APPLIED INDUSTRIAL TECHNOLOGIES INC
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Table of Contents
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 þ
Filed by a
Party other than the
Registrant o
Check the
appropriate box:
| o Preliminary Proxy Statement | ||
|
o Confidential,
for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
|
||
| þ Definitive Proxy Statement | ||
| o Definitive Additional Materials | ||
|
o Soliciting
Material Pursuant to Section 240.14a-12
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||
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):
| þ | No fee required. |
| o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
| (1) | Title of each class of securities to which transaction applies: |
| (2) | Aggregate number of securities to which transaction applies: |
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
| (4) | Proposed maximum aggregate value of transaction: |
| (5) | Total fee paid: |
| o | Fee paid previously with preliminary materials. |
| o | 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. |
| (1) | Amount Previously Paid: |
| (2) | Form, Schedule or Registration Statement No.: |
| (3) | Filing Party: |
| (4) | Date Filed: |
Table of Contents
APPLIED
INDUSTRIAL TECHNOLOGIES, INC.
1 APPLIED PLAZA
CLEVELAND, OHIO 44115
(216) 426-4000
www.applied.com
1 APPLIED PLAZA
CLEVELAND, OHIO 44115
(216) 426-4000
www.applied.com
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Dear Shareholder:
We are pleased to invite you to the 2010 annual meeting of the
shareholders of Applied Industrial Technologies, Inc. The
meeting will be at our headquarters, 1 Applied Plaza, East
36th Street and Euclid Avenue, Cleveland, Ohio, 44115 on
Tuesday, October 26, 2010, at 10:00 a.m., Eastern
Time. The meeting will be held for the following purposes:
| 1. | Electing as directors, for a three-year term, the three nominees named in the attached proxy statement, and | |
| 2. | Voting on a proposal to ratify the appointment of independent auditors for the fiscal year ending June 30, 2011. |
Shareholders of record at the close of business on
August 30, 2010, are entitled to vote at the meeting. The
transfer books will not be closed. A list of shareholders as of
the record date will be available for examination at the meeting.
The attached proxy statement describes the business of the
meeting and provides information about our corporate governance.
After the meeting, we will report on our operations and other
matters of interest.
Fred D. Bauer
Vice President-General Counsel
& Secretary
September 9, 2010
YOUR VOTE IS IMPORTANT! WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING,
PLEASE PROMPTLY VOTE BY TELEPHONE, VIA THE INTERNET, OR BY EXECUTING AND
RETURNING THE ENCLOSED PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED.
VOTING EARLY WILL HELP AVOID ADDITIONAL SOLICITATION COSTS.
PLEASE PROMPTLY VOTE BY TELEPHONE, VIA THE INTERNET, OR BY EXECUTING AND
RETURNING THE ENCLOSED PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED.
VOTING EARLY WILL HELP AVOID ADDITIONAL SOLICITATION COSTS.
Important Notice
Regarding the Availability of Proxy Materials for the
Shareholder Meeting to be Held on October 26, 2010.
Shareholder Meeting to be Held on October 26, 2010.
The Proxy
Statement and 2010 Annual Report to Shareholders are available
at
www.applied.com/proxy
www.applied.com/proxy
PROXY
STATEMENT
TABLE OF
CONTENTS
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Table of Contents
INTRODUCTION AND
VOTING INFORMATION
In this statement, “we,” “our,”
“us,” and “Applied” all refer to Applied
Industrial Technologies, Inc., an Ohio corporation. Our common
stock, without par value, is listed on the New York Stock
Exchange with the ticker symbol “AIT.”
What is the proxy
statement’s purpose?
The proxy statement summarizes information you need to vote at
our 2010 annual meeting of shareholders to be held on Tuesday,
October 26, 2010, at 10:00 a.m., Eastern Time, at our
headquarters, and any adjournment of that 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 the accompanying proxy card are
being sent to shareholders of record on or about
September 9, 2010.
On what matters
are shareholders voting?
| • | The election, as directors, of the three nominees named on pages 5 and 6, and | |
| • | A proposal to ratify the Audit Committee’s appointment of Deloitte & Touche LLP as Applied’s independent auditors for the fiscal year ending June 30, 2011. |
Who may vote and
what constitutes a quorum at the meeting?
Only shareholders of record at the close of business on
August 30, 2010, may vote. As of that date, there were
42,418,166 outstanding shares of Applied common stock, without
par value. The holders of a majority of those shares will
constitute a quorum to hold the meeting. A quorum is necessary
for valid action to be taken.
We have no class or series of shares outstanding other than our
common stock.
How many votes do
I have?
Each shareholder is entitled to one vote per share.
How do I
vote?
The answer depends on whether you hold the 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 considered 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 by telephone, via the Internet, 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, by a trustee, or by another nominee, then that other person is considered the shareholder of record. We sent these proxy materials to that other person, and they have been forwarded to you with a voting instructions card. As the shares’ beneficial owner, you have the right to 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 see what voting options are available to you. | |
| • | Beneficial owner of shares held in Applied’s Retirement Savings Plan or Supplemental Defined Contribution Plan. If you own shares in one of these company plans, then you may direct the plan’s trustee how to vote your shares by telephone, via the Internet, or by mailing in your signed voting instructions card. |
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Table of Contents
Votes submitted by telephone or online for shares held in the
Retirement Savings Plan or Supplemental Defined Contribution
Plan must be received by Thursday, October 21, 2010; votes
by telephone or online for other shares must be received by
Monday, October 25, 2010.
If you attend the meeting and vote in person, a ballot will be
available when you arrive. If, however, your shares are held in
the name of your broker, trustee, or other nominee, you must
bring a valid proxy from that party giving you the right to vote
the shares.
What if I
don’t indicate my voting choices?
If Applied receives your proxy in time to use at the meeting,
your shares will be voted according to your instructions. If you
have not indicated otherwise on the proxy you submit, your
shares will be voted as the Board of Directors recommends on the
two matters identified above. In addition, the proxies will vote
your shares according to their judgment on other matters brought
before the meeting.
What effect do
abstentions and broker non-votes have?
Brokers holding shares for beneficial owners must vote the
shares according to instructions they receive from the owners.
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 —
this is called a “broker non-vote.”
Under new NYSE rules, brokers no longer have discretionary
authority to vote on the election of directors, so we expect
there will be broker non-votes on Item 1. Broker non-votes
will not, however, impact the vote’s outcome because,
pursuant to Ohio law, the properly nominated candidates
receiving the greatest number of votes will be elected.
The affirmative vote of a majority of the votes cast at the
meeting is required to approve Item 2. In determining the
votes cast on the item, abstentions will not count as votes cast
and, accordingly, will not affect the vote’s outcome.
Brokers still have discretionary authority to vote on
Item 2, so there will be no broker non-votes on that item.
What does it mean
if I receive multiple sets of proxy materials?
Receiving multiple sets usually means your shares are held in
different names or different accounts. Please respond to all of
the proxy solicitation requests to ensure all of your shares are
voted.
May I revoke my
proxy?
You may revoke your proxy before it is voted at the meeting by
notifying Applied’s Secretary in writing, voting a second
time by telephone or via the Internet, returning a later-dated
proxy card, or voting in person. Your presence at the meeting
will not by itself revoke the proxy.
Who pays the
costs of soliciting proxies?
Applied pays these costs. We will also pay the standard charges
and expenses of brokers or other nominees for forwarding these
materials to, and obtaining proxies from, beneficial owners.
Directors, officers, and other employees, acting on our behalf,
may solicit proxies. We have also retained Morrow &
Co., LLC, at an estimated fee of $7,000 plus expenses, to aid in
soliciting proxies from brokers and institutional holders. In
addition to using the mail, proxies may be solicited personally,
and by telephone, facsimile, or other electronic means.
Who counts the
votes?
Computershare Trust Company, N.A., will act as inspector of
election and tabulate the votes.
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Table of Contents
ITEM 1 —
ELECTION OF DIRECTORS
Applied’s Code of Regulations divides our Board of
Directors 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 2010 annual meeting, the
shareholders will elect directors for a three-year term expiring
in 2013 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 Board’s Corporate Governance Committee recommended, and
the Board has nominated, three incumbents for election as
directors: William G. Bares, L. Thomas Hiltz, and Edith
Kelly-Green.
Ms. Kelly-Green and Mr. Bares were most recently
elected at the 2007 annual meeting and their terms expire this
year. Mr. Hiltz was elected at the 2008 annual meeting and
his current term expires in 2011. The Board renominated them
following the Corporate Governance Committee’s review and
evaluation of their performance.
Mr. Hiltz has been nominated to replace Stephen E. Yates in the
class whose term will expire in 2013. Mr. Yates resigned
effective with the expiration of his term at the 2010 annual
meeting. The Board currently intends to reduce its size to
10 directors following the effective time of
Mr. Yates’s resignation. The Board reassigned Mr.
Hiltz to this class to comport with both applicable law and
Section 9 of Applied’s Code of Regulations, which
provides in relevant part, “If the number of directors is
changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class
as nearly equal as possible . . . .”
The directors serving for terms expiring in 2011 and 2012 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 reserve discretion to vote for
any other person or persons who may be nominated at the meeting
and/or to
vote to reduce the number of directors. We are not aware of any
existing circumstance that would cause a nominee to be
unavailable to serve.
The Board of
Directors recommends that the shareholders vote FOR the
nominees.
Below we show background information about the nominees and the
directors continuing in office. Unless otherwise stated, the
individuals have held the positions indicated for the last five
years. We also include a summary of reasons our Board concluded,
as of the date of this proxy statement, that the respective
director or nominee should serve as an Applied director, in
light of our business and governance structure. The summaries
are not comprehensive, but describe the primary experiences,
attributes, and skills that the Board believes qualify the
individuals to continue as directors. In addition to the
qualifications referred to below, we believe each individual has
a reputation for integrity, honesty, and high ethical standards,
and has demonstrated strong business judgment.
Nominees for
Election as Directors with Terms Expiring in 2013
|
William G. Bares
Director since 1986, member of Executive and Executive Organization & Compensation Committees Business Experience. Mr. Bares, age 69, retired as Chairman and Chief Executive Officer of The Lubrizol Corporation (NYSE: LZ) in 2004. Lubrizol is a premier specialty chemical company focused on providing innovative technology to global transportation, industrial, and consumer markets. Other Directorship in Previous 5 Years. KeyCorp (NYSE: KEY) |
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Table of Contents
| Qualifications. Mr. Bares has demonstrated success in business and strong public company leadership skills, serving as Lubrizol’s Chairman and Chief Executive Officer for eight years and President for over 20 years. In those roles, he directed his company’s global expansion, including making significant business acquisitions and overseeing their financing. As a member of several public company boards during his career, he has chaired numerous key committees and has also served as the lead or presiding director. These experiences enable Mr. Bares to be an effective director and chair of the Executive Organization & Compensation Committee. | ||
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L. Thomas Hiltz
Director since 1981, member of Corporate Governance Committee Business Experience. Mr. Hiltz, age 64, is an attorney in Covington, Kentucky and is one of five trustees of the H.C.S. Foundation, a charitable trust which has sole voting and dispositive power with respect to 600,000 shares (as of June 30, 2010) of Applied stock. Other Directorship in Previous 5 Years. Great American Financial Resources, Inc. (formerly NYSE: GFR; 2007-2008) Qualifications. Mr. Hiltz’s background as a practicing lawyer and fiduciary includes diverse experience with business transactions, including mergers and acquisitions, and board governance. In addition to his service for Great American Financial Resources, Inc. (prior to its acquisition by American Financial Group, Inc.), he has served as a director of numerous private companies, some with significant minority shareholder bases, and led those boards in overseeing large corporate transactions. Mr. Hiltz also is the Board’s longest-serving member, contributing to Board deliberations an institutional memory stretching back several generations of executive teams. |
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Edith Kelly-Green
Director since 2002, member of Corporate Governance Committee Business Experience. Until her retirement in 2003, Ms. Kelly-Green, age 57, was Vice President and Chief Sourcing Officer of FedEx Express, the world’s largest express transportation company and a subsidiary of FedEx Corporation (NYSE: FDX). Qualifications. Ms. Kelly-Green has significant procurement and logistics experience from her service with FedEx Express, where she was successful in designing and enhancing the company’s extensive internal supply chain processes. Because Applied is a distributor, the processes of buying, inventorying, and transporting products are critical to our business. In addition, her career began in the field of accounting as a Certified Public Accountant with an international public accounting firm and she served as Vice President-Internal Audit with FedEx Corporation. Ms. Kelly-Green’s skills and background in these areas make her well-suited for our company and Board. |
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Table of Contents
Continuing
Directors with Terms Expiring in 2011
|
John F. Meier
Director since 2005, member of Executive Organization & Compensation Committee Business Experience. Mr. Meier, age 62, is Chairman and Chief Executive Officer of Libbey Inc. (NYSE Amex: LBY), a leading supplier of glass tableware products in the U.S., Canada, and Mexico, in addition to supplying to other key international markets. Other Directorships in Previous 5 Years. Cooper Tire & Rubber Company (NYSE: CTB), Libbey Inc. Qualifications. Mr. Meier has served as Libbey’s Chairman and Chief Executive Officer for 17 years, having led the company through significant business acquisitions and international expansion. He brings to the Board broad general management and marketing experience, including considerable experience working with distributors in markets throughout the world. He also contributes the knowledge and skills he has acquired and continues to acquire through service on other public company boards. |
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David L. Pugh
Director since 2000, member of Executive Committee Business Experience. Mr. Pugh, age 61, is Applied’s Chairman & Chief Executive Officer. Other Directorships in Previous 5 Years. Hexcel Corporation (NYSE: HXL; since 2006), JLG Corporation (formerly NYSE: JLG; 2004 – 2006), OM Group, Inc. (NYSE: OMG; 2007 – 2010) Qualifications. Mr. Pugh is the only officer of our company to serve on the Board. As Chief Executive Officer for over a decade, Mr. Pugh has a deep understanding of Applied, its lines of business, and its markets. He has demonstrated his leadership abilities and commitment to Applied since he joined us in 1999. Prior to that time, his career included extensive marketing, operations, business development, and general management experience as an executive with global responsibilities for leading industrial equipment companies including Rockwell Automation Inc. (NYSE: ROK), Square D Company, and Westinghouse Electric Company. Mr. Pugh’s service on other NYSE-listed company boards has enhanced his contributions to our Board and, more broadly, to Applied overall. |
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Peter C. Wallace
Director since 2005, member of Executive Organization & Compensation Committee Business Experience. Mr. Wallace, age 56, has served as President and Chief Executive Officer, and a director, of Robbins & Myers, Inc. (NYSE: RBN) since 2004. Robbins & Myers is a leading designer, manufacturer, and marketer of highly engineered, application-critical equipment and systems for the pharmaceutical, energy, and industrial markets worldwide. Prior to joining Robbins & Myers, Mr. Wallace was President and Chief Executive Officer of IMI Norgren Group, a manufacturer of sophisticated motion and fluid control systems for original equipment manufacturers. Other Directorships in Previous 5 Years. Robbins & Myers, Inc., Rogers Corporation (NYSE: ROG, since 2010) 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. Prior to joining Robbins & Myers, Mr. Wallace had global responsibilities for equipment manufacturers with product lines |
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Table of Contents
| 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. | ||
Continuing
Directors with Terms Expiring in 2012
|
Thomas A. Commes
Director since 1999, member of Audit and Executive Committees Business Experience. Until his retirement in 1999, Mr. Commes, age 68, was President and Chief Operating Officer, and a director, of The Sherwin-Williams Company (NYSE: SHW), a manufacturer, distributor, and retailer of paints and painting supplies. His career included service as that company’s Chief Financial Officer. Other Directorships in Previous 5 Years. Agilysys, Inc. (NasdaqGS: AGYS), U-Store-It Trust (NYSE: YSI; 2004 – 2008) Qualifications. Mr. Commes has an extensive background in finance and accounting through his education and work as a Certified Public Accountant with an international public accounting firm and later as a financial executive for several large retailers, culminating in his role as Sherwin-Williams’ Chief Financial Officer. Mr. Commes then served as President and Chief Operating Officer of Sherwin-Williams, a multi-billion dollar company, for over a decade. From these experiences, he brings to the Board in-depth knowledge of business operations, including the logistics of operating a network of distribution centers and sales outlets, a fundamental characteristic of our business. He also has extensive acquisitions and financing experience. This knowledge and experience, along with his service on other public company boards, make him well-suited for our Board and, in particular, the Audit Committee, which he chairs. |
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Peter A. Dorsman
Director since 2002, member of Corporate Governance and Executive Committees Business Experience. Mr. Dorsman, age 55, has served as Senior Vice President, Global Operations for NCR Corporation (NYSE: NCR) since October 2007. NCR is a global technology company providing assisted and self-service solutions and comprehensive support services that address the needs of retail, financial, travel, healthcare, hospitality, entertainment and gaming organizations in more than 100 countries. He joined NCR in April 2006 as Vice President and General Manager of its Systemedia business. From 2000 to 2004, he had been Executive Vice President & Chief Operating Officer of The Standard Register Company (NYSE: SR), a leading provider of information solutions for financial services, healthcare, manufacturing, and other markets worldwide. Qualifications. Mr. Dorsman has broad experience in marketing, sales, strategy, and operations. At NCR, a multi-billion dollar company, he is responsible for global demand and supply planning, sourcing, manufacturing, fulfillment services, logistics, quality/continuous improvement, and sales order management. With his diverse background and knowledge, he contributes insights about many aspects of our business operations and initiatives. In addition, Mr. Dorsman’s leadership skills and dedication have made him an effective Corporate Governance Committee chair and presiding non-management director. |
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J. Michael Moore
Director since 1997, member of Audit Committee Business Experience. Mr. Moore, age 67, is President of Oak Grove Consulting Group, Inc. He was Chairman and Chief Executive Officer of Invetech Company, a distributor of bearings, mechanical and electrical drive system products, industrial rubber products, and specialty maintenance and repair products, prior to its acquisition by Applied in 1997. Qualifications. Mr. Moore was the longtime Chairman and Chief Executive Officer of Invetech, an industrial distributor and direct competitor of Applied’s. After Applied acquired Invetech, Mr. Moore continued to participate in industry trade associations, and served as board chairman of the National Association of Wholesaler-Distributors. His firsthand experience with the operational, financial, and marketplace dynamics of Applied’s industry makes him a key contributor to the Board’s business discussions. In addition, Mr. Moore’s career includes service as Invetech’s Chief Financial Officer and as a board member, and chairman, of the Detroit branch of the Federal Reserve Bank of Chicago. |
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Dr. Jerry Sue Thornton
Director since 1994, member of Audit Committee Business Experience. Dr. Thornton, age 63, is President of Cuyahoga Community College, the largest multi-campus community college in Ohio. Other Directorships in Previous 5 Years. American Greetings Corporation (NYSE: AM), RPM, Inc. (NYSE: RPM), National City Corporation (formerly NYSE: NCC; 2001 – 2009) Qualifications. Dr. Thornton is a preeminent educator with significant experience in career training. Our workforce is our most important resource, and her background and skills help the Board monitor Applied’s efforts to maximize our associates’ potential. Having served as Cuyahoga Community College’s President for over 18 years, overseeing a budget of over $320 million, she also contributes broad general management skills to Applied’s Board. In addition, Dr. Thornton has extensive service as a director of other NYSE-listed companies, including participation on numerous key board committees. |
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ITEM 2 —
RATIFICATION OF AUDITORS
Subject to shareholder ratification, the Audit Committee has
appointed Deloitte & Touche LLP to serve as
independent auditors for the fiscal year ending June 30,
2011. The committee made the appointment after evaluating the
firm and its performance. Deloitte & Touche has
confirmed it is not aware of any relationship between the firm
(and its affiliates) and Applied that may reasonably be thought
to bear on its independence.
Deloitte & Touche, the member firms of Deloitte Touche
Tohmatsu, and their respective affiliates billed the following
fees, including expenses, to Applied for fiscal years 2010 and
2009:
| Type of Fees | Fiscal 2010 ($) | Fiscal 2009 ($) | ||||||||
|
Audit Fees
|
924,600 | 1,101,000 | ||||||||
|
Audit-Related Fees
|
18,900 | 59,900 | ||||||||
|
Tax Fees
|
363,600 | 403,600 | ||||||||
|
All Other Fees
|
4,300 | 3,600 | ||||||||
Audit-Related Fees in 2010 include amounts paid
for debt compliance letters, financial accounting and reporting
consultations, and other agreed upon procedures, and in 2009
were for acquisition due diligence ($51,900) and debt compliance
letters and other agreed upon procedures ($8,000).
Tax Fees in 2010 were for tax compliance and
return preparation ($60,000) and consulting ($303,600) and in
2009 were for tax compliance and return preparation ($69,100)
and consulting ($334,500).
All Other Fees in 2010 and in 2009 were for an
annual subscription to an accounting research tool.
The Audit Committee pre-approves the services performed by the
independent auditors to assure that the provision of the
services does not impair the auditors’ independence. If a
type of service to be provided is not included in the
committee’s general pre-approval, then it requires specific
pre-approval. In addition, any services exceeding pre-approved
cost levels require additional committee pre-approval. The
committee has delegated pre-approval authority to its chair,
provided that the committee reviews the chair’s action at
its next regular meeting. The committee also reviews, generally
on a quarterly basis, reports summarizing the services provided
by the independent auditors.
Unless otherwise indicated, the accompanying proxy will be voted
in favor of ratifying Deloitte & Touche’s
appointment. Ratification requires the affirmative vote of a
majority of the shares cast at the meeting. If
Deloitte & Touche withdraws or otherwise becomes
unavailable for reasons not currently known, the proxies will
vote for other independent auditors, as they deem appropriate.
We expect one or more Deloitte & Touche
representatives to be present at the meeting. They will have the
opportunity to make a statement and we expect them to be
available to respond to appropriate questions.
The Board of Directors recommends that the shareholders vote
FOR ratifying the appointment of the independent auditors.
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. |
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Table of Contents
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 the directors, other than
Mr. Pugh, our Chief Executive Officer, meet these
independence standards.
Director
Attendance at Meetings
During the fiscal year ended June 30, 2010, the Board had
eight meetings. Each director attended at least 75% of the total
number of meetings of the Board and all committees on which he
or she served.
Applied expects its 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
Applied’s non-management directors meet in executive
sessions without management, typically at every regular Board
meeting. Mr. Dorsman, the Corporate Governance Committee
chair, calls and serves as presiding director of the sessions.
On the independent directors’ behalf, the presiding
non-management director 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 its Corporate Governance Committee.
Board Leadership
Structure
The Board is led by a Chairman it elects. Mr. Pugh, our
Chief Executive Officer, is also Chairman. All of our other
directors are independent.
The Board periodically evaluates its leadership structure. The
Board believes that, at this time, having our CEO as Chairman is
in Applied’s best interests because it promotes unity of
vision for the company’s leadership. The Board also
believes that Applied and its shareholders are currently best
served by having a Chairman who has a wide-ranging, in-depth
knowledge of Applied’s operations and the business
landscape and who can best identify the strategic issues to be
considered by the Board. In addition, the structure promotes the
timely flow of information to support Board decision-making.
There are benefits and limitations to combining the offices of
Chairman and Chief Executive Officer, but the Board believes
that, in Applied’s case, the limitations are substantially
diminished by existing safeguards. These safeguards include the
roles of the presiding non-management director and the
independent chairs of the key committees, regular meetings of
the non-management directors in executive session, and the fact
that executive compensation is determined by a committee of
independent directors who make extensive use of peer
benchmarking. The Board has thus concluded that its leadership
structure is optimal for Applied and its shareholders at this
time.
Committees
The Board’s Audit, Corporate Governance, and Executive
Organization & Compensation Committees are composed
solely of independent directors, as defined in the NYSE listing
standards and Applied’s categorical standards, and, in the
case of the Audit Committee, under applicable federal securities
laws.
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The committee members’ names and number of meetings held in
fiscal 2010 follow:
| Committee | Members | Number of Meetings | ||||||
|
Audit Committee
|
Thomas A. Commes, chair J. Michael Moore Dr. Jerry Sue Thornton Stephen E. Yates |
4 | ||||||
|
Corporate Governance
Committee |
Peter A. Dorsman, chair L. Thomas Hiltz Edith Kelly-Green |
4 | ||||||
|
Executive Organization & Compensation Committee
|
William G. Bares, chair John F. Meier Peter C. Wallace |
6 | ||||||
We briefly describe each committee below. Each committee’s
charter, posted via hyperlink from the investor relations area
of Applied’s website, contains a more complete description.
The Board also has a standing Executive Committee which, during
the 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 presiding non-management director, and
the other committee chairs, did not meet in fiscal 2010.
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 Mr. Commes is an “audit
committee financial expert,” as defined in
Item 407(d)(5) of Securities and Exchange Commission
(“SEC”)
Regulation S-K.
The Audit Committee’s report is on page 45 of this
proxy statement.
Corporate Governance Committee. The Corporate
Governance Committee assists the Board by reviewing and
evaluating potential director nominees, Board and Chief
Executive Officer performance, Board governance matters,
director compensation, compliance with laws, public policy
matters, and other issues. The committee also administers
long-term incentive awards to directors under the 2007 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 the
executive officers’ compensation and benefits. The
committee also administers incentive awards to executives under
the 2007 Long-Term Performance Plan, including the annual
Management Incentive Plan. Towers Watson & Co. serves
as the committee’s independent executive compensation
consultant.
In approving the officers’ compensation and benefits, the
committee bases its decisions on a number of factors and
considerations, including the following: the committee’s
own reasoned judgment; peer group and market survey information
and recommendations provided by the independent consultant; and
recommendations from Mr. Pugh, Applied’s Chief
Executive Officer, as to the other officers’ compensation
and benefits.
For more information on the committee, please read, beginning on
page 18, the “Compensation Discussion and
Analysis” portion of this proxy statement.
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Table of Contents
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 satisfying itself 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 is available to respond to
directors’ questions or concerns about risk
management-related 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. 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 fulfilling its responsibility
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 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. |
As required by new SEC rules, 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
any 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 established in the
investor relations area of Applied’s website at
www.applied.com. The Board has instructed Applied’s
Secretary to review these communications and to exercise his
judgment not to forward correspondence such as routine business
inquiries and complaints, business solicitations, and frivolous
communications.
Director
Nominations
In identifying and evaluating director candidates, the Corporate
Governance Committee first considers Applied’s developing
needs and the desired characteristics of a new director, as
determined from time to time by the committee. The committee
then considers various attributes of candidates, 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.
As part of its ongoing efforts to strengthen the experience and
quality of the Board, the committee recently engaged a
professional search firm, to which it has paid a fee, to assist
in identifying and evaluating potential nominees to the Board.
If a suitable candidate is identified, the Board has the
authority under Applied’s Code of Regulations to expand the
Board and either nominate the candidate for election by
shareholders or appoint the candidate to the newly-created
vacancy.
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The committee will also consider qualified director candidates
recommended by our 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 first anniversary of the date on which our proxy
statement was released to shareholders in connection with the
previous year’s annual meeting. Shareholders must include
appropriate detail regarding the shareholder’s identity and
the candidate’s business, professional, and educational
background, diversity considerations, and independence. The
committee does not intend to evaluate candidates proposed by
shareholders differently than other candidates.
Transactions with
Related Persons
Applied’s Code of Business Ethics expresses the principle
that situations presenting a conflict of interest must be
avoided. In furtherance of this principle, the Board has adopted
a written policy, administered by the Corporate Governance
Committee, for the review and approval, or ratification, of
transactions with related persons.
The related party transaction policy applies to any proposed
transaction in which Applied is a participant, the amount
involved exceeds $50,000, and any director, executive officer or
significant shareholder, or any 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 any
discussion or approval of a transaction for which he or she is a
related person.
DIRECTOR
COMPENSATION
Only non-employee directors receive compensation for service as
directors. Mr. Pugh, our Chief Executive Officer, does not
receive additional compensation for serving as a director.
Compensation
Review
The Corporate Governance Committee reviews our directors’
compensation annually. The committee seeks to provide a
competitive compensation program 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.
In considering changes, the committee bases its decisions on a
number of factors and considerations, including published survey
data and the committee’s own reasoned judgment. In general,
the committee targets the 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 any change.
Management assists the committee by preparing and presenting
analyses at the committee’s request, but does not play a
role in determining or recommending the amount or form of
director compensation.
As a result of the fiscal 2010 review, effective as of
July 1, 2010, the Board approved a new $1,875 quarterly
retainer for the presiding non-management director and increased
the Corporate Governance Committee chair’s retainer by $625
per quarter.
Components of
Compensation Program
The primary components of the director compensation program
follow:
Retainers. Directors earn a $10,000 quarterly
retainer.
Meeting Fees. Directors earn a $1,500 fee for the
first Board or committee meeting attended per day, and $500 for
each additional meeting attended on the same day, up to a
maximum of $2,500 per day. Directors may be similarly
compensated if they attend other meetings or telephone
conferences at the
14
Table of Contents
Chairman’s request. In addition, Applied pays directors
$500 for any action taken by unanimous written consent or via
telephone conference of less than 30 minutes.
Committee Chair Retainers. The chairs of the Audit
Committee, the Corporate Governance Committee, and the Executive
Organization & Compensation Committee each earn an
additional $1,875 quarterly retainer.
Presiding Non-Management Director Retainer. The
presiding non-management director earns an additional $1,875
quarterly retainer.
Long-Term Incentives. Annually, after considering
survey data, the Corporate Governance Committee considers
long-term incentive awards to the directors. In 2010, the
committee awarded each director 4,437 stock options and 2,637
restricted shares under the 2007 Long-Term Performance Plan. The
stock options’ exercise price is the closing market price
for Applied stock on the grant date. The options are exercisable
immediately and expire on the tenth anniversary of the grant
date. The restricted shares vest one year after the grant date,
subject to conditions as to forfeiture and acceleration of
vesting.
Deferred Compensation Plan for Non-Employee
Directors. Pursuant to the Deferred Compensation Plan
for Non-Employee Directors, and subject to Internal Revenue Code
(“Code”) section 409A, a director may defer
payment of future retainer and meeting fees. Deferred fees are
deemed invested, at a director’s option, in a money market
fund and/or
Applied stock.
At the end of the quarter in which the compensation would
otherwise become due and payable, Applied transfers the amount
deferred, in either cash or treasury shares (depending on the
option chosen), to a grantor trust. In general, distribution of
a director’s account commences in the manner —
lump sum or up to 10 annual installments — and at the
time designated in the director’s election form. The plan
prohibits acceleration of distributions and any distribution
change must comply with section 409A. The plan does not
offer guaranteed or above-market returns.
Four directors currently defer all or a portion of their
retainer and meeting fees and elect to have the fees invested in
Applied stock.
Other Benefits. In addition to the items described
above, Applied reimburses directors for travel expenses for
attending meetings, as well as for expenses incurred in
attending director education seminars and conferences. The
directors also participate in our travel accident insurance plan
and may elect to participate in our contributory health care
plan, although the latter benefit will not be available to
future new directors.
Stock Ownership
Guideline
Applied expects each non-employee director to maintain, within
five years of joining the Board, ownership of Applied shares
valued at a minimum of three times the annual retainer fees.
Directors may hold the shares directly or indirectly, including
shares deemed invested in the Deferred Compensation Plan for
Non-Employee Directors. All the directors currently satisfy this
guideline.
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Table of Contents
Director
Compensation — Fiscal Year 2010
The following table shows information about each non-employee
director’s compensation in 2010.
|
Fees Earned |
All Other |
||||||||||||||||||||||
|
or Paid in |
Stock Awards |
Option Awards |
Compensation |
||||||||||||||||||||
| Name | Cash ($) | ($) (1) | ($) (2) | ($) (3) | Total ($) | ||||||||||||||||||
|
William G. Bares
|
69,500 | 58,251 | 41,847 | 0 | 169,598 | ||||||||||||||||||
|
Thomas A. Commes
|
62,000 | 58,251 | 41,847 | 0 | 162,098 | ||||||||||||||||||
|
Peter A. Dorsman
|
64,500 | 58,251 | 41,847 | 0 | 164,598 | ||||||||||||||||||
|
L. Thomas Hiltz
|
61,000 | 58,251 | 41,847 | 23,539 | 184,637 | ||||||||||||||||||
|
Edith Kelly-Green
|
58,000 | 58,251 | 41,847 | 0 | 158,098 | ||||||||||||||||||
|
John F. Meier
|
58,500 | 58,251 | 41,847 | 0 | 158,598 | ||||||||||||||||||
|
J. Michael Moore
|
57,500 | 58,251 | 41,847 | 22,373 | 179,971 | ||||||||||||||||||
|
Dr. Jerry Sue Thornton
|
56,000 | 58,251 | 41,847 | 0 | 156,098 | ||||||||||||||||||
|
Peter C. Wallace
|
60,500 | 58,251 | 41,847 | 0 | 160,598 | ||||||||||||||||||
|
Stephen E. Yates
|
57,500 | 58,251 | 41,847 | 0 | 157,598 | ||||||||||||||||||
| (1) | At June 30, 2010, each director held 2,637 restricted shares of Applied stock. These shares will vest in December 2010. Applied pays dividends on the restricted stock at the same rate paid to all shareholders and the directors hold voting rights for the shares. The amounts in the table represent the aggregate grant date fair value of the 2010 awards computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation (“FASB ASC Topic 718”). | |
| (2) | At June 30, 2010, the directors held the corresponding numbers of stock options: Mr. Bares — 48,210; Mr. Commes — 11,825; Mr. Dorsman — 39,210; Mr. Hiltz — 48,210; Ms. Kelly-Green — 34,710; Mr. Meier — 19,710; Mr. Moore — 25,710; Dr. Thornton — 48,210; Mr. Wallace — 19,710; and Mr. Yates — 48,210. The Corporate Governance Committee awarded each director 4,437 stock options in 2010. The amounts in the table represent the aggregate grant date fair value of the 2010 awards computed in accordance with FASB ASC Topic 718. | |
| (3) | The amounts reflect the value of health care benefits. Aggregate perquisites and other personal benefits provided to each other outside director did not exceed $10,000 in value and are not required to be reported. |
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BENEFICIAL
OWNERSHIP OF CERTAIN APPLIED SHAREHOLDERS AND
MANAGEMENT
The following table shows beneficial ownership of Applied common
stock, as of June 30, 2010, by (a) each person
believed by us to own beneficially more than 5% of
Applied’s outstanding shares, based on our review of SEC
filings, (b) all directors and nominees, (c) the named
executive officers included in the Summary Compensation Table on
page 30, and (d) all directors, nominees, and
executive officers as a group.
|
Shares |
||||||||||
|
Beneficially Owned |
Percent of |
|||||||||
| Name of Beneficial Owner | on June 30, 2010 (1) | Class (%) (2) | ||||||||
|
Capital World Investors
333 South Hope Street, 55th Floor Los Angeles, California 90071-1447 |
3,888,790 | (3) | 9.2 | |||||||
|
BlackRock, Inc.
40 East 52nd Street New York, New York 10022 |
3,628,411 | (4) | 8.6 | |||||||
|
Dimensional Fund Advisors LP
Building One, 6300 Bee Cave Road Austin, Texas 78746 |
3,121,475 | (5) | 7.4 | |||||||
|
Applied Industrial Technologies, Inc. Retirement Savings
Plan
c/o Wells Fargo Bank, N.A. 901 Marquette Avenue, Suite 500 Minneapolis, Minnesota 55402 |
3,114,063 | (6) | 7.4 | |||||||
|
William G. Bares
|
177,489 | (7) | ||||||||
|
Fred D. Bauer
|
115,090 | |||||||||
|
Thomas A. Commes
|
79,075 | |||||||||
|
Peter A. Dorsman
|
70,426 | |||||||||
|
Mark O. Eisele
|
176,556 | |||||||||
|
L. Thomas Hiltz
|
669,704 | (8) | 1.6 | |||||||
|
Edith Kelly-Green
|
67,567 | |||||||||
|
John F. Meier
|
36,425 | |||||||||
|
Benjamin J. Mondics
|
122,042 | |||||||||
|
J. Michael Moore
|
88,485 | (9) | ||||||||
|
David L. Pugh
|
1,281,524 | 3.0 | ||||||||
|
Jeffrey A. Ramras
|
145,572 | |||||||||
|
Dr. Jerry Sue Thornton
|
105,498 | |||||||||
|
Peter C. Wallace
|
39,404 | |||||||||
|
Stephen E. Yates
|
86,004 | |||||||||
|
All directors, nominees, and executive officers as a group
(19 individuals)
|
3,504,317 | (10) | 8.0 | |||||||
| (1) | We have 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, 2010, by exercising vested stock options and stock-settled stock appreciation rights (“SARs”), as follow: Mr. Bares — 48,210; Mr. Bauer — 72,301; Mr. Commes — 11,825; Mr. Dorsman — 39,210; Mr. Eisele — 74,044; Mr. Hiltz — 48,210; Ms. Kelly-Green — 34,710; Mr. Meier — 19,710; Mr. Mondics — 91,016; Mr. Moore — 25,710; Mr. Pugh — 769,955; Mr. Ramras — 112,797; Dr. Thornton — 48,210; Mr. Wallace — 19,710; and Mr. Yates — 48,210. The totals also include the following shares held in nonqualified deferred compensation plan accounts for which the beneficial owner has voting, but not dispositive power: Mr. Bares — 47,732; Mr. Commes — 14,087; Mr. Dorsman — 23,838; Mr. Eisele — 6,624; Ms. Kelly-Green — 1,866; Mr. Meier — 7,762; Mr. Moore — 25,050; Mr. Ramras — 20,364; Dr. Thornton — 31,195; Mr. Wallace — 10,816; and Mr. Yates — 30,415. Each non-employee director’s total also includes 2,637 restricted shares of stock, for which the director has voting but not dispositive power. The executive officers’ totals do not include restricted stock unit holdings. | |
| (2) | Does not show percent of class if less than 1%. | |
| (3) | Capital World Investors reported its share ownership, including shares beneficially owned by affiliated entities, in a Form 13F filed with the SEC on August 13, 2010, indicating it had sole dispositive power for 0 shares. | |
| (4) | BlackRock, Inc. reported its share ownership, including shares beneficially owned by affiliated entities, in a Form 13G filed with the SEC on January 29, 2010. | |
| (5) | Dimensional Fund Advisors LP reported its share ownership, including shares beneficially owned by affiliated entities, in a Form 13F filed with the SEC on August 6, 2010, indicating it had sole voting power for 3,094,409 shares, no voting power for 27,066 shares, and sole dispositive power for 0 shares. |
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Table of Contents
| (6) | The trustee of the Applied Industrial Technologies, Inc. Retirement Savings Plan, a tax-qualified defined contribution plan with a Code section 401(k) feature, holds shares for the benefit of plan participants. Participants may vote all shares allocated to their accounts and also vote on a pro rata basis, as named fiduciaries, shares for which no voting instructions are received. | |
| (7) | Includes 5,062 shares owned by Mr. Bares’ wife, who has sole voting and dispositive power. | |
| (8) | Includes 600,000 shares held by the H.C.S. Foundation, a charitable trust of which Mr. Hiltz is one of five trustees, with sole voting and dispositive power. Pursuant to a Schedule 13D filed by the H.C.S. Foundation in 1989, the trustees, including Mr. Hiltz, disclaimed beneficial ownership of those shares. | |
| (9) | Includes 31,247 shares held by an irrevocable family trust of which Mr. Moore disclaims beneficial ownership. | |
| (10) | Includes 1,590,801 shares that could be acquired by the individuals within 60 days after June 30, 2010, by exercising vested stock options and SARs. In determining share ownership percentage, these stock option and SAR shares are added to both the denominator and the numerator. Also includes 61,084 shares held by Applied’s Retirement Savings Plan for the executive officers’ benefit; these shares are included too in the figure shown for the plan’s holdings. |
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Introduction
This Compensation Discussion and Analysis 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 2010.
Unless otherwise noted, references to years in the
“Executive Compensation” section of this proxy
statement mean Applied’s fiscal years ending on
June 30.
Summary of 2010
Compensation
The approach of the Board’s Executive
Organization & Compensation Committee (the
“Committee”) in 2010 to setting the executive
officers’ base salaries and incentive target values aligned
with the difficult economic environment and the company’s
overall efforts to control expenses. In 2009, amid the recession
and its impact on Applied’s business, management had acted
to defer consideration of salary and wage increases for
Applied’s workforce until after 2010. Likewise, and after
also considering executive pay practices in the broader market,
the Committee did not adjust the executive officers’ base
salaries, annual incentive target values, or long-term incentive
target values in 2010; all of these remained unchanged from 2009.
From the standpoint of realized incentive compensation, in 2009,
when Applied’s performance declined in the recession, the
executive officers did not earn annual or three-year incentive
payouts. By contrast, during 2010, as described below,
performance rebounded, and annual incentive pay recovered in a
like manner. Applied did not, however, achieve its goals for the
three-year period ending in 2010, and the executive officers
again did not earn three-year incentive payouts.
Compensation
Philosophy and Objectives
As with our overall business, 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 is competitive with our industry peers and in the broader marketplace for executive talent, and | |
| • | Motivate executives to achieve goals, and to take appropriate risks, consistent with Applied’s business strategies. |
Applied is an industrial distributor in a mature market. The
business is highly competitive, with many other companies
offering the same or substantially similar products and
services. In this environment, attracting and retaining talented
key employees is critical to our success. We compete for talent
with other industrial distributors, industrial product
manufacturers, and similarly sized companies outside our
18
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industry. For these reasons, we have designed Applied’s
executive compensation program to be competitive both within our
industry and in the broader marketplace.
Consistent with maximizing shareholder return, Applied believes
it is important for executives to focus on both short-term and
long-term performance. Accordingly, we provide annual and
long-term incentive plans designed to align executives’
interests with those of shareholders.
Roles and
Responsibilities
Executive Organization & Compensation
Committee. The Committee is composed 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 Chief Executive Officer and the other executive officers, | |
| • | Overseeing Applied’s executive compensation and benefit plans, including approving annual and long-term incentive awards, and | |
| • | Approving incentive plan goals that use performance metrics and evaluating performance at the end of plan terms (i.e., annually and on a three-year basis) to determine whether goals have been achieved. |
For every meeting at which compensation items are to be
discussed, the Committee receives a tally sheet displaying
updated data with respect to the material components of each
executive’s compensation and benefits. This enables the
Committee to make decisions with respect to each component in
the context of total compensation.
Independent Compensation Consultant. Towers
Watson & Co. serves as the Committee’s
independent compensation consultant, assisting the Committee in
the following:
| • | Establishing the executive compensation program’s components, | |
| • | Analyzing the program’s competitiveness, and | |
| • | Setting each executive officer’s annual target compensation levels. |
Towers Watson is engaged by and reports directly to the
Committee. The firm’s representative directly interacts
with the Committee chair between meetings and participates in
meetings and performs assignments as requested. The firm submits
its invoices to the chair for approval and payment by Applied.
Hewitt Associates LLC served as the Committee’s consultant
for the 2010 compensation review and prepared the pay study
described in “Executive Compensation Program
Overview,” below. Hewitt performed no other work for
Applied during the year and received no other compensation from
Applied outside this engagement. After Hewitt’s lead
representative for the engagement left the firm during the third
quarter of fiscal 2010, the Committee interviewed other firms
and ultimately selected Towers Watson as its new consultant in
May 2010.
Management. While the Committee is responsible for
the program’s design and implementation, management assists
the Committee in several ways.
Mr. Pugh, our Chief Executive Officer, and other key
executives attend portions of Committee meetings at its
invitation. They prepare and present analyses at the
Committee’s request, offer recommendations about program
components and incentive plan goals, and regularly report on
Applied’s performance. Mr. Pugh also reports on the
other officers’ individual performance and makes
recommendations regarding their base salaries, incentive awards,
and benefits. The Committee sets Mr. Pugh’s pay in
executive session without management present.
Mr. Pugh and other executives assist 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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Table of Contents
Executive
Compensation Program Overview
Structure. The compensation program for executive
officers includes the following components:
| • | Base salary, | |
| • | Annual incentives, | |
| • | Long-term incentives, | |
| • | Qualified and nonqualified plan benefits, and | |
| • | Perquisites and other personal benefits. |
Base salary, annual incentives, and long-term incentives are the
primary components. The Committee sets base salaries to be
competitive with similar positions in companies in the peer
group described below. Annual incentive pay rewards the
achievement of short-term earnings objectives, and longer-term
earnings and total shareholder return are promoted through
long-term incentive awards including performance shares,
stock-settled stock appreciation rights (“SARs”), and
restricted stock units (“RSUs”).
Applied’s compensation practices reflect our
pay-for-performance
philosophy. The Committee places the majority of the
compensation provided to the officers named in the Summary
Compensation Table on page 30 (the “named executive
officers”), including targeted incentive compensation, at
risk and tied to company-wide performance. Moreover, incentive
compensation generally makes up a greater share of the overall
opportunity for executives in more senior positions.
Applied also believes that programs leading to equity ownership
ensure that the executives’ interests are aligned with
those of shareholders. However, to avoid excessive dilution, the
Committee manages incentive awards to keep annual share
utilization well below 2% of the shares outstanding. The
Committee regularly reviews its share utilization in relation to
market practices.
With these guideposts, the Committee establishes a mix among
base salary, annual incentive pay, and long-term incentive pay,
as well as a mix between cash and equity-based incentives, that
are aligned with competitive market practices.
The Committee generally determines each executive officer’s
base salary, annual incentive target compensation (expressed as
a percentage of salary), and long-term incentive target
compensation independently from the other primary elements of
compensation. Notwithstanding this fact, the Committee reviews
data regarding total target cash compensation and total target
compensation and considers such information contextually when
evaluating each primary compensation element.
The following table shows the allocation (rounded) of the
opportunity provided in 2010 to the named executive officers,
considering the primary components of compensation —
base salary, annual incentive target opportunity, and
approximate long-term incentive target opportunity:
|
Annual |
Long-Term |
||||||||||||||
|
Incentive Target |
Incentive Target |
||||||||||||||
|
Base Salary |
Opportunity |
Opportunity |
|||||||||||||
| Name and Principal Position | (% of Total) | (% of Total) | (% of Total) | ||||||||||||
|
David L. Pugh
Chairman & Chief Executive Officer |
26 | 26 | 48 | ||||||||||||
|
Benjamin J. Mondics
President & Chief Operating Officer |
34 | 22 | 44 | ||||||||||||
|
Mark O. Eisele
Vice President — Chief Financial Officer & Treasurer |
40 | 24 | 36 | ||||||||||||
|
Fred D. Bauer
Vice President — General Counsel & Secretary |
42 | 23 | 35 | ||||||||||||
|
Jeffrey A. Ramras
Vice President — Supply Chain Management |
47 | 23 | 30 | ||||||||||||
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The Committee’s application of compensation policies and
practices among the named executive officers is consistent in
all material respects. Mr. Pugh, our Chief Executive
Officer, earns a higher salary and has higher incentive
opportunities than the other officers. The primary components of
his compensation are also more heavily weighted toward incentive
pay. These distinctions are appropriate considering his
responsibility and influence over Applied’s performance and
they are typical among the companies in the peer group described
below.
Competitive Benchmarking in 2010. In 2010, Hewitt
prepared a target compensation study from its proprietary Total
Compensation Measurement database to assist the Committee with
competitive benchmarking. The first step in preparing the study
was the Committee’s selection from Hewitt’s database,
with the consultant’s input, of a peer group for evaluating
compensation. For 2010, this group (the “Peer Group”)
consisted of 26 companies in the distribution,
manufacturing, and industrial machinery and equipment
industries. The companies’ annual revenues ranged from
$1 billion to over $6 billion, with a median of
$2.8 billion; Hewitt recommended this range to reflect the
marketplace within which Applied competes for executive talent.
Management did not participate in selecting the companies.
The Peer Group included the following members:
|
Alliant Techsystems Inc.
BorgWarner Inc. Cameron International Corporation Donaldson Company, Inc. FMC Corp. H. B. Fuller Company Herman Miller, Inc. Joy Global Inc. Kaman Corporation |
Kennametal Inc. Lennox International Inc. Martin Marietta Materials, Inc. Nalco Company Olin Corporation Packaging Corporation of America Rayonier Inc. Rockwell Collins, Inc. Sauer-Danfoss Inc. |
Sonoco Products Company Steelcase Inc. Thomas & Betts Corporation United Stationers Inc. Valmont Industries, Inc. Vulcan Materials Company Waters Corporation W. W. Grainger, Inc. |
The Committee has changed the group from year to year due to
companies ceasing to participate in the consultant’s
proprietary database, changes in companies’ size or
business profile, and other factors.
After the Peer Group was identified, Hewitt prepared the target
compensation study. Because of the prevailing economic distress
and the resulting volatility in executive pay, the Committee
sought to use the study to assist in understanding broader
market trends, particularly in regard to incentive target
values. With this goal in mind, the Committee directed Hewitt to
study four representative executive positions: chief executive
officer, chief operating officer, chief financial officer, and
general counsel.
Hewitt 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.”
Hewitt’s study analyzed base salary, annual incentive
target compensation, total short-term target compensation (base
salary plus annual incentive target compensation), long-term
incentive target compensation, and total target compensation
(total short-term target compensation plus long-term incentive
target compensation). Hewitt’s study also benchmarked
company performance, comparing Applied’s total shareholder
return, earnings growth, sales growth, and other financial
metrics, over one-and five-year periods, with the Peer Group
companies.
Using the target compensation study, the Committee benchmarked
each primary compensation component, by position, against the
market. In most years, the Committee seeks to target total
compensation at or near market median if Applied’s
performance targets are met. By design, 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.
It is important to note, however, that market medians are only
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, and the
position’s importance in Applied’s organization.
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Table of Contents
The Committee does not consider the executive officers’
personal wealth in determining appropriate levels of future
compensation.
Components of
Compensation
Base Salary. The Committee observes a general
policy that base salaries for executive officers who have been
in their positions for at least three years and are meeting
performance expectations should be at or near (generally, within
+/- 10%) the market median for comparable positions. As with all
components of pay, however, the Committee, using its subjective
judgment, sets salaries higher or lower to reward individual
performance and skills, as well as to reflect factors such as
long-term potential, tenure in the position, internal equity,
and the position’s importance in Applied’s
organization.
As discussed above, the Committee did not adjust the executive
officers’ base salaries in 2010. In 2009, amid the
recession and its impact on Applied’s business, management
had acted to defer consideration of salary and wage increases
for Applied’s workforce until after 2010. Likewise, and
after also considering executive pay practices in the broader
market, the Committee did not adjust the executive
officers’ base salaries, annual incentive target values, or
long-term incentive target values in 2010; all of these remained
unchanged from 2009.
When compared with Hewitt’s 2010 study data for the four
selected positions, the salaries for Messrs. Pugh, Eisele,
and Bauer were within +/- 10% of the 2010 market medians, and
the salary for Mr. Mondics, who has held his position for
less than three years, was more than 10% below the market median.
Annual Incentives. The Management Incentive
Plan rewards executive officers, in cash, for achieving fiscal
year goals. In general, the Committee seeks to pay total
short-term compensation at or near the market median when
Applied meets its annual performance goals, and to pay
substantially above the market median when Applied substantially
exceeds its goals. If Applied does not achieve the threshold
performance level, then the executive officers do not earn
annual incentive pay, and pay would fall substantially below
market median levels.
At the beginning of the fiscal year, after the Board reviews
Applied’s annual business plan as prepared and presented by
management, the Committee reviews and discusses proposed
objective performance goals for the Management Incentive Plan.
The Committee considers the market outlook and the business
plan, along with the available opportunities and the attendant
risks.
For the 2010 Management Incentive Plan, the Committee set goals
tied to Applied’s net income. The Committee adopted net
income growth as the sole performance measure because of its
value as a proxy for annual growth in shareholder value.
Each year, the Committee sets goals it believes are attainable,
but that require executives to perform at a consistently high
level to achieve target award values. The Committee set the 2010
goals as follow:
| 2010 Net Income | |||||||||||||||||||||||||
|
Equal to or Greater |
|||||||||||||||||||||||||
|
Less than |
than |
||||||||||||||||||||||||
| $38.5 million | $38.5 million | $42.8 million | $49.2 million | $55.6 million | |||||||||||||||||||||
|
Payout as % of
Target Award Value |
0% | 50% | 75% | 100% | 200% | ||||||||||||||||||||
As shown above, payouts for 2010 could have ranged from 0% to
200% of the executive officers’ target award values. The
Committee established this range after considering Hewitt’s
guidance as to market practices. Payouts were to be prorated on
a straight-line proportional basis for net income results
falling between the threshold 50%, 75%, 100%, and maximum 200%
payout levels.
The $49.2 million target goal for 2010, which was 6% above
2009’s net income, reflected prospective improvements in
sales and operating profit percentage based on Applied’s
business plan, as well as the unusually difficult and uncertain
market environment that prevailed at the beginning of the fiscal
year.
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Then the Committee assigns an incentive target —
expressed as a percentage of salary — to each
executive officer. As with base salaries, the Committee
maintained target percentages for 2010 at the same levels as for
2009. The named executive officers’ targets for 2010 follow:
| Name | Base Salary ($) | Incentive Target (%) | Target Award Value ($) | ||||||||||||
|
D. Pugh
|
945,000 | 100 | 945,000 | ||||||||||||
|
B. Mondics
|
450,000 | 65 | 292,500 | ||||||||||||
|
M. Eisele
|
438,000 | 60 | 262,800 | ||||||||||||
|
F. Bauer
|
355,000 | 53 | 188,150 | ||||||||||||
|
J. Ramras
|
350,000 | 50 | 175,000 | ||||||||||||
When compared with Hewitt’s 2010 study data for the four
selected positions, the target annual incentive award values for
Messrs. Pugh, Eisele, and Bauer were within +/- 10% of the
market median, and the value for Mr. Mondics, who has held
his position for less than three years, was more than 10% below
the market median.
Applied’s performance dictates the amounts paid. In 2009,
net income performance did not reach the plan’s threshold
goal and the executive officers did not earn annual incentive
pay. In 2010, though, Applied’s net income of
$65.9 million exceeded the maximum goal and the executive
officers earned annual incentive pay at 200% of target levels.
Management Incentive Plan payouts are a component of the
“Non-Equity Incentive Plan Compensation” column of the
Summary Compensation Table at page 30.
Long-Term Incentives. The 2007 Long-Term
Performance Plan rewards executives for achieving long-term
goals. The shareholder-approved plan authorizes long-term
incentive awards in a variety of forms. The Committee typically
makes awards annually, after the release of 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 at or
near the market median for equivalent positions, with some
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, 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 performance goals,
and executive retention. The Committee intends to pay total
long-term compensation at or near the market median when Applied
meets its performance goals and substantially above when Applied
substantially exceeds its goals. If goals are not met, then
long-term compensation should fall below the market median.
As discussed above, the Committee maintained 2010 long-term
incentive target values at the same levels as in 2009. When
compared with Hewitt’s study data for the four selected
positions, the officers’ long-term incentive target values
were below the approximate market medians.
In 2010, the Committee awarded the target value approximately
one-third in SARs, one-third in RSUs, and one-third in
three-year stock-settled performance shares.
This mix represented a design change from previous years, in
which the Committee awarded the target value approximately half
in SARs and half in three-year performance grants. The Committee
made the change after considering information from Hewitt
regarding current market practices as well as the
Committee’s subjective judgment regarding the appropriate
combination of long-term incentive vehicles, balancing their
distinct purposes, and the portion of earnings that should be
paid in shares. The value of the executive officers’
holdings of Applied stock at the beginning of the year relative
to our stock ownership guidelines (see below at page 28)
also was a factor in the Committee’s decision to use three
stock-based vehicles.
In determining the number of SARs and RSUs to be awarded and
performance shares to be targeted, the Committee valued
Applied’s shares using a
12-month
average price methodology, again after
23
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considering Hewitt’s input regarding market practices and
the desirability of reducing the impact of stock price
volatility. The Grants of Plan-Based Awards table on
page 32 shows the number of SARs and RSUs awards made to
the named executive officers, as well as the threshold, target,
and maximum payouts for the performance shares.
The following paragraphs describe the three types of long-term
incentive awards made in 2010 and also report on performance
under the expired
2008-2010
performance grants.
| • | SARs. The SARs’ ultimate value to executives depends on Applied’s stock price growth. The base stock price for the SARs awarded in 2010 is $21.11, the market closing price on the grant date. SARs vest 25% on the first through fourth anniversaries of the grant date, subject to continuous employment with Applied. In addition, unvested SARs vest on retirement. SARs expire on the tenth anniversary of the grant date. |
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 increases in
Applied’s stock value. The four-year vesting period,
ten-year term, and stock-settled nature of the SARs are
consistent with this purpose.
| • | RSUs. RSUs are grants valued in shares of Applied stock, but shares are not issued to the executives until the grants vest three years from the award date, assuming continued employment with Applied. In addition, RSUs vest on a pro rata basis if an executive retires during the three-year term. Applied pays dividend equivalents on RSUs on a current basis. |
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.
| • | Performance shares. At the beginning of each three-year performance shares period, the Committee sets a target number of shares of Applied stock to be paid to each executive officer at the end of the period. The actual payout the executive earns is calculated, relative to the target payout, based on Applied’s achievement of objective performance goals during the period. |
Each year, as a new three-year period begins, the Committee
reviews the business plan and market outlook. Then, after
considering management’s recommendations and the
independent consultant’s guidance as to market practices,
the Committee determines the performance measures and goal
ranges at which payouts can be earned. The Committee sets goals
it believes are attainable without inappropriate risk-taking,
but that still require officers 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. The
Grants of Plan-Based Awards table on page 32 shows the
threshold, target, and maximum payouts for the performance
shares awarded to the named executive officers in 2010.
Because the payout is measured in number of shares, the value of
the award depends on both the company’s operating
performance and its stock price, motivating the executives
throughout the performance period with regard to both measures.
Performance shares are intended typically to provide incentives
to achieve three-year goals. However, because of volatile market
conditions at the beginning of 2010 that made long-term
forecasting unusually difficult, the Committee set the following
one-year goals for the
2010-2012
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Table of Contents
performance shares, tied to Applied’s earnings before
interest, tax, depreciation, and amortization
(“EBITDA”), and comparable to the 2010 Management
Incentive Plan net income goals:
| 2010 EBITDA | ||||||||||||||||||||
|
Less than |
Equal to or Greater than |
|||||||||||||||||||
| $91.8 million | $91.8 million | $108.0 million | $124.2 million | |||||||||||||||||
|
Payout, in RSUs, as % of
Target Number of Shares |
0% | 50% | 100% | 200% | ||||||||||||||||
EBITDA is calculated from our financial statements by starting
with operating income, as shown in the statements of
consolidated income, and then adding the following items from
the statements of consolidated cash flows: depreciation,
amortization of intangibles, amortization of stock option and
appreciation rights, and goodwill or intangibles impairment (if
any).
As with the 2010 Management Incentive Plan goals, the goals for
the performance shares reflected prospective improvements in
sales and operating profit percentage based on Applied’s
business plan, as well as the unusually difficult and uncertain
market environment that prevailed at the beginning of the fiscal
year.
Depending on Applied’s 2010 EBITDA, the performance shares
would convert to RSUs at the achieved payout level, vesting at
the end of the three-year period, with dividend equivalents paid
on a current basis.
Applied earned $134.7 million in EBITDA for 2010. Following
the Committee’s confirmation of the performance in August
2010, the performance shares converted into the following
numbers of RSUs for the named executive officers:
| Name | Number of Performance Share RSUs | ||||
|
D. Pugh
|
69,000 | ||||
|
B. Mondics
|
23,800 | ||||
|
M. Eisele
|
16,000 | ||||
|
F. Bauer
|
11,600 | ||||
|
J. Ramras
|
8,800 | ||||
| • | 2008-2010 performance grants. Prior to 2010, the Committee made annual awards to the executive officers of three-year performance grants. Performance grants are similar to performance shares, except they have target dollar payouts rather than target share payouts. Once the performance achievement is determined at the end of the three years, the Committee can make payouts, if any, in cash, Applied stock, or a combination. |
Payouts range from 0% to 200% of the targeted levels, with 100%
as the target payout.
The Committee established two sets of goals for the
2008-2010
performance grants. Two-thirds of the target payout depended on
the company’s achievement of cumulative net income and
sales growth goals, providing a balance between profitability
and growth. Payout levels were linked in a matrix with multiple
ranges of achievement for various combinations of the two goals.
The matrix for the
2008-2010
performance grants is shown on the next page. The Committee
amended the matrix during the grant term, increasing the sales
and net income targets (making them tougher to achieve), to
reflect then-projected improvements in performance following
Applied’s August 2008 Fluid Power Resource acquisition.
25
Table of Contents
2008-2010
PERFORMANCE GRANT MATRIX
| Cumulative Annual Sales Growth Percentage | ||||||||||||||||||
|
Under 3.85% |
3.85% - 4.34% |
4.35% - 4.94% |
4.95% - 5.64% |
5.65% - 6.54% |
Above 6.54% |
|||||||||||||
|
(3-year total sales of under |
(3-year total sales of |
(3-year total sales of |
(3-year total sales of |
(3-year total sales of |
(3-year total sales of above |
|||||||||||||
| $6.951 billion) | $6.952-$7.014 billion) | $7.015-$7.091 billion) | $7.092-$7.182 billion) | $7.183-$7.300 billion) | $7.301 billion) | |||||||||||||
|
Cumulative Net Income Amounts 
|
Over $340.1 million (less 4.89% of all sales below
$6.951 billion) Payout = 75% |
Over $340.1 million Payout = 150% |
Over $343.3 million Payout = 180% |
Over $347.3 million Payout = 180% |
Over $352.0 million Payout = 200% |
Over $358.0 million (plus 4.9% of all sales above $7.301 billion) Payout = 200% |
||||||||||||
|
$287.9 million (less 4.15% of all sales below
$6.951 billion) to the amount calculated in the above
box
Payout = 50% |
$287.9 million to $340.1 million Payout = 100% |
$290.7 million to $343.3 million Payout = 120% |
$294.0 million to $347.3 million Payout = 160% |
$298.0 million to $352.0 million Payout = 180% |
$303.1 million (plus 4.15% of all sales above $7.301 billion) to the amount calculated in the above box Payout = 200% |
|||||||||||||
|
Amounts lower than the lower end of
the range calculated in the above box Payout = 0% |
$268.4 million to $287.8 million Payout = 70% |
$270.9 million to $290.6 million Payout = 80% |
$274.0 million to $293.9 million Payout = 100% |
$277.7 million to $297.9 million Payout = 120% |
$282.5 million (plus 3.87% of all sales above $7.301 billion) to the lower end of the range calculated in the above box Payout = 140% |
|||||||||||||
|
Amounts lower than the lower end of
the range calculated in the above box Payout = 0% |
$242.3 million to $268.3 million Payout = 40% |
$244.6 million to $270.8 million Payout = 40% |
$247.4 million to $273.9 million Payout = 60% |
$250.7 million to $277.6 million Payout = 70% |
$255.0 million (plus 3.49% of all sales above $7.301 billion) to the lower end of the range calculated in the above box Payout = 80% |
|||||||||||||
|
Amounts lower than the lower end of
the range calculated in the above box Payout = 0% |
$190.8 million to $242.2 million Payout = 20% |
$192.6 million to $244.5 million Payout = 20% |
$194.8 million to $247.3 million Payout = 25% |
$197.4 million to $250.6 million Payout = 30% |
$200.7 million (plus 2.75 of all sales above $7.301 billion) to the lower end of the range calculated in the above box Payout = 40% |
|||||||||||||
|
Amounts lower than the lower end of the range calculated in the
above box
Payout = 0% |
lower than $190.8 million Payout = 0% |
lower than $192.6 million Payout = 0% |
lower than $194.8 million Payout = 0% |
lower than $197.4 million Payout = 0% |
Amounts lower than the lower end of the range calculated in the above box Payout = 0% |
|||||||||||||
26
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The other one-third of the target payout was tied to the
company’s cumulative total shareholder return compared with
19 other companies in Applied’s and related industries. The
calculations used average market closing prices for the ten days
prior to the beginning and the end of the three-year period.
Payouts were determined based on absolute return and percentile
ranking. A 100% payout depended on Applied stock achieving a
three-year return at least at the 50th percentile and
greater than 12.49% on an absolute basis. If, however, the
return was lower than the 45th percentile or lower than 0%
on an absolute basis, then the executive officers would not earn
a payout for this portion of the grants.
The 19 companies used for shareholder return comparison
purposes were the following:
|
Airgas, Inc.
Anixter International Inc. Barnes Group, Inc. Donaldson Company, Inc. Fastenal Company FMC Technologies, Inc. Genuine Parts Company |
IDEX Corporation Kaman Corporation Kennametal Inc. Lawson Products, Inc. MSC Industrial Direct Co., Inc. Pall Corporation |
Parker Hannifin Corporation Rockwell Automation, Inc. Sauer-Danfoss Inc. The Timken Company WESCO International, Inc. W. W. Grainger, Inc. |
The Committee selected these companies in 2008, when the
performance grants were awarded, primarily on an industry basis.
Unlike the selection of companies for compensation benchmarking,
the Committee was not limited by the scope of Hewitt’s
proprietary database, nor was revenue size as important a
consideration.
Ultimately, the executives did not earn payouts for the
2008-2010
performance grant period. With respect to the matrix,
Applied’s cumulative net income for the period was
$203.6 million, but sales only reached $5.9 billion,
so the threshold targets were not achieved. As calculated under
the grants, Applied’s total shareholder return for the
period wound up well above the 50th percentile level, but
at -3% on an absolute basis. So, despite Applied’s relative
outperformance, the negative return meant that no executive
earned a payout on this portion of the grants either, again
demonstrating the program’s alignment with shareholder
interests.
Qualified, Nonqualified, and Welfare Plan
Benefits. Through the plans described below, we
seek to provide personal security and other benefits comparable
to those available at similarly sized companies. The Committee,
with its independent consultant’s assistance, reviews the
executive-level benefits periodically and compares them with
market survey information, considering executives’
positions and years of service.
| • | Qualified plan. Applied maintains a defined contribution plan with a section 401(k) feature (the Retirement Savings Plan) for eligible U.S. employees, including the officers. | |
| • | Supplemental Executive Retirement Benefits Plan. Applied does not have a qualified defined benefit plan for employees generally, but does maintain the Supplemental Executive Retirement Benefits Plan (the “SERP”), a nonqualified defined benefit plan, for executive officers designated as participants by the Board or the Committee. Providing supplemental retirement benefits assists with executive recruitment and retention. |
Normal SERP retirement benefits are payable upon separation from
service after attainment of age 65 to participants with at
least five years’ credited service as an executive officer.
Reduced benefits are available to participants who separate from
service with at least 10 years’ credited service with
Applied, five as an executive officer.
Each named executive officer participates in the SERP. Their
accrued benefits are described in “Pension Plans,” at
page 34.
| • | Nonqualified deferred compensation plans. Applied also maintains plans that permit highly compensated U.S. employees, including the executive officers, to defer receiving portions of base salary and cash incentive awards and to accumulate nonqualified savings. Applied does not make contributions to these plans. We describe the plans more fully in “Nonqualified Deferred Compensation,” at page 36. |
27
Table of Contents
| • | Welfare plans. Applied maintains a health care plan as well as life and disability insurance plans for full-time U.S. employees. Executive officers may also participate in executive life and disability insurance programs. | |
| • | Retiree health care program. Applied provides retiree health care coverage to executive officers who retire after reaching age 55. Under this program, eligible retirees may participate in the health care plan available to active employees, paying the premiums that active employees pay. When the retiree attains age 65, the program becomes a Medicare supplement. |
Perquisites and Other Personal
Benefits. Applied provides executive officers with
perquisites and other personal benefits that Applied believes
are reasonable and consistent with the objective of attracting
and retaining superior employees for key positions. As with
other compensation, the Committee periodically reviews and
adjusts these benefits after reviewing market practices.
In 2010, the principal items made available included an
automobile allowance, reimbursement and tax
gross-up for
financial planning and tax return preparation services, an
annual executive physical examination, reimbursement and tax
gross-up for
spousal travel and child care tied to approved business trips,
and five weeks’ annual vacation (other employees get five
weeks when they achieve 25 years of service). Applied
provides some officers with club memberships for business
purposes, which are available for personal use as well; the
executive pays for expenses related to personal use. See the
“All Other Compensation” column of the Summary
Compensation Table at page 30.
Change in Control and Termination
Benefits. Applied does not have employment
contracts with its officers, nor does it have a formal executive
severance policy. The Committee retains discretion to determine
the severance benefits, if any, to be offered if the company
terminates an officer’s employment, other than in the
circumstance of a change in control.
Applied’s executive officers do have change in control
agreements. These arrangements are designed to retain executives
and to promote management continuity if an actual or threatened
change in control occurs. The Board approved the agreements
primarily for two reasons: 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, and the agreements are consistent with
prevailing market practices.
The agreements provide severance benefits if an executive’s
employment is terminated by the officer for “good
reason” or by Applied “without cause” (each as
defined in the agreements), if the termination occurs within
three years after a change in control. The executive, in turn,
must not compete with Applied for one year following the
termination. The Committee has periodically, most recently in
2008, reviewed and adjusted the agreements after considering
market practices and outside advisors’ advice. We describe
the agreements more fully on pages 38 – 39 of
this proxy statement.
Stock Ownership
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. See “Beneficial Ownership of
Certain Applied Shareholders and Management” on
page 17 for the shares of Applied stock beneficially owned
by each named executive officer.
Pursuant to Applied’s stock ownership guidelines, we expect
executive officers not to dispose of stock unless their
“owned” shares’ market value equals or exceeds
the following base salary multiples immediately after the
disposition:
| Chairman & Chief Executive Officer | 5x salary | ||
| President & Chief Operating Officer | 5x salary | ||
| Direct reports to CEO or COO | 3x salary | ||
| Other Vice Presidents | 2x salary | ||
28
Table of Contents
“Owned” shares, per the guidelines, include those
owned outright, those owned beneficially in Applied’s
Retirement Savings Plan and other deferred compensation plans,
and RSUs, but do not include unexercised stock options or SARs.
The guidelines are not mandatory in the sense that they do not
require an executive immediately to acquire shares if his or her
ownership is below the applicable guideline.
Until the guideline is achieved, the executive is expected to
retain the net shares received as a result of the exercise of
stock options or SARs. “Net shares” are those shares
that remain after shares are sold or netted to pay the exercise
price (if applicable) and withholding taxes.
At June 30, 2010, the value of the named executive
officers’ holdings (determined as described above) and
their individual guidelines were as follow:
| Name | Value of Holdings of Applied Stock ($) | Guideline ($) | ||||||||
|
D. Pugh
|
13,801,147 | 4,725,000 | ||||||||
|
B. Mondics
|
1,079,290 | 2,250,000 | ||||||||
|
M. Eisele
|
2,793,100 | 1,314,000 | ||||||||
|
F. Bauer
|
1,227,741 | 1,065,000 | ||||||||
|
J. Ramras
|
938,739 | 1,050,000 | ||||||||
Because the guidelines are based on values of holdings rather
than number of shares, volatility in Applied’s stock price
can have a dramatic effect on compliance with the guidelines.
Also, when reviewing Mr. Mondics’s holdings, it should be
noted that he has been President & Chief Operating Officer
for less than three years.
The Committee monitors compliance with the guidelines. The
Committee also periodically reviews the guidelines and compares
them with market data reported by the independent consultant and
others. With guidelines in force, the Committee has not adopted
stock retention policies for equity-based grants.
Clawback
Provisions
Because incentive awards are intended to motivate executives to
act in Applied’s best interests, the Committee included
provisions in the 2010 awards to claw back compensation under
certain circumstances:
| • | The Committee may terminate or rescind an award and, if applicable, require an executive to repay all cash or shares (and any dividends, distributions, and dividend equivalents paid thereon) issued pursuant to the award within the previous six months (and any proceeds thereof), if the Committee determines that, during the executive’s employment with Applied or during the period ending six 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 all cash or shares (and any dividends, distributions, and dividend equivalents paid thereon) issued pursuant to an award within the previous 36 months (and any 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
Code section 162(m) limits the amount of compensation a
publicly held corporation may deduct as a business expense for
federal income tax purposes. That limit, which applies to the
chief executive officer and the three other most highly
compensated executive officers, is $1 million per
individual per year, subject to certain exceptions. The law
provides an exception for compensation that is performance-based.
In general, the Committee seeks to preserve the tax
deductibility of compensation without compromising the
Committee’s flexibility in designing an effective,
competitive compensation program. Applied
29
Table of Contents
intends for awards under most of the executive incentive
programs — Management Incentive Plan awards, income
from the exercise of stock options and SARs, and performance
grant and performance share payouts — to qualify as
performance-based compensation.
In making long-term incentive grants in 2010, the Committee
sought to place greater emphasis on promoting executive
retention. Accordingly, the Committee selected RSUs as one of
three types of awards. Although RSUs do not qualify as
performance-based compensation, the Committee believes that
drawback is outweighed by the awards’ positive influence on
executive retention.
Conclusion
The Committee reviews all the 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 each executive officer’s total
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 links executive compensation to
Applied’s annual and long-term financial results and to the
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.
Summary
Compensation Table — Fiscal Years 2010, 2009, and
2008
The following table summarizes information, for the years ended
June 30, 2010, 2009 and 2008, regarding the compensation of
Applied’s Chief Executive Officer, Chief Financial Officer,
and the three other most highly compensated executive officers
at June 30, 2010.
|
Change in |
||||||||||||||||||||||||||||||||||||||||
|
Pension |
||||||||||||||||||||||||||||||||||||||||
|
Value and |
||||||||||||||||||||||||||||||||||||||||
|
Nonqualified |
||||||||||||||||||||||||||||||||||||||||
|
Non-Equity |
Deferred |
|||||||||||||||||||||||||||||||||||||||
|
Stock |
Option |
Incentive Plan |
Compensation |
All Other |
||||||||||||||||||||||||||||||||||||
|
Name and Principal |
Salary |
Awards |
Awards |
Compensation |
Earnings |
Compensation |
Total |
|||||||||||||||||||||||||||||||||
| Position | Year | ($) | ($) (1) | ($) (1) | ($) (2) | ($) (3) | ($) (4) | ($) | ||||||||||||||||||||||||||||||||
| David L. Pugh | 2010 | 945,000 | 1,435,480 | 682,722 | 1,890,000 | 754,225 | 49,498 | 5,756,925 | ||||||||||||||||||||||||||||||||
| Chairman & Chief | 2009 | 945,000 | 0 | 917,339 | 0 | 7,456,328 | 62,515 | 9,381,182 | ||||||||||||||||||||||||||||||||
| Executive Officer | 2008 | 913,400 | 0 | 612,359 | 1,927,866 | 886,523 | 58,080 | 4,398,228 | ||||||||||||||||||||||||||||||||
| Benjamin J. Mondics | 2010 | 450,000 | 496,085 | 235,834 | 626,393 | 354,224 | 56,599 | 2,219,135 | ||||||||||||||||||||||||||||||||
| President & Chief | 2009 | 450,000 | 0 | 319,907 | 37,429 | 357,224 | 34,737 | 1,199,297 | ||||||||||||||||||||||||||||||||
| Operating Officer (5) | 2008 | 375,000 | 0 | 189,607 | 342,519 | 195,988 | 49,135 | 1,152,249 | ||||||||||||||||||||||||||||||||
| Mark O. Eisele | 2010 | 438,000 | 333,538 | 158,077 | 525,600 | 574,733 | 59,596 | 2,089,544 | ||||||||||||||||||||||||||||||||
| Vice President — Chief | 2009 | 438,000 | 0 | 215,565 | 0 | 358,662 | 35,641 | 1,047,868 | ||||||||||||||||||||||||||||||||
| Financial Officer & | 2008 | 415,200 | 0 | 173,384 | 544,460 | 393,372 | 62,337 | 1,588,753 | ||||||||||||||||||||||||||||||||
| Treasurer | ||||||||||||||||||||||||||||||||||||||||
| Fred D. Bauer | 2010 | 355,000 | 242,765 | 115,353 | 376,300 | 400,058 | 34,432 | 1,523,908 | ||||||||||||||||||||||||||||||||
| Vice President — | 2009 | 355,000 | 0 | 157,087 | 0 | 134,065 | 31,413 | 677,565 | ||||||||||||||||||||||||||||||||
| General Counsel & | 2008 | 337,400 | 0 | 120,666 | 364,789 | 133,532 | 46,973 | 1,003,360 | ||||||||||||||||||||||||||||||||
| Secretary | ||||||||||||||||||||||||||||||||||||||||
| Jeffrey A. Ramras | 2010 | 350,000 | 183,657 | 87,156 | 350,000 | 316,900 | 47,126 | 1,334,839 | ||||||||||||||||||||||||||||||||
| Vice President — | 2009 | 350,000 | 0 | 118,102 | 0 | 192,999 | 42,861 | 703,962 | ||||||||||||||||||||||||||||||||
| Supply Chain | 2008 | 338,000 | 0 | 97,338 | 365,201 | 218,583 | 61,448 | 1,080,570 | ||||||||||||||||||||||||||||||||
| Management | ||||||||||||||||||||||||||||||||||||||||
| (1) | Amounts represent the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The assumptions used to determine the awards’ grant date fair values are described in the notes to Applied’s consolidated financial statements, included in our annual reports to shareholders for those years. The 2010 |
30
Table of Contents
| awards are described in the Compensation Discussion and Analysis at page 24 and the Grants of Plan-Based Awards table on page 32. The amounts reported for 2010 in the Stock Awards column are totals of the following: |
| Name | RSUs ($) | Performance Shares ($) | ||||||||
|
D. Pugh
|
707,185 | 728,295 | ||||||||
|
B. Mondics
|
244,876 | 251,209 | ||||||||
|
M. Eisele
|
164,658 | 168,880 | ||||||||
|
F. Bauer
|
120,327 | 122,438 | ||||||||
|
J. Ramras
|
90,773 | 92,884 | ||||||||
| The performance shares’ grant date fair values assume performance at the target level of achievement. If instead it was assumed that the highest level of performance would be achieved, as in fact occurred, then the grant date fair values would be twice the amounts reported for the performance shares. | ||
| (2) | The 2010 amounts are for cash awards paid under the 2010 Management Incentive Plan, except that Mr. Mondics’s amount also includes a $41,393 payout under a non-officer plan in which he participated prior to his promotion to an executive officer position. | |
| (3) | Reflects the increase in the estimated actuarial present value of the individual’s accrued benefit under the Supplemental Executive Retirement Benefits Plan. However, the individual may not currently be entitled to receive the amount shown because it may not be vested. The 2010 figure is the difference between the number shown in the Pension Benefits table on page 35 for 2010 year-end and the same item calculated for July 1, 2009. See the notes to that table for information regarding how the estimated amounts were calculated. | |
| The SERP uses the interest rates and mortality tables that are imposed on tax-qualified pension plans by Code section 417(e). The rates were revised by the Pension Protection Act of 2006, as of 2008. Values for 2010 reflect a 4.25% discount rate and a three-segment interest rate structure, in effect for January 2010, with 3.23% for the first five years, 5.22% for the next 15 years, and 5.72% thereafter, including recognition of the 40% permissible transition with the 30-year treasury rate. | ||
| Values for 2009 reflect a 6.00% discount rate and a three-segment interest rate structure, in effect for January 2009, with 3.96% for the first five years, 4.60% for the next 15 years, and 4.40% thereafter, including recognition of the 60% permissible transition with the 30-year treasury rate. Values for 2008 reflect a 6.00% discount rate and a three-segment interest rate structure, in effect for January 2008, with 4.34% for the first five years, 4.67% for the next 15 years, and 4.81% thereafter, including recognition of the 80% permissible transition with the 30-year treasury rate. | ||
| In addition, in each successive year, the mortality table reflected adjustments pursuant to Code section 417(e). Present values were determined assuming no probability of termination, retirement, death, or disability before normal retirement age (age 65). | ||
| Mr. Pugh’s 2009 figure reflects his completion of 10 years of service with Applied, qualifying him for enhanced plan benefits as described in “Pension Plans,” at page 34. | ||
| (4) | Amounts in this column for 2010 are totals of the following: (a) Retirement Savings Plan (section 401(k) plan) profit-sharing contributions, (b) gross-up payments to cover income taxes in connection with the reimbursement of expenses for financial planning and tax services and/or in connection with business travel, (c) company contributions for executive life insurance, for a $300,000 benefit, and (d) the estimated value of perquisites and other personal benefits. | |
| The following perquisites and other personal benefits were made available in 2010 to named executive officers: automobile allowance and related gas and maintenance payments; reimbursement of expenses for financial planning and tax return preparation services; physical examinations; the annual expense related to each individual’s post-retirement health care benefit; company contributions for officer-level disability and accident insurance benefits; and token awards related to meetings or events. Applied provides certain officers with club memberships for business purposes, which are available for personal use as well, but the officer reimburses Applied for any personal expenses. | ||
| No perquisite or personal benefit exceeded the greater of $25,000 or 10% of the total amount of perquisites and personal benefits for any of the named executive officers for 2010, 2009 or 2008. | ||
| The following table itemizes “All Other Compensation” for 2010: |
|
Perquisites and |
||||||||||||||||||||
|
Retirement Savings Plan |
Other Personal |
|||||||||||||||||||
|
Profit-Sharing Contributions |
Gross-up Payments |
Life Insurance Benefits |
Benefits |
|||||||||||||||||
| Name | ($) | ($) | ($) | ($) | ||||||||||||||||
|
D. Pugh
|
6,480 | 1,789 | 1,798 | 39,431 | ||||||||||||||||
|
B. Mondics
|
6,480 | 7,835 | 674 | 41,610 | ||||||||||||||||
|
M. Eisele
|
6,480 | 6,868 | 727 | 45,521 | ||||||||||||||||
|
F. Bauer
|
6,480 | 0 | 328 | 27,624 | ||||||||||||||||
|
J. Ramras
|
6,480 | 2,066 | 858 | 37,722 | ||||||||||||||||
| (5) | The Board elected Mr. Mondics our President & Chief Operating Officer effective midway through fiscal 2008. |
31
Table of Contents
Grants of
Plan-Based Awards — Fiscal Year 2010
In 2010, the Executive Organization & Compensation
Committee provided the following incentive opportunities and
grants under the 2007 Long-Term Performance Plan to the named
executive officers:
|
All Other |
|||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Option |
Grant Date |
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Estimated Future Payouts Under |
Estimated Future Payouts Under |
All Other |
Awards: |
Fair |
|||||||||||||||||||||||||||||||||||||||||||||||||
| Non-Equity Incentive Plan Awards (1) | Equity Incentive Plan Awards (2) |
Stock |
Number |
Base Price |
Value of |
||||||||||||||||||||||||||||||||||||||||||||||||
|
Awards: |
of Securities |
of Option |
Stock |
||||||||||||||||||||||||||||||||||||||||||||||||||
|
Threshold |
Target |
Maximum |
Threshold |
Target |
Maximum |
Number of |
Underlying |
Awards |
and Option |
||||||||||||||||||||||||||||||||||||||||||||
| Name | Grant Date | ($) | ($) | ($) | (#) | (#) | (#) | Units (#) (3) | Options (#) | ($/Share) (4) | Awards ($) | ||||||||||||||||||||||||||||||||||||||||||
|
D. Pugh
|
9/10/2009 | 33,500 | 707,185 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | 79,900 | 21.11 | 682,722 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(3-Year Performance Shares) |
17,250 | 34,500 | 69,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(2010 Management Incentive Plan) |
472,500 | 945,000 | 1,890,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
B. Mondics
|
9/10/2009 | 11,600 | 244,876 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | 27,600 | 21.11 | 235,834 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(3-Year Performance Shares) |
5,950 | 11,900 | 23,800 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(2010 Management Incentive Plan) |
146,250 | 292,500 | 585,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
M. Eisele
|
9/10/2009 | 7,800 | 164,658 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | 18,500 | 21.11 | 158,077 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(3-Year Performance Shares) |
4,000 | 8,000 | 16,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(2010 Management Incentive Plan) |
131,400 | 262,800 | 525,600 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
F. Bauer
|
9/10/2009 | 5,700 | 120,327 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | 13,500 | 21.11 | 115,353 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(3-Year Performance Shares) |
2,900 | 5,800 | 11,600 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(2010 Management Incentive Plan) |
94,075 | 188,150 | 376,300 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
J. Ramras
|
9/10/2009 | 4,300 | 90,773 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | 10,200 | 21.11 | 87,156 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(3-Year Performance Shares) |
2,200 | 4,400 | 8,800 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/10/2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(2010 Management Incentive Plan) |
87,500 | 175,000 | 350,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | The annual Management Incentive Plan is described in the Compensation Discussion and Analysis at pages 22 – 23. The Summary Compensation Table shows payouts under the 2010 Management Incentive Plan in the column marked “Non-Equity Incentive Plan Compensation.” | |
| (2) | The 2010-2012 performance shares program is described in the Compensation Discussion and Analysis at pages 24 – 25. At June 30, 2010, the maximum performance condition was satisfied and, following the Executive Organization & Compensation |
32
Table of Contents
| Committee’s confirmation of the performance in August 2010, the performance shares converted to RSUs at the maximum award level. | ||
| (3) | The RSUs are described in the Compensation Discussion and Analysis at page 24. | |
| (4) | The SARs’ base price is our stock’s closing price on the NYSE on the date the award was granted. |
Outstanding
Equity Awards at Fiscal 2010 Year-End
The following table shows the named executive officers’
outstanding stock options, SARs, and RSUs at June 30, 2010.
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||
|
Equity |
||||||||||||||||||||||||||||||||||
|
Equity |
Incentive |
|||||||||||||||||||||||||||||||||
|
Incentive |
Plan Awards: |
|||||||||||||||||||||||||||||||||
|
Plan |
Market or |
|||||||||||||||||||||||||||||||||
|
Number of |
Number of |
Awards: |
Payout |
|||||||||||||||||||||||||||||||
|
Securities |
Securities |
Number of |
Market Value |
Number of |
Value of |
|||||||||||||||||||||||||||||
|
Underlying |
Underlying |
Option |
Units of |
of Units of |
Unearned |
Unearned |
||||||||||||||||||||||||||||
|
Unexercised |
Unexercised |
Exercise |
Option |
Stock That |
Stock That |
Shares That |
Shares That |
|||||||||||||||||||||||||||
|
Options |
Options |
Price |
Expiration |
Have Not |
Have Not |
Have Not |
Have Not |
|||||||||||||||||||||||||||
| Name | (#) Exercisable | (#) Unexercisable | ($/Share) | Date | Vested (#) | Vested ($) | Vested (#) | Vested ($) | ||||||||||||||||||||||||||
|
D. Pugh
|
112,500 | 0 | 6.94 | 8/6/2012 | 33,500(6 | ) | 848,220 | 69,000(7) | 1,747,080(7) | |||||||||||||||||||||||||
| 256,005 | 0 | 9.46 | 8/8/2013 | |||||||||||||||||||||||||||||||
| 144,000 | 0 | 12.91 | 8/6/2014 | |||||||||||||||||||||||||||||||
| 79,500 | 0 | 23.00 | 8/9/2015 | |||||||||||||||||||||||||||||||
| 66,600 | 22,200 | (1) | 21.94 | 8/8/2016 | ||||||||||||||||||||||||||||||
| 32,500 | 32,500 | (2) | 25.44 | 8/9/2017 | ||||||||||||||||||||||||||||||
| 20,200 | 60,600 | (3) | 29.41 | 8/8/2018 | ||||||||||||||||||||||||||||||
| 0 | 79,900 | (4) | 21.11 | 9/10/2019 | ||||||||||||||||||||||||||||||
|
B. Mondics
|
3,250 | 0 | 8.60 | 1/18/2011 | 11,600(6 | ) | 293,712 | 23,800(7) | 602,616(7) | |||||||||||||||||||||||||
| 6,750 | 0 | 7.92 | 8/9/2011 | |||||||||||||||||||||||||||||||
| 9,000 | 0 | 6.94 | 8/6/2012 | |||||||||||||||||||||||||||||||
| 10,241 | 0 | 9.46 | 8/8/2013 | |||||||||||||||||||||||||||||||
| 11,250 | 0 | 12.91 | 8/6/2014 | |||||||||||||||||||||||||||||||
| 6,450 | 0 | 23.00 | 8/9/2015 | |||||||||||||||||||||||||||||||
| 6,450 | 2,150 | (1) | 21.94 | 8/8/2016 | ||||||||||||||||||||||||||||||
| 7,500 | 2,500 | (5) | 23.78 | 1/23/2017 | ||||||||||||||||||||||||||||||
| 9,350 | 9,350 | (2) | 25.44 | 8/9/2017 | ||||||||||||||||||||||||||||||
| 6,975 | 20,925 | (3) | 29.41 | 8/8/2018 | ||||||||||||||||||||||||||||||
| 0 | 27,600 | (4) | 21.11 | 9/10/2019 | ||||||||||||||||||||||||||||||
|
M. Eisele
|
9,619 | 0 | 12.91 | 8/6/2014 | 7,800(6 | ) | 197,496 | 16,000(7) | 405,120(7) | |||||||||||||||||||||||||
| 18,900 | 0 | 23.00 | 8/9/2015 | |||||||||||||||||||||||||||||||
| 17,475 | 5,825 | (1) | 21.94 | 8/8/2016 | ||||||||||||||||||||||||||||||
| 8,550 | 8,550 | (2) | 25.44 | 8/9/2017 | ||||||||||||||||||||||||||||||
| 4,700 | 14,100 | (3) | 29.41 | 8/8/2018 | ||||||||||||||||||||||||||||||
| 0 | 18,500 | (4) | 21.11 | 9/10/2019 | ||||||||||||||||||||||||||||||
|
F. Bauer
|
3,701 | 0 | 9.46 | 8/8/2013 | 5,700(6 | ) | 144,324 | 11,600(7) | 293,712(7) | |||||||||||||||||||||||||
| 24,075 | 0 | 12.91 | 8/6/2014 | |||||||||||||||||||||||||||||||
| 12,450 | 0 | 23.00 | 8/9/2015 | |||||||||||||||||||||||||||||||
| 12,225 | 4,075 | (1) | 21.94 | 8/8/2016 | ||||||||||||||||||||||||||||||
| 5,950 | 5,950 | (2) | 25.44 | 8/9/2017 | ||||||||||||||||||||||||||||||
| 3,425 | 10,275 | (3) | 29.41 | 8/8/2018 | ||||||||||||||||||||||||||||||
| 0 | 13,500 | (4) | 21.11 | 9/10/2019 | ||||||||||||||||||||||||||||||
|
J. Ramras
|
13,500 | 0 | 7.92 | 8/9/2011 | 4,300(6 | ) | 108,876 | 8,800(7) | 222,816(7) | |||||||||||||||||||||||||
| 22,500 | 0 | 6.94 | 8/6/2012 | |||||||||||||||||||||||||||||||
| 17,922 | 0 | 9.46 | 8/8/2013 | |||||||||||||||||||||||||||||||
| 24,075 | 0 | 12.91 | 8/6/2014 | |||||||||||||||||||||||||||||||
| 12,450 | 0 | 23.00 | 8/9/2015 | |||||||||||||||||||||||||||||||
| 7,500 | 2,500 | (1) | 21.94 | 8/8/2016 | ||||||||||||||||||||||||||||||
| 4,800 | 4,800 | (2) | 25.44 | 8/9/2017 | ||||||||||||||||||||||||||||||
| 2,575 | 7,725 | (3) | 29.41 | 8/8/2018 | ||||||||||||||||||||||||||||||
| 0 | 10,200 | (4) | 21.11 | 9/10/2019 | ||||||||||||||||||||||||||||||
| (1) | These SARs vested on August 8, 2010. | |
| (2) | Half of these SARs vested on August 9, 2010. The remaining SARs vest on August 9, 2011. | |
| (3) | One-third of these SARs vested on August 8, 2010. The remaining SARs vest in equal installments on August 8, 2011 and 2012. | |
| (4) | These SARs vest in equal installments on September 10, 2010, 2011, 2012, and 2013. | |
| (5) | These SARs vest on January 23, 2011. |
33
Table of Contents
| (6) | These RSUs vest on September 10, 2012. | |
| (7) | The 2010-2012 performance shares are described in the Compensation Discussion and Analysis at pages 24 – 25. At June 30, 2010, the performance condition was met and, following the Executive Organization & Compensation Committee’s confirmation of the performance in August 2010, the performance shares converted to RSUs at the maximum award level. These RSUs vest on June 30, 2012. The number of performance shares and their values reported in the table reflect this maximum achievement. |
Option Exercises
and Stock Vested — Fiscal Year 2010
The following table shows the value realized in 2010 by the
named executive officers on the exercise of stock options and
SARs and the vesting of stock awards.
| Option Awards | Stock Awards | |||||||||||||||||||
|
Number of Shares |
Value Realized |
Number of Shares |
Value Realized |
|||||||||||||||||
| Name | Acquired on Exercise (#) | on Exercise ($) | Acquired on Vesting (#) | on Vesting ($) | ||||||||||||||||
|
D. Pugh
|
0 | 0 | 0 | 0 | ||||||||||||||||
|
B. Mondics
|
8,000 | 179,204 | 0 | 0 | ||||||||||||||||
|
M. Eisele
|
0 | 0 | 0 | 0 | ||||||||||||||||
|
F. Bauer
|
0 | 0 | 0 | 0 | ||||||||||||||||
|
J. Ramras
|
0 | 0 | 0 | 0 | ||||||||||||||||
Pension
Plans
The SERP, a nonqualified defined benefit plan, provides
supplemental retirement benefits to executive officers
designated as participants by the Board or the Executive
Organization & Compensation Committee. Each of the
current named executive officers is a SERP participant. Applied
offers a section 401(k) defined contribution plan (the
Retirement Savings Plan) for employees, but does not maintain a
qualified defined benefit plan for employees generally.
The SERP’s principal features follow:
Retirement Benefits. Except as described
below, the annual normal retirement benefit, calculated in a
single life annuity form, is 45% of an eligible
participant’s average base salary and annual incentive pay
for the highest three calendar years during the last 10 calendar
years of service with Applied. To receive a normal retirement
benefit, a participant must separate from service at or after
age 65, with at least five years’ service as an
executive officer. To receive an early retirement benefit prior
to attainment of age 65, a participant must separate from
service after reaching age 55 and completing at least
10 years’ service with Applied, of which at least five
were as an executive officer. Of the named executive officers,
only Messrs. Pugh and Ramras are currently eligible for
early retirement.
Upon completion of 10 years of service with Applied in
2009, Mr. Pugh’s normal retirement benefit became
based on 60% of average base salary and annual incentive pay.
His benefit is reduced, however, by the benefit payable at
age 65 in a single life form under all former employer
plans and then reduced further by 50% of his primary Social
Security benefit.
The benefit for Mr. Mondics is reduced by the actuarial
equivalent of his benefits under a non-officer plan in which he
participated prior to his promotion to an executive officer
position.
Normal and early retirement benefits are reduced by 5% for each
year that a participant’s years of service are less than
20, except that this reduction does not apply to Mr. Pugh,
who joined Applied in 1999. In addition, early retirement
benefits are also reduced by 5% for each year that the
commencement of benefits precedes age 65.
Disability Benefits. If a participant with at
least five years of service as an executive officer becomes
disabled, as defined in regulations under Code
section 409A, the participant will receive a monthly SERP
disability benefit until the earlier of age 65 or death.
The monthly benefit, when added to all other long-term
disability benefits under Applied programs, will equal
1/12th of 60% of the average of the participant’s
34
Table of Contents
highest three calendar years of total compensation (base salary
plus annual incentive pay) during the last 10 calendar years of
service with Applied.
Deferred Vested Benefits. Deferred vested
benefits will be paid at age 65 to any participant who
separates from service for reasons other than cause or
disability prior to attainment of age 55 with at least
10 years’ service, of which at least five were as an
executive officer. The benefits will equal 25% of the
participant’s accrued normal retirement benefits at the
time of separation.
Payment Forms. Normal and early retirement
benefits vested
and/or
accrued after 2004 are paid in the form designated by the
participant pursuant to the provisions of section 409A.
Available forms of payment include a single life annuity,
various joint and survivor annuities, and substantially equal
annual installment payments for a minimum of three years (five
for any participant who is or was Chairman or Chief Executive
Officer) up to a maximum of 10 years. Deferred vested
benefits are payable in three substantially equal annual
installments following attainment of age 65.
Death Benefits. If a participant dies before
receiving any SERP benefit, the participant’s designated
beneficiary will receive the accrued benefit’s present
value in a lump sum or a series of installments, as the
participant elects in advance.
Change in Control. If a change in control of
Applied (as defined in the SERP) occurs, each participant will
be 100% vested, regardless of age and service, in his accrued
normal retirement benefit. In addition, the benefit will be
increased because the participant will be credited with
additional years of service and age equal to one-half the
difference between the participant’s age at the time of the
change in control and age 65, up to a maximum of
10 years. The benefit will be paid in a lump sum unless the
participant previously elected a different option.
Non-Competition. Except if a change in
control occurs, payment of SERP benefits is subject to the
condition that the participant not compete with Applied.
Pension
Benefits — Fiscal 2010 Year-End
The following table shows the present value of accumulated
benefits payable to the named executive officers and their years
of credited service under the SERP.
|
Present Value of |
||||||||||||||||||||
|
Number of Years |
Accumulated Benefit |
Payments during |
||||||||||||||||||
| Name | Plan Name | Credited Service (#) | ($) (1) (2) | Last Fiscal Year ($) | ||||||||||||||||
|
D. Pugh
|
SERP | 11.5 | 12,601,182 | 0 | ||||||||||||||||
|
B. Mondics
|
SERP | 15.8 | 1,338,887 | 0 | ||||||||||||||||
|
M. Eisele
|
SERP | 19.1 | 2,628,573 | 0 | ||||||||||||||||
|
F. Bauer
|
SERP | 17.8 | 1,210,933 | 0 | ||||||||||||||||
|
J. Ramras
|
SERP | 28.9 | 2,100,643 | 0 | ||||||||||||||||
| (1) | This figure reflects the estimated present value of the annual pension benefit accrued through June 30, 2010, and payable at age 65. The plan’s actuary used the following key assumptions, pursuant to SEC rules, to determine the present values: | |
|
• A
discount rate of 4.25%, the FAS 87 discount rate as of
June 30, 2010,
|
||
|
• The
Code section 417(e) 2010 Optional Combined Unisex Mortality
Table and a three-segment interest rate structure in effect for
January 2010 with 3.23% for the first five years, 5.22% for the
next 15 years, and 5.72% thereafter, and
|
||
|
• No
probability of termination, retirement, death, or disability
before normal retirement age.
|
||
| Actual payments after retirement are determined based on the Code section 417(e) interest rate and mortality table in effect at that time, along with the participant’s age, years of service, and compensation history. | ||
| (2) | Except as described above under “Retirement Benefits” with respect to Messrs. Pugh and Mondics, SERP benefits are not subject to deductions for Social Security benefits or other material offset amounts. Messrs. Pugh and Ramras are fully vested in their benefits. Messrs. Eisele and Bauer are under 55 years of age but are eligible for deferred vested benefits. Mr. Mondics is also under 55 but is ineligible for deferred vested benefits because he has not served as an executive officer for at least five years. |
35
Table of Contents
Nonqualified
Deferred Compensation
Applied maintains two nonqualified, unfunded defined
contribution plans available to key employees, including
executive officers. Eligibility is limited to highly compensated
or select management employees whose benefits under the
Retirement Savings Plan are subject to certain Code limitations.
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 Retirement Savings Plan due to
Code limitations.
Participants are always fully vested in their Supplemental
Defined Contribution Plan deferrals. Applied does not contribute
to the plan. In general, with the exception of Applied stock,
participants generally have the same diverse equity, fixed
income, and money market investment options as they have in the
Retirement Savings Plan.
Participants may receive distributions in a lump sum or in
installments, as specified in the participant’s deferral
election form. Acceleration of distributions is prohibited and
any distribution change must comply with Code section 409A.
Other than a date specified in a deferral election form, the
plan only permits withdrawals, while employed, due to an
unforeseeable emergency as allowed under section 409A.
Each named executive officer has a plan account, but only
Mr. Ramras made deferrals in 2010.
Deferred
Compensation Plan
The Deferred Compensation Plan permits executive officers to
defer a portion or all of the awards payable under an annual
incentive plan or performance grant program. The plan’s
purpose is to promote increased efforts on Applied’s behalf
through increased investment in Applied stock.
The plan gives each annual incentive plan participant the
opportunity to defer payment of his or her cash award. A
participant who elects to make a deferral may have the amounts
deemed invested in Applied stock
and/or in a
money market fund.
Participants may receive distributions in a lump sum or in
installments over a period not exceeding 10 years, as
specified in a deferral election form. Acceleration of
distributions is prohibited and any distribution change must
comply with Code section 409A. Other than a date specified
in a deferral election form, the plan only permits withdrawals,
while employed, due to an unforeseeable emergency as allowed
under section 409A.
Although none of the named executive officers deferred pay into
the Deferred Compensation Plan in 2010, Messrs. Eisele and
Ramras have plan accounts due to deferrals in past years.
36
Table of Contents
Nonqualified
Deferred Compensation — Fiscal Year 2010
The following table presents contribution, earnings, and balance
information for the named executive officers’ Deferred
Compensation Plan and Supplemental Defined Contribution Plan
accounts for 2010.
|
Executive |
Registrant |
Aggregate Earnings |
Aggregate |
Aggregate |
|||||||||||||||||||||
|
Contributions |
Contributions |
(Losses) |
Withdrawals/ |
Balance at Last |
|||||||||||||||||||||
| Name and Plan | in Last FY ($) | in Last FY ($) | in Last FY ($) | Distributions ($) | FYE ($) | ||||||||||||||||||||
|
D. Pugh
|
|||||||||||||||||||||||||
|
Supplemental Defined Contribution Plan
|
0 | 0 | 151,842 | 0 | 778,733 | ||||||||||||||||||||
|
B. Mondics
|
|||||||||||||||||||||||||
|
Supplemental Defined Contribution Plan
|
0 | 0 | 17,078 | 0 | 147,556 | ||||||||||||||||||||
|
M. Eisele
|
|||||||||||||||||||||||||
|
Deferred Compensation Plan
|
0 | 0 | 40,642 | 0 | 167,725 | ||||||||||||||||||||
|
Supplemental Defined Contribution Plan
|
0 | 0 | 65,627 | 0 | 461,110 | ||||||||||||||||||||
|
F. Bauer
|
|||||||||||||||||||||||||
|
Supplemental Defined Contribution Plan
|
0 | 0 | 13,388 | 0 | 92,623 | ||||||||||||||||||||
|
J. Ramras
|
|||||||||||||||||||||||||
|
Deferred Compensation Plan
|
0 | 0 | 124,939 | 0 | 515,618 | ||||||||||||||||||||
|
Supplemental Defined Contribution Plan
|
16,750 | 0 | 71,691 | 0 | 636,727 | ||||||||||||||||||||
Potential
Payments upon Termination or Change in Control
The summaries and tables below describe the compensation and
benefits that would have been payable to each named executive
officer at June 30, 2010, if, as of that date, there had
occurred (a) a termination of the executive’s
employment with Applied prior to a change in control, (b) a
termination of employment due to death, disability, or
retirement, (c) a change in control of Applied, or
(d) a termination of employment following a change in
control. Compensation and benefits earned or accrued prior to
the event, and not contingent on the event’s occurrence,
are not included in the summaries or tables.
Payments in the
Event of a Termination
Applied does not have a formal severance policy or arrangement
that provides payments to executive officers if termination of
employment occurs (other than in the circumstance of a change in
control or by reason of death, disability, or retirement). The
Board and its Executive Organization & Compensation
Committee retain discretion to determine the severance benefits,
if any, to be offered.
Regardless of reason, if an executive officer’s employment
terminates (other than in the circumstance of a change in
control or by reason of death, disability or retirement) prior
to the end of a vesting or performance period, then the
following shall occur:
| • | Annual incentive awards under the Management Incentive Plan shall be forfeited. | |
| • | Performance grants, performance shares, RSUs, and unvested SARs shall be forfeited. | |
| • | Accrued SERP benefits shall be forfeited if the participant separates from service prior to becoming eligible for normal, early, or deferred vested retirement benefits. SERP benefits payable to named executive officers are more fully described on pages 34 – 35 in “Pension Plans.” | |
| • | The accrual of all other compensation and benefits under Applied’s qualified and nonqualified benefit plans shall cease. | |
| • | All perquisites and other personal benefits shall cease. |
37
Table of Contents
Payments in the
Event of Death, Disability, or Retirement
If an executive officer’s employment terminates by reason
of death, disability, or retirement (other than following a
change in control), then the following shall occur:
| • | Annual incentive awards under the Management Incentive Plan shall be payable on a pro rata basis at the end of the performance period based on the number of quarters during which the executive worked during the performance period and the actual achievement of performance targets. | |
| • | Performance grants and performance shares shall be payable on a pro rata basis at the end of the performance period based on the number of quarters during which the executive worked during the performance period and the actual achievement of performance targets. | |
| • | RSUs shall be payable on a pro rata basis pegged to the number of quarters during which the executive worked during the three-year term. | |
| • | SARs that have not yet vested shall vest. | |
| • | SERP benefits payable on death, separation from service, or termination due to disability are more fully described in “Pension Plans.” | |
| • | Upon retirement or termination due to disability after reaching age 55, the executive may continue to participate in Applied’s health benefit plans on the same basis, and after paying the same contribution rates, as active employees. | |
| • | The accrual of all other compensation and benefits under Applied’s qualified and nonqualified benefit plans shall cease. | |
| • | All perquisites and other personal benefits shall cease. |
Payments in the
Event of a Change in Control
Change in Control Agreements. Applied does not
have employment agreements with its executive officers. However,
Applied has entered into change in control agreements with each
of them. The agreements obligate Applied to provide severance
benefits to an executive officer who incurs a separation from
service effected either by the officer for “good
reason” or by Applied “without cause” if the
separation occurs within three years after a change in control.
The executive officer, in turn, is required not to compete with
Applied for one year following the separation and to hold in
confidence Applied confidential information and trade secrets.
No compensation or benefits are payable under the agreement on
termination of the executive’s employment prior to a change
in control, or following a change in control if the
executive’s employment is terminated by Applied for cause
or by reason of death, disability, or retirement.
The compensation and principal benefits to be provided under the
agreements to the executive officers are as follow:
| • | A lump sum severance payment equal to three times the aggregate amount of the executive’s annual base salary and target annual incentive pay, reduced proportionately if the officer would reach age 65 within three years after termination, | |
| • | A cash payment for any vested, unexercised SARs held on the termination date, equal to the difference between the exercise price and the higher of (a) the mean of the high and low trading prices on the NYSE on the termination date, and (b) the highest price paid for Applied common stock in connection with the change in control, | |
| • | Continued participation in Applied’s employee benefit plans, programs, and arrangements, or equivalent benefits for three years after termination at the levels in effect immediately before termination, | |
| • | Outplacement services, and |
38
Table of Contents
| • | An additional payment in an amount sufficient, after payment of taxes on the additional payment, to pay any required “parachute” excise tax. |
“Change in control” is generally defined as follows:
| • | A merger of Applied with another entity or a sale of substantially all of Applied’s assets to a third party, following which Applied’s shareholders prior to the transaction hold less than a majority of the combined voting power of the merged entities or asset acquirer, | |
| • | Acquisition of beneficial ownership by any person of 20% or more of Applied’s then-outstanding common stock, or | |
| • | One quarter or more of the members of the Board of Directors being persons other than (a) directors who were in office on the agreement date, or (b) directors who are elected after such date and whose nomination or election is approved by two-thirds of directors then in office or their successors approved by that proportion. |
“Good reason” means the following:
| • | Diminution of position or assigned duties, excluding an isolated, insubstantial, and inadvertent action not taken in bad faith, | |
| • | Reduction of compensation, incentive compensation potential, or benefits following a change in control, other than an isolated, insubstantial, and inadvertent failure not occurring in bad faith, | |
| • | Applied requiring the executive to change principal place of employment or to travel to a greater extent than required immediately prior to a change in control, or | |
| • | Failure of a successor to Applied to assume Applied’s obligations under the agreement. |
Applied may modify or terminate its obligations under the
agreements at any time prior to a change in control so long as
the modification or termination is not made in anticipation of
or in connection with a change in control.
2007 Long-Term Performance Plan. The 2007
Long-Term Performance Plan (as well as the 1997 Long-Term
Performance Plan it replaced, under which unvested awards remain
outstanding) provides that if a change in control occurs, then
all SARs outstanding become exercisable and awards under a
Management Incentive Plan become earned at the target amount. In
addition, pursuant to the award terms, (a) RSUs shall be
vested in full, and (b) performance grants and performance
shares shall be payable at the target amount on a pro rata basis
pegged to the timing of the change in control in the three-year
performance period.
Supplemental Executive Retirement Benefits Plan.
If a SERP participant is terminated following a change in
control (as defined in the regulations under Code
section 409A), or is receiving, or is eligible to receive,
a retirement benefit when the change in control occurs, the
executive is entitled to receive the actuarial equivalent of the
executive’s retirement benefit in a lump sum. In addition,
upon a change in control, the executive will be credited with
additional years of service and age for benefit calculation
purposes equal to half the difference between the
executive’s age and age 65, up to a maximum of
10 years.
Quantitative Disclosure. The tables assume that a
termination or change in control occurred on June 30, 2010,
the last day of our fiscal year, and Applied’s stock price
for all calculations is $25.32, the closing price on the NYSE on
that date. The tables include amounts earned through that time
and current estimates of the amounts that would be paid on the
occurrence of the events shown. The actual payment amounts can
be determined only at the time of the event. The amounts shown
do not include benefits and payments that are generally
available to all salaried employees on a non-discriminatory
basis. Also, as noted above, compensation and benefits earned
by an executive prior to an event shown, and not contingent on
the event’s occurrence, are not reflected in the tables.
39
Table of Contents
David L. Pugh, Chairman & Chief Executive
Officer
|
Termination |
||||||||||||||||||||||||||||||||||||||||
|
Without |
||||||||||||||||||||||||||||||||||||||||
|
Cause or |
||||||||||||||||||||||||||||||||||||||||
|
Termination |
for Good |
|||||||||||||||||||||||||||||||||||||||
|
Termination |
for Cause |
Reason |
Change in |
|||||||||||||||||||||||||||||||||||||
|
(No Change |
Normal |
Early |
Following |
Following |
Control (No |
Termination |
||||||||||||||||||||||||||||||||||
|
Benefits and |
in Control) |
Retirement |
Retirement |
Change in |
Change in |
Termination) |
due to |
|||||||||||||||||||||||||||||||||
| Payments | ($) | ($) (1) | ($) (2) | Control ($) | Control ($) | ($) | Death ($) | Disability ($) | ||||||||||||||||||||||||||||||||
|
Base Salary
|
0 | 0 | 0 | 0 | 2,835,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Management Incentive Plan
|
0 | 0 | 0 | 0 | 2,835,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Performance Grants/Shares (3)
|
0 | 0 | 1,274,360 | 0 | 0 | 1,274,360 | 1,274,360 | 1,274,360 | ||||||||||||||||||||||||||||||||
|
SARs
|
0 | 0 | 411,415 | 0 | 0 | 411,415 | 411,415 | 411,415 | ||||||||||||||||||||||||||||||||
|
RSUs
|
0 | 0 | 282,740 | 0 | 0 | 848,220 | 282,740 | 282,740 | ||||||||||||||||||||||||||||||||
|
SERP (4) (5)
|
387,052 | 0 | 387,052 | 0 | 0 | 1,312,599 | 0 | 0 | * | |||||||||||||||||||||||||||||||
|
Health Care and Welfare Benefits (6)
|
0 | 0 | 0 | 0 | 116,800 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Life/Disability Insurance Proceeds (7)
|
0 | 0 | 0 | 0 | 0 | 0 | 300,000 | * | ||||||||||||||||||||||||||||||||
|
Outplacement Services
|
0 | 0 | 0 | 0 | 20,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Excise Tax
Gross-Up
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Total
|
387,052 | 0 | 2,355,567 | 0 | 5,806,800 | 3,846,594 | 2,268,515 | * | ||||||||||||||||||||||||||||||||
| (1) | “Normal retirement” under Applied’s plans is separation from service after attainment of age 65. Mr. Pugh is age 61 and therefore ineligible for normal retirement. | |
| (2) | “Early retirement” is defined as separation from service after attainment of age 55 with at least 10 years of service, five of which are as an executive officer. | |
| (3) | Assumes performance corresponds to target award, except for performance shares where performance conditions have been satisfied, in which case market value of actual award is shown. | |
| (4) | Calculation of post-termination SERP benefits assumes the executive would receive benefits in the installment payment form at the earliest date he would be eligible. To calculate the estimated present value of the installments, a 4.25% discount rate and the three-segment interest rate structure in effect for January 2010 under Code section 417(e), with 3.23% for the first five years, 5.22% for the next 15 years, and 5.72% thereafter, are used. The RP-2000 Disability Mortality Table for males and a 4.25% interest rate are used in valuing the disability benefits. | |
| (5) | The amounts representing SERP payments relating to events of termination prior to a change in control and early retirement are not representative of actual amounts payable under those circumstances. If Mr. Pugh had actually terminated his employment or retired as of June 30, 2010, no additional amounts would have been payable. The amounts shown result from actuarial calculations of amounts payable on the occurrence of those events without discounting for the statistical probability of death, early retirement, or termination due to disability. | |
| (6) | Includes health care benefits, accidental death and dismemberment insurance, car allowance, gas and maintenance, annual physical examination, and annual financial planning and tax service reimbursement and related gross-up payments. | |
| (7) | Proceeds are payable from third-party insurance policies and the SERP. As permitted by program terms, after reaching age 60, Mr. Pugh opted out of the employee-paid portion of the life insurance coverage, and so his coverage is capped at $300,000. | |
| * | Applied’s supplemental long-term disability (“LTD”) insurance, with premiums paid by the executive, provides a monthly disability benefit equal to 60% of monthly total compensation (monthly base salary plus the average of the three most recent years’ annual incentive compensation divided by 12), minus the basic plan benefit of 60% of base salary, up to a $3,000 per month maximum benefit. The aggregate maximum monthly LTD benefit, under the basic and supplemental programs, is $21,000. In addition, the SERP provides a monthly disability benefit to participants with five years of service as an executive officer which, when added to the amounts payable under the basic and supplemental LTD programs, equals 1/12th of 60% of the average of the highest three of the last 10 calendar years of total compensation (base salary plus annual incentive). |
40
Table of Contents
Benjamin J. Mondics, President & Chief Operating
Officer
|
Termination |
||||||||||||||||||||||||||||||||||||||||
|
Without |
||||||||||||||||||||||||||||||||||||||||
|
Cause or |
||||||||||||||||||||||||||||||||||||||||
|
Termination |
for Good |
|||||||||||||||||||||||||||||||||||||||
|
Termination |
for Cause |
Reason |
Change in |
|||||||||||||||||||||||||||||||||||||
|
(No Change |
Normal |
Early |
Following |
Following |
Control (No |
Termination |
||||||||||||||||||||||||||||||||||
|
Benefits and |
in Control) |
Retirement |
Retirement |
Change in |
Change in |
Termination) |
due to |
|||||||||||||||||||||||||||||||||
| Payments | ($) | ($) (1) | ($) (2) | Control ($) | Control ($) | ($) | Death ($) | Disability ($) | ||||||||||||||||||||||||||||||||
|
Base Salary
|
0 | 0 | 0 | 0 | 1,350,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Management Incentive Plan
|
0 | 0 | 0 | 0 | 877,500 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Performance Grants/Shares (3)
|
0 | 0 | 0 | 0 | 0 | 439,805 | 439,805 | 439,805 | ||||||||||||||||||||||||||||||||
|
SARs
|
0 | 0 | 0 | 0 | 0 | 127,326 | 127,326 | 127,326 | ||||||||||||||||||||||||||||||||
|
RSUs
|
0 | 0 | 0 | 0 | 0 | 293,712 | 97,904 | 97,904 | ||||||||||||||||||||||||||||||||
|
Non-Officer Incentive Plan (4)
|
0 | 0 | 0 | 0 | 0 | 0 | 28,442 | 28,442 | ||||||||||||||||||||||||||||||||
|
SERP (5)
|
0 | 0 | 0 | 0 | 0 | 2,478,822 | 1,043,322 | 0 | * | |||||||||||||||||||||||||||||||
|
Health Care and Welfare Benefits (6)
|
0 | 0 | 0 | 0 | 145,200 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Life/Disability Insurance Proceeds (7)
|
0 | 0 | 0 | 0 | 0 | 0 | 1,563,131 | * | ||||||||||||||||||||||||||||||||
|
Outplacement Services
|
0 | 0 | 0 | 0 | 20,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Excise Tax
Gross-Up
|
0 | 0 | 0 | 0 | 1,248,789 | 1,274,132 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Total
|
0 | 0 | 0 | 0 | 3,641,489 | 4,613,797 | 3,299,930 | * | ||||||||||||||||||||||||||||||||
| (1) | “Normal retirement” under Applied’s plans is separation from service after attainment of age 65. Mr. Mondics is age 52 and therefore ineligible for normal retirement. | |
| (2) | Mr. Mondics is ineligible for “early retirement” under Applied’s plans because he is only age 52; early retirement is defined as separation from service after attainment of age 55 with at least 10 years of service, five of which are as an executive officer. | |
| (3) | Assumes performance corresponds to target award, except for performance shares where performance conditions have been satisfied, in which case market value of actual award is shown. | |
| (4) | Shows payout under non-officer incentive plan in which Mr. Mondics participated prior to his promotion to an executive officer position. | |
| (5) | Calculation of post-termination SERP benefits assumes the executive would receive benefits in the installment payment form at the earliest date he would be eligible. To calculate the estimated present value of the installments, a 4.25% discount rate and the three-segment interest rate structure in effect for January 2010 under Code section 417(e), with 3.23% for the first five years, 5.22% for the next 15 years, and 5.72% thereafter, are used. | |
| (6) | Includes health care benefits, accidental death and dismemberment insurance, car allowance, gas and maintenance, annual physical examination, and annual financial planning and tax service reimbursement and related gross-up payments. | |
| (7) | Proceeds are payable from third-party insurance policies. | |
| * | Applied’s supplemental long-term disability (“LTD”) insurance, with premiums paid by the executive, provides a monthly disability benefit equal to 60% of monthly total compensation (monthly base salary plus the average of the three most recent years’ annual incentive compensation divided by 12), minus the basic plan benefit of 60% of base salary, up to a $3,000 per month maximum benefit. The aggregate maximum monthly LTD benefit, under the basic and supplemental programs, is $21,000. In addition, the SERP provides a monthly disability benefit to participants with five years of service as an executive officer (Mr. Mondics does not yet qualify) which, when added to the amounts payable under the basic and supplemental LTD programs, equals 1/12th of 60% of the average of the highest three of the last 10 calendar years of total compensation (base salary plus annual incentive). |
41
Table of Contents
Mark O. Eisele, Vice President — Chief Financial
Officer & Treasurer
|
Termination |
||||||||||||||||||||||||||||||||||||||||
|
without |
||||||||||||||||||||||||||||||||||||||||
|
Cause or |
||||||||||||||||||||||||||||||||||||||||
|
Termination |
for Good |
|||||||||||||||||||||||||||||||||||||||
|
Termination |
for Cause |
Reason |
Change in |
|||||||||||||||||||||||||||||||||||||
|
(No Change |
Normal |
Early |
Following |
Following |
Control (No |
Termination |
||||||||||||||||||||||||||||||||||
|
Benefits and |
in Control) |
Retirement |
Retirement |
Change in |
Change in |
Termination) |
due to |
|||||||||||||||||||||||||||||||||
| Payments | ($) | ($) (1) | ($) (2) | Control ($) | Control ($) | ($) | Death ($) | Disability ($) | ||||||||||||||||||||||||||||||||
|
Base Salary
|
0 | 0 | 0 | 0 | 1,314,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Management Incentive Plan
|
0 | 0 | 0 | 0 | 788,400 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Performance Grants/Shares (3)
|
0 | 0 | 0 | 0 | 0 | 295,707 | 295,707 | 295,707 | ||||||||||||||||||||||||||||||||
|
SARs
|
0 | 0 | 0 | 0 | 0 | 97,574 | 97,574 | 97,574 | ||||||||||||||||||||||||||||||||
|
RSUs
|
0 | 0 | 0 | 0 | 0 | 197,496 | 65,832 | 65,832 | ||||||||||||||||||||||||||||||||
|
SERP (4)
|
0 | 0 | 0 | 0 | 0 | 3,084,525 | 1,456,445 | * | ||||||||||||||||||||||||||||||||
|
Health Care and Welfare Benefits (5)
|
0 | 0 | 0 | 0 | 119,400 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Life/Disability Insurance Proceeds (6)
|
0 | 0 | 0 | 0 | 0 | 0 | 1,692,328 | * | ||||||||||||||||||||||||||||||||
|
Outplacement Services
|
0 | 0 | 0 | 0 | 20,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Excise Tax
Gross-Up
|
0 | 0 | 0 | 0 | 2,356,058 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Total
|
0 | 0 | 0 | 0 | 4,597,858 | 3,675,302 | 3,607,886 | * | ||||||||||||||||||||||||||||||||
| (1) | “Normal retirement” under Applied’s plans is separation from service after attainment of age 65. Mr. Eisele is age 53 and therefore ineligible for normal retirement. | |
| (2) | Mr. Eisele is ineligible for “early retirement” under Applied’s plans because he is only age 53; early retirement is defined as separation from service after attainment of age 55 with at least 10 years of service, five of which are as an executive officer. | |
| (3) | Assumes performance corresponds to target award, except for performance shares where performance conditions have been satisfied, in which case market value of actual award is shown. | |
| (4) | Calculation of post-termination SERP benefits assumes the executive would receive benefits in the installment payment form at the earliest date he would be eligible. To calculate the estimated present value of the installments, a 4.25% discount rate and the three-segment interest rate structure in effect for January 2010 under Code section 417(e), with 3.23% for the first five years, 5.22% for the next 15 years, and 5.72% thereafter, are used. The RP-2000 Disability Mortality Table for males and a 4.25% interest rate are used in valuing the disability benefits. | |
| (5) | Includes health care benefits, accidental death and dismemberment insurance, car allowance, gas and maintenance, annual physical examination, and annual financial planning and tax service reimbursement and related gross-up payments. | |
| (6) | Proceeds are payable from third-party insurance policies and the SERP. | |
| * | Applied’s supplemental long-term disability (“LTD”) insurance, with premiums paid by the executive, provides a monthly disability benefit equal to 60% of monthly total compensation (monthly base salary plus the average of the three most recent years’ annual incentive compensation divided by 12), minus the basic plan benefit of 60% of base salary, up to a $3,000 per month maximum benefit. The aggregate maximum monthly LTD benefit, under the basic and supplemental programs, is $21,000. In addition, the SERP provides a monthly disability benefit to participants with five years of service as an executive officer which, when added to the amounts payable under the basic and supplemental LTD programs, equals 1/12th of 60% of the average of the highest three of the last 10 calendar years of total compensation (base salary plus annual incentive). |
42
Table of Contents
Fred D. Bauer, Vice President — General
Counsel & Secretary
|
Termination |
||||||||||||||||||||||||||||||||||||||||
|
without |
||||||||||||||||||||||||||||||||||||||||
|
Cause or |
||||||||||||||||||||||||||||||||||||||||
|
Termination |
for Good |
|||||||||||||||||||||||||||||||||||||||
|
Termination |
for Cause |
Reason |
Change in |
|||||||||||||||||||||||||||||||||||||
|
(No Change |
Normal |
Early |
Following |
Following |
Control (No |
Termination |
||||||||||||||||||||||||||||||||||
|
Benefits and |
in Control) |
Retirement |
Retirement |
Change in |
Change in |
Termination) |
due to |
|||||||||||||||||||||||||||||||||
| Payments | ($) | ($) (1) | ($) (2) | Control ($) | Control ($) | ($) | Death ($) | Disability ($) | ||||||||||||||||||||||||||||||||
|
Base Salary
|
0 | 0 | 0 | 0 | 1,065,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Management Incentive Plan
|
0 | 0 | 0 | 0 | 564,450 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Performance Grants/Shares (3)
|
0 | 0 | 0 | 0 | 0 | 214,771 | 214,771 | 214,771 | ||||||||||||||||||||||||||||||||
|
SARs
|
0 | 0 | 0 | 0 | 0 | 70,609 | 70,609 | 70,609 | ||||||||||||||||||||||||||||||||
|
RSUs
|
0 | 0 | 0 | 0 | 0 | 144,324 | 48,108 | 48,108 | ||||||||||||||||||||||||||||||||
|
SERP (4)
|
0 | 0 | 0 | 0 | 0 | 660,773 | 512,242 | * | ||||||||||||||||||||||||||||||||
|
Health Care and Welfare Benefits (5)
|
0 | 0 | 0 | 0 | 119,200 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Life/Disability Insurance Proceeds (6)
|
0 | 0 | 0 | 0 | 0 | 0 | 1,291,968 | * | ||||||||||||||||||||||||||||||||
|
Outplacement Services
|
0 | 0 | 0 | 0 | 20,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Excise Tax
Gross-Up
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Total
|
0 | 0 | 0 | 0 | 1,768,650 | 1,090,477 | 2,137,698 | * | ||||||||||||||||||||||||||||||||
| (1) | “Normal retirement” under Applied’s plans is separation from service after attainment of age 65. Mr. Bauer is age 44 and therefore ineligible for normal retirement. | |
| (2) | Mr. Bauer is ineligible for “early retirement” under Applied’s plans because he is only age 44; early retirement is defined as separation from service after attainment of age 55 with at least 10 years of service, five of which are as an executive officer. | |
| (3) | Assumes performance corresponds to target award, except for performance shares where performance conditions have been satisfied, in which case market value of actual award is shown. | |
| (4) | Calculation of post-termination SERP benefits assumes the executive would receive benefits in the installment payment form at the earliest date he would be eligible. To calculate the estimated present value of the installments, a 4.25% discount rate and the three-segment interest rate structure in effect for January 2010 under Code section 417(e), with 3.23% for the first five years, 5.22% for the next 15 years, and 5.72% thereafter, are used. The RP-2000 Disability Mortality Table for males and a 4.25% interest rate are used in valuing the disability benefits. | |
| (5) | Includes health care benefits, accidental death and dismemberment insurance, car allowance, gas and maintenance, annual physical examination, and annual financial planning and tax service reimbursement and related gross-up payments. | |
| (6) | Proceeds are payable from third-party insurance policies and the SERP. | |
| * | Applied’s supplemental long-term disability (“LTD”) insurance, with premiums paid by the executive, provides a monthly disability benefit equal to 60% of monthly total compensation (monthly base salary plus the average of the three most recent years’ annual incentive compensation divided by 12), minus the basic plan benefit of 60% of base salary, up to a $3,000 per month maximum benefit. The aggregate maximum monthly LTD benefit, under the basic and supplemental programs, is $21,000. In addition, the SERP provides a monthly disability benefit to participants with five years of service as an executive officer which, when added to the amounts payable under the basic and supplemental LTD programs, equals 1/12th of 60% of the average of the highest three of the last 10 calendar years of total compensation (base salary plus annual incentive). |
43
Table of Contents
Jeffrey A. Ramras, Vice President — Supply Chain
Management
|
Termination |
||||||||||||||||||||||||||||||||||||||||
|
without |
||||||||||||||||||||||||||||||||||||||||
|
Cause or |
||||||||||||||||||||||||||||||||||||||||
|
Termination |
for Good |
|||||||||||||||||||||||||||||||||||||||
|
Termination |
for Cause |
Reason |
Change in |
|||||||||||||||||||||||||||||||||||||
|
(No Change |
Normal |
Early |
Following |
Following |
Control (No |
Termination |
||||||||||||||||||||||||||||||||||
|
Benefits and |
in Control) |
Retirement |
Retirement |
Change in |
Change in |
Termination) |
due to |
|||||||||||||||||||||||||||||||||
| Payments | ($) | ($) (1) | ($) (2) | Control ($) | Control ($) | ($) | Death ($) | Disability ($) | ||||||||||||||||||||||||||||||||
|
Base Salary
|
0 | 0 | 0 | 0 | 1,050,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Management Incentive Plan
|
0 | 0 | 0 | 0 | 525,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Performance Grants/Shares (3)
|
0 | 0 | 162,605 | 0 | 0 | 162,605 | 162,605 | 162,605 | ||||||||||||||||||||||||||||||||
|
SARs
|
0 | 0 | 51,392 | 0 | 0 | 51,392 | 51,392 | 51,392 | ||||||||||||||||||||||||||||||||
|
RSUs
|
0 | 0 | 36,292 | 0 | 0 | 108,876 | 36,292 | 36,292 | ||||||||||||||||||||||||||||||||
|
SERP (4)
|
0 | 0 | 0 | 0 | 0 | 1,303,415 | 413,668 | * | ||||||||||||||||||||||||||||||||
|
Health Care and Welfare Benefits (5)
|
0 | 0 | 0 | 0 | 78,500 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Life/Disability Insurance Proceeds (6)
|
0 | 0 | 0 | 0 | 0 | 0 | 1,279,812 | * | ||||||||||||||||||||||||||||||||
|
Outplacement Services
|
0 | 0 | 0 | 0 | 20,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Excise Tax
Gross-Up
|
0 | 0 | 0 | 0 | 1,313,399 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
|
Total
|
0 | 0 | 250,289 | 0 | 2,986,899 | 1,626,288 | 1,943,769 | * | ||||||||||||||||||||||||||||||||
| (1) | “Normal retirement” under Applied’s plans is separation from service after attainment of age 65. Mr. Ramras is age 55 and therefore ineligible for normal retirement. | |
| (2) | “Early retirement” is defined as separation from service after attainment of age 55 with at least 10 years of service, five of which are as an executive officer. | |
| (3) | Assumes performance corresponds to target award, except for performance shares where performance conditions have been satisfied, in which case market value of actual award is shown. | |
| (4) | Calculation of post-termination SERP benefits assumes the executive would receive benefits in the installment payment form at the earliest date he would be eligible. To calculate the estimated present value of the installments, a 4.25% discount rate and the three-segment interest rate structure in effect for January 2010 under Code section 417(e), with 3.23% for the first five years, 5.22% for the next 15 years, and 5.72% thereafter, are used. The RP-2000 Disability Mortality Table for males and a 4.25% interest rate are used in valuing the disability benefits. | |
| (5) | Includes health care benefits, accidental death and dismemberment insurance, car allowance, gas and maintenance, annual physical examination, and annual financial planning and tax service reimbursement and related gross-up payments. | |
| (6) | Proceeds are payable from third-party insurance policies and the SERP. | |
| * | Applied’s supplemental long-term disability (“LTD”) insurance, with premiums paid by the executive, provides a monthly disability benefit equal to 60% of monthly total compensation (monthly base salary plus the average of the three most recent years’ annual incentive compensation divided by 12), minus the basic plan benefit of 60% of base salary, up to a $3,000 per month maximum benefit. The aggregate maximum monthly LTD benefit, under the basic and supplemental programs, is $21,000. In addition, the SERP provides a monthly disability benefit to participants with five years of service as an executive officer which, when added to the amounts payable under the basic and supplemental LTD programs, equals 1/12th of 60% of the average of the highest three of the last 10 calendar years of total compensation (base salary plus annual incentive). |
44
Table of Contents
COMPENSATION
COMMITTEE REPORT
The Executive Organization & Compensation Committee
has reviewed and discussed with management the Compensation
Discussion and Analysis included in this proxy statement. Based
on the review and discussions, the committee recommended to the
Board of Directors that the Compensation Discussion and Analysis
be included in this proxy statement and the annual report on
Form 10-K
for the fiscal year ended June 30, 2010, filed with the SEC.
EXECUTIVE ORGANIZATION &
COMPENSATION COMMITTEE
William G. Bares, Chair
John F. Meier
Peter C. Wallace
AUDIT COMMITTEE
REPORT
The Audit Committee is composed solely of independent directors,
as determined by the Board according to applicable laws and SEC
and NYSE rules, and operates under a written charter. The
charter is posted via hyperlink from the investor relations area
of Applied’s website at www.applied.com.
In performing its responsibilities relating to the audit of
Applied’s consolidated financial statements for the fiscal
year ended June 30, 2010, the committee reviewed and
discussed the audited financial statements with management and
Applied’s independent auditors, Deloitte &
Touche. The committee also discussed with the independent
auditors the matters required to be discussed by the Statement
on Auditing Standards No. 61, as amended (AICPA,
Professional Standards, Vol. 1. AU section 380), as
adopted by the Public Company Accounting Oversight Board in
Rule 3200T.
The independent auditors also provided to the committee the
letter and written disclosures required by applicable
requirements of the Public Company Accounting Oversight Board
regarding the independent accountant’s communications with
the audit committee concerning independence. The committee
discussed with Deloitte & Touche their independence
and also considered whether their provision of non-audit
services to Applied is compatible with maintaining their
independence.
Based on the reviews and discussions described above, the
committee recommended to the Board that the audited financial
statements be included in Applied’s 2010 annual report on
Form 10-K
for filing with the SEC.
AUDIT COMMITTEE
Thomas A. Commes, Chair
J. Michael Moore
Dr. Jerry Sue Thornton
Stephen E. Yates
SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Applied’s executive officers and directors, and persons who
beneficially own more than 10% of Applied’s stock, must
file initial reports of ownership and reports of changes in
ownership with the SEC and furnish copies to Applied.
Based solely on a review of forms furnished to us and written
representations from Applied’s executive officers and
directors, we believe that during the fiscal year ended
June 30, 2010 all filing requirements were satisfied on a
timely basis except that, during the year, one of our directors,
Dr. Jerry Sue Thornton, identified, and filed a late report
for, two fiscal 2009 sales of 1,835 shares and
2,828 shares, respectively.
45
Table of Contents
SHAREHOLDER
PROPOSALS FOR 2011 ANNUAL MEETING
Proposals by shareholders for inclusion in our 2011 annual
meeting proxy statement must be received by Applied’s
Secretary at 1 Applied Plaza, Cleveland, Ohio 44115, no later
than May 12, 2011. Under Ohio law, only proposals included
in the meeting notice may be raised at a meeting of
shareholders. Accordingly, if you wish to nominate a candidate
for director or bring other business from the floor of the 2011
annual meeting, you must notify the Secretary in writing by
August 26, 2011.
HOUSEHOLDING
INFORMATION
Only one copy of this proxy statement and annual report is being
delivered to multiple shareholders sharing an address unless
Applied received contrary instructions from one or more of the
shareholders.
If a shareholder at a shared address to which single copies of
the proxy statement and annual report were delivered wishes to
receive a separate copy of the proxy statement or annual report,
he or she should contact Applied’s registrar and transfer
agent, Computershare Trust Company, N.A., by telephoning
1-800-988-5291
or by writing to Computershare at P.O. Box 43078,
Providence, Rhode Island
02940-3078.
The shareholder will be delivered, without charge, a separate
copy of the proxy statement or annual report promptly upon
request.
If shareholders at a shared address currently receiving multiple
copies of the proxy statement and annual report wish to receive
only a single copy of these documents, they should contact
Computershare in the manner provided above.
OTHER
MATTERS
The Board of Directors does not know of any other matters to be
presented at the meeting. If other matters requiring a
shareholder vote arise, including the question of adjourning the
meeting, the persons named on the accompanying proxy card will
vote your shares according to their judgment in the interests of
Applied.
By order of the Board of Directors.
Fred D. Bauer
Vice President-General Counsel
& Secretary
September 9, 2010
46
Table of Contents
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| A Proposals — The Board of Directors recommends a vote FOR the listed nominees and FOR Proposal 2. | |
| 1. | Election of Directors: | For | Withhold | For | Withhold | For | Withhold | + | ||||||||||
01 – William G. Bares
|
o | o | 02 – L. Thomas Hiltz | o | o | 03 – Edith Kelly-Green | o | o | ||||||||||
| For | Against | Abstain | ||||||||||||||||
2.
|
Ratification of appointment of independent auditors. | o | o | o | ||||||||||||||
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corporate officer, trustee, guardian, or custodian, please give full
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Date (mm/dd/yyyy) — Please print date below.
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Table of Contents
CONSIDER RECEIVING FUTURE APPLIED INDUSTRIAL TECHNOLOGIES, INC. PROXY MATERIALS VIA THE
INTERNET!
Consider receiving future Applied Industrial Technologies, Inc. proxy notifications in electronic
form rather than in print form. While voting via the Internet, just provide your e-mail address
where indicated and click the box to give your consent. Electronic delivery saves Applied a
significant portion of the costs associated with printing and mailing annual meeting materials. If
you consent to electronic delivery of meeting materials, you will receive an e-mail with links to
all annual meeting materials and to the online proxy voting site for every annual meeting. If you
do not consent to electronic delivery, you will continue to receive the proxy notification in the
mail.
Accessing the Applied Industrial Technologies, Inc. annual report and proxy materials via the
Internet may result in charges to you from your Internet service provider and/or telephone
companies.
DIRECTIONS TO MEETING
You may access directions to attend the meeting at www.investorvote.com/AIT.
You may access directions to attend the meeting at www.investorvote.com/AIT.
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IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE,
FOLD ALONG THE PERFORATION, DETACH AND RETURN
THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. ▼
Proxy/Instruction Card — Applied Industrial Technologies, Inc.
Proxy Solicited on Behalf of the Board of Directors
The undersigned appoints David L. Pugh, Benjamin J. Mondics, and Mark O. Eisele, and each of
them, as proxies, with full power of substitution, to attend the Annual Meeting of Shareholders of
Applied Industrial Technologies, Inc., on October 26, 2010, and any adjournments, and to represent
and vote the shares which the undersigned is entitled to vote on the following matters as directed
on the reverse side.
When properly executed, these instructions will be voted in the manner directed on the reverse side
of this card; if you do not provide direction, this proxy will be voted FOR Items 1 and 2.
NOTICE TO PARTICIPANTS IN THE RETIREMENT SAVINGS PLAN
AND/OR SUPPLEMENTAL DEFINED CONTRIBUTION PLAN
AND/OR SUPPLEMENTAL DEFINED CONTRIBUTION PLAN
This card also constitutes voting instructions for participants in the Applied
Industrial Technologies, Inc. Retirement Savings Plan and/or Supplemental Defined
Contribution Plan. A participant who signs on the reverse side hereby instructs Wells
Fargo Bank, N.A., Trustee, to vote all the shares of Applied’s common stock allocated
to the participant’s account(s) in the plan(s) and any shares not otherwise directed
under the Retirement Savings Plan, at the Annual Meeting of Shareholders. If no
voting instructions are provided on a properly executed card, the shares will be
voted FOR items 1 and 2.
If you vote by telephone or the Internet, please DO NOT mail back this proxy card.
YOUR VOTE IS IMPORTANT!
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE
OR VOTE BY TELEPHONE OR INTERNET PURSUANT TO THE INSTRUCTIONS ON THE REVERSE.
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE
OR VOTE BY TELEPHONE OR INTERNET PURSUANT TO THE INSTRUCTIONS ON THE REVERSE.
SEE REVERSE SIDE
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Shareholder Meeting Notice
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Important Notice Regarding the Availability of Proxy Materials for the
Applied Industrial Technologies, Inc. Annual Meeting of Shareholders to be Held on October 26, 2010
Applied Industrial Technologies, Inc. Annual Meeting of Shareholders to be Held on October 26, 2010
Under new Securities and Exchange Commission rules, you are receiving this notice that the
proxy materials for the annual shareholders’ meeting are available on the Internet. Follow the
instructions below to view the materials and vote online or request a copy. The items to be voted
on and location of the annual meeting are on the reverse side. Your vote is important!
This communication presents only an overview of the more complete proxy materials that are
available to you on the Internet. We encourage you to access and review all of the important
information contained in the proxy materials before voting. The proxy statement and annual report
to shareholders are available at:
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Easy Online Access — A Convenient Way to View Proxy Materials and Vote | |
| When you go online to view materials, you can also vote your shares. | ||
| Step 1: Go to www.investorvote.com/AIT. | ||
| Step 2: Click the View button(s) to access the proxy materials. | ||
| Step 3: Return to the investorvote.com window and follow the instructions on the screen to log in. | ||
| Step 4: Make your selection as instructed on each screen to select delivery preferences and vote. |
When you go online, you can also help the environment by consenting to receive electronic delivery of future materials.
|
Obtaining a Copy of the Proxy Materials — If you want to receive a paper or e-mail copy of these documents, you must request one. There is no charge to you for requesting a copy. Please make your request for a copy as instructed on the reverse side on or before October 15, 2010 to facilitate timely delivery. | |
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Shareholder Meeting Notice
The Applied Industrial Technologies, Inc. Annual Meeting of Shareholders will be held on
October 26, 2010, at 10:00 a.m. ET, at Applied’s corporate headquarters, 1 Applied Plaza, East 36th
Street and Euclid Avenue, Cleveland, Ohio 44115.
Proposals to be voted on at the meeting, or any adjournments, are listed below along with the
recommendations of the Board of Directors.
The Board of Directors recommends that you vote FOR the
listed director nominees and FOR Proposal 2.
| 1. | Election of Directors: | ||
| 01- William G. Bares, 02 — L. Thomas Hiltz, 03 — Edith Kelly-Green | |||
| 2. | Ratification of the Audit Commitee’s appointment of Deloitte & Touche LLP as independent auditors for the fiscal year ending June 30, 2011. |
In their discretion, the proxies are authorized to vote on such other business as may properly come
before the meeting.
PLEASE NOTE — YOU CANNOT VOTE BY RETURNING THIS NOTICE. To vote your shares you must vote online
by Thursday, October 21, 2010, or request a paper copy of the proxy materials to receive a proxy
card. If you wish to attend and vote at the meeting, please bring this notice with you.
You may access directions to attend the meeting at www.investorvote.com/AIT.
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Here’s how to order a copy of the proxy materials and select a future delivery preference: | |
| Paper copies: Current and future paper delivery requests can be submitted via the telephone, Internet or e-mail options below. | ||
| E-mail copies: Current and future e-mail delivery requests must be submitted via the Internet following the instructions below. If you request an e-mail copy of current materials you will receive an e-mail with a link to the materials. | ||
| PLEASE NOTE: You must use the number in the shaded bar on the reverse side when requesting a set of proxy materials. | ||
| → | Internet — Go to www.investorvote.com/AIT. Follow the instructions to log in and order a paper or e-mail copy of the current meeting materials and submit your preference for e-mail or paper delivery of future meeting materials. | ||
| → | Telephone — Call us free of charge at 1-866-641-4276 using a touch-tone phone and follow the instructions to log in and order a paper copy of the materials by mail for the current meeting. You can also submit a preference to receive a paper copy for future meetings. | ||
| → | E-mail — Send e-mail to investorvote@computershare.com with “Proxy Materials Applied Industrial Technologies,Inc.” in the subject line. Include in the message your full name and address, plus the number located in the shaded bar on the reverse, and state in the e-mail that you want a paper copy of current meeting materials. You can also state your preference to receive a paper copy for future meetings. | ||
| To facilitate timely delivery, all requests for a paper copy of the proxy materials must be received by October 15, 2010. | |||
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TABLE OF CONTENTS
Introduction and Voting InformationItem 1 Election of DirectorsItem 2 Ratification of AuditorsCorporate GovernanceCorporate Governance DocumentsDirector IndependenceDirector Attendance at MeetingsMeetings of Non-Management DirectorsBoard Leadership StructureCommitteesBoards Role in Risk OversightCommunications with Board of DirectorsDirector NominationsTransactions with Related PersonsDirector CompensationCompensation ReviewComponents of Compensation ProgramStock Ownership GuidelineDirector Compensation TableBeneficial Ownership of Certain Applied Shareholders and ManagementExecutive CompensationCompensation Discussion and AnalysisSummary Compensation TableGrants of Plan-Based Awards TableOutstanding Equity Awards at Fiscal Year-End TableOption Exercises and Stock Vested TablePension PlansNonqualified Deferred CompensationPotential Payments upon Termination or Change in ControlCompensation Committee ReportAudit Committee ReportSection 16(a) Beneficial Ownership Reporting ComplianceShareholder Proposals for 2011 Annual MeetingHouseholding InformationOther Matters