ENERPAC TOOL GROUP CORP - FORM 10-Q

ENERPAC TOOL GROUP CORP - FORM 10-Q - July 9, 2015

Attached files

Attached files

file	filename
EX-10.1 - EXHIBIT 10.1 - ENERPAC TOOL GROUP CORP	atu-20150531exhibit101.htm
EX-31.1 - EXHIBIT 31.1 - ENERPAC TOOL GROUP CORP	atu-20150531exhibit311.htm
EX-32.2 - EXHIBIT 32.2 - ENERPAC TOOL GROUP CORP	atu-20150531exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - ENERPAC TOOL GROUP CORP	atu-20150531exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - ENERPAC TOOL GROUP CORP	atu-20150531exhibit312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————————

FORM 10-Q

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(Mark One)



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

For the quarterly period ended May 31, 2015



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

Commission File No. 1-11288

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ACTUANT CORPORATION

(Exact name of registrant as specified in its charter)

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

N86 W12500 WESTBROOK CROSSING

MENOMONEE FALLS, WISCONSIN 53051

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

(Address of principal executive offices)

(262) 293-1500

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x

The number of shares outstanding of the registrant’s Class A Common Stock as of June 30, 2015 was 59,478,846.

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TABLE OF CONTENTS



	Page No.

Part I—Financial Information

Item 1—Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Statements of Operations	3

Condensed Consolidated Statements of Comprehensive Income (Loss)	4

Condensed Consolidated Balance Sheets	5

Condensed Consolidated Statements of Cash Flows	6

Notes to Condensed Consolidated Financial Statements	7

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3—Quantitative and Qualitative Disclosures about Market Risk	29

Item 4—Controls and Procedures	29

Part II—Other Information

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 6—Exhibits	31

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. Such forward-looking statements include statements regarding expected financial results and other planned events, including, but not limited to, anticipated liquidity, and capital expenditures. Words such as “may,” “should,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “plan,” “project” and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. We disclaim any obligation to publicly update or revise any forward-looking statements as a result of new information, future events or any other reason.

The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements:


•	economic uncertainty or a prolonged economic downturn;


•	challenging end market conditions in the truck, automotive, agricultural, industrial, production automation, oil & gas, energy, maintenance, power generation and infrastructure industries;


•	failure to realize anticipated cost savings from restructuring activities and cost reduction efforts;


•	increased competition in the markets we serve and market acceptance of existing and new products;


•	our ability to successfully identify and integrate acquisitions and realize anticipated benefits/results from acquired companies;


•	operating margin risk due to competitive pricing, operating inefficiencies, reduced production levels and material, labor and overhead cost increases;


•	our international operations present special risks, primarily from currency exchange rate fluctuations, exposure to local economic and political conditions, export and import restrictions and controls on repatriation of cash;


•	regulatory and legal developments including changes to United States taxation rules, health care reform, conflict mineral supply chain compliance and governmental climate change initiatives;


•	the potential for a non-cash asset impairment charge, if operating performance at one or more of our businesses were to fall significantly below current levels;


•	our ability to execute our share repurchase program, which depends in part, on our free cash flow, liquidity and changes in the trading price of our common stock;

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•	a significant failure in information technology (IT) infrastructure and systems, unauthorized access to financial and other sensitive data or cybersecurity threats;


•	litigation, including product liability and warranty claims;


•	inadequate intellectual property protection or if our products are deemed to infringe on the intellectual property of others;


•	our level of indebtedness, ability to comply with the financial and other covenants in our debt agreements and fluctuations in interest rates;


•	numerous other matters including those of a political, economic, business, competitive and regulatory nature contained from time to time in U.S. Securities and Exchange Commission ("SEC") filings, including, but not limited to, those factors listed in the "Risk Factors" section within Item 1A of Part I of the Form 10-K filed with the SEC on October 27, 2014.

When used herein, the terms “Actuant,” “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 SEC.

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PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

ACTUANT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended May 31,					Nine Months Ended May 31,
	2015			2014		2015			2014
Net sales	$	320,100		$	378,187	$	948,870		$	1,045,513
Cost of products sold	201,540			229,637		593,573			640,737
Gross profit	118,560			148,550		355,297			404,776
Selling, administrative and engineering expenses	69,569			83,498		227,809			244,655
Amortization of intangible assets	5,989			6,272		18,362			18,713
Impairment charge	—			—		84,353			—
Operating profit	43,002			58,780		24,773			141,408
Financing costs, net	7,462			5,932		20,683			18,944
Other (income) expense, net	569			620		(489		)	3,087
Earnings from continuing operations before income taxes	34,971			52,228		4,579			119,377
Income tax expense (benefit)	(2,987		)	1,671		6,785			13,511
Earnings (loss) from continuing operations	37,958			50,557		(2,206		)	105,866
Earnings from discontinued operations, net of income taxes	—			—		—			22,120
Net earnings (loss)	$	37,958		$	50,557	$	(2,206	)	$	127,986

Earnings (loss) from continuing operations per share:
Basic	$	0.64		$	0.72	$	(0.04	)	$	1.47
Diluted	$	0.63		$	0.70	$	(0.04	)	$	1.44

Earnings (loss) per share:
Basic	$	0.64		$	0.72	$	(0.04	)	$	1.78
Diluted	$	0.63		$	0.70	$	(0.04	)	$	1.74

Weighted average common shares outstanding:
Basic	59,617			70,432		61,911			71,915
Diluted	60,243			71,770		61,911			73,518

See accompanying Notes to Condensed Consolidated Financial Statements

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ACTUANT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)



	Three Months Ended May 31,					Nine Months Ended May 31,
	2015			2014		2015			2014
Net earnings (loss)	$	37,958		$	50,557	$	(2,206	)	$	127,986
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments	(10,882		)	25		(131,249		)	21,342
Pension and other postretirement benefit plans	143			51		895			151
Cash flow hedges	40			96		(56		)	79
Total other comprehensive (loss) income, net of tax	(10,699		)	172		(130,410		)	21,572
Comprehensive (loss) income	$	27,259		$	50,729	$	(132,616	)	$	149,558

See accompanying Notes to Condensed Consolidated Financial Statements

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ACTUANT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



	May 31, 2015			August 31, 2014
ASSETS
Current assets
Cash and cash equivalents	$	108,125		$	109,012
Accounts receivable, net	219,408			227,008
Inventories, net	155,196			162,620
Deferred income taxes	10,548			11,050
Other current assets	64,672			33,300
Total current assets	557,949			542,990
Property, plant and equipment
Land, buildings and improvements	48,729			52,989
Machinery and equipment	269,656			281,763
Gross property, plant and equipment	318,385			334,752
Less: Accumulated depreciation	(169,940		)	(165,651		)
Property, plant and equipment, net	148,445			169,101
Goodwill	612,232			742,770
Other intangibles, net	316,909			365,177
Other long-term assets	25,483			36,841
Total assets	$	1,661,018		$	1,856,879
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade accounts payable	$	129,689		$	145,798
Accrued compensation and benefits	42,433			52,964
Current maturities of debt	—			4,500
Income taxes payable	3,430			38,347
Other current liabilities	57,281			57,512
Total current liabilities	232,833			299,121
Long-term debt, less current maturities	600,000			385,500
Deferred income taxes	87,067			96,970
Pension and postretirement benefit liabilities	12,971			15,699
Other long-term liabilities	54,842			57,878
Total liabilities	987,713			855,168
Shareholders’ equity
Class A common stock, $0.20 par value per share, authorized 168,000,000 shares, issued 78,900,471 and 78,480,780 shares, respectively	15,780			15,695
Additional paid-in capital	102,143			93,449
Treasury stock, at cost, 19,405,317 and 12,195,359 shares, respectively	(593,254		)	(388,627		)
Retained earnings	1,347,454			1,349,602
Accumulated other comprehensive loss	(198,818		)	(68,408		)
Stock held in trust	(3,497		)	(4,083		)
Deferred compensation liability	3,497			4,083
Total shareholders’ equity	673,305			1,001,711
Total liabilities and shareholders’ equity	$	1,661,018		$	1,856,879

See accompanying Notes to Condensed Consolidated Financial Statements

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ACTUANT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine months ended May 31,
	2015			2014
Operating Activities
Net earnings (loss)	$	(2,206	)	$	127,986
Adjustments to reconcile net earnings (loss) to cash provided by operating activities:
Impairment charge	84,353			—
Net gain on disposal of business	—			(26,339		)
Depreciation and amortization	40,235			46,934
Provision (benefit) for deferred income taxes	1,948			(11,545		)
Stock-based compensation expense	9,237			14,006
Amortization of debt discount and debt issuance costs	1,329			1,406
Other non-cash adjustments	413			(346		)
Sources (uses) of cash from changes in components of working capital and other:
Accounts receivable	(11,315		)	(26,271		)
Inventories	(5,076		)	(25,676		)
Trade accounts payable	(8,278		)	1,464
Prepaid expenses and other assets	(15,593		)	(1,342		)
Income taxes payable/refundable	(47,983		)	(25,939		)
Accrued compensation and benefits	(11,564		)	8,553
Other accrued liabilities	5,780			(9,705		)
Cash provided by operating activities	41,280			73,186
Investing Activities
Capital expenditures	(17,234		)	(33,839		)
Proceeds from sale of property, plant and equipment	886			44,036
Proceeds from sale of business, net of transaction costs	—			252,773
Business acquisition, net of cash acquired	—			(30,500		)
Cash (used in) provided by investing activities	(16,348		)	232,470
Financing Activities
Net repayments on revolver and other debt	—			(125,000		)
Principal repayments on term loan	(3,375		)	—
Proceeds from term loan	213,375			—
Purchase of treasury shares	(204,627		)	(183,152		)
Payment of contingent acquisition consideration	—			(1,585		)
Debt issuance cost	(1,875		)	—
Stock option exercises, related tax benefits and other	5,046			29,849
Cash dividend	(2,598		)	(2,919		)
Cash provided by (used in) financing activities	5,946			(282,807		)
Effect of exchange rate changes on cash	(31,765		)	2,790
Net (decrease) increase in cash and cash equivalents	(887		)	25,639
Cash and cash equivalents – beginning of period	109,012			103,986
Cash and cash equivalents – end of period	$	108,125		$	129,625

See accompanying Notes to Condensed Consolidated Financial Statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

General

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, 2014 was derived from the Company’s audited financial statements, but does not include all disclosures required by the United States generally accepted accounting principles. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes in the Company’s fiscal 2014 Annual Report on Form 10-K.

In the opinion of management, all adjustments considered necessary for a fair statement of financial results have been made. Such adjustments consist of only those of a normal recurring nature. The condensed consolidated statement of cash flows for the nine months ended May 31, 2015 includes an adjustment to properly state the foreign currency impact on cash during the first half of the fiscal year. The impact of this adjustment is a $10.4 million increase in cash provided by operating activities and in the effect of exchange rate changes on cash. This adjustment had no impact on the results of operations, financial position or cash balances. Operating results for the three and nine months ended May 31, 2015 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2015.

New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which includes amendments that change the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. The guidance is effective for annual periods beginning on or after December 15, 2014. The adoption of this standard is not expected to have a material impact on the financial statements of the Company.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is currently effective for annual periods beginning on or after December 15, 2016, subject to an additional one year deferral as recently proposed by the FASB. The Company is currently evaluating the impact of adopting this standard.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which includes amendments that require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Under the new guidance, the recognition and measurement of debt issuance costs is not affected. This guidance is effective for annual periods beginning on or after December 15, 2015. The Company is currently evaluating the impact of adopting this standard.

Significant Accounting Policies (Goodwill and Intangible Assets)

Intangible assets with definite lives, consisting primarily of purchased customer relationships, patents, trademarks and non-compete agreements, are amortized over periods from two to twenty-five years. Goodwill and intangible assets with indefinite lives are not subject to amortization, but are subject to annual impairment testing.

The Company’s goodwill is tested for impairment annually, in the fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company performs impairment reviews for its reporting units using the fair value method based on management’s judgments and assumptions. In estimating the fair value, the Company generally utilizes a discounted cash flow model, which is dependent on a number of assumptions including estimated future revenues and expenses, weighted average cost of capital, capital expenditures and other variables. The estimated fair value of the reporting unit is compared to the carrying amount of the reporting unit, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the goodwill is potentially impaired and the Company then determines the implied fair value of goodwill, which is compared to the carrying value to determine if an impairment charge is required. Indefinite lived intangible assets (tradenames) are also subject to impairment testing. On an annual basis, or more frequently if events or changes in circumstances indicate that indefinite lived intangible assets might not be recoverable, the fair value of the indefinite lived intangible assets (using the relief of royalty valuation approach) are compared to the carrying value to determine if an impairment charge is required.

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A considerable amount of management judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of each reporting unit and the indefinite lived intangible assets. While management believes the judgments and assumptions are reasonable; different assumptions or adverse market developments could change the estimated fair values and ultimately result in future impairment charges.

As discussed in Note 4, "Goodwill and Other Intangible Assets," the Company recognized an $84.4 million non-cash pre-tax impairment charge in the second quarter of fiscal 2015.

Note 2. Acquisitions

The Company completed one business acquisition during fiscal 2014, which resulted in the recognition of goodwill in the condensed consolidated financial statements because its purchase price reflects the future earnings and cash flow potential of the acquired company, as well as the complementary strategic fit and resulting synergies the acquisition is expected to bring to existing operations.

The Company makes an initial allocation of the purchase price at the date of acquisition, based upon its understanding of the fair value of the acquired assets and assumed liabilities. If additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), including through asset appraisals and other sources, the Company will refine its estimates of fair value and adjust the initial purchase price allocation.

The Company acquired Hayes Industries Ltd. ("Hayes") on May 23, 2014 for $30.5 million plus up to $4.0 million of potential contingent consideration. This Industrial segment acquisition is headquartered in Sugar Land, Texas and maintains a leading position in the domestic concrete tensioning market. Its products include patented encapsulated anchor systems, wedges and customized extruded cables. The purchase price allocation resulted in $14.3 million of goodwill (which is deductible for tax purposes) and $10.6 million of intangible assets, including $5.0 million of patents, $3.3 million of customer relationships, $2.0 million of tradenames and $0.3 million for non-compete agreements. During fiscal 2015, goodwill related to this acquisition decreased by $3.2 million, the result of adjustments to reflect the fair value of acquired fixed assets. Hayes generated net sales of $7.6 million and $21.7 million during the three and nine months ended May 31, 2015, respectively.

Note 3. Discontinued Operations and Divestiture Activities

On June 13, 2014, the Company completed the divestiture of its Recreational Vehicle ("RV") business for $36.5 million in cash. This product line divestiture resulted in a $13.5 million pre-tax gain on sale ($2.8 million net of tax) during the fourth quarter of fiscal 2014. The results of the RV business (which had sales of $7.7 million and $20.8 million for the three and nine months ended May 31, 2014, respectively) are included in the results from continuing operations, but are not material to the consolidated financial results.

On December 13, 2013, the Company completed the sale of its former Electrical segment for net cash proceeds of $252.4 million, which resulted in a pre-tax gain on disposal of $34.5 million ($26.3 million net of tax). The Electrical segment was primarily involved in the design, manufacture and distribution of a broad range of electrical products to the retail DIY, wholesale, OEM, solar, utility, marine and other harsh environment markets. The following table summarizes the results of discontinued operations (in thousands):



	Nine Months Ended May 31, 2014
Net sales	$	72,139

Operating loss	(4,873		)
Gain on disposal	34,459
Income tax expense	(7,466		)
Income from discontinued operations, net of income taxes	$	22,120

Note 4. Goodwill and Other Intangible Assets

The Energy segment provides products and services to the global energy markets, where safety, reliability, up-time and productivity are key value drivers. The dramatic decline in oil prices since the start of the current fiscal year has caused customers to reduce the scope of maintenance activities or extend intervals between scheduled maintenance. In addition, a slowdown in upstream oil & gas activity has occurred as asset owners hesitate on starting new oil & gas projects, existing projects are sometimes deferred or canceled and capital spending is reduced. While the Company believes in the long-term growth prospects of the global energy markets, it has taken several actions to adjust the cost structure of the Energy segment in response to current unfavorable market demand.

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The Energy segment contains three reporting units for goodwill impairment testing (Hydratight, Cortland and Viking). The Hydratight business is primarily tied to downstream production and maintenance activities and therefore is less impacted by changes in customer capital spending patterns or oil & gas prices. However, customer demand at the more recent Cortland and Viking acquisitions are more susceptible to changes in oil & gas prices and capital spending reductions. The persistence of unfavorable market conditions (a “triggering event” in the second quarter that required an interim impairment review) is expected to have an adverse impact on the future financial results of the Energy segment. During the second quarter of fiscal 2015, the Company recognized a $84.4 million non-cash pre-tax impairment charge related to the goodwill and indefinite-lived intangible assets of the Cortland and Viking businesses. The impairment charge (as a result of lower projected near-term sales and profits) consisted of a $78.0 million write-down of goodwill and $6.4 million impairment of indefinite-lived intangible assets (tradenames).

The changes in the carrying value of goodwill for the nine months ended May 31, 2015 are as follows (in thousands):



	Industrial			Energy			Engineered Solutions			Total
Balance as of August 31, 2014	$	100,265		$	350,628		$	291,877		$	742,770
Purchase accounting adjustments	(3,244		)	—			—			(3,244		)
Impairment charge	—			(78,530		)	—			(78,530		)
Impact of changes in foreign currency rates	(5,058		)	(31,382		)	(12,324		)	(48,764		)
Balance as of May 31, 2015	$	91,963		$	240,715		$	279,553		$	612,232

The gross carrying value and accumulated amortization of the Company’s other intangible assets are as follows (in thousands):



		May 31, 2015						August 31, 2014
	Weighted Average Amortization Period (Years)	Gross Carrying Value		Accumulated Amortization		Net Book Value		Gross Carrying Value		Accumulated Amortization		Net Book Value
Amortizable intangible assets:
Customer relationships	15	$	304,265	$	127,241	$	177,024	$	325,164	$	117,706	$	207,458
Patents	10	30,879		19,229		11,650		31,678		17,494		14,184
Trademarks and tradenames	18	21,850		6,797		15,053		23,241		6,201		17,040
Other intangibles	3	6,844		6,505		339		7,373		6,783		590
Indefinite lived intangible assets:
Tradenames	N/A	112,843		—		112,843		125,905		—		125,905
		$	476,681	$	159,772	$	316,909	$	513,361	$	148,184	$	365,177

The Company estimates that amortization expense will be $5.9 million for the remaining three months of fiscal 2015. Amortization expense for future years is estimated to be: $23.6 million in fiscal 2016, $22.7 million in 2017, $22.3 million in fiscal 2018, $22.1 million in fiscal 2019, $21.5 million in fiscal 2020 and $86.0 million thereafter. These future amortization expense amounts represent estimates and may be impacted by potential future acquisitions and divestitures or changes in foreign currency exchange rates.

Note 5. Product Warranty Costs

The Company generally offers its customers a warranty on products they purchase, although warranty periods vary by product type and application. The reserve for future warranty claims is based on historical claim rates and current warranty cost experience. The following is a rollforward of the product warranty reserve (in thousands):



	Nine Months Ended May 31,
	2015			2014
Beginning balance	$	4,056		$	7,413
Provision for warranties	4,198			2,923
Warranty reserve of acquired business	—			50
Warranty payments and costs incurred	(3,505		)	(5,311		)
Impact of changes in foreign currency rates	(589		)	30
Ending balance	$	4,160		$	5,105

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Note 6. Debt

The following is a summary of the Company’s long-term indebtedness (in thousands):



	May 31, 2015		August 31, 2014
Senior Credit Facility
Revolver	$	—	$	—
Term Loan	300,000		90,000
Total Senior Credit Facility	300,000		90,000
5.625% Senior Notes	300,000		300,000
Total Senior Indebtedness	600,000		390,000
Less: current maturities of long-term debt	—		(4,500		)
Total long-term debt, less current maturities	$	600,000	$	385,500

The Company’s Senior Credit Facility, which was amended and restated during the third quarter of fiscal 2015, matures on May 8, 2020 and includes a $600 million revolver, $300 million term loan and a $450 million expansion option. Borrowings are subject to a pricing grid, which can result in increases or decreases to the borrowing spread above LIBOR, depending on the Company’s net leverage ratio, ranging from 1.00% to 2.25% in the case of loans bearing interest at LIBOR and from 0.00% to 1.25% in the case of loans bearing interest at the base rate. At May 31, 2015, the borrowing spread on LIBOR based borrowings was 1.75% (aggregating to 1.94%). In addition, a non-use fee is payable quarterly on the average unused credit line under the revolver ranging from 0.15% to 0.35% per annum. At May 31, 2015, the unused credit line under the revolver was $590.8 million, of which $250.5 million was available for borrowings. Quarterly principal payments of $3.8 million begin on the term loan on June 30, 2016, increasing to $7.5 million per quarter beginning on June 30, 2017, with the remaining principal due at maturity. The Senior Credit Facility is secured by substantially all of the Company’s domestic personal property assets and contains customary limits and restrictions concerning investments, sales of assets, liens on assets, dividends and other payments. The two financial covenants included in the Senior Credit Facility agreement are a maximum leverage ratio of 3.75 to 1 and a minimum interest coverage ratio of 3.50 to 1. The Company was in compliance with all financial covenants at May 31, 2015.

On April 16, 2012, the Company issued $300 million of 5.625% Senior Notes due 2022 (the “Senior Notes”). The Senior Notes require no principal payments prior to their June 15, 2022 maturity, require semiannual interest payments in December and June of each year and contain certain financial and non-financial covenants. The Senior Notes include a call feature that allows the Company to repurchase them anytime on or after June 15, 2017 at stated redemption prices (ranging from 100.0% to 102.8%), plus accrued and unpaid interest. As required under the indenture governing the Senior Notes, on June 19, 2015, the Company initiated an offer to repurchase, at par value, an amount of Senior Notes equal to the net proceeds from the Electrical segment and RV divestitures that exceed the amounts reinvested in capital expenditures and business acquisitions since the divestitures. The maximum principal amount of Senior Notes that will be repurchased in the repurchase offer (which will expire on July 20, 2015) is $165.0 million. The Company has adequate capacity under its Senior Credit Facility revolver to fund the repurchase offer. However, if the Senior Notes continue to trade in excess of par value (102.8% on May 31, 2015) through the expiration of the repurchase offer, it is unlikely that Senior Note holders will accept the par repurchase offer.

Note 7. Fair Value Measurement

The Company assesses the inputs used to measure the fair value of financial assets and liabilities using a three-tier hierarchy. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level 3 inputs are not observable in the market and include management’s own judgments about the assumptions market participants would use in pricing the asset or liability. The following financial assets, measured at fair value, are included in the condensed consolidated balance sheet (in thousands):



	May 31, 2015		August 31, 2014
Level 1 Valuation:
Cash equivalents	$	1,971	$	1,207
Investments	1,669		2,118
Level 2 Valuation:
Foreign currency derivatives	202		$	(966	)

The fair value of the Company’s cash, accounts receivable, accounts payable, short-term borrowings and its variable rate long-term debt approximated book value at both May 31, 2015 and August 31, 2014 due to their short-term nature and the fact that

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the interest rates approximated market rates. The fair value of the Company’s outstanding $300 million of 5.625% Senior Notes was $308.3 million and $315.8 million at May 31, 2015 and August 31, 2014, respectively. The fair value of the Senior Notes was based on quoted inactive market prices and are therefore classified as Level 2 within the valuation hierarchy.

Note 8. Derivatives

The Company is exposed to market risk for changes in foreign currency exchange rates due to the global nature of its operations. In order to manage this risk the Company hedges certain portions of its recognized balances and forecasted cash flows that are denominated in non-functional currencies. All derivatives are recognized in the balance sheet at their estimated fair value. On the date it enters into a derivative contract, the Company designates the derivative as a hedge of a recognized asset or liability ("fair value hedge") or a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"). The Company does not enter into derivatives for speculative purposes. Changes in the value of fair value hedges and non-designated hedges are recorded in earnings along with the gain or loss on the hedged asset or liability, while changes in the value of cash flow hedges are recorded in accumulated other comprehensive loss, until earnings are affected by the variability of cash flows.

The U.S. dollar equivalent notional value of short duration foreign currency forward contracts (fair value hedges or non-designated hedges) was $186.4 million and $219.9 million, at May 31, 2015 and August 31, 2014, respectively. Net foreign currency gains (losses) related to these derivative instruments are as follows (in thousands):



	Three Months Ended May 31,					Nine Months Ended May 31,
	2015		2014			2015		2014
Foreign currency gain (loss)	$	2,310	$	(2,141	)	$	304	$	(13,452	)

These derivative gains and losses offset foreign currency gains and losses from the related revaluation of non-functional currency assets and liabilities (amounts included in other income and expense in the condensed consolidated statement of operations).

Note 9. Capital Stock and Share Repurchases

The Company's Board of Directors has authorized the repurchase of shares of the Company's common stock under publicly announced share repurchase programs. At May 31, 2015, the Company could repurchase an additional 8,594,683 shares under existing share repurchase authorizations. The following table summarizes the total capital deployed for share repurchases:



Period	Shares Repurchased	Average Price Paid per Share
Fiscal 2012	2,658,751	$	23.70
Fiscal 2013	1,324,762	31.55
Fiscal 2014	8,211,846	34.52
Fiscal 2015 (September 1 - May 31)	7,209,958	28.35
	19,405,317	$	30.54

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The reconciliation between basic and diluted earnings (loss) per share from continuing operations is as follows (in thousands, except per share amounts):



	Three Months Ended May 31,				Nine Months Ended May 31,
	2015		2014		2015			2014
Numerator:
Earnings (loss) from continuing operations	$	37,958	$	50,557	$	(2,206	)	$	105,866
Denominator:
Weighted average common shares outstanding - basic	59,617		70,432		61,911			71,915
Net effect of dilutive securities—stock based compensation plans ⁽¹⁾	626		1,338		—			1,603
Weighted average common shares outstanding - diluted	60,243		71,770		61,911			73,518

Earnings (loss) per common share from continuing operations:
Basic	$	0.64	$	0.72	$	(0.04	)	$	1.47
Diluted	$	0.63	$	0.70	$	(0.04	)	$	1.44

Anti-dilutive securities stock based compensation plans (excluded from earnings per share calculation)	2,256		463		4,662			558

(1) As a result of the impairment charge in the second quarter of fiscal 2015 which caused a loss from continuing operations for the nine months ended May 31, 2015, shares from stock based compensation plans are excluded from the calculation of diluted earnings (loss) per share, as the result would be anti-dilutive.

Note 10. Income Taxes

The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are higher or lower than the U.S. Federal statutory rate, permanent items, state tax rates and the ability to utilize various tax credits and net operating loss carryforwards. The Company adjusts the quarterly provision for income taxes based on the estimated annual effective income tax rate and facts and circumstances known at each interim reporting period. Comparative pre-tax income, income tax expense (benefit) and effective income tax rates from continuing operations are as follows:



	Three Months Ended May 31,						Nine Months Ended May 31,
	2015			2014			2015			2014
Earnings from continuing operations before income taxes	$	34,971		$	52,228		$	4,579		$	119,377
Income tax expense (benefit)	(2,987		)	1,671			6,785			13,511
Effective income tax rate	(8.5		)%	3.2		%	148.2		%	11.3		%

The income tax provision for the current and prior year periods reflects the benefits of tax minimization planning, taxable earnings derived in foreign jurisdictions with tax rates that are lower than the U.S. Federal statutory rate and foreign tax credits. The effective income tax rate for the third quarter of fiscal 2015 was (8.5)% compared to 3.2% in the comparable prior year period. Income tax expense for the three months ended May 31, 2015 includes $19.2 million of tax reserve benefits from the lapsing of income tax statutes of limitations and the favorable resolution of income tax audits, which were partially offset by a $5.0 million increase to the reserve for uncertain tax positions and a $5.2 million increase in valuation allowances due to uncertainty regarding utilization of foreign net operating losses. Similarly, income tax expense for the three months ended May 31, 2014 included a $10.5 million income tax benefit from tax planning and a $6.8 million tax reserve benefit from the lapsing of income tax statues of limitations. The effective income tax rate for the nine months ended May 31, 2015 was 148.2%, primarily the result of the second quarter impairment charge ($1.7 million tax benefit on $84.4 million pre-tax charge).

The gross liability for unrecognized income tax benefits, excluding interest and penalties, decreased to $21.2 million at May 31, 2015 from $32.3 million at August 31, 2014. Substantially all of these unrecognized tax benefits, if recognized, would reduce the effective income tax rate. In addition, at May 31, 2015 and August 31, 2014, the Company had liabilities totaling $2.1 million and $2.0 million, respectively, for the payment of interest and penalties related to unrecognized income tax benefits.

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Note 11. Segment Information

The Company is a global manufacturer of a broad range of industrial products and systems and is organized in three reportable segments: Industrial, Energy and Engineered Solutions. The Industrial segment is primarily engaged in the design, manufacture and distribution of branded hydraulic and mechanical tools to the maintenance, industrial, infrastructure and production automation markets. The Energy segment provides joint integrity products and services, customized offshore vessel mooring solutions, as well as rope and cable solutions to the global oil & gas, power generation and energy markets. The Engineered Solutions segment provides highly engineered position and motion control systems to OEMs in various vehicle markets, as well as a variety of other products to the industrial and agricultural markets. The following tables summarize financial information by reportable segment and product line (in thousands):



	Three Months Ended May 31,						Nine Months Ended May 31,
	2015			2014			2015			2014
Net Sales by Segment:
Industrial	$	103,546		$	109,809		$	302,448		$	302,022
Energy	99,297			125,231			311,029			339,187
Engineered Solutions	117,257			143,147			335,393			404,304
	$	320,100		$	378,187		$	948,870		$	1,045,513
Net Sales by Reportable Product Line:
Industrial	$	103,546		$	109,809		$	302,448		$	302,022
Energy	99,297			125,231			311,029			339,187
Vehicle Systems	59,673			75,442			170,122			214,369
Other	57,584			67,705			165,271			189,935
	$	320,100		$	378,187		$	948,870		$	1,045,513
Operating Profit (Loss):
Industrial	$	29,165		$	34,123		$	79,386		$	87,496
Energy	12,774			19,936			(50,457		)	38,363
Engineered Solutions	8,313			13,560			16,601			36,297
General Corporate	(7,250		)	(8,839		)	(20,757		)	(20,748		)
	$	43,002		$	58,780		$	24,773		$	141,408



	May 31, 2015		August 31, 2014
Assets:
Industrial	$	289,849	$	307,058
Energy	619,514		788,915
Engineered Solutions	624,289		643,323
General Corporate	127,366		117,583
	$	1,661,018	$	1,856,879

In addition to the impact of foreign currency exchange rate changes, the comparability of segment and product line information is also impacted by acquisition/divestiture activities and the second quarter fiscal 2015 Energy segment impairment charge. Corporate assets, which are not allocated, principally represent cash and cash equivalents, capitalized debt issuance costs and deferred income taxes.

Note 12. Contingencies and Litigation

The Company had outstanding letters of credit of $16.4 million and $14.0 million at May 31, 2015 and August 31, 2014, respectively, the majority of which secure self-insured workers compensation liabilities.

The Company is a party to various legal proceedings that have arisen in the normal course of business. These legal proceedings typically include product liability, environmental, labor, patent claims and other disputes. Operating results for the nine months ended May 31, 2015 include a $3.0 million charge for adverse litigation matters. 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 can be reasonably estimated. In the opinion of management, the resolution of these contingencies, individually

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and in the aggregate, are not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The Company has facilities in numerous geographic locations that are subject to a range of environmental laws and regulations. Environmental expenditures over the past two 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.

The Company remains contingently liable for lease payments of businesses that it previously divested or spun-off, in the event that such businesses are unable to fulfill their lease payment obligations. The discounted present value of future minimum lease payments for these leases was $18.5 million at May 31, 2015 (including $13.7 million related to the divested Electrical segment).

Note 13. Guarantor Subsidiaries

As discussed in Note 6, “Debt” on April 16, 2012, Actuant Corporation (the “Parent”) issued $300 million of 5.625% Senior Notes. All material domestic wholly owned subsidiaries (the “Guarantors”) fully and unconditionally guarantee (except for certain customary limitations) such debt on a joint and several basis. There are no significant restrictions on the ability of the Guarantors to make distributions to the Parent. 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.

Certain assets, liabilities and expenses have not been allocated to the Guarantors and non-Guarantors and therefore are included in the Parent column in the accompanying condensed consolidating financial statements. These items are of a corporate or consolidated nature and include, but are not limited to, tax provisions and related assets and liabilities, certain employee benefit obligations, prepaid and accrued insurance and corporate indebtedness. Intercompany activity primarily includes loan activity, purchases and sales of goods or services, investments and dividends. Intercompany balances also reflect certain non-cash transactions including transfers of assets and liabilities between the Parent, Guarantor and non-Guarantor, allocation of non-cash expenses from the Parent to the Guarantors and non-Guarantors and the impact of foreign currency rate changes.

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands)



	Three Months Ended May 31, 2015
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net sales	$	40,011		$	58,896		$	221,193		$	—		$	320,100
Cost of products sold	11,749			40,360			149,431			—			201,540
Gross profit	28,262			18,536			71,762			—			118,560
Selling, administrative and engineering expenses	16,560			11,228			41,781			—			69,569
Amortization of intangible assets	318			2,394			3,277			—			5,989
Operating profit	11,384			4,914			26,704			—			43,002
Financing costs, net	7,769			—			(307		)	—			7,462
Intercompany expense (income), net	(3,559		)	(1,187		)	4,746			—			—
Other expense, net	123			27			419			—			569
Earnings before income taxes	7,051			6,074			21,846			—			34,971
Income tax expense (benefit)	(11,957		)	914			8,056			—			(2,987		)
Net earnings before equity in earnings (loss) of subsidiaries	19,008			5,160			13,790			—			37,958
Equity in earnings (loss) of subsidiaries	18,950			12,757			(340		)	(31,367		)	—
Net earnings	$	37,958		$	17,917		$	13,450		$	(31,367	)	$	37,958
Comprehensive income	$	27,259		$	13,244		$	7,930		$	(21,174	)	$	27,259

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands)



	Three Months Ended May 31, 2014
	Parent			Guarantors		Non-Guarantors			Eliminations			Consolidated
Net sales	$	54,219		$	84,870	$	239,098		$	—		$	378,187
Cost of products sold	14,841			58,152		156,644			—			229,637
Gross profit	39,378			26,718		82,454			—			148,550
Selling, administrative and engineering expenses	21,554			16,128		45,816			—			83,498
Amortization of intangible assets	318			2,575		3,379			—			6,272
Operating profit	17,506			8,015		33,259			—			58,780
Financing costs, net	6,122			—		(190		)	—			5,932
Intercompany expense (income), net	(5,620		)	560		5,060			—			—
Other expense (income), net	1,597			23		(1,000		)	—			620
Earnings before income taxes	15,407			7,432		29,389			—			52,228
Income tax expense (benefit)	(9,755		)	2,306		9,120			—			1,671
Net earnings before equity in earnings of subsidiaries	25,162			5,126		20,269			—			50,557
Equity in earnings of subsidiaries	25,395			20,151		683			(46,229		)	—
Net earnings	$	50,557		$	25,277	$	20,952		$	(46,229	)	$	50,557
Comprehensive income	$	50,729		$	25,621	$	20,970		$	(46,591	)	$	50,729

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands)



	Nine Months Ended May 31, 2015
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net sales	$	119,612		$	207,162		$	622,096		$	—		$	948,870
Cost of products sold	33,792			145,800			413,981			—			593,573
Gross profit	85,820			61,362			208,115			—			355,297
Selling, administrative and engineering expenses	52,062			45,062			130,685			—			227,809
Amortization of intangible assets	954			7,964			9,444			—			18,362
Impairment charge	—			20,249			64,104			—			84,353
Operating profit (loss)	32,804			(11,913		)	3,882			—			24,773
Financing costs, net	21,583			—			(900		)	—			20,683
Intercompany expense (income), net	(14,389		)	896			13,493			—			—
Intercompany dividend income	(212		)	(243		)	(31		)	486			—
Other expense (income), net	342			(133		)	(698		)	—			(489		)
Earnings (loss) before income taxes	25,480			(12,433		)	(7,982		)	(486		)	4,579
Income tax expense (benefit)	(8,133		)	1,413			13,589			(84		)	6,785
Net earnings (loss) before equity in earnings (loss) of subsidiaries	33,613			(13,846		)	(21,571		)	(402		)	(2,206		)
Equity in earnings (loss) of subsidiaries	(35,819		)	(1,673		)	177			37,315			—
Net loss	$	(2,206	)	$	(15,519	)	$	(21,394	)	$	36,913		$	(2,206	)
Comprehensive loss	$	(132,616	)	$	(58,603	)	$	(80,728	)	$	139,331		$	(132,616	)

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands)



	Nine Months Ended May 31, 2014
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net sales	$	142,905		$	239,709		$	662,899		$	—		$	1,045,513
Cost of products sold	38,905			165,416			436,416			—			640,737
Gross profit	104,000			74,293			226,483			—			404,776
Selling, administrative and engineering expenses	57,811			45,833			141,011			—			244,655
Amortization of intangible assets	954			7,726			10,033			—			18,713
Operating profit	45,235			20,734			75,439			—			141,408
Financing costs, net	19,400			3			(459		)	—			18,944
Intercompany expense (income), net	(22,770		)	5,555			17,215			—			—
Other expense (income), net	12,683			(395		)	(9,201		)	—			3,087
Earnings from continuing operations before income taxes	35,922			15,571			67,884			—			119,377
Income tax expense (benefit)	(3,862		)	4,580			12,793			—			13,511
Net earnings before equity in earnings of subsidiaries	39,784			10,991			55,091			—			105,866
Equity in earnings of subsidiaries	109,714			9,488			4,750			(123,952		)	—
Earnings from continuing operations	149,498			20,479			59,841			(123,952		)	105,866
Earnings (loss) from discontinued operations, net of income taxes	(21,512		)	56,494			(12,862		)	—			22,120
Net earnings	$	127,986		$	76,973		$	46,979		$	(123,952	)	$	127,986
Comprehensive income	$	149,558		$	99,361		$	42,837		$	(142,198	)	$	149,558

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CONDENSED CONSOLIDATING BALANCE SHEETS

(in thousands)



	May 31, 2015
	Parent			Guarantors			Non-Guarantors		Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	9,821		$	964		$	97,340	$	—		$	108,125
Accounts receivable, net	15,863			31,347			172,198		—			219,408
Inventories, net	25,373			34,098			95,725		—			155,196
Deferred income taxes	7,559			—			2,989		—			10,548
Other current assets	37,391			1,681			25,600		—			64,672
Total current assets	96,007			68,090			393,852		—			557,949
Property, plant and equipment, net	6,851			20,902			120,692		—			148,445
Goodwill	38,847			175,045			398,340		—			612,232
Other intangibles, net	11,020			102,705			203,184		—			316,909
Investment in subsidiaries	2,056,121			1,076,426			31,019		(3,163,566		)	—
Intercompany receivable	—			601,999			584,965		(1,186,964		)	—
Other long-term assets	19,620			—			5,863		—			25,483
Total assets	$	2,228,466		$	2,045,167		$	1,737,915	$	(4,350,530	)	$	1,661,018
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable	$	15,440		$	20,953		$	93,296	$	—		$	129,689
Accrued compensation and benefits	13,269			2,426			26,738		—			42,433
Income taxes payable	(273		)	(550		)	4,253		—			3,430
Other current liabilities	19,886			3,180			34,215		—			57,281
Total current liabilities	48,322			26,009			158,502		—			232,833
Long-term debt, less current maturities	600,000			—			—		—			600,000
Deferred income taxes	48,635			—			38,432		—			87,067
Pension and postretirement benefit liabilities	6,919			—			6,052		—			12,971
Other long-term liabilities	44,927			2,090			7,825		—			54,842
Intercompany payable	806,358			—			380,606		(1,186,964		)	—
Shareholders’ equity	673,305			2,017,068			1,146,498		(3,163,566		)	673,305
Total liabilities and shareholders’ equity	$	2,228,466		$	2,045,167		$	1,737,915	$	(4,350,530	)	$	1,661,018

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CONDENSED CONSOLIDATING BALANCE SHEETS

(in thousands)



	August 31, 2014
	Parent		Guarantors		Non-Guarantors		Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	27,931	$	3,325	$	77,756	$	—		$	109,012
Accounts receivable, net	22,811		38,511		165,686		—			227,008
Inventories, net	31,024		38,860		92,736		—			162,620
Deferred income taxes	7,503		—		3,547		—			11,050
Other current assets	3,871		1,057		28,372		—			33,300
Total current assets	93,140		81,753		368,097		—			542,990
Property, plant and equipment, net	9,096		22,879		137,126		—			169,101
Goodwill	44,700		280,693		417,377		—			742,770
Other intangibles, net	11,974		140,400		212,803		—			365,177
Investment in subsidiaries	2,286,068		806,414		237,207		(3,329,689		)	—
Intercompany receivable	—		678,073		622,818

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