OVERVIEW  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With more than 4,600 associates across North America, Applied  Industrial Technologies (“Applied,” the “Company,” “We,” “Us”  or “Our”) is a leading industrial distributor serving MRO and OEM  customers in virtually every industry. In addition, Applied  provides engineering, design and systems integration for  industrial and fluid power applications, as well as customized  mechanical, fabricated rubber and fluid power shop services. Applied also offers maintenance training and inventory  management solutions that provide added value to its customers. We have a long tradition of growth dating back to 1923, the year  our business was founded in Cleveland, Ohio. At June 30, 2012,  business was conducted in the United States, Canada, Mexico  and Puerto Rico from 476 facilities. When reviewing the discussion and analysis set forth below,  please note that the majority of SKUs we sell in any given year  were not sold in the prior year, resulting in the inability to  quantify certain commonly used comparative metrics analyzing  sales, such as changes in product mix and volume.  Our fiscal 2012 sales were $2.4 billion, an increase of $162.6  million or 7.3% compared to the prior year. Net sales from  acquired businesses added $16.6 million or 0.7% to the current  year. Gross margin of 27.6% compares to 27.7% in the prior  year. Our operating margin increased to 7.1% compared to the  prior year’s 6.8%. Our earnings per share was $2.54 versus $2.24  in fiscal year 2011, an increase of 13.4%.  Our consolidated balance sheet remains strong. Shareholders’  equity is $672.1 million, up from $633.6 million at June 30, 2011. Working capital increased $31.4 million from June 30, 2011 to  $435.6 million at June 30, 2012. Our current ratio remains strong  at 2.9 to 1, consistent with the June 30, 2011 level.  Applied monitors several economic indices that have been key  indicators for industrial economic activity in the United States. These include the Industrial Production and Manufacturing  Capacity Utilization (MCU) indices published by the Federal  Reserve Board and the Purchasing Managers Index (PMI)  published by the Institute for Supply Management (ISM).  Historically, our performance correlates well with the MCU which measures productivity and calculates a ratio of actual  manufacturing output versus potential full capacity output. When manufacturing plants are running at a high rate of  capacity, they tend to wear out machinery and require  replacement parts. Our sales tend to lag the MCU by up to six months.  Net sales in fiscal 2012 were $2.4 billion, which was $162.6 million  or 7.3% above the prior year, driven by improvements in the  industrial economy as well as a continued focus on profitable sales  growth. Incremental net sales from companies acquired since the  prior year period contributed approximately $16.6 million or 0.7%. Currency translation decreased fiscal year sales by approximately  $1.8 million or 0.1%. In local currency, net sales from our  Canadian operations were up 12.2% from fiscal 2011, including  2.8% from acquisitions. In local currency, net sales from our  Mexican operations were up 25.9%. The number of selling days in  fiscal 2012 was the same as in fiscal 2011.  Net sales of our Service Center Based Distribution segment increased  $133.8 million, or 7.6%, compared to fiscal year 2011 led by  improvements in the industrial economy as well as a continued focus on  profitable sales growth, with acquisitions adding $16.6 million or 0.9%. Net sales of our Fluid Power Businesses segment increased $28.8 million  or 6.5%, also driven by improvements in the industrial economy as well  as a continued focus on profitable sales growth.  The sales product mix for fiscal 2012 was 70.8% industrial products  and 29.2% fluid power products compared to 70.5% industrial and  29.5% fluid power in the prior year.  At June 30, 2012, we had a total of 476 operating facilities in the U.S.,  Canada and Mexico versus 474 at June 30, 2011.  5 Applied Industrial Technologies, Inc. and Subsidiaries Year Ended June 30, As a % of Net Sales  Change in  $'s Versus  Prior Period  2012  2011  % Increase  Net Sales  100.0  %  100.0%  7.3%  Gross Profit  27.6  %  27.7%  6.7%  Selling, Distribution & Administrative 20.5  %  20.9%  5.1%  Operating Income  7.1  %  6.8%  11.7%  Net Income  4.6  %  4.4%  12.4%  Industrial production increased 0.4% in June after having declined  0.2% in May. In the manufacturing sector, outputs advanced  0.7% in June, reversing a decline of 0.7% in May and increased at  an annual rate of 1.4% in the second quarter. In June, capacity  utilization for manufacturing moved up 0.4% to 77.7%, a rate  13.9 percentage points above its trough in June of 2009 and was  still 1.1 percentage points below its long-run average. The ISM PMI  registered 49.7 in June, the first time this indicator dropped below  50 (its expansionary threshold) since July 2009. We remain  optimistic about the U.S. industrial economy for our fiscal 2013.  The following table is included to aid in review of Applied’s  statements of consolidated income.  YEAR ENDED JUNE 30, 2012 vs. 2011 