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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended November 30, 2003

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 1-11288

 

ACTUANT CORPORATION

(Exact name of registrant as specified in its charter)

 

Wisconsin   39-0168610
(State of incorporation)   (I.R.S. Employer Id. No.)

 

6100 NORTH BAKER ROAD

MILWAUKEE, WISCONSIN 53209

Mailing address: P. O. Box 3241, Milwaukee, Wisconsin 53201

(Address of principal executive offices)

 

(414) 352-4160

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x    No ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes x    No ¨

 

The number of shares outstanding of the registrant’s Class A Common Stock as of December 31, 2003 was 23,576,456

 


 


Table of Contents

TABLE OF CONTENTS

 

     Page No.

Part I - Financial Information

    

Item 1 - Financial Statements (Unaudited)

    

Actuant Corporation-

    

Condensed Consolidated Statements of Earnings

   3

Condensed Consolidated Balance Sheets

   4

Condensed Consolidated Statements of Cash Flows

   5

Notes to Condensed Consolidated Financial Statements

   6

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

   21

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

   29

Item 4 - Controls and Procedures

   29

Part II - Other Information

    

Item 2 - Changes in Securities and Use of Proceeds

   30

Item 6 - Exhibits and Reports on Form 8-K

   30

 

FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS

 

This quarterly report on Form 10-Q contains certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms “may,” “should,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “objective,” “plan,” “project” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to inherent risks and uncertainties that may cause actual results or events to differ materially from those contemplated by such forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that may cause actual results or events to differ materially from those contemplated by such forward-looking statements include, without limitation, general economic conditions and market conditions in the recreational vehicle, truck, automotive, industrial production, and construction industries in North America, Europe and, to a lesser extent, Asia, market acceptance of existing and new products, successful integration of acquisitions, operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material or labor cost increases, foreign currency risk, interest rate risk, the economy’s reaction to terrorist attacks and the impact of war, the length of economic downturns in the Company’s markets, the resolution of contingent liabilities related to APW Ltd. and other litigation matters, the Company’s ability to access capital markets, the Company’s debt level, and other factors that may be referred to or noted in the Company’s reports filed with the Securities and Exchange Commission from time to time.

 

When used herein, the terms “Actuant,” “Applied Power,” “we,” “us,” “our,” and the “Company” refer to Actuant Corporation and its subsidiaries.

 

Actuant Corporation provides free-of-charge access to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto, through its website, www.actuant.com, as soon as reasonably practical after such reports are electronically filed with the Securities and Exchange Commission.

 

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PART I - FINANCIAL INFORMATION

 

Item 1 - Financial Statements

 

ACTUANT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
November 30,


     2003

   2002

Net Sales

   $ 166,584    $ 147,858

Cost of Products Sold

     111,966      101,956
    

  

Gross Profit

     54,618      45,902

Selling, Administrative and Engineering Expenses

     33,349      27,087

Amortization of Intangible Assets

     547      627
    

  

Operating Profit

     20,722      18,188

Net Financing Costs

     4,391      5,662

Charge for Early Extinguishment of Debt

     15,069      1,974

Litigation Charge Associated with Divested Businesses

     —        7,300

Other (Income) Expense, net

     453      246
    

  

Earnings Before Income Tax Expense and Minority Interest

     809      3,006

Income Tax Expense

     283      1,067

Minority Interest, net of income taxes

     233      83
    

  

Net Earnings

   $ 293    $ 1,856
    

  

Earnings per Share:

             

Basic

   $ 0.01    $ 0.08

Diluted

   $ 0.01    $ 0.08

Weighted Average Common Shares Outstanding:

             

Basic

     23,539      23,206

Diluted

     24,727      24,396

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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ACTUANT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

     November 30,
2003


    August 31,
2003


 
     (Unaudited)        
ASSETS                 

Current Assets:

                

Cash and cash equivalents

   $ 32,692     $ 4,593  

Accounts receivable, net

     99,048       81,825  

Inventories, net

     74,666       67,640  

Deferred income taxes

     15,334       14,727  

Other current assets

     4,516       3,977  
    


 


Total Current Assets

     226,256       172,762  

Property, Plant and Equipment, net

     63,555       59,197  

Goodwill

     121,530       101,680  

Other Intangible Assets, net

     21,985       19,521  

Other Long-term Assets

     11,968       8,493  
    


 


Total Assets

   $ 445,294     $ 361,653  
    


 


LIABILITIES AND SHAREHOLDERS’ DEFICIT                 

Current Liabilities:

                

Short-term borrowings

   $ 516     $ 1,224  

Trade accounts payable

     56,130       53,045  

Accrued compensation and benefits

     17,419       16,773  

Income taxes payable

     15,794       21,444  

Current maturities of long-term debt

     7,696       8,918  

Other current liabilities

     39,032       40,753  
    


 


Total Current Liabilities

     136,587       142,157  

Long-term Debt, less current maturities

     245,651       159,692  

Deferred Income Taxes

     9,444       8,841  

Pension and Postretirement Benefit Liabilities

     30,618       29,430  

Other Long-term Liabilities

     29,743       29,042  

Minority Interest in Net Equity of Consolidated Affiliates

     160       4,117  

Shareholders’ Deficit:

                

Class A common stock, $0.20 par value, authorized 32,000,000 shares, issued and outstanding 23,572,250 and 23,512,406 shares, respectively

     4,714       4,702  

Additional paid-in capital

     (522,239 )     (522,627 )

Retained earnings

     528,415       528,122  

Stock held in trust

     (676 )     (636 )

Deferred compensation liability

     676       636  

Accumulated other comprehensive loss

     (17,799 )     (21,823 )
    


 


Total Shareholders’ Deficit.

     (6,909 )     (11,626 )
    


 


Total Liabilities and Shareholders’ Deficit

   $ 445,294     $ 361,653  
    


 


 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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ACTUANT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Three Months Ended
November 30,


 
     2003

    2002

 

Operating Activities

                

Net earnings

   $ 293     $ 1,856  

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:

                

Depreciation and amortization

     3,934       3,689  

Amortization of debt discount and debt issuance costs

     374       377  

Write-off of debt discount and debt issuance costs in conjunction with early extinguishment of debt

     1,385       317  

Provision for deferred income taxes

     820       366  

Loss on disposal of assets

     70       25  

Changes in operating assets and liabilities, excluding the effects of the business acquisitions:

                

Accounts receivable

     (8,355 )     (6,381 )

Inventories

     (2,413 )     1,915  

Prepaid expenses and other assets

     (326 )     1,978  

Trade accounts payable

     (136 )     (2,621 )

Accrued interest

     (4,056 )     (4,117 )

Income taxes payable

     (5,835 )     (2,564 )

Other accrued liabilities

     625       9,148  
    


 


Net cash (used in) provided by operating activities

     (13,620 )     3,988  

Investing Activities

                

Proceeds from sale of property, plant and equipment

     —         4  

Capital expenditures

     (2,885 )     (3,392 )

Cash paid for business acquisitions, net of cash acquired

     (33,197 )     (8,730 )
    


 


Net cash used in investing activities

     (36,082 )     (12,118 )

Financing Activities

                

Partial redemption of 13% senior subordinated notes

     (49,354 )     (9,425 )

Net proceeds from convertible senior subordinated note offering

     145,216       —    

Net principal borrowings (payments) on other debt

     (18,586 )     18,010  

Stock option exercises and other

     358       298  
    


 


Net cash provided by financing activities

     77,634       8,883  

Effect of exchange rate changes on cash

     167       3  
    


 


Net increase in cash and cash equivalents

     28,099       756  

Cash and cash equivalents – beginning of period

     4,593       3,043  
    


 


Cash and cash equivalents – end of period

   $ 32,692     $ 3,799  
    


 


 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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ACTUANT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

Note 1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Actuant Corporation (“Actuant,” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial reporting and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The condensed consolidated balance sheet data as of August 31, 2003 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The Company’s significant accounting policies are disclosed in its fiscal 2003 Annual Report on Form 10-K. For additional information, refer to the consolidated financial statements and related footnotes in the Company’s fiscal 2003 Annual Report on Form 10-K.

 

In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as discussed otherwise, such adjustments consist of only those of a normal recurring nature. Operating results for the three months ended November 30, 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2004.

 

Prior year financial statements have been reclassified where appropriate to conform to current year presentations.

 

Note 2. Acquisitions

 

On September 3, 2003, the Company acquired certain assets and assumed certain liabilities of Kwikee Products Company, Inc. (“Kwikee” or the “Kwikee Acquisition”) for $28.2 million of cash. Kwikee, headquartered in Cottage Grove, Oregon, is a leading provider of retractable step systems and storage tray systems for the North American recreational vehicle (“RV”) market. The purchase agreement allows for additional payments to the sellers aggregating no more than $1.0 million, contingent on the Company’s achieving earnings before interest, income taxes, depreciation, and amortization above a specified level in the fiscal years ended August 31, 2004, 2005, 2006, 2007, and 2008. These additional payments, $0.5 million of which was prepaid at closing, are limited to $0.25 million in each fiscal year during the performance period, with a cumulative earn-out payment in the last year of the performance period subject to the achievement of certain earnings objectives. This transaction was funded through borrowings under the Company’s senior secured credit agreement (the “Senior Credit Agreement”). Kwikee was an attractive acquisition candidate because it held a leading market position in retractable step systems and storage tray systems and it increased the Company’s content per vehicle in the important motor home segment of the RV industry. In addition, Kwikee’s brand name, experienced management, and track record of profitable growth were all attractive factors in evaluating the acquisition. The transaction was accounted for using the purchase method of accounting; therefore, the results of operations are included in the accompanying condensed consolidated financial statements only since the acquisition date. The preliminary purchase price allocation, which is subject to change, resulted in goodwill of $19.9 million and intangible assets of $3.1 million, consisting of patents, trademarks, and customer relationships. Pro forma results of operations of the Company for the three months ended November 30, 2002 and a purchase price allocation have not been presented for Kwikee, as this acquisition is not considered to be significant.

 

On September 3, 2002, the Company acquired approximately 80% of the outstanding capital stock of Heinrich Kopp AG (“Kopp” or the “Kopp Acquisition”). Kopp, headquartered in Kahl, Germany, is a leading provider of electrical products to the German, Austrian and Eastern European retail home center markets. In the transaction, the Company paid approximately $15.8 million (including the assumption of debt and deferred purchase price of $1.6 million, less acquired cash). During the first quarter of fiscal 2004, the Company paid the deferred purchase price and exercised its option to acquire the remaining 20% of the outstanding capital stock for $3.3 million by utilizing borrowings available under its Senior Credit Agreement. The transactions were accounted for using the purchase method of accounting; therefore, the results of operations are included in the accompanying condensed consolidated financial statements only since the respective acquisition dates. There was no goodwill recorded in the acquisition, as the purchase price in both steps of the acquisition was less than the fair value of the acquired assets and liabilities. Accordingly, the book value of the acquired long-lived assets has been reduced as required under generally accepted accounting principles.

 

The Company committed to integration plans to restructure portions of Kopp’s operations during the first quarter of fiscal 2003. These plans are designed to reduce administrative and operational costs and resulted in an $11.7 million restructuring reserve being recorded in the purchase accounting process. Of the reserve, $2.6 million relates to the closure of Kopp’s manufacturing facility in Ingolstadt, Germany, with the balance primarily representing other employee severance costs to be incurred in connection with the transfer of certain production to lower cost locations and general

 

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reductions in the workforce. The restructuring reserve was originally estimated to be $16.7 million, however, in the fourth quarter of fiscal 2003 the Company revised this estimate due to a combination of higher attrition rates and lower severance costs. This adjustment resulted in a reduction in the recorded value of the fixed assets as required by generally accepted accounting principles. As a result of these integration plans, the Company expects to reduce a sizable number of personnel in the first 24 months of Kopp ownership. As of November 30, 2003 the Ingolstadt facility had been closed and in total, over 100 employees had been terminated.

 

A rollforward of the restructuring reserve follows:

 

     August 31,
2003
Balance


   Cash
Payments


    Currency
Impact


  

November 30,
2003

Balance


Severance

   $ 8,407    $ (616 )   $ 742    $ 8,533

Exit costs

     389      (203 )     28      214
    

  


 

  

Total reserve

   $ 8,796    $ (819 )   $ 770    $ 8,747
    

  


 

  

 

The Company expects that cash payments related to the Kopp restructuring reserve will increase in the second and third quarter of fiscal 2004 relative to the first quarter of fiscal 2004.

 

Note 3. Accounts Receivable Financing

 

The Company utilizes an accounts receivable securitization program whereby it sells certain of its United States trade accounts receivable to a wholly owned special purpose subsidiary which, in turn, sells participating interests in its pool of receivables to a financial institution. Sales of the participating interests in the trade receivables are reflected as a reduction of accounts receivable in the accompanying Condensed Consolidated Balance Sheets and the proceeds received are included in cash flows from operating activities in the accompanying Condensed Consolidated Statements of Cash Flows. Trade receivables sold and being serviced by the Company were $26.0 million and $23.9 million at November 30, 2003 and August 31, 2003, respectively.

 

Accounts receivable financing costs of $0.1 million for each of the three months ended November 30, 2003 and 2002 are included in “Net Financing Costs” in the accompanying Condensed Consolidated Statements of Earnings. Total cash proceeds under the trade accounts receivable financing program were $24.5 million and $27.9 million for the three months ended November 30, 2003 and 2002, respectively.

 

Note 4. Inventories, Net

 

The nature of the Company’s products is such that they generally have a very short production cycle. Consequently, the amount of work-in-process at any point in time is minimal. In addition, many parts or components are ultimately either sold individually or assembled with other parts making a distinction between raw materials and finished goods impractical to determine. Other locations maintain and manage their inventories using a job cost system where the distinction of categories of inventory by state of completion is also not available.

 

As a result of these factors, it is neither practical nor cost effective to segregate the amounts of raw materials, work-in-process or finished goods inventories at the respective balance sheet dates, as segregation would only be possible as the result of physical inventories which are taken at dates different from the balance sheet dates.

 

Note 5. Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill for the three months ended November 30, 2003 are as follows:

 

     Tools &
Supplies
Segment


    Engineered
Solutions
Segment


   Total

Balance as of August 31, 2003

     43,214       58,466      101,680

Goodwill of acquired business

     —         19,850      19,850

Currency impact

     (18 )     18      —  
    


 

  

Balance as of November 30, 2003

   $ 43,196     $ 78,334    $ 121,530
    


 

  

 

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The gross carrying amount and accumulated amortization of the Company’s intangible assets that have defined useful lives and are subject to amortization as of November 30, 2003 and August 31, 2003 are as follows:

 

     November 30, 2003

   August 31, 2003

     Gross
Carrying
Amount


   Accumulated
Amortization


   Net Book
Value


   Gross
Carrying
Amount


   Accumulated
Amortization


   Net Book
Value


Patents

   $ 22,505    $ 9,277    $ 13,228    $ 22,376    $ 9,391    $ 12,985

Trademarks

     5,196      1,548      3,648      4,496      1,303      3,193

Non-compete agreements

     1,163      997      166      3,342      3,086      256

Other

     1,788      698      1,090      1,349      772      577
    

  

  

  

  

  

Total

   $ 30,652    $ 12,520    $ 18,132    $ 31,563    $ 14,552    $ 17,011
    

  

  

  

  

  

 

The gross carrying amount of the Company’s intangible assets that have indefinite lives and are not subject to amortization as of November 30, 2003 and August 31, 2003 are as follows:

 

     November 30,
2003


   August 31,
2003


Tradenames

   $ 3,732    $ 2,389

Other

     121      121
    

  

Total

   $ 3,853    $ 2,510
    

  

 

In connection with the acquisition of Kwikee, the Company allocated $1.3 million and $0.6 million of the purchase price to its patents and customer relationships, respectively. The patents and customer relationships are being amortized over their useful lives of 13 and 15 years, respectively. In addition, the Company acquired certain tradenames valued at $1.2 million, which are classified as indefinite lived intangible assets and are not subject to amortization. See Note 2, “Acquisitions,” for further information about the acquisition of Kwikee.

 

Amortization expense recorded on the intangible assets listed in the above table was $0.5 million and $0.6 million for the three months ended November 30, 2003 and 2002, respectively. Total fiscal 2004 amortization expense is estimated to be $2.0 million. Amortization expense for fiscal years 2005 through 2009 is estimated to be $1.8 million per year.

 

Note 6. Accrued Product Warranty Costs

 

The Company recognizes the cost associated with its product warranties at the time of sale. The amount recognized is based on historical claims rates and current claim cost experience. The following is a reconciliation of the changes in accrued product warranty for the three months ended November 30, 2003:

 

Balance as of August 31, 2003

   $ 3,436  

Warranty reserves of acquired business

     313  

Currency impact

     161  

Provision for warranties

     906  

Warranty payments and costs incurred

     (1,157 )
    


Balance as of November 30, 2003

   $ 3,659  
    


 

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Note 7. Debt

 

The Company’s indebtedness, other than short-term borrowings, as of November 30, 2003 and August 31, 2003 was as follows:

 

    

November 30,

2003


    August 31,
2003


 

Senior secured credit agreement

                

Revolving credit borrowings

   $ —       $ 400  

Term loan

     35,000       48,000  

Euro denominated term loans

     8,022       11,439  
    


 


Sub-total – Senior secured indebtedness

     43,022       59,839  

Convertible senior subordinated debentures (“Convertible Notes”), due 2023

     150,000       —    

Senior subordinated notes (“13% Notes”), due 2009

     60,779       110,133  

Initial issuance discount

     (499 )     (946 )

Fair value adjustments on interest rate swaps

     45       (416 )
    


 


Sub-total – Senior subordinated indebtedness

     210,325       108,771  
    


 


Total debt, excluding short-term borrowings

     253,347       168,610  

Less: current maturities of long-term debt

     (7,696 )     (8,918 )
    


 


Total long-term debt, less current maturities

   $ 245,651     $ 159,692  
    


 


 

In November 2003, the Company sold $150.0 million aggregate principal amount of Convertible Senior Subordinated Debentures (“Convertible Notes”) due November 15, 2023. The Convertible Notes bear interest at a rate of 2.00% annually which is payable on November 15 and May 15 of each year. Beginning with the six-month interest period commencing November 15, 2010, holders of the Convertible Notes will receive contingent interest if the trading price of the Convertible Notes equals or exceeds 120% of the principal amount of the Convertible Notes over a specified trading period. If payable, the contingent interest shall equal 0.25% of the average trading price of the Convertible Notes during the five days immediately preceding the applicable six-month interest period per $1,000 principal amount of Convertible Notes.

 

The Company has the right to repurchase for cash all or part of the Convertible Notes on or after November 20, 2010. The holders of the Convertible Notes have the right to require the Company to purchase all or a portion of the Convertible Notes on November 15, 2010, November 15, 2013 and November 15, 2018 or upon certain corporate events. The purchase price for these repurchases shall equal 100% of the principal amount of the Convertible Notes purchased plus accrued and unpaid interest.

 

The Convertible Notes are jointly and severally guaranteed by certain of the Company’s domestic subsidiaries on a senior subordinated basis. These guarantees will be released when the Company has no 13% Notes outstanding; provided that if the Company issues other senior subordinated debt that is guaranteed by one or more of the Company’s subsidiaries, then such subsidiaries will be required to guarantee the Convertible Notes on an unsecured senior subordinated basis.

 

The Convertible Notes are convertible into shares of the Company’s common stock at a conversion rate of 25.0563 shares per $1,000 principal amount of Convertible Notes, which equals a conversion price of approximately $39.91 per share (subject to adjustment) only under the following conditions: (i) during any fiscal quarter commencing after November 30, 2003, if the closing sale price of the Company’s common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding fiscal quarter, (ii) during any period in which the Company’s senior subordinated debt credit rating falls below certain thresholds, (iii) if a Convertible Note has been called for redemption and has not yet been redeemed, the holder may convert that Convertible Notes prior to the close of business on the last business day prior to the redemption date, or (iv) if specified corporate transactions occur. The Company has agreed to file a shelf registration statement with the Securities and Exchange Commission covering the resale of the Convertible Notes and the underlying common stock.

 

Net proceeds from the issuance of the Convertible Notes were $145.2 million. The Company used approximately $63.9 million of the net proceeds to fund the repurchase of $49.4 million of 13% Notes through open market and negotiated purchases, including premium payments and accrued interest. As a result of these repurchases the Company recorded a pre-tax charge of $15.1 million during the first quarter of fiscal 2004, consisting of bond

 

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redemption premium payments and the non-cash write-off of the associated debt discount and debt issuance costs. In addition, the net proceeds were used to repay $33 million of borrowings under the senior secured credit agreement related to the acquisition of Kwikee, and the remaining 20% interest in Kopp, as well as the Kopp deferred purchase price. The Company also made optional prepayments on the term loan under the senior secured credit agreement and the Euro-denominated term loans totaling $17.3 million. The remaining net proceeds are in cash and cash equivalents on the Condensed Consolidated Balance Sheets and will be used for general corporate purposes, which may include, without limitation, repurchases of outstanding 13% Notes, working capital and possible future acquisitions.

 

During the first quarter of fiscal 2003, the Company retired $9.4 million of its 13% Notes acquired through open market and negotiated purchases. The Company recorded a pre-tax charge of $2.0 million consisting of bond redemption premium payments and the non-cash write-off of the associated debt discount and debt issuance costs.

 

The 13% Notes include fair value adjustments of $0.1 and $(0.4) million at November 30, 2003 and August 31, 2003, respectively, related to interest rate swap contracts that convert fixed rates to variable rates. See Note 10, “Derivatives” for further information.

 

Note 8. Stock Option Plans

 

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for its stock option plans. During the second quarter of fiscal 2003, the Company adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” The following table illustrates the effect on net earnings and earnings per share had the Company adopted the fair value based method of accounting for stock-based employee compensation for all periods presented.

 

     Three Months
Ended
November 30,


 
     2003

    2002

 

Net earnings, as reported

   $ 293     $ 1,856  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     (439 )     (211 )
    


 


Pro forma net earnings (loss)

   $ (146 )   $ 1,645  
    


 


Earnings (loss) per share:

                

Basic – as reported

   $ 0.01     $ 0.08  

Basic – pro forma

   $ (0.01 )   $ 0.07  

Diluted – as reported

   $ 0.01     $ 0.08  

Diluted – pro forma

   $ (0.01 )   $ 0.07  

 

Note 9. Distribution of Electronics Segment

 

On July 31, 2000, the Company effected the spin-off of APW Ltd., a Bermuda company organized to own and operate its former Electronics Business. In conjunction with the spin-off and as is customary in these types of transactions, APW agreed to indemnify the Company for certain claims and liabilities. However, as a result of APW’s bankruptcy filing discussed below, APW was released from its obligation to indemnify the Company for income tax matters relating to the spin-off and periods prior to the spin-off. Accordingly, the Company is or may be subject to substantial liabilities of APW. In particular, the Company remains liable for tax obligations associated with the spin-off and related corporate restructuring transactions as well as APW’s and its potential tax obligations for periods prior to the spin-off.

 

During the third quarter of fiscal 2002, APW and one of APW’s wholly owned indirect subsidiaries, Vero Electronics, Inc., commenced prepackaged bankruptcy cases in the United States Bankruptcy Court for the Southern District of New York. On July 31, 2003, APW and Vero Electronics emerged from bankruptcy. Pursuant to the bankruptcy proceedings, APW rejected certain agreements entered into between APW and the Company at the time of the spin-off that governed a variety of indemnification matters between the parties. These agreements included the Tax Sharing and Indemnification Agreement, or TSA, in which APW agreed to indemnify the Company for income tax liabilities in excess of $1.0 million which could arise from any audit or other administrative or judicial

 

10


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proceedings resulting in adjustments to the separate taxable income of APW or any of its subsidiaries which were included in the Company’s consolidated group for periods prior to the spin-off, as well as all taxes related to the spin-off and related corporate restructuring transactions. The Internal Revenue Service has commenced an audit of the Company’s tax return for fiscal 2000, which was the year in which the spin-off and related corporate restructuring transactions occurred. If any audit adjustments were to result in a tax liability, such liability would be payable by the Company. The amount of such additional tax liabilities may be substantial and could have a material adverse effect on the Company’s financial condition and results of operations.

 

On August 6, 2002, the Company and APW entered into an agreement which provides, among other things, that the right of offset asserted by the Company with respect to approximately $23.8 million of funds (the “Offset Funds”) which it held on behalf of APW is an allowed secured claim which is unimpaired by the APW bankruptcy proceeding; and, further, that the Company may retain possession of the Offset Funds and may use such Offset Funds to, among other things, reimburse it for certain estimated costs of approximately $4.9 million and any tax adjustments arising from the Company’s spin-off of APW. In the event that such costs and adjustments exceed the Offset Funds, the Company will be responsible for any shortfall, and such excess amount could result in a materially adverse impact upon its financial position and results of operations. Pursuant to the agreement with APW, the Company will be required to pay an estimated $18 to $19 million of the Offset Funds to APW or other third parties as spin-off related contingencies are resolved. The Company estimates that these payments will be made sometime during fiscal 2005 although there can be no assurance as to the actual date these payments may in fact be made. The Offset Funds have been recorded in “Other Long-term Liabilities” and totaled $18.9 million as of November 30, 2003 and August 31, 2003.

 

Prior to the spin-off, the Company, in the normal course of business, entered into certain real estate and equipment leases or guaranteed such leases on behalf of its subsidiaries, including those in the Electronics Business segment. In conjunction with the spin-off, the Company assigned its rights in the leases used in the Electronics Business segment to APW, but was not released as a responsible party from all such leases by the lessors. As a result, the Company remains contingently liable for such leases. The discounted present value of future minimum lease payments for such leases totals, assuming no offset for sub-leasing, approximately $17.5 million at November 30, 2003. The future undiscounted minimum lease payments for these leases are as follows: $4.3 million in calendar 2004; $3.1 million in calendar 2005; $2.4 million in calendar 2006; $2.4 million in calendar 2007; $2.5 million in calendar 2008; and $9.1 million thereafter. The parties to these leases, which currently include both subsidiaries of APW and certain former APW subsidiaries that have been acquired by third parties, have not filed Chapter 11 cases and, as such, none of those leases have been rejected in the bankruptcies noted above. However, the Company remains contingently liable for those leases if these APW subsidiaries or their successors are unable to fulfill their obligations thereunder. A future breach of these leases by these APW subsidiaries or their successors could, therefore, potentially have a material adverse impact upon the Company’s financial position and results of operations.

 

Note 10. Derivatives

 

All derivatives are recognized on the balance sheet at their estimated fair value. At November 30, 2003 and August 31, 2003, the Company was a party to one interest rate swap contract that has a notional amount of $25 million and converts fixed rate debt of 13% to variable rate debt based on the six-month LIBOR plus 9.63%. At November 30, 2003 the six-month LIBOR was 1.26%. This swap contract matures on May 1, 2009, which corresponds to the maturity date of the debt. No net gain or loss has been recorded in earnings related to changes in the fair value of this contract since the contract is considered to be “effective” as the terms of the contract exactly match the terms of the underlying debt. Instead, the fair value of the contract is recorded as a $1.3 million and a $1.8 million long-term liability at November 30, 2003 and August 31, 2003, respectively, with the offset recorded as a fair value adjustment to the 13% Notes.

 

During the third quarter of fiscal 2003 the Company terminated an interest rate swap contract that had a notional amount of $25 million, which converted fixed rate debt to variable rate debt. The Company received a cash settlement of $1.6 million, representing the fair value of the swap contract, from the counterparty. Prior to the termination, hedge accounting treatment was used since the contract was considered to be “effective” as the terms of the contract exactly matched the terms of the underlying debt. Hedge accounting treatment resulted in no net gain or loss being recorded in earnings related to changes in the fair value of the contract. Because the swap was terminated, hedge accounting must also be discontinued. At November 30, 2003, the $1.4 million fair value adjustment to the 13% Notes is treated as a premium to the underlying debt and is being amortized to net financing costs over the original remaining life of the contract.

 

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At August 31, 2003, the Company was a party to an interest rate swap contract to convert variable rate debt to a fixed rate with a notional value of $25 million. This contract matured on September 5, 2003. Unrealized gains, net of income taxes, of $0 and $0.1 million were recorded in other comprehensive income to recognize the fair value of interest rate swap contracts to convert variable rate debt to a fixed rate for the three months ended November 30, 2003 and 2002.

 

Note 11. Earnings Per Share

 

The reconciliations between basic and diluted earnings per share for all periods presented are as follows:

 

     Three Months
Ended
November 30,


     2003

   2002

Numerator:

             

Net earnings

   $ 293    $ 1,856

Denominator:

             

Weighted average common shares outstanding for basic earnings per share

     23,539      23,206

Net dilutive effect of stock options based on the treasury stock method using average market price

     1,188      1,190
    

  

Weighted average common and equivalent shares outstanding for diluted earnings per share

     24,727      24,396
    

  

Basic Earnings Per Share

   $ 0.01    $ 0.08

Diluted Earnings Per Share

   $ 0.01    $ 0.08

 

The convertible senior subordinated notes discussed in Note 7, “Debt,” have no impact on the Company’s earnings per share calculations because conditions under which the notes may be converted have not been satisfied.

 

Note 12. Comprehensive Income

 

The components of comprehensive income are as follows:

 

     Three Months
Ended
November 30,


 
     2003

   2002

 

Net earnings

   $ 293    $ 1,856  

Foreign currency adjustments

     4,015      (541 )

Fair value of interest rate swaps, net of taxes

     7      78  

Unrealized gain on available for sale securities, net of tax

     2      —    
    

  


Comprehensive income

   $ 4,317    $ 1,393  
    

  


 

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Note 13. Segment Information

 

The Company has two reportable segments: Tools & Supplies and Engineered Solutions, with separate and distinct operating management and strategies. The Tools & Supplies segment is primarily involved in the design, manufacture and distribution of tools and supplies to the retail do-it-yourself, construction, electrical wholesale, industrial and production automation markets. The Engineered Solutions segment focuses on developing and marketing value-added, customized motion control systems for original equipment manufacturers in the recreational vehicle, automotive, truck, and industrial markets. The Company has not aggregated individual operating segments within these reportable segments. The accounting policies of the segments are the same as described the in the fiscal 2003 Annual Report on Form 10-K in Note 1, “Summary of Significant Accounting Policies.” The Company evaluates segment performance based primarily on earnings before interest, taxes and amortization less a net asset carrying charge.

 

The following tables summarize financial information from continuing operations by reportable segment. Earnings (Loss) before Income Tax Expense and Minority Interest for each reportable segment and geographic region does not include general corporate expenses, interest expense or currency exchange adjustments.

 

     Three Months Ended
November 30,


 
     2003

    2002

 

Net Sales:

                

Tools & Supplies

   $ 96,335     $ 92,014  

Engineered Solutions

     70,249       55,844  
    


 


Total

   $ 166,584     $ 147,858  
    


 


Earnings (Loss) Before Income Taxes and Minority Interest:

                

Tools & Supplies

   $ 13,122     $ 11,297  

Engineered Solutions

     5,160       3,807  

General Corporate and Other

     (17,473 )     (12,098 )
    


 


Total

   $ 809     $ 3,006  
    


 


     November 30,
2003


    August 31,
2003


 

Assets:

                

Tools & Supplies

   $ 218,914     $ 204,787  

Engineered Solutions

     163,342       126,483  

General Corporate and Other

     63,038       30,383  
    


 


Total

   $ 445,294     $ 361,653  
    


 


 

Kwikee is included in the Engineered Solutions segment from its date of acquisition, which impacts the comparability of the segment data. General Corporate and Other results for the three months ended November 30, 2003 and 2002 are impacted by a reduction in Net Financing Costs due to the net impact of the repurchase of $49.4 million of the 13% Notes and the convertible debt issuance, costs incurred related to the early extinguishment of debt during the first quarter of fiscal 2004 and 2003, and the litigation charge in the first quarter of fiscal 2003.

 

Corporate assets, which are not allocated, represent principally cash, capitalized debt issuance costs, and deferred income taxes. The assets that are categorized as “General Corporate and Other” have significantly increased from August 31, 2003 to November 30, 2003 due to an increase in cash and deferred debt issuance costs as a result of the convertible debt issuance in November 2003 as discussed in Note 7, “Debt.”

 

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Note 14. Contingencies and Litigation

 

The Company had outstanding letters of credit of $4.8 million and $9.2 million at November 30, 2003 and August 31, 2003, respectively. The letters of credit are for self-insured workers compensation liabilities and contingent payments related to indemnifications provided to purchasers of sold subsidiaries.

 

The Company is party to various legal proceedings that have arisen in the normal course of its business. These legal proceedings typically include product liability, environmental, labor, patent claims, commission or divestiture disputes. The Company has recorded reserves for loss contingencies based on the specific circumstances of each case. Such reserves are recorded when it is probable that a loss has been incurred and such loss can be reasonably estimated. In the opinion of management, the resolution of these contingencies will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

In the first quarter of fiscal 2003, the Company recorded a pre-tax charge of $7.3 million to recognize the impact of adverse developments in two separate litigation matters associated with businesses divested prior to the spin-off of APW in July 2000, for which the Company retained indemnification risk. Both matters were resolved and funded during fiscal year 2003. In the third quarter of fiscal 2003, the Company recorded a pre-tax benefit of $0.8 million to reverse excess reserves after the settlement of the second matter.

 

The Company has facilities in numerous geographic locations that are subject to a range of environmental laws and regulations. Environmental costs that have no future economic value are expensed. Liabilities are recorded when environmental remediation is probable and the costs are reasonably estimable. Environmental expenditures over the last three years have not been material. Management believes that such costs will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. Environmental remediation accruals of $1.7 million and $1.8 million were recorded at November 30, 2003 and August 31, 2003, respectively.

 

In the first quarter of fiscal 2003 the Internal Revenue Service began its audit of the Company’s fiscal year 2000 Federal income tax return. Company management believes that adequate reserves are maintained as of November 30, 2003 to cover a reasonable estimate of its potential exposure with respect to the income tax liabilities that may result from such audit. Nonetheless, there can be no assurance that such reserves will be sufficient upon completion of the IRS audit, and if not, there could be a material adverse impact on the Company’s financial position and results of operations. See Note 10, “Distribution of Electronics Segment”, for further discussion of certain contingencies related to the Distribution.

 

Note 15. New Accounting Pronouncements

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The Company adopted the provisions of the statement effective January 1, 2003. The adoption did not have any impact on the consolidated financial statements beyond disclosure.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” The provisions of SFAS No. 148 provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The provisions also amend the disclosure requirements of SFAS No. 123 for both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. The transitional provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002 and the disclosure provisions are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002, with early adoption encouraged. The Company adopted the disclosure requirements of SFAS No. 148 in the second quarter of fiscal 2003.

 

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 clarifies the application of Accounting Research Bulletin No. 52, “Consolidated Financial Statements,” to certain entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient

 

14


Table of Contents

equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A variable interest entity is required to be consolidated by the company that has a majority of the exposure to expected losses of the variable interest entity. FIN No. 46 is effective immediately for variable interest entities created after January 31, 2003. For variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003, FIN No. 46 applies no later than December 31, 2003. Management does not anticipate that FIN No. 46 will have a material effect on the company’s consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement also addresses the classification of financial instruments that include obligations to issue equity shares as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective as of July 1, 2003. The adoption of SFAS No. 150 did not have an impact on the company’s consolidated financial statements.

 

Note 16. Subsequent Event

 

On December 30, 2003, the Company acquired Dresco B.V. (“Dresco”). Dresco, headquartered in Wijchen, Netherlands, is a market leader selling electrical, plumbing, and other supplies to the Benelux do-it-yourself (DIY) market. In the transaction, the Company acquired 100% of the outstanding shares of Dresco for approximately $30 million. The transaction was funded with proceeds from the Company’s November 2003 Convertible Note offering.

 

Note 17. Guarantor Condensed Financial Statements

 

In connection with the Distribution, Actuant issued the 13% Notes. In November 2003, Actuant issued the Convertible Notes. All of our material domestic 100%-owned subsidiaries (the “Guarantors”) fully and unconditionally guarantee the 13% Notes and the Convertible Notes on a joint and several basis. We believe separate financial statements and other disclosures concerning each of the Guarantors would not provide additional information that is material to investors. Therefore, the Guarantors are combined in the presentation below. There are no significant restrictions on the ability of the Guarantors to make distributions to Actuant. The following tables present the results of operations, financial position and cash flows of Actuant Corporation and its subsidiaries, the Guarantor and Non-Guarantor entities, and the eliminations necessary to arrive at the information for the Company on a consolidated basis.

 

General corporate expenses have not been allocated to subsidiaries, and are all included under the Actuant Corporation heading. As a matter of course, the Company retains certain assets and liabilities at the corporate level (Actuant Corporation column in the following tables), which are not allocated to subsidiaries including, but not limited to, certain employee benefit, insurance, financing, and tax liabilities. Income tax provisions for domestic Actuant Corporation subsidiaries are typically recorded using an estimate and finalized in total with an adjustment recorded at the corporate level. Additionally, substantially all of the indebtedness of the Company has historically been, and continues to be, carried at the corporate level and is therefore included in the Actuant Corporation column in the following tables. Intercompany balances include receivables/payables incurred in the normal course of business in addition to investments and loans transacted between subsidiaries of the Company or with Actuant.

 

15


Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS

 

     Three Months Ended November 30, 2003

     Actuant
Corporation


    Guarantors

    Non –
Guarantors


   Eliminations

   Consolidated

Net sales

   $ 28,932     $ 51,648     $ 86,004    $ —      $ 166,584

Cost of products sold

     16,539       36,110       59,317      —        111,966
    


 


 

  

  

Gross profit

     12,393       15,538       26,687      —        54,618

Selling, administrative, and engineering expenses

     8,827       9,107       15,415      —        33,349

Amortization of intangible assets

     —         523       24      —        547
    


 


 

  

  

Operating profit

     3,566       5,908       11,248      —        20,722

Other expense (income):

                                    

Intercompany activity, net

     (2,329 )     848       1,481      —        —  

Net financing costs

     4,120       213       58      —        4,391

Early extinguishment of debt

     15,069       —         —        —        15,069

Other (income) expense

     230       10       213      —        453
    


 


 

  

  

(Loss) earnings before income tax (benefit) expense and minority interest

     (13,524 )     4,837       9,496      —        809

Income tax (benefit) expense

     (4,733 )     1,693       3,323      —        283

Minority interest, net of income taxes

     —         —         233      —        233
    


 


 

  

  

Net (loss) earnings

   $ (8,791 )   $ 3,144     $ 5,940    $ —      $ 293
    


 


 

  

  

     Three Months Ended November 30, 2002

     Actuant
Corporation


    Guarantors

    Non –
Guarantors


   Eliminations

   Consolidated

Net sales

   $ 18,482     $ 56,176     $ 73,200    $ —      $ 147,858

Cost of products sold

     10,180       40,176       51,600      —        101,956
    


 


 

  

  

Gross profit

     8,302       16,000       21,600      —        45,902

Selling, administrative, and engineering expenses

     6,642       8,276       12,169      —        27,087

Amortization of intangible assets

     —         605       22      —        627
    


 


 

  

  

Operating earnings

     1,660       7,119       9,409      —        18,188

Other expense (income):

                                    

Intercompany activity, net

     (571 )     (168 )     739      —        —  

Net financing costs

     5,312       246       104      —        5,662

Early extinguishment of debt

     1,974       —         —        —        1,974

Litigation charge associated with divested businesses

     7,300       —         —        —        7,300

Other (income) expense

     (286 )     (32 )     564      —        246
    


 


 

  

  

(Loss) earnings before income tax (benefit) expense and minority interest

     (12,069 )     7,073       8,002      —        3,006

Income tax (benefit) expense

     (4,837 )     2,590       3,314      —        1,067

Minority interest, net of income taxes

     —         —         83      —        83
    


 


 

  

  

Net (loss) earnings

   $ (7,232 )   $ 4,483     $ 4,605    $ —      $ 1,856
    


 


 

  

  

 

16


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS

 

     November 30, 2003

 
     Actuant
Corporation


    Guarantors

    Non –
Guarantors


    Eliminations

    Consolidated

 
ASSETS                                         

Current assets

                                        

Cash and cash equivalents

   $ 28,978     $ (504 )   $ 4,218     $ —       $ 32,692  

Accounts receivable, net

     3,451       1,832       92,693       1,072       99,048  

Inventories, net

     16,337       26,722       31,607       —         74,666  

Deferred income taxes

     8,549       —         6,785       —         15,334  

Other current assets

     1,387       714       2,415       —         4,516  
    


 


 


 


 


Total current assets

     58,702       28,764       137,718       —         226,256  

Property, plant and equipment, net

     7,379       16,841       39,335       —         63,555  

Goodwill

     21,430       95,954       4,146       —         121,530  

Other intangible assets, net

     —         18,789       3,196       —         21,985  

Other long-term assets

     11,375       51       542       —         11,968  
    


 


 


 


 


Total assets

   $ 98,886     $ 160,399     $ 184,937     $ 1,072     $ 445,294  
    


 


 


 


 


LIABILITIES AND EQUITY                                         

Current liabilities

                                        

Short-term borrowings

   $ —       $ —       $ 516     $ —       $ 516  

Current maturities of long-term debt

     3,889       —         3,807       —         7,696  

Trade accounts payable

     13,787       12,901       29,442       —         56,130  

Accrued compensation and benefits

     6,053       2,185       9,181       —         17,419  

Income taxes payable

     11,776       1,882       2,136       —         15,794  

Other current liabilities

     5,967       9,447       23,618       —         39,032  
    


 


 


 


 


Total current liabilities

     41,472       26,415       68,700       —         136,587  

Long-term debt, less current maturities

     241,436       —         4,215       —         245,651  

Deferred income taxes

     4,901       (1,030 )     5,573       —         9,444  

Pension and postretirement benefit liabilities

     14,563       —         16,055       —         30,618  

Other long-term liabilities

     27,069       327       2,347       —         29,743  

Minority interest in net equity of consolidated affiliates

     —         —         160       —         160  

Intercompany balances, net

     (54,975 )     (198,731 )     (183,023 )     436,729       —    

Total shareholders’ equity (deficit)

     (175,580 )     333,418       270,910       (435,657 )     (6,909 )
    


 


 


 


 


Total liabilities and shareholders’ equity

   $ 98,886     $ 160,399     $ 184,937     $ 1,072     $ 445,294  
    


 


 


 


 


 

17


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS

 

     August 31, 2003

 
     Actuant
Corporation


    Guarantors

    Non
Guarantors


    Eliminations

    Consolidated

 
A S S E T S                                         

Current assets

                                        

Cash and cash equivalents

   $ 158     $ 1,348     $ 3,087     $ —       $ 4,593  

Accounts receivable, net

     5,006       (1,263 )     78,082       —         81,825  

Inventories, net

     14,870       24,795       27,975       —         67,640  

Deferred income taxes

     7,833       —         6,894       —         14,727  

Prepaid expenses

     1,543       365       2,069       —         3,977  
    


 


 


 


 


Total current assets

     29,410       25,245       118,107       —         172,762  

Property, plant and equipment, net

     7,691       14,896       36,610       —         59,197  

Goodwill, net

     21,430       76,079       4,171       —         101,680  

Other intangibles, net

     —         16,263       3,258       —         19,521  

Other long-term assets

     7,942       31       520       —         8,493  
    


 


 


 


 


Total assets

   $ 66,473     $ 132,514     $ 162,666     $ —       $ 361,653  
    


 


 


 


 


L I A B I L I T I E S  A N D  E Q U I T Y                                         

Current liabilities

                                        

Short-term borrowings

     —         —         1,224     $ —       $ 1,224  

Trade accounts payable

     11,765       15,059       26,221       —         53,045  

Accrued compensation and benefits

     6,309       2,279       8,185       —         16,773  

Income taxes payable

     11,150       10,167       127       —         21,444  

Current maturities of long-term debt

     4,473       —         4,445       —         8,918  

Other current liabilities

     10,376       6,887       23,490       —         40,753  
    


 


 


 


 


Total current liabilities

     44,073       34,392       63,692       —         142,157  

Long-term debt, less current maturities

     152,698       —         6,994       —         159,692  

Deferred income taxes

     4,880       (1,027 )     4,988       —         8,841  

Pension and postretirement benefit liabilities

     14,594       —         14,836       —         29,430  

Other long-term liabilities

     26,461       393       2,188       —         29,042  

Minority interest

     —         —         4,117       —         4,117  

Intercompany balances, net

     284,655       (271,887 )     (234,480 )     221,712       —    

Total shareholders’ equity (deficit)

     (460,888 )     370,643       300,331       (221,712 )     (11,626 )
    


 


 


 


 


Total liabilities and shareholders’ equity

   $ 66,473     $ 132,514     $ 162,666     $ —       $ 361,653  
    


 


 


 


 


 

18


Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

 

     Three Months Ended November 30, 2003

 
     Actuant
Corporation


    Guarantors

    Non –
Guarantors


    Eliminations

   Consolidated

 

Operating activities

                                       

Net (loss) earnings

   $ (8,791 )   $ 3,144     $ 5,940     $ —      $ 293  

Adjustments to reconcile net (loss) earnings to cash (used by) provided by operating activities:

                                       

Depreciation and amortization

     618       1,781       1,535       —        3,934  

Amortization of debt discount and debt issuance costs

     374       —         —         —        374  

Write-off of debt discount and debt issuance costs in conjunction with early extinguishment of debt

     1,385       —         —         —        1,385  

Provision (benefit) for deferred income taxes

     18       (3 )     805       —        820  

Loss on disposal of assets

     70       —         —         —        70  

Changes in operating assets and liabilities, excluding the effects of the business acquisition, net

     (5,003 )     (12,600 )     (2,893 )     —        (20,496 )
    


 


 


 

  


Net cash (used in) provided by operating activities

     (11,329 )     (7,678 )     5,387       —        (13,620 )

Investing activities

                                       

Capital expenditures

     (487 )     (563 )     (1,835 )     —        (2,885 )

Investment in domestic affiliates

     (33,197 )     33,197       —         —        —    

Investment in foreign affiliates

     —         (4,997 )     4,997       —        —    

Business acquisitions, net of cash acquired

     —         (28,200 )     (4,997 )     —        (33,197 )
    


 


 


 

  


Net cash used in investing activities

     (33,684 )     (563 )     (1,835 )     —        (36,082 )

Financing activities

                                       

Partial redemption of 13% Notes

     (49,354 )     —         —         —        (49,354 )

Net principal payments on other debt

     (13,400 )     —         (5,186 )     —        (18,586 )

Net proceeds from convertible note offering

     145,216       —         —         —        145,216  

Proceeds from stock option exercises

     358       —         —         —        358  

Intercompany payables (receivables)

     (8,987 )     6,389       2,598       —        —    
    


 


 


 

  


Net cash provided by (used in) financing activities

     73,833       6,389       (2,588 )     —        77,634  

Effect of exchange rate changes on cash

     —         —         167       —        167  
    


 


 


 

  


Net (decrease) increase in cash and cash equivalents

     28,820       (1,852 )     1,131       —        28,099  

Cash and cash equivalents—beginning of period

     158       1,348       3,087       —        4,593  
    


 


 


 

  


Cash and cash equivalents—end of period

   $ 28,978     $ (504 )   $ 4,218     $ —      $ 32,692  
    


 


 


 

  


 

19


Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

 

     Three Months Ended November 30, 2002

 
     Actuant
Corporation


    Guarantors

    Non –
Guarantors


    Eliminations

    Consolidated

 

Operating activities

                                        

Net (loss) earnings

   $ (7,232 )   $ 4,483     $ 4,605     $ —       $ 1,856  

Adjustments to reconcile net (loss) earnings to cash provided by (used in) operating activities:

                                        

Depreciation and amortization

     495       1,909       1,285       —         3,689  

Amortization of debt discount and debt isssuance costs

     377       —         —         —         377  

Write-off of debt discount and debt issuance costs in conjunction with early extinguishment of debt

     317       —         —         —         317  

Provision (benefit) for deferred income taxes

     11       (7 )     362       —         366  

Loss on sale of assets

     —         5       20       —         25  

Changes in operating assets and liabilities, net

     4,197       (7,004 )     10,796       (10,631 )     (2,642 )
    


 


 


 


 


Net cash provided by (used in) operating activities

     (1,835 )     (614 )     17,068       (10,631 )     3,988  

Investing activities

                                        

Proceeds from sale of property, plant and equipment

     —         4       —         —         4  

Capital expenditures

     (417 )     (294 )     (2,681 )     —         (3,392 )

Business acquisitions, net of cash acquired

     —         —         (8,730 )     —         (8,730 )
    


 


 


 


 


Net cash (used in) provided by investing activities

     (417 )     (290 )     (11,411 )     —         (12,118 )

Financing activities

                                        

Partial redemption of 13% Notes

     (9,425 )     —         —         —         (9,425 )

Net principal borrowings on debt

     17,000       —         1,010       —         18,010  

Debt issuance costs

     (18 )     —         —         —         (18 )

Stock option exercises

     316       —         —         —         316  

Intercompany payables (receivables)

     (6,402 )     570       (4,799 )     10,631       —    
    


 


 


 


 


Net cash provided by (used in) financing activities

     1,471       570       (3,789 )     10,631       8,883  

Effect of exchange rate changes on cash

     —         —         3       —         3  
    


 


 


 


 


Net increase (decrease) in cash and cash equivalents

     (781 )     (334 )     1,871       —         756  

Cash and cash equivalents—beginning of period

     1,835       (228 )     1,436       —         3,043  
    


 


 


 


 


Cash and cash equivalents—end of period

   $ 1,054     $ (562 )   $ 3,307     $ —       $ 3,799  
    


 


 


 


 


 

20


Table of Contents

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” when we refer to “Actuant” or the “Company,” we mean Actuant Corporation and its subsidiaries. The Company’s significant accounting policies are disclosed in the Notes to Consolidated Financial Statements in the fiscal 2003 Annual Report on Form 10-K. The more critical of these policies include consolidation and presentation of financial statements, revenue recognition, inventory valuation, goodwill and other intangible asset accounting, and the use of estimates, which are summarized below.

 

Consolidation and Presentation: The consolidated financial statements include the accounts of Actuant Corporation and its consolidated subsidiaries. The Company consolidates companies in which it owns or controls more than fifty percent of the voting shares. The minority interest amount included on the condensed consolidated balance sheet as of November 30, 2003 represents the amount of equity attributable to minority shareholders of consolidated subsidiaries. The results of companies acquired or disposed are included in the consolidated financial statements from the date of acquisition or until the date of disposal. All significant intercompany balances, transactions, and profits have been eliminated in consolidation.

 

Revenue Recognition: Revenue is recognized when title to the products being sold transfers to the customer, which is upon shipment.

 

Inventories: Inventories are comprised of material, direct labor and manufacturing overhead, and are stated at the lower of cost or market. Inventory cost is determined using the last-in, first-out (“LIFO”) method for a portion of U.S. owned inventory (approximately 39% and 43% of total inventories at November 30, 2003 and August 31, 2003, respectively). The first-in, first-out or average cost method is used for all other inventories. If the LIFO method were not used, the inventory balance would be higher than the amount in the Condensed Consolidated Balance Sheet by approximately $5.5 million and $5.6 million at November 30, 2003 and August 31, 2003, respectively.

 

Goodwill and Other Intangible Assets: Other intangible assets, consisting primarily of purchased patents, trademarks and noncompete agreements, are amortized over periods from three to twenty-five years unless the asset is an indefinite lived intangible. Indefinite lived intangibles and goodwill are not amortized, but are subjected to annual impairment testing.

 

Use of Estimates: As required under generally accepted accounting principles, the condensed consolidated financial statements include estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses for the periods presented. They also affect the disclosure of contingencies. Actual results could differ from those estimates and assumptions. See Note 14, “Contingencies and Litigation,” in Notes to Condensed Consolidated Financial Statements.

 

Results of Operations for the Three Months Ended November 30, 2003 and 2002

 

On September 3, 2003, the Company acquired certain assets and assumed certain liabilities of Kwikee Products Company, Inc. (“Kwikee” or the “Kwikee Acquisition”) which impacts the comparability of the operating results for the three months ended November 30, 2003 to the three months ended November 30, 2002. See Note 2, “Acquisitions,” in Notes to Condensed Consolidated Financial Statements.

 

Net earnings for the three months ended November 30, 2003 were $0.3 million, or $0.01 per diluted share, compared with net earnings of $1.9 million, or $0.08 per diluted share, for the three months ended November 30, 2002. During the three months ended November 30, 2003 and 2002 the Company recorded pre-tax charges of $15.1 million and $2.0 million, respectively, related to the early extinguishment of debt. During the first quarter of fiscal 2003, the Company recorded a pre-tax charge of $7.3 million related to litigation matters associated with businesses divested before the spin-off.

 

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Table of Contents

Net Sales

 

The following table summarizes net sales for the three months ended November 30, 2003 and 2002:

 

Net Sales by Segment

(in thousands)

   Three Months Ended
November 30,


      
   2003

   2002

   Change

 

Tools & Supplies

   $ 96,335    $ 92,014    5 %

Engineered Solutions

     70,249      55,844    26 %
    

  

      

Total net sales

   $ 166,584    $ 147,858    13 %
    

  

      

 

Total net sales increased by $18.7 million, or 13%, from $147.9 million for the three months ended November 30, 2002 to $166.6 million for the three months ended November 30, 2003. Currency translation rates positively impacted sales in the first quarter of fiscal 2004 by $11.4 million. Excluding the one-time impact of the Kwikee Acquisition and foreign currency rate changes on translated results, sales for the three months ended November 30, 2003 increased 1% as compared to the three months ended November 30, 2002.

 

Tools & Supplies

 

Net sales for the Tools & Supplies segment increased by $4.3 million, or 5%, from $92.0 million for the three months ended November 30, 2002 to $96.3 million for the three months ended November 30, 2003. Excluding the impact of foreign currency rate changes on translated results, which had a positive impact of $7.4 million, sales decreased 3% in the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003. This decrease was due to the positive impact in the first quarter of fiscal 2003 of Kopp’s electrical line fills at certain European home centers and strong fiscal 2003 Enerpac sales related to the Millau viaduct project, as well as weak economic conditions.

 

Engineered Solutions

 

Engineered Solutions net sales increased $14.4 million, or 26%, from $55.8 million for the three months ended November 30, 2002 to $70.2 million for the three months ended November 30, 2003. Currency translation rates positively impacted sales in the first quarter of fiscal 2004 by $4.0 million. Excluding the one-time impact of the Kwikee Acquisition and foreign currency rate changes on translated results, sales increased 6% in the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003, due to growth in automotive convertible top shipments attributable to new model launches.

 

Gross Profit

 

The following table summarizes gross profit and gross profit margins for the three months ended November 30, 2003 and 2002:

 

Gross Profit by Segment

(in thousands)

   Three Months Ended
November 30,


       
   2003

    2002

    Change

 

Tools & Supplies

   $ 37,665     $ 33,274     13 %

Engineered Solutions

     16,953       12,628     34 %
    


 


     

Total gross profit

   $ 54,618     $ 45,902     19 %
    


 


     
Gross Profit Margins by Segment                   

Tools & Supplies

     39.1 %     36.2 %      

Engineered Solutions

     24.1 %     22.6 %      

Total gross profit margin

     32.8 %     31.0 %      

 

Total gross profit increased by $8.7 million, or 19%, from $45.9 million for the three months ended November 30, 2002 to $54.6 million for the three months ended November 30, 2003. Excluding foreign currency rate changes on translated results, which had a positive impact of $3.3 million, total gross profit in the first quarter of fiscal 2004 increased 11% from the first quarter of fiscal 2003. Additionally, total gross profit margin increased from 31.0% for the three months ended November 30, 2002 to 32.8% for the three months ended November 30, 2003. These increases are the result of the one-time impact of the Kwikee Acquisition and the Company’s continued success in driving initiatives to improve manufacturing efficiencies and achieve cost reductions.

 

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Table of Contents

Tools & Supplies

 

Gross profit for the Tools & Supplies segment increased by $4.4 million or 13%, from $33.3 million for the three months ended November 30, 2002 to $37.7 million for the three months ended November 30, 2003. Excluding the impact of foreign currency rate changes on translated results, which had a positive impact of $2.5 million, gross profit increased 5% in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. Total gross profit margin increased from 36.2% for the three months ended November 30, 2002 to 39.1% for the three months ended November 30, 2003. Since the acquisition of Kopp at the beginning of the first quarter of fiscal 2003, gross profit expansion has been achieved as a result of reducing manufacturing capacity and overhead, implementation of lean manufacturing techniques to reduce costs, simplifying the business, shortening cycle time and reducing overall inventory levels. Gardner Bender and Enerpac also experienced gross profit growth as a result of successful efforts in cost reductions.

 

Engineered Solutions

 

Engineered Solutions gross profit increased $4.3 million, or 34%, from $12.6 million for the three months ended November 30, 2002 to $16.9 million for the three months ended November 30, 2003. Total gross profit margin increased from 22.6% for the three months ended November 30, 2002 to 24.1% for the three months ended November 30, 2003. Currency translation rates positively impacted gross profit in the first quarter of fiscal 2004 by $0.9 million. Excluding the impact of foreign currency rate changes on translated results, gross profit in the first quarter of fiscal 2004 increased 26% as compared to the first quarter of fiscal 2003 due to the acquisition of Kwikee, cost reductions, and manufacturing process improvements in the recreational vehicle (“RV”) business, partially offset by initial production inefficiencies related to new automotive convertible top platforms.

 

Selling, Administrative, and Engineering Expense

 

The following table summarizes selling, administrative, and engineering expenses for the three months ended November 30, 2003 and 2002:

 

Selling, Administrative, and Engineering (“SAE”) Expense by Segment
(in thousands)
   Three Months Ended
November 30,


      
   2003

   2002

   Change

 

Tools & Supplies

   $ 22,996    $ 20,031    15 %

Engineered Solutions

     7,939      5,810    37 %

General Corporate

     2,414      1,246    94 %
    

  

      

Total SAE expense

   $ 33,349    $ 27,087    23 %
    

  

      

 

Total SAE increased by $6.2 million, or 23%, from $27.1 million for the three months ended November 30, 2002 to $33.3 million for the three months ended November 30, 2003. Currency translation rates negatively impacted SAE in the first quarter of fiscal 2004 by $1.9 million. Excluding the impact of foreign currency rate changes on translated results, SAE for the three months ended November 30, 2003 increased 15% as compared to the three months ended November 30, 2002 due to the Kwikee Acquisition, increased corporate spending, increased segment spending for downsizing programs, increased insurance expense, and sales initiatives.

 

Tools & Supplies

 

SAE for the Tools & Supplies segment increased by $3.0 million or 15%, from $20.0 million for the three months ended November 30, 2002 to $23.0 million for the three months ended November 30, 2003. Excluding the impact of foreign currency rate changes on translated results, which had a negative impact of $1.5 million, SAE increased 7% in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003 due to severance, increased insurance and sales costs.

 

Engineered Solutions

 

Engineered Solutions SAE increased $2.1 million, or 37%, from $5.8 million for the three months ended November 30, 2002 to $7.9 million for the three months ended November 30, 2003. Currency translation rates

 

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Table of Contents

negatively impacted SAE in the quarter by $0.4 million. The remaining increase in SAE was due to the one-time impact of the Kwikee Acquisition and increased spending to support automotive business growth.

 

General Corporate

 

General Corporate SAE expenses increased $1.2 million, or 94%, from $1.2 million for the three months ended November 30, 2002 to $2.4 million for the three months ended November 30, 2003. These increases were primarily due to additional headcount and consulting fees related to Sarbanes-Oxley Section 404 compliance, increased insurance and personnel expense, and increased spending on tax planning services and acquisition advice.

 

Amortization Expense

 

Amortization expense for the three months ended November 30, 2003 and 2002 was $0.5 million and $0.6 million, respectively.

 

Net Financing Costs

 

Net financing costs for the three months ended November 30, 2003 decreased $1.3 million compared to the three months ended November 30, 2002. This net reduction was the result of repurchasing $49.4 million of the 13% Notes and lower market interest rates during the first quarter of fiscal 2004. These actions to reduce net financing costs during the three months ended November 30, 2003 were partially offset by increased debt levels as a result of the 2% Convertible Notes issued in November 2003. See “Liquidity and Capital Resources” below for further information.

 

Charge for Early Extinguishment of Debt

 

During the first quarter of fiscal 2004, the Company retired $49.4 million (gross principal amount) of its 13% Notes acquired through open market and negotiated purchases. The Company recorded a pre-tax charge of $15.1 million related to the redemption of the 13% Notes. The pre-tax charge consisted of the $13.7 million bond redemption premium payments and a $1.4 million non-cash write-off of the associated debt discount and debt issuance costs.

 

During the first quarter of fiscal 2003, the Company retired $9.4 million (gross principal amount) of its 13% Notes acquired through open market and negotiated purchases. The Company recorded a pre-tax charge of $2.0 million related to the redemption of the 13% Notes. The pre-tax charge consisted of the $1.7 million bond redemption premium payment and a $0.3 million non-cash write-off of the associated debt discount and debt issuance costs.

 

Litigation Charge Associated with Divested Businesses

 

In the first quarter of fiscal 2003, the Company recorded a pre-tax charge of $7.3 million to recognize the impact of adverse developments in two separate litigation matters associated with businesses divested prior to the spin-off of APW in July 2000, for which the Company retained indemnification risk. Both matters were resolved and funded during fiscal year 2003. In the third quarter of fiscal 2003, the Company recorded a pre-tax benefit of $0.8 million to reverse excess reserves after the settlement of the second matter.

 

Other (Income) Expense

 

Other (income) expense for the three months ended November 30, 2003 and 2002 is comprised of the following (in thousands):

 

     Three Months
Ended
November 30,


     2003

    2002

Net foreign currency transaction loss

   $ 578     $ 169

Other, net

     (125 )     77
    


 

Other (income) expense

   $ 453     $ 246
    


 

 

Restructuring Reserves

 

The Company committed to integration plans to restructure portions of Kopp’s operations during the first quarter of fiscal 2003. These plans are designed to reduce administrative and operational costs and resulted in an $11.7 million

 

24


Table of Contents

restructuring reserve being recorded in the purchase accounting process. Of the reserve, $2.6 million relates to the closure of Kopp’s manufacturing facility in Ingolstadt, Germany, with the balance primarily representing other employee severance costs to be incurred in connection with the transfer of certain production to lower cost locations and general reductions in the workforce. The restructuring reserve was originally estimated to be $16.7 million, however, in the fourth quarter of fiscal 2003 the Company revised this estimate due to a combination of higher attrition rates and lower severance costs. This adjustment resulted in a reduction in the recorded value of the fixed assets as required by generally accepted accounting principles. As a result of these integration plans, the Company expects to reduce a sizable number of personnel in the first 24 months of Kopp ownership. As of November 30, 2003 the Ingolstadt facility had been closed and in total, over 100 employees had been terminated.

 

A rollforward of the restructuring reserve follows:

 

     August 31,
2003
Balance


   Cash
Payments


    Currency
Impact


   November 30,
2003
Balance


Severance

   $ 8,407    $ (616 )   $ 742    $ 8,533

Exit costs

     389      (203 )     28      214
    

  


 

  

Total reserve

   $ 8,796    $ (819 )   $ 770    $ 8,747
    

  


 

  

 

The Company expects that cash payments related to the Kopp restructuring reserve will increase in the second and third quarter of fiscal 2004 relative to the first quarter of fiscal 2004.

 

Liquidity and Capital Resources

 

Cash and cash equivalents totaled $32.7 million and $4.6 million at November 30, 2003 and August 31, 2003, respectively. The increase in cash at November 30, 2003 is a result of the issuance of $150 million of 2% Convertible Notes.

 

Net cash used by operating activities was $13.6 million for the three months ended November 30, 2003, as compared to net cash provided by operating activities of $4.0 million for the three months ended November 30, 2002. Operating cash flows for the three month period ended November 30, 2003 were lower than the three month period ended November 30, 2002 primarily due to $12.0 million in incremental premium payments on 13% senior subordinated note repurchases and increased working capital requirements as a result of growth in the automotive convertible top business. Additionally, an increase in cash income tax payments during the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003 was partially offset by decreased cash interest payments.

 

Net cash used in investing activities totaled $36.1 million and $12.1 million for the three months ended November 30, 2003 and 2002, respectively. During the three months ended November 30, 2003 $28.2 million of cash was used for the acquisition of Kwikee, $5.0 million of cash was used to fund the purchase of the Kopp minority interest and pay the Kopp deferred purchase price, and $2.9 million of cash was used for capital expenditures. During the three months ended November 30, 2002, $8.7 million was used to fund the Kopp Acquisition and $3.4 million of cash was used for capital expenditures.

 

Net cash provided by financing activities totaled $77.6 million for the three months ended November 30, 2003. In November 2003, the Company sold an aggregate principal amount of $150.0 million of 2% Convertible Notes (the “Convertible Notes”) due November 15, 2023. Net proceeds from the issuance of the Convertible Notes totaled $145.2 million. Additionally, during the first quarter of fiscal 2004 the Company redeemed $49.4 million of 13% Notes through open market purchases and made optional prepayments of $13.0 million on the term loan under the senior secured credit agreement and $4.3 million on the Euro denominated term loans. Net cash provided by financing activities was $8.9 million for the three months ended November 30, 2002. This consisted of $18.0 million of net principal borrowings on debt, offset by $9.4 million of payments of the 13% Notes.

 

Debt

 

In November 2003, the Company sold $150.0 million aggregate principal amount of Convertible Senior Subordinated Debentures (“Convertible Notes”) due November 15, 2023. The Convertible Notes bear interest at a rate of 2.00% annually which is payable on November 15 and May 15 of each year. Beginning with the six-month interest period commencing November 15, 2010, holders of the Convertible Notes will receive contingent interest if the trading price of the Convertible Notes equals or exceeds 120% of the principal amount of the Convertible Notes

 

25


Table of Contents

over a specified trading period. If payable, the contingent interest shall equal 0.25% of the average trading price of the Convertible Notes during the five days immediately preceding the applicable six-month interest period per $1,000 principal amount of Convertible Notes.

 

The Company has the right to repurchase for cash all or part of the Convertible Notes on or after November 20, 2010. The holders of the Convertible Notes have the right to require the Company to purchase all or a portion of the Convertible Notes on November 15, 2010, November 15, 2013 and November 15, 2018 or upon certain corporate events. The purchase price for these repurchases shall equal 100% of the principal amount of the Convertible Notes purchased plus accrued and unpaid interest.

 

The Convertible Notes are jointly and severally guaranteed by certain of the Company’s domestic subsidiaries on a senior subordinated basis. These guarantees will be released when the Company has no 13% Notes outstanding; provided that if the Company issues other senior subordinated debt that is guaranteed by one or more of the Company’s subsidiaries, then such subsidiaries will be required to guarantee the Convertible Notes on an unsecured senior subordinated basis.

 

The Convertible Notes are convertible into shares of the Company’s common stock at a conversion rate of 25.0563 shares per $1,000 principal amount of Convertible Notes, which equals a conversion price of approximately $39.91 per share (subject to adjustment) only under the following conditions: (i) during any fiscal quarter commencing after November 30, 2003, if the closing sale price of the Company’s common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding fiscal quarter, (ii) during any period in which the Company’s senior subordinated debt credit rating falls below certain thresholds, (iii) if a Convertible Note has been called for redemption and has not yet been redeemed, the holder may convert that Convertible Notes prior to the close of business on the last business day prior to the redemption date, or (iv) if specified corporate transactions occur. The Company has agreed to file a shelf registration statement with the Securities and Exchange Commission covering the resale of the Convertible Notes and the underlying common stock.

 

Total debt at November 30, 2003 was $253.9 million reflecting the recent issuance of the Convertible Notes, and the use of $33.2 million of cash to fund both the Kwikee acquisition and Kopp minority interest acquisition, $63.9 million of funding for open market repurchases of the Company’s 13% Notes, as well as repayments of senior credit agreement borrowings. Net debt (total debt less approximately $32.7 million of cash) was $221 million, compared to $165 million at the beginning of the quarter. The increase was attributable to acquisitions of $33 million, $14 million in premiums paid to repurchase 13% Notes, seasonal working capital growth, semi-annual interest payments and income tax payments. The Company had no borrowings outstanding under its $100 million revolver at November 30, 2003.

 

At November 30, 2003, the Company was a party to one interest rate swap contract that had a notional amount of $25 million and converted fixed rate debt of 13% to variable rate debt based on the six-month LIBOR plus 9.63%. At November 30, 2003 the six-month LIBOR was 1.26%. This swap contract matures on May 1, 2009, which corresponds to the maturity date of the debt. No net gain or loss has been recorded in earnings related to changes in the fair value of this contract since the contract is considered to be “effective” as the terms of the contract exactly match the terms of the underlying debt. Instead, the fair value of the contract is recorded as a $1.3 million long-term liability at November 30, 2003 with the offset recorded as a fair value adjustment to the 13% Notes. See Note 10, “Derivatives,” in the accompanying Condensed Consolidated Financial Statements for further information.

 

Commitments and Contingencies

 

The Company leases certain facilities, computers, equipment, and vehicles under various operating lease agreements, generally over periods from one to twenty years. Under most arrangements, the Company pays the property taxes, insurance, maintenance and expenses related to the leased property. Many of the leases include provisions that enable the Company to renew the lease based upon fair value rental rates on the date of expiration of the initial lease.

 

As discussed in Note 9, “Distribution of Electronics Segment” in the accompanying Condensed Consolidated Financial Statements, the Company is contingently liable for certain lease agreements held by APW or its successors. If APW or its successors do not fulfill their obligations under the leases, the Company could be liable for such leases. The discounted present value of future minimum lease payments for such leases totals, assuming no offset for sub-leasing, approximately $17.5 million at November 30, 2003. The future undiscounted minimum lease payments for these leases are as follows: $4.3 million in calendar 2004; $3.1 million in calendar 2005; $2.4 million in calendar 2006; $2.4 million in calendar 2007; $2.5 million in calendar 2008; and $9.1 million thereafter. A future breach of

 

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the lease agreements by APW or its successors could potentially have a material adverse effect on the Company’s results of operations and financial position.

 

As more fully discussed in Note 3, “Accounts Receivable Financing,” in the accompanying Condensed Consolidated Financial Statements, the Company is party to an accounts receivable securitization arrangement. Trade receivables sold and being serviced by the Company were $26.0 million and $23.9 million at November 30, 2003 and August 31, 2003, respectively. If the Company were to discontinue this securitization program, at November 30, 2003 it would have been required to borrow approximately $26.0 million to finance the working capital increase. Total capacity under the program is approximately $35 million.

 

Pursuant to an agreement with the Company’s former subsidiary, APW, the Company will be required to pay an estimated $18 to $19 million to APW or other third parties as Distribution related contingencies are resolved. This amount is accrued in “Other long-term liabilities” in the Condensed Consolidated Balance Sheets. The Company estimates that these payments will be made sometime in fiscal 2005, and will be funded by availability under the revolving credit facilities and funds generated from operations. In addition, cash outflows will be required over the next twelve months to fund the Kopp restructuring cash flow requirements. See Note 2, “Acquisitions,” in the accompanying notes to condensed consolidated financial statements for further information about Kopp.

 

In September 2002, the Company was informed that its Federal income tax return for fiscal year 2000 would be subject to audit by the Internal Revenue Service (“IRS”). Company management believes that adequate reserves are maintained as of November 30, 2003 to cover a reasonable estimate of its potential exposure with respect to the income tax liabilities that may result from such audit. Nonetheless, there can be no assurance that such reserves will be sufficient upon completion of the IRS audit, and if not, there could be a material adverse impact on the Company’s financial position and results of operations.

 

The Company had outstanding letters of credit of $4.8 million and $9.2 million at November 30, 2003 and August 31, 2003, respectively. The letters of credit are for self-insured workers compensation liabilities and contingent payments related to indemnifications provided to purchasers of sold subsidiaries.

 

Dividends have not been declared or paid during fiscal 2004, nor does the Company expect to pay dividends in the foreseeable future. Cash flow will instead be retained for working capital needs, acquisitions, and to reduce outstanding debt. At November 30, 2003, the Company had approximately $98 million of availability under its revolver. The Company’s senior credit agreement contains customary limits and restrictions concerning investments, sales of assets, liens on assets, interest and fixed cost coverage ratios, maximum leverage, capital expenditures, acquisitions, excess cash flow, dividends, and other restricted payments. At November 30, 2003 the Company was in compliance with all debt covenants. The Company believes that availability under its credit facilities, plus funds generated from operations, will be adequate to meet operating, debt service and capital expenditure requirements for at least the next twelve months.

 

Timing of Commitments

 

The timing of payments due under the Company’s commitments is as follows:

 

Contractual Obligations(a)

Years Ended August 31,


   Long-term Debt
Obligations


   Operating Lease
Obligations


   Total

2004

   $ 5,832    $ 8,400    $ 14,232

2005

     11,582      7,661      19,243

2006

     25,410      5,732      31,142

2007

     132      3,724      3,856

2008

     66      5,086      5,152

Thereafter

     210,779      6,892      217,671
    

  

  

Total

   $ 253,801    $ 37,495    $ 291,296
    

  

  

 

(a) The above table excludes the $18 - $19 million of payments due to APW or other third parties as Distribution related contingencies are resolved since the exact timing of these payments is not known. The Company estimates that such payments will be made in fiscal 2005. The table also excludes the impact of the sale-leaseback of the Kopp land and building that occurred in December 2003. Under the terms of the sale-leaseback transaction, the Company will make quarterly lease payments of €0.3 million for a period of 17 years, commencing in January 2004.

 

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New Accounting Pronouncements

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The Company adopted the provisions of the statement effective January 1, 2003. The adoption did not have any impact on the consolidated financial statements beyond disclosure.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” The provisions of SFAS No. 148 provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The provisions also amend the disclosure requirements of SFAS No. 123 for both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. The transitional provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002 and the disclosure provisions are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002, with early adoption encouraged. The Company adopted the disclosure requirements of SFAS No. 148 in the second quarter of fiscal 2003.

 

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 clarifies the application of Accounting Research Bulletin No. 52, “Consolidated Financial Statements,” to certain entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A variable interest entity is required to be consolidated by the company that has a majority of the exposure to expected losses of the variable interest entity. FIN No. 46 is effective immediately for variable interest entities created after January 31, 2003. For variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003, FIN No. 46 applies no later than December 31, 2003. Management does not anticipate that FIN No. 46 will have a material effect on the company’s consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement also addresses the classification of financial instruments that include obligations to issue equity shares as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective as of July 1, 2003. The adoption of SFAS No. 150 did not have an impact on the company’s consolidated financial statements.

 

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Item 3 – Quantitative and Qualitative Disclosures about Market Risk

 

The Company is exposed to market risk from changes in foreign currency exchange rates and interest rates and, to a much lesser extent, commodities. To reduce such risks, the Company selectively uses financial instruments and other proactive management techniques. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which strictly prohibit the use of financial instruments for trading or speculative purposes.

 

A discussion of the Company’s accounting policies for derivative financial instruments is included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2003 within Note 1 - “Summary of Significant Accounting Policies” in Notes to Consolidated Financial Statements.

 

Currency Risk - The Company has exposure to foreign currency exchange fluctuations. Approximately 51% and 52% of its revenues for the year ended August 31, 2003 and three months ended November 30, 2003, respectively, were denominated in currencies other than the U.S. dollar. Of those non-U.S. dollar denominated amounts, approximately 78% and 80%, respectively, were denominated in euro, with the majority of the remainder denominated in various Asian and other European currencies. The Company does not hedge the translation exposure represented by the net assets of its foreign subsidiaries. Foreign currency translation adjustments are recorded as a component of shareholders’ equity.

 

The Company’s identifiable foreign currency exchange exposure results primarily from the anticipated purchase of product from affiliates and third party suppliers and from the repayment of intercompany loans between subsidiaries denominated in foreign currencies. The Company periodically identifies areas where it does not have naturally occurring offsetting positions and then may purchase hedging instruments to protect against anticipated exposures. There are no such hedging instruments in place as of the date of this filing. The Company’s financial position is not materially sensitive to fluctuations in exchange rates as any gains or losses on foreign currency exposures are generally offset by gains and losses on underlying payables, receivables and net investments in foreign subsidiaries.

 

Interest Rate Risk - The Company has earnings exposure related to interest rate changes on its outstanding floating rate debt instruments that are indexed to the LIBOR and EURIBOR interest rates. The Company has periodically utilized interest rate swap agreements to manage overall financing costs and interest rate risk. At November 30, 2003, the Company was party to one interest rate swap agreement. This swap contract converts $25 million of fixed rate senior subordinated debt to a variable rate. At November 30, 2003, the aggregate fair value of this contract was approximately $(1.3) million. A ten percent increase or decrease in the applicable interest rates on unhedged variable rate debt would result in a change in pre-tax interest expense of approximately $0.1 million on an annual basis.

 

The Company’s senior secured credit agreement stipulates that no more than 50% of total debt shall be effectively subject to a floating interest rate at the time an interest rate swap agreement is entered into. The Company is in compliance with this requirement.

 

Item 4 – Controls and Procedures

 

The Company’s chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Company’s internal control over financial reporting during the quarter ended November 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 2 – Changes in Securities and Use of Proceeds

 

(a) None

 

(b) None

 

(c) See the second, third, fourth, fifth and sixth paragraphs of Note 7, “Debt,” on page 9, which is incorporated herein by reference.

 

(d) None

 

Item 6 – Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

See “Index to Exhibits” on page 32, which is incorporated herein by reference.

 

(b) Reports on Form 8-K

 

The following reports on Form 8-K were filed during the first quarter of fiscal 2004:

 

Date of Report

  

Description


October 1, 2003

   Announcement of the Company’s results for the fourth quarter of fiscal 2003

November 4, 2003

   Announcement of the Company’s proposed offering of $100 million convertible senior subordinated debentures

November 5, 2003

   Announcement of the Company’s pricing of $125 million convertible senior subordinated debentures

November 10, 2003

   Announcement of the Company’s sale of an additional $25 million of its 2% convertible senior subordinated debentures pursuant to exercise of over allotment option granted to initial purchasers

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

       

ACTUANT CORPORATION

(Registrant)

Date: January 14, 2004       By:   /s/    ANDREW G. LAMPEREUR        
         
               

Andrew G. Lampereur

Vice President and Chief Financial Officer

 

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ACTUANT CORPORATION

(the “Registrant”)

(Commission File No. 1-11288)

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED NOVEMBER 30, 2003

INDEX TO EXHIBITS

 

Exhibit

  

Description


  

Incorporated Herein By Reference To


   Filed
Herewith


    4.1

   Registration Rights Agreement, dated November 10, 2003, relating to $150,000,000 Actuant Corporation 2% Convertible Senior Subordinated Notes Due 2023         X

    4.2

   Indenture, dated as of November 10, 2003, among Actuant Corporation as issuer and the Subsidiary Guarantors and U.S. Bank National Association relating to $150,000,000 Actuant Corporation 2% Convertible Senior Subordinated Notes Due 2023         X

   4.3

   First Supplemental Indenture, dated as of January 14, 2004, to the Indenture dated August 1, 2000 relating to $200,000,000 Actuant Corporation 13% Senior Subordinated Notes Due 2009         X

  31.1

   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002         X

  31.2

   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002         X

  32.1

   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         X

  32.2

   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         X

 

32