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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 February 28, 2007

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.)

13000 WEST SILVER SPRING DRIVE

BUTLER, WISCONSIN 53007

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

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 March 31, 2007 was 27,409,448.

 



Table of Contents

TABLE OF CONTENTS

 

     Page No.

Part I - Financial Information

  

Item 1 - Condensed Consolidated 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

   15

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

   19

Item 4 - Controls and Procedures

   20

Part II - Other Information

  

Item 4 - Submission of Matters to a Vote of Security Holders

   21

Item 6 - Exhibits

   21

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, variation in demand from customers, the impact on the economy of terrorist attacks and other geopolitical activity, continued market acceptance of the Company’s new product introductions, the successful integration of business unit acquisitions and related restructuring, operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material and labor cost increases, foreign currency fluctuations, interest rate risk 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.

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

 

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PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

ACTUANT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

 

    

Three Months Ended

February 28,

   

Six Months Ended

February 28,

 
     2007    2006     2007     2006  

Net sales

   $ 341,020    $ 276,019     $ 684,003     $ 559,895  

Cost of products sold

     230,775      184,958       460,713       369,356  
                               

Gross profit

     110,245      91,061       223,290       190,539  

Selling, administrative and engineering expenses

     66,910      54,433       134,064       113,915  

Restructuring charge

     3,776      —         3,885       —    

Amortization of intangible assets

     2,660      1,774       4,913       3,559  
                               

Operating profit

     36,899      34,854       80,428       73,065  

Financing costs, net

     8,268      6,084       15,109       12,151  

Other expense (income), net

     754      325       972       1,023  
                               

Earnings before income tax expense and minority interest

     27,877      28,445       64,347       59,891  

Income tax expense

     8,956      9,159       20,334       19,379  

Minority interest, net of income taxes

     2      (12 )     (8 )     (54 )
                               

Net earnings

   $ 18,919    $ 19,298     $ 44,021     $ 40,566  
                               

Earnings per share:

         

Basic

   $ 0.69    $ 0.71     $ 1.61     $ 1.50  

Diluted

   $ 0.62    $ 0.63     $ 1.43     $ 1.33  

Weighted average common shares outstanding:

         

Basic

     27,327      27,084       27,313       27,060  

Diluted

     31,740      31,568       31,729       31,539  

See accompanying Notes to Condensed Consolidated Financial Statements

 

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ACTUANT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

    

February 28,

2007

   

August 31,

2006

 
     (Unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 24,851     $ 25,659  

Accounts receivable, net of allowances for losses of $8,176 and $7,363, respectively

     206,542       171,262  

Inventories, net

     188,975       165,760  

Deferred income taxes

     22,340       18,796  

Other current assets

     11,622       9,448  
                

Total current assets

     454,330       390,925  

Gross property, plant and equipment

     252,669       220,833  

Less: Accumulated depreciation

     (140,449 )     (126,289 )
                

Property, plant and equipment, net

     112,220       94,544  

Goodwill

     565,972       505,428  

Other intangible assets, net

     246,586       210,899  

Other long-term assets

     10,140       11,579  
                

Total assets

   $ 1,389,248     $ 1,213,375  
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Short-term borrowings

   $ 351     $ —    

Trade accounts payable

     117,656       122,164  

Accrued compensation and benefits

     40,373       43,983  

Income taxes payable

     19,379       21,852  

Current maturities of long-term debt

     4,072       18,896  

Other current liabilities

     56,242       57,499  
                

Total current liabilities

     238,073       264,394  

Long-term debt, less current maturities

     590,144       461,356  

Deferred income taxes

     85,272       70,184  

Pension and postretirement benefit liabilities

     36,642       36,606  

Other long-term liabilities

     20,986       17,870  

Shareholders’ equity:

    

Class A common stock, $0.20 par value, authorized 84,000,000 shares, issued and outstanding, 27,403,672 and 27,295,372 shares, respectively

     5,481       5,460  

Additional paid-in capital

     (352,858 )     (360,353 )

Retained earnings

     766,450       722,439  

Accumulated other comprehensive loss

     (942 )     (4,581 )

Stock held in trust

     (1,726 )     (1,355 )

Deferred compensation liability

     1,726       1,355  
                

Total shareholders’ equity

     418,131       362,965  
                

Total liabilities and shareholders’ equity

   $ 1,389,248     $ 1,213,375  
                

See accompanying Notes to Condensed Consolidated Financial Statements

 

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ACTUANT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

    

Six Months Ended

February 28 ,

 
     2007     2006  

Operating Activities

    

Net earnings

   $ 44,021     $ 40,566  

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Depreciation and amortization

     16,721       13,242  

Amortization of debt discount and debt issuance costs

     765       721  

Stock-based compensation expense

     2,750       2,172  

(Benefit) provision for deferred income taxes

     (3,154 )     503  

Loss (gain) on disposal of assets

     —         70  

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

    

Accounts receivable

     (16,245 )     (16,209 )

Inventories

     (7,820 )     (5,313 )

Prepaid expenses and other assets

     (1,311 )     (1,230 )

Trade accounts payable

     (15,208 )     2,513  

Income taxes payable

     (3,770 )     1,650  

Other accrued liabilities

     (5,391 )     (3,684 )
                

Net cash provided by operating activities

     11,358       35,001  

Investing Activities

    

Proceeds from sale of property, plant and equipment

     2,789       115  

Capital expenditures

     (12,737 )     (9,899 )

Cash paid for business acquisitions, net of cash acquired

     (110,059 )     (9,337 )
                

Net cash used in investing activities

     (120,007 )     (19,121 )

Financing Activities

    

Net repayments on revolving credit facilities and short-term borrowings

     (43,991 )     (15,085 )

Proceeds from senior credit facility term loan

     150,000       —    

Proceeds from euro-denominated term loan

     5,677       —    

Principal repayments on euro-denominated term loans

     (2,469 )     —    

Cash dividend

     (2,187 )     (2,165 )

Stock option exercises and other

     67       2,137  
                

Net cash provided by(used in) financing activities

     107,097       (15,113 )

Effect of exchange rate changes on cash

     744       (144 )
                

Net (decrease)increase in cash and cash equivalents

     (808 )     623  

Cash and cash equivalents – beginning of period

     25,659       10,356  
                

Cash and cash equivalents – end of period

   $ 24,851     $ 10,979  
                

See accompanying Notes to Condensed Consolidated Financial Statements

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and 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, 2006 was derived from the Company’s 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 2006 Annual Report on Form 10-K. For additional information, refer to the consolidated financial statements and related footnotes in the Company’s fiscal 2006 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 described, such adjustments consist of only those of a normal recurring nature. Operating results for the three and six months ended February 28, 2007 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2007.

New Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No.’s 133 and 140, and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for these instruments (“FASB 155”). Specifically, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued by the Company after the beginning of fiscal 2008. We are currently evaluating the impact SFAS No. 155 could have on our consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for us beginning in fiscal 2008. We are evaluating the interpretation to determine the effect on our consolidated financial statements and related disclosures.

In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans – an Amendment of FASB Statements No. 87, 88, 106 and 132(R) (“FASB 158”). This statement requires companies to recognize a net liability or asset to report the funded status of their defined benefit pension and other post retirement plans on the balance sheet. FASB 158 requires additional new disclosures to be made in companies financial statements. FASB 158 will be effective for us beginning in fiscal 2008. We do not anticipate a significant impact on our consolidated financial statements upon the adoption of this standard as the accumulated benefit obligation closely approximates the projected benefit obligation for all of the Company’s defined benefit plans.

In September 2006, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 108, Financial Statements – Concerning the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 will be effective for us at the end of fiscal 2007. The adoption of SAB 108 will not have an impact on our consolidated results of operations, financial position or cash flows.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“FASB 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. The fair value option permits a company to choose to measure eligible items at fair value at specified election dates. A company will report unrealized gains and losses on items for which the fair value option has been elected in earnings after adoption. FASB 159 will be effective for us beginning in fiscal 2009. We are currently evaluating the impact that FASB 159 could have on our consolidated financial statements.

 

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Note 2. Acquisitions

The Company completed three business acquisitions during the second quarter of fiscal 2007, and four during fiscal 2006, all of which resulted in the recognition of goodwill in the Condensed Consolidated Financial Statements. The Company is continuing to evaluate the initial purchase price allocations for all the fiscal 2007 acquisitions and three of the acquisitions completed in fiscal 2006, and will adjust the allocations if additional information relative to the fair values of the assets and liabilities of the acquired businesses become known.

On January 22, 2007, the Company acquired all of the outstanding stock of Injectaseal Deutschland GmbH (“Injectaseal”) for $13.0 million in cash. Headquartered in Kerpen, Germany, Injectaseal provides leak management, on-site machining, pipeline intervention, and safety valve testing services primarily to companies in the Western European oil & gas and power generation industries. Injectaseal is included in our Industrial segment. The preliminary purchase price allocation resulted in $8.2 million assigned to goodwill (which is not currently deductible for tax purposes), $0.5 million assigned to non-compete agreements, $0.2 million assigned to patents, $5.0 million assigned to customer relationships and a deferred tax liability of $2.0 million. The amounts assigned to the non-compete agreement, the patents, and the customer relationship will be amortized over 3 years, 7 years, and 15 years, respectively.

On January 5, 2007, the Company acquired all of the outstanding stock of Veha Haaksbergen B.V. (“Veha”) for $5 million, net of cash acquired. Headquartered in Haaksbergen, The Netherlands, Veha manufactures a wide range of machined products, including hydraulic cylinders. Veha is included in our Industrial segment. The preliminary purchase price allocation resulted in $2.4 million assigned to goodwill (which is not currently deductible for tax purposes), $0.2 million to non-compete agreements and $0.5 million assigned to customer relationships. The amounts assigned to the non-compete agreement and customer relationships will be amortized over 3 years and 10 years, respectively.

On December 22, 2006, the Company acquired all of the outstanding stock of Maxima Technologies (“Maxima”) for $91 million, including the assumption of approximately $1.9 million of Maxima’s debt. Maxima, headquartered in Lancaster, Pennsylvania, is a global electronics company specializing in custom-engineered and standard vehicle instrumentation, controls, components, and systems for low-to-medium volume severe-duty applications. The Company serves a diverse array of end-user markets, including marine, agricultural, off-highway, industrial, specialty vehicle, and automotive aftermarket. Maxima is included in our Engineered Products segment. The preliminary purchase price allocation resulted in $45.4 million assigned to goodwill (which is not currently deductible for tax purposes), $7.7 million assigned to tradenames, $6.8 million assigned to patents, and $19.3 million assigned to customer relationships. The amounts assigned to patents and customer relationships will be amortized over 10 years and 15 years, respectively.

On August 17, 2006, the Company acquired all of the outstanding stock of Actown-Electrocoil, Inc. (“Actown”) for $23.8 million, net of cash acquired. Actown, based in Spring Grove, Illinois, is a leader in producing custom transformers, coils, neon transformers and LED lighting systems to global OEMs including those in low-voltage lighting, construction, factory automation, wireless communication and power generation. Actown is included in our Electrical segment. The preliminary purchase price allocation resulted in $11.9 million assigned to goodwill (which is currently not deductible for tax purposes in the United States), $5.4 million assigned to tradenames, and $1.1 million assigned to customer relationships. These balances have been adjusted since our Fiscal 2006 year-end balance due to the receipt of a third-party valuation of the business during the first quarter. The amount assigned to customer relationships will be amortized over 10 years.

On April 28, 2006, the Company acquired all of the outstanding stock of Precision Sure-Lock (“PSL”) for $42.3 million, net of cash acquired. PSL, based in Dallas, Texas, has a leading U.S. market position in the concrete pre- and post-tensioning product market. PSL produces one-time use and reusable chucks and wedges, stressing jacks, and anchors used in residential, commercial, and public works concrete construction, underground mining, and ground stabilization. PSL is included in our Industrial segment. The preliminary purchase price allocation resulted in $26.6 million assigned to goodwill (which is not currently deductible for tax purposes), $8.5 million assigned to tradenames, and $7.8 million assigned to customer relationships. The amount assigned to customer relationships will be amortized over 20 years.

On April 21, 2006, the Company acquired all of the outstanding stock of D. L. Ricci (“Ricci”) for $52.4 million, net of cash acquired. Ricci, based in Red Wing, Minnesota, is a leader in selling and renting portable machining equipment and providing industrial field service for power plants, refineries, chemical plants, mines and other industrial applications primarily in North America. Ricci’s machining products and services complement the product and service offerings of our Hydratight business, which provides joint integrity products and services to the same industries. Ricci is included in our Industrial segment. The preliminary purchase price allocation resulted in $27.5 million assigned to goodwill (which is currently deductible for tax purposes in the United States), $5.0 million assigned to tradenames, $5.1 million assigned to patents, $0.4 million assigned to non-compete agreements and $8.4 million assigned to customer relationships. The amounts assigned to patents, non-compete agreements and customer relationships will be amortized over periods of 15, 5 and 20 years, respectively.

On December 16, 2005, the Company acquired all of the outstanding stock of B.E.P. Marine Limited (“B.E.P. Marine” or the “B.E.P. acquisition) for $7.6 million of cash. B.E.P. Marine, based in Auckland, New Zealand, is a leading provider of AC and DC control panels, digital monitoring systems, battery switches and battery distribution products, waterproof switch panels, and gas detectors primarily to original equipment manufacturer (OEM) boat builders and the marine aftermarket. B.E.P. Marine’s product offering complements the existing product line offered by our Specialty Electrical Group in the Electrical segment. The purchase

 

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price allocation resulted in $3.7 million assigned to goodwill (which is not currently deductible for tax purposes), $0.9 million assigned to tradenames, $0.6 million assigned to patents, and $0.7 million assigned to customer relationships. The amounts assigned to patents and customer relationships will be amortized over 11 years and 10 years, respectively.

The following unaudited pro forma results of operations of the Company for the three and six months ended February 28, 2007 and 2006, respectively, give effect to all acquisitions completed since September 1, 2005 as though the Injectaseal, Veha, Maxima, Actown, PSL, Ricci and B.E.P. Marine acquisitions had occurred on September 1, 2005.

 

     Three Months Ended
February 28,
   Six Months Ended
February 28,
     2007    2006    2007    2006

Net sales

           

As reported

   $ 341,020    $ 276,019    $ 684,003    $ 559,895

Pro forma

     345,726      313,470      706,888      639,698

Net earnings

           

As reported

   $ 18,919    $ 19,298    $ 44,021    $ 40,566

Pro forma

     18,563      19,486      43,434      41,974

Basic earnings per share

           

As reported

   $ 0.69    $ 0.71    $ 1.61    $ 1.50

Pro forma

     0.68      0.72      1.59      1.55

Diluted earnings per share

           

As reported

   $ 0.62    $ 0.63    $ 1.43    $ 1.33

Pro forma

     0.60      0.64      1.41      1.37

Note 3. Restructuring Reserves

The Company initiated plans to restructure its European Electrical business during the fourth quarter of fiscal 2006. These plans were designed to reduce operating costs and increase profitability. To date, the Company has recorded pre-tax provisions totaling approximately $9 million (including $0.1 million and $3.8 million in the first and second quarters of fiscal 2007, respectively) and expects to recognize an additional $8-11 million of related pre-tax costs by the end of calendar 2007. Annual cost savings resulting from the European Electrical restructuring plan are anticipated to be $7-8 million.

A rollforward of the European Electrical restructuring reserve follows:

 

Accrued restructuring costs as of August 31, 2006

   $ 4,404  

Restructuring charge

     3,885  

Cash payments

     (2,926 )

Currency impact

     151  
        

Accrued restructuring costs as of February 28, 2007

   $ 5,514  
        

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. Book value of accounts receivable in the accompanying Condensed Consolidated Balance Sheets is comprised of the gross accounts receivable retained interest less a reserve for doubtful accounts, which is calculated based on a review of the specific receivable issues and supplemented by a general reserve based on past write-off history. The retained interest recorded at February 28, 2007 and August 31, 2006 is $47.0 million and $41.5 million, respectively, and is included in accounts receivable in the accompanying Condensed Consolidated Balance Sheets. The securitization program has a final maturity in May 2007, subject to annual renewal by the Purchaser. The Company amended its securitization program in May 2006 to increase capacity to $60 million. Trade accounts receivables sold and being serviced by the Company totaled $43.9 million and $50.0 million at February 28, 2007 and August 31, 2006, respectively.

Sales of trade receivables from the special purpose subsidiary to the Purchaser totaled $94.4 million and $197.6 million for the three and six months ended February 28, 2007, respectively, and $86.7 million and $181.9 million for the three and six months ended February 28, 2006, respectively. Cash collections of trade accounts receivable balances in the total receivable pool, which includes participating

 

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interests sold to the Purchaser and the retained interest, totaled $167.6 million and $338.3 million for the three and six months ended February 28, 2007, respectively, and $141.3 million and $287.0 million for the three and six months ended February 28, 2006, respectively.

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.

 

     Balance Outstanding    Balance Outstanding 60
Days or More Past Due
   Net Credit Losses
           Six Months Ended
     February 28,
2007
   August 31,
2006
   February 28,
2007
   August 31,
2006
   February 28,
2007
   February 28,
2006

Trade accounts receivable subject to securitization program

   $ 90,950    $ 91,511    $ 7,555    $ 7,141    $ 590    $ 459

Trade accounts receivable balances sold

     43,942      49,963            
                         

Retained interest

   $ 47,008    $ 41,548            
                         

Accounts receivable financing costs of $0.7 million and $1.5 million for the three and six months ended February 28, 2007, respectively, and $0.5 million and $1.0 million for the three and six months ended February 28, 2006 respectively, are included in financing costs in the accompanying Condensed Consolidated Statements of Earnings.

Note 5. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the six months ended February 28, 2007 are as follows:

 

     Industrial
Segment
   Electrical
Segment
   Actuation
Systems
Segment
   Engineered
Products
Segment
   Total

Balance as of August 31, 2006

   $ 129,155    $ 188,667    $ 168,877    $ 18,729    $ 505,428

Businesses acquired

     10,413      —        —        45,429      55,842

Purchase accounting adjustments

     29      954      —        —        983

Foreign currency impact

     2,257      1,004      406      52      3,719
                                  

Balance as of February 28, 2007

   $ 141,854    $ 190,625    $ 169,283    $ 64,210    $ 565,972
                                  

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 February 28, 2007 and August 31, 2006 are as follows:

 

     February 28, 2007    August 31, 2006
     Gross
Carrying
Amount
   Accumulated
Amortization
  

Net

Book
Value

   Gross
Carrying
Amount
   Accumulated
Amortization
   Net Book
Value

Customer Relationships

   $ 107,348    $ 10,834    $ 96,514    $ 85,095    $ 7,999    $ 77,096

Patents

     44,756      16,501      28,255      38,162      14,947      23,215

Trademarks

     6,409      2,799      3,610      6,378      2,556      3,822

Non-compete agreements

     1,588      647      941      1,634      582      1,052

Other

     746      737      9      808      565      243
                                         

Total

   $ 160,847    $ 31,518    $ 129,329    $ 132,077    $ 26,649    $ 105,428
                                         

The gross carrying amount of the Company’s intangible assets that have indefinite lives and are not subject to amortization as of February 28, 2007 and August 31, 2006 are $117.2 million and $105.5 million, respectively. These assets are comprised of acquired tradenames and have increased due to current year acquisitions.

Amortization expense recorded on the intangible assets listed above was $2.7 million and $4.9 million for the three and six months ended February 28, 2007, respectively, and $1.8 million and $3.6 million for the three and six months ended February 28, 2006, respectively. The Company estimates that amortization expense will approximate $6.0 million for the second half of the fiscal year ended August 31, 2007. Amortization expense for future years is estimated as follows: $11.2 million in fiscal 2008, $11.1 million in fiscal 2009, $10.8 million in 2010, $10.3 million in fiscal 2011, $10.1 million in fiscal 2012 and $69.8 million thereafter.

Note 6. Accrued Product Warranty Costs

The Company recognizes the cost associated with 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 six months ended February 28, 2007 and 2006:

 

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     Six Months Ended
February 28,
 
     2007     2006  

Beginning balance

   $ 6,888     $ 6,307  

Provision for warranties

     3,730       1,767  

Warranty payments and costs incurred

     (3,278 )     (2,544 )

Warranty reserves of acquired businesses

     1,481       200  

Currency impact

     96       (78 )
                

Ending balance

   $ 8,917     $ 5,652  
                

Note 7. Debt

The Company’s indebtedness, as of February 28, 2007 and August 31, 2006 was as follows:

 

     February 28,
2007
    August 31,
2006
 

Senior credit facility

    

Revolving credit facility (“Revolver”)

   $ 2,000     $ 38,000  

Term loan

     400,000       250,000  

Commercial paper

     33,925       42,226  

Other

     8,642       26  
                

Sub-total – Senior indebtedness

     444,567       330,252  

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

     150,000       150,000  
                

Total debt, including short-term borrowings

     594,567       480,252  

Less: Current maturities of long-term debt

     (4,072 )     (18,896 )

Less: Short-term borrowings

     (351 )     —    
                

Total long-term debt, less current maturities

   $ 590,144     $ 461,356  
                

The Company’s senior credit facility, as amended, provides for $400.0 million of term loans in addition to a $250.0 million Revolver. During the quarter ended May 31, 2006, the Company obtained an amendment to reduce the borrowing spreads and Revolver non-use fees under the senior credit facility. During the quarter ended February 28, 2007, the Company obtained an amendment to increase the funded term loans available from $250.0 million to $400.0 million and adjust the amortization schedule. The term loans mature on December 22, 2009 and are fully payable on that date. At February 28, 2007, the outstanding term loan and Revolver borrowings carried an interest rate of 6.345% and 8.25%. Of the outstanding term loan, $100.0 million of principal was swapped to a fixed interest rate of 4.10% plus the applicable borrowing spread until maturity. Additionally, €75.0 million ($96.2 million equivalent) of principal of the term loans was swapped in the fourth quarter of fiscal 2006 to a EURIBOR variable interest rate plus a borrowing spread (aggregating 4.95% at February 28, 2007). All senior credit facility borrowings are subject to a pricing grid, which can result in further increases or decreases to the borrowing spread on a quarterly basis, depending on the Company’s leverage ratios. In addition, a non-use fee is payable quarterly on the average unused credit line under the Revolver. At February 28, 2007, the non-use fee was 0.20%. The senior credit facility contains customary limits and restrictions concerning investments, sales of assets, liens on assets, fixed charge coverage ratios, maximum leverage, dividends and other restricted payments. As of February 28, 2007, the Company was in compliance with all debt covenants.

There were $33.9 million of commercial paper borrowings outstanding at February 28, 2007, all of which had original maturity terms of 91 days or less and had a weighted interest rate of 5.7%, including issuance fees. Total commercial paper outstanding cannot exceed $75.0 million under the terms of the senior credit facility. The Revolver provides the liquidity backstop for outstanding commercial paper. Accordingly, the combined outstanding balance under the Revolver and commercial paper cannot exceed $250.0 million. The outstanding Revolver and commercial paper balances are classified as a component of long-term debt due to the February 2009 maturity date of the Revolver. The unused and available credit line under the Revolver at February 28, 2007, was approximately $214 million.

As a result of the cross-currency interest rate swap agreements further discussed in Note 8, a fair value adjustment to the debt underlying the agreements has been recorded resulting in an additional $3.2 million of debt at February 28, 2007 classified as “other” in the table above. The offset was to currency translation adjustment within accumulated other comprehensive income in the Condensed Consolidated Balance Sheets.

Note 8. Derivatives

All derivatives are recognized in the Condensed Consolidated Balance Sheet at their estimated fair value. On the date a derivative contract is entered into, the Company designates the derivative as a hedge of a recognized asset or liability (“fair value” hedge), 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), or a hedge of the net investment in a foreign operation. The Company does not enter into derivatives for speculative purposes.

 

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Changes in the fair value of a derivative that qualify as a fair value hedge are recorded in earnings along with the gain or loss on the underlying hedged asset or liability. Changes in the fair value of a derivative that qualifies as a cash flow hedge are recorded in accumulated other comprehensive income, until earnings are affected by the variability of cash flows. Changes in the fair value of a derivative used to hedge the net investment in a foreign operation are recorded in the accumulated other comprehensive income accounts within equity in the Condensed Consolidated Balance Sheets.

In January 2005, the Company entered into interest rate swap contracts that have a total notional value of $100.0 million and have a maturity date of December 22, 2009. These interest rate swap contracts will pay the Company variable interest at the three month LIBOR rate, and the Company will pay the counterparties a fixed interest rate of 4.10%. These interest rate swap contracts were entered into to convert $100.0 million of the variable rate term loan under the senior credit facility into fixed rate debt. Based on the terms of the interest rate swap contracts and the underlying debt, these interest rate contracts were determined to be effective, and thus qualify as a cash flow hedge. The total fair value of these interest rate swap contracts was $2.1 million at February 28, 2007, and $3.0 million at August 31, 2006, respectively, and is reported in other long-term assets with the corresponding offset to accumulated other comprehensive income in the accompanying Condensed Consolidated Balance Sheets.

The Company has significant investments in foreign subsidiaries, and the net assets of these subsidiaries are exposed to currency exchange rate volatility. In August 2006, the Company entered into cross-currency interest rate swap agreements (the “agreements”) between the U.S. dollar and the euro to hedge its net investment in European subsidiaries. The agreements have a total notional value of €75.0 million ($96.2 million equivalent) and a maturity date of November 30, 2009. Additionally, the agreements contain an embedded interest rate swap under which the counterparties pay the Company variable interest at the three month LIBOR rate, and the Company will pay the counterparties variable interest at the three month EURIBOR rate. Gains and losses on the net investments in subsidiaries are offset by losses and gains of the agreement. At February 28, 2007, $2.9 million of translation losses on the synthetically developed Euro-denominated debt were included in the accumulated other comprehensive income account in the Condensed Consolidated Balance Sheets, with the offset recorded as a fair value adjustment in debt (see Note 7 for additional details). This was offset by the gains included in accumulated other comprehensive income resulting from the translation of the net investment in subsidiaries. In addition, the $(2.9) million value of the agreements as of February 28, 2007 was included in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets.

While the Company regularly hedges certain commodity risks, the fair value of such contracts were not significant at February 28, 2007.

Note 9. Stock Based Compensation

Stock based compensation expense is calculated by estimating the fair value of incentive stock options at the time of grant and amortized over the stock options’ vesting period. Stock based compensation expense was $1.3 million and $2.8 million for the three and six months ended February 28, 2007, respectively, and $1.1 million and $2.2 million for the three and six months ended February 28, 2006, respectively.

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 February 28, 2007 and August 31, 2006, the defined benefit plans consisted of three plans. Most of the domestic defined benefit pension plans are frozen, and as a result, the majority of the plan participants no longer earn additional benefits. The postretirement medical plans consist of four plans, all of which are unfunded. Two of the plans require individuals receiving medical benefits under the plan to make contributions to defray a portion of the cost, and these retiree contributions are adjusted annually. The other two plans do not require retiree contributions.

The Company also maintains defined benefit pension plans for certain employees in various foreign countries. The defined benefit pension plans consist of several separate plans. Unlike existing U.S. pension plans, future benefits are earned with respect to the foreign plans.

Components of net periodic benefit costs (income) were as follows:

 

     Three Months Ended
February 28,
    Six Months Ended
February 28,
 
     2007     2006     2007     2006  

Domestic Defined Benefit Pension Plans

        

Service cost

   $ 21     $ 19     $ 42     $ 38  

Interest cost

     550       524       1,100       1,048  

Expected return on assets

     (631 )     (607 )     (1,262 )     (1,214 )

Amortization of actuarial loss

     37       111       73       222  
                                

Net periodic benefit (credit)/cost

   $ (23 )   $ 47     $ (47 )   $ 94  
                                

Domestic Postretirement Medical Benefit Plans

        

Service cost

   $ 6     $ 6     $ 12     $ 12  

Interest cost

     60       59       120       117  

Amortization of actuarial gain

     (119 )     (98 )     (237 )     (196 )
                                

Net periodic benefit credit

   $ (53 )   $ (33 )   $ (105 )   $ (67 )
                                

Foreign Defined Benefit Pension Plans

        

Service cost

   $  149     $  161     $ 299     $ 322  

Interest cost

     322       279       644       558  

Expected return on assets

     (64 )     (66 )     (128 )     (133 )

Amortization of actuarial (gain) loss

     6       26       12       53  
                                

Net periodic benefit cost

   $ 413     $ 400     $ 827     $ 800  
                                

 

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For domestic defined benefit pension plans, the Company contributed approximately $0.5 million in aggregate during the six months ended February 28, 2007. No further funding is anticipated during fiscal 2007 for these plans. Postretirement medical claims and a majority of foreign defined pension benefits are paid as incurred.

Note 11. Earnings Per Share

The reconciliations between basic and diluted earnings per share are as follows:

 

     Three Months Ended
February 28,
   Six Months Ended
February 28,
     2007    2006    2007    2006

Numerator:

           

Net earnings, as reported, for basic earnings per share

   $ 18,919    $ 19,298    $ 44,021    $ 40,566

Plus: 2% Convertible Notes financing costs, net of taxes

     611      611      1,222      1,222
                           

Net earnings, for diluted earnings per share

   $ 19,530    $ 19,909    $ 45,243    $ 41,788
                           

Denominator:

           

Weighted average common shares outstanding for basic earnings per share

     27,327      27,084      27,313      27,060

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

     655      726      658      721

Net effect of 2% Convertible Notes based on the if-converted method

     3,758      3,758      3,758      3,758
                           

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

     31,740      31,568      31,729      31,539
                           

Basic earnings per share

   $ 0.69    $ 0.71    $ 1.61    $ 1.50

Diluted earnings per share

   $ 0.62    $ 0.63    $ 1.43    $ 1.33

Note 12. Segment Information

During the first quarter of fiscal 2007, the Company changed certain management reporting and the way it views its businesses. The Company considered these changes as part of our ongoing assessment of segment reporting, and changed its operating and reportable segments to reflect four reportable segments: Industrial, Electrical, Actuation Systems, and Engineered Products. The Industrial segment is primarily involved in the design, manufacture and distribution of branded hydraulic and mechanical tools to the construction, industrial, oil & gas, and production automation markets. In addition, this segment provides manpower services and product rental to the global joint integrity market. The Electrical segment is primarily involved in the design, manufacture, and distribution of electrical tools and supplies to the retail home center, construction, electrical wholesale and marine markets. The Actuation Systems segment focuses on developing and marketing value-added, customized motion control systems and equipment for original equipment manufacturers in the recreational vehicle, automotive, truck, and other industrial markets. The Engineered Products segment designs and manufactures a variety of industrial products for industrial markets. Segment reporting for all previous periods have been revised to reflect this change. The Company has not aggregated individual operating segments within these reportable segments. The Company evaluates segment performance based primarily on net sales and operating profit.

The following tables summarize financial information by reportable segment.

 

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Table of Contents
    

Three Months Ended
February 28,

   

Six Months Ended
February 28,

 
    

2007

   

2006

   

2007

   

2006

 

Net Sales:

        

Tools & Supplies Group

        

Industrial

   $ 93,487     $ 68,907     $ 194,354     $ 144,753  

Electrical

     123,599       105,670       245,616       211,130  
                                

Sub-total

     217,086       174,577       439,970       355,883  

Engineered Solutions Group

        

Actuation Systems

     97,656       87,779       203,310       176,457  

Engineered Products

     26,278       13,663       40,723       27,555  
                                

Sub-total

     123,934       101,442       244,033       204,012  
                                

Total

   $ 341,020     $ 276,019     $ 684,003     $ 559,895  
                                

Operating Profit:

        

Tools & Supplies Group

        

Industrial

   $ 23,988     $ 16,595     $ 52,668     $ 36,796  

Electrical

     5,759       10,760       15,007       20,975  
                                

Sub-total

     29,747       27,355       67,675       57,771  

Engineered Solutions Group

        

Actuation Systems

     7,954       9,297       16,568       19,331  

Engineered Products

     3,303       1,834       5,234       3,562  
                                

Sub-total

     11,257       11,131       21,802       22,893  

General Corporate

     (4,105 )     (3,632 )     (9,049 )     (7,599 )
                                

Total

   $ 36,899     $ 34,854     $ 80,428     $ 73,065  
                                

 

     February 28,
2007
   August 31,
2006

Assets:

     

Tools & Supplies Group

     

Industrial

   $ 362,966    $ 332,428

Electrical

     429,337      412,014
             

Sub-total

     792,303      744,442

Engineered Solutions Group

     

Actuation Systems

   $ 357,862    $ 351,910

Engineered Products

     160,948      41,006
             

Sub-total

     518,810      392,916

General Corporate and Other

     76,800      76,017
             

Total

   $ 1,387,913    $ 1,213,375
             

The following table summarizes sales by product line:

 

    

Three Months Ended
February 28,

  

Six Months Ended
February 28,

    

2007

  

2006

  

2007

  

2006

High Force Hydraulic Tools

   $ 62,611    $ 49,560    $ 123,489    $ 97,179

Joint Integrity

     30,875      19,346      70,865      47,573

North American Electrical

     34,163      35,088      67,725      69,162

European Electrical

     41,167      36,608      84,511      76,419

Specialty Electrical

     20,620      18,359      38,863      33,945

Professional Electrical

     27,649      15,616      54,517      31,606

Recreational Vehicle Actuation Systems

     26,024      22,537      50,197      46,076

Automotive Actuation Systems

     28,760      22,693      61,088      43,867

Truck Actuation Systems

     33,858      33,788      75,345      69,650

Other

     35,293      22,424      57,403      44,418
                           
   $ 341,020    $ 276,019    $ 684,003    $ 559,895
                           

The comparability of the segment data is impacted by the acquisitions completed in fiscal 2006 and fiscal 2007. B.E.P. Marine and Actown Electrocoil are included in the Electrical Segment. D.L. Ricci, Precision Sure-Lock, Veha, and Injectaseal are included in the Industrial Segment. Maxima Technologies is in the Engineered Products segment.

Corporate assets, which are not allocated, principally represent capitalized debt issuance costs, deferred income taxes, fair value of

 

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derivative instruments and the retained interest in trade accounts receivable (subject to the accounts receivable program discussed in Note 4 “Accounts Receivable Financing”). All group expenses have been allocated to the segments, but general corporate expenses have not.

Note 13. Contingencies and Litigation

The Company had outstanding letters of credit of $6.5 million and $6.8 million at February 28, 2007 and August 31, 2006, respectively, which secure self-insured workers compensation liabilities.

The Company is a 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 spin-off of a former subsidiary in fiscal 2000, the Company assigned its rights in the leases used by the former subsidiary, but was not released as a responsible party from all such leases by the lessors. All of these businesses were subsequently sold. 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 $6.6 million at February 28, 2007. The future undiscounted minimum lease payments for these leases are as follows: $0.9 million in calendar 2007, $1.1 million in calendar 2008 through 2010; and $6.1 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 $1.3 million and $1.7 million were included in the Condensed Consolidated Balance Sheets at February 28, 2007 and August 31, 2006, respectively.

 

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

We are a diversified global manufacturer of a broad range of industrial products and systems, organized into four reportable segments, Industrial, Electrical, Actuation Systems, and Engineered Products. Our Industrial segment is primarily involved in the design, manufacture and distribution of branded hydraulic tools to the construction, industrial, oil & gas, and production automation. Industrial also provides manpower services and tool rental to the global joint integrity market. Our Electrical segment is primarily involved in the design, manufacture, and distribution of electrical tools and supplies to the retail, construction, electrical wholesale, and marine markets. Our Actuation Systems segment primarily focuses on developing and marketing highly engineered position and motion control systems for original equipment manufacturers in the recreational vehicle, automotive, truck, and other industrial markets. Our Engineered Products segment designs and manufactures various industrial products for industrial 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”) faster than most multi-industry peers. We intend to leverage our leading market positions to generate annual internal sales growth that exceeds the annual growth rates of the gross domestic product in the geographic regions in which we operate. In addition to internal sales growth, we are focused on acquiring complementary businesses. 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 additional acquisitions and internal growth opportunities. Our application of this strategy has generated profitable growth over the past five years.

Results of Operations for the Three and Six Months Ended February 28, 2007 and 2006

The comparability of the operating results for the three and six months ended February 28, 2007 to the comparable prior year periods have been significantly impacted by acquisitions. Listed below are the acquisitions completed since September 1, 2005.

 

Business

  

Segment

  

Product Line

  

Acquisition Date

B.E.P. Marine Ltd.

   Electrical    Specialty Electrical    December 16, 2005

D. L. Ricci

   Industrial    Joint Integrity    April 21, 2006

Precision Sure-Lock

   Industrial    High Force Hydraulic Tools    April 28, 2006

Actown Electrocoil, Inc.

   Electrical    Professional Electrical    August 17, 2006

Maxima Technologies

   Engineered Products    Other    December 22, 2006

Veha Haaksbergen B.V.

   Industrial    High Force Hydraulic Tools    January 5, 2007

Injectaseal Deutschland GmbH

   Industrial    Joint Integrity    January 22, 2007

The results of operations for acquired businesses are included in our reported results of operations only since their respective acquisition dates. In addition to the impact of acquisitions on operating results, currency translation rates can influence our reported results since approximately 49% of our sales are denominated in currencies other than the US dollar. The weakening of the US dollar has positively impacted comparisons of fiscal 2007 results to the prior year due to the translation of non-US dollar denominated subsidiary results.

Consolidated net sales increased by $65.0 million, or 24%, from $276.0 million for the three months ended February 28, 2006 to $341.0 million for the three months ended February 28, 2007. Excluding $33.5 million of sales from acquired businesses and the $11.2 million favorable impact of foreign currency exchange rate changes on translated results, fiscal 2007 second quarter consolidated net sales increased 7% compared to the fiscal 2006 second quarter consolidated net sales. Fiscal 2007 year-to-date consolidated net sales increased by $124.1 million, or 22%, from $559.9 million in the comparable prior year period to $684.0 million in the current year. Excluding $58.2 million of sales from acquired businesses and the $19.7 million favorable impact of foreign currency exchange rate changes on translated results, consolidated net sales for the six months ended February 28, 2007 increased 8% compared to the six months ended February 28, 2006. The changes in sales at the segment level are discussed in further detail below.

Consolidated operating profit for the three months ended February 28, 2007 was $36.9 million, compared to $34.9 million for the three months ended February 28, 2006. Consolidated operating profit for the six months ended February 28, 2007 was $80.4 million, compared to $73.1 million for the six months ended February 28, 2006. The comparability between periods is impacted by acquisitions, foreign currency exchange rate changes, and European Electrical restructuring provisions recorded during fiscal 2007. The changes in operating profit at the segment level are discussed in further detail below.

 

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Segment Results

Net Sales

 

    

Three Months Ended
February 28,

  

Six Months Ended
February 28,

    

2007

  

2006

  

2007

  

2006

Tools & Supplies Group

           

Industrial

   $ 93.5    $ 68.9    $ 194.4    $ 144.8

Electrical

     123.6      105.7      245.6      211.1
                           

Sub-total

     217.1      174.6      440.0      355.9

Engineered Solutions Group

           

Actuation Systems

     97.6      87.8      203.3      176.5

Engineered Products

     26.3      13.6      40.7      27.5
                           

Sub-total

     123.9      101.4      244.0      204.0
                           

Total

   $ 341.0    $ 276.0    $ 684.0    $ 559.9
                           

Industrial Segment

Industrial net sales increased by $24.6 million, or 36%, from $68.9 million for the three months ended February 28, 2006 to $93.5 million for the three months ended February 28, 2007. Excluding sales from the January 2007 acquisitions of Veha and Injectaseal, the April 2006 acquisitions of Precision Sure-Lock and D.L. Ricci, and the $3.6 million favorable impact of foreign currency rate changes on translated results, sales grew 12% due to continued strong worldwide demand in both the hydraulic tool and joint integrity product lines. Strong demand from the oil, gas and power generation markets as well as economy-driven industrial demand drove higher sales in both product lines. The joint integrity product line also experienced better than expected demand in the North Sea in what is normally a seasonally weak quarter, as many operators delayed routine maintenance given high oil prices. Year-over-year sales growth trends for both product lines improved in Europe and moderated in North America compared to previous quarters due to economic conditions in these regions.

Fiscal 2007 year-to-date Industrial net sales were $194.4 million, which was 34% higher than the prior year comparable period. Sales grew 11% during the current year period, excluding the impact of acquisitions and the $6.7 million favorable impact of foreign currency rate changes on translated results, for reasons consistent with the second quarter explanations provided above.

Electrical Segment

Electrical net sales increased by $17.9 million, or 17%, from $105.7 million for the three months ended February 28, 2006 to $123.6 million for the three months ended February 28, 2007. Excluding sales from the fiscal 2006 acquisitions of B.E.P. Marine and Actown and the $3.8 million favorable impact of foreign currency rate changes on translated results, sales grew 4%. The increase was the result of a strong original equipment manufacturer demand in the professional electrical product line and the net effect of price increases obtained during the second half of fiscal 2006 to offset rising copper prices, partially offset by the effects of a slow-down in North America residential construction.

Fiscal 2007 year-to-date Electrical net sales were $245.6 million, or 16% higher than the prior year comparable period. Sales grew 3% during the current year period, excluding the impact of acquisitions and the $6.5 million favorable impact of foreign currency rate changes on translated results, for reasons consistent with the second quarter explanation.

Actuation Systems Segment

Actuation Systems net sales increased by $9.8 million, or 11%, from $87.8 million for the three months ended February 28, 2006 to $97.6 million for the three months ended February 28, 2007. Excluding the $3.8 million favorable impact of foreign currency rate changes on translated results, sales grew 7%. This growth was driven by increased sales volumes in automotive and recreational vehicles (“RV”) actuation systems product lines offset by a decline in truck actuation system sales. Due to the carryover impact of new convertible automotive platform introductions in 2006, automotive actuation system sales increased 17%. RV product line sales increased 15% due primarily to market share gains. Despite robust sales growth in Europe, as expected, truck actuation systems product line sales declined approximately 5% due to the end of the pre-buy stemming from more restrictive demand in advance of new more stringent North American diesel engine emissions standards that took effect on January 1, 2007.

Fiscal 2007 year-to-date Actuation Systems net sales were $203.3 million, which was 15% higher than the prior year comparable period. Sales grew 11% during the current year period, excluding the $6.5 million favorable impact of foreign currency rate changes on translated results, for reasons consistent with the second quarter explanation.

Engineered Products Segment

Engineered Products net sales increased by $12.7 million, or 92%, from $13.6 million for the three months ended February 28, 2006 to $26.3 million for the three months ended February 28, 2007. Excluding sales from the December 2006 acquisition of Maxima, sales increased 9% due primarily to increased demand in most served markets.

On a year-to-date basis, Engineered Products net sales increased by $13.2 million, or 48%, from $27.5 million for the six months ended February 28, 2006 to $40.7 million for the six months ended February 28, 2007 due to 6% sales growth, excluding the impact of acquisitions and currency.

 

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Operating Profit

 

    

Three Months Ended
February 28,

   

Six Months Ended
February 28,

 
    

2007

   

2006

   

2007

   

2006

 

Tools & Supplies Group

        

Industrial

   $ 24.0     $ 16.6     $ 52.7     $ 36.8  

Electrical

     5.7       10.8       15.0       21.0  
                                

Sub-total

     29.7       27.4       67.7       57.8  

Engineered Solutions Group

        

Actuation Systems

     8.0       9.3       16.5       19.3  

Engineered Products

     3.3       1.8       5.2       3.6  
                                

Sub-total

     11.3       11.1       21.7       22.9  

General Corporate

     (4.1 )     (3.6 )     (9.0 )     (7.6 )
                                

Total

   $ 36.9     $ 34.9     $ 80.4     $ 73.1  
                                

Industrial Segment

Industrial operating profit increased by $7.4 million, or 45%, from $16.6 million for the three months ended February 28, 2006 to $24.0 million for the three months ended February 28, 2007. Excluding the favorable impact of foreign currency rate changes on translated results, operating profit grew 39% as a result of increased sales volumes from both existing and acquired businesses, higher production levels resulting in increased absorption of fixed costs, and operating efficiencies, the combined effect of which was partially offset by negative sales and acquisition mix.

Fiscal 2007 year-to-date Industrial operating profit was $52.7 million, which was 43% higher than the prior year comparable period. Excluding the favorable impact of foreign currency rate changes on translated results, operating profit grew by 38% for reasons consistent with the second quarter explanation.

Electrical Segment

Electrical operating profit decreased by $5.1 million from $10.8 million for the three months ended February 28, 2006 to $5.7 million for the three months ended February 28, 2007 as a result of the $3.8 million European Electrical restructuring charge, related inefficiencies in the European Electrical business, higher rebates and discounts in the DIY channel, increased medical costs in the U.S. and unfavorable sales and acquisition mix.

Fiscal 2007 year-to-date Electrical operating profit was $15.0 million, which was $6.0 million lower than the prior year comparable period for reasons consistent with the second quarter explanation above in addition to $1.0 million of downsizing charges recorded during the first quarter of fiscal 2007, which were unrelated to the European restructuring.

Actuation Systems Segment

Actuation Systems operating profit decreased by $1.3 million, or 14%, from $9.3 million for the three months ended February 28, 2006 to $8.0 million for the three months ended February 28, 2007. Excluding the favorable impact of foreign currency rate changes on translated results, operating profit declined 17% due primarily to unfavorable product line sales mix driven by higher auto and RV actuation system volumes and lower production levels of truck actuation systems, all of which were partially offset by material costs reduction resulting from increased low cost country sourcing.

Fiscal 2007 year-to-date Actuation Systems operating profit was $16.5 million, which was 14% lower than the prior year comparable period. Excluding the favorable impact of foreign currency rate changes on translated results, operating profit declined by 16% for reasons consistent with the second quarter explanation above.

Engineered Products Segment

Engineered Products operating profit increased by $1.5 million, from $1.8 million for the three months ended February 28, 2006 to $3.3 million for the three months ended February 28, 2007 reflecting the impact of base business sales growth, improved absorption of fixed costs, realization of LEAD activities resulting in margin expansion and the December 2006 Maxima acquisition. Similarly, fiscal 2007 year-to-date Actuation Systems operating profit was $5.2 million, which was a $1.7 million increase over the six months ended February 28, 2006.

General Corporate

General corporate expenses increased by approximately $0.5 million and $1.4 million during the three and six months ended February 28, 2007, respectively, primarily due to higher staffing levels to support business expansion.

Financing Costs, net

All debt is considered to be for general corporate purposes, and, financing costs, therefore, have not been allocated to the reportable segments. The increase in financing costs during the three and six months ended February 28, 2007 versus the comparable prior year period reflects a 50 basis point increase in LIBOR over the past twelve months, as well as increased debt levels due to acquisition financing. See “Liquidity and Capital Resources” below for further information.

 

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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, state tax rates in the jurisdictions where we do business, and our ability to utilize various tax credits and net operating loss carryforwards. The effective income tax rate for the three and six months ended February 28, 2007, was 32.1% and 31.6% compared to 32.2% and 32.4% during the three and six months ended February 28, 2006. The effective income tax rate was lower in the six months ended February 28, 2007 as a result of the mix of revenue taxed at lower statutory tax rates and tax minimization planning, partially offset by non-benefitted restructuring charges. The effective income tax rate for the three months ended February 28, 2007 includes the impact of a portion of the restructuring charge not being benefitted in local jurisdictions. The effective income tax rate excluding the restructuring charge was 31.0%.

Restructuring Reserves

The Company initiated plans to restructure its European Electrical business during the fourth quarter of fiscal 2006. In order to reduce operating costs and increase profitability. To date, the Company has recorded pre-tax provisions totaling approximately $9 million (including $0.1 million and $3.8 million in the first and second quarters of fiscal, respectively) and expects to recognize an additional $8-11 million of related pre-tax costs by the end of calendar 2007. Annual costs savings resulting from the European Electrical restructuring plan are anticipated to be $7-8 million.

A rollforward of the European Electrical restructuring reserve follows (in thousands):

 

Accrued restructuring costs as of August 31, 2006

   $ 4,404  

Restructuring charge

     3,885  

Cash payments

     (2,926 )

Currency impact

     151  
        

Accrued restructuring costs as of February 28, 2007

   $ 5,514  
        

Liquidity and Capital Resources

Cash and cash equivalents totaled $24.9 million and $25.7 million at February 28, 2007 and August 31, 2006, respectively. Our goal is to maintain modest cash balances, utilizing excess cash to reduce debt in an effort to minimize financing costs.

The Company generated cash from operating activities of $11.4 million during the six months ended February 28, 2007, compared to $35.0 million during the six months ended February 28, 2006. Operating cash flow for the six months ended February 28, 2007 reflects cash generated from increased earnings offset by an increase in working capital to support business growth. In addition, operating cash flow was impacted by the timing of Federal income tax payments, which were higher than prior year amounts.

Cash used in investing activities totaled $120.0 million and $19.1 million during the six months ended February 28, 2007, and 2006, respectively. The use of cash in fiscal 2007 reflected $110.1 million of business acquisitions as well as $12.7 million of capital expenditures. Net cash provided by financing activities totaled $107.1 million during the six months ended February 28, 2007, primarily related to the proceeds from $150.0 million of additional term loans offset by other debt repayments.

The Company uses primary working capital as a percentage of sales as a key indicator of working capital management. We define this metric as the sum of net accounts receivable, outstanding balances on the accounts receivable securitization facility, and net inventory less accounts payable, divided by the past three months sales annualized. The following table shows the components of the metric:

 

     February 28,
2007
    PWC
%
    February 28,
2006
    PWC
%
 

Accounts receivable, net

   $ 206,542       $ 147,657    

Accounts receivable securitization

     43,942         44,299    
                    

Total accounts receivable

     250,484     18.1 %     191,956     17.4 %

Inventory, net

     188,975     13.6 %     141,543     12.8 %

Accounts payable

     (117,656 )   (8.5 )%     (90,812 )   (8.2 )%
                    

Net primary working capital

   $ 321,803     23.2 %   $ 242,687     22.0 %
                    

Our net primary working capital percentage increased year-over-year from 22.0% to 23.2%, reflecting a higher working capital to support business growth. Our accounts receivable percentage increased from 17.4% to 18.1% due to increased sales in the last month of the quarter as compared to the prior year. Inventory as a percentage of sales has increased from 12.8% to 13.6%, while accounts payable levels as a percentage of sales were consistent with prior year levels.

Our cash flows from operations are impacted by seasonality where the first and second quarters of the fiscal year experience a lower cash flow due to seasonal working capital builds followed by working capital reductions and lower income tax payments in the third and fourth quarters.

 

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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 spin-off of a former subsidiary in fiscal 2000, the Company assigned its rights in the leases used by the former subsidiary, but was not released as a responsible party from all such leases by the lessors. All of these businesses were subsequently sold by the former subsidiary. 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 $6.6 million at February 28, 2007. The future undiscounted minimum lease payments for these leases are as follows: $0.9 million in calendar 2007, $1.1 million in calendar 2008 through 2010; and $6.1 million thereafter.

As more fully discussed in Note 4, “Accounts Receivable Financing” in the Notes to Condensed Consolidated Financial Statements, the Company is a party to an accounts receivable securitization program. Trade receivables sold and being serviced by the Company were $43.9 million and $50.0 million at February 28, 2007 and August 31, 2006, respectively. If the Company had discontinued this securitization program at February 28, 2007, it would have been required to borrow approximately $43.9 million on its revolver to finance the working capital increase. Total capacity under the securitization program is $60.0 million.

The Company had outstanding letters of credit of $6.5 million and $6.8 million at February 28, 2007 and August 31, 2006, respectively. The letters of credit secure self-insured workers compensation liabilities.

Timing of Commitments

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

Contractual Obligations (a)

 

Years Ended August 31,    Debt
Obligations
   Operating Lease
Obligations (b)
   Total

2007

   $ 4,420    $ 18,099    $ 22,519

2008

     162      14,580      14,742

2009

     36,087      11,187      47,274

2010

     403,214      9,035      412,249

2011

     150,162      6,790      156,952

Thereafter

     522      23,316      23,838
                    

Total

   $ 594,567    $ 83,007    $ 677,574
                    

(a) The above table excludes the additional payments for acquisition earn-out payments, as the exact amount and timing of payments is not known. In addition, interest payments on debt obligations and pension and post-retirement plan obligations are not included in the above table.
(b) 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.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices. To reduce such risks, we 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 our 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 2006 Annual Report on Form 10-K.

Currency Risk —We have exposure to foreign currency exchange fluctuations. Approximately 49% and 47% of our revenues for the six month ended February 28, 2007 and the year ended August 31, 2006, respectively, were denominated in currencies other than the U.S. dollar. Of those non-U.S. dollar denominated amounts, approximately 67% were denominated in euros, with the

 

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majority of the remainder denominated in various Asian and other European currencies. We selectively use cross-currency interest rate swaps to hedge the foreign currency exposure associated with its net investment in certain foreign operations (net investment hedges). Under such swaps, we receive interest based on a variable U.S. dollar rate and pays interest on variable euro rates on the outstanding notional principal amounts in dollars and euros. Foreign currency translation adjustments are recorded as a component of shareholders’ equity.

Our 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. Our financial position is not materially sensitive to fluctuations in exchange rates as any gains or losses on foreign currency exposures are generally offset by gains and losses on underlying payables, receivables, and net investments in foreign subsidiaries.

Interest Rate Risk —We have earnings exposure related to interest rate changes on its outstanding floating rate debt instruments that are based on LIBOR and EURIBOR interest rates. We have periodically utilized interest rate swap agreements to manage overall financing costs and interest rate risk. At February 28, 2007, we were a party to interest rate swap agreements that convert $100 million of floating rate debt to a fixed rate of interest. An increase or decrease of 25 basis points in the applicable interest rates on unhedged variable rate debt at February 28, 2007 would result in a change in pre-tax interest expense of approximately $1.0 million on an annual basis.

Commodity Risk —We source a wide variety of materials and components from a network of global suppliers. While such goods are typically available from numerous suppliers, commodity raw materials, such as steel, plastic resin, and copper, are subject to price fluctuations, which could have a negative impact on our results. We strive to pass along such commodity price increases to customers to avoid profit margin erosion. In addition, LEAD initiatives further mitigate the impact of commodity raw material price fluctuations as improved efficiencies across all locations are achieved. We did not enter into any significant derivative contracts to hedge its exposure to commodity risk in the first six months of fiscal 2007 and all of fiscal year 2006.

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). There have been no changes in our internal control over financial reporting that occurred during the quarter ended February 28, 2007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

Items 1, 1A, 2, 3 and 5 are inapplicable and have been omitted.

Item 4 – Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders was held on January 16, 2007 to elect a board of nine directors. Each director nominee was elected. The number of votes for each nominee is set forth below:

 

     Share Votes For    Share Votes Withheld

Robert C. Arzbaecher

   25,006,387    247,547

Gustav H.P. Boel

   25,147,509    106,425

Thomas J. Fischer

   22,988,114    2,265,820

William K. Hall

   24,275,717    978,217

Kathleen J. Hempel

   24,742,549    511,385

Robert A. Peterson

   24,737,645    516,289

William P. Sovey

   25,225,896    28,038

Dennis K. Williams

   24,779,089    474,845

Larry D. Yost

   25,225,289    28,645

Item 6 – Exhibits

 

(a) Exhibits

See “Index to Exhibits” on page 23, 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: April 6, 2007   By:  

/s/ Andrew G. Lampereur

   

Andrew G. Lampereur

Executive Vice President and Chief Financial Officer

(Principal 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 February 28, 2007

INDEX TO EXHIBITS

 

Exhibit   

Description

  

Incorporated

Herein

By Reference

To

  

Filed

Herewith

10.1    Amendment No. 3 to Amended and Restated Credit Agreement dated as of February 16, 2007, by and among Actuant Corporation, the financial institutions listed on the signature pages thereto and JP Morgan Chase Bank, National Association, as the administrative agent for the lenders   

Form 8-K filed

on February

23, 2007

  
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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