ENERPAC TOOL GROUP CORP — Interim / Quarterly Report 2001

Jul 12, 2001

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-11288 ACTUANT CORPORATION (Exact name of registrant as specified in its charter) Wisconsin 39-0168610 (State of incorporation) (I.R.S. Employer Id. No.) 6100 NORTH BAKER ROAD MILWAUKEE, WISCONSIN 53209 Mailing address: P. O. Box 325, Milwaukee, Wisconsin 53201 (Address of principal executive offices) (414) 352-4160 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ --- The number of shares outstanding of the registrant's Class A Common Stock as of June 30, 2001 was 7,970,984. 1 TABLE OF CONTENTS

• ---------------- *No response to this item is included herein for the reason that it is inapplicable or the answer to such item is negative. Risk Factors That May Affect Future Results - ------------------------------------------- This quarterly report on Form 10-Q contains certain statements, which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms "anticipate," "believe," "estimate," "expect," "objective," "plan," "project" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to inherent risks and uncertainties that may cause actual results or events to differ materially from those contemplated by such forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that may cause actual results or events to differ materially from those contemplated by such forward-looking statements include, without limitation, general economic conditions and market conditions in the recreational vehicle, truck, automotive, industrial production, and construction industries in North America, Europe and, to a lesser extent, Asia, market acceptance of existing and new products, successful integration of acquisitions, competitive pricing, foreign currency risk, interest rate risk, the Company's ability to access capital markets, the Company's high debt level which results in less financial flexibility in terms of debt covenants and debt availability, 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. 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (unaudited) - ----------------------------------------- ACTUANT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share amounts) (Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements 3 ACTUANT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements 4 ACTUANT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements 5 ACTUANT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation - ------------------------- On January 9, 2001, Applied Power Inc. shareholders approved the change of the name of the Company to Actuant Corporation. The accompanying unaudited condensed consolidated financial statements of Actuant Corporation ("Applied Power," "Actuant," or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial reporting and the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The condensed consolidated balance sheet data as of August 31, 2000 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. For additional information, refer to the consolidated financial statements and related footnotes in the Company's fiscal 2000 Annual Report on Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Such adjustments consist of only those of a normal recurring nature. Operating results for the nine months ended May 31, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2001. On January 9, 2001, our shareholders approved a reverse stock split whereby every five shares of common stock were converted into one share of common stock. In addition, our shareholders approved a reduction in our authorized Class A common shares from 80 million to 16 million with a similar reduction for other capital stock. Where appropriate, these changes are reflected in these financial statements for all periods presented. Prior year's financial statements have been reclassified where appropriate to conform to current year presentations. (2) Distribution and Discontinued Operations - -------------------------------------------- On January 27, 2000, Applied Power's board of directors authorized various actions to enable Applied Power to distribute its Electronics segment ("APW Ltd.") to its shareholders (the "Distribution"). In the Distribution, Applied Power shareholders received, in the form of a special dividend, one share of APW Ltd. common stock for each Applied Power common share. As a result, APW Ltd. became a separately traded, publicly held company. The Distribution was approved by the board of directors on July 7, 2000 and shares of APW Ltd. were distributed to Applied Power shareholders of record at July 21, 2000, effective July 31, 2000. Accordingly, the Condensed Consolidated Statement of Earnings and the Condensed Consolidated Statement of Cash Flows for the nine months ended May 31, 2000 have been reclassified to reflect the Company's former Electronics segment as a discontinued operation. Thus, the revenues, costs and expenses, and cash flows of the former Electronics segment have been excluded from the respective captions in the accompanying condensed consolidated financial statements. The net operating results of the former Electronics segment have been reported, net of applicable taxes, as "Discontinued Operations, net of Income Taxes." The net operating results of the discontinued operations include financing costs related to the debt allocated to the Electronics segment. An $0.8 million loss was recorded in "Discontinued Operations, net of Income Taxes" for the three months ended May 31, 2001 to reflect a change in estimate for Electronics segment liabilities assumed by the Company as part of the Distribution. (3) Acquisitions and Divestitures - --------------------------------- On March 1, 2001, the Company, through a wholly owned subsidiary, acquired certain assets and assumed certain liabilities of Dewald Manufacturing, Inc. ("Dewald"). Dewald is engaged in the design and manufacture of recreational vehicle ("RV") slide out and leveling systems for the North American RV market. The results of operations of Dewald are included in the accompanying financial statement since the date of acquisition. The acquisition was accounted for as a purchase, and the purchase price of $13.4 million (including deferred purchase price of $1.8 million and transaction costs) was allocated to the fair value of the assets acquired and the liabilities assumed. The excess purchase price over the fair value of assets acquired, which approximates $8.3 million, was recorded as goodwill and is being amortized over 20 years. This acquisition was funded by borrowings under Actuant credit facilities. In May 2001, the Company sold its Tools and Supplies Quick Mold Change ("QMC") business to the QMC 6 management team for approximately $1.0 million. The QMC business had revenue of approximately $6.0 million and a net loss of approximately $0.3 million in the last twelve months. The sale resulted in a loss of approximately $0.6 million, $0.4 million after-tax, or $0.05 per diluted share which is recorded in "Other Expense (Income), Other." In May 2001, the Company recorded a charge in "Other Expense (Income), Other" of $1.5 million, $0.9 million after-tax, or $0.11 per diluted share, for the net present value of future lease and holding costs on a building that had been occupied by a former subsidiary. At the time the Company sold the divested business, it received a five-year sub-lease with renewal options. Due to a change in control at the parent company of the divested business, the renewal option was not exercised. We were unsuccessful in subletting the building during the quarter. On May 26, 2000, the Company completed the sale of Air Cargo Equipment Corporation, a business unit in the Engineered Solutions segment. The total consideration from the transaction, which was structured as both a sale of stock of the Air Cargo Equipment Corporation and a sale of other assets, was $12.0 million, resulting in an extraordinary loss of $13.9 million, $12.2 million after tax, or $1.51 per diluted share. During the fourth quarter of fiscal 2000, the Company divested other businesses and discontinued certain product lines, which significantly impacts the comparability of financial information presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion. (4) Sale of Trade Accounts Receivable - ------------------------------------- During the quarter ended May 31, 2001, the Company sold certain domestic trade accounts receivable in a securitization transaction. In this transaction, the Company retained servicing responsibilities and a subordinated interest in the receivables sold. The investors have no recourse against the Company for failure of debtors to pay when due, and the Company's retained interest in the receivable pool is subordinate to the investor's interests. The Company's retained interest in the receivable pool is recorded at fair value, which was determined based on historical default rates for the trade receivables. The Company recorded a discount on the receivables sold of $0.2 million and transaction costs of $0.4 million, both of which are included in "Accounts Receivable Securitization Costs." The Company received $30 million for sold receivables, which was used to reduce indebtedness under its senior credit agreement. (5) Restructuring Charge - ------------------------ The Company adopted plans to restructure portions of its operations in the fiscal third quarter of 2001. These plans are designed to reduce administrative and operational costs and resulted in a charge of $1.7 million, $1.0 million after-tax, or $0.13 per diluted share. Of the pre-tax charge, $0.3 million related to the consolidation of our RV slide production facilities, $0.6 related to downsizing our cable tie production facility, and $0.8 million related to other personnel reductions. The company wrote down the fixed assets at the locations to be closed or downsized to their fair value, less costs to sell, in the third quarter. We expect net cash proceeds of approximately $0.5 million from the ultimate disposal of these assets, which should be completed by the third quarter of fiscal 2002. As a result of these plans, we have terminated approximately 36 people. A rollforward of the restructuring reserve recorded is shown in the following table:

(6) Inventories, Net - -------------------- The nature of the Company's products is such that they generally have a very short production cycle. Consequently, the amount of work-in-process at any point in time is minimal. In addition, many parts or components are ultimately either sold individually or assembled with other parts making a distinction between raw materials and finished goods impractical to determine. Several other locations maintain and manage their inventories using a job cost system where the distinction of categories of inventory by state of completion is also not available. As a result of these 7 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. (7) Earnings Per Share - ---------------------- The reconciliations between basic and diluted earnings per share are as follows (in thousands, except per share amounts):

Note: Earnings per share data may not total due to rounding. (8) Comprehensive Income - ------------------------ The components of comprehensive income are as follows (in thousands):

8 (9) Plant Fire - -------------- In February 2001, one of the Company's facilities in Oldenzaal, The Netherlands was damaged by fire. The fire damaged a portion of the leased building, as well as certain inventory and property, plant and equipment contained therein. Additionally, the fire impacted the shipment of product produced on the truck cab-tilt production line that is housed in the damaged facility. The Company is party to an insurance contract that is expected to cover the damaged inventory and equipment as well as the business interruption resulting from the fire. The costs incurred through May 31, 2001 and the net book value of lost assets total $1.5 million. The Company received advance payments of $1.5 million from the insurance carrier during the third quarter in partial settlement of the insurance contract. Of the $1.5 million received, $1.1 million related to recovery on fixed assets destroyed and the remaining $0.4 million related to recovery of business interruption costs. A gain of $1.0 million, $0.6 million after-tax, or $0.07 per diluted share, was recorded in "Other Expense (Income), Other" to reflect the difference between the book value of the assets destroyed and the minimum reimbursement from the insurance carrier received in the quarter. Approximately $1.0 million of costs associated with the fire loss are recorded in other current assets at May 31, 2001 in the Condensed Consolidated Balance Sheet, which represents amounts expected to be recovered from our insurance carrier. Future insurance recoveries under our insurance policy are probable, and will be recorded net of additional costs associated with the fire, when estimable. (10) Segment Information - ------------------------ The Company is organized and managed along the lines of its two business segments: Tools & Supplies and Engineered Solutions. Tools & Supplies products include high-force hydraulic tools, electrical tools and consumables, which are sold to a variety of distribution markets including general industrial, construction, production automation, retail do-it-yourself ("DIY"), retail marine and retail automotive aftermarket. Engineered Solutions works with customers to provide customized solutions in the recreational vehicle ("RV"), truck, automotive, medical, and other markets. Products include RV slide-out and leveling systems, hydraulic cab-tilt systems for heavy-duty trucks, electro-hydraulic automotive convertible top actuation systems and extruded and molded silicone products for the medical market. "General corporate and other" as indicated below primarily includes general corporate expenses, financing costs on third party debt and foreign currency exchange adjustments. The following table summarizes financial information by reportable segment (in thousands):

(11) Recent Events - ------------------ On March 21, 2001, the Company announced that it is in preliminary discussion with a number of parties regarding the possible sale of its Mox-Med business, which is part of the Engineered Solutions segment. Mox-Med provides molded and extruded silicone products for the medical and housewares industries, and has annual net sales of approximately $20 million. In the event we complete a divestiture of Mox-Med, the net proceeds would be used to reduce our outstanding debt. (12) Guarantor Condensed Financial Statements - --------------------------------------------- In connection with the Distribution, Actuant issued 13% Senior Subordinated Notes due 2009. All of our material domestic wholly-owned subsidiaries (the "Guarantors") fully and unconditionally guarantee the 13% notes on a joint and several basis. We believe separate financial statements and other disclosures concerning each of the Guarantors would not provide additional information that is material to investors. Therefore, the Guarantors are combined in the presentation below. There are no significant restrictions on the ability of the Guarantors to make distributions to 9 Actuant. The following tables present the results of operations, financial position and cash flows of Actuant Corporation and its subsidiaries, the Guarantors and non-guarantor entities, and the eliminations necessary to arrive at the information for the Company on a condensed consolidated basis. CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS (Dollars in thousands)

10 CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS (Dollars in thousands)

11 CONDENSED CONSOLIDATING BALANCE SHEET (Dollars in thousands)

12 CONDENSED CONSOLIDATING BALANCE SHEET (Dollars in thousands)

13 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Dollars in thousands)

14 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Dollars in thousands)

15 Item 2 - Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations - --------------------- On January 9, 2001 Applied Power Inc. changed its name to Actuant Corporation. Throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" when we refer to "Actuant," "Applied Power," or the "Company," we mean Actuant Corporation and its subsidiaries. Also on January 9, 2001, our shareholders approved a reverse stock split whereby every five shares of common stock were converted into one share of common stock. Where appropriate, this change is reflected in this Form 10-Q for all periods presented. The Distribution - ---------------- On January 27, 2000, Applied Power's board of directors authorized various actions to enable Applied Power to distribute its Electronics segment ("APW Ltd.") to its shareholders (the "Distribution"). In the Distribution, Applied Power shareholders received, in the form of a special dividend, one share of APW Ltd. common stock for each Applied Power common share. As a result, APW Ltd. became a separately traded, publicly held company. The Distribution was approved by the board of directors on July 7, 2000 and shares of APW Ltd. were distributed to Applied Power shareholders of record at July 21, 2000, effective July 31, 2000. Applied Power now trades separately on The New York Stock Exchange ("NYSE") under the ticker symbol "ATU." APW Ltd. trades on the NYSE under the ticker symbol "APW." As a result of the Distribution, the Company's Electronics segment is presented as "discontinued operations" in the accompanying financial statements. Results of Operations - --------------------- During fiscal years 2001 and 2000, we divested several businesses and discontinued certain product lines that were no longer considered integral to our business strategy, collectively referred to as the "non-continuing businesses." The following table summarizes the significant divestitures that were completed:

• -------- (1) At the time of the transactions. The comparability of operating results from period to period is impacted by the non-continuing businesses. The tables included in "Results of Continuing Operations" below show the effect, by segment, of the non-continuing businesses on reported results. Results from Continuing Operations for the Three and Nine Months Ended May 31, - ------------------------------------------------------------------------------ 2001 and 2000 - ------------- Earnings from continuing operations were $1.5 million, or $0.18 per diluted share, and $12.1 million, or $1.50 per diluted share, for the three months ended May 31, 2001 and 2000, respectively. Earnings from continuing operations for the nine months ended May 31, 2001 and 2000 were $8.8 million, or $1.07 per diluted share, and $35.0 million, or $4.34 per diluted share, respectively. The Company's operating results for the three and nine month periods ended May 31, 2001 and 2000 include earnings from the divested businesses listed above, which were disposed of in the periods indicated. Furthermore, our current capital structure is different than that which existed during the comparable periods in the prior year since we entered into new credit agreements and issued new subordinated debt in conjunction with the Distribution. Also included are various one time credits or charges recognized during the periods. As a result, certain adjustments must be made to make the results in the Condensed Consolidated Statements of Earnings comparable. Removing the impact of the divested businesses, the impact of our new capital structure, non-recurring recoveries for contract terminations and insurance settlements, and non-recurring costs associated with product line dispositions, restructuring charges, and excess corporate expenses recognized prior to the Distribution, earnings from continuing operations would have been $4.1 million, or $0.50 per diluted share, and $7.4 million, or $0.92 per diluted share, for the three months ended May 31, 2001 and 2000, respectively. For the nine months ended May 31, 2001 and 2000, 16 earnings from continuing operations would have been $11.8 million, or $1.43 per diluted share, compared to $19.3 million, or $2.39 per diluted share, respectively. This reduction in earnings is due to the impact of currency rates on translated results and slowing economic conditions, especially in the RV market. Following is a discussion of the comparative operating results for the three and nine-month periods ended May 31, 2001 and 2000. Net Sales by Segment (in thousands)

• -------- (1) "Non-continuing" represents the divested Tools & Supplies businesses, which include Norelem, the automotive line of business, the TAM product line and QMC. (2) "Non-continuing" represents the divested Engineered Solutions businesses, which include Barry Controls, Air Cargo, Samuel Groves and Magnets. Adjusted net sales declined $9.5 million, or 7.2%, and $38.2 million, or 9.8%, for the three and nine months ended May 31, 2001, respectively, compared to the prior year periods. The $38.2 million decline in revenue from fiscal 2000 resulted from a $10.8 million reduction in RV market sales, negative currency impact of $11.3 million due to the impact of foreign currency rate changes on translated results, and overall weaker economic conditions which adversely impacted sales to most of our markets. Tools & Supplies Adjusted net sales for the Tools & Supplies segment declined from the comparable prior year periods by $7.1 million and $9.9 million for the three and nine-months ended May 31, 2001, respectively. Excluding the effect of foreign currency rate changes, which caused $1.4 million of the third quarter decline and $4.4 million of the nine month sales decline, Tools & Supplies sales decreased 7.6% and 2.6% compared to the three and nine months ended May 31, 2000, respectively. This decline was driven primarily by the softening U.S. economy. Hydraulic tool sales were down 5.2% and electrical tools and supply sales were down 10.3% in the quarter, as compared to the prior fiscal year period. Engineered Solutions Adjusted net sales for the Engineered Solutions segment decreased from the prior year periods by $2.4 million and $28.2 million for the three and nine months ended May 31, 2001, respectively. The impact of foreign exchange rates on translated results caused sales declines of $1.5 million and $6.9 million for the three and nine months ended May 31, 2001, respectively, as compared to the prior year periods. Our sales to the North American RV market increased in the quarter by $3.3 million due to $8.0 million of sales from Dewald, a business acquired at the beginning of the quarter. The North American RV market started slowing in the third quarter of fiscal 2000, with the slowing continuing into the current quarter. Engineered Solutions sales to its largest RV customer were 40% lower in the third quarter of 2001 as compared to the third quarter of 2000 due to weak end user demand and the OEM market share changes. The majority of the remainder of the sales decline for the quarter, after factoring out currency impact and sales to the RV market, resulted from reduced sales to automotive and truck manufacturers of approximately $3.4 million, reflecting the impact of slower economic conditions. The $28.2 million adjusted net sales decline experienced during the nine months ended May 31, 2001 primarily resulted from a $10.8 million reduction in sales to the RV market and $6.9 million from foreign currency rate changes. The majority of 17 the remainder of the decline resulted from slower economic conditions that lowered sales to truck and automobile manufacturers by $6.9 million. Gross Profit Margins By Segment

Tools & Supplies Adjusted gross profit margins in our Tools & Supplies segment decreased in the quarter, as compared to the prior fiscal quarter. Our production levels were lower than normal, which reduced inventory in line with our goal of lowering working capital employed in the business, but resulted in lower margins. In addition, we experienced high opening order discounts and buybacks associated with significant line fills at two large retail customers which negatively impacted margins in the quarter. For the nine months ended May 31, 2001, these third quarter reductions were offset by our efforts to eliminate low margin SKUs and other costs reduction initiatives undertaken in the period, which resulted in higher gross profit margins. Engineered Solutions Engineered Solutions' adjusted gross profit margins decreased in the quarter and year-to-date as compared to the prior fiscal year periods. The quarter over quarter decline is largely due to higher sales of lower margin business, primarily attributable to Dewald. While Dewald sales were very strong in the quarter, sales in our higher margin business units declined. As integration activities continue with implementation of world class performance program initiatives, Dewald margins should improve. We are reducing employment and fixed costs at plants that supply our RV customers, through attrition and by closing one plant. 18 Engineering, Selling, and Administrative Expense by Segment (in thousands)

____ (1) "Non-continuing" represents the divested Tools & Supplies businesses, which include Norelem, the automotive line of business, the TAM product line, and QMC. (2) "Non-continuing" represents the divested Engineered Solutions businesses, which include Barry Controls, Air Cargo, Samuel Groves and Magnets. Adjusted engineering, selling and administrative ("ESA") expenses decreased $1.6 million and $5.4 million for the three and nine months ended May 31, 2001, as compared to the prior year periods. The decrease is due largely to a reduction in corporate expenses which, for fiscal 2000, included costs related to both the former Industrial and Electronics business segments of Applied Power. None of these expenses have been allocated to the discontinued operation's financial results. Tools & Supplies Tools & Supplies adjusted ESA expenses for the fiscal third quarter were flat year over year, but increased 2.9% for the nine months ended May 31, 2001, as compared to the prior year period. This increase in adjusted Tools & Supplies ESA expenses is primarily caused by higher levels of information technology ("IT") costs associated with a new computer system and increased marketing spending associated with tradeshows and promotions. Engineered Solutions Engineered Solutions adjusted ESA expenses increased by 11.7% for the fiscal 2001 third quarter and 11.4% for the nine months ended May 31, 2001, as compared to the prior year periods. These increases are a result of higher spending on new platform development associated with our convertible top product line and the inclusion of ESA expenses from Dewald, which was acquired on March 1, 2001. Amortization Expense Amortization expense was lower in the current year periods compared to the prior year primarily due to the non-continuing businesses. Contract Termination Recovery During the first quarter of fiscal 2000, the Company recovered approximately $1.4 million of a contract termination charge originally expensed in fiscal 1999 by the Engineered Solutions segment. Restructuring Charge The Company adopted plans to restructure portions of its operations in the third quarter of fiscal 2001. These plans are designed to reduce administrative and operational costs and resulted in a charge of $1.7 million, $1.0 million after-tax, 19 or $0.13 per diluted share. Of the pre-tax charge, $0.3 million related to the consolidation of our RV slide production facilities, $0.6 related to the downsizing of our cable tie production facility, and $0.8 million related to a staff reduction plan. The company wrote down the fixed assets at the locations to be closed or downsized to their fair value, less costs to sell, in the third quarter. We expect net cash proceeds of approximately $0.5 million from the ultimate disposal of these assets, which should be complete by the third quarter of fiscal 2002. As a result of these plans, we have terminated approximately 36 people. Other Expense (Income) Net financing costs for the three and nine-month periods ended May 31, 2001 increased $3.1 million and $15.3 million, respectively, compared to the prior fiscal year periods. The increased costs are the result of the realignment of debt in the Distribution. The current credit facilities have higher interest rates than that which had been previously incurred by the Company. Current borrowings consist of those under a senior secured credit agreement (the "Senior Credit Agreement") and the Senior Subordinated Notes, which carry a 13% interest rate. Accounts Receivable Securitization Costs for fiscal 2001 is comprised of a discount of $0.2 million and transaction costs of $0.4 million related to the May 2001 sale of receivables. Other, net for the three months ended May 31, 2001 is comprised of the following: Three Months Ended May 31, 2001 ------------- Gain on Insurance recovery......................... $ (983) Loss on sale of QMC................................ 619 Net present value of idled lease................... 1,531 Net foreign currency transaction gain.............. (344) Other.............................................. 354 ------------- Other, net......................................... $ 1,177 ============= Other, net for the three months ended May 31, 2000 and for the nine months ended May 31, 2001 and 2000 is comprised primarily of foreign currency gains and losses. Discontinued Operations and Extraordinary Items As a result of the Distribution, the results of operations for the Company's Electronics segment is presented as discontinued operations in the financial statements. Earnings from discontinued operations were $12.9 million, or $1.60 per diluted share, and $34.2 million, or $4.25 per diluted share, for the three and nine months ended May 31, 2000, respectively. An $0.8 million loss was recorded in "Discontinued Operations, net of Income Taxes" for the three months ended May 31, 2001 to reflect a change in estimate for Electronics segment liabilities assumed by the Company as part of the Distribution. On May 26, 2000, the Company completed the sale of Air Cargo Equipment Corporation, a business unit in the Engineered Solutions segment. The total consideration from the transaction, which was structured as both a sale of stock of the Air Cargo Equipment Corporation and a sale of other assets, was $12.0 million, resulting in an extraordinary loss of $13.9 million, $12.2 million after tax, or $1.51 per diluted share. Liquidity and Capital Resources - ------------------------------- Cash and cash equivalents totaled $0.6 million at May 31, 2001 and $9.9 million at August 31, 2000. In order to minimize net financing costs, the Company intentionally maintains low cash balances by using available cash to reduce borrowings. Net cash generated by operating activities of continuing operations totaled $44.8 million and $27.2 million for the nine-month periods ended May 31, 2001 and May 31, 2000, respectively. Discontinued operations generated $17.7 million of cash from operating activities in the nine months ended May 31, 2000. Net cash used in investing and financing activities for the nine months ended May 31, 2001 totaled $12.3 million and $41.8 million, respectively. Net cash 20 used for investing activities primarily consisted of cash paid for acquisitions and capital expenditures, offset by cash received from a partial insurance settlement and proceeds from the sale of fixed assets. Cash used for financing activities primarily consisted of debt repayments.

During the first quarter of fiscal 2001, a European subsidiary of the Company completed a bank term loan financing of 15.0 million Euro. Amortization of the loan begins on January 31, 2003 with semi-annual repayments thereafter and a final maturity of July 31, 2007. The loan interest rate is based on three month EURIBOR with a spread of 1.10%. Proceeds from the borrowing were used to prepay 15.0 million Euro of the Euro denominated term borrowings under the Company's Senior Credit Agreement, which carried a higher rate of interest. The Company is focused on debt reduction. In the ten months since the Distribution, debt has been reduced by $61.2 million. During the first nine months of fiscal 2001 debt was reduced $43.2 million. The Company plans to use all cash provided from operations to fund capital expenditures and reduce debt. In an effort to reduce financing costs and outstanding debt, in May 2001 the Company sold certain domestic trade accounts receivable in a securitization transaction. All proceeds from the sale, which totaled $30 million, were used to reduce debt. Although focused on debt reduction, when strategic opportunities exist to grow our core business through acquisitions, debt may be incurred. During the third quarter of fiscal 2001 the Company borrowed $11.3 million to fund the Dewald acquisition. Dividend payments have not been made in fiscal 2001, nor do we expect to pay dividends in the near future, so that cash flow from operations can be used to reduce debt. At May 31, 2001, the Company had approximately $36.1 million of availability under its credit facilities, and was in compliance with all covenants under its debt agreements. The Company believes that availability under its credit facilities, plus funds generated from operations, will be adequate to meet operating, debt service and capital expenditure requirements for the foreseeable future. New Accounting Pronouncements - ----------------------------- In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." This bulletin summarizes certain views of the SEC staff on applying generally accepted accounting principles to revenue recognition in financial statements. The SEC staff expressed its view that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable; and collectability is reasonably assured. The adoption of SAB 101 did not have a material effect on the Company's earnings or financial position. Effective September 1, 2000, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires all derivative instruments to be recorded in the balance sheet at fair value. The initial adoption of this statement did not have a material effect on the Company's earnings or financial position. Recent Events - ------------- In February 2001, one of the Company's facilities in Oldenzaal, The Netherlands was damaged by fire. The fire damaged a portion of the leased building, as well as certain inventory and property, plant and equipment contained therein. Additionally, the fire impacted the shipment of product produced on the truck cab-tilt production line that is housed in the damaged facility. The Company is party to an insurance contract that is expected to cover the damaged inventory and equipment as well as the business interruption resulting from the fire. The costs incurred through May 31, 2001 and the net book value of lost assets total $1.5 million. The Company received advance payments of $1.5 million from the insurance carrier during the third quarter in partial settlement of the insurance contract. Of the $1.5 million received, $1.1 million related to recovery on fixed assets destroyed and the remaining $0.4 million related to recovery of business interruption costs. A gain of $1.0 million, $0.6 million after-tax, or 21 $0.07 per diluted share, was recorded in "Other Expense (Income), Other" to reflect the difference between the book value of the assets destroyed and the minimum reimbursement from the insurance carrier received in the quarter. Approximately $1.0 million of costs associated with the fire loss are recorded in other current assets at May 31, 2001 in the Condensed Consolidated Balance Sheet, which represents amounts expected to be recovered from our insurance carrier. Future insurance recoveries under our insurance policy are probable, and will be recorded net of additional costs associated with the fire, when estimable. On March 21, 2001, the Company announced that it is in preliminary discussion with a number of parties regarding the possible sale of its Mox-Med business, which is part of the Engineered Solutions segment. Mox-Med provides molded and extruded silicone products for the medical and housewares industries, and has annual net sales of approximately $20 million. In the event we complete a divestiture of Mox-Med, the net proceeds would reduce our outstanding debt. Outlook - ------- Based on current expectations, we believe that revenues will be between $116 million and $121 million for the fourth quarter of 2001. At this sales level, EBITDA is projected to be between $20 million and $23 million for the quarter, before non-operational items. This estimate is dependant on, among other things, no changes in foreign exchange and interest rates from their present levels, steady economic conditions, and successful implementation of the restructuring program initiated in the fiscal third quarter. We believe that revenues for fiscal 2002 will range from $475 million to $500 million and that EBITDA will range from $94 million to $100 million. This estimate is dependant on, among other things, steady economic conditions during the first half of fiscal 2002 with slight improvement during the second half of 2002, foreign exchange and interest rates remaining at their present levels, the successful implementation of the restructuring program initiated in May 2001, and the successful achievement of our fiscal 2001 fourth quarter forecast. In addition, the impact of any divestitures or acquisitions has not been considered. We anticipate debt reduction during fiscal 2002 of $40 million, excluding the impact of any divestitures or acquisitions, subject to the achievement of our operating earnings estimate. Item 3 - Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- The Company is exposed to market risk from changes in foreign exchange and interest rates and, to a lesser extent, commodities. To reduce such risks, the Company selectively uses financial instruments. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which strictly prohibit the use of financial instruments for trading purposes. A discussion of the Company's accounting policies for derivative financial instruments is included in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2000 within Note A - "Summary of Significant Accounting Policies" in Notes to Consolidated Financial Statements. Currency Risk - The Company has significant international operations. In most - ------------- instances, the Company's products are produced at manufacturing facilities located near the customer. As a result, significant volumes of finished goods are manufactured in countries for sale into those markets. For goods purchased from other Company affiliates, the Company denominates the transaction in the functional currency of the producing operation. The Company has adopted the following guidelines to manage its foreign exchange exposures: (i) increase the predictability of costs associated with goods whose purchase price is not denominated in the functional currency of the buyer; (ii) minimize the cost of hedging through the use of naturally offsetting positions (borrowing in local currency), netting, pooling; and (iii) where possible, sell product in the functional currency of the producing operation. The Company's identifiable foreign exchange exposures result primarily from the anticipated purchase of product from affiliates and third-party suppliers along with the repayment of intercompany loans with foreign subsidiaries denominated in foreign currencies. The Company periodically identifies areas where we do not have naturally occurring offsetting positions and then purchases hedging instruments to protect against anticipated exposures. There are no such 22 hedging instruments in place at May 31, 2001 or through the date of this filing. The Company's financial position is not materially sensitive to fluctuations in exchange rates as any gains or losses on foreign currency exposures are generally offset by gains and losses on underlying payables, receivables and net investments in foreign subsidiaries. Interest Rate Risk - Given our leverage, we are exposed to interest rate risk - ------------------ from changes in interest rates. We have periodically utilized interest rate swap agreements historically to manage overall financing costs and interest rate risk. During the quarter ended May 31, 2001, we entered into a contract to swap variable interest rates on $25 million of our Senior debt for fixed interest rates. We have no other such agreements in place at May 31, 2001, or through the date of this filing. Our Senior Credit Agreement stipulates that the lower of 50% of our total debt or $200.0 million be fixed interest rate obligations. We are in compliance with this requirement. PART II - OTHER INFORMATION Item 5 - Other Information - -------------------------- Notice for Shareholder Proposals Effective May 4, 2001, the Company amended Section 2.04 of its bylaws to include an advance notice provision. Pursuant to Section 2.04, shareholders must timely submit, to the Company and in writing, any nominations of persons for election as a director or proposals to be considered at an annual meeting of the Company. Generally, to be considered timely under the new provision, a nomination or proposal must be received by the Secretary at the Company's principal office no earlier than 150 days nor later than 120 days prior to the anniversary of the prior year's annual meeting. Each such notice by a shareholder must set forth certain information as specified in Section 2.04 of the Company's bylaws. The date by which a director nomination or shareholder proposal must be received for the 2002 annual meeting is September 11, 2001 and no earlier than August 11, 2001. Notice should be sent to the attention of the Secretary of the Company and must contain specified information concerning the matters to be brought before such meeting and concerning the shareholder proposing such matters. In order to curtail any controversy as to the date on which we receive notice, it is suggested that proponents submit their notice by Certified Mail, Return Receipt Requested. The amended bylaws are being filed as an exhibit to this Report on Form 10-Q and are incorporated by reference herein. Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- (a) See Index to Exhibits on page 24, which is incorporated herein by reference. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACTUANT CORPORATION ------------------- (Registrant) Date: July 12, 2001 By: /s/ Andrew G. Lampereur ----------------------- Andrew G. Lampereur Chief Financial Officer (Principal Financial Officer and duly authorized to sign on behalf of the registrant) ACTUANT CORPORATION (the "Registrant") (Commission File No. 1-11288) QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2001 INDEX TO EXHIBITS