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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, 2004

 

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, 2004 was 26,929,561.

 



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

   17

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

   22

Item 4 - Controls and Procedures

   23

Part II - Other Information

    

Item 6 - Exhibits

   24

 

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, commodity risk, the impact of geopolitical activity on the economy, the length of economic downturns in the Company’s markets, the resolution of contingent liabilities and other litigation matters, the Company’s ability to access capital markets, 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,” “we,” “us,” “our,” and the “Company” refer to Actuant Corporation and its subsidiaries.

 

We provide free-of-charge access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto, through our 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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Table of Contents

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,


     2004

    2003

Net sales

   $ 199,677     $ 166,584

Cost of products sold

     135,850       111,966
    


 

Gross profit

     63,827       54,618

Selling, administrative and engineering expenses

     35,957       33,349

Amortization of intangible assets

     591       547
    


 

Operating profit

     27,279       20,722

Financing costs, net

     1,938       4,391

Charge for early extinguishment of debt

     —         15,069

Other (income) expense, net

     (1,219 )     453
    


 

Earnings before income tax expense and minority interest

     26,560       809

Income tax expense

     9,110       283

Minority interest, net of income taxes

     (56 )     233
    


 

Net earnings

   $ 17,506     $ 293
    


 

Earnings per share:

              

Basic

   $ 0.73     $ 0.01

Diluted

   $ 0.71     $ 0.01

Weighted average common shares outstanding:

              

Basic

     23,877       23,539

Diluted

     24,604       24,727

 

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,

2004


    August 31,
2004


 
     (Unaudited)        
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 7,088     $ 6,033  

Accounts receivable, net

     112,895       90,433  

Inventories, net

     99,541       87,074  

Deferred income taxes

     11,681       11,126  

Other current assets

     4,812       7,648  
    


 


Total current assets

     236,017       202,314  

Gross property, plant and equipment

     156,887       148,511  

Less: accumulated depreciation

     (106,512 )     (100,538 )
    


 


Property, plant and equipment, net

     50,375       47,972  

Goodwill

     155,415       145,387  

Other intangible assets, net

     22,565       22,127  

Other long-term assets

     6,373       6,336  
    


 


Total Assets

   $ 470,745     $ 424,136  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY                 

Current liabilities:

                

Short-term borrowings

   $ 803     $ 960  

Trade accounts payable

     68,247       64,165  

Accrued compensation and benefits

     19,952       21,401  

Income taxes payable

     11,890       9,608  

Current maturities of long-term debt

     4,135       3,863  

Other current liabilities

     39,866       34,627  
    


 


Total current liabilities

     144,893       134,624  

Long-term debt, less current maturities

     207,174       189,068  

Deferred income taxes

     9,706       8,376  

Pension and postretirement benefit liabilities

     30,486       28,862  

Other long-term liabilities

     13,915       31,218  

Minority interest in net equity of consolidated affiliates

     177       211  

Shareholders’ Equity:

                

Class A common stock, $0.20 par value, authorized 42,000,000 shares, issued and outstanding 24,052,314 and 23,762,494 shares, respectively

     4,810       4,753  

Additional paid-in capital

     (512,612 )     (518,321 )

Retained earnings

     580,451       562,945  

Stock held in trust

     (1,140 )     (806 )

Deferred compensation liability

     1,140       806  

Accumulated other comprehensive loss

     (8,255 )     (17,600 )
    


 


Total Shareholders’ Equity

     64,394       31,777  
    


 


Total Liabilities and Shareholders’ Equity

   $ 470,745     $ 424,136  
    


 


 

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,


 
     2004

    2003

 

Operating Activities

                

Net earnings

   $ 17,506     $ 293  

Adjustments to reconcile net earnings to net cash used in operating activities:

                

Depreciation and amortization

     4,098       3,934  

Amortization of debt discount and debt issuance costs

     245       374  

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

     —         1,385  

Provision for deferred income taxes

     549       820  

(Gain) loss on disposal of assets

     (179 )     70  

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

                

Accounts receivable

     (11,034 )     (8,355 )

Inventories

     (5,327 )     (2,413 )

Prepaid expenses and other assets

     3,785       (326 )

Trade accounts payable

     (1,940 )     (136 )

Income taxes payable.

     5,210       (5,835 )

Reimbursement of tax refund to former subsidiary

     (15,837 )     —    

Other accrued liabilities

     (3,395 )     (3,431 )
    


 


Net cash used in operating activities

     (6,319 )     (13,620 )

Investing Activities

                

Proceeds from sale of property, plant and equipment

     357       —    

Capital expenditures

     (3,183 )     (2,885 )

Cash paid for business acquisitions, net of cash acquired

     (8,952 )     (33,197 )
    


 


Net cash used in investing activities

     (11,778 )     (36,082 )

Financing Activities

                

Partial redemption of 13% senior subordinated notes

     —         (49,354 )

Net proceeds from convertible senior subordinated note offering

     —         145,216  

Principal payments on term loans

     (91 )     (17,401 )

Net borrowings (repayments) on revolving credit facilities and short-term borrowings

     17,625       (1,185 )

Stock option exercises and other

     1,233       358  
    


 


Net cash provided by financing activities

     18,767       77,634  

Effect of exchange rate changes on cash

     385       167  
    


 


Net increase in cash and cash equivalents

     1,055       28,099  

Cash and cash equivalents – beginning of period

     6,033       4,593  
    


 


Cash and cash equivalents - end of period

   $ 7,088     $ 32,692  
    


 


 

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, 2004 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 2004 Annual Report on Form 10-K. For additional information, refer to the consolidated financial statements and related footnotes in the Company’s fiscal 2004 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 otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three months ended November 30, 2004 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2005.

 

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

 

Note 2. Acquisitions

 

Fiscal 2005

 

On September 16, 2004, the Company acquired 100% of the outstanding capital stock of Yvel S.A. (“Yvel” or the “Yvel Acquisition”) for $10.0 million of cash (net of $1.6 million of cash acquired). Included in the $10.0 million total cash purchase price is a closing working capital payment of $1.0 million made to the sellers on December 3, 2004 which was recorded in “Other current liabilities” at November 30, 2004 in the accompanying Condensed Consolidated Balance Sheet. There are no additional payments due to the sellers. Yvel, headquartered in Paris, France, is a leading provider of hydraulic latches to the European cab-over-engine heavy-duty truck market and is included in our Engineered Solutions segment. This transaction was funded through borrowings under the Company’s senior credit agreement. Yvel was an attractive acquisition candidate because of it’s market leadership and the synergistic opportunities with our Power-Packer truck business, as Yvel latches are often used in combination with Power-Packer cab-tilt systems to provide complete engine access solutions. 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 purchase price allocation resulted in goodwill of $7.1 million and intangible assets of $0.6 million, consisting of trademarks, proprietary technology, and customer relationships.

 

See Note 17, “Subsequent Events,” for a discussion of acquisitions completed subsequent to November 30, 2004.

 

Fiscal 2004

 

On September 3, 2003, the Company acquired certain assets and assumed certain liabilities of Kwikee Products Company, Inc. (“Kwikee” or the “Kwikee Acquisition”) for $28.7 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 and is included in our Engineered Solutions segment. During the first quarter of fiscal 2005 the Company settled the final payment obligation due to the sellers for $0.5 million, which resulted in an adjustment to recorded goodwill. This transaction was funded through borrowings under the Company’s senior secured credit agreement. Kwikee was an attractive acquisition candidate because it holds leading market positions in retractable step systems and storage tray systems and increases the Company’s content per vehicle in the important motorhome 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 purchase price allocation resulted in goodwill of $20.1 million and intangible assets of $3.1 million, consisting of patents, trademarks, and customer relationships.

 

On December 30, 2003, the Company acquired 100% of the outstanding capital stock of Dresco B.V. (“Dresco” or the “Dresco Acquisition”) for $31.9 million of cash (net of $0.8 million of cash acquired). Dresco,

 

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headquartered in Wijchen, Netherlands, is a leading provider of electrical, plumbing and other supplies to the Benelux (Belgium, the Netherlands, and Luxembourg) home center market and is included in our Tools & Supplies segment. The purchase agreement requires additional payments to the sellers aggregating no less than $2.3 million and no more than $13.3 million, contingent on the Company achieving targeted net sales in the calendar years ended December 31, 2004 through 2006. The aggregate minimum payment of $2.3 million has been recorded as a liability in the preliminary purchase price allocation. Dresco was an attractive acquisition candidate because of its market leadership, the synergistic opportunities with Kopp (our German-based electrical home center supplier), and its logistics competencies. Dresco’s Benelux customer base provides the Company with geographic expansion opportunities for markets beyond those covered by Kopp in Germany, Austria, and Eastern Europe, and it’s non-electrical products, such as plumbing, expand the Tools & Supplies business product offering. A portion of the proceeds from the Company’s 2% Convertible Senior Subordinated Debentures offering in November 2003 was used to fund the transaction. 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 purchase price allocation resulted in goodwill of $24.4 million and intangible assets of $2.5 million, consisting of trademarks, a non-compete agreement, and customer relationships.

 

The following unaudited pro forma results of operations of the Company for the three months ended November 30, 2004 and 2003, respectively, give effect to the Yvel and Dresco acquisitions as though the transactions had occurred on September 1, 2003.

 

     Three Months Ended
November 30,


     2004

   2003

Net sales:

             

As reported

   $ 199,677    $ 166,584

Pro forma

   $ 200,609    $ 180,255

Operating profit:

             

As reported

   $ 27,279    $ 20,722

Pro forma

   $ 27,376    $ 22,706

Net Earnings:

             

As Reported

   $ 17,506    $ 293

Pro forma

   $ 17,527    $ 1,345

Earnings per share:

             

Basic - as reported

   $ 0.73    $ 0.01

Basic - pro forma

   $ 0.73    $ 0.06

Diluted - as reported

   $ 0.71    $ 0.01

Diluted - pro forma

   $ 0.71    $ 0.05

 

The comparability of net earnings between the periods presented is impacted by a $9.8 million net of tax charge for the early extinguishment of debt included in the results for the three months ended November 30, 2003.

 

Note 3. Restructuring Reserve

 

The Company committed to integration plans to restructure portions of its Kopp operation during the first quarter of fiscal 2003. These plans were designed to reduce administrative and operational costs, and the related reserves were established as part of the Kopp purchase price allocation. The reserve represents employee severance costs to be incurred in connection with the transfer of certain production out of Germany to lower cost locations and general reductions in the workforce. German employment has been reduced by over 200 employees, or nearly 30%. The $2.7 million of accrued severance costs at November 30, 2004 will be paid to former employees over the next two years as dictated by contractual arrangements with those employees.

 

A rollforward of the restructuring reserve (all of which relates to accrued severance costs) follows:

 

Accrued severance costs as of August 31, 2004

   $ 2,815  

Cash payments

     (361 )

Currency impact

     241  
    


Accrued severance costs as of November 30, 2004

   $ 2,695  
    


 

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Table of Contents

Note 4. Accounts Receivable Financing

 

The Company maintains an accounts receivable securitization program whereby it sells certain of its trade accounts receivable to a wholly owned, bankruptcy-remote special purpose subsidiary which, in turn, sells participating interests in its pool of receivables to a third-party financial institution (the “Purchaser”). The Purchaser receives an ownership and security interest in the pool of receivables. New receivables are purchased by the special purpose subsidiary and participation interests are resold to the Purchaser as collections reduce previously sold participation interests. The Company has retained collection and administrative responsibilities on the participation interests sold. The Purchaser has no recourse against the Company for uncollectible receivables; however, the Company’s retained interest in the receivable pool is subordinate to the Purchaser and is recorded at fair value. Due to a short average collection cycle of approximately 60 days for such accounts receivable and the Company’s collection history, the fair value of the Company’s retained interest approximates book value. The retained interest recorded at November 30, 2004 and August 31, 2004 is $16.3 million and $18.6 million, respectively, and is included in accounts receivable in the accompanying Condensed Consolidated Balance Sheets. The securitization program has a final maturity in May 2006, subject to annual renewal by the Purchaser. The total credit capacity under the program is approximately $35 million, with trade accounts receivables sold and being serviced by the Company totaling $24.6 million at both November 30, 2004 and August 31, 2004.

 

Sales of trade receivables from the special purpose subsidiary to the Purchaser totaled $51.7 million and $49.0 million for the three months ended November 30, 2004 and 2003, respectively. Cash collections of trade accounts receivable balances in the total receivable pool totaled $83.0 million and $78.4 million for the three months ended November 30, 2004 and 2003, respectively.

 

The Accounts Receivables Securitization Program is accounted for as a sale in accordance with FASB Statement No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities—a Replacement of FASB Statement No. 125.” Sales of 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.

 

The table below provides additional information about delinquencies and net credit losses for trade accounts receivable subject to the Accounts Receivable Securitization Program.

 

               Net Credit Losses

     Balance Outstanding

   Balance Outstanding 60 Days
or More Past Due


   Three Months Ended
November 30,


    

November 30,

2004


  

August 31,

2004


  

November 30,

2004


  

August 31,

2004


   2004

   2003

Trade Accounts

                                         

Receivable Subject to Securitization Program

   $ 40,933    $ 43,148    $ 2,126    $ 2,468    $ 146    $ 377

Trade Accounts

                                         

Receivable Balances Sold

     24,617      24,571                            
    

  

                           

Retained Interest

   $ 16,316    $ 18,577                            
    

  

                           

 

Accounts receivable financing costs of $0.2 million and $0.1 million for the three months ended November 30, 2004 and 2003, respectively, are included in financing costs, net in the accompanying Condensed Consolidated Statements of Earnings.

 

Note 5. 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. Several 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.

 

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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 6. Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill for the three months ended November 30, 2004 are as follows:

 

     Tools &
Supplies
Segment


   Engineered
Solutions
Segment


   Total

Balance as of August 31, 2004

   $ 66,943    $ 78,444    $ 145,387

Goodwill of acquired businesses

     —        7,289      7,289

Currency impact

     2,244      495      2,739
    

  

  

Balance as of November 30, 2004

   $ 69,187    $ 86,228    $ 155,415
    

  

  

 

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, 2004 and August 31, 2004 are as follows:

 

     November 30, 2004

   August 31, 2004

     Gross
Carrying
Amount


   Accumulated
Amortization


  

Net

Book
Value


   Gross
Carrying
Amount


   Accumulated
Amortization


  

Net

Book
Value


Patents

   $ 22,487    $ 10,712    $ 11,775    $ 22,440    $ 10,341    $ 12,099

Trademarks

     5,544      1,799      3,745      5,196      1,724      3,472

Non-compete agreements

     1,811      1,337      474      1,750      1,266      484

Other

     2,963      983      1,980      2,632      868      1,764
    

  

  

  

  

  

Total

   $ 32,805    $ 14,831    $ 17,974    $ 32,018    $ 14,199    $ 17,819
    

  

  

  

  

  

 

The gross carrying amount of the Company’s intangible assets that have indefinite lives and are not subject to amortization as of November 30, 2004 and August 31, 2004 are $4.6 million and $4.3 million, respectively. These assets are comprised of acquired tradenames.

 

Amortization expense recorded on the intangible assets listed in the above table for the three months ended November 30, 2004 and 2003 was $0.6 million and $0.5 million, respectively. Amortization expense for future years is estimated to be as follows: $2.4 million in fiscal 2005, $2.2 million in fiscal 2006, $2.1 million in fiscal 2007, $1.9 million in both fiscal 2008 and 2009, and $8.1 million thereafter. These estimates do not include the impact of the Key Components, Inc. acquisition that was completed on December 27, 2004 (See Note 17, “Subsequent Events,” for additional details).

 

Note 7. 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 during the three months ended November 30, 2004:

 

Balance as of August 31, 2004

   $ 4,729  

Provision for warranties

     1,258  

Warranty payments and costs incurred

     (1,084 )

Warranty reserves of acquired business

     208  

Currency impact

     187  
    


Balance as of November 30, 2004

   $ 5,298  
    


 

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Note 8. Debt

 

The Company’s indebtedness, other than short-term borrowings, as of November 30, 2004 and August 31, 2004 was as follows:

 

     November 30,
2004


    August 31,
2004


 

Senior revolving credit facility (the “Revolver”)

   $ 38,000     $ 15,000  

Commercial paper

     18,882       23,800  

Euro denominated term loans

     4,427       4,131  
    


 


Sub-total – Senior indebtedness

     61,309       42,931  

Convertible senior subordinated debentures (“2% Convertible Notes”), due 2023

     150,000       150,000  
    


 


Total debt, excluding short-term borrowings

     211,309       192,931  

Less: current maturities of long-term debt

     (4,135 )     (3,863 )
    


 


Total long-term debt, less current maturities

   $ 207,174     $ 189,068  
    


 


 

At November 30, 2004, outstanding Revolver borrowings were at a weighted-average interest rate of 3.88%, which represents a variable index rate plus a spread. A non-use fee is payable quarterly on the average unused credit line under the Revolver. At November 30, 2004, the non-use fee was 0.25%. Borrowings and non-use fees under the Revolver are subject to a pricing grid, which can result in further increases or decreases on a quarterly basis, depending on the Company’s leverage ratios. The unused and available credit line under the Revolver at November 30, 2004 was approximately $192.0 million. The Revolver contains customary limits and restrictions concerning investments, sales of assets, liens on assets, fixed charge coverage ratios, maximum leverage, acquisitions, dividends and other restricted payments. As of November 30, 2004 the Company was in compliance with all debt covenants.

 

In December 2004, the Company amended the Revolver to provide for additional borrowing capacity to fund the acquisition of Key Components, Inc. See Note 17, “Subsequent Events,” for additional details.

 

At November 30, 2004, there was $18.9 million of commercial paper outstanding, all of which had original maturity terms of 60 days or less and were at an average interest rate of 2.40%, including issuance fees. Total commercial paper outstanding cannot exceed $50.0 million under the terms of the Revolver. The Revolver provides the liquidity backstop for outstanding commercial paper. Accordingly, the combined outstanding balance of the Revolver and Commercial Paper facility cannot exceed $250.0 million.

 

Note 9. Stock Option Plans

 

The Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No employee or outside director compensation costs related to stock option grants are reflected in net income, as all option awards granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. For purposes of pro forma disclosures under SFAS No. 123, “Accounting for Stock based Compensation,” the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information for the three months ended November 30, 2004 and 2003 are as follows:

 

    

Three Months Ended

November 30,


 
     2004

    2003

 

Net earnings, as reported

   $ 17,506     $ 293  

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

     (571 )     (439 )
    


 


Pro forma net earnings (loss)

   $ 16,935     $ (146 )
    


 


Earnings (loss) per share:

                

Basic – as reported

   $ 0.73     $ 0.01  

Basic – pro forma

   $ 0.71     $ (0.01 )

Diluted – as reported

   $ 0.71     $ 0.01  

Diluted – pro forma

   $ 0.69     $ (0.01 )

 

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Note 10. Employee Benefit Plans

 

The Company provides defined benefit pension and other postretirement benefits to certain employees of domestic businesses it acquired that were entitled to those benefits prior to acquisition. At November 30, 2004 and August 31, 2004, the domestic defined benefit pension plans consisted of two plans, which cover certain employees and executives of a business acquired in 1997. The domestic plans are frozen and as a result plan participants no longer earn future benefits.

 

Certain former employees of acquired domestic businesses who retired before February 1, 1994 (and their dependents) have the option of being covered under the Company’s postretirement medical plans. In addition, retiree life insurance is available to certain employees hired before 1988. The postretirement benefit liability related to these plans is unfunded. Most individuals receiving postretirement health care benefits under these programs are required to make monthly contributions to defray a portion of the cost. Retiree contributions are adjusted annually. The accounting for retiree health care benefits assumes retirees will continue to contribute toward the cost of such benefits. Retirees currently do not contribute toward the cost of life insurance.

 

The Company also maintains defined benefit pension plans for certain employees in various foreign countries. At November 30, 2004 and August 31, 2004, the foreign defined benefit pension plans consisted of five separate plans that covered employees in Germany, the Netherlands, and Japan. Future benefits are earned with respect to the foreign plans.

 

Components of net periodic benefit costs were as follows:

 

    

Three Months Ended

November 30,


 
     2004

    2003

 

Domestic Defined Benefit Pension Plans

                

Interest cost

   $ 231     $ 230  

Expected return on assets

     (223 )     (225 )

Amortization of actuarial loss

     108       74  
    


 


Net periodic benefit cost

   $ 116     $ 79  
    


 


Domestic Postretirement Medical Benefit Plans

                

Service cost

   $ 4     $ 2  

Interest cost

     52       88  

Amortization of actuarial gain

     (96 )     (48 )
    


 


Net periodic benefit (credit) cost

   $ (40 )   $ 42  
    


 


Foreign Defined Benefit Pension Plans

                

Service cost

   $ 113     $ 120  

Interest cost

     238       218  

Expected return on assets

     (14 )     (12 )

Amortization of actuarial (gain) loss

     (1 )     (8 )
    


 


Net periodic benefit cost

   $ 336     $ 318  
    


 


 

The Company contributed $0.4 million in December 2004 to a domestic defined benefit pension plan, and will not be required to make any additional contributions to its pension plans in fiscal 2005. Postretirement medical claims and a majority of foreign defined pension benefits are paid as incurred.

 

Note 11. Distribution of Electronics Segment

 

On July 31, 2000, the Company distributed its former Electronics segment (“APW”) to shareholders in the form of a special dividend (the “Distribution”). During the third quarter of fiscal 2002, APW and one of its wholly

 

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Table of Contents

owned indirect subsidiaries commenced prepackaged bankruptcy cases in the United States Bankruptcy Court for the Southern District of New York. No other subsidiaries of APW have filed Chapter 11 cases. On July 31, 2002, APW and the wholly owned subsidiary emerged from bankruptcy.

 

In its bankruptcy filing, APW disclosed that it was rejecting the majority of the agreements entered into between it and the Company at the time of the Distribution that govern a variety of indemnification matters between the parties, including income tax indemnifications relating to years prior to the Distribution and the Distribution itself.

 

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 income tax refunds (the “Offset Funds”) which the Company held on behalf of APW is an allowed secured claim which is unimpaired in 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 itself for certain estimated costs arising from the Company’s Distribution of APW. In November 2004, the Company entered into an agreement with APW to reimburse them for the remaining Offset Funds, prior to the contractual settlement date, in exchange for allowing the Company to retain $2.0 million of the Offset Funds for their own use. The $15.8 million reimbursement payment to APW fully satisfied APW’s interest in the Offset Funds, and this favorable settlement resulted in a $2.0 million pre-tax gain, which was recorded in “Other expense (income), net” on the Condensed Consolidated Statements of Earnings for the three months ended November 30, 2004.

 

Note 12. Earnings Per Share

 

The reconciliations between basic and diluted earnings per share for the three months ended November 30, 2004 and 2003 are as follows:

 

     Three Months Ended
November 30,


     2004

   2003

Numerator:

             

Net earnings

   $ 17,506    $ 293

Denominator:

             

Weighted average common shares outstanding for basic earnings per share

     23,877      23,539

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

     727      1,188
    

  

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

     24,604      24,727
    

  

Basic Earnings Per Share

   $ 0.73    $ 0.01

Diluted Earnings Per Share

   $ 0.71    $ 0.01

 

In November 2003, the Company sold $150.0 million of 2% Convertible Notes due November 15, 2023. The 2% Convertible Notes bear interest at a rate of 2.0% annually. The 2% Convertible Notes are convertible into shares of the Company’s common stock at a conversion rate of 25.0563 shares per $1,000 of principal amount, which equals a conversion price of approximately $39.91 per share. See Note 6, “Debt,” in the Notes to Consolidated Financial Statements in the Company’s fiscal 2004 Annual Report on Form 10-K for a complete discussion of conditions that must be met for the 2% Convertible Notes to be converted. The Company has excluded the potential conversion of 2% Convertible Notes into common stock in its diluted earnings per share calculations because the conditions under which conversion is allowed have not been met. The Emerging Issues Task Force (EITF) has issued EITF No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which will require the inclusion of the potential conversion of the Company’s 2% Convertible Notes into common stock in the diluted earnings per share calculation even if the conditions that must be satisfied to allow conversion have not been met. EITF 04-8 is effective for reporting periods ending after December 15, 2004. The Company will adopt EITF No. 04-8 during the second quarter of fiscal 2005 and will retroactively restate it’s fiscal 2004 and first quarter of fiscal 2005 diluted earnings per share. The Company currently estimates that the adoption of EITF 04-8 will cause diluted earnings per share during the first quarter of fiscal 2005 to be reduced from $0.71 to $0.63. The adoption of EITF 04-8 will not impact diluted earnings per share for the first quarter of fiscal 2004 because the effect is anti-dilutive.

 

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In December 2004, the Company sold, pursuant to an underwritten public offering, 2,875,000 shares of previously unissued shares of Class A Common Stock. See Note 17, “Subsequent Events,” for additional details.

 

Note 13. Comprehensive Income

 

The components of comprehensive income are as follows:

 

     Three Months Ended
November 30,


     2004

   2003

Net earnings

   $ 17,506    $ 293

Accumulated foreign currency translation adjustments

     9,345      4,015

Other items, net of taxes

     —        9
    

  

Comprehensive income

   $ 26,851    $ 4,317
    

  

 

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Note 14. 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, 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 Company evaluates segment performance based primarily on net sales and earnings (loss) before income tax expense and minority interest.

 

The following tables summarize financial information by reportable segment.

 

     Three Months Ended
November 30,


 
     2004

    2003

 

Net Sales:

                

Tools & Supplies

   $ 112,537     $ 96,335  

Engineered Solutions

     87,140       70,249  
    


 


Total

   $ 199,677     $ 166,584  
    


 


Earnings (Loss) Before Income Taxes and Minority Interest:

                

Tools & Supplies

   $ 17,443     $ 14,585  

Engineered Solutions

     11,588       8,255  

General Corporate and Other

     (2,471 )     (22,031 )
    


 


Total

   $ 26,560     $ 809  
    


 


     November 30,
2004


    August 31,
2004


 

Assets:

                

Tools & Supplies

   $ 252,791     $ 231,928  

Engineered Solutions

     190,361       163,653  

General Corporate and Other

     27,593       28,555  
    


 


Total

   $ 470,745     $ 424,136  
    


 


 

The comparability of the segment data is impacted by the Yvel and Dresco acquisitions, which occurred on September 16, 2004 and December 30, 2003, respectively. Yvel is included in the Engineered Solutions segment and Dresco is in the Tools & Supplies segment. The comparability of General Corporate and Other results is impacted by a reduction in financing costs due to the repurchase of the remaining 13% Notes during fiscal 2004 and the impact of the convertible debt issuance in fiscal 2004, as well as costs incurred for the early extinguishments of debt.

 

Corporate assets, which are not allocated, principally represent capitalized debt issuance costs, deferred income taxes, and the retained interest in trade accounts receivable (subject to the accounts receivable securitization program discussed in Note 4, “Accounts Receivable Financing”).

 

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Table of Contents

Note 15. Contingencies and Litigation

 

The Company had outstanding letters of credit of $5.5 million and $6.1 million at November 30, 2004 and August 31, 2004, respectively. The letters of credit secure self-insured workers compensation liabilities and contingent payments related to indemnifications provided to purchasers of divested businesses.

 

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, and indemnification 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 as of the balance sheet date 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.

 

The Company, in the normal course of business, enters into certain real estate and equipment leases or guarantees such leases on behalf of its subsidiaries. In conjunction with the Distribution, the Company assigned its rights in the leases used in the former Electronics segment, but was not released as a responsible party from all such leases by the lessors. Some of these businesses were subsequently sold to third parties. The Company remains contingently liable for those leases if any of these businesses are unable to fulfill their obligations thereunder. The discounted present value of future minimum lease payments for such leases totals, assuming no offset for sub-leasing, approximately $14.3 million at November 30, 2004. The future undiscounted minimum lease payments for these leases are as follows: $0.3 million in the balance of 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; $1.9 million in calendar 2009; and $7.2 million thereafter.

 

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 $1.9 million were included in the Condensed Consolidated Balance Sheets at both November 30, 2004 and August 31, 2004.

 

Note 16. New Accounting Pronouncements

 

The Emerging Issues Task Force (EITF) has issued EITF No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which will require the inclusion of the potential conversion of the Company’s 2% Convertible Notes into common stock in the diluted earnings per share calculation even if the conditions that must be satisfied to allow conversion have not been met. EITF 04-8 is effective for reporting periods ending after December 15, 2004. The Company will adopt EITF No. 04-8 during the second quarter of fiscal 2005. See Note 12, “Earnings Per Share”, for a description of the impact of this new accounting rule.

 

In December 2004, the Financial Accounting Standards Board (“FASB”) revised SFAS No. 123, “Accounting for Stock Based Compensation.” SFAS No. 123-Revised supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and will require all companies to estimate the fair value of incentive stock options granted and then amortize that estimated fair value to expense over the options’ vesting period. SFAS No. 123-Revised is effective for all periods beginning after June 15, 2005. The Company currently accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No employee or outside director compensation costs related to stock option grants are currently reflected in net income, as all option awards granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company is required to adopt SFAS No. 123-Revised by the first quarter of fiscal year 2006. See Note 9, “Stock Option Plans,” for pro forma information if the Company had elected to adopt the requirements of the previously issued SFAS No. 123.

 

15


Table of Contents

Note 17. Subsequent Events

 

On December 1, 2004, the Company acquired A.W. Sperry Instruments, Inc. (“Sperry”). Sperry, headquartered in Hauppauge, New York, maintains a leading market position selling electrical test meters and instruments to the do-it-yourself retail channels. In the transaction, the Company acquired 100% of the outstanding shares of Sperry for $12.5 million in cash. The transaction was funded by borrowings under the Revolver.

 

On December 27, 2004, the Company acquired Key Components, Inc. (“KCI”). Total consideration paid for the transaction was approximately $315.0 million, including the assumption of approximately $80.0 million of KCI’s 10.5% senior notes. KCI, headquartered in Tarrytown, New York, is a leading manufacturer of custom engineered products for a diverse array of end-user markets. The products offered through KCI’s six operating businesses consist of specialty electrical components, power conversion products, high-voltage utility switches, flexible shafts, and turbocharger components. Each of KCI’s operating businesses will fit into one of Actuant’s business segments, Tools & Supplies or Engineered Solutions. As discussed in more detail below, the transaction was funded by borrowings under the Company’s existing Senior Credit Facility, as amended in December 2004, and through a public offering of Class A Common Stock in December 2004.

 

The Company completed an amendment to its Senior Credit Facility in December 2004. The amendment provides for a $250.0 million term loan in addition to the existing $250.0 million revolving credit facility. The $250.0 million term loan will initially bear interest at LIBOR plus 1.25% and will be repaid in installments starting in fiscal 2007. In connection with the amendment, the Company incurred approximately $2.5 million of debt issuance costs, which will be amortized over the five year period of the term loan. The proceeds from the term loan will be used to fund the KCI acquisition.

 

In December 2004, the Company sold, pursuant to an underwritten public offering, 2,875,000 shares of previously unissued Class A Common Stock at a price of $49.50 per share. Cash proceeds from the offering, net of underwriting discounts, were approximately $135.2 million. In addition to underwriting discounts, the Company incurred approximately $1.3 million of additional accounting, legal and other expenses related to the offering that were charged to additional paid-in-capital. The proceeds will be used to fund the call of the $80.0 million of 10.5% senior notes assumed in the KCI acquisition and pay down outstanding borrowings on the Company’s Revolver and Commercial Paper facility.

 

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Table of Contents

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

 

Background

 

We are a diversified global manufacturer and marketer of a broad range of industrial products and systems, organized into two reportable segments, Tools & Supplies and Engineered Solutions. Our Tools & Supplies segment provides branded specialized electrical and industrial tools and supplies to hydraulic and electrical wholesale distributors, to catalog houses and through various retail distribution channels. Our Engineered Solutions segment’s primary expertise is in designing, manufacturing and marketing customized motion control systems primarily for automotive, recreational vehicle and truck original equipment manufacturers (“OEMs”) in diversified niche markets. We believe that our strength in these product categories is the result of a combination of our brand recognition, proprietary engineering and design competencies, dedicated service philosophy, and global manufacturing and distribution capabilities.

 

Our long-term goal is to grow annual diluted earnings per share excluding unusual or non-recurring items (“EPS”) by 15% to 20%. We intend to leverage our leading market positions to generate annual internal sales growth that exceeds the annual growth rate of the gross domestic product. In addition to internal sales growth, we are focused on an acquisition strategy that identifies complementary businesses that can be acquired. Following an acquisition, we seek to drive cost reductions, develop additional cross-selling opportunities and deepen customer relationships. We also focus on profit margin expansion and cash flow generation to achieve our EPS growth goal. Our LEAD (“Lean Enterprise Across Disciplines”) process utilizes various continuous improvement techniques to drive out costs and improve efficiencies across all locations and functions worldwide, thereby expanding profit margins. Strong cash flow generation is achieved by maximizing returns on assets and minimizing primary working capital needs. The cash flow that results from efficient asset management and improved profitability is used to reduce debt and fund both acquisitions and internal growth opportunities. Our application of this strategy has generated favorable results, including significant debt reduction and profitability growth over the past five years.

 

Results of Operations for the Three Months Ended November 30, 2004 and 2003

 

In thousands, except per share amounts

 

     Three Months Ended
November 30,


 
     2004

    2003

 

Net Sales

   $ 199,677     $ 166,584  

Cost of Products Sold

   $ 135,850     $ 111,966  
    


 


Gross Profit

   $ 63,827     $ 54,618  

Gross Profit Margin

     32.0 %     32.8 %

Selling, Administrative and Engineering Expenses (“SAE”)

   $ 35,957     $ 33,349  

SAE as a Percentage of Net Sales

     18.0 %     20.0 %

Amortization of Intangible Assets

   $ 591     $ 547  
    


 


Operating Profit

   $ 27,279     $ 20,722  

Operating Profit Margin

     13.7 %     12.4 %

Financing Costs, net

   $ 1,938     $ 4,391  

Charge for Early Extinguishment of Debt

   $ —       $ 15,069  

Other (Income) Expense, net

   $ (1,219 )   $ 453  
    


 


Earnings Before Income Tax Expense and Minority Interest

   $ 26,560     $ 809  
    


 


 

On September 16, 2004, the Company acquired 100% of the outstanding capital stock of Yvel S.A. (“Yvel” or the “Yvel Acquisition”), and on December 30, 2003 the Company acquired 100% of the outstanding capital stock of Dresco B.V. (“Dresco” or the “Dresco Acquisition”). Yvel is included in the Company’s Engineered Solutions segment, while Dresco is included in the Tools & Supplies segment. Both of these transactions impact the comparability of the operating results for the three months ended November 30, 2004 and 2003. See Note 2, “Acquisitions” in Notes to Condensed Consolidated Financial Statements for further information. Additionally, the weak US dollar favorably impacted comparisons of current year results to the prior year results due to the translation of non-US dollar denominated subsidiary results.

 

Consolidated net sales increased by $33.1 million, or 20%, from $166.6 million during the first quarter of fiscal 2004 to $199.7 million during the first quarter of fiscal 2005. Excluding acquisitions and the $7.2 million favorable impact of foreign currency exchange rate changes on translated results, fiscal 2005 first quarter consolidated net sales increased approximately 6%. The changes in net sales due to operating segment results are discussed in further detail below.

 

Consolidated earnings before income taxes and minority interest during the first quarter of fiscal 2005 were $26.6 million, compared with $0.8 million during the first quarter of fiscal 2004. In addition to the impact of the Yvel and Dresco Acquisitions and the weak US dollar, the comparability of consolidated earnings before income taxes and minority interest was impacted by the $15.1 million pre-tax charge for the early extinguishment of debt during the three months ended November 30, 2003. The changes in earnings before income taxes and minority interest due to operating segment results and financing costs are discussed in further detail below.

 

Tools & Supplies Segment Results

 

     Three Months Ended
November 30,


 
     2004

    2003

 

Net Sales

   $ 112,537     $ 96,335  

Cost of Products Sold

   $ 69,863     $ 58,670  
    


 


Gross Profit

   $ 42,674     $ 37,665  

Gross Profit Margin

     37.9 %     39.1 %

Selling, Administrative and Engineering Expenses (“SAE”)

   $ 24,575     $ 22,996  

SAE as a Percentage of Net Sales

     21.8 %     23.9 %

Amortization of Intangible Assets

   $ 381     $ 308  
    


 


Operating Profit

   $ 17,718     $ 14,361  

Operating Profit Margin

     15.7 %     14.9 %

Other Expense (Income), net

   $ 275     $ (224 )
    


 


Earnings Before Income Tax Expense and Minority Interest

   $ 17,443     $ 14,585  
    


 


Net sales during the first quarter of fiscal 2005 increased $16.2 million, or 17%, to $112.5 million from $96.3 million during the first quarter of fiscal 2004. Dresco, which was acquired on December 30, 2003, comprised 60% of the increase, while currency translation rate changes positively impacted net sales by $4.4 million during the first quarter of fiscal 2005. Excluding the Dresco Acquisition and currency rate changes, core sales increased 2%. Core sales increased 11% in the Enerpac business due to successful efforts to obtain integrated system contracts worldwide and an increase in overall demand, while core sales declined approximately 3% in the Electrical business, reflecting weak demand and the loss of a region from a North American retail home center customer during the second half of fiscal 2004.

 

Gross profit during the three months ended November 30, 2004 increased by $5.0 million, or 13%, to $42.7 million from $37.7 million primarily due to the higher sales. Excluding the $1.7 million impact of foreign currency rate changes on translated results, gross profit increased 9%. Gross profit margins decreased from 39.1% during the first quarter of fiscal 2004 to 37.9% during the first quarter of fiscal 2005. Excluding the impact of Dresco’s comparatively lower gross profit margins, gross profit margins increased slightly during the first quarter of fiscal 2005, reflecting positive sales mix offset by increasing raw materials prices and reduced absorption from the decrease in production volumes in the Electrical business.

 

SAE increased by $1.6 million, or 7%, from $23.0 million during the first quarter of fiscal 2004 to $24.6 million during the first quarter of fiscal 2005. Excluding the $1.0 million impact of foreign currency rate changes on translated results, SAE increased 2%. This increase is mainly due to the impact of the Dresco Acquisition, which was partially offset by the benefits of ongoing cost reduction actions.

 

Engineered Solutions Segment Results

 

     Three Months Ended
November 30,


 
     2004

    2003

 

Net Sales

   $ 87,140     $ 70,249  

Cost of Products Sold

   $ 65,987     $ 53,296  
    


 


Gross Profit

   $ 21,153     $ 16,953  

Gross Profit Margin

     24.3 %     24.1 %

Selling, Administrative and Engineering Expenses (“SAE”)

   $ 8,738     $ 7,939  

SAE as a Percentage of Net Sales

     10.0 %     11.3 %

Amortization of Intangible Assets

   $ 210     $ 239  
    


 


Operating Profit

   $ 12,205     $ 8,775  

Operating Profit Margin

     14.0 %     12.5 %

Other Expense, net

   $ 617     $ 520  
    


 


Earnings Before Income Tax Expense and Minority Interest

   $ 11,588     $ 8,255  
    


 


 

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Net sales increased by $16.9 million, or 24%, from $70.2 million during the three months ended November 30, 2003 to $87.1 million during the three months ended November 30, 2004. Yvel, which was acquired on September 16, 2004, comprised 31% of the increase, while currency translation rate changes positively impacted sales during the first quarter of fiscal 2005 by $2.8 million. Excluding the impact of the Yvel Acquisition and foreign currency translation, core sales during the first quarter of fiscal 2005 increased 12%. With the exception of sales to the recreational vehicle (RV) market, core sales to all other markets grew in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. The 18% core sales decrease to the RV market was due to reduced production levels at a number of RV OEM’s, lower retail RV sales, and lost business during the second half of fiscal 2004. Core sales to the automotive market increased 40%, reflecting the continued benefit of the introduction of new convertible models in Europe and North America during the past twelve months, as well as increased demand for certain existing models. We expect the growth in automotive sales to slow as we reach the start of production anniversary dates on a number of the newer platforms in future quarters. Core sales to the heavy-duty truck market increased 15% due to the strength of the overall European truck market and market share gains by our OEM customers.

 

Gross profit increased by $4.2 million, or 25%, from $16.9 million during the first quarter of fiscal 2004 to $21.1 million during the first quarter of fiscal 2005 primarily due to sales growth. Excluding the $0.5 million positive impact of foreign currency rate changes on translated results, gross profit increased 22%. Gross profit margins increased slightly from 24.1% during the first quarter of fiscal 2004 to 24.3% during the comparable period for fiscal 2005 due to the benefits of improved efficiencies and increased production volumes, offset by rising raw material costs.

 

SAE increased by $0.8 million, or 10%, from $7.9 million during the three months ended November 30, 2003 to $8.7 million during the comparable period in fiscal 2005. Excluding the $0.3 million impact of foreign currency rate changes on translated results, SAE increased 7%. The increase is primarily due to the impact of the Yvel Acquisition and increased spending to support overall growth in this segment.

 

General Corporate Results

 

     Three Months Ended
November 30,


 
     2004

    2003

 

Selling, Administrative and Engineering Expenses (“SAE”)

   $ 2,644     $ 2,414  

Financing Costs, net

     1,938       4,391  

Charge for Early Extinguishment of Debt

     —         15,069  

Other (Income) Expense, net

     (2,111 )     147  
    


 


Loss Before Income Tax Expense and Minority Interest

   $ (2,471 )   $ (22,031 )
    


 


 

Financing costs, net declined 56% from the first quarter of fiscal 2004 to the first quarter of fiscal 2005 due to the gradual replacement of all outstanding 13% Notes throughout fiscal 2004 with lower interest rate debt such as the 2% Convertible Notes and the Revolver. See “Liquidity and Capital Resources” below for further information.

 

During the first quarter of fiscal 2004, the Company retired $49.4 million (gross principal amount) of its senior subordinated notes due 2009 (“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.

 

See Note 11, “Distribution of Electronics Segment,” in Notes to Condensed Consolidated Financial Statements for discussion of the $2.0 million gain recognized during the first quarter of fiscal 2005.

 

Restructuring Reserves

 

The Company committed to integration plans to restructure portions of its Kopp operation during the first quarter of fiscal 2003. These plans were designed to reduce administrative and operational costs, and the related reserves were established as part of the Kopp purchase price allocation. The reserve represents employee severance costs to be incurred in connection with the transfer of certain production out of Germany to lower cost locations and general reductions in the workforce. German employment has been reduced by over 200 employees, or nearly 30%.

 

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Table of Contents

The $2.7 million of accrued severance costs at November 30, 2004 will be paid to former employees over the next two years as dictated by contractual arrangements with those employees.

 

A rollforward of the restructuring reserve (all of which relates to accrued severance costs) follows:

 

Accrued severance costs as of August 31, 2004

   $ 2,815  

Cash payments

     (361 )

Currency impact

     241  
    


Accrued severance costs as of November 30, 2004

   $ 2,695  
    


 

Liquidity and Capital Resources

 

Cash and cash equivalents totaled $7.1 million and $6.0 million at November 30, 2004 and August 31, 2004, respectively. Our goal is to maintain low cash balances, utilizing any excess cash to pay down debt in an effort to minimize financing costs.

 

The Company reported cash used in operating activities of $6.3 million and $13.6 million during the three months ended November 30, 2004 and 2003, respectively. The cash flows for the first quarter of fiscal 2005 include the impact of the $15.8 million reimbursement to APW, and the cash flows of the first quarter of fiscal 2004 include approximately $8.4 million of premiums paid to bondholders for 13% Note repurchases, net of the related tax benefit. First quarter of fiscal 2005 cash provided from operating activities, after considering the reimbursement to APW and premiums paid to bondholders, increased as compared to the first quarter of fiscal 2004 due to improved profitability resulting from the Yvel and Dresco acquisitions and core business growth, reduced cash payments for interest of approximately $5.6 million, and the active management of our primary working capital. Operating cash flow during the first quarter of each fiscal year is typically weaker than the other fiscal quarters due to the seasonal build-up of primary working capital.

 

Cash used in investing activities was $11.8 million and $36.1 million during the three months ended November 30, 2004 and 2003, respectively. The Company used $9.0 million to fund the closing of the Yvel acquisition during the first quarter of fiscal 2005, and used $28.2 million for the acquisition of Kwikee during the first quarter of fiscal 2004. Additionally, $5.0 million was used in the first quarter of fiscal 2004 to fund the purchase of the Kopp minority interest and pay the Kopp deferred purchase price. Capital expenditures were fairly consistent, totaling $3.2 million and $2.9 million during the three months ended November 30, 2004 and 2003, respectively.

 

The Company utilized borrowings of $17.6 million on its revolving credit facilities during the three months ended November 30, 2004 to fund the cash used in operating and investing activities as discussed above. 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 due November 15, 2023. Net proceeds from the issuance of the 2% 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.

 

In December 2004, the Company sold, pursuant to an underwritten public offering, 2,875,000 shares of previously unissued Class A Common Stock to fund the acquisition of Key Components, Inc and pay down outstanding revolving borrowings. Net proceeds, net of underwriting discounts and additional legal and accounting expenses, were approximately $133.9 million. See Note 17, “Subsequent Events,” in Notes to Condensed Consolidated Financial Statements for additional details.

 

Debt

 

Debt outstanding at November 30, 2004 totaled $212.1 million, an $18.2 million increase from the $193.9 million at August 31, 2004. The net increase was attributable to $9.0 million of borrowings to fund the Yvel acquisition and $15.8 million of borrowings to reimburse APW for the fiscal 2000 income tax refund. These increases in debt were partially offset by cash flow from operations.

 

At November 30, 2004, outstanding Revolver borrowings were at a weighted-average interest rate of 3.88%, which represents a variable index rate plus a spread. A non-use fee is payable quarterly on the average unused credit line under the Revolver. At November 30, 2004, the non-use fee was 0.25%. Borrowings and non-use fees under the Revolver are subject to a pricing grid, which can result in further increases or decreases on a quarterly basis, depending on the Company’s leverage ratios. The unused and available credit line under the Revolver at November 30, 2004 was approximately $192.0 million.

 

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The Revolver contains customary limits and restrictions concerning investments, sales of assets, liens on assets, acquisitions, dividends, and other restricted payments. In addition, the Company must comply with two separate financial ratio covenants on a quarterly basis: the Leverage Ratio and the Fixed Charge Coverage Ratio. The Leverage Ratio measures indebtedness (as defined by the Revolver) as a multiple of earnings before interest, taxes, depreciation, and amortization (as defined by the Revolver). The maximum Leverage Ratio allowed by the Revolver is 3.50. For the twelve months ended November 30, 2004, the Company’s Leverage Ratio was 2.05, including the impact of accounts receivable sold under the accounts receivable securitization program. The Fixed Charge Coverage Ratio measures earnings before interest, taxes, depreciation, and amortization adjusted for capital expenditures and lease payments (as defined by the Revolver) as a multiple of interest expense (as defined by the Revolver). The minimum Fixed Charge Coverage Ratio allowed by the Revolver is 1.75. For the twelve months ended November 30, 2004, the Company’s Fixed Charge Coverage Ratio was 2.51.

 

In December 2004, the Company amended the Revolver to provide for additional borrowing capacity to fund the acquisition of Key Components, Inc. See Note 17, “Subsequent Events,” in Notes to Condensed Consolidated Financial Statements for additional details.

 

At November 30, 2004, there was $18.9 million of commercial paper outstanding, all of which had original maturity terms of 60 days or less and were at an average interest rate of 2.40%, including issuance fees. Total commercial paper outstanding cannot exceed $50.0 million under the terms of the Revolver. The Revolver provides the liquidity backstop for outstanding commercial paper. Accordingly, the combined outstanding balance of the Revolver and Commercial Paper facility cannot exceed $250.0 million.

 

The Company has made considerable progress in its efforts to reduce its financing costs over the past several years. Financing costs, net were $1.9 million during the first quarter of fiscal 2005, compared with $4.4 million during the first quarter of fiscal 2004. A major part of this reduction was the gradual replacement of 13% Notes with less expensive forms of debt, such as 2% Convertible Notes and Revolver borrowings. Throughout fiscal year 2004, the Company retired all of its remaining 13% Notes outstanding through open market and negotiated purchases of $49.4 million and $31.5 million during the first and third quarters, respectively; a cash tender and consent solicitation for $28.0 million of 13% Notes outstanding during the fourth quarter; and the establishment of a defeasance trust for the remaining $1.2 million of 13% Notes outstanding during the fourth quarter.

 

See the “Timing of Commitments” table below for the maturities schedule of long-term debt outstanding at November 30, 2004.

 

The Company was not party to any interest rate swaps at November 30, 2004 or August 31, 2004.

 

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. See the “Timing of Commitments” table below for further information.

 

The Company, in the normal course of business, enters into certain real estate and equipment leases or guarantees such leases on behalf of its subsidiaries. In conjunction with the Distribution, the Company assigned its rights in the leases used in the former Electronics segment, but was not released as a responsible party from all such leases by the lessors. Some of these businesses were subsequently sold to third parties. The Company remains contingently liable for those leases if any of these businesses are unable to fulfill their obligations thereunder. The discounted present value of future minimum lease payments for such leases totals, assuming no offset for sub-leasing, approximately $14.3 million at November 30, 2004. The future undiscounted minimum lease payments for these leases are as follows: $0.3 million in the balance of 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; $1.9 million in calendar 2009; and $7.2 million thereafter.

 

As more fully discussed in Note 4, “Accounts Receivable Financing” in the Notes to Condensed Consolidated Financial Statements, the Company is party to an accounts receivable securitization arrangement. Trade receivables sold and being serviced by the Company were $24.6 million at both November 30, 2004 and August 31, 2004, respectively. If the Company were to discontinue this securitization program, at November 30, 2004 it would have been required to borrow approximately $24.6 million to finance the working capital increase. Total capacity under the program is approximately $35 million.

 

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Cash outflows totaling approximately $2.7 million will be required in fiscal 2005 and 2006 to fund the Kopp restructuring cash flow requirements. See Note 3, “Kopp Restructuring Reserve,” in the accompanying Notes to Condensed Consolidated Financial Statements for further information.

 

The Company had outstanding letters of credit of $5.5 million and $6.1 million at November 30, 2004 and August 31, 2004, respectively. The letters of credit secure self-insured workers compensation liabilities and contingent payments related to indemnifications provided to purchasers of divested businesses.

 

Dividends have not been declared or paid during fiscal 2005 or 2004, and the Company currently does not plan to pay dividends. Cash flow from operations is expected to be retained for working capital needs, acquisitions, and to reduce outstanding debt. At November 30, 2004, the Company had approximately $192.0 million of availability under the Revolver. The Company believes that availability under the Revolver, 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 (b)


   Operating Lease
Obligations (c )


   Total

Amounts in 000’s               

2005

   $ 4,135    $ 13,260    $ 17,395

2006

     146      11,222      11,368

2007

     146      8,847      8,993

2008

     —        7,847      7,847

2009

     56,882      6,713      63,595

Thereafter

     150,000      26,968      176,968
    

  

  

Total

   $ 211,309    $ 74,857    $ 286,166
    

  

  


(a) The above table excludes the additional payments (“earn-out payments”) due to a third party related to the Dresco acquisition, as the exact amounts or timing of payments are not known. The Dresco purchase agreement allows for earn-out payments to the sellers aggregating no less than $2.3 million and no more than $13.3 million, contingent on the Company achieving targeted net sales in the calendar years ended December 31, 2004 through 2006.

 

(b) Interest on long-term debt is payable as follows:

 

  Senior revolving facility; payable on interest-rate reset dates on individual borrowings

 

  Commercial paper; payable on maturity dates of individual issuances

 

  2% Convertible Notes; payable semi-annually on November 15th and May 15th

 

  Euro denominated term loans; payable semi-annually on January 31st and July 31st

 

(c) The Company’s purchase obligations generally relate to amounts due under contracts with third party service providers. These contracts are primarily for real estate leases, information technology services, including software and hardware support services and leases, and telecommunications services. Those purchase obligations, such as leases, that are not cancelable are included in the table. The Company routinely issues purchase orders to numerous vendors for the purchase of inventory and other supplies. These purchase orders are generally cancelable with reasonable notice to the vendor, and as such, they are excluded from the contractual obligations table.

 

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New Accounting Pronouncements

 

The Emerging Issues Task Force (EITF) has issued EITF No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which will require the inclusion of the potential conversion of the Company’s 2% Convertible Notes into common stock in the diluted earnings per share calculation even if the conditions that must be satisfied to allow conversion have not been met. EITF 04-8 is effective for reporting periods ending after December 15, 2004. The Company will adopt EITF No. 04-8 during the second quarter of fiscal 2005 and will retroactively restate it’s fiscal 2004 and first quarter of fiscal 2005 diluted earnings per share. The Company currently estimates that the adoption of EITF 04-8 will cause diluted earnings per share during the first quarter of fiscal 2005 to be reduced from $0.71 to $0.63. The adoption of EITF 04-8 will not impact diluted earnings per share for the first quarter of fiscal 2004 because the effect is anti-dilutive.

 

In December 2004, the Financial Accounting Standards Board (“FASB”) revised SFAS No. 123, “Accounting for Stock Based Compensation.” SFAS No. 123-Revised supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and will require all companies to estimate the fair value of incentive stock options granted and then amortize that estimated fair value to expense over the options’ vesting period. SFAS No. 123-Revised is effective for all periods beginning after June 15, 2005. The Company currently accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No employee or outside director compensation costs related to stock option grants are currently reflected in net income, as all option awards granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company is required to adopt SFAS No. 123-Revised by the first quarter of fiscal year 2006. See Note 9, “Stock Option Plans,” in the Notes to Condensed Consolidated Financial Statements for pro forma information if the Company had elected to adopt the requirements of the previously issued SFAS No. 123.

 

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 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 within Note 1, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s fiscal 2004 Annual Report on Form 10-K.

 

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Currency Risk—The Company has exposure to foreign currency exchange fluctuations. Approximately 61% and 53% of its revenues for the three months ended November 30, 2004 and the year ended August 31, 2004, respectively, were denominated in currencies other than the U.S. dollar. Of those non-U.S. dollar denominated amounts, approximately 84% and 82%, 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 material hedging instruments in place as of the date of this filing.

 

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, 2004 or August 31, 2004, the Company was not party to any interest rate swap agreements. An increase or decrease of 25 basis points in the applicable interest rates on unhedged variable rate debt would result in a change in pre-tax interest expense of approximately $0.2 million on an annual basis.

 

Commodity Risk— We source a wide variety of materials and components from a network of global suppliers. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. Fluctuations in the market prices for these commodities resulted in a reduction in gross profit by approximately $2.0 million for fiscal 2004. However, market prices of certain commodities such as steel, plastic resin, and copper have been rising, which could have a negative impact on our results. Prior to the completion of the KCI acquisition in December 2004, we estimated that increases in raw material prices would have an incremental negative impact on our gross profit of approximately $2 – $3 million in fiscal 2005 as compared to fiscal 2004. However, the actual negative impact of increases in raw material prices will likely be higher, perhaps substantially, in part because this estimate did not take into account the effect of these increases on KCI’s operating results. We attempt to pass along such commodity price increases to customers to avoid profit margin erosion. We have not entered into any derivative contracts to hedge our exposure to commodity risk during the first quarter of fiscal 2005 or in fiscal years 2004 or 2003.

 

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, 2004 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 6 – Exhibits

 

(a) Exhibits

 

See “Index to Exhibits” on page 26, which is incorporated herein by reference.

 

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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 7, 2005

 

By:

 

/s/ Andrew G. Lampereur


       

Andrew G. Lampereur

       

Executive 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, 2004

INDEX TO EXHIBITS

 

Exhibit

  

Description


  

Incorporated Herein

By Reference To


  

Filed
Herewith


3.1    Bylaws, as amended         X
10.1    Stock Purchase Agreement between Key Components, Inc. (“KCI”), the shareholders of KCI, and Actuant Corporation dated November 18, 2004    Exhibit 2.1 to current report on Form 8-K dated November 19, 2004     
10.2    Amendment No. 1 to the Stock Purchase Agreement dated November 18, 2004 between Key Components, Inc. (“KCI”), the shareholders of KCI, and Actuant Corporation dated December 3, 2004    Exhibit 2.1 to current report on Form 8-K dated December 9, 2004     
10.3    Amendment No. 2 to the Stock Purchase Agreement dated November 18, 2004 between Key Components, Inc. (“KCI”), the shareholders of KCI, and Actuant Corporation dated December 16, 2004    Exhibit 2.1 to current report on Form 8-K dated December 22, 2004     
10.4    Amended and Restated Credit Agreement dated as of December 27, 2004 among the Company and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA (Illinois)), as Administrative Agent for the revolving loan facility and the term loan facility, Wachovia Bank, National Association, and U.S. Bank, National Association, as Syndication Agents for the revolving loan facility and the term loan facility, LaSalle Bank N.A. and M&I Marshall & Ilsley Bank, as Document Agents for the revolving loan facility, and Bank Of America, N.A.and Harris Trust & Savings Bank, as Document Agents for the revolving loan facility.    Exhibit 4.8 to current report on Form 8-k dated December 27, 2004     
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

 

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