Applied Industrial Technologies : 2022 Annual Report

ANNUAL REPORT 2022

I N D U S T R I A L M O T I O N • F L U I D P O W E R • F L O W C O N T R O L • A U T O M AT I O N • M A I N T E N A N C E S U P P L I E S

Applied Industrial Technologies is a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies.

Our multi-channel capabilities provide choice, convenience, and expertise to MRO and OEM end users in virtually all industrial markets.

Industrial Motion

We Are committed to keeping critical systems up and running, from bearings and gearboxes to industrial motors and material handling.

Fluid Power

We Are one of the world's largest fluid power distributors. Applied Fluid Power® is a valuable resource for dedicated fluid power application expertise and custom-designed solutions.

Flow Control

We Are a leading process flow control company. Our highly technical sales team provides mission-critical products and services for everything on the pipe.

Automation

We Are an emerging provider of motion control, machine vision, connectivity products and robotic technologies with an emphasis on design, integration and assembly.

Maintenance Supplies

We Are C-Class maintenance, repair, operating and production supplies, specializing in fasteners, cutting tools, paints and chemicals, fluid flow, safety and welding.

E-Business

We Are today's digital technologies, offering customization to streamline the online procurement process.

BOARD OF DIRECTORS	Shelly M. Chadwick	Robert J. Pagano, Jr. (1, 2, 4)
Peter C. Wallace (2, 3)	Vice President, Finance and Chief Financial Officer	President and Chief Executive Officer
Materion Corporation	Watts Water Technologies, Inc.
Chairman of the Board of Directors
(High-Performance Engineered Materials)	(Plumbing, Heating, and Water Quality Solutions)
Former Chief Executive Officer
Mary Dean Hall (1, 2)	Vincent K. Petrella (1, 2, 3, 4)
Gardner Denver, Inc.
Executive Vice President and	Former Executive Vice President
(Equipment Manufacturer)
Former President and Chief Executive Officer	Chief Financial Officer	Lincoln Electric Holdings, Inc.
Ingevity Corporation	(Welding, Brazing Products Manufacturer)
Robbins & Myers, Inc.
(Specialty Chemicals, High-Performance Carbon	Joe A. Raver (2, 3, 4)
(Equipment Manufacturer)	Materials, and Engineered Polymers)
Madhuri A. Andrews (1, 2)	Dan P. Komnenovich (1, 2)	Former President and Chief Executive Officer
Hillenbrand, Inc.
Executive Vice President, Chief Digital	Former President and Chief Executive Officer
(Diversified Industrial Company)
and Information Officer	Aviall, Inc.	Neil A. Schrimsher (3)
Jacobs
(Aviation Parts, Related Aftermarket Operations)
(Technical, Professional, and Construction Services)		President & Chief Executive Officer
		Applied Industrial Technologies, Inc.

Committees of the Board
(1) Audit Committee	(2) Corporate Governance &	(3) Executive Committee	(4) Executive Organization &
Chair: Vincent K. Petrella	Sustainabilty Committee	Chair: Peter C. Wallace	Compensation Committee
	Chair: Peter C. Wallace		Chair: Joe A. Raver

FISCAL 2022 FINANCIAL HIGHLIGHTS

• Achieved Record Sales, EBITDA, and EPS
• • Sales of $3.8 billion, up 17.8% year-over-year including 16.6% on an organic basis
  • EPS of $6.58, up 39% over prior-year adjusted levels (a)
  • EBITDA margin of 10.7%, up 90 bps over prior-year adjusted levels; inclusive of an unfavorable 70 bps LIFO impact (b)
• Generated $188 million of operating cash flow, and $169 million of free cash flow; inclusive of growth-relatedworking capital investment (c)

• Reduced debt by $139 million, or 17% from the prior year end
• Deployed $73 million toward dividends, share buybacks, and M&A
• Raised the quarterly dividend to $0.34 per share, our 13th dividend increase since 2010

Refer to the inside back cover for:

1. Reconciliation of Net Income and Net Income Per Share to Adjusted Net Income and Adjusted Net Income Per Share
2. Reconciliation of EBITDA and Adjusted EBITDA
3. Reconciliation of Free Cash Flow

EXECUTING TO UNLOCK VALUE; EVOLVING FOR THE FUTURE

TO OUR STAKEHOLDERS

Fiscal 2022 was a year of significant progress and solid execution. We reported record sales and earnings, and strong returns on capital, while managing through acute inflation and supply chain challenges. We also continued to position the Company for long-term success through continuous improvement actions, growth investments, and ongoing expansion of our emerging Applied Automation℠ platform. At the same time, we strengthened our balance sheet through debt reduction, while continuing to deploy capital toward dividends, share buybacks, and acquisitions. Lastly, we advanced our ESG efforts, which we view as a fundamental responsibility and an increasingly important priority of our business. I am extremely proud of what we accomplished and the unwavering operational focus our talented team continues to demonstrate.

Reflecting further on fiscal 2022, industrial activity and broader economic trends continued to recover, though inflationary pressures and supply chain constraints presented notable headwinds. Our teams responded and executed effectively, turning these challenges into opportunities by leveraging our industry position and driving enhanced support of our customers' technical MRO and production needs as their businesses ramped following the pandemic. Efficiency gains and a more diversified end-market mix provided additional tailwinds as the year unfolded. Indeed, our consistent execution in this dynamic environment is validating our nimbleness, confirming our ability to effectively serve our customer base and value proposition in any environment, and supporting our strategy as expectations heighten across the industrial sector.

As we enter fiscal 2023 and our centennial year, there is a strong sense of pride and excitement throughout the Applied® organization. We are playing an increasingly critical role across the industrial space today, and progressing on an evolution that is optimizing our growth and margin trajectory for the future. From critical break-fix MRO support at a local level to an expanding portfolio of emerging technologies and specialized engineering solutions, our products, services, team, and competitive position have never been stronger as our customers deal with labor constraints, equipment optimization initiatives, and increased manufacturing investment across North America. Overall, we believe our strategy and industry position will present many new and relevant growth catalysts, and further solidify Applied as the premier technical provider of customer return-enhancing solutions and application expertise across critical industrial infrastructure.

Continued...

OFFICERS	SENIOR MANAGEMENT	Joe Mangiapane
Neil A. Schrimsher	Mike R. Allen	Managing Director - Australia & New Zealand
Jeremy S. Moorman
President & Chief Executive Officer	President - Applied Industrial Technologies, LP (Canada)
David K. Wells	Ivan J. Batista	Vice President - Operational Excellence
Sergio H. Nevárez
Vice President - Chief Financial Officer & Treasurer	General Director - Rafael Benitez Carrillo, Inc.
Fred D. Bauer	(Puerto Rico)	President - Applied Mexico
Barbara D. Emery	Darren B. "Ben" Padd
Vice President - General Counsel & Secretary
Warren E. "Bud" Hoffner	Vice President - Human Resources	Vice President - Midwest Area
David S. Green	William P. Rozier
Vice President, General Manager -
Fluid Power & Flow Control	Vice President - North Atlantic Area	Vice President - Western Area
Kurt W. Loring	Thomas R. Hayes
Vice President - Chief Human Resources Officer	Vice President - Southeast Area
Jason W. Vasquez	James A. Jeffiers
Vice President - Sales & Marketing, U.S. Service Centers	Vice President - Central States Area
Christopher Macey	Lonny D. Lawrence
Corporate Controller	Vice President - Information Technology
Ryan D. Cieslak	Tracie M. Longpre
Assistant Treasurer	Vice President - Supply Chain

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‛‛ Applied's technical support and local inventory availability are vital to customers in the current supply and labor-constrainedmarketplace."

LEVERAGING OUR CORE OPERATIONS, WHILE CONTINUING TECHNICAL EXPANSION

A key driver of our strong performance in fiscal 2022 came from significant growth and operational execution across our core Service Center network. In addition to benefiting from greater break-fix and required maintenance activity, our service centers are increasingly called upon as customers look to optimize their production capabilities and align with leading technical service providers. This is particularly evident following pandemic and supply chain-related challenges over the past several years, as well as increasing labor constraints across our customers' operations. These are meaningful trends for our Service Center network given our core focus on more highly-engineered motion control products and solutions across the industrial supply chain.

Of note, Applied's technical support and local inventory availability are vital to customers in the current supply and labor-constrained marketplace. With hundreds of service centers primarily across North America, we maintain a strong local focus, which allows us to promptly address a wide variety of customer needs, particularly as their supply chain requirements continue to expand and become more complex. An aligned strategy and geographic coverage with our supplier partners

further strengthens our ability to offer product breadth, customized support, and timely service. This is deepening the value we provide our customers, who are increasingly looking to Applied® as their first-choice provider of technical MRO and related solutions. In addition, strategic initiatives focused on optimizing sales processes, tools, analytics, and our e-commerce channel are driving greater and more efficient capture of growth opportunities, including within new and under-penetratedhigh-growth end markets. Overall, our service centers are in a solid position to address our customers' evolving needs near term, while helping them to prepare for and execute growing production requirements over the intermediate to long term.

Furthermore, we continue to focus on expanding outside of our legacy core offering, including across higher-engineered solutions tied to fluid power, process flow control, and advanced automation technologies. These solutions - which now represent roughly a third of our sales - present enhanced organic growth and margin improvement opportunities, and are expected to become a greater mix of our business in coming years based on our growth initiatives.

Fluid Power - One of the World's Largest Fluid Power Distributors

Our fluid power capabilities are concentrated on components, services, and engineered solutions that optimize the productivity, safety, and efficiency of our customers' production infrastructure and off-highway mobile equipment. These offerings - including our design, engineering, and software coding expertise - are in greater demand as customers focus on reducing power consumption and C02 emissions, navigate a tight labor market, and integrate more predictive maintenance into their equipment.

With smart machine technology accelerating at a rapid pace, Applied Fluid Power® is keeping step with the most advanced solutions, including growth opportunities around IIoT, telematics, and electrification for fluid power systems. Our expertise and solutions tied to semiconductor manufacturing, data-center cooling, and 5G build-out also remain key contributors where secular tailwinds are providing strong support to our growth. From tailored approaches to turnkey applications, our team is deploying and developing cutting-edge technology solutions across both mobile and industrial fluid power equipment.

ELEVATING & DRIVING OUR COMMITMENT TO CORPORATE SOCIAL RESPONSIBILITY

We know that our ESG focus takes many forms. We also know that committing to Corporate Social Responsibility - and taking action on it - are essential in today's business environment. Our efforts affect all Applied stakeholders, including customers, suppliers, fellow associates and communities where we operate. Our 2022 Sustainability Report details how our increased efforts are making a difference across our business, including in the following areas: governance; supply chain management; information & technology; environmental, health & safety; sustainability; and community.

A key part of Applied's value proposition is our knowledgeable associates' ability to help customers make the best choices for their operation. Through our Applied IoT CONNECT™ program, we offer comprehensive solutions to customers that can help increase productivity and extend product life expectancy, which reduces waste, while also lowering owning and operating expenses. Similarly, Applied Fluid Power CONNECT™ is an IoT solution built to manage customers' mobile or industrial machinery, allowing for more informed planning, staffing, and maintenance decisions - even optimizing mobile fleet, including fuel, operation and utilization.

We understand that our customers' choice of industrial products does more than keep their operations running. Selecting the right solutions can also help keep workers safe, reduce environmental impact, comply with government mandates, lower operating costs, and gain a competitive edge. For instance, it is frequently more cost effective to repair or rebuild parts than to purchase new ones.

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Flow Control - Industry Leader of Specialty Flow Control Solutions

Following a more balanced recovery last year, demand is expanding for our higher-engineered process flow control products and solutions. In particular, MRO activity and capital spending on process infrastructure are ramping up in core end markets, such as

Chemicals, Refining, Petrochemical, Utilities, and Metals. In addition, our flow control products and solutions	are increasingly used
in applications tied to our customers' decarbonization efforts and other required infrastructure investments as	end markets transition
around new energy requirements.

We also continue to see strong growth within Hygienic and High-Purity applications, as well as demand for filtration and related service solutions. Our expertise in these growing areas is critical in dealing effectively with key issues that include thermal control, sanitization, and increased regulations. Additionally, we are seeing notable progress in cross-selling our flow control solutions across our legacy Service Center network as we connect key accounts to these leading process capabilities. Quoting and order activity tied to our cross-selling initiative hit a new high in fiscal 2022, and we see further momentum building into fiscal 2023 as our internal teams continue to execute on this important and meaningful opportunity.

Automation - Growing Provider of Next-Generation Solutions

The evolution at Applied® is also tied to our growing automation platform. This business - which includes our four automation acquisitions over the past three years - is now annualizing more than $150 million in sales and is focused on advanced technologies, including collaborative robots, machine vision, and digital solutions. These products and solutions are in greater demand as customers accelerate technology investments and shift from industrialized to intelligent automation across their operational footprints. This investment trend is reinforced by labor constraints and evolving production considerations post the pandemic, which is expanding automation across functions such as material handling, product inspection, machine tending, palletizing, and quality control.

Aligning with our legacy technical product focus, we are approaching this market opportunity with industry-leading application expertise and differentiated technical guidance supported by complete engineered solutions. During fiscal 2022, we began entering new markets across the U.S. with the opening of various greenfield sites. We are leveraging our existing Service Center and operational network to support this growth, as well as developing new ways to further penetrate this market opportunity through both customized and turnkey automation solutions. Overall, we are increasingly recognized across the industry as a leading channel partner in next-generation automation solutions, and expect to further grow this platform in coming years through both M&A and organic initiatives.

Clearly, the momentum building across our legacy core operations and growth initiatives is encouraging, and a strong indication of our potential as secular and company-specific opportunities persist over the intermediate to long term. We remain steadfast on our commitments to drive attractive returns as this growth continues to manifest, through both consistent execution and continuous improvement. This was apparent in fiscal 2022 as our teams responded well to inflationary pressures industry-wide by implementing effective price actions and other channel countermeasures. Combined with enhanced internal processes and operational efficiencies from system investments and our shared services model, our EBITDA margins hit record levels and are progressing toward our 11% interim annual target sooner than expected. While we expect ongoing inflationary pressures and growth investments going forward, our recent results and operational track record provide strong evidence of our operating leverage potential as we continue to scale our business across both our legacy Service Center network and new emerging areas of growth in coming years.

Our teams can identify what's best for worn parts and assemblies, whether it's repair, rebuild, replacement or even a new, more efficient system. Parts are reworked to their original or improved design specifications and fully tested. This in turn reduces the amount of material that is sent to landfills or otherwise discarded. Additionally, our eco-friendly power unit program was developed with choice in mind. With improvements in electro-mechanical technology, we can integrate our application knowledge to save energy and / or increase productivity.

COMMITTED

RESPONSIBLE

SUPPORTIVE

The foundation of all of our efforts - from industrial solutions to sustainability practices - is our exceptional associates, who deliver value every day and remain our greatest asset. As such, it made us very proud to be recognized as a NorthCoast 99 Platinum Award winner in fiscal 2022 - a prestigious honor given to those companies who have been named one of Northeast Ohio's best workplaces for top talent for 20 years. Companies are evaluated on how their organization addresses top-performer attraction, development, and retention in the following areas: organizational strategy, policies, and benefits; talent attraction, acquisition, and onboarding; employee well-being; employee engagement and talent development; total rewards; and diversity, equity, and inclusion. We take pride in the distinction and our culture that fosters teamwork and personal growth.

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