ENERPAC TOOL GROUP CORP — Interim / Quarterly Report 2002

Apr 12, 2002

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-11288 ACTUANT CORPORATION (Exact name of registrant as specified in its charter) Wisconsin 39-0168610 (State of incorporation) (I.R.S. Employer Id. No.) 6100 NORTH BAKER ROAD MILWAUKEE, WISCONSIN 53209 Mailing address: P. O. Box 3241, Milwaukee, Wisconsin 53201 (Address of principal executive offices) (414) 352-4160 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ------ The number of shares outstanding of the registrant's Class A Common Stock as of March 31, 2002 was 11,586,550. 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 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, including statements under the caption Outlook, are subject to inherent risks and uncertainties that may cause actual results or events to differ materially from those contemplated by such forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that may cause actual results or events to differ materially from those contemplated by such forward-looking statements include, without limitation, general economic conditions and market conditions in the recreational vehicle, truck, automotive, industrial production, and construction industries in North America, Europe and, to a lesser extent, Asia, market acceptance of existing and new products, successful integration of acquisitions, operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material or labor cost increases, foreign currency risk, interest rate risk, the economy's reaction to the September 11, 2001 and any other terrorist actions, uncollected tax or other indemnification claims from other parties, 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 borrowing 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 - ----------------------------- 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 ACTUANT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except shares and per share amounts) Note 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Actuant Corporation ("Actuant" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial reporting and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The condensed consolidated balance sheet data as of August 31, 2001 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The Company's significant accounting policies are disclosed in its fiscal 2001 Annual Report on Form 10-K. For additional information, refer to the consolidated financial statements and related footnotes in the Company's fiscal 2001 Annual Report on Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as discussed otherwise, such adjustments consist of only those of a normal recurring nature. Operating results for the six months ended February 28, 2002 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2002. Prior year's financial statements have been reclassified where appropriate to conform to current year presentations. Note 2. Acquisitions and Divestitures In March 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 statements since the date of the acquisition and are included in the Engineered Solutions segment in Note 14 - Segment Information. The acquisition was accounted for as a purchase, and the purchase price of $13.0 million (including deferred purchase price of $1.8 million) was allocated to the fair value of the assets acquired and the liabilities assumed. The excess purchase price over the fair value of the assets acquired, which approximated $8.8 million, was recorded as goodwill. This acquisition was funded by borrowings under Actuant's senior secured credit facility. In May 2001, the Company sold the Enerpac Quick Mold Change ("QMC") product line in the Tools & Supplies segment to the QMC business management team for approximately $1.0 million. QMC had annual sales of approximately $6.0 million. The sale resulted in a loss of approximately $0.7 million, $0.4 million after-tax, or $0.05 per diluted share. In August 2001, the Company completed the sale of Mox-Med, Inc., a business unit in the Engineered Solutions segment. Mox-Med had annual sales of approximately $18.0 million at the time of the sale. Cash proceeds from the sale were approximately $40.5 million, which resulted in a net gain of $18.5 million, $11.1 million after-tax, or $1.34 per diluted share. During the quarter ended November 30, 2001, the Company paid approximately $7.0 million in income taxes and fees related to the Mox-Med, Inc. sale. Note 3. Accounts Receivable Financing During fiscal 2001, the Company established an accounts receivable securitization program whereby it sells certain of its trade accounts receivable to a wholly owned special purpose subsidiary which, in turn, sells participating interests in its pool of receivables to a financial institution. Sales of the participating interests in the trade receivables are reflected as a reduction of accounts receivable in the accompanying Condensed Consolidated Balance Sheets and the proceeds received are included in cash flows from operating activities in the accompanying Condensed Consolidated Statements of Cash Flows. Trade receivables sold and being serviced by the Company were $27.5 million and $25.3 million at February 28, 2002 and August 31, 2001, respectively. Accounts receivable financing costs of $0.3 million and $0.6 million for the three months and six months ended February 28, 2002, respectively, are included in "Net Financing Costs" in the accompanying Condensed Consolidated Statements of Earnings. Total cash proceeds under the trade accounts receivable financing program were $34.9 million and $64.3 million for the three months and six months ended February 28, 2002, respectively. There were no receivables sold during the first and second quarters of fiscal 2001, and as such there were no accounts receivable financing costs for those quarters. 6 Note 4. 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 factors, it is neither practical nor cost effective to segregate the amounts of raw materials, work-in-process or finished goods inventories at the respective balance sheet dates, as segregation would only be possible as the result of physical inventories which are taken at dates different from the balance sheet dates. Note 5. Goodwill and Other Intangible Assets The Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," in the first quarter of fiscal 2002. Application of the non-amortization provisions of SFAS No. 142 is expected to result in an increase in net income of approximately $3.2 million in fiscal 2002. Under the transitional provisions of SFAS No. 142, the Company recorded an impairment loss associated with its Milwaukee Cylinder reporting unit of $7.2 million in the first quarter. The impairment loss has been recorded as a cumulative effect of change in accounting principle on the accompanying Condensed Consolidated Statements of Earnings for the six months ended February 28, 2002. The following sets forth a reconciliation of net income and earnings per share information for the three months and six months ended February 28, 2002 and 2001 adjusted for the non-amortization provisions of SFAS No. 142.

7 The changes in the carrying amount of goodwill for the year ended August 31, 2001 and for the six months ended February 28, 2002 are as follows:

The gross carrying amount and accumulated amortization of the Company's intangible assets other than goodwill as of February 28, 2002 and August 31, 2001 are as follows:

Amortization expense recorded on the intangible assets for the three months and six months ended February 28, 2002 was $0.6 million and $1.2 million, respectively, and for the three months and six months ended February 28, 2001 was $0.6 million and $1.3 million, respectively. The reduction in gross carrying amount and accumulated amortization for non-compete agreements and other intangible assets in the table above reflect the removal of fully amortized intangible assets in fiscal 2002. The estimated amortization expense for each of the five succeeding fiscal years is as follows: For the year ended August 31, - ----------------------------- 2002 ............................. $2,450 2003 ............................. $2,195 2004 ............................. $1,783 2005 ............................. $1,600 2006 ............................. $1,579 Note 6. New Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 related to the disposal of a segment of a business. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001, however earlier adoption is permitted. The Company does not expect SFAS No. 144 will have a material impact on the consolidated financial statements. Note 7. Common Stock On February 13, 2002, the Company sold, pursuant to an underwritten public offering, 3,450,000 shares of its Class A common stock at a price of $30.50 per share. Cash proceeds from the offering, net of underwriting discounts, were approximately $99.7 million. Excluding underwriting discounts, the Company incurred approximately $0.8 million of additional accounting, legal and other expenses related to the offering that were subsequently charged to additional paid- 8 in capital. The proceeds will be used to redeem a portion of the Company's 13% senior subordinated notes and retire portions of the Company's term debt under its senior secured credit facility. A summary of the equity accounts affected by the common stock offering is as follows: Class A Additional Common Stock Paid-in Capital ------------------ ---------------- Balance at August 31, 2001 ...... $ 1,603 $ (623,867) Common stock offering ........... 690 98,265 Stock option exercises .......... 24 1,125 Restricted stock awards ......... -- 3 ------------------ ---------------- Balance at February 28, 2002 .... $ 2,317 $ (524,474) ================== ================ Note 8. Distribution of Electronics Segment On January 27, 2000, Applied Power Inc.'s ("Applied Power") board of directors authorized various actions to enable Applied Power to distribute its Electronics segment ("APW Ltd.") to its shareholders (the "Distribution"). Refer to Note 2 to the consolidated financial statements in the Company's fiscal 2001 Annual Report on Form 10-K for a discussion of certain tax indemnification matters. Prior to the Distribution, Applied Power, in the normal course of business, entered into certain real estate and equipment leases or guaranteed such leases on behalf of its subsidiaries, including those in the Electronics segment. In conjunction with the Distribution, the Company assigned its rights in such leases used in the Electronics segment to APW Ltd., but was not released as a responsible party from all such leases by the lessors. As a result, the Company remains contingently liable for such leases in the event APW Ltd. does not meet its obligations under the lease agreements. The discounted present value of future minimum lease payments for the leases totals approximately $23.9 million at February 28, 2002. In the event APW Ltd. is unable to meet its obligations under such lease agreements, the Company would seek to mitigate such exposure by subletting the properties or negotiating out of the existing lease agreements. If APW Ltd. is unable to fulfill its obligations under the indemnification arrangements and lease commitments, there could be a material adverse impact to the Company's financial position and results of operations. Note 9. Restructuring Costs The Company adopted plans to restructure portions of its operations in the fiscal third quarter of 2001. These plans were designed to reduce administrative and operational costs and resulted in a charge of $1.7 million, or $1.0 million after-tax. Of the pre-tax charge, $0.3 million related to the consolidation of RV slide-out production facilities, $0.6 related to downsizing the cable tie production facility, and $0.8 million related to other personnel reductions. The Company wrote down the fixed assets at the locations being closed or downsized to their fair value, less costs to sell, in the third quarter of fiscal 2001. As a result of these plans, the Company eliminated approximately 36 positions. In the second quarter of fiscal 2002 the Company received net cash proceeds of approximately $0.5 million from the sale of a former RV slide-out manufacturing facility. The Company is currently executing the downsizing plan for its cable tie production facility. The remainder of the costs accrued primarily represent future minimum lease payments on the idled cable tie production facility. A rollforward of the restructuring reserve recorded is shown in the following table:

Note 10. Gain on Insurance Settlement 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 was housed in the damaged facility. The Company was party to an insurance contract that covered the damaged inventory 9 and equipment as well as the business interruption resulting from the fire. In the third quarter of fiscal 2001, the Company recorded a pre-tax gain of $1.0 million to reflect the difference between the book value of the assets destroyed and the minimum reimbursement received for such assets during the quarter from the insurance carrier. During the second quarter of fiscal 2002, the Company settled its claim with the insurance company, and as a result recorded an additional gain of $0.6 million. The new facility is expected to be fully operational by June 2002, at which time the Company will vacate certain temporary production facilities. Note 11. Derivatives All derivatives are recognized on the balance sheet at their estimated fair value. At August 31, 2001 the Company was party to one interest rate swap contract to convert $25 million of its variable rate debt to a fixed rate. In the first quarter of fiscal 2002, the Company entered into a second contract to convert a further $25 million of its variable rate debt to a fixed rate. Unrealized gains (losses) of $0.4 million and $(0.3) million were recorded in other comprehensive income for the three and six months ended February 28, 2002, respectively. During the second quarter of fiscal 2002, the Company recorded interest expense of $0.2 million to recognize the portion of a swap contract that became ineffective due to the pay down of term debt as a result of the common stock offering. The remaining effective notional amount of contracts is approximately $40 million at February 28, 2002. There were no such swap contracts in place at February 28, 2001. Note 12. Earnings Per Share The reconciliations between basic and diluted earnings per share are as follows:

10 Note 13. Comprehensive Income The components of comprehensive income are as follows:

Note 14. Segment Information The Company is organized and managed as two business segments: Tools & Supplies and Engineered Solutions, with separate and distinct operating management and strategies. The Tools & Supplies segment is primarily involved in the design, manufacture, and distribution of tools and supplies to the construction, electrical wholesale, retail do-it-yourself, industrial and production automation markets. The Engineered Solutions segment focuses on developing and marketing value-added, customized motion control systems for original equipment manufacturers in the recreational vehicle, automotive, truck, and industrial markets. "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:

Note 15. Guarantor Condensed Financial Statements In July 2000, Actuant issued 13% Senior Subordinated Notes due 2009 (the "13% Notes"). All of the Company's material domestic wholly owned subsidiaries (the "Guarantors") fully and unconditionally guarantee the 13% Notes on a joint and several basis. The Company believes 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 Actuant. The following tables present the results of operations, financial position and cash flows of Actuant Corporation, the Guarantors and non-guarantor entities, and the eliminations necessary to arrive at the information for the Company and its subsidiaries on a condensed consolidated basis. 11 CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS

12 CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS

13 CONDENSED CONSOLIDATING BALANCE SHEETS

14 CONDENSED CONSOLIDATING BALANCE SHEETS

15 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

16 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

17 Item 2 - Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- Throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" when we refer to "Actuant" or the "Company," we mean Actuant Corporation and its subsidiaries. The Company's significant accounting policies are disclosed in the Notes to Consolidated Financial Statements in the fiscal 2001 Annual Report on Form 10-K. The more critical of these policies include revenue recognition, inventory valuation, goodwill and other intangible asset accounting, and the use of estimates. Revenue Recognition: Revenue is recognized when title to the products being sold - ------------------- transfers to the customer, which is generally upon shipment. The Company's revenue recognition policies are in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." 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 U.S. owned inventory (approximately 62% of total inventories at August 31, 2001). 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 Condensed Consolidated Balance Sheet by approximately $7.1 million at August 31, 2001. Goodwill and Other Intangible Assets: Other intangible assets, consisting - ------------------------------------ primarily of purchased patents, trademarks and noncompete agreements, are amortized over periods from three to twenty-five years. Goodwill is not amortized, but is subjected to annual impairment testing in accordance with the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Use of Estimates: As required under generally accepted accounting principles, - ---------------- the condensed consolidated financial statements include estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses for the periods presented. They also affect the disclosure of contingencies. Actual results could differ from those estimates and assumptions. Results of Operations for the Three and Six Months Ended February 28, 2002 and - ------------------------------------------------------------------------------ 2001 - ---- During fiscal year 2001, the Company divested one business and one product line that were not considered integral to the Company's business strategy, collectively referred to as the "non-continuing businesses." The following table summarizes the 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 below show the effect, by segment, of the non-continuing businesses on reported results. In addition, a subsidiary of the Company acquired Dewald Manufacturing, Inc. in March 2001, which impacts the comparability of the operating results. Net earnings before cumulative effect of change in accounting principle for the three and six months ended February 28, 2002 were $4.0 million, or $0.44 per diluted share, and $8.6 million, or $0.97 per diluted share, respectively. During the first quarter of fiscal 2002, the Company recorded a charge of $7.2 million, or $0.85 per diluted share, for the cumulative effect of a change in accounting principle related to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Including this charge, the net earnings for the six months ended February 28, 2002 were $1.4 million, or $0.16 per diluted share, compared with $7.4 million, or $0.89 per diluted share, for the six months ended February 28, 2001. Following are detailed discussions of the components of our operating results for the periods ended February 28, 2002 and 2001. 18

• ---------- (1) "Non-continuing" represents the divested QMC business of the Tools & Supplies segment. (2) "Non-continuing" represents the divested Mox-Med business of the Engineered Solutions segment. Total net sales decreased by $7.1 million, or 6.1%, from $115.5 million for the three months ended February 28, 2001 to $108.4 million for the three months ended February 28, 2002. Currency translation rates negatively impacted the quarter resulting in $2.2 million of the reported sales decline. Total net sales decreased by $13.7 million, or 5.8% from $235.3 million for the six months ended February 28, 2001 to $221.6 million for the six months ended February 28, 2002. Currency translation rates also negatively impacted the six-month results causing $1.5 million of the reported sales decline. Excluding the non-continuing businesses, adjusted net sales declined 1.3% for both the three and six-month periods ended February 28, 2002. Net sales in the three and six-month periods ending February 28, 2002 include the results of Dewald Manufacturing, Inc. which was acquired in March 2001. Assuming Dewald had been acquired on September 1, 2000, and its sales therefore included in our operating results in the fiscal 2001 periods presented, net sales would have decreased 4.7% and 6.6% for the three and six months ended February 28, 2002, respectively, primarily as a result of weak economic conditions in the Company's served markets. Tools & Supplies Net sales for Tools & Supplies decreased by $8.5 million or 12.0%, from $70.9 million for the three months ended February 28, 2001 to $62.3 million for the three months ended February 28, 2002. The QMC business, which was sold in fiscal 2001 and the negative impact of the change in currency exchange rates comprised $1.3 and $1.0 million of the decline, respectively. The remaining $6.2 million decrease was driven primarily by the weak economic conditions in North America, which caused decreases in sales by the Company to all of the markets served by the Tools & Supplies segment. Our sales to European and Asian customers decreased by approximately $0.6 million. Tools & Supplies net sales for the six months ended February 28, 2002 declined $16.3 million, or 11.4%, from $142.7 million for the six months ended February 28, 2001 to $126.4 million. This decrease is comprised of the elimination of QMC sales of $2.2 million, the negative impact of currency translation rates of $1.0 million, the negative impact of the September 11, 2001 terrorist actions and the impact of the poor economic conditions in North America as described above. Engineered Solutions Engineered Solutions net sales increased $1.5 million, or 3.2%, from $44.6 million for the three months ended February 28, 2001 to $46.1 million for the three months ended February 28, 2002. Excluding the results of Mox-Med, which we divested in August 2001, Engineered Solutions net sales increased 14.3%. This increase is attributable to improved demand in the RV market including the benefit of sales from Dewald, which was acquired in March 2001. Assuming the Company owned Dewald during the second quarter of fiscal 2001, our sales to the RV market increased 35% in the second quarter of fiscal 2002 due to a sharp increase in demand from RV original equipment manufacturers. Aside from the RV market, we experienced sales declines in all of our other Engineered Solutions markets, including the truck and convertible top markets. Engineered Solutions net sales for the six months ended February 28, 2002 increased $2.6 million, or 2.8%, from $92.6 million for the six months ended February 28, 2001 to $95.2 million. Excluding the impact of Mox Med, which was 19 sold in 2001, Engineered Solutions net sales for the six-month period increased $11.2 million, or 13.4%. This increase in adjusted net sales is comprised of the improvement in RV market sales including the impact of Dewald sales, offset by decreases in sales to the automotive and truck markets. Gross Profit The following table summarizes gross profit and gross profit margins for the three months and six months ended February 28, 2002 and 2001:

• ---------- (1) "Non-continuing" represents the divested QMC business of the Tools & Supplies segment. (2) "Non-continuing" represents the divested Mox-Med business of the Engineered Solutions segment. Total gross profit for the second quarter of fiscal 2002 was $36.7 million, a $4.3 million decline from the $41.0 million reported in the second quarter of fiscal year 2001. Gross profit decreased $8.1 million, or 9.8%, from $82.8 million to $74.7 million for the six months ended February 28, 2001 and 2002, respectively. Approximately $2.7 and $4.9 million of the reductions, for the three and six months ended February 28, 2002, respectively, were due to the non-continuing businesses. The majority of the remaining reduction in gross profit was the result of lower sales volume, as explained above. Total gross profit margin declined from 35.5% to 33.8% for the three months ended February 28, 2002 and from 35.2% to 33.7% for the six months ended February 28, 2002 due to margin declines in the Engineered Solutions segment, partially offset by margin increases in the Tools & Supplies segment. Tools & Supplies Tools & Supplies gross profit decreased $2.6 million, or 8.7%, from $28.7 million to $26.1 million for the three months ended February 28, 2001 and 2002, respectively. For the six months ended February 28, 2002 gross profit decreased $4.2 million, or 7.4%, to $52.6 million from the $56.8 million of gross profit recognized for the six months ended February 28, 2001. These decreases resulted from the lower sales levels in fiscal 2002 as compared to fiscal 2001 and 20 the impact of the non-continuing Tools & Supplies business. Although gross profit decreased, Tools & Supplies gross profit margins increased for the three and six month periods due to the realization of the benefits of cost reduction and restructuring activities in both the hydraulic and electrical tool businesses, including material cost reductions, personnel reductions and facility downsizing. Engineered Solutions Engineered Solutions gross profit decreased $1.8 million, or 14.5%, from $12.3 million to $10.5 million for the three months ended February 28, 2001 and 2002, respectively. For the six months ended February 28, 2002 gross profit decreased $3.9 million, or 14.9%, to $22.1 million from the $26.0 million of gross profit recognized for the six months ended February 28, 2001. These decreases are due to the divestiture of Mox-Med in August 2001, as well as lower gross profit margins on higher net sales. Excluding the impact of the divestiture of Mox-Med, adjusted gross profit margin declined from 25.2% to 22.9% for the three months ended February 28, 2002 and from 26.2% to 23.2% for the six months ended February 28, 2002. This margin decline was caused by lower fixed cost absorption at our more vertically integrated Milwaukee Cylinder and Nielsen Sessions operations due to lower sales and production levels, higher inefficiencies at our RV slide-out production facility due to an increase in demand at the end of the quarter as we were completing the consolidation of the slide-out production facilities, a shift in demand for the quarter to lower margin product, and lower absorption for the Engineered Solutions businesses in general due to end of year RV, automotive, and truck customer shut downs. During the second quarter of fiscal 2002 we also experienced higher pre-production costs associated with new convertible actuation business and $0.3 million of lower customer billings for prototype and development costs due to the contracted timing of billings.

• ---------- (1) "Non-continuing" represents the divested QMC business of the Tools & Supplies segment. (2) "Non-continuing" represents the divested Mox-Med business of the Engineered Solutions segment. Total SAE expenses decreased $0.6 million, or 2.9%, from $21.7 million for the three months ended February 28, 2001 to $21.1 million for the three months ended February 28, 2002. SAE decreased $2.3 million, or 5.3%, from $43.3 million to $41.0 million for the six months ended February 28, 2001 and 2002, respectively. Approximately $1.0 and $2.2 million of the reductions, for the three and six months ended February 28, 2002, respectively, were due to the non-continuing businesses. Tools & Supplies Tools & Supplies SAE expenses decreased $1.2 million, or 7.6%, from $15.9 million for the three months ended February 28, 2001 to $14.7 million for the three months ended February 28, 2002. For the six-month periods ended February 28, 2001 and 2002, SAE expenses decreased $2.5 million from $31.7 million to $29.2 million, or 8.0%. The non-continuing Tools & Supplies business comprised $0.5 million and $1.1 million of the decrease for the three and six months ended February 28, 2002, respectively. The remaining decrease was driven largely by cost reduction efforts initiated in fiscal 2001, and lower sales levels. 21 Engineered Solutions Engineered Solutions SAE expenses increased $1.0 million, or 20.5%, from $4.4 million for the three months ended February 28, 2001 to $5.4 million for the three months ended February 28, 2002. For the six-month periods ended February 28, 2001 and 2002, SAE expenses increased $0.6 million from $9.1 million to $9.7 million, or 7.0%. Excluding the non-continuing business, Engineered Solutions adjusted SAE expenses increased 36.7% and 21.7% for the three and six months ended February 28, 2002, respectively. These increases in SAE were a result of the inclusion of SAE costs for Dewald, which was acquired March 1, 2001, non-accruable costs associated with the consolidation of RV production facilities, and a high level of prototype and engineering development costs related to convertible top actuation for new automotive models. Amortization Expense Amortization expense for the three months and six months ended February 28, 2002 was $0.6 million and $1.2 million, respectively, compared with $1.4 million and $2.9 million for the comparable prior year periods. These decreases were primarily due to ceasing goodwill amortization in accordance with SFAS No. 142. See Note 5 to the Condensed Consolidated Financial Statements, "Goodwill and Other Intangible Assets," for more information on this change in accounting principle. Net Financing Costs Net financing costs for the three months and six months ended February 28, 2002 decreased $2.7 million and $5.8 million, respectively, compared to the respective prior year periods. These reductions were due to the combined effect of lower market interest rates and reduced debt levels in fiscal 2002. In February 2002 the Company recorded interest expense of $0.2 million to recognize the portion of a variable to fixed interest rate swap contract that became ineffective due to the pay down of term debt as a result of the common stock offering. See "Liquidity and Capital Resources" below for further information regarding the composition of our debt and the impact of our fiscal 2002 second quarter offering of 3,450,000 shares of Class A Common Stock. Other Expense (Income) Other expense (income) for the three and six months ended February 28, 2002 is comprised of the following (in thousands):

During the second quarter of fiscal 2002 we recognized a gain upon the final insurance settlement related to fire damage incurred in February 2001 at our manufacturing facility in Oldenzaal, The Netherlands. See Note 10 to the Condensed Consolidated Financial Statements, "Gain on Insurance Settlement," for further information. Other expense (income) for the three and six months ended February 28, 2001 is comprised primarily of foreign currency transaction gains and losses. Cumulative Effect of Change in Accounting Principle On September 1, 2001 the Company adopted SFAS No. 142. Under the transitional provisions of SFAS No. 142, the Company identified its reporting units and performed impairment tests on the net goodwill associated with each of the reporting units. The Company recorded an impairment loss associated with its Milwaukee Cylinder reporting unit of $7.2 million, or $0.85 per diluted share in the first quarter of fiscal 2002. See Note 5 to the Condensed Consolidated Financial Statements, "Goodwill and Other Intangible Assets," for further discussion. Liquidity and Capital Resources - ------------------------------- Net cash provided by operating activities was $2.3 million for the six months ended February 28, 2002, compared to $14.5 million for the six months ended February 28, 2001. During the first quarter of fiscal 2002, cash payments were made for the semi-annual interest payment on our 13% senior subordinated notes due 2009 totaling $13.0 million and income tax and transaction costs of approximately $7.0 million related to the sale of Mox-Med. There were no similar payments for Mox-Med in the first quarter of the prior year, and the interest payment on the bonds in the prior year was approximately $6.5 million lower as the bonds had just recently been issued. 22 Net cash used in investing activities totaled $3.6 million and $3.3 million for the six months ended February 28, 2002 and 2001, respectively. This cash was used to fund capital expenditures in both periods, although for the six months ended February 28, 2002, the capital expenditures were partially offset by cash proceeds of $1.7 million on the sale of two unneeded facilities. Cash provided by financing activities was $25.1 million for the six months ended February 28, 2002, as compared to cash used in financing activities of $20.6 million for the six months ended February 28, 2001. Cash provided from financing activities for the six months ended February 28, 2002 primarily reflects the proceeds of the equity offering offset by debt repayments as described below. Cash used in financing activities for the six months ended February 28, 2001 primarily reflects net debt repayments. The Company issued 3,450,000 shares of previously unissued shares of Class A Common Stock in February 2002 for $30.50 per share (the "Equity Offering"). Cash proceeds from the Equity Offering, net of underwriting discounts, were approximately $99.7 million. The primary objectives of the Equity Offering were to 1) redeem $70 million of the 13% senior subordinated notes prior to the April 2003 expiration of our equity "clawback" feature, 2) reduce overall debt to improve financial stability and flexibility, 3) increase the "float" of the Company's common stock in the capital markets, and 4) increase the awareness of Actuant Corporation among United States investors. Proceeds from the Equity Offering were utilized as follows (in thousands): Net cash proceeds ........................................ $ 99,705 Debt retirement .......................................... (86,468) Redemption premium on 13% notes .......................... (9,100) Accrued interest on 13% notes ............................ (3,387) Transaction expenses ..................................... (750) ---------- $ -- ========== Due to the need to provide 30 days notice of the 13% note redemption to 13% note holders, and the Company's desire to first provide notice of such after the completion of the Equity Offering, the redemption of $70 million of the 13% notes occurred on March 15, 2002, after the end of the fiscal second quarter. As a result, all of the approximate $86 million of debt reduction was not reflected in the February 28, 2002 balance sheet or statement of cash flows. Approximately $23.5 million of the funds to redeem the debt were included in the $50.4 million cash balance at February 28, 2002. Total debt was comprised of the following at February 28, 2002, assuming the redemption of the 13% bonds occurred in the second quarter, and at August 31, 2001:

/(1)/ Assuming entire $86.5 million debt pay down occurred by February 28, 2002 The borrowings under the senior secured credit facility bear interest rates based on a variable pricing grid tied to the Company's total leverage, as measured by debt to trailing twelve-month EBITDA (earnings before interest, taxes, depreciation, and amortization). As a result of the debt retirement resulting from the Equity Offering, the borrowing "spread" above LIBOR will decline starting in the fiscal third quarter. The spread on revolver borrowings will be 23 reduced from LIBOR plus 2.75% to LIBOR plus 2.50%. Similarly, the spread on the Tranche B term loans will be reduced from LIBOR plus 3.75% to LIBOR plus 3.50%. Despite the significant deleveraging that has taken place during the last seven quarters, the Company will seek to continue to reduce debt. However, when strategic opportunities exist to grow the Company's core business through acquisitions, debt may be incurred to finance acquisitions. During the second quarter of fiscal 2002 the Company did not incur any debt to fund acquisitions. We continue to review alternatives and options to further reduce the Company's financing costs, including refinancing all or portions of existing debt or renegotiating the terms of agreements underlying such debt obligations. Long term debt outstanding at February 28, 2002 is payable as follows: Years ended August 31, ---------------------- 2002 .......................... $ -- 2003 .......................... $ 2,737 2004 .......................... $ 5,736 2005 .......................... $ 5,746 2006 .......................... $ 382 Thereafter .................... $ 236,505 The Company leases certain facilities, computers, equipment, and vehicles under various operating lease agreements, generally over periods from one to twenty years. Under most arrangements, the Company pays the property taxes, insurance, maintenance and expenses related to the leased property. Many of the leases include provisions that enable the Company to renew the lease based upon fair value rental rates on the date of expiration of the initial lease. For a schedule of future minimum lease payments see Note 8, "Leases," in the financial statements contained in the Company's Annual Report on Form 10-K for the year ended August 31, 2001. As more fully discussed in Note 3 to the Condensed Consolidated Financial Statements, "Accounts Receivable Financing", the Company is party to an accounts receivable securitization arrangement. Trade receivables sold and being serviced by the Company were $27.5 million and $25.3 million at February 28, 2002 and August 31, 2001, respectively. If the Company were to discontinue this securitization program, at February 28, 2002 it would have been required to borrow approximately $27.5 million to finance the working capital increase. On January 27, 2000, Applied Power Inc.'s ("Applied Power") board of directors authorized various actions to enable Applied Power to distribute its Electronics segment ("APW Ltd.") to its shareholders. On July 31, 2000 we distributed the capital stock of APW Ltd. to our shareholders. Based on APW Ltd.'s annual report on Form 10-K for its fiscal year ended August 31, 2001, and more recent public filings, APW Ltd. has indicated that it has experienced financial difficulties. We are, or may be, responsible for various APW Ltd. liabilities, including liabilities for taxes and lease payments. In the event that APW Ltd. is unable to fulfill its obligations, there could be a material adverse impact to the Company's financial position and result of operations. See Note 8 to the Condensed Consolidated Financial Statements, "Distribution of Electronics Segment," for further discussion. No dividend payments were declared or made during the first two quarters of fiscal 2002, nor does the Company expect to pay dividends in the foreseeable future. Cash flow will instead be retained for working capital needs, acquisitions, and to reduce outstanding debt. At February 28, 2002, the Company had $100.0 million of availability under its credit facilities. However, the availability following the 13% senior subordinated bond redemption on March 15, 2002 was reduced to approximately $41.2 million following the Company's $58.8 million revolver draw down. The Company's senior credit agreement contains customary limits and restrictions concerning investments, sales of assets, liens on assets, interest and fixed cost coverage ratios, maximum leverage, capital expenditures, acquisitions, excess cash flow, dividends, and other restricted payments. At February 28, 2002 the Company was in compliance with all debt covenants. 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 at least the next twelve months. 24 Outlook - ------- The Company has revised its estimates of its projected operating results for fiscal 2002 as a result of the Equity Offering and has made those revised estimates available to the public in a press release. Accordingly, shareholders and others should no longer rely on the Company's prior estimates of projected operating results, including the estimates appearing in the Company's Annual Report on Form 10-K for its fiscal year ended August 31, 2001, because those prior estimates have been revised and superseded to reflect current operating and market conditions. Extraordinary Charge on Early Extinguishment of Debt - ---------------------------------------------------- As a result of the redemption of a portion of the 13% senior subordinated notes, the Company will be recording in its fiscal third quarter a pre-tax extraordinary charge of approximately $11.9 million, $7.8 million after-tax or $0.65 per diluted share, for the payment of the make-whole premium associated with the 13% senior subordinated notes and the write-off of the associated debt discount and issuance costs. 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, 2001 within Note 1 - "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 it does not have naturally occurring offsetting positions and then purchases hedging instruments to protect against anticipated exposures. There are no such hedging instruments in place at February 28, 2002 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 the Company's leverage, it is exposed to interest - ------------------ rate risk from changes in interest rates. The Company has periodically utilized interest rate swap agreements historically to manage overall financing costs and interest rate risk. During the quarter ended May 31, 2001, the Company entered into a contract to swap variable interest rates on $25 million of the Senior debt for fixed interest rates. In the first quarter of fiscal 2002, the Company entered into a second contract to swap variable interest rates on $25 million of the Senior debt for fixed interest rates. In the second quarter of fiscal 2002, approximately $10 million of this swap agreement became ineffective due to the pay down of Senior debt as a result of the common stock offering. The Company recorded interest expense of $0.2 million related to the ineffective portion. The remaining effective swap agreements total approximately $40 million at February 28, 2002. The Company has no other such agreements in place at February 28, 2002 or through the date of this filing. The Company's Senior Credit Agreement stipulates that the lower of 50% of total debt or $200.0 million be fixed interest rate obligations. The Company is in compliance with this requirement. 25 PART II - OTHER INFORMATION Item 2 - Changes in Securities and Use of Proceeds - -------------------------------------------------- On February 13, 2002, the Company completed an offering of 3,450,000 shares of its Class A common stock. The managing underwriters in the offering were Wachovia Securities, ABN AMRO Rothschild LLC, Robert W. Baird & Co. and Bear, Stearns & Co., Inc. The Class A common stock in the offering was registered under the Securities Act of 1933, as amended, on the Company's shelf registration statement filed on Form S-3 No. 333-47493 that was declared effective by the SEC on January 27, 1999. The offering price of the shares was $30.50 per share, resulting in gross proceeds of approximately $105.2 million and net proceeds (excluding the underwriters' discount) of approximately $99.7 million. The aggregate amount of expenses incurred by the Company in connection with the issuance and distribution of the shares of Class A common stock offered and sold in the offering were approximately $6.3 million, including $5.5 million in underwriting discounts and commissions and $0.8 million in other offering expenses. After giving effect to the offering, approximately $295 million remains available under the existing shelf registration statement for the issuance of securities. None of the net proceeds of the offering were paid directly or indirectly to any director, officer, general partner of the Company or the Company's associates, persons owning 10% or more of any class of equity securities of the Company, or any affiliate of the Company; however, payments were made to Quarles & Brady LLP, legal counsel to the Company, in connection with the offering and in which Anthony W. Asmuth III, the Company's secretary, is a partner. On March 15, 2002, the Company used $82.5 million of the net proceeds from this offering to redeem $70 million of aggregate principal balance of its 13% senior subordinated notes due 2009 and to pay a related redemption premium of approximately $9.1 million, plus approximately $3.4 million of accrued interest on the notes redeemed. Under the terms of the indenture, the Notes are not redeemable until 30 days after notice is given to the Note holders. The Notes were redeemed on March 15, 2002. The remaining $16.4 million of the net proceeds were used to reduce debt under the Company's senior secured credit facility. Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits See "Index to Exhibits" on page 28, which is incorporated herein by reference. (b) Reports on Form 8-K See "Index to Exhibits" on page 28, which is incorporated herein by reference. 26 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACTUANT CORPORATION ------------------- (Registrant) Date: April 12, 2002 By: /s/ Andrew G. Lampereur ------------------------- Andrew G. Lampereur Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized to sign on behalf of the registrant) 27 ACTUANT CORPORATION (the "Registrant") (Commission File No. 1-11288) QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 2002 INDEX TO EXHIBITS

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