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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

  x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended August 31, 2011

OR

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from to                             to                             

Commission File No. 1-11288

ACTUANT CORPORATION

(Exact name of Registrant as specified in its charter)

 

Wisconsin   39-0168610
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification 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)

Securities registered pursuant to Section 12(b) of the Act:

 

        (Title of each class)        

   (Name of each exchange on
which registered)
 

Class A Common Stock, par value $0.20 per share

     New York Stock Exchange   

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        Yes    x          No    ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15d of the Act.        Yes    ¨          No    x

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, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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 “large accelerated filer,” “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

 

Large accelerated filer    x   Accelerated filer    ¨
Non-accelerated filer     ¨   Smaller-reporting company    ¨
(do not check if a smaller reporting company)  

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

There were 68,922,419 shares of the Registrant’s Class A Common Stock outstanding as of September 30, 2011. The aggregate market value of the shares of Common Stock (based upon the closing price on the New York Stock Exchange on February 28, 2011) held by non-affiliates of the Registrant was approximately $1,907 million.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on January 10, 2012 are incorporated by reference into Part III hereof.

 

 

 


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TABLE OF CONTENTS

 

PART I   
Item 1.    Business      1   
Item 1A.    Risk Factors      8   
Item 1B.    Unresolved Staff Comments      12   
Item 2.    Properties      12   
Item 3.    Legal Proceedings      13   
Item 4.    (Removed and Reserved)      13   
PART II   
Item 5.   

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

     14   
Item 6.    Selected Financial Data      16   
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      17   
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk      28   
Item 8.    Financial Statements and Supplementary Data      29   
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      69   
Item 9A.    Controls and Procedures      69   
Item 9B.    Other Information      69   
PART III   
Item 10.    Directors; Executive Officers and Corporate Governance      70   
Item 11.    Executive Compensation      70   
Item 12.   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     70   
Item 13.    Certain Relationships and Related Transactions, and Director Independence      70   
Item 14.    Principal Accounting Fees and Services      70   
PART IV   
Item 15.    Exhibits, Financial Statement Schedules      71   

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


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FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS

This annual report on Form 10-K contains certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms “may,” “should,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “objective,” “plan,” “project” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to inherent risks and uncertainties that may cause actual results or events to differ materially from those contemplated by such forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that may cause actual results or events to differ materially from those contemplated by such forward-looking statements include, without limitation, general economic conditions and market conditions in the truck, automotive, agricultural, industrial, production automation, oil & gas, power generation, maintenance, energy, marine, solar, infrastructure, residential and commercial construction and retail electrical Do-It-Yourself (“DIY”) industries, market acceptance of existing and new products, successful integration of acquisitions and related restructuring, operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material, labor, or overhead cost increases, foreign currency risk, interest rate risk, commodity risk, the impact of geopolitical activity on the economy, economic uncertainty and the impact on the Company’s served markets, litigation matters, the Company’s ability to access capital markets, and other factors that may be referred to or noted in the Company’s reports filed with the Securities and Exchange Commission from time to time. 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.

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

PART I

Item  1.    Business

General

Actuant Corporation, headquartered in Menomonee Falls, Wisconsin, is a Wisconsin corporation incorporated in 1910. We are a global diversified company that designs, manufactures and distributes a broad range of industrial products and systems to various end markets. The Company is organized into four operating and reportable segments as follows: Industrial, Energy, Electrical and Engineered Solutions.

The Industrial segment is primarily involved 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, as well as umbilical, rope and cable solutions to the global oil & gas, power generation and energy markets. The Electrical segment is primarily involved in the design, manufacture and distribution of a broad range of electrical products to the retail DIY, wholesale, original equipment manufacturer (“OEM”), solar, utility, marine and other harsh environment markets. The Engineered Solutions segment provides highly engineered position and motion control systems to OEMs in various on and off-highway vehicle markets, as well as a variety of other products to the industrial and agricultural markets.

Our long-term goal is to grow annual diluted earnings per share (“EPS”), excluding unusual or non-recurring items, faster than most multi-industry peers. We intend to leverage our 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 financial objectives. Our LEAD (“Lean Enterprise Across Disciplines”) operational

 

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excellence process utilizes various continuous improvement techniques to reduce 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. Our LEAD efforts also support our Growth + Innovation initiative, a new process focused on improving core sales growth. The cash flow that results from efficient asset management and improved profitability is used to reduce debt and fund both strategic acquisitions and internal growth opportunities.

A significant portion of our growth has come from business acquisitions and this will continue to be an important part of our strategy in the future. For further information, see Note 2, “Acquisitions” in the notes to consolidated financial statements.

Description of Business Segments

Industrial

The Industrial segment is a leading global supplier of branded hydraulic and mechanical tools to a broad array of end markets, including general maintenance and repair, industrial, infrastructure and production automation. Its primary products include high-force hydraulic tools, highly engineered heavy lifting solutions, workholding (production automation) solutions and concrete stressing products. These hydraulic and mechanical tools are marketed primarily through our Enerpac, Simplex, Precision Sure-Lock and Milwaukee Cylinder brand names.

The high-force hydraulic and mechanical tools, including cylinders, pumps, valves, specialty tools and presses are designed to allow users to apply controlled force and motion to increase productivity, reduce labor costs and make work safer and easier to perform. Our hydraulic tools operate at very high pressures of approximately 5,000 to 12,000 pounds per square inch and are generally sold by a diverse group of industrial and specialty fluid power distributors to customers in the infrastructure, mining, steel mill, cement, rail, oil & gas and general maintenance industries. Key industrial distributors include W.W. Grainger, Applied Industrial Technologies and MSC, which collectively generate less than 10% of this segment’s sales.

In addition to providing a comprehensive line of industrial tools, the segment also provides high-force hydraulic systems (integrated solutions) to meet customer specific requirements for safe and precise control of movement and positioning. These customized heavy lifting solutions, which combine hydraulics, steel fabrication and electronic controls with engineering and application knowledge, are typically utilized in major infrastructure projects (bridges, stadiums, tunnels and offshore platforms) for heavy lifting, launching & skidding or synchronous lifting applications.

The Industrial segment has leveraged production and engineering capabilities to also offer a broad range of workholding products (work supports, swing cylinders and system components) that are marketed through distributors to the automotive, machine tool and fixture design markets. In addition, the segment designs, manufactures and distributes concrete pre- and post-tensioning products (chucks and wedges, stressing jacks and anchors) which are used by concrete tensioning system designers, fabricators and installers for the residential and commercial construction, railroad, bridge, infrastructure and mining markets.

Energy

The Energy segment provides technical products and services to the global energy markets, where safety, security, reliability and productivity are key value drivers. Products include joint integrity tools and connectors for oil & gas and power generation installations, as well as umbilical, rope and cable solutions. In addition to these products, the Energy segment also provides manpower services, including machining, engineering and maintenance activities. The products and services of the Energy segment are distributed and marketed under various brand names (principally Hydratight, D.L. Ricci, Morgrip, Cortland, FibronBX, Puget Sound Rope, Biach and Selantic) to OEMs, maintenance and service organizations and energy producers in emerging and developed countries.

 

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Joint integrity products include hydraulic torque wrenches, bolt tensioners and portable machining equipment, which are either sold or rented to asset owners, service providers and end users. These products are used in the maintenance of bolted joints on oil rigs and platforms, wind turbines, refineries and pipelines, petrochemical installations, as well as fossil fuel and nuclear power plants to reduce customer downtime and provide increased safety and reliability. The Hydratight businesses also provide manpower services where our highly trained technicians perform bolting, machining and joint integrity work for customers. Our joint integrity business operates to world class safety standards while delivering products and services through a localized infrastructure of rental and maintenance depots. Service, product sales and rental revenue each generate approximately one-third of our joint integrity sales. This business maintains strong relationships with a variety of leading firms such as Statoil, BJ Services, Petrobras and British Petroleum.

The Energy segment also provides highly-engineered umbilical, rope and cable solutions that maximize performance, safety and efficiency for customers in the oil & gas, heavy marine, subsea, ROV and seismic markets. With its global design and manufacturing capabilities, the Cortland business is able to provide customized synthetic ropes, heavy lift slings, electro-mechanical cables and umbilicals to customers such as CGG Veritas, Expro and Sercel. These products are utilized in critical applications, often deployed in harsh environments (sub sea oil & gas production, maintenance and exploration) and are required to meet robust safety standards. Additional custom designed products are also sold to a variety of other niche markets including medical, security, aerospace and defense.

Electrical

The Electrical segment is involved in the design, manufacture and distribution of a broad range of electrical products to the retail DIY, OEM, electrical distribution, power transformation and harsh environment electrical markets. Our Electrical businesses share core competencies in product branding, distribution and channel management, global sourcing and managing the logistics of SKU intensive product lines. The Electrical segment sells its products through a combination of distributors, direct sales personnel and manufacturers’ representatives.

The Electrical segment provides the retail DIY market with a variety of electrical tools and consumables such as wire strippers, electrical meters, connectors, terminals, cable ties, staples and other wire management products and conduit bending equipment under the Gardner Bender, Del City and A.W. Sperry brands. These products are sold to leading retailers such as Lowe’s, The Home Depot, Menards, True Value and Ace Hardware, as well as numerous electrical distributors and OEM’s. This segment also sells power transformation products in North America including low voltage, single-phase dry type transformers and custom toroidal transformers under the Acme Electric brand name and high voltage switches under the Turner Electric brand name. These transformers are sold through electrical wholesale distributors, as well as directly to OEMs such as Rockwell Automation, Eaton, Yaskawa and General Electric. Product offerings also include electrical components and systems for the harsh environment and marine markets under the Ancor, Marinco, Guest, Mastervolt and B.E.P Marine brand names. These products are primarily sold to various customers in the industrial, marine, power generation, industrial and retail markets, including West Marine, Applied Materials and Kohler. The acquisition of Mastervolt in fiscal 2011 increased the Electrical segment’s product offerings, including batteries, generators, battery chargers, inverters, display panels, wiring and fully integrated systems, to the global marine and European solar markets. Solar products (primarily high efficiency solar inverters for residential and small commercial applications) are sold through local distributors and installers.

Engineered Solutions

The Engineered Solutions segment is a leading global designer and assembler of customized position and motion control systems and other industrial products to various transportation and other niche markets. This segment focuses on providing technical and highly engineered products, including actuation systems, mechanical power transmission products, engine air flow management solutions, rugged electronic instrumentation and flexible power transmission systems. Products in the Engineered Solutions segment are primarily marketed directly to OEMs through a technical sales organization. Within this segment, engineering capabilities, technical service, quality and established customer relationships are key competitive advantages.

 

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Approximately 70% of this segment’s revenue comes from the vehicle systems product line (Power-Packer, Gits and Power Gear brands), which is sold to the truck, automotive, off-highway and specialty vehicle markets. Products include hydraulic cab-tilt and latching systems which are sold to global heavy duty truck OEMs such as Volvo, Iveco, Scania and CNHTC and electro-hydraulic convertible top latching and actuation systems. The automotive convertible top actuation systems are utilized on both retractable soft and hard top vehicles manufactured by OEMs such as Daimler, Audi, Volkswagen, Renault, Peugeot, Saab, BMW, Volvo and Nissan. Our diesel engine air flow solutions, such as exhaust gas recirculation (EGR) systems, are used by diesel engine and turbocharger manufacturers to reduce emissions, improve fuel efficiency and increase horsepower. Primary end markets include heavy duty truck and off-highway equipment serving customers such as Caterpillar, DAF, Detroit Diesel, Garrett Turbochargers, Honeywell and Borg Warner. We also sell actuation systems to various specialty vehicle OEMs (principally in the defense and off-highway markets) such as Oshkosh, BAE Systems and Winnebago.

The fiscal 2011 acquisition of Weasler Engineering further diversified the Engineered Solutions segment. Weasler is a global designer and manufacturer of highly engineered drive train components and systems for agricultural, lawn & turf and industrial markets. The diverse products, technologies and engineered solutions of Weasler, Maxima Technologies, Elliott Manufacturing, Sanlo and Nielsen Sessions comprise the Other product lines within the Engineered Solutions segment. Products include severe-duty electronic instrumentation (including displays and clusters, machine controls and sensors), power transmission products (highly engineered drive train components including drive shafts, torque limiters, gearboxes and torsional dampers), custom designed flexible shafts and push pull cable assemblies, custom steel cable assemblies and a comprehensive line of case, container and industrial hardware. These products are sold to a variety of niche markets including agricultural implement, lawn & turf, construction, industrial, aerospace, material handling and security.

International Business

Our products and services are generally available worldwide, with our principal markets outside the United States being Europe and Asia. In fiscal 2011 we derived approximately 48% of our net sales from the United States, 35% from Europe, 12% from Asia and 5% from other areas. We have operations around the world and this geographic diversity allows us to draw on the skills of a global workforce, provides flexibility to our operations, allows us to drive economies of scale, provides revenue streams that may help offset economic trends that are specific to individual countries and offers us an opportunity to access new markets. In addition, we believe that our future growth depends, in part, on our ability to develop products and sales opportunities that successfully target developing countries. Although international operations are subject to certain risks, we continue to believe that a global presence is key to maintaining strong relationships with many of our global customers.

Product Development and Engineering

We conduct research and development activities to develop new products, enhance the functionality, effectiveness, ease of use and reliability of our existing products and expand the applications for our products. We believe that our engineering and research & development efforts have been key drivers of our success in the marketplace. Our advanced design and engineering capabilities contribute to the development of innovative and highly engineered products, maintain our technological leadership in each segment and enhance our ability to provide customers with unique and customized solutions and products. While much research and development activity supports improvements to existing products, our engineering staff engages in research for new products and product enhancements. We anticipate that we will continue to make significant expenditures for research and development as we seek to provide innovative products to maintain and improve our competitive position. Research and development costs are expensed as incurred, and approximated $18 million, $15 million and $16 million in fiscal 2011, 2010 and 2009, respectively. We also incur significant costs in connection with fulfilling custom orders and developing unique solutions for customer applications, which are not included in these research and development expense totals.

 

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Through our advanced proprietary processes, with approximately 640 patents (excluding pending applications), we create products that satisfy specific customer needs and make tasks easier and more efficient for our customers. We own numerous United States and foreign patents and trademarks. No individual patent or trademark is believed to be of such importance that its termination would have a material adverse effect on our business.

Competition

The markets for all of our products are highly competitive. We provide a diverse and broad range of industrial products and systems to numerous global end markets, many of which are highly fragmented. Although we face larger competitors in several served markets, much of our competition is comprised of smaller companies that often lack the global footprint or financial resources to serve global customers. We compete for business principally on the basis of customer service, product quality, engineering, research and development expertise, and price. In addition, we believe that our competitive cost structure, strategic global sourcing capabilities and global distribution support our competitive position.

Manufacturing and Operations

While we do have extensive manufacturing capabilities including machining, stamping, injection molding and fabrication, our manufacturing primarily consists of light assembly operations. We have implemented single piece flow methodology in most of our manufacturing plants, which reduces inventory levels, lowers “re-work” costs and shortens lead times to customers. We manufacture the majority of the products we sell, but strategically source components and finished goods from an established global network of qualified suppliers. Components are purchased from a variety of suppliers, including those in low cost countries such as China, Turkey and Mexico. We have built strong relationships with our key suppliers and, while we single source certain of our components, we believe that in most cases there are several qualified alternative sources.

Raw Material Costs and Inflation

We source a wide variety of materials and components from a network of global suppliers. These items are typically available from numerous suppliers. 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 offset such cost inflation with price increases to customers and by driving operational cost reductions.

No meaningful measures of inflation are available because we have significant operations in countries with diverse rates of inflation and currency rate movements. However, we believe that the overall rate of inflation in recent years has been relatively low and has not had a significant effect on our results of operations, after factoring in price increases and other manufacturing cost reductions.

Order Backlogs and Seasonality

Our Industrial, Energy and Electrical segments have relatively short order-to-ship cycles, while our OEM oriented Engineered Solutions segment has a longer cycle, and therefore typically has a larger backlog. We had order backlogs of approximately $260 million and $204 million at August 31, 2011 and 2010, respectively. Substantially all orders are expected to be completed in the next twelve months. While we typically enjoy a stronger second half of our fiscal year, our consolidated sales are not subject to significant seasonal fluctuations.

Sales Percentages by Fiscal Quarter

 

     2011     2010  

Quarter 1

     22     23

Quarter 2

     23     23

Quarter 3

     27     27

Quarter 4

     28     27
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

 

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Employees

At August 31, 2011, we employed approximately 6,200 individuals. Our employees are not subject to collective bargaining agreements, with the exception of approximately 375 U.S. production employees, as well as certain international employees covered by government mandated collective labor agreements. We believe we have a good working relationship with our employees.

Environmental Matters

Our operations, like those of most industrial businesses, are subject to federal, state, local and foreign laws and regulations relating to the protection of the environment, including those regulating discharges of hazardous materials into the air and water, the storage and disposal of such materials and the clean-up of soil and groundwater contamination. We believe that we are in substantial compliance with applicable environmental regulations. Compliance with these laws has and will require expenditures on an ongoing basis. However, environmental expenditures over the last three years have not been material. Soil and groundwater contamination has been identified at a few facilities that we operate or formerly owned or operated. We are also a party to certain state and local environmental matters, have provided environmental indemnifications for certain divested businesses, and retain responsibility for certain potential environmental liabilities. For further information, see Note 17, “Contingencies and Litigation” in the notes to consolidated financial statements.

Executive Officers of the Registrant

The names, ages and positions of all of the executive officers of the Company as of October 15, 2011 are listed below.

 

Name

   Age     

Position

Robert C. Arzbaecher

     51       President and Chief Executive Officer; Chairman of the Board

William L. Axline

     63       Executive Vice President—Global Customer Relationships

William S. Blackmore

     55       Executive Vice President—Engineered Solutions Segment

Gustav H.P. Boel

     66       Executive Vice President; Director

Mark E. Goldstein

     55       Executive Vice President and Chief Operating Officer

Sheri R. Grissom

     47       Executive Vice President—Global Human Resources

Brian K. Kobylinski

     45       Executive Vice President—Industrial and Energy Segments

Andrew G. Lampereur

     48       Executive Vice President and Chief Financial Officer

David L. Scheer

     52       Executive Vice President—Electrical Segment

Theodore C. Wozniak

     53       Executive Vice President—Business Development

Robert C. Arzbaecher, President and Chief Executive Officer and Chairman of the Board of Directors. Mr. Arzbaecher was named President and Chief Executive Officer of the Company in August 2000. He served as Vice President and Chief Financial Officer of Actuant starting in 1994 and Senior Vice President in 1998. He served as Vice President, Finance of Tools & Supplies from 1993 to 1994. He joined Actuant in 1992 as Corporate Controller. From 1988 through 1991, Mr. Arzbaecher was employed by Grabill Aerospace Industries LTD, where he last held the position of Chief Financial Officer.

William L. Axline, Executive Vice President—Global Customer Relationships. In fiscal 2011, Mr. Axline was appointed to the newly created position of Executive Vice President—Global Customer Relationships. Mr. Axline joined Actuant in January 2008 as Executive Vice President of the Electrical Segment. Prior to Actuant, Mr. Axline held the role of Executive Vice President, Chief Operating Officer of Fluidmaster, Inc. from 2003 to 2007. Prior to joining Fluidmaster, he served as President, Chief Executive Officer, of Distribution America, Inc. from 2001 to 2003 and held the role of Vice President, General Manager at Alltrade, Inc. from 1999 to 2000. Mr. Axline also had over 27 years of leadership experience with The Stanley Works.

 

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William S. Blackmore, Executive Vice President—Engineered Solutions Segment. Mr. Blackmore has been the Executive Vice-President—Engineered Solutions Segment since fiscal year 2004. He joined the Company as leader of the Engineered Solutions-Americas business in fiscal year 2002. Prior to joining Actuant, he served as President of Integrated Systems—Americas at APW Ltd. from 2000 to 2001 and as President, Rexnord Gear and Coupling Products (“Rexnord”) from 1997 to 2000. Prior to 1997, Mr. Blackmore held various general management positions at Rexnord and Pillar Industries.

Gustav H.P. Boel, Executive Vice President and member of the Board of Directors. Mr. Boel has been associated with the Company for over 25 years, currently as a member of the Board of Directors and an Executive Vice President in charge of our LEAD initiatives. Following the spin-off of the Company’s Electronics segment in fiscal 2000, he left the Company as an employee but served as a member of the Board of Directors. During this time he was employed by APW Ltd., where he last held the position of Senior Vice President. In September 2002, he rejoined the Company as an employee and was named business leader of the European Electrical business in addition to his Board responsibilities. Prior to the spin-off, he held various positions with Actuant, including President of the Industrial business segment, President of Engineered Solutions Europe and President of Enerpac.

Mark E. Goldstein, Executive Vice President and Chief Operating Officer. Mr. Goldstein has been Actuant’s Chief Operating Officer since fiscal 2007. He joined the Company in fiscal 2001 as the leader of the Gardner Bender business and was appointed Executive Vice President—Tools and Supplies in 2003. Prior to joining Actuant, he spent over 20 years in sales, marketing and operations management positions at The Stanley Works, most recently as President, Stanley Door Systems.

Sheri R. Grissom, Executive Vice President—Global Human Resources. Ms. Grissom joined Actuant in fiscal 2011, from Johnson Controls, where she was Vice President of Human Resources for the Service, Energy Solution and Global Workplace Solutions business. Prior to that, Ms. Grissom held increasingly responsible human resources positions with several leading global organizations including Johns Manville, McKechnie Group and General Electric. Ms. Grissom brings to Actuant over 20 years of global human resources experience.

Brian K. Kobylinski, Executive Vice President—Industrial and Energy Segments. Mr. Kobylinski joined Actuant in 1993 and progressed through a number of management roles within the Electrical Segment. He became Vice President of Business Development for Actuant in 2002 and was named Global Business Leader, Hydratight in 2005. In 2007, he was promoted to the position of Industrial and Energy Segment Leader. Prior to Actuant, Mr. Kobylinski was employed by Fort Howard Corporation and Federated Insurance.

Andrew G. Lampereur, Executive Vice President and Chief Financial Officer. Mr. Lampereur joined Actuant in 1993 as Corporate Controller, a position he held until 1996 when he was appointed Vice President of Finance for Gardner Bender. In 1998, Mr. Lampereur was appointed Vice President, General Manager for Gardner Bender. He was appointed to his present position in August 2000. Prior to joining Actuant, Mr. Lampereur held a number of financial management positions at Terex Corporation.

David L. Scheer, Executive Vice President—Electrical Segment. Mr. Scheer joined Actuant in his current role in fiscal 2011, bringing over 25 years of experience in retail and wholesale electrical businesses. Prior to joining Actuant, Mr. Scheer was Chief Operating Officer at GranQuartz (2005-2010) and Sigma Electric Manufacturing (2002-2005). Mr. Scheer also previously held various management positions at Rexel USA, Thomas & Betts and Electroline Manufacturing.

Theodore C. Wozniak, Executive Vice President—Business Development. Mr. Wozniak joined Actuant in 2006 in his current position. Prior to joining Actuant, Mr. Wozniak held senior investment banking positions at Wachovia Securities, most recently as Managing Director of the Industrial Growth Corporate Finance Group. Mr. Wozniak was employed by Wachovia Securities for ten years. Prior to that, Mr. Wozniak held various investment banking positions at First Chicago Capital Markets and Riggs National Corporation.

 

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Item  1A.    Risk Factors

The risk factors discussed in this section should be considered together with other information in the Form 10-K and should not be considered the only risks facing the Company.

The Company’s financial condition, results of operations, cash flows or liquidity may be adversely affected by a prolonged economic downturn or economic uncertainty.

Our businesses and operating results have been and will continue to be affected by worldwide economic conditions. The level of demand for our products depends, in part, on the general economic conditions that exist in our served end markets. A substantial portion of our revenues are derived from customers in cyclical industries (vehicles, industrial, oil & gas, marine and electrical) that typically are adversely affected by downward economic cycles. As global economic conditions deteriorate or economic uncertainty continues, our customers may experience deterioration of their businesses, which may delay or lengthen sales cycles. Unforeseen events may also require additional restructuring costs. Although we expect that the related cost savings and realization of efficiencies will offset the restructuring related costs over time, we may not achieve the net benefits. Like most industrial companies, our sensitivity to economic cycles may have a material effect on our financial condition, results of operations, cash flows and liquidity.

Our growth strategy includes strategic acquisitions. We may not be able to consummate future acquisitions or successfully integrate recent and future acquisitions.

A significant portion of our growth has come from strategic acquisitions of businesses. We plan to continue making acquisitions to enhance our global market position and broaden our product offerings. Our ability to successfully execute acquisitions will be impacted by a number of factors, including the availability of financing for acquisitions on terms acceptable to us, our ability to identify acquisition candidates and increased competition for acquisitions. The process of integrating acquired businesses into our existing operations may result in unforeseen operating difficulties and may require additional financial resources and attention from management that would otherwise be available for the ongoing development or expansion of our existing operations. Failure to effectively execute our acquisition strategy or successfully integrate the acquired businesses could have an adverse effect on our financial condition, results of operations, cash flows and liquidity.

We may not be able to realize the anticipated benefits from acquired companies.

We may not be able to realize the anticipated benefits from acquired companies. Achieving those benefits depends on the timely, efficient and successful execution of a number of post-acquisition events, including integrating the acquired business into the Company. Factors that could affect our ability to achieve these benefits include:

 

   

difficulties in integrating and managing personnel, financial reporting and other systems used by the acquired businesses;

 

   

the failure of acquired businesses to perform in accordance with our expectations;

 

   

failure to achieve anticipated synergies between our business units and the business units of acquired businesses;

 

   

the loss of customers of acquired businesses; or

 

   

the loss of key managers of acquired businesses.

If acquired businesses do not operate as we anticipate, it could materially impact our business, financial condition and results of operations. In addition, acquired businesses may operate in niche markets in which we have little or no experience. In such instances, we will be highly dependent on existing managers and employees to manage those businesses, and the loss of any key managers or employees of the acquired business could have a material adverse effect on our financial condition, results of operations, cash flows and liquidity.

 

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The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and may result in unexpected liabilities.

Certain of the acquisition agreements from past acquisitions require the former owners to indemnify us against certain liabilities related to the operation of each of their companies before we acquired it. In most of these agreements, however, the liability of the former owners is limited and certain former owners may not be able to meet their indemnification responsibilities. These indemnification provisions may not fully protect us, and as a result we may face unexpected liabilities that adversely affect our profitability and financial position.

Our goodwill and other intangible assets represent a substantial amount of our total assets.

Our total assets reflect substantial intangible assets, primarily goodwill. At August 31, 2011, goodwill and other intangible assets totaled $1,368 million, or about 67% of our total assets. The goodwill results from our acquisitions, representing the excess of cost over the fair value of the net tangible and other identifiable intangible assets we have acquired. We assess annually whether there has been impairment in the value of our goodwill or indefinite-lived intangible assets. If future operating performance at one or more of our reporting units were to fall significantly below current levels, we could be required to recognize a non-cash charge to operating earnings for goodwill or other intangible asset impairment. Any significant goodwill or intangible asset impairment would negatively affect our financial condition and results of operations. See Note 6, “Impairment Charges” in the notes to consolidated financial statements for more information regarding impairment charges recognized in fiscal 2010 and 2009.

If the Company fails to develop new products or its customers do not accept the new products it develops, the Company’s business could be adversely affected.

Our ability to develop new products based on innovation can affect our competitive position and often requires the investment of significant resources. Difficulties or delays in research, development or production of new products or failure to gain market acceptance of new products and technologies may reduce future sales and adversely affect our competitive position. We continue to invest in the development and marketing of new products through our Growth + Innovation process. There can be no assurance that we will have sufficient resources to make such investments, that we will be able to make the technological advances necessary to maintain competitive advantages or that we can recover major research and development expenses. If we fail to make innovations, launch products with quality problems or the market does not accept our new products, then our financial condition, results of operations, cash flows and liquidity could be adversely affected. A lack of successful new product developments may also cause customers to buy from a competitor or may cause us to have to lower our prices to compete.

Our indebtedness could harm our operating flexibility and competitive position.

We have incurred, and may in the future incur, significant indebtedness in connection with acquisitions. We have, and will continue to have, a substantial amount of debt which requires interest and principal payments. Our level of debt and the limitations imposed on us by our debt agreements could adversely affect our operating flexibility and put us at a competitive disadvantage. Our substantial debt level may adversely affect our future performance.

Our ability to make scheduled principal and interest payments, refinance our indebtedness and satisfy our other debt and lease obligations will depend upon our future operating performance and credit market conditions, which could be affected by factors beyond our control. In addition, there can be no assurance that future borrowings or equity financings will be available to us on favorable terms, or at all, for the payment or refinancing of our indebtedness. If we are unable to service our indebtedness, our business, financial condition and results of operations will be adversely affected.

 

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Our ability to service our debt obligations would be harmed if we fail to comply with the financial and other covenants in our debt agreements.

Our senior credit agreement and our other debt agreements contain financial and other restrictive covenants. These covenants could adversely affect us by limiting our financial and operating flexibility as well as our ability to plan for and react to market conditions and to meet our capital needs. Our failure to comply with these covenants could result in events of default which, if not cured or waived, could result in us being required to repay indebtedness before its due date, and we may not have the financial resources or be able to arrange alternative financing to do so. Borrowings under our senior credit facility are secured by most domestic personal property assets and are guaranteed by most of our domestic subsidiaries and by a pledge of the stock of most of our domestic subsidiaries and certain foreign subsidiaries. If borrowings under our senior credit facility were declared or became due and payable immediately as the result of an event of default and we were unable to repay or refinance those borrowings, the lenders could foreclose on the pledged assets and stock. Any event that requires us to repay any of our debt before it is due could require us to borrow additional amounts at unfavorable borrowing terms, cause a significant decrease in our liquidity and impair our ability to pay amounts due on our indebtedness. Moreover, if we are required to repay any of our debt before it becomes due, we may be unable to borrow additional amounts or otherwise obtain the cash necessary to repay that debt, when due, which could seriously harm our business.

Our businesses operate in highly competitive markets, so we may be forced to cut prices or incur additional costs.

Our businesses generally face substantial competition in each of their respective markets. We may lose market share in certain businesses or be forced to reduce prices or incur increased costs. We compete on the basis of product design, quality, availability, performance, customer service and price. Present or future competitors may have greater financial, technical or other resources which could put us at a competitive disadvantage.

Our international operations pose currency and other risks.

We continue to focus on penetrating global markets as part of our overall growth strategy and expect sales from and into foreign markets to continue to represent a significant portion of our revenue. In addition, many of the Company’s manufacturing operations and suppliers are located outside the United States. Our international operations present special risks, primarily from currency exchange rate fluctuations, exposure to local economic and political conditions, export and import restrictions, controls on repatriation of cash and exposure to local political conditions. In particular, our results of operations have been significantly affected by fluctuations in foreign currency exchange rates, especially the euro and British pound. For example, since approximately one-third of our revenue is generated in Europe, the weakening of the U.S. dollar against the euro and British pound in fiscal 2011 favorably impacted our results of operations due to the translation of non-U.S. dollar denominated revenues. In addition, there have been several proposals to reform international taxation rules in the United States. We earn a substantial portion of our income from international operations and therefore changes to United States international tax rules may have a material adverse effect on future results of operations or liquidity. To the extent that we expand our international presence, these risks may increase.

Geopolitical unrest and terrorist activities may cause the economic conditions in the U.S. or abroad to deteriorate, which could harm our business.

Terrorist attacks against targets in the U.S. or abroad, rumors or threats of war, other geopolitical activity or trade disruptions may impact our operations or cause general economic conditions in the U.S. and abroad to deteriorate. A prolonged economic slowdown or recession in the U.S. or in other areas of the world could reduce the demand for our products and, therefore, negatively affect our future sales. Any of these events could have a significant impact on our business, financial condition or results of operations.

 

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Large or rapid increases in the costs of raw materials or substantial decreases in their availability could adversely affect our operations.

The primary raw materials that we use include steel, plastic resin, copper, brass, steel wire and rubber. Most of our suppliers are not currently parties to long-term contracts with us. Consequently, we are vulnerable to fluctuations in prices of such raw materials. If market prices for certain materials such as steel, plastic resin and copper rise, it could have a negative effect on our operating results and ability to manufacture our respective products on a timely basis. Factors such as supply and demand, freight costs and transportation availability, inventory levels, the level of imports and general economic conditions may affect the prices of raw materials that we need. If we experience a significant increase in raw material prices, or if we are unable to pass along increases in raw material prices to our customers, our results of operations could be adversely affected. In addition, an increasing portion of our products are sourced from low cost regions. Changes in export laws, taxes and disruptions in transportation routes could adversely impact our results of operations.

Regulatory and legal developments including changes to United States taxation rules, health care reform and governmental climate change initiatives could negatively affect our financial performance.

Our operations and the markets we compete in are subject to numerous federal, state, local and foreign governmental laws and regulations. Existing laws and regulations may be revised or reinterpreted and new laws and regulations, including with respect to taxation, health care reform and governmental climate change initiatives, may be adopted or become applicable to us or customers. These regulations are complex, change frequently and have tended to become more stringent over time. We cannot predict the form any such new laws or regulations will take or the impact any of these laws and regulations will have on our business or operations. Any significant change in any of these regulations could reduce demand for our products or increase our cost of producing these products.

Environmental laws and regulations may result in additional costs.

We are subject to federal, state, local and foreign laws and regulations governing public and worker health and safety. Any violations of these laws by us could cause us to incur unanticipated liabilities that could harm our operating results. Pursuant to such laws, governmental authorities have required us to contribute to the cost of investigating or remediating certain matters at current or previously owned and operated sites. In addition, we provided environmental indemnities in connection with the sale of certain businesses and product lines. Liability as an owner or operator, or as an arranger for the treatment or disposal of hazardous substances, can be joint and several and can be imposed without regard to fault. There is a risk that our costs relating to these matters could be greater than what we currently expect or exceed our insurance coverage, or that additional remediation and compliance obligations could arise which require us to make material expenditures. In particular, more stringent environmental laws, unanticipated remediation requirements or the discovery of previously unknown conditions could materially harm our financial condition and operating results. We are also required to comply with various environmental laws and maintain permits, some of which are subject to discretionary renewal from time to time, for many of our businesses, and our business operations could be restricted if we are unable to renew existing permits or to obtain any additional permits that we may require.

Any loss of key personnel and the inability to attract and retain qualified employees could have a material adverse impact on our operations.

We are dependent on the continued services of key executives such as our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and executives in charge of our segments. We currently do not have employment agreements with most of these or other officers. The departure of key personnel without adequate replacement could severely disrupt our business operations. Additionally, we need qualified managers and skilled employees with technical and manufacturing industry experience to operate our businesses successfully. From time to time there may be shortages of skilled labor which may make it more difficult and expensive for us to

 

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attract and retain qualified employees. If we are unable to attract and retain qualified individuals or our costs to do so increase significantly, our operations would be materially adversely affected.

If our intellectual property protection is inadequate, others may be able to use our technologies and tradenames and thereby reduce our ability to compete, which could have a material adverse effect on us, our financial condition and results of operations.

We regard much of the technology underlying our services and products and the trademarks under which we market our products as proprietary. The steps we take to protect our proprietary technology may be inadequate to prevent misappropriation of our technology, or third parties may independently develop similar technology. We rely on a combination of patents, trademark, copyright and trade secret laws, employee and third-party non-disclosure agreements and other contracts to establish and protect our technology and other intellectual property rights. The agreements may be breached or terminated, and we may not have adequate remedies for any breach, and existing trade secrets, patent and copyright law afford us limited protection. Policing unauthorized use of our intellectual property is difficult. A third party could copy or otherwise obtain and use our products or technology without authorization. Litigation may be necessary for us to defend against claims of infringement or to protect our intellectual property rights and could result in substantial cost to us and diversion of our efforts. Further, we might not prevail in such litigation which could harm our business.

Our products could infringe on the intellectual property of others, which may cause us to engage in costly litigation and, if we are not successful, could cause us to pay substantial damages and prohibit us from selling our products.

Third parties may assert infringement or other intellectual property claims against us based on their patents or other intellectual property claims, and we may have to pay substantial damages, possibly including treble damages, if it is ultimately determined that our products infringe. We may have to obtain a license to sell our products if it is determined that our products infringe upon another party’s intellectual property. We might be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay substantial royalties. Even if infringement claims against us are without merit, defending these types of lawsuits takes significant time, may be expensive and may divert management attention from other business concerns.

Item  1B.    Unresolved Staff Comments

None.

Item 2.    Properties

As of August 31, 2011, the Company operated the following facilities in its continuing operations (square footage in thousands):

 

     Number of Locations                       
            Distribution /
Sales /
Admin
            Square Footage  
     Manufacturing         Total      Owned      Leased      Total  

Industrial

     8         12         20         157         496         653   

Energy

     11         16         27         26         485         511   

Electrical

     6         7         13         127         624         751   

Engineered Solutions

     15         3         18         677         716         1,393   

Corporate and other

     1         3         4         353         90         443   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     41         41         82         1,340         2,411         3,751   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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We consider our facilities suitable and adequate for the purposes for which they are used and do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities. Our largest locations are located in the United States, the United Kingdom, the Netherlands and China. We also maintain a presence in Australia, Austria, Brazil, Canada, France, Germany, Hong Kong, Hungary, India, Italy, Japan, Kazakhstan, Malaysia, Mexico, New Zealand, Norway, Poland, Russia, Singapore, South Korea, Spain, Turkey and the United Arab Emirates. See Note 10 “Leases” in the notes to the consolidated financial statements for information with respect to our lease commitments. In addition to the facilities above, we retain responsibility for approximately 14 owned or leased facilities that are now idle and available for sale or sublease.

Item 3.    Legal Proceedings

We are a party to various legal proceedings that have arisen in the normal course of business, including product liability, environmental, labor and patent claims.

We have recorded reserves for estimated losses 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, the amount of the loss can be reasonably estimated and the loss is not covered by insurance. In our opinion, the resolution of these contingencies is not likely to have a material adverse effect on our financial condition, results of operation or cash flows. For further information refer to Note 17, “Contingencies and Litigation” in the notes to consolidated financial statements.

Item 4.    (Removed and Reserved)

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company’s common stock is traded on the New York Stock Exchange under the symbol ATU. At September 30, 2011, there were 1,809 shareholders of record of Actuant Corporation common stock. The high and low sales prices of the common stock were as follows for the previous two fiscal years:

 

Fiscal
Year

  

Period

   High      Low  

2011

   June 1, 2011 to August 31, 2011    $ 27.65       $ 17.47   
   March 1, 2011 to May 31, 2011      29.29         23.94   
   December 1, 2010 to February 28, 2011      30.41         23.91   
   September 1, 2010 to November 30, 2010      23.97         20.06   

2010

   June 1, 2010 to August 31, 2010    $ 21.74       $ 17.47   
   March 1, 2010 to May 31, 2010      23.87         18.10   
   December 1, 2009 to February 28, 2010      19.80         15.93   
   September 1, 2009 to November 30, 2009      17.31         13.37   

Dividends

In fiscal 2011, the Company declared a dividend of $0.04 per common share payable on October 14, 2011 to shareholders of record on September 30, 2011. In fiscal 2010, the Company declared a dividend of $0.04 per common share payable on October 15, 2010 to shareholders of record on September 30, 2010.

Securities Authorized for Issuance under Equity Compensation Plans

The information required by Item 201(d) of Regulation S-K is provided under Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, which is incorporated herein by reference.

 

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Performance Graph:

The graph below compares the cumulative 5-year total return of Actuant Corporation’s common stock with the cumulative total returns of the S&P 500 index and the Dow Jones US Diversified Industrials index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from August 31, 2006 to August 31, 2011.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among Actuant Corporation, the S&P 500 Index

and the Dow Jones US Diversified Industrials Index

LOGO

Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Copyright© 2011 Dow Jones & Co. All rights reserved.

 

     8/06      8/07      8/08      8/09      8/10      8/11  

Actuant Corporation

   $ 100.00       $ 135.45       $ 140.31       $ 62.94       $ 88.51       $ 89.83   

S&P 500

     100.00         115.14         102.31         83.63         87.74         103.97   

Dow Jones US Diversified Industrials

     100.00         122.28         97.10         61.98         67.34         78.03   

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

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Item 6.    Selected Financial Data

The following selected financial data has been derived from the consolidated financial statements of the Company. The data should be read in conjunction with these financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Year Ended August 31,  
    2011     2010     2009     2008     2007  
    (in millions, except per share data)  

Statement of Earnings Data(1)(2):

         

Net sales

  $ 1,445      $ 1,161      $ 1,118      $ 1,446      $ 1,274   

Gross profit

    556        427        388        529        452   

Selling, administrative and engineering expenses

    333        268        250        298        247   

Restructuring charges

    2        15        19        —          —     

Impairment charges

    —          —          31        —          —     

Amortization of intangible assets

    27        22        20        14        10   

Operating profit

    194        122        68        217        195   

Earnings from continuing operations

    125        70        26        126        114   

Diluted earnings per share from continuing operations

  $ 1.68      $ 0.97      $ 0.43      $ 1.98      $ 1.83   

Cash dividends per share

    0.04        0.04        0.04        0.04        0.04   

Diluted weighted average common shares outstanding

    75,305        74,209        66,064        64,833        63,628   

Balance Sheet Data (at end of period)(2):

         

Total assets

  $ 2,057      $ 1,622      $ 1,568      $ 1,668      $ 1,501   

Total debt

    525        367        400        574        562   

 

(1) Results are from continuing operations and exclude the financial results of previously divested businesses (European Electrical, Acme Aerospace and BH Electronics).
(2) We have completed various acquisitions that impact the comparability of the selected financial data. The results of operations for these acquisitions are included in our financial results for the period subsequent to their acquisition date. The following table summarizes the significant acquisitions that were completed during the last five years:

 

     Segment    Date Completed    Sales(a)  

Weasler Engineering, Inc.

   Engineered Solutions    June 2011    $ 85   

Mastervolt Intl. Holding B.V.

   Electrical    December 2010      110   

Selantic

   Energy    June 2010      10   

Biach Industries

   Energy    April 2010      5   

Hydrospex

   Industrial    April 2010      25   

Team Hydrotec

   Industrial    April 2010      5   

The Cortland Companies

      September 2009   

Cortland Cable Company

   Energy         75   

Sanlo, Inc.

   Engineered Solutions         25   

Superior Plant Services, LLC

   Energy    March 2008      25   

Templeton, Kenly & Co, Inc.

   Industrial    September 2007      35   

BH Electronics, Inc.

   Electrical    July 2007      35   

T.T. Fijnmechanica B.V.

   Industrial    April 2007      10   

Injectaseal Deutschland GmbH

   Energy    January 2007      10   

Veha Haaksbergen B.V.

   Industrial    January 2007      5   

Maxima Technologies

   Engineered Solutions    December 2006      65   

 

  (a) Represents approximate annual sales (in millions) at the acquisition date.

 

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Background

As Discussed in Item 1, “Business,” we are a global diversified company that manufactures a broad range of industrial products and systems and are organized into four reportable segments, Industrial, Energy, Electrical and Engineered Solutions. The Industrial segment is primarily involved 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, as well as umbilical, rope and cable solutions to the global oil & gas, power generation and energy markets. The Electrical segment designs, manufactures and distributes a broad range of electrical products to the retail DIY, wholesale, OEM, solar, utility, marine and other harsh environment 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.

Our businesses provide a vast array of products and services across multiple customers and geographies which results in significant diversification to our overall enterprise. Most end markets we serve slowed dramatically in fiscal 2009 and into early fiscal 2010, as a result of the global recession. Since then, the majority of our end markets have improved, the result of increased global industrial output, improved worldwide demand for energy, elevated industrial manufacturing activities and increased production of vehicles for the heavy-duty truck, construction, military and agricultural markets. The long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment, but also on our ability to identify, consummate and integrate strategic acquisitions, develop and market innovative new products, expand our business activity geographically and continuously improve operational excellence. We remain focused on maintaining our financial strength by continually adjusting our cost structure to reflect changes in demand levels, if needed, and by proactively managing working capital and cash flow generation. Our priorities during fiscal 2012 include a continued focus on operational excellence, cash flow generation and growth initiatives (new product development, market share gains and strategic acquisitions).

Results of Operations

The comparability of operating results has been impacted by acquisitions, divestitures and the economic conditions that existed in the end markets we serve. The operating results of acquired businesses are included in our consolidated financial statements only since their respective acquisition date. In addition to acquisitions, changes in foreign currency exchange rates also influence our financial results as approximately half of our sales are denominated in currencies other than the U.S. dollar. The year-over-year weakening of the U.S. dollar during fiscal 2011 favorably impacted our operating results due to the translation of non-U.S. dollar denominated results. Impairment charges, restructuring costs and the related benefits from previously completed restructuring projects also impact the comparability of financial results. Since fiscal 2009 we have taken significant actions to address our cost structure, including workforce reductions, consolidation of facilities and the centralization of certain selling and administrative functions.

 

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Historical Financial Data (in millions)

 

    Year Ended August 31,  
    2011     2010     2009  

Statements of Earnings Data:

           

Net sales

  $ 1,445        100   $ 1,161        100   $ 1,118        100

Cost of products sold

    889        62     734        63     730        65
 

 

 

     

 

 

     

 

 

   

Gross profit

    556        38     427        37     388        35

Selling, administration and engineering expenses

    333        23     268        23     250        22

Restructuring charges

    2        0     15        1     19        2

Impairment charges

    —          0     —          0     31        3

Amortization of intangible assets

    27        2     22        2     20        2
 

 

 

     

 

 

     

 

 

   

Operating profit

    194        13     122        11     68        6

Financing costs, net

    32        2     32        3     42        4

Other expense (income), net

    2        0     1        0     (1     0
 

 

 

     

 

 

     

 

 

   

Earnings from continuing operations before income tax expense

    160        11     89        8     27        2

Income tax expense

    35        2     19        2     1        0
 

 

 

     

 

 

     

 

 

   

Earnings from continuing operations

    125        9     70        6     26        2

Loss from discontinued operations, net of income taxes

    (13     -1     (46     -4     (12     -1
 

 

 

     

 

 

     

 

 

   

Net earnings

  $ 112        8   $ 24        2   $ 14        1
 

 

 

     

 

 

     

 

 

   

Other Financial Data:

           

Depreciation

  $ 25        $ 25        $ 30     

Capital expenditures

    23          20          21     

Consolidated net sales increased by approximately $284 million (25%) from $1,161 million in fiscal 2010 to $1,445 million in fiscal 2011. Excluding the $119 million of sales from acquired businesses and the $23 million favorable impact of foreign currency exchange rate changes, fiscal 2011 consolidated core sales increased 13%. Consolidated net sales increased by approximately $43 million (4%) from $1,118 million in fiscal 2009 to $1,161 million in fiscal 2010. Excluding the $14 million of sales from acquired businesses and the $12 million favorable impact of foreign currency exchange rate changes, fiscal 2010 consolidated core sales increased 2% compared to the prior year. Changes in net sales at the segment level are discussed in further detail below.

Consolidated operating profit for fiscal 2011 was $194 million, compared with $122 million and $68 million for fiscal 2010 and 2009, respectively. In addition to the impact of economic conditions, the comparability between periods is impacted by acquisitions, the $31 million impairment charge in fiscal 2009 and the timing and amount of restructuring charges and related benefits. Changes in operating profit at the segment level are discussed in further detail below.

 

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Segment Results

Industrial Segment

During the fourth quarter of fiscal 2011, the Industrial segment delivered its sixth consecutive quarter of year-over-year double digit core sales growth due to robust demand across nearly all geographic regions. This increased sales volume, coupled with the benefits of previous restructuring actions, drove significant year-over-year improvement in operating profits. The Industrial segment continues to focus on operational excellence (manufacturing, distribution, sourcing and supply chain management), the commercialization of new products and expansion of its business in fast growing regions and vertical markets. The following table sets forth the results of operations for the Industrial segment (in millions):

 

     Year Ended August 31,  
     2011     2010     2009  

Net Sales

   $ 393      $ 300      $ 287   

Operating Profit

     98        66        67   

Operating Profit %

     25.0     22.0     23.3

Fiscal 2011 compared to Fiscal 2010

Compared to fiscal 2010, Industrial segment net sales increased $93 million (31%) during fiscal 2011. The acquisition of two Integrated Solutions businesses (Hydrospex and Team Hydrotec) contributed $36 million of sales for the twelve months ended August 31, 2011. Excluding sales from these acquisitions and the weaker U.S. dollar ($8 million), core sales growth for fiscal 2011 was 19%. In addition to generally improved macroeconomic conditions, the increased sales were the result of new product introductions and increased demand from distributors and end users in the mining, oil & gas and general maintenance industries.

Industrial segment operating profits reached $98 million for the year ended August 31, 2011 compared to $66 million during fiscal 2010. Fiscal 2011 operating profit comparisons were favorably impacted by increased sales volumes and a $6 million reduction in restructuring costs. The expansion of the Industrial segment operating profit margin, despite unfavorable acquisition mix and additional costs associated with growth initiatives, was the result of a lower cost structure from past restructuring actions and increased production levels (higher absorption of fixed manufacturing costs).

Fiscal 2010 compared to Fiscal 2009

Fiscal 2010 Industrial segment net sales increased by $13 million (5%) to $300 million, relative to fiscal 2009. Excluding foreign currency rate changes (which favorably impacted fiscal 2010 sales by $6 million) and sales from acquired businesses, core sales declined 1% during fiscal 2010. End markets in the Industrial segment were not significantly impacted by the global economic environment until the second quarter of fiscal 2009, and therefore full year fiscal 2010 core sales comparisons were unfavorable. However, sales levels and the core sales trend improved significantly during the second half of fiscal 2010, primarily the result of increasing global demand and comparatively lower sales levels in the prior year period (due to the impact of the recession in fiscal 2009).

Industrial segment operating profit decreased by $1 million (2%) to $66 million in fiscal 2010. Despite increased sales levels, operating profit margins declined, the result of $2 million of incremental restructuring costs in fiscal 2010 (related to the consolidation of facilities), unfavorable acquisition mix and higher incentive compensation costs, somewhat offset by cost savings from restructuring actions.

Energy Segment

Being a later cycle business, our Energy segment was the last of our four segments to recover from the global recession. Strong core sales growth during fiscal 2011 (including double-digit growth in the second half of

 

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the year) reflects increased global demand and easier year-over-year comparisons resulting from the lower overall levels of demand that prevailed during fiscal 2010. Increased worldwide requirements for energy and higher oil prices during fiscal 2011 (despite recent declines) encouraged customers and asset owners to invest in capital projects or complete previously deferred maintenance activities. As a result, we experienced broad based strength across this segment in the second half of fiscal 2011. The following table sets forth the results of operations for the Energy segment (in millions):

 

     Year Ended August 31,  
     2011     2010     2009  

Net Sales

   $ 293      $ 236      $ 260   

Operating Profit

     49        31        44   

Operating Profit %

     16.8     13.1     16.9

Fiscal 2011 compared to Fiscal 2010

Energy segment net sales for the fiscal year ended August 31, 2011 increased $57 million (24%) to $293 million from $236 million a year ago. Excluding $17 million of sales from the Selantic and Biach acquisitions and the impact of foreign currency rate changes (which favorably impacted fiscal 2011 sales by $6 million), core sales increased 15%. The increase was the result of higher activity levels across nearly all of the segment’s primary markets including capital project activity in the oil & gas market, maintenance related spending in North America and emerging markets and strong sales to the power generation market.

Energy segment operating profit increased $18 million (58%) to $49 million in fiscal 2011 compared to $31 million in fiscal 2010. The year-over-year increase in operating profit margins is primarily the result of continued productivity improvements and significantly increased operating leverage, a $2 million reduction in restructuring charges and favorable acquisition mix, partially offset by higher incentive compensation costs.

Fiscal 2010 compared to Fiscal 2009

Energy segment net sales in fiscal 2010 were $236 million, a $24 million (9%) reduction compared to fiscal 2009. Excluding sales from acquired businesses and foreign currency changes (which favorably impacted fiscal 2010 sales by $2 million), core sales decreased 10% during the year. This decline reflected the continued deferral of maintenance activities at certain oil & gas installations (especially in mature refinery markets) and lower capital project based revenue. The core sales trend improved slightly during the second half of fiscal 2010 due to growth in emerging markets, alternative energy and adjacent markets.

Energy segment operating profit decreased by $13 million (30%) to $31 million for fiscal 2010. Reduced operating profits were primarily due to low sales volumes, unfavorable product mix and an additional $1 million of restructuring costs in fiscal 2010, relative to fiscal 2009.

Electrical Segment

Many of the end markets that the Electrical segment serves (including retail DIY, solar, construction and marine) continued to experience weak demand throughout fiscal 2011, the result of ongoing weak consumer confidence, low construction market spending and uncertainty in worldwide economic conditions. Future Electrical segment results will be dependent on fluctuations in commodity costs, the realization of price increases, changes in European solar feed-in tariffs and end market demand. The Electrical segment continues to focus on successfully integrating the Mastervolt business and achieving the related cost savings and synergies. The following table sets forth the results of operations for the Electrical segment (in millions):

 

     Year Ended August 31,  
     2011     2010     2009  

Net Sales

   $ 286      $ 234      $ 242   

Operating Profit

     21        20        4   

Operating Profit %

     7.2     8.5     1.7

 

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Fiscal 2011 compared to Fiscal 2010

Compared to the prior year, fiscal 2011 Electrical segment net sales increased $52 million (22%) to $286 million, with Mastervolt contributing sales of $49 million since its acquisition in December 2010. Excluding sales from this acquisition and favorable changes in foreign currency exchange rates, core sales were flat for fiscal 2011, compared to the prior year period.

Electrical segment operating profit for fiscal 2011 was $21 million compared to $20 million in fiscal 2010. Excluding restructuring costs, operating profits declined in fiscal 2011 as a result of the timing of raw material cost increases and related customer price increases, expedited freight costs and temporary operating inefficiencies as we completed facility consolidations. Unfavorable mix, resulting from the Mastervolt acquisition, also negatively impacted current year operating profit margins, despite the higher sales levels and lower incentive compensation costs.

Fiscal 2010 compared to Fiscal 2009

Electrical segment net sales decreased by $8 million (3%) to $234 million in fiscal 2010. Foreign currency rate changes favorably impacted fiscal 2010 sales by $2 million. Excluding foreign currency rate changes, core sales declined 4% for the year, reflecting lower demand in the first half of fiscal 2010 across all end markets, especially retail DIY, commercial construction and utility markets.

Electrical segment operating profit increased by $16 million, to $20 million for fiscal 2010, including a $5 million non-cash asset impairment charge related to the harsh environment electrical business and $2 million of incremental restructuring charges. Excluding these charges, the improvement in operating profit primarily reflected restructuring related cost savings as we realized the benefits of facility consolidations, reduced headcount and the movement of production and product sourcing to low cost countries.

Engineered Solutions Segment

The Engineered Solutions segment continued to see a rebound in demand from global heavy-duty truck, construction equipment and other markets which resulted in higher sales levels. As expected, year-over-year core sales growth moderated during the second half of fiscal 2011, reflecting tougher fiscal 2010 comparables and the anniversary of prior year new vehicle launches. The acquisition of Weasler in June 2011 is expected to provide future sales and earnings growth opportunities for the segment, by expanding the product offerings (primarily in the North American and European agricultural markets) and providing increased aftermarket sales opportunities. The following table sets forth the results of operations for the Engineered Solutions segment (in millions):

 

     Year Ended August 31,  
     2011     2010     2009  

Net Sales

   $ 473      $ 391      $ 329   

Operating Profit (Loss)

     64        32        (28

Operating Profit %

     13.4     8.2     (8.5 %) 

Fiscal 2011 compared to Fiscal 2010

Net sales in the Engineered Solutions segment increased by $82 million (21%) from $391 million for the year ended August 31, 2010 to $473 million in the current year. Excluding the $26 million of sales generated by the recent Weasler acquisition and the impact of the weaker U.S. dollar (which favorably impacted fiscal 2011 sales by $8 million), core sales growth was 12% for fiscal 2011. The core sales growth reflects improved demand from vehicle OEMs in the global heavy-duty truck, agriculture and construction equipment markets.

Engineered Solutions segment operating profit was $64 million during fiscal 2011 and $32 million in the prior year. Year-over-year operating profit comparisons are impacted by $3 million of fiscal 2011 purchase accounting (Weasler) charges and $4 million of restructuring costs incurred in the prior year. Operating profit

 

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margin expansion was the result of increased manufacturing volume, continued productivity improvements and the benefits of previously completed restructuring actions, somewhat offset by higher incentive compensation costs and additional costs associated with growth initiatives.

Fiscal 2010 compared to Fiscal 2009

Engineered Solutions segment net sales increased by $62 million (19%) to $391 million for fiscal 2010. Excluding the $2 million favorable impact of foreign currency rate changes and sales from acquired businesses, core sales increased 15% in fiscal 2010. The core sales increase was a result of a strong rebound in demand in the Vehicle Systems product line (new automotive platforms, growth in China and Europe truck shipments and substantially higher recreational vehicle OEM production) and the impact of prior year inventory destocking by OEMs.

Engineered Solutions segment operating profit increased by $60 million from an operating loss of $28 million in fiscal 2009 to an operating profit of $32 million for fiscal 2010. The loss from operations in fiscal 2009 included a $27 million non-cash asset impairment charge related to the RV business and an incremental $5 million of restructuring charges, relative to fiscal 2010. Excluding these charges, operating profit improved during fiscal 2010 due to increased sales and production levels (higher absorption of fixed manufacturing costs), favorable product mix, the benefits of completed restructuring activities and the favorable impact of foreign currency rate changes, which were partially offset by increased incentive compensation costs.

Restructuring Charges

In fiscal 2009, in response to the dramatic downturn in the worldwide economy, the Company committed to various restructuring initiatives including workforce reductions, plant consolidations to reduce manufacturing overhead, the continued movement of production and product sourcing to low cost countries and the centralization of certain selling and administrative functions. These actions were substantially completed by August 31, 2010, with limited restructuring activity and expense in fiscal 2011, which primarily related to facility exit lease charges. Total restructuring costs were $2 million, $17 million and $21 million for the years ended August 31, 2011, 2010 and 2009, respectively. We believe these restructuring actions better align our resources with strategic growth opportunities, optimize existing manufacturing capabilities, improve our overall cost structure and deliver increased free cash flow and profitability. See Note 4, “Restructuring” in the notes to the consolidated financial statements for further discussion on restructuring charges.

Impairment Charges

Significant adverse developments in the RV market during the first quarter of fiscal 2009, including sharply lower wholesale motorhome shipments by OEM’s, decreased consumer confidence and the lack of financing available to RV dealers and retail customers negatively impacted the financial results of our RV business. As a result, during the first quarter of fiscal 2009, we recognized a $27 million non-cash impairment charge related to the goodwill and long-lived assets of the RV business (Engineered Solutions segment).

Difficult economic conditions, low consumer confidence, increased unemployment and tight credit markets during the third quarter of fiscal 2009 also negatively impacted consumer discretionary spending, resulting in a substantial reduction in recreational boating industry sales. During 2009, many OEM boat builders responded to the sharp drop in demand and high levels of finished goods inventory by temporarily suspending operations as well as eliminating brands and permanently closing facilities. As a result, in the third quarter of fiscal 2009, we recognized a $32 million non-cash asset impairment charge related to the goodwill, indefinite lived intangibles and long-lived assets of the harsh environment electrical business (Electrical segment).

Financing Costs, Net

All debt is considered to be for general corporate purposes and therefore financing costs have not been allocated to our segments. Net financing costs were $32 million for the years ended August 31, 2011 and 2010

 

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and $42 million for the year ended August 31, 2009. The $10 million reduction in financing costs in fiscal 2010, relative to fiscal 2009, was the result of substantially lower average debt levels and reduced interest rates on variable rate debt.

Income Tax Expense

Our 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 lower than the U.S. federal statutory rate, state tax rates in the jurisdictions where we do business, tax minimization planning and our ability to utilize various tax credits and net operating loss carryforwards. The effective income tax rate for fiscal 2011 was 21.8%, compared to 21.1% and 2.3% in fiscal 2010 and 2009, respectively. The income tax expense recognized in fiscal 2011 and 2010 benefited from the utilization of foreign tax credits, increased taxable earnings in foreign jurisdictions (with statutory tax rates lower than the U.S. statutory rate) and favorable changes in valuation allowances, which were offset somewhat by unfavorable provision to return adjustments and additional provisions for unrecognized tax benefits. The lower effective tax rate in fiscal 2009 is the result of the tax benefit on the impairment and restructuring charges being recognized at the domestic tax rate (which is higher than our consolidated global effective tax rate) and the benefit of income tax reserve adjustments resulting from settling tax audits for amounts less than previously accrued and the lapsing of various tax statutes of limitations.

Discontinued Operations

Discontinued operations reflects the results of the divested European Electrical (sold in fiscal 2010), and Acme Aerospace and BH Electronics, Inc. (sold in fiscal 2009) businesses. See Note 3 “Discontinued Operations” in the notes to the consolidated financial statements for further information. The following table summarizes the results of discontinued operations (in millions):

 

     Year Ended August 31,  
     2011     2010     2009  

Net sales

   $ 49      $ 106      $ 146   

Net gain (loss) on disposal

     (16     —          18   

Loss from operations of discontinued businesses(1)

     (1     (41     (34

Income tax benefit (expense)

     4        (5     4   
  

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of income tax

   $ (13   $ (46   $ (12
  

 

 

   

 

 

   

 

 

 

 

  (1) Includes non-cash asset impairment charges of $36 million (European Electrical) and $27 million (BH Electronics) in fiscal 2010 and 2009, respectively.

Liquidity and Capital Resources

The following table summarizes the cash flow attributable to operating, investing and financing activities (in millions):

 

     Year Ended August 31,  
     2011     2010     2009  

Net cash provided by operating activities

   $ 172      $ 121      $ 147   

Net cash used in investing activities

     (331     (57     (221

Net cash provided by (used in) financing activities

     158        (37     (30

Effect of exchange rate changes on cash

     5        2        (7
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 4      $ 29      $ (111
  

 

 

   

 

 

   

 

 

 

 

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During fiscal 2011 we generated $172 million of cash flow from operations reflecting improved earnings from continuing operations and effective working capital management. We utilized the cash flow from operations, borrowings under our Senior Credit Facility and the $4 million of proceeds from the sale of the European Electrical business to fund the $313 million of capital deployed on the acquisitions of Mastervolt and Weasler and $23 million of capital expenditures.

In fiscal 2010, cash flows from operating activities were $121 million. Excluding the $37 million negative impact on working capital due to the expiration of our accounts receivable securitization program, net cash provided by operating activities increased relative to the prior year as a result of increased earnings from continuing operations, effective working capital management and the receipt of income tax refunds. These operating cash flows and the $8 million of proceeds from the sale of a portion of the European Electrical product line in the second quarter of fiscal 2010, funded $46 million of acquisitions and $20 million of capital expenditures, while reducing net debt by $67 million.

Effective cash flow management during fiscal 2009 resulted in substantial cash flow from operating activities of $147 million and an improved financial position at August 31, 2009. Operating cash flows benefited from lower working capital, given the decline in sales levels. During fiscal 2009, cash flows from operations, along with the $125 million proceeds from a follow-on equity offering and $38 million of proceeds from the divestiture of two businesses, funded $239 million of business acquisitions (including the acquisition of the Cortland Companies), $21 million of capital expenditures and a net reduction in debt of $147 million.

Primary Working Capital Management

We use primary working capital (“PWC”) as a percentage of sales as a key indicator of working capital management. We define this metric as the sum of net accounts receivable and net inventory less accounts payable, divided by the past three months sales annualized. The following table shows the components of the metric (amounts in millions):

 

     August 31, 2011     August 31, 2010  
     $     PWC %     $     PWC %  

Accounts receivable, net

   $ 224        14   $ 186        15

Inventory, net

     223        14     146        12

Accounts payable

     (170     (11 %)      (130     (11 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net primary working capital

   $ 277        17   $ 202        16
  

 

 

   

 

 

   

 

 

   

 

 

 

Our net primary working capital percentage increased year-over-year from 16% to 17% as of August 31, 2011, primarily due to the fiscal 2011 acquisitions and a conscious effort to increase inventory levels in certain businesses to meet growing customer demand. During fiscal 2011, excluding acquisitions and changes in foreign currency exchange rates, accounts receivable decreased $3 million and inventory increased $29 million, while accounts payable increased $7 million.

Liquidity

Our Senior Credit Facility, which was expanded and extended during the second quarter of fiscal 2011, includes a $600 million revolving credit facility, a $100 million term loan and a $300 million expansion option. There are no required principal repayments under the term loan until March 31, 2012. At August 31, 2011, we had $44 million of cash and cash equivalents and $540 million of unused capacity on the revolver (of which $523 million was available for borrowings). We believe that the remaining revolver availability combined with our existing cash on hand and anticipated operating cash flows will be adequate to meet operating, debt service, acquisition funding and capital expenditure requirements for the foreseeable future.

 

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Holders of our 2% Convertible Notes have the option to require us to repurchase all or a portion of their 2% Convertible Notes for cash on November 15, 2013 and November 15, 2018 at a price equal to 100% of the principal amount, plus accrued interest. Holders may also convert their 2% Convertible Notes into shares of the Company’s Class A common stock prior to the scheduled maturity date under certain conditions. Effective November 2010, we have the ability to redeem all or part of the 2% Convertible Notes for cash, at a redemption price equal to 100% of the principal amount, plus accrued interest.

See Note 8, “Debt” in the notes to the consolidated financial statements for further discussion on the Senior Credit Facility and the 2% Convertible Notes.

Seasonality and Working Capital

We have met our working capital and capital expenditure requirements through a combination of operating cash flow and availability under our Senior Credit Facility. Although there are modest seasonal factors within certain of our businesses, on a consolidated basis, we do not experience material changes in seasonal working capital or capital resource requirements.

Our receivables are derived from a diverse customer base in a number of industries. We have no single customer which generated 5% or more of fiscal 2011 net sales.

Capital Expenditures

The majority of our manufacturing activities consist of the assembly of components which are sourced from a variety of vendors. As a result, we believe that our capital expenditure requirements are not as extensive as many other industrial companies given the assembly nature of our operations. Capital expenditures were $23 million, $20 million and $21 million in fiscal 2011, 2010 and 2009, respectively. Capital expenditures have historically been funded by operating cash flows. Capital expenditures for fiscal 2012 are expected to be approximately $30 million.

Commitments and Contingencies

We lease certain facilities, computers, equipment and vehicles under various operating lease agreements, generally over periods ranging from one to twenty years. Under most arrangements, we pay the property taxes, insurance, maintenance and expenses related to the leased property. Many of the leases include provisions that enable us to renew the lease based upon fair value rental rates on the date of expiration of the initial lease. See Note 10, “Leases,” in the notes to consolidated financial statements and the “Contractual Obligations” table below for further information.

We are contingently liable for certain lease agreements entered into by businesses that were part of our former Electronics segment, which was spun-off to shareholders in fiscal 2000. Some of these businesses were subsequently sold to third parties. If any of these businesses do not fulfill their obligations under the leases, we could be liable for such leases. The present value of future minimum lease payments for these leases was $3 million at August 31, 2011.

We had outstanding letters of credit totaling $9 million at August 31, 2011 and 2010, respectively, the majority of which secure self-insured workers compensation liabilities.

Off-Balance Sheet Arrangements

As more fully discussed in Note 5, “Accounts Receivable Securitization” in the notes to consolidated financial statements, we were a party to an accounts receivable securitization arrangement under which we sold certain trade receivables to a wholly owned bankruptcy-remote special purpose subsidiary, which in turn, sold

 

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participating interests in the receivables to a third party financial institution. We did not renew the arrangement on its September 9, 2009 maturity date and, as a result, utilized availability under the Senior Credit Facility to fund the corresponding $37 million increase in accounts receivable.

Contractual Obligations

The timing of payments due under our contractual commitments is as follows (in millions):

 

     Payments Due  
     2012      2013      2014      2015      2016      Thereafter      Total  

Long-term debt

   $ 3       $ 8       $ 10       $ 10       $ 128       $ 366       $ 525   

Interest on long-term debt

     23         23         23         23         21         31         144   

Operating leases

     22         18         15         11         8         31         105   

Acquisition deferred purchase price

     1         7         —           —           —           —           8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 49       $ 56       $ 48       $ 44       $ 157       $ 428       $ 782   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

The above table includes deferred purchase price and contingent consideration related to acquisitions completed in fiscal 2011 and previous years.

The contractual obligation schedule for long-term debt assumes we do not call the remaining 2% Convertible Notes or have them put back to us prior to their maturity date of November 15, 2023.

Our operating lease 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 obligations that are not cancelable are included in the table.

We routinely issue purchase orders to numerous vendors for inventory and other supplies. These purchase orders are generally cancelable with reasonable notice to the vendor, and as such, are excluded from the contractual obligations table.

We have long-term obligations related to our deferred compensation, pension and postretirement plans at August 31, 2011 (excluded from the contractual obligations table). Our liabilities related to these plans are summarized in Note 11, “Employee Benefit Plans” in the notes to consolidated financial statements.

As discussed in Note 12, “Income Taxes” in the notes to consolidated financial statements, we have unrecognized tax benefits of $26 million at August 31, 2011. The liability for unrecognized tax benefits was not included in the table of contractual obligations because the timing of the potential settlements of these uncertain tax positions cannot be reasonably estimated.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The following policies are considered by management to be the most critical in understanding the judgments that are involved in the preparation of our consolidated financial statements and the uncertainties that could impact our results of operations, financial position and cash flows.

Inventories:    Inventories are stated at the lower of cost or market. Inventory cost is determined using the last-in, first-out (“LIFO”) method for a portion of U.S. owned inventory (approximately 18% and 23% of total inventories at August 31, 2011 and 2010, respectively). The first-in, first-out or average cost method is used for all other inventories. If the LIFO method were not used, the inventory balance would be higher than the amount in the consolidated balance sheet by approximately $5 million at both August 31, 2011 and 2010, respectively.

 

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We perform an analysis of the historical sales usage of the individual inventory items on hand and a reserve is recorded to adjust inventory cost to market value. The inventory valuation assumptions used are based on historical experience. We believe that such estimates are made based on consistent and appropriate methods; however, actual results may differ from these estimates under different assumptions or conditions.

Goodwill and Long-Lived Assets:    Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We perform impairment reviews for our reporting units using a fair-value method based on our judgments and assumptions. The fair value represents the amount at which a reporting unit could be bought or sold in a current transaction between willing parties on an arms-length basis. In estimating the fair value, we use a discounted cash flow model. The estimated fair value is compared with the carrying amount of the reporting unit, including goodwill. The annual impairment testing performed at August 31, 2011 indicated that the estimated fair value of each reporting unit exceeded its corresponding carrying amount and, as such, no impairment existed. Indefinite-lived intangible assets are also subject to annual impairment testing. The fair value of the indefinite lived assets, based on a relief of royalty model, are evaluated to determine if an impairment charge is required. We also review long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. If such indicators are present, we perform undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Refer to Note 6, “Impairment Charges” in the notes to the consolidated financial statements for further discussion on impairment charges recognized in fiscal 2010 and 2009.

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 we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore, impairment charges could be required.

Employee Benefit Plans:    We provide a variety of benefits to employees and former employees, including in some cases, pensions and postretirement health care. Plan assets and obligations are recorded based on an August 31 measurement date utilizing various actuarial assumptions such as discount rates, assumed rates of return and health care cost trend rates. We determine the discount rate assumptions by referencing high-quality long-term bond rates that are matched to the duration of our benefit obligations, with appropriate consideration of local market factors, participant demographics and benefit payment terms. At August 31, 2011 and 2010, the weighted-average discount rate on domestic benefit plans was 5.00% and 4.60%, respectively. In estimating the expected return on plan assets, we consider the historical returns on plan assets, forward-looking considerations, inflation assumptions and the impact of the management of the plans’ invested assets. Domestic benefit plan assets consist primarily of participating units in common stock, index funds and bond funds. The expected return on domestic benefit plan assets was 7.90% and 8.00% at August 31, 2011 and 2010, respectively. A 25 basis point change in the assumptions for the discount rate or expected return on plan assets would not materially change fiscal 2012 domestic benefit plan expense.

We review actuarial assumptions on an annual basis and make modifications based on current rates and trends when appropriate. As required by U.S. GAAP, the effects of the modifications are recorded currently or amortized over future periods. Based on information provided by independent actuaries and other relevant sources, we believe that the assumptions used are reasonable; however, changes in these assumptions could impact our financial position, results of operations or cash flows. See Note 11, “Employee Benefit Plans” in the notes to the consolidated financial statements for further discussion.

Income Taxes:    We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense also reflects best estimates and assumptions regarding, among other things, the level of future taxable income and the effect of various tax planning strategies. Future tax

 

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authority rulings and changes in tax laws, changes in projected levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded.

Use of Estimates:    We record reserves or allowances for customer returns and discounts, doubtful accounts, inventory, incurred but not reported medical claims, environmental matters, warranty claims, workers compensation claims, product and non-product litigation and incentive compensation. These reserves require the use of estimates and judgment. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. We believe that such estimates are made on a consistent basis and with appropriate assumptions and methods. However, actual results may differ from these estimates.

New Accounting Pronouncements

The information required by this Item is provided in Note 1, “Summary of Significant Accounting Policies” in the notes to consolidated financial statements contained in Item 8—Financial Statements and Supplementary Data.

Item  7A.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in foreign currency exchange rates and interest rates and, to a lesser extent, commodities. To reduce such risks, we selectively use 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 the consolidated financial statements.

Currency Risk—We have exposure to foreign currency exchange fluctuations. Approximately 50% of our revenues are denominated in currencies other than the U.S. dollar. Of those non-U.S. dollar denominated amounts, approximately 55% were denominated in Euro, with the remainder denominated in British pounds and various Asian and other currencies. 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. We periodically identify areas where we do not have naturally offsetting positions and then may purchase hedging instruments to protect against anticipated exposures. At August 31, 2011 and 2010, there were no material hedging instruments oustanding related to the purchase of products from affiliates and third party suppliers. 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 and receivables.

Interest Rate Risk—We have earnings exposure related to interest rate changes on our outstanding floating rate debt instruments that are based on LIBOR interest rates. We have periodically utilized interest rate swap agreements to manage overall financing costs and interest rate risk. As discussed in Note 8, “Debt” in the notes to the consolidated financial statements, at August 31, 2011 we were a party to interest rate swap agreements that converted $100 million of floating rate debt to a fixed rate of interest. A 25 basis point increase or decrease in the applicable interest rates on our unhedged variable rate debt would not have a material effect on our annual interest expense.

Commodity Risk—We source a wide variety of materials and components from a network of global suppliers. While such materials are typically available from numerous suppliers, commodity raw materials, 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 and utilize LEAD initiatives to further mitigate the impact of commodity raw material price fluctuations as improved efficiencies across all locations are achieved.

 

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Item  8. Financial Statements and Supplementary Data

 

     Page  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  

Report of Independent Registered Public Accounting Firm

     30   

Consolidated Statements of Earnings for the years ended August 31, 2011, 2010 and 2009

     31   

Consolidated Balance Sheets as of August 31, 2011 and 2010

     32   

Consolidated Statements of Cash Flows for the years ended August 31, 2011, 2010 and 2009

     33   

Consolidated Statements of Shareholders’ Equity for the years ended August  31, 2011, 2010 and 2009

     34   

Notes to consolidated financial statements

     35   

INDEX TO FINANCIAL STATEMENT SCHEDULE

  

Schedule II—Valuation and Qualifying Accounts

     68   

All other schedules are omitted because they are not applicable, not required or because the required information is included in the consolidated financial statements or notes thereto.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Actuant Corporation:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Actuant Corporation and its subsidiaries at August 31, 2011 and August 31, 2010, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in management’s report on internal control over financial reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, management has excluded certain elements of the Mastervolt International Holding B.V. and Weasler Engineering, Inc. businesses from its assessment of internal control over financial reporting as of August 31, 2011 because they were acquired by the Company in purchase business combinations during the year ended August 31, 2011. Subsequent to the acquisition certain elements of the acquired businesses’ internal control over financial reporting and related processes were integrated into the Company’s existing systems and internal control over financial reporting. Those controls that were not integrated have been excluded from management’s assessment of the effectiveness of internal control over financial reporting as of August 31, 2011. We have also excluded these elements of the internal control over financial reporting of the acquired businesses from our audit of internal control over financial reporting. The Mastervolt International Holding B.V. and Weasler Engineering, Inc. businesses are wholly-owned subsidiaries whose combined total assets and total revenues, excluding integrated elements, represent 20% and 5%, respectively, of the related consolidated financial statement amounts as of and for the year ended August 31, 2011.

/S/ PRICEWATERHOUSECOOPERS LLP

Milwaukee, WI

October 28, 2011

 

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ACTUANT CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share amounts)

 

     Year Ended August 31,  
     2011     2010     2009  

Net sales

   $ 1,445,323      $ 1,160,508      $ 1,117,625   

Cost of products sold

     889,424        733,256        729,398   
  

 

 

   

 

 

   

 

 

 

Gross profit

     555,899        427,252        388,227   

Selling, administrative and engineering expenses

     332,639        267,866        250,004   

Restructuring charges

     2,223        15,597        19,530   

Impairment charges

     —          —          31,321   

Amortization of intangible assets

     27,467        22,017        19,644   
  

 

 

   

 

 

   

 

 

 

Operating profit

     193,570        121,772        67,728   

Financing costs, net

     32,119        31,859        41,849   

Other expense (income), net

     2,244        711        (714
  

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income tax

     159,207        89,202        26,593   

Income tax expense

     34,711        18,846        611   
  

 

 

   

 

 

   

 

 

 

Earnings from continuing operations

     124,496        70,356        25,982   

Loss from discontinued operations, net of income taxes

     (12,937     (46,325     (12,259
  

 

 

   

 

 

   

 

 

 

Net earnings

   $ 111,559      $ 24,031      $ 13,723   
  

 

 

   

 

 

   

 

 

 

Earnings from continuing operations per share:

      

Basic

   $ 1.82      $ 1.04      $ 0.45   

Diluted

   $ 1.68      $ 0.97      $ 0.43   

Earnings per share:

      

Basic

   $ 1.63      $ 0.36      $ 0.24   

Diluted

   $ 1.50      $ 0.35      $ 0.24   

Weighted average common shares outstanding:

      

Basic

     68,254        67,624        58,047   

Diluted

     75,305        74,209        66,064   

The accompanying notes are an integral part of these financial statements.

 

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ACTUANT CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

     August 31,  
     2011     2010  

A S S E T S

            

Current Assets

    

Cash and cash equivalents

   $ 44,221      $ 40,222   

Accounts receivable, net

     223,760        185,693   

Inventories, net

     223,235        146,154   

Deferred income taxes

     32,461        30,701   

Prepaid expenses and other current assets

     22,807        12,578   

Current assets of discontinued operations

     —          44,802   
  

 

 

   

 

 

 

Total Current Assets

     546,484        460,150   

Property, Plant and Equipment

    

Land, buildings, and improvements

     51,901        48,301   

Machinery and equipment

     263,250        228,270   
  

 

 

   

 

 

 

Gross property, plant and equipment

     315,151        276,571   

Less: Accumulated depreciation

     (186,502     (168,189
  

 

 

   

 

 

 

Property, Plant and Equipment, net

     128,649        108,382   

Goodwill

     888,466        704,889   

Other Intangibles, net

     479,406        336,978   

Other Long-term assets

     13,676        11,304   
  

 

 

   

 

 

 

Total Assets

   $ 2,056,681      $ 1,621,703   
  

 

 

   

 

 

 

L I A B I L I T I E S  A N D  S H A R E H O L D E R S’  E Q U I T Y

            

Current Liabilities

    

Trade accounts payable

   $ 170,084      $ 130,051   

Accrued compensation and benefits

     71,639        53,212   

Short-term borrowings

     2,690        —     

Income taxes payable

     19,342        17,903   

Other current liabilities

     66,548        74,561   

Current liabilities of discontinued operations

     —          37,695   
  

 

 

   

 

 

 

Total Current Liabilities

     330,303        313,422   

Long-term Debt, less current maturities

     522,727        367,380   

Deferred Income Taxes

     165,945        110,230   

Pension and Postretirement Benefit Liabilities

     18,864        28,072   

Other Long-term Liabilities

     99,829        62,878   

Shareholders’ Equity

    

Class A common stock, $0.20 par value per share, authorized 168,000,000 shares, issued and outstanding 68,657,234 and 68,056,387 shares, respectively

     13,731        13,610   

Additional paid-in capital

     (154,231     (175,157

Retained earnings

     1,077,192        968,373   

Accumulated other comprehensive loss

     (17,679     (67,105

Stock held in trust

     (2,137     (1,934

Deferred compensation liability

     2,137        1,934   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     919,013        739,721   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,056,681      $ 1,621,703   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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ACTUANT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended August 31,  
     2011     2010     2009  

Operating activities

      

Net earnings

   $ 111,559      $ 24,031      $ 13,723   

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

      

Depreciation and amortization

     52,996        51,875        51,978   

Net loss (gain) on disposal of businesses

     11,695        (334     (15,831

Stock-based compensation expense

     10,758        8,399        8,609   

Provision (benefit) for deferred income taxes

     6,480        (2,876     (17,847

Amortization of debt discount and debt issuance costs

     2,904        3,969        4,531   

Impairment charges

     —          36,139        58,274   

Other non-cash adjustments

     (46     (855     1,585   

Changes in components of working capital and other:

      

Accounts receivable

     (2,564     (14,507     71,215   

Expiration of accounts receivable securitization program

     —          (37,106     —     

Inventories

     (29,909     (7,964     57,963   

Prepaid expenses and other assets

     5,876        3,817        1,075   

Trade accounts payable

     7,158        32,727        (61,932

Income taxes payable

     4,155        16,000        (9,180

Accrued compensation and benefits

     12,178        27,361        (25,836

Other accrued liabilities

     (21,674     (19,590     8,388   
  

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     171,566        121,086        146,715   

Investing activities

      

Proceeds from sale of property, plant and equipment

     1,779        1,236        1,862   

Proceeds from sale of businesses

     3,463        7,516        38,455   

Capital expenditures

     (23,096     (19,966     (21,454

Business acquisitions, net of cash acquired

     (313,456     (45,866     (239,422
  

 

 

   

 

 

   

 

 

 

Cash used in investing activities

     (331,310     (57,080     (220,559

Financing activities

      

Net borrowings (repayments) on revolver and short-term borrowings

     58,204        (14,313     16,657   

Principal repayments on term loans and other debt

     —          —          (270,000

Proceeds from issuance of term loans

     100,000        —          115,000   

Repurchases of 2% Convertible Notes

     (34     (22,894     (9,100

Debt issuance costs

     (5,197     —          (9,158

Proceeds from equity offering, net of transaction costs

     —          —          124,781   

Stock option exercises, related tax benefits and other

     8,235        3,315        4,024   

Cash dividend

     (2,716     (2,702     (2,251
  

 

 

   

 

 

   

 

 

 

Cash provided by (used in) financing activities

     158,492        (36,594     (30,047

Effect of exchange rate changes on cash

     5,251        1,425        (7,273
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     3,999        28,837        (111,164

Cash and cash equivalents—beginning of year

     40,222        11,385        122,549   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents—end of year

   $ 44,221      $ 40,222      $ 11,385   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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ACTUANT CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except per share amounts)

 

    Class A Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Stock
Held in
Trust
    Deferred
Compensation
Liability
    Total
Shareholders’
Equity
 
    Shares     Amount              

Balance at August 31, 2008

    56,002      $ 11,200      $ (324,898   $ 936,055      $ 7,149      $ (2,081   $ 2,081      $ 629,506   

Net earnings

    —          —          —          13,723        —          —          —          13,723   

Currency translation adjustments

    —          —          —          —          (24,940     —          —          (24,940

Fair value of derivatives, net of taxes

    —          —          —          —          (535     —          —          (535

Pension and postretirement plan funded status, net of taxes

    —          —          —          —          (6,273     —          —          (6,273
               

 

 

 

Total comprehensive loss

                  (18,025
               

 

 

 

Company stock contribution to employee benefit plans and other

    228        46        5,198        —          —          —          —          5,244   

Restricted stock awards

    312        62        (62     —          —          —          —          —     

Issuance of common stock

    10,925        2,185        122,441        —          —          —          —          124,626   

Cash dividend ($0.04 per share)

    —          —          —          (2,708     —          —          —          (2,708

Stock based compensation expense

    —          —          8,609        —          —          —          —          8,609   

Stock option exercises

    233        47        (1,994     —          —          —          —          (1,947

Excess benefit on stock option exercises

    —          —          1,514        —          —          —          —          1,514   

Stock issued to, acquired for and distributed from rabbi trust

    18        3        548        —          —          315        (315     551   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at August 31, 2009

    67,718        13,543        (188,644     947,070        (24,599     (1,766     1,766        747,370   

Net earnings

    —          —          —          24,031        —          —          —          24,031   

Currency translation adjustments

    —          —          —          —          (34,845     —          —          (34,845

Fair value of derivatives, net of taxes

    —          —          —          —          15        —          —          15   

Pension and postretirement plan funded status, net of taxes

    —          —          —          —          (7,676     —          —          (7,676
               

 

 

 

Total comprehensive loss

                  (18,475
               

 

 

 

Company stock contribution to employee benefit plans and other

    123        24        1,963        —          —          —          —          1,987   

Restricted stock awards

    (24     (5     5        —          —          —          —          —     

Cash dividend ($0.04 per share)

    —          —          —          (2,728     —          —          —          (2,728

Stock based compensation expense

    —          —          8,875        —          —          —          —          8,875   

Stock option exercises

    228        46        1,686        —          —          —          —          1,732   

Excess benefit on stock option exercises

    —          —          756        —          —          —          —          756   

Stock issued to, acquired for and distributed from rabbi trust

    11        2        202        —          —          (168     168        204   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at August 31, 2010

    68,056        13,610        (175,157     968,373        (67,105     (1,934     1,934        739,721   

Net earnings

    —          —          —          111,559        —          —          —          111,559   

Currency translation adjustments

    —          —          —          —          46,307        —          —          46,307   

Fair value of derivatives, net of taxes

    —          —          —          —          (2,822     —          —          (2,822

Pension and postretirement plan funded status adjustment, net of taxes

    —          —          —          —          5,941        —          —          5,941   
               

 

 

 

Total comprehensive income

                  160,985   
               

 

 

 

Company stock contribution to employee benefit plans and other

    138        29        3,050        —          —          —          —          3,079   

Restricted stock awards

    (31     (7     7        —          —          —          —          —     

Cash dividend ($0.04 per share)

    —          —          —          (2,740     —          —          —          (2,740

Stock based compensation expense

    —          —          11,036        —          —          —          —          11,036   

Stock option exercises

    484        97        4,227        —          —          —          —          4,324   

Excess benefit on stock option exercises

    —          —          2,364        —          —          —          —          2,364   

Stock issued to, acquired for and distributed from rabbi trust

    10        2        242        —          —          (203     203        244   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at August 31, 2011

    68,657      $ 13,731      $ (154,231   $ 1,077,192      $ (17,679   $ (2,137   $ 2,137      $ 919,013   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

Note 1.    Summary of Significant Accounting Policies

Nature of Operations:    Actuant Corporation (“Actuant” or the “Company”) is a global manufacturer of a broad range of industrial products and systems, organized into four reportable segments. The Industrial segment is primarily involved 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, as well as umbilical, rope and cable solutions to the global oil & gas, power generation and energy markets. The Electrical segment designs, manufactures and distributes a broad range of electrical products to the retail DIY, wholesale, original equipment manufacturer (“OEM”), solar, utility, marine and other harsh environment 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.

Consolidation and Presentation:    The consolidated financial statements include the accounts of the Company and its subsidiaries. Actuant consolidates companies in which it owns or controls more than fifty percent of the voting shares. The results of companies acquired or disposed of during the fiscal year are included in the consolidated financial statements from the effective date of acquisition or until the date of divestiture. All intercompany balances, transactions and profits have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to current year presentation.

Cash Equivalents:    The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.

Inventories:    Inventories are comprised of material, direct labor and manufacturing overhead, and are stated at the lower of cost or market. Inventory cost is determined using the last-in, first-out (“LIFO”) method for a portion of the U.S. owned inventory (approximately 18% and 23% of total inventories in 2011 and 2010, respectively). The first-in, first-out or average cost methods are used for all other inventories. If the LIFO method were not used, inventory balances would be higher than the amounts in the consolidated balance sheets by approximately $5.5 million and $4.9 million at August 31, 2011 and 2010, respectively.

The nature of the Company’s products is such that they generally have a very short production cycle. Consequently, the amount of work-in-process at any point in time is minimal. In addition, many parts or components are ultimately either sold individually or assembled with other parts making a distinction between raw materials and finished goods impractical to determine. Other locations maintain and manage their inventories using a job cost system where the distinction of categories of inventory by state of completion is also not available. As a result of these factors, it is neither practical nor cost effective to segregate the amounts of raw materials, work-in-process or finished goods inventories at the respective balance sheet dates, as segregation would only be possible as the result of physical inventories which are taken at dates different from the balance sheet dates.

Property, Plant and Equipment:    Property, plant and equipment are stated at cost. Plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, ranging from ten to forty years for buildings and improvements and two to fifteen years for machinery and equipment. Leasehold improvements are amortized over the life of the related asset or the term of the lease, whichever is shorter.

Impairment of Long-Lived and Other Intangible Assets:    The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived and finite-lived intangible assets may warrant revision or that the remaining balance of the asset may not be recoverable. The

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

measurement of possible impairment is generally estimated by the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. If impairment is determined to exist, any related impairment loss is calculated based on the fair value of the asset. See Note 6, “Impairment Charges” for details on long-lived asset impairment charges recognized in fiscal 2010 and 2009.

Product Warranty Costs:    The Company generally offers its customers a warranty on products sold, although warranty periods vary by product type and application. The acquisition of Mastervolt during fiscal 2011 has increased the required warranty reserve, as this business has a longer base warranty period. The reserve for future warranty claims is based on historical claim rates and current warranty cost experience. The following is a reconciliation of the changes in accrued product warranty for fiscal years 2011 and 2010 (in thousands):

 

     2011     2010  

Beginning balance

   $ 7,868      $ 8,989   

Warranty reserves of acquired businesses

     17,457        920   

Provision for warranties

     9,190        5,153   

Warranty payments and costs incurred

     (12,662     (5,959

Warranty reserves of divested businesses

     —          (939

Impact of changes in foreign currency rates

     1,854        (296
  

 

 

   

 

 

 

Ending balance

   $ 23,707      $ 7,868   
  

 

 

   

 

 

 

Revenue Recognition:    Customer sales are recognized as revenue when the risk of loss and title pass to the customer, which is generally upon shipment. Customer sales are recorded net of allowances for returns and discounts, which are recognized as a deduction from sales at the time of sale. The Company commits to one-time or on-going trade discounts and promotions with customers that require the Company to estimate and accrue the ultimate costs of such programs. The Company maintains an accrual at the end of each period for the earned, but unpaid costs related to the programs. The Company generally does not require collateral or other security for receivables and provides for an allowance for doubtful accounts based on historical experience and a review of its existing receivables. Accounts Receivable are stated net of an allowance for doubtful accounts of $7.2 million and $7.7 million at August 31, 2011 and 2010, respectively.

Shipping and Handling Costs:    The Company records costs associated with shipping its products within cost of products sold.

Research and Development Costs:    Research and development costs consist primarily of an allocation of overall engineering and development resources and are expensed as incurred. Such costs incurred in the development of new products or significant improvements to existing products were $17.7 million, $14.5 million and $16.2 million in fiscal 2011, 2010, and 2009 respectively. The Company also incurs significant costs in connection with fulfilling custom customer orders and executing customer applications that are not included in these research and development expense totals.

Other Income/Expense:    Other income and expense primarily consists of foreign exchange transaction (gains)/losses of $2.7 million, $1.5 million, and $(1.1) million in fiscal 2011, 2010 and 2009, respectively.

Short-term Borrowings:    Short-term borrowings consist of foreign and domestic subsidiary overdraft borrowings and the current portion of the Company’s long-term debt. Certain of the Company’s foreign subsidiaries are parties to unsecured non-committed lines of credit with various banks. Interest rates vary depending on the currency being borrowed.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Financing Costs:    Financing costs represent interest expense, financing fees and amortization of debt issuance costs, net of interest income.

Income Taxes:    The provision for income taxes includes federal, state, local and non-U.S. taxes on income. Tax credits, primarily for non-U.S. earnings and export programs, are recognized as a reduction of the provision for income taxes in the year in which they are available for tax purposes. Deferred taxes are provided on temporary differences between assets and liabilities for financial and tax reporting purposes as measured by enacted tax rates expected to apply when temporary differences are settled or realized. Future tax benefits are recognized to the extent that realization of those benefits is considered to be more likely than not. A valuation allowance is established for deferred tax assets for which realization is not more likely than not of being realized. The Company has not provided for any residual U.S. income taxes on unremitted earnings of non-U.S. subsidiaries as such earnings are intended to be indefinitely reinvested. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

Foreign Currency Translation:    The financial statements of the Company’s foreign operations are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an appropriate weighted average exchange rate for each applicable period for revenues and expenses. Translation adjustments are reflected in the consolidated balance sheets and consolidated statements of shareholders’ equity caption “Accumulated Other Comprehensive Loss.”

Use of Estimates:    The Company has recorded reserves or allowances for customer returns and discounts, doubtful accounts, inventory, incurred but not reported medical claims, environmental matters, warranty claims, workers compensation claims, product and non-product litigation and incentive compensation. These reserves require the use of estimates and judgment. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company believes that such estimates are made with consistent and appropriate methods. Actual results may differ from these estimates under different assumptions or conditions.

Accounting for Derivatives and Hedging Activities:    All derivatives are recognized on the 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) 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 a fair value hedge 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.

New Accounting Pronouncements:    In June 2011, the Financial Accounting Standards Board (FASB) updated the disclosure requirements for comprehensive income. The updated guidance requires companies to disclose the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance does not affect how earnings per share is calculated or presented. The amended guidance, which must be applied retroactively, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with earlier adoption permitted.

In September 2011, the FASB issued an amendment to existing guidance on the testing of goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with earlier adoption permitted.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 2.    Acquisitions

The Company completed several business acquisitions during the last three years. All of the acquisitions resulted in the recognition of goodwill in the Company’s consolidated financial statements because the purchase prices reflect the future earnings and cash flow potential of these companies, as well as the complementary strategic fit and resulting synergies these businesses bring to existing operations. The Company is continuing to evaluate the initial purchase price allocations for the acquisitions completed within the past twelve months and will adjust the allocations as additional information, relative to the fair values of the assets and liabilities of the acquired businesses, becomes known.

Fiscal 2011

On June 2, 2011, the Company completed the acquisition of the stock of Weasler Engineering, Inc. (“Weasler”) for $153.2 million of cash. The purchase consideration was funded through the Company’s existing cash balances and borrowings under the revolving credit facility. Weasler, which is headquartered in Wisconsin, is a leading global designer and manufacturer of highly engineered drive train components and systems for agriculture, lawn & turf and industrial equipment. Weasler also supplies a variety of torque limiters, high-end gear boxes, clutches and torsional dampers which will expand the product offerings of the Engineered Solutions segment.

On December 10, 2010, the Company completed the acquisition of the stock of Mastervolt International Holding B.V. (“Mastervolt”) for $158.2 million of cash. Mastervolt, which is headquartered in The Netherlands, is a designer, developer and global supplier of highly innovative, branded power electronics, primarily for the solar and marine markets. Mastervolt expands the Electrical Segment’s geographic presence and product offerings to include additional technologies associated with the efficient conversion, control, storage and conditioning of electrical power.

The purchase price allocations for fiscal 2011 acquisitions resulted in the recognition of $155.9 million of goodwill (which is not deductible for tax purposes) and $157.5 million of intangible assets, including $81.5 million of customer relationships, $69.9 million of tradenames, $5.5 million of patents and technologies and $0.6 million of non-compete agreements. During fiscal 2011, the Company also paid $1.9 million of deferred purchase prices for acquisitions completed in previous years and completed a small product line acquisition for $0.2 million. The Company incurred acquisition transaction costs of $1.9 million and $1.1 million in fiscal 2011 and 2010, respectively, related to various business acquisition activities.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition for the businesses acquired during fiscal 2011 (in thousands):

 

     Total  

Accounts receivable, net

   $ 33,275   

Inventories, net

     44,406   

Other current assets

     1,182   

Property, plant & equipment

     18,509   

Goodwill

     155,864   

Other intangible assets

     157,474   

Trade accounts payable

     (26,244

Other current liabilities

     (12,225

Deferred income taxes

     (41,785

Other non-current liabilities

     (18,884
  

 

 

 

Cash paid, net of cash acquired

   $ 311,572   
  

 

 

 

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Fiscal 2010

During fiscal 2010, the Company completed four tuck-in acquisitions for $43.9 million of cash (net of cash acquired), $2.5 million of deferred purchase price and $4.5 million of contingent consideration. On April 9, 2010 the Company acquired Team Hydrotec, a Singapore based business that provides engineering and integrated solutions primarily to the infrastructure, energy and industrial markets. This was followed by the acquisition of Hydrospex on April 14, 2010. Headquartered in The Netherlands, Hydrospex is a leading provider of a broad range of heavy-lift technologies including strand jacks and gantries for the global infrastructure, power generation and other industrial markets. The products, technologies, engineering and geographic breadth of both Team Hydrotec and Hydrospex will further strengthen the market positions of the Industrial Segment. On April 27, 2010, the Company completed the acquisition of New Jersey based Biach Industries, which provides custom designed bolt and stud tensioning products and services, predominately for the North American nuclear market. Biach Industries, through its strong customer relationships, engineering expertise and customized products will broaden the product and service offerings of the Energy segment to the global power generation market. Finally, on June 11, 2010 the Company completed the acquisition of Norway based Selantic, which is included in the Energy Segment. Selantic provides custom designed high performance slings, tethers and related products for heavy lifting applications.

The purchase price allocations for these acquisitions resulted in the recognition of $37.1 million of goodwill (a portion of which is deductible for tax purposes) and $18.2 million of intangible assets, including $14.5 million of customer relationships, $2.5 million of trade names, $1.2 million of non-compete agreements and patents. During fiscal 2010, the Company also paid $2.0 million of deferred purchase price for acquisitions completed in previous years and incurred acquisition transaction costs of $1.1 million related to various business acquisition activities.

Fiscal 2009

On September 26, 2008, the Company completed the acquisition of the stock of The Cortland Companies (“Cortland”) for approximately $231.2 million in cash, net of cash acquired. Cortland is a global designer, manufacturer and distributor of custom-engineered electro-mechanical cables and umbilicals, high performance synthetic ropes and value-added steel cable assemblies. The majority of the Cortland businesses are included within the Energy segment, while the steel cable assembly business (Sanlo) is included in the Other product line within the Engineered Solutions segment. The purchase price allocation resulted in $131.1 million assigned to goodwill (a portion of which is deductible for tax purposes), $17.8 million to trade names, $1.3 million to non-compete agreements, $4.3 million to patents and $81.4 million to customer relationships. The amounts assigned to non-compete agreements, patents and customer relationships are being amortized over 3, 8 and 15 years, respectively.

In addition to the acquisition of Cortland, the Company also completed several smaller product line acquisitions for an aggregate purchase price of $7.4 million of cash and a deferred purchase price of $2.5 million. During fiscal 2009, the Company also paid approximately $0.8 million in earn-out payments for acquisitions completed in previous years.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following unaudited pro forma results of operations of the Company give effect to all acquisitions completed in the last three years as though the transactions and related financing activities had occurred on September 1, 2008 (in thousands, except per share amounts).

 

     Fiscal Year Ended August 31,  
     2011      2010      2009  

Net sales

        

As reported

   $ 1,445,323       $ 1,160,508       $ 1,117,625   

Pro forma

     1,494,822         1,365,110         1,297,097   

Earnings from continuing operations

        

As reported

   $ 124,496       $ 70,356       $ 25,982   

Pro forma

     127,703         79,632         23,800   

Basic earnings per share from continuing operations

        

As reported

   $ 1.82       $ 1.04       $ 0.45   

Pro forma

     1.87         1.18         0.41   

Diluted earnings per share from continuing operations

        

As reported

   $ 1.68       $ 0.97       $ 0.43   

Pro forma

     1.74         1.10         0.40   

Note 3.    Discontinued Operations

During the second quarter of fiscal 2010, the Company divested a portion of its European Electrical business (Electrical segment) for $7.5 million of cash proceeds, which resulted in a net pre-tax gain on disposal of $0.3 million. On February 28, 2011, the Company completed the sale of the remainder of the European Electrical business for total cash proceeds of $3.5 million, net of transaction costs. As a result of the sale transaction, the Company recognized a pre-tax loss on disposal of $15.8 million, including an $11.4 million charge to cover future lease payments on an unfavorable real estate lease of the divested business.

In addition, during the fourth quarter of fiscal 2009, the Company sold the Acme Aerospace (Engineered Solutions segment) and BH Electronics (Electrical segment) businesses in separate transactions for total cash proceeds of $38.5 million, net of transaction costs. As a result of the sale transactions, the Company recognized a net pre-tax gain of $17.8 million in the fourth quarter of fiscal 2009. The results of operations for the divested businesses have been reported as discontinued operations for all periods presented. The following table summarizes the results of discontinued operations (in thousands):

 

     Year Ended August 31,  
     2011     2010     2009  

Net sales

   $ 49,305      $ 105,661      $ 145,929   

Net (loss) gain on disposal

     (15,829     334        17,800   

Loss from operations of divested businesses(1)

     (1,157     (41,525     (33,933

Income tax benefit (expense)(2)

     4,049        (5,134     3,874   
  

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of income tax

   $ (12,937   $ (46,325   $ (12,259
  

 

 

   

 

 

   

 

 

 

 

(1) Includes non-cash asset impairment charges of $36.1 million (European Electrical) and $27.0 million (BH Electronics) in fiscal 2010 and 2009, respectively—see Note 6, “Impairment Charges.”
(2) Fiscal 2010 includes incremental tax expense of $4.3 million related to provision to return adjustments and the correction of prior period income tax amounts (correction amounts are immaterial to previously reported periods and the current year).

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 4.    Restructuring

In fiscal 2009, in response to the dramatic downturn in the worldwide economy, the Company committed to various restructuring initiatives including workforce reductions, plant consolidations, the transfer of production and product sourcing to lower cost plants or regions and the centralization of certain selling and administrative functions. These actions were substantially completed by August 31, 2010, with limited restructuring activity and expense in fiscal 2011, which primarily related to facility exit lease charges. Total restructuring costs recognized, which impact all segments are as follows (in thousands):

 

     Year Ended August 31,  
     2011      2010      2009  

Severance and facility consolidation

   $ 1,459       $ 9,726       $ 15,733   

Product line rationalization

     87         1,096         1,313   

Other restructuring costs

     764         5,872         3,797   
  

 

 

    

 

 

    

 

 

 

Total restructuring costs

   $ 2,310       $ 16,694       $ 20,843   
  

 

 

    

 

 

    

 

 

 

Approximately $0.1 million, $1.1 million and $1.3 million of the total restructuring cost recognized in fiscal 2011, 2010 and 2009, respectively, were reported in the Consolidated Statements of Earnings in “Cost of products sold” with the balance reported in “Restructuring charges.”

A rollforward of the restructuring reserve (included in Other Current Liabilities and Other Long-term Liabilities in the consolidated balance sheets) is as follows (in thousands):

 

     2011     2010  

Beginning balance

   $ 6,517      $ 9,282   

Restructuring charges

     2,310        16,694   

Cash payments

     (5,251     (14,914

Product line rationalization

     (87     (1,096

Other non-cash uses of reserve

     —          (4,571

Impact of changes in foreign currency rates

     146        1,122   
  

 

 

   

 

 

 

Ending balance

   $ 3,635      $ 6,517   
  

 

 

   

 

 

 

Note 5.    Accounts Receivable Securitization

Historically, the Company maintained an accounts receivable securitization program under which it sold certain of its trade accounts receivable to a wholly-owned, bankruptcy-remote special purpose subsidiary which, in turn, sold participating interests in its pool of receivables to a third party financial institution. The Company did not renew the securitization program on its September 9, 2009 maturity date and as a result, utilized availability under the Senior Credit Facility to fund the corresponding $37.1 million increase in accounts receivable. Sales of trade receivables from the special purpose subsidiary totaled $352.7 million for the year ended August 31, 2009, while related cash collections during the same period totaled $608.0 million (included in operating activities in the consolidated statement of cash flows). Financing costs related to the accounts receivable securitization program were $1.6 million for the year ended August 31, 2009.

Note 6.    Impairment Charges

During the fourth quarter of fiscal 2010, the Company committed to a plan to divest its European Electrical business, which designed, manufactured and marketed electrical sockets, switches and other tools and consumables predominately in the European DIY retail market. This planned divestiture was part of the Company’s portfolio management process to focus on businesses that create the most shareholder value. Weak economic conditions throughout Europe and reduced demand in the retail DIY markets, combined with the

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

decision to divest the business, caused the Company to reduce the projected sales, operating profit and cash flows of the business, which resulted in a $36.1 million non-cash asset impairment charge to adjust the carrying value of this business to fair value. This impairment charge was recognized in the fourth quarter of fiscal 2010 and consisted of the write-down of $24.5 million of goodwill, $2.3 million of intangible assets and $9.3 million of property, plant and equipment and other assets. As discussed in Note 3, “Discontinued Operations,” the Company subsequently divested the business in the second quarter of fiscal 2011.

During the third quarter of fiscal 2009, the Company recorded a $31.7 million non-cash asset impairment charge related to the goodwill, indefinite lived intangibles and long-lived assets of the harsh environment electrical business (Electrical segment). Approximately $27.0 million of the impairment charge is included in the Loss from Discontinued Operations. Poor economic conditions, low consumer confidence, increased unemployment and tight credit markets have negatively impacted consumer discretionary spending, resulting in a substantial reduction in recreational boating industry sales. OEM boat builders responded to the sharp drop in demand and high levels of finished goods inventory by suspending operations as well as eliminating brands and permanently closing facilities. These actions caused the Company to significantly reduce its projections for sales, operating profits and cash flows for the harsh environment electrical business, which resulted in a $14.4 million goodwill impairment charge, a $15.7 million impairment of intangible assets and a $1.6 million impairment of fixed assets. As discussed in Note 3, “Discontinued Operations,” the Company subsequently divested the marine OEM business, BH Electronics, in the fourth quarter of fiscal 2009.

Significant adverse developments in the recreational vehicle (“RV”) market in the first quarter of fiscal 2009 had a dramatic effect on the Company’s RV business (Engineered Solutions segment). Its financial results were negatively impacted by lower wholesale motorhome shipments by OEM’s, decreased consumer confidence and the lack of financing as a result of the global credit crisis. These factors caused the Company to significantly reduce its projections for sales, operating profits and cash flows of the RV business, and resulted in the recognition of a $26.6 million non-cash asset impairment charge. The asset impairment charge included a $22.2 million write-off of all remaining goodwill of the RV business, a $0.8 million impairment of indefinite lived intangibles (tradename) and a $3.6 million impairment of fixed assets and amortizable intangible assets.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 7.    Goodwill and other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. Goodwill is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Annual impairment tests are performed by the Company in the fourth quarter of each fiscal year. As discussed in Note 6, “Impairment Charges” total cumulative goodwill impairment charges were $61.2 million at both August 31, 2011 and 2010. The changes in the carrying amount of goodwill for the years ended August 31, 2011 and 2010 are as follows (in thousands):

 

     Industrial     Energy     Electrical     Engineered
Solutions
    Total  

Balance as of August 31, 2009

   $ 64,688      $ 228,534      $ 199,229      $ 219,071      $ 711,522   

Businesses acquired

     15,630        18,071        —          —          33,701   

Purchase accounting adjustments

     —          1,581        —          —          1,581   

Impairment charge

     —          —          (24,542     —          (24,542

Impact of changes in foreign currency rates

     (2,382     (7,596     (3,148     (4,247     (17,373
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of August 31, 2010

     77,936        240,590        171,539        214,824        704,889   

Businesses acquired

     200        —          84,478        71,186        155,864   

Purchase accounting adjustments

     3,192        248        —          140        3,580   

Impact of changes in foreign currency rates

     4,081        11,447        4,760        3,845        24,133   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of August 31, 2011

   $ 85,409      $ 252,285      $ 260,777      $ 289,995      $ 888,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

    Weighted
Average
Amortization
Period (Years)
  August 31, 2011     August 31, 2010  
      Gross
Carrying
Amount
    Accumulated
Amortization
    Net Book
Value
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net Book
Value
 

Amortizable intangible assets:

             

Customer relationships

  16   $ 331,171      $ 73,215      $ 257,956      $ 242,384      $ 53,013      $ 189,371   

Patents

  13     51,169        31,221        19,948        44,987        27,264        17,723   

Trademarks and tradenames

  20     38,917        6,571        32,346        6,205        5,103        1,102   

Non-compete agreements and other

  4     7,362        5,671        1,691        6,941        4,755        2,186   

Indefinite lived intangible assets:

             

Tradenames

  N/A     167,465        —          167,465        126,596        —          126,596   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 596,084      $ 116,678      $ 479,406      $ 427,113      $ 90,135      $ 336,978   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in the carrying value of intangible assets are due to the impact of foreign currency exchange rate changes, acquisition and divestiture activities and the reclassification of certain tradenames from indefinite lived intangibles to amortizable intangibles. Amortization expense recorded on intangible assets for the years ended August 31, 2011, 2010 and 2009 was $27.5 million, $22.0 million and $19.7 million respectively. Amortization expense for future years is estimated to be: $28.8 million in fiscal 2012, $27.1 million in fiscal 2013, $26.0 million in fiscal 2014, $25.9 million in fiscal 2015, $25.8 million in fiscal 2016, and $178.3 million thereafter. The future amortization expense amounts represent estimates, which may change based on future acquisitions, changes in foreign currency exchange rates or other factors.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 8.    Debt

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

 

     August 31,  
     2011     2010  

Senior Credit Facility

    

Revolver

   $ 58,000      $ —     

Term Loan

     100,000        —     
  

 

 

   

 

 

 
     158,000        —     

6.875% Senior notes

     249,432        249,334   

Other debt

     —          203   
  

 

 

   

 

 

 

Total Senior Indebtedness

     407,432        249,537   

Convertible subordinated debentures (“2% Convertible Notes”)

     117,795        117,843   
  

 

 

   

 

 

 

Total debt

     525,227        367,380   

Less: current maturities of long-term debt

     (2,500     —     
  

 

 

   

 

 

 

Total long-term debt, less current maturities

   $ 522,727      $ 367,380   
  

 

 

   

 

 

 

On February 23, 2011, the Company expanded and extended its Senior Credit Facility, extending its maturity to February 23, 2016 and increasing total capacity from $400 million to $700 million. The amended Senior Credit Facility provides a $600 million revolving credit facility, a $100 million term loan and a $300 million expansion option, subject to certain conditions. Borrowings are subject to a pricing grid, which can result in increases or decreases to the borrowing spread, depending on the Company’s leverage ratio, ranging from 1.25% to 2.50% in the case of loans bearing interest at LIBOR and from 0.25% to 1.25% in the case of loans bearing interest at the base rate. At August 31, 2011, the borrowing spread on LIBOR based borrowings was 1.75% (aggregating to 2.00% on outstanding term loan borrowings and 2.06% on revolver borrowings). In addition, a non-use fee is payable quarterly on the average unused credit line under the revolver ranging from 0.2% to 0.4% per annum. At August 31, 2011 the unused credit line under the revolver was $539.7 million, of which $522.6 million was available for borrowings. The $100 million term loan will be repaid in quarterly installments of $1.25 million starting on March 31, 2012, increasing to $2.5 million per quarter beginning on March 31, 2013, with the remaining balance due at maturity. The Senior Credit Facility, which is secured by substantially all of the Company’s domestic personal property assets, also 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 3.75:1 and a minimum fixed charge coverage ratio of 1.50:1. The Company was in compliance with all debt covenants at August 31, 2011.

On June 12, 2007, the Company issued $250.0 million of 6.875% Senior Notes (the “Senior Notes”) at an approximate $1.0 million discount, generating net proceeds of $249.0 million. The Senior Notes were issued at a price of 99.607% to yield 6.93%, and require no principal installments prior to their June 15, 2017 maturity. The approximate $1.0 million initial issuance discount is being amortized through interest expense over the 10 year life of the Senior Notes. Semiannual interest payments on the Senior Notes are due in December and June of each year.

In November 2003, the Company issued $150.0 million of Senior Subordinated Convertible Debentures due November 15, 2023 (the “2% Convertible Notes”). Since the issuance date, the Company has repurchased (for cash) $32.2 million of 2% Convertible Notes at an average price of 99.3% of par value. The remaining $117.8 million of 2% Convertible Notes, are convertible into 5,966,953 shares of Company’s Class A common stock at a conversion rate of 50.6554 shares per $1,000 of principal amount, which equates to a conversion price of

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

approximately $19.74 per share. The 2% Convertible Notes bear interest at a rate of 2.0% annually which is payable on November 15 and May 15 of each year. Beginning with the six-month interest period commencing May 16, 2011, holders also receive contingent interest as the trading price of the 2% Convertible Notes exceeded 120% of their underlying principal amount over a specified trading period, which effectively increased the interest rate from 2.0% to 2.7% for the six month period through November 15, 2011. Contingent interest is re-evaluated every six months immediately proceeding each semi-annual interest period. Since November 2010, the Company has had the ability to redeem all or part of the 2% Convertible Notes for cash at any time, at a redemption price equal to 100% of the principal amount, plus accrued interest. In addition, holders of the 2% Convertible Notes have the option to require the Company to repurchase all or a portion of their 2% Convertible Notes for cash on November 15, 2013 and November 15, 2018, at a repurchase price equal to 100% of the principal amount, plus accrued interest. Holders may also convert their 2% Convertible Notes into shares of the Company’s Class A common stock prior to the scheduled maturity date if certain conditions are met.

In the third quarter of fiscal 2011, the Company entered into interest rate swap contracts that have a total notional value of $100.0 million and have maturity dates of March 23, 2016. The interest rate swap contracts pay the Company variable interest at the three month LIBOR rate, and the Company pays the counterparties a fixed interest rate of approximately 2.06%. These interest rate swap contracts were entered into to synthetically convert $100.0 million of the Senior Credit Facility variable rate borrowings into fixed rate debt. Based on the terms of the contracts and underlying debt, the interest rate swap contracts were determined to be effective, and thus qualify as cash flow hedges. As such, any changes in the fair value of these interest rate swap contracts are recorded in accumulated other comprehensive loss in the accompanying consolidated balance sheets. The market value of these interest rate swap contracts was a $4.6 million liability at August 31, 2011 and recognized in Other Long-term Liabilities.

The Company made cash interest payments of $26.1 million, $26.8 million and $36.1 million in fiscal 2011, 2010 and 2009, respectively.

Note 9.    Fair Value Measurements

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 Company has no financial assets or liabilities that are recorded at fair value using significant unobservable inputs (Level 3). The fair value of financial assets and liabilities included in the consolidated balance sheet are as follows (in thousands):

 

     August 31,  
     2011     2010  

Level 1 Valuation:

    

Cash equivalents

   $ 1,958      $ 5,092   

Investments

     1,464        1,313   

Level 2 Valuation:

    

Foreign currency forward contracts

   $ (81   $ 207   

Interest rate swap contracts

     (4,552     —     

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 August 31, 2011 and 2010 due to their short-term nature and the fact that the interest rates approximated year-end market rates of interest. The fair value of the Company’s outstanding $117.8 million 2% Convertible Notes at August 31, 2011 and 2010 was $127.9 million

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

and $126.4 million, respectively. The fair value of the Company’s outstanding $250.0 million of Senior Notes was $252.5 million at August 31, 2011 and 2010. The fair values of the 2% Convertible Notes and Senior Notes were based on the quoted market prices.

Note 10.    Leases

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

As of August 31, 2011, future obligations under non-cancelable operating leases (related to continuing operations) were as follows: $22.2 million in fiscal 2012; $18.1 million in fiscal 2013; $14.6 million in fiscal 2014; $10.9 million in fiscal 2015; $8.4 million in fiscal 2016; and $31.4 million thereafter. Total rental expense under operating leases was $26.4 million, $22.3 million and $28.8 million in fiscal 2011, 2010 and 2009, respectively. As discussed in Note 17, “Contingencies and Litigation” the Company is also contingently liable for certain leases entered into by a former subsidiary.

Note 11.    Employee Benefit Plans

Defined Benefit Pension Plans

The Company has several defined benefit pension plans which cover certain existing and former employees of domestic businesses it acquired, that were entitled to those benefits prior to acquisition, or existing and former employees of foreign businesses. Most of the U.S. defined benefit pension plans are frozen, and as a result, the majority of the plan participants no longer earn additional benefits. The following table provides detail of changes in the projected benefit obligations, the fair value of plan assets and the funded status of the Company’s U.S. defined benefit pension plans as of the Company’s August 31 measurement date (in thousands):

 

     2011     2010  

Reconciliation of benefit obligations:

    

Benefit obligation at beginning of year

   $ 46,967      $ 42,281   

Interest cost

     2,108        2,306   

Actuarial (gain) loss

     (2,311     5,275   

Benefits paid

     (2,334     (2,895
  

 

 

   

 

 

 

Benefit obligation at end of year

   $ 44,430      $ 46,967   
  

 

 

   

 

 

 

Reconciliation of plan assets:

    

Fair value of plan assets at beginning of year

   $ 25,429      $ 26,786   

Actual return on plan assets

     2,890        1,233   

Company contributions

     6,427        305   

Benefits paid from plan assets

     (2,334     (2,895
  

 

 

   

 

 

 

Fair value of plan assets at end of year

     32,412        25,429   
  

 

 

   

 

 

 

Funded status of the plans (underfunded)

   $ (12,018   $ (21,538
  

 

 

   

 

 

 

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table provides detail on the Company’s net periodic benefit costs (in thousands):

 

     Year ended August 31,  
     2011     2010     2009  

Interest cost

   $ 2,108      $ 2,306      $ 2,483   

Expected return on assets

     (2,221     (2,568     (2,934

Amortization of actuarial loss

     669        310        78   
  

 

 

   

 

 

   

 

 

 

Net benefit cost (credit)

   $ 556      $ 48      $ (373
  

 

 

   

 

 

   

 

 

 

At August 31, 2011 and 2010, $12.0 million and $14.3 million, respectively, of pension plan actuarial gains and losses, which have not yet been recognized in net periodic benefit cost, were included in Accumulated Other Comprehensive Loss, net of income taxes. During fiscal 2012, $0.4 million of these actuarial gains and losses are expected to be recognized in net periodic benefit cost.

Weighted-average assumptions used to determine benefit obligations as of August 31 and weighted-average assumptions used to determine net periodic benefit cost for the years ended August 31 are as follows:

 

     2011     2010     2009  

Assumptions for benefit obligations:

      

Discount rate

     5.00     4.60     5.60

Assumptions for net periodic benefit cost:

      

Discount rate

     4.60     5.60     6.50

Expected return on plan assets

     8.00     8.25     8.50

The Company employs a total return on investment approach for its pension plan assets whereby a mix of equities and fixed income investments are used to maximize the long-term return for plan assets, at a prudent level of risk. The investment portfolio contains a diversified blend of equity and fixed income investments. Within the equity allocation, a blend of growth and value investments are maintained in a variety of market capitalizations and diversified between U.S. and non-U.S. stocks. The Company’s targeted asset allocation as a percentage of total market value is 60% to 80% equity securities and the remainder fixed income securities and cash. Cash balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis.

At August 31, 2011, Company’s overall expected long-term rate of return for assets in U.S. pension plans was 7.9%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The target return is based on historical returns adjusted to reflect the current view of the long-term investment market.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The fair value of all U.S. pension plan assets are determined based on quoted market prices and therefore all plan assets are determined based on Level 1 inputs, except for fixed income securities which are valued based on Level 2 inputs, as defined in Note 9, “Fair Value Measurements.” The U.S. pension plan investment allocations by asset category (in thousands):

 

     Year Ended August 31,  
     2011      %     2010      %  

Cash and cash equivalents

   $ 5,703         17.6   $ 470         1.8

Fixed Income securities:

          

Government bonds

     554         1.7     405         1.6

Corporate bonds

     6,677         20.6     7,104         27.9

Short term funds

     107         0.3     29         0.1
  

 

 

    

 

 

   

 

 

    

 

 

 
     7,338         22.6     7,538         29.6

Equity Securities:

          

U.S. Companies

     14,560         44.9     13,712         53.9

International Companies

     4,811         14.8     3,709         14.6
  

 

 

    

 

 

   

 

 

    

 

 

 
     19,371         59.8     17,421         68.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Plan Assets

   $ 32,412         100.0   $ 25,429         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Projected benefit payments from plan assets to participants in the Company’s U.S. pension plans are approximately $2.6 million per year for fiscal 2012 through 2016 and $14.3 million in aggregate for fiscal 2017 through 2021. During fiscal 2012, the Company anticipates contributing $0.9 million to U.S. pension plans.

Non-U.S. Defined Benefit Pension Plans

The Company has several Non-U.S. defined benefit pension plans which cover certain existing and former employees of businesses outside the U.S. Most of the Non-U.S. defined benefit pension plans continue to earn additional benefits. The funded status of these plans at August 31, 2011 and 2010 is summarized as follows (in thousands):

 

     2011     2010  

Benefit obligation

   $ 9,035      $ 8,892   

Fair value of plan assets

     7,333        6,479   
  

 

 

   

 

 

 

Funded status of plans (underfunded)

   $ (1,702   $ (2,413
  

 

 

   

 

 

 

Net periodic benefit cost for these Non-U.S. plans was $0.4 million, $0.3 million and $0.4 million in fiscal 2011, 2010 and 2009, respectively. The weighted average discount rate utilized for determining the benefit obligation at August 31, 2011 and 2010 was 5.5% and 4.3%, respectively. The plan assets of these non-U.S. pension plans consist primarily of participating units in common stock and bond funds. The Company’s overall expected long-term rate of return on these investments is 4.5%. During fiscal 2012, the Company anticipates contributing $0.4 million to non-U.S. pension plans.

Other Post-Retirement Health Benefit Plans

The Company provides other post-retirement health benefits (“OPEB”) to certain existing and former employees of domestic businesses it acquired, that were entitled to those benefits prior to acquisition. These unfunded plans had a benefit obligation of $3.3 million and $3.7 million at August 31, 2011 and 2010,

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

respectively. These obligations are determined utilizing assumptions consistent with those used for U.S. pension plans and a health care cost trend rate of 8%, trending downward to 5% by the year 2018, and remaining level thereafter. Net periodic benefit costs (credit) for the other post-retirement benefits were $(0.2) million for each of the three years ended August 31, 2011, 2010, and 2009. Benefit payments from the plan are funded through participant contributions and Company contributions which are projected to be $0.3 million in fiscal 2012.

Defined Contribution Benefit Plans

The Company maintains a 401(k) Plan for substantially all full time U.S. employees (the “401(k) Plan”). Under plan provisions, the Company issues new shares of Class A Common Stock for its contributions and allocates such shares to accounts set aside for each employee’s retirement. Employees generally may contribute up to 50% of their compensation to individual accounts within the 401(k) Plan. While contributions vary, the Company generally makes core contributions to employee accounts equal to 3% of each employee’s eligible annual cash compensation, subject to IRS limitations. In addition, the Company matches approximately 25% of each employee’s contribution up to 6% of the employee’s eligible compensation. Expense recognized related to the 401(k) plan totaled approximately $5.6 million, $2.7 million and $1.4 million for the years ended August 31, 2011, 2010 and 2009, respectively. The increase in expense for the year ended August 31, 2011 is the result of the full reinstatement of the core contribution, which had been temporarily suspended for fiscal 2009 and the first half of fiscal 2010 (due to adverse economic conditions).

Deferred Compensation Plan

The Company maintains a deferred compensation plan to allow eligible U.S. employees to defer receipt of current cash compensation in order to provide future savings benefits. Eligibility is limited to employees that earn compensation that exceeds certain pre-defined levels. Participants have the option to invest their deferrals in a fixed income investment, in Company Common Stock, or a combination of the two. The fixed income portion of the plan is currently unfunded, and therefore all compensation deferred under the plan is held by the Company and commingled with its general assets. Liabilities of $15.6 million and $13.0 million are included in “Other Current Liabilities” and “Other Long-term Liabilities” on the consolidated balance sheets at August 31, 2011 and 2010, respectively, to reflect the unfunded portion of the deferred compensation liability. The Company recorded expense of $1.2 million, $1.0 million and $0.9 million for the years ended August 31, 2011, 2010 and 2009, respectively, related to interest on participant deferrals in the fixed income investment option. Company Common Stock to fund the plan is held in a rabbi trust, accounted for in a manner similar to treasury stock and is recorded at cost in “Stock held in trust” within shareholders’ equity with the corresponding deferred compensation liability also recorded within shareholders’ equity. Since no investment diversification is permitted within the trust, changes in fair value of Actuant common stock are not recognized. The shares held in the trust are included in both the basic and diluted earnings per share calculations. The cost of the shares held in the trust was $1.0 million at both August 31, 2011 and 2010.

Long Term Incentive Plan

The Company adopted a long term incentive plan in July 2006 to provide certain executive officers with an opportunity to receive a lump sum cash incentive payment based on the attainment of a $50 per share Actuant Common Stock price appreciation target over an 8 year period. The Company recorded expense (income) of $0.1 million, $0.4 million and $(2.6) million for the years ended August 31, 2011, 2010 and 2009, respectively, pursuant to this plan. A related liability of $1.0 million and $0.9 million is included in “Other Long-term Liabilities” on the consolidated balance sheets at August 31, 2011 and 2010, respectively. As of August 31, 2011 the minimum and maximum payments available under the plan, depending on the attainment of the $50 per share stock price appreciation target, are $0 and $16.6 million, respectively.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 12.    Income Taxes

Income tax expense from continuing operations is summarized as follows (in thousands):

 

     Year ended August 31,  
     2011     2010     2009  

Currently payable:

      

Federal

   $ 2,402      $ 9,708      $ —     

Foreign

     23,847        15,834        19,491   

State

     1,982        784        (1,570
  

 

 

   

 

 

   

 

 

 
     28,231        26,326        17,921   

Deferred:

      

Federal

     15,297        (4,892     (12,439

Foreign

     (4,639     (2,147     (8,053

State

     (4,178     (441     3,182   
  

 

 

   

 

 

   

 

 

 
     6,480        (7,480     (17,310
  

 

 

   

 

 

   

 

 

 

Total income tax expense

   $ 34,711      $ 18,846      $ 611   
  

 

 

   

 

 

   

 

 

 

Income tax expense from continuing operations recognized in the accompanying consolidated statements of earnings differs from the amounts computed by applying the Federal income tax rate to earnings from continuing operations before income tax expense. A reconciliation of income taxes at the Federal statutory rate to the effective tax rate is summarized in the following table:

 

     Year ended August 31,  
     2011     2010     2009  

Federal statutory rate

     35.0     35.0     35.0

State income taxes, net of Federal effect

     0.5        0.4        2.0   

Net effect of foreign tax rates and credits

     (13.1     (23.5     (39.3

Restructuring and valuation allowance

     (2.6     (1.9     15.4   

Other items(1)

     2.0        11.1        (10.8
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     21.8     21.1     2.3
  

 

 

   

 

 

   

 

 

 

 

  (1) Other items for the year ended August 31, 2010 of 11.1% includes provision to return adjustments and additional provisions for unrecognized tax benefits. Other items for the year ended August 31, 2009 of (10.8%) reflects the benefit of income tax reserve adjustments resulting from settling tax audits for amounts less than previously accrued.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):

 

     Year ended August 31,  
     2011     2010  

Deferred income tax assets:

    

Operating loss and tax credit carryforwards

   $ 19,312      $ 21,391   

Compensation related liabilities

     8,122        12,766   

Postretirement benefits

     7,192        11,126   

Inventory

     9,202        6,522   

Restructuring and idle facility reserves

     5,674        2,248   

Book reserves and other items

     16,073        12,949   
  

 

 

   

 

 

 

Total deferred income tax assets

     65,575        67,002   

Valuation allowance

     (7,260     (8,542
  

 

 

   

 

 

 

Net deferred income tax assets

     58,315        58,460   

Deferred income tax liabilities:

    

Depreciation and amortization

     (155,022     (107,738

2% Convertible Note interest

     (34,579     (29,346

Other items

     (2,198     (905
  

 

 

   

 

 

 

Deferred income tax liabilities

     (191,799     (137,989
  

 

 

   

 

 

 

Net deferred income tax liability

   $ (133,484   $ (79,529
  

 

 

   

 

 

 

The valuation allowance primarily represents a reserve for foreign loss carryforwards for which utilization is uncertain. Certain of these foreign loss carryforwards may be carried forward indefinitely, with the remaining $4.1 million expiring at various dates between 2018 and 2020.

The deductibility of the 2% Convertible Notes interest, for tax purposes, may have to be recaptured, in part or in whole, if the notes are redeemed or converted at a price below a calculated level.

Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):

 

     August 31,  
     2011     2010     2009  

Beginning balance

   $ 28,225      $ 28,541      $ 29,872   

Increase for tax positions taken in a prior period

     4,026        2,868        4,633   

Decrease for tax positions taken in a prior period

     (6,072     (484     —     

Decrease due to settlements

     —          (2,700     (5,964
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 26,179      $ 28,225      $ 28,541   
  

 

 

   

 

 

   

 

 

 

Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2011, 2010 and 2009, the Company recognized $5.1 million, $4.2 million and $3.5 million, respectively for the payment of interest and penalties related to unrecognized tax benefits. With few exceptions, the Company is no longer subject to U.S. federal, state and local and foreign income tax examinations by tax authorities in our major tax jurisdictions for years before fiscal 2005. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could increase or decrease by approximately $3.5 million within the next twelve months.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company’s policy is to remit earnings from foreign subsidiaries only to the extent any resultant foreign income taxes are creditable in the United States. Accordingly, the Company does not currently provide for the additional United States and foreign income taxes which would become payable upon remission of undistributed earnings of foreign subsidiaries. Undistributed earnings on which additional income taxes have not been provided amounted to approximately $288.7 million at August 31, 2011. If all such undistributed earnings were remitted, an additional income tax provision of approximately $61.9 million would have been necessary as of August 31, 2011.

Earnings before income taxes related to non-United States operations were $102.1 million, $33.1 million and $43.9 million for the years ended August 31, 2011, 2010 and 2009, respectively. Cash paid for income taxes, net of refunds was $23.1 million, $6.5 million and $20.1 million during the years ended August 31, 2011, 2010 and 2009, respectively.

Note 13.    Capital Stock

The authorized common stock of the Company as of August 31, 2011 consisted of 168,000,000 shares of Class A Common Stock, $0.20 par value, of which 68,657,234 shares were issued and outstanding; 1,500,000 shares of Class B Common Stock, $0.20 par value, none of which were issued and outstanding; and 160,000 shares of Cumulative Preferred Stock, $1.00 par value (“Preferred Stock”), none of which have been issued. Holders of both classes of the Company’s Common Stock are entitled to dividends, as the Company’s board of directors may declare out of funds legally available, subject to any contractual restrictions on the payment of dividends or other distributions on the Common Stock. If the Company were to issue any of its Preferred Stock, no dividends could be paid or set apart for payment on shares of Common Stock, unless paid in Common Stock, until dividends on all of the issued and outstanding shares of Preferred Stock had been paid or set apart for payment and provision had been made for any mandatory sinking fund payments.

In the fourth quarter of fiscal 2009, the Company completed a follow-on equity offering of 10,925,000 shares of its Class A common stock. Total proceeds from the offering, net of transactions costs, were $124.8 million, which were used to reduce Senior Credit Facility borrowings.

As described in Note 8, “Debt,” the remaining $117.8 million of 2% Convertible Notes are convertible into 5,966,953 shares of the Company’s Class A Common Stock if certain conditions are met.

On September 28, 2011, the Company’s Board of Directors authorized a share buyback program for up to 7,000,000 shares of the Company’s Class A Common Stock. The share repurchase plan may be implemented from time to time on the open market or in privately negotiated transactions, with repurchased shares available for use in connection with the Company’s stock-based compensation plans and for other corporate purposes.

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

     Year Ended August 31,  
     2011      2010      2009  

Numerator:

        

Net earnings

   $ 111,559       $ 24,031       $ 13,723   

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

     1,755         1,898         2,429   
  

 

 

    

 

 

    

 

 

 

Net earnings for diluted earnings per share

   $ 113,314       $ 25,929       $ 16,152   
  

 

 

    

 

 

    

 

 

 

Denominator:

        

Weighted average common shares outstanding for basic earnings per share

     68,254         67,624         58,047   

Net effect of dilutive securities—employee stock compensation plans

     1,089         661         514   

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

     5,962         5,924         7,503   
  

 

 

    

 

 

    

 

 

 

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

     75,305         74,209         66,064   
  

 

 

    

 

 

    

 

 

 

Basic Earnings Per Share:

   $ 1.63       $ 0.36       $ 0.24   

Diluted Earnings Per Share:

   $ 1.50       $ 0.35       $ 0.24   

At August 31, 2011 and 2010, outstanding share based awards to acquire 2,582,000 and 4,371,000 shares of common stock were not included in the computation of earnings per share because the effect would have been anti-dilutive. The increase in the weighted average common shares outstanding for the years ended August 31, 2011 and 2010 results from the 10,925,000 shares of common stock issued in connection with the follow-on equity offering in the fourth quarter of fiscal 2009.

Note 14.    Stock Plans

Stock options may be granted to officers and key employees under the Actuant Corporation 2009 Omnibus Incentive Plan (the “Plan”). At August 31, 2011, 5,400,000 shares of Class A Common Stock were authorized for issuance under the Plan of which 2,166,380 shares were available for future award grants. The Plan permits the Company to grant share-based awards, including stock options and restricted stock, to employees and directors. Options generally have a maximum term of ten years, an exercise price equal to 100% of the fair market value of the Company’s common stock at the date of grant and generally vest 50% after three years and 100% after five years. The Company’s restricted stock grants generally have similar vesting provisions. The provisions of share-based awards may vary by individual grant with respect to vesting period, dividend and voting rights, performance conditions and forfeitures.

A summary of stock option activity during fiscal 2011 is as follows:

 

     Shares     Weighted-
Average
Exercise Price
(Per Share)
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic Value
 

Outstanding on September 1, 2010

     5,932,988      $ 19.87         

Granted

     423,977        27.50         

Exercised

     (479,610     9.01         

Forfeited

     (231,550     24.08         
  

 

 

         

Outstanding on August 31, 2011

     5,645,805      $ 21.23         5.4 years       $ 10.2 million   
  

 

 

         

Exercisable on August 31, 2011

     3,053,165      $ 20.44         3.6 years       $ 8.3 million   

 

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ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Intrinsic value is the difference between the market value of the stock at August 31, 2011 and the exercise price which is aggregated for all options outstanding and exercisable. A summary of the weighted-average grant-date fair value of options, total intrinsic value of options exercised, and cash receipts from options exercised is shown below (in thousands, except per share amounts):

 

     Year Ended August 31,  
     2011      2010      2009  

Weighted-average fair value of options granted (per share)

   $ 10.74       $ 7.56       $ 6.78   

Intrinsic value gain of options exercised

     7,540         2,607         5,881   

Cash receipts from exercise of options

     4,324         1,732         365   

A summary of restricted stock activity during fiscal 2011 is as follows:

 

     Number of
Shares
    Weighted-
Average Fair Value
at Grant Date
(Per Share)
 

Outstanding August 31, 2010

     829,036      $ 19.78   

Granted

     565,259        27.36   

Forfeited

     (117,148     22.49   

Vested

     (83,225     23.12   
  

 

 

   

Outstanding August 31, 2011

     1,193,922      $ 22.87   
  

 

 

   

As of August 31, 2011, there was $27.4 million of total unrecognized compensation cost related to share-based compensation for stock options and restricted stock outstanding. That cost is expected to be recognized over a weighted average period of 3.5 years. The total fair value of shares vested during the fiscal years ended August 31, 2011 and 2010 was $2.1 million and $0.7 million, respectively. The Company issues previously unissued shares of Class A common stock to satisfy stock option exercises and restricted stock vesting.

The Company generally records compensation expense (over the vesting period) for restricted stock awards based on the market value of Actuant common stock on the grant date. Stock based compensation expense was calculated using the Black-Scholes option pricing model for options granted in the first half of fiscal 2005 and a binomial pricing model for options granted thereafter. Assumptions used to determine the fair value of each option were based upon historical data and standard industry valuation practices and methodology. The following weighted-average assumptions were used in each fiscal year:

 

     Fiscal Year Ended August 31,  
     2011     2010     2009  

Dividend yield

     0.15     0.23     0.22

Expected volatility

     39.62     40.01     38.07

Risk-free rate of return

     2.53     2.76     1.70

Expected forfeiture rate

     15     15     15

Expected life

     6.1 years        6.1 years        6.0 years   

 

54


Table of Contents

ACTUANT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 15.    Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss in the accompanying consolidated balance sheets and consolidated statements of shareholders equity consists of the following (in thousands):

 

     Year Ended August 31,  
     2011     2010  

Currency translation adjustments, net of tax

   $ (4,283   $ (50,590

Unrecognized pension and OPEB actuarial losses, net of tax

     (10,574     (16,515

Unrecognized loss on interest rate swap agreements, net of tax

     (2,822     —     
  

 

 

   

 

 

 
   $ (17,679   $ (67,105
  

 

 

   

 

 

 

Note 16.    Business Segment, Geographic and Customer Information

The Company is a global manufacturer of a broad range of industrial products and systems and is organized into four reportable segments: Industrial, Energy, Electrical and Engineered Solutions. The Industrial segment is primarily involved 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, as well as umbilical, rope and cable solutions to the global oil & gas, power generation and energy markets. The Electrical segment designs, manufactures and distributes a broad range of electrical products to the retail DIY, wholesale, OEM, utility, marine and other harsh environment 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 for continuing operations by reportable segment and product line (in thousands):

 

     Year Ended August 31,  
     2011     2010     2009  

Net Sales by Segment:

      

Industrial

   $ 393,013      $ 299,983      $ 286,851   

Energy

     293,060        235,723        259,490   

Electrical

     286,013        233,702        241,988   

Engineered Solutions

     473,237        391,100        329,296   
  

 

 

   

 

 

   

 

 

 
   $ 1,445,323      $ 1,160,508      $ 1,117,625   
  

 

 

   

 

 

   

 

 

 

Net Sales by Reportable Product Line:

      

Industrial

   $ 393,013      $ 299,983      $ 286,851   

Energy

     293,060        235,723        259,490   

Electrical

     286,013