Contribution Plan

       42,020        0        15,001       0        149,067
         

 F. Bauer

                                                     

 Key Executive Restoration Plan

       0        25,979        5,770       0        273,575

 Supplemental Defined Contribution Plan

       77,016        0        10,255       0        352,568
         

 W. Hoffner

                                                     

 Key Executive Restoration Plan

       0        25,635        1,811       0        123,726
         

 K. Loring

                                                     

 Key Executive Restoration Plan

       0        21,543        3,159       0        154,519

 Supplemental Defined Contribution Plan

       34,055        0        3,975       0        100,133

 

(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 (5) to the Summary Compensation Table on page 36.

Pension Plans

The Supplemental Executive Retirement Benefits Plan (the “SERP”), a nonqualified defined benefit plan, provides supplemental retirement benefits to executive officers the Committee designated as participants more than a decade ago. 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). Mr. Bauer is the only remaining active participant.

The SERP’s principal features follow:

Retirement Benefits. 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 years of service prior to calendar 2012. To receive a normal retirement benefit, a participant must separate from service at or after age 65. 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. Mr. Bauer has the requisite service but is 54 years old and not yet eligible for early retirement.

Early retirement benefits are reduced by 5% for each year that the commencement of benefits precedes age 65.

Disability Benefits. If a participant becomes disabled, 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

 

 
40      Applied Industrial Technologies 2020 Proxy Statement


Table of Contents

Executive Compensation

 

 

Applied programs, will equal 1/12th of 60% of the average of the participant’s highest three calendar years of base salary plus annual incentive pay during the last 10 years of service prior to calendar 2012.

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

Payment Forms. Normal and early retirement benefits are paid as designated by the participant. 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 accrued benefit in a lump sum or installments, as the participant elects in advance.

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

Pension Benefits — Fiscal 2020 Year-End

The following table shows the present value of accumulated benefits payable to the NEOs 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

           

D. Wells

           

F. Bauer

   SERP    19.3    3,894,516    0

W. Hoffner