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Actuant 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
Form 10-Q
Table of Contents

 

 

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, 2008

OR

 

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

Commission File No. 1-11288

 

 

ACTUANT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

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

13000 WEST SILVER SPRING DRIVE

BUTLER, WISCONSIN 53007

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

(Address of principal executive offices)

(414) 352-4160

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

 

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

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

The number of shares outstanding of the registrant’s Class A Common Stock as of June 30, 2008 was 55,918,858.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page No.

Part I - Financial Information

  

Item 1 - Condensed Consolidated Financial Statements (Unaudited)

   4

Actuant Corporation-

   4

Condensed Consolidated Statements of Earnings

   4

Condensed Consolidated Balance Sheets

   5

Condensed Consolidated Statements of Cash Flows

   6

Notes to Condensed Consolidated Financial Statements

   7

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

   25

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

   30

Item 4 - Controls and Procedures

   30

Part II - Other Information

  

Item 6 - Exhibits

   31

FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS

This quarterly report on Form 10-Q contains certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include statements regarding expected financial results and other planned events, including, but not limited to, anticipated liquidity, acquisitions, and capital expenditures. Words such as “anticipate”, “assume”, “believe”, “estimate”, “expect”, “intend”, “plan”, “seek”, “project”, “target”, “goal”, and variations of such words and similar expressions are intended to indentify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. We undertake no obligation to publicly update these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or otherwise.

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

 

   

exposure to fluctuations in energy prices;

 

   

market conditions in the recreational vehicle, truck, automotive, industrial production, oil & gas, and construction industries;

 

   

market acceptance of existing and new products;

 

   

successful integration of acquisitions and related restructurings;

 

   

operating margin risk due to competitive pricing and operating efficiencies;

 

   

supply chain risk, material, labor, or overhead cost increases;

 

   

foreign currency risk, interest rate risk and commodity risk;

 

   

the length of economic downturns in our markets, litigation matters, our ability to access capital markets;

 

   

industry trends, including changes in buying, inventory and other business practices by customers;

 

   

our substantial indebtedness;

 

   

our future profitability;

 

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an increase in competition within the markets in which we compete;

 

   

regulatory changes;

 

   

changes in general and/or regional economic conditions;

 

   

our relationships with employees;

 

   

the impact of current and future laws; and

 

   

additional terrorist attacks.

Our Form 10-K for the fiscal year ended August 31, 2007 as updated in the Current Report on Form 8-K dated February 28, 2008 contains an expanded description of these and other risks that may affect our business, assets, and results of operations under the section entitled “Risk Factors”.

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

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

 

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

ACTUANT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
May 31,
   Nine Months Ended
May 31,
     2008    2007    2008     2007

Net sales

   $ 444,656    $ 385,090    $ 1,259,428     $ 1,069,093

Cost of products sold

     290,684      255,504      830,783       716,218
                            

Gross profit

     153,972      129,586      428,645       352,875

Selling, administrative and engineering expenses

     88,421      73,772      252,396       207,837

Restructuring charges - European Electrical

     —        434      10,473       4,319

Amortization of intangible assets

     4,023      2,906      10,741       7,819
                            

Operating profit

     61,528      52,474      155,035       132,900

Financing costs, net

     9,190      9,075      27,522       24,185

Other (income) expense, net

     201      660      (1,579 )     1,632
                            

Earnings before income tax expense and minority interest

     52,137      42,739      129,092       107,083

Income tax expense

     13,465      13,146      40,767       33,480

Minority interest, net of income taxes

     37      11      24       3
                            

Net earnings

   $ 38,635    $ 29,582    $ 88,301     $ 73,600
                            

Earnings per share:

          

Basic

   $ 0.69    $ 0.54    $ 1.58     $ 1.35
                            

Diluted

   $ 0.60    $ 0.47    $ 1.39     $ 1.19
                            

Weighted average common shares outstanding:

          

Basic

     55,874      54,684      55,766       54,646
                            

Diluted

     64,945      63,622      64,770       63,506
                            

See accompanying Notes to Condensed Consolidated Financial Statements

 

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ACTUANT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

     (Unaudited)
May 31,
2008
    August 31,
2007
 
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 91,079     $ 86,680  

Accounts receivable

     249,163       194,775  

Inventories

     223,151       197,539  

Deferred income taxes

     14,147       14,827  

Other current assets

     13,810       11,459  
                

Total Current Assets

     591,350       505,280  

Property, Plant and Equipment

    

Land, buildings, and improvements

     40,843       43,034  

Machinery and equipment

     267,782       224,238  
                

Gross property, plant and equipment

     308,625       267,272  

Less: Accumulated depreciation

     (172,317 )     (144,455 )
                

Property, Plant and Equipment, net

     136,308       122,817  

Goodwill

     651,560       599,841  

Other Intangibles, net

     300,352       260,418  

Other Long-term Assets

     9,696       12,420  
                

Total Assets

   $ 1,689,266     $ 1,500,776  
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities

    

Short-term borrowings

   $ 2,218     $ —    

Trade accounts payable

     178,877       153,205  

Accrued compensation and benefits

     58,587       52,345  

Income taxes payable

     28,176       20,309  

Current maturities of long-term debt

     35       519  

Other current liabilities

     71,325       64,449  
                

Total Current Liabilities

     339,218       290,827  

Long-term Debt, less Current Maturities

     584,876       561,138  

Deferred Income Taxes

     111,000       103,589  

Pension and Postretirement Benefit Liabilities

     23,226       27,437  

Other Long-term Liabilities

     26,444       17,864  

Shareholders’ Equity

    

Class A common stock, $0.20 par value per share, authorized 84,000,000 shares, issued and outstanding 55,898,934 and 55,348,718 shares, respectively

     11,179       11,070  

Additional paid-in capital

     (330,779 )     (349,190 )

Retained earnings

     904,051       825,165  

Accumulated other comprehensive income

     20,051       12,876  

Stock held in trust

     (2,069 )     (1,744 )

Deferred compensation liability

     2,069       1,744  
                

Total Shareholders’ Equity

     604,502       499,921  
                

Total Liabilities and Shareholders’ Equity

   $ 1,689,266     $ 1,500,776  
                

See accompanying Notes to Condensed Consolidated Financial Statements

 

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ACTUANT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended
May 31,
 
     2008     2007  

Operating Activities

    

Net earnings

   $ 88,301     $ 73,600  

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

    

Depreciation and amortization

     32,926       25,888  

Stock-based compensation expense

     4,890       4,087  

Provision (benefit) for deferred income taxes

     6,990       (2,402 )

Other

     (541 )     63  

Source (use) of cash from changes in components of working capital:

    

Accounts receivable

     (34,851 )     (6,435 )

Accounts receivable securitization program

     5,045       14,121  

Inventories

     (8,066 )     (8,971 )

Prepaid expenses and other assets

     1,744       (4,043 )

Trade accounts payable

     14,713       19,196  

Income taxes payable

     (1,278 )     4,441  

Other accrued liabilities

     15,319       9,869  
                

Net cash provided by operating activities

     125,192       129,414  

Investing Activities

    

Proceeds from sale of property, plant and equipment

     13,676       4,119  

Capital expenditures

     (32,502 )     (20,494 )

Cash paid for business acquisitions, net of cash acquired

     (110,109 )     (132,590 )
                

Net cash used in investing activities

     (128,935 )     (148,965 )

Financing Activities

    

Net borrowings (repayments) on revolving credit facilities and short-term borrowings

     2,155       (80,355 )

Proceeds from term loans

     —         155,737  

Principal repayments on term loans

     (1,008 )     (7,077 )

Cash dividend

     (2,221 )     (2,187 )

Stock option exercises, related tax benefits, and other

     4,210       335  
                

Net cash provided by financing activities

     3,136       66,453  

Effect of exchange rate changes on cash

     5,006       1,142  
                

Net increase in cash and cash equivalents

     4,399       48,044  

Cash and cash equivalents – beginning of period

     86,680       25,659  
                

Cash and cash equivalents – end of period

   $ 91,079     $ 73,703  
                

See accompanying Notes to Condensed Consolidated Financial Statements

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Note 1. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Actuant Corporation (“Actuant,” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial reporting, and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The condensed consolidated balance sheet data as of August 31, 2007 was derived from the Company’s audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The Company’s significant accounting policies are disclosed in its fiscal 2007 Annual Report on Form 10-K. For additional information, refer to the consolidated financial statements and related footnotes in the Company’s fiscal 2007 Annual Report on Form 10-K and the Current Report on Form 8-K dated February 28, 2008.

In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise described, such adjustments consist of only those of a normal recurring nature. Operating results for the three and nine months ended May 31, 2008 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2008.

On October 18, 2007, the Company announced that its board of directors had approved a two-for-one stock split of its Class A common stock payable on November 8, 2007 to shareholders of record on October 29, 2007. The split was in the form of a stock dividend. All prior periods presented have been adjusted to reflect the stock split.

Prior year Condensed Financial Statements have been reclassified where appropriate to conform to current year presentations. During the first quarter of fiscal 2008, the Company made an organizational change involving its Milwaukee Cylinder business unit, which resulted in it moving from the Engineered Products segment to the Industrial segment.

New Accounting Pronouncements

The following are new accounting pronouncements that are applicable to us.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the way companies are to account for uncertainty in income tax reporting and filing and prescribes a consistent recognition threshold and measurement attribute for recognizing, derecognizing, and measuring the tax benefits of a tax position taken, or expected to be taken, on a tax return. The adoption of FIN 48 on September 1, 2007 increased the amount recorded by the Company for uncertain tax positions by approximately $9.4 million. This increase was recorded as an adjustment to fiscal 2008 opening retained earnings (See Note 11).

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 provides a common definition of fair value and establishes a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable. SFAS No. 157 also requires expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. SFAS No. 157 is effective for us beginning in fiscal 2010. We do not anticipate the adoption of this statement will have a material impact on our consolidated financial statements.

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

 

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In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS No. 141(R)”). The objective of SFAS No. 141(R) is to improve the information provided in financial reports about a business combination and its effects. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS No. 141(R) also requires the acquirer to recognize and measure the goodwill acquired in a business combination or a gain from a bargain purchase and how to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will be effective for us beginning in fiscal 2010.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51”. The objective of SFAS No. 160 is to improve the financial information provided in consolidated financial statements. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also changes the way the consolidated income statement is presented, establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation, requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interest of the noncontrolling owners of a subsidiary are also required. SFAS No. 160 will be effective for us beginning in fiscal 2010. The adoption of SFAS No. 160 is not expected to have a significant impact on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting by requiring transparency about the nature, purpose, location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No 133; and how derivative instruments and related hedged items affect its financial position, financial performance and cash flows. SFAS No. 161 will be effective for us beginning in fiscal 2009. The Company is currently evaluating the effects that SFAS No. 161 may have on our financial statements.

Note 2. Acquisitions

The Company completed two business acquisitions during the nine months ended May 31, 2008, and five business acquisitions during the fiscal year ended August 31, 2007, all of which resulted in the recognition of goodwill in the Company’s Condensed Consolidated Financial Statements. The Company is continuing to evaluate the initial purchase price allocations for the acquisitions completed during fiscal 2008 and one of the acquisitions completed in fiscal 2007, and will adjust the allocations if additional information relative to the fair values of the assets and liabilities of the acquired businesses become known.

On March 3, 2008, the Company acquired Superior Plant Services, LLC, (“SPS”) for approximately $58.8 million of cash. Headquartered in Terrytown, Louisiana, SPS is a specialized maintenance services company serving the North American oil & gas and nuclear power industries. Its services include field machining, flange weld testing, line isolation, bolting, heat treating, and metal disintegration. SPS is included in the Joint Integrity product line of our Industrial segment. The preliminary purchase price allocation resulted in $22.5 million assigned to goodwill (which is deductible for tax purposes), $0.2 million assigned to tradenames, $1.5 million assigned to non-compete agreements, and $25.3 million assigned to customer relationships. The amounts assigned to tradenames, non-compete agreements, and customer relationships are being amortized over 1, 5 and 15 years, respectively.

 

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On September 13, 2007, the Company acquired Templeton, Kenly & Co, Inc. (“TK”) for approximately $47.4 million of cash. Headquartered in Broadview, Illinois, TK manufactures hydraulic pumps and tools, mechanical jacks, wrenches, and actuators. TK is included in the High Force Hydraulic Tools product line of our Industrial segment. The preliminary purchase price allocation resulted in $14.4 million assigned to goodwill (which is deductible for tax purposes), $1.7 million assigned to tradenames, $0.3 million assigned to non-compete agreements, $0.3 assigned to patents and $19.1 million assigned to customer relationships. The amounts assigned to non-compete agreements, patents and customer relationships are being amortized over 3, 5 and 15 years, respectively.

On June 29, 2007, the Company acquired BH Electronics, Inc. (“BH”) for approximately $30.0 million of cash. Headquartered in Munford, Tennessee, BH produces dashboard control panels and electronic assembly systems, primarily for the recreational boating market. BH is included in the Specialty Electrical product line of our Electrical segment. The preliminary purchase price allocation resulted in $14.4 million assigned to goodwill (which is not currently deductible for tax purposes), $2.8 million assigned to tradenames, $0.1 million assigned to non-compete agreements, and $9.3 million assigned to customer relationships. The amounts assigned to non-compete agreements and customer relationships are being amortized over 3 and 15 years, respectively.

On April 16, 2007, the Company acquired T.T. Fijnmechanica B.V. (“TTF”) for approximately $23.0 million of cash. Headquartered in Roermond, The Netherlands, TTF supplies products and systems for use in the bridge building, infrastructure, and heavy lifting markets. Products include wedges, anchor heads, multi-strand jacks, and heavy lifting systems. TTF is included in the High Force Hydraulic Tools product line of our Industrial segment. The preliminary purchase price allocation resulted in $11.8 million assigned to goodwill (which is not currently deductible for tax purposes), $2.7 million assigned to tradenames, $0.7 million assigned to non-compete agreements, and $6.8 million assigned to customer relationships. The amounts assigned to non-compete agreements and customer relationships are being amortized over 3 and 15 years, respectively.

On January 22, 2007, the Company acquired all of the outstanding stock of Injectaseal Deutschland GmbH (“Injectaseal”) for $13.0 million of cash. Headquartered in Kerpen, Germany, Injectaseal provides leak management, on-site machining, pipeline intervention, and safety valve testing services primarily to Western European oil & gas and power generation companies. Injectaseal is included in the Joint Integrity product line of our Industrial segment. The purchase price allocation resulted in $11.2 million assigned to goodwill (which is not currently deductible for tax purposes), $0.1 million assigned to non-compete agreements, and $1.8 million assigned to customer relationships. The amounts assigned to the non-compete agreements and the customer relationships are being amortized over 3 years and 15 years, respectively.

On January 5, 2007, the Company acquired all of the outstanding stock of Veha Haaksbergen B.V. (“Veha”) for $5.0 million of cash. Headquartered in Haaksbergen, The Netherlands, Veha manufactures a wide range of machined products, including hydraulic cylinders. Veha is included in the High Force Hydraulic Tools product line of our Industrial segment. The purchase price allocation resulted in $2.2 million assigned to goodwill (which is not currently deductible for tax purposes), $0.2 million to non-compete agreements and $0.5 million assigned to customer relationships. The amounts assigned to the non-compete agreements and customer relationships are being amortized over 3 years and 10 years, respectively.

On December 22, 2006, the Company acquired all of the outstanding stock of Maxima Technologies (“Maxima”) for $91.0 million, including the assumption of approximately $1.9 million of Maxima’s debt. Maxima, headquartered in Lancaster, Pennsylvania, is a global electronics company specializing in custom-engineered and standard vehicle instrumentation, controls, components, and systems for low-to-medium volume severe-duty applications. Maxima serves the marine, agricultural, construction equipment, industrial, specialty vehicle, and automotive aftermarket. Maxima is included in the Other product line of our Engineered Products segment. The purchase price allocation resulted in $45.9 million assigned to goodwill (which is not currently deductible for tax purposes), $7.7 million assigned to tradenames, $6.8 million assigned to patents, and $19.3 million assigned to customer relationships. The amounts assigned to patents and customer relationships are being amortized over periods of 10 and 15 years, respectively.

 

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The following unaudited pro forma financial results of the Company for the three and nine months ended May 31, 2008 and 2007, respectively, give effect to all acquisitions completed since September 1, 2006 as though the transactions and related financing activities had occurred on September 1, 2006.

 

     Three Months Ended    Nine Months Ended
     May 31,
2008
   May 31,
2007
   May 31,
2008
   May 31,
2007

Net sales

           

As reported

   $ 444,656    $ 385,090    $ 1,259,428    $ 1,069,093

Pro forma

     444,656      412,339      1,272,833      1,170,713

Net earnings

           

As reported

   $ 38,635    $ 29,582    $ 88,301    $ 73,600

Pro forma

     38,635      30,454      87,703      75,059

Basic earnings per share

           

As reported

   $ 0.69    $ 0.54    $ 1.58    $ 1.35

Pro forma

     0.69      0.56      1.57      1.37

Diluted earnings per share

           

As reported

   $ 0.60    $ 0.47    $ 1.39    $ 1.19

Pro forma

     0.60      0.49      1.38      1.21

Note 3. Restructuring

The Company initiated plans to restructure its European Electrical product line within the Electrical segment during the fourth quarter of fiscal 2006. These plans were designed to reduce operating costs and improve profitability. During the quarter ended February 29, 2008, the Company completed these restructuring activities resulting in cumulative pre-tax restructuring provisions totaling $20.8 million.

A rollforward of the European Electrical restructuring reserve follows:

 

Accrued restructuring costs as of August 31, 2007

   $ 2,150  

Restructuring charges

     10,473  

Cash restructuring payments

     (3,214 )

Product line rationalization

     (3,051 )

Foreign currency impact

     643  
        

Accrued restructuring costs as of May 31, 2008

   $ 6,999  
        

The remaining $7.0 million of accrued restructuring costs at May 31, 2008 represents severance cost of approximately $0.6 million, lease exit costs of approximately $4.3 million, and product line rationalization costs of $2.1 million. The severance and product line rationalization costs will be paid during fiscal 2008 and 2009, while the lease exit costs will be paid over the remaining 12 year term of the lease.

 

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Note 4. Accounts Receivable Securitization

The Company maintains an accounts receivable securitization program whereby it sells certain of its trade accounts receivable to a wholly owned, bankruptcy-remote special purpose subsidiary which, in turn, sells participating interests in its pool of receivables to a third-party financial institution (the “Purchaser”). The Purchaser receives an ownership and security interest in the pool of receivables. New receivables are purchased by the special purpose subsidiary and participation interests are resold to the Purchaser as collections reduce previously sold participation interests. The Company has retained collection and administrative responsibilities on the participation interests sold. The Purchaser has no recourse against the Company for uncollectible receivables; however, the Company’s retained interest in the receivable pool is subordinate to the Purchaser and is recorded at fair value. Due to a short average collection cycle of approximately 60 days for such accounts receivable and the Company’s collection history, the fair value of the Company’s retained interest approximates book value. Book value of accounts receivable in the accompanying Condensed Consolidated Balance Sheet is comprised of the gross accounts receivable retained interest less a reserve for doubtful accounts, which is calculated based on a review of the specific receivable issues and supplemented by a general reserve based on past collection history. The retained interest recorded at May 31, 2008 and August 31, 2007 was $51.8 million and $47.2 million, respectively, and is included in accounts receivable in the accompanying Condensed Consolidated Balance Sheets. The securitization program maturity date was extended to September 15, 2008 during May 2008. Trade accounts receivables sold and being serviced by the Company totaled $61.6 million and $56.5 million at May 31, 2008 and August 31, 2007, respectively.

Sales of trade receivables from the special purpose subsidiary totaled $117.6 million and $342.9 million for the three and nine months ended May 31, 2008, respectively, and $89.6 million and $287.2 million for the three and nine months ended May 31, 2007, respectively. Cash collections of trade accounts receivable balances in the total receivable pool (including both sold and retained portions) totaled $199.5 million and $597.0 million for the three and nine months ended May 31, 2008, respectively, and $166.1 million and $504.4 million for the three and nine months ended May 31, 2007, respectively.

The accounts receivables securitization program is accounted for as a sale in accordance with FASB Statement No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities – A Replacement of FASB Statement No. 125.” Sales of trade receivables are reflected as a reduction of accounts receivable in the accompanying Condensed Consolidated Balance Sheets and the proceeds received from the sale are included in cash flows from operating activities in the accompanying Condensed Consolidated Statements of Cash Flows.

The following table provides additional information about delinquencies and net credit losses for trade accounts receivable subject to the accounts receivable securitization program.

 

     Balance Outstanding    Balance Outstanding 60
Days or More Past Due
   Net Credit Losses
Nine Months Ended
     May 31,
2008
   August 31,
2007
   May 31,
2008
   August 31,
2007
   May 31,
2008
   May 31,
2007

Trade accounts receivable subject to securitization program

   $ 113,410    $ 103,706    $ 7,456    $ 6,963    $ 796    $ 786

Trade accounts receivable balances sold

     61,562      56,518            
                         

Retained interest

   $ 51,848    $ 47,188            
                         

Accounts receivable financing costs of $0.6 million and $2.1 million for the three and nine months ended May 31, 2008, respectively, and $0.8 million and $2.3 million for the three and nine months ended May 31, 2007, respectively, are included in financing costs in the accompanying Condensed Consolidated Statements of Earnings.

 

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Note 5. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended May 31, 2008 are as follows:

 

     Industrial    Electrical    Actuation
Systems
   Engineered
Products
   Total

Balance as of August 31, 2007

   $ 163,890    $ 205,963    $ 169,660    $ 60,328    $ 599,841

Businesses acquired

     36,789      —        —        —        36,789

Purchase accounting adjustments

     2,275      1,019      —        —        3,294

Currency impact

     2,980      4,181      1,826      2,649      11,636
                                  

Balance as of May 31, 2008

   $ 205,934    $ 211,163    $ 171,486    $ 62,977    $ 651,560
                                  

As discussed in Note 12, during the first quarter of fiscal 2008, a segment reporting change was made involving the Company’s Milwaukee Cylinder business unit. This resulted in a $4.7 million reclassification of goodwill between the Engineered Products and Industrial segments.

The gross carrying amount and accumulated amortization of the Company’s intangible assets that have defined useful lives and are subject to amortization as of May 31, 2008 and August 31, 2007 are as follows:

 

     May 31, 2008    August 31, 2007
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Book
Value
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Book
Value

Customer Relationships

   $ 155,117    $ 22,440    $ 132,677    $ 120,505    $ 15,181    $ 105,324

Patents

     55,771      20,558      35,213      44,922      18,284      26,638

Trademarks

     6,618      3,378      3,240      6,437      3,041      3,396

Non-compete agreements

     3,852      1,119      2,733      1,930      781      1,149

Other

     845      791      54      656      583      73
                                         

Total

   $ 222,203    $ 48,286    $ 173,917    $ 174,450    $ 37,870    $ 136,580
                                         

The gross carrying amount of the Company’s remaining intangible assets (that have indefinite lives and are not subject to amortization) as of May 31, 2008 and August 31, 2007 are $126.5 million and $123.8 million, respectively. These assets are comprised of acquired tradenames.

The increase in the gross carrying amounts of goodwill and other intangible assets is the result of acquisitions completed in the current fiscal year and the impact of foreign currency rates. See Note 2, “Acquisitions” for additional details.

Amortization expense recorded on the intangible assets listed above was $4.0 million and $10.7 million for the three and nine months ended May 31, 2008, respectively, and $2.9 million and $7.8 million for the three and nine months ended May 31, 2007, respectively. The Company estimates that amortization expense will approximate $3.9 million for the remainder of the fiscal year ended August 31, 2008. Amortization expense for future years is estimated to be as follows: $15.6 million in fiscal 2009, $15.4 million in fiscal 2010, $14.8 million in 2011, $14.2 million in fiscal 2012, $13.1 million in fiscal 2013, and $96.9 million thereafter.

 

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Note 6. Accrued Product Warranty

The Company recognizes the cost associated with its product warranties at the time of sale. The amount recognized is based on historical claims rates and current claim cost experience. The following is a reconciliation of the changes in accrued product warranty during the nine months ended May 31, 2008 and 2007:

 

     Nine Months Ended
May 31,
 
     2008     2007  

Beginning balance

   $ 10,070     $ 6,888  

Provision for warranties

     8,644       6,267  

Warranty payments and costs incurred

     (7,604 )     (5,102 )

Warranty reserves of acquired business

     50       2,122  

Foreign currency impact

     496       164  
                

Ending balance

   $ 11,656     $ 10,339  
                

Note 7. Debt

The Company’s indebtedness, as of May 31, 2008 and August 31, 2007 was as follows:

 

     May 31,
2008
    August 31,
2007
 

Senior Credit Facility

    

Commercial paper

   $ —       $ —    

Revolver

     —         —    

Term loan

     155,000       155,000  
                

Total Senior Credit Facility

     155,000       155,000  

6.875% Senior Notes, due 2017

     249,112       249,039  

Other

     33,017       7,618  
                

Sub-total - Senior Indebtedness

     437,129       411,657  

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

     150,000       150,000  
                

Total debt

     587,129       561,657  

Less: short-term borrowings and current maturities of long-term debt

     (2,253 )     (519 )
                

Total long-term debt, less current maturities

   $ 584,876     $ 561,138  
                

The Company’s senior credit facility, as amended, includes $155.0 million of term loans in addition to a $250.0 million revolver. The term loans mature on December 22, 2009 while the revolver matures on February 19, 2009. At May 31, 2008, the outstanding term loan carried an interest rate of 3.37%, which represented LIBOR plus a 0.875% borrowing spread. All senior credit facility borrowings are subject to a pricing grid, which can result in further increases or decreases to the borrowing spread on a quarterly basis, depending on the Company’s debt to EBIDTA leverage ratios. In addition, a non-use fee is payable quarterly on the average unused credit line under the revolver. At May 31, 2008, the non-use fee was 0.20%. The senior credit facility contains customary limits and restrictions concerning investments, sales of assets, liens on assets, fixed charge coverage ratios, maximum leverage, dividends and other restricted payments. As of May 31, 2008, the Company was in compliance with all debt covenants.

There were no commercial paper borrowings outstanding at May 31, 2008. Total commercial paper outstanding cannot exceed $100.0 million under the terms of the senior credit facility. The unused and available credit line under the revolver at May 31, 2008 was approximately $250.0 million.

On June 12, 2007, the Company issued $250.0 million of 6.875% Senior Notes (the “6.875% Senior Notes”) at an approximate $1.0 million discount, generating net proceeds of $249.0 million. The Senior Notes were issued at a price of 99.607% to yield 6.93%, and require no principal installments prior to their June 15, 2017 maturity. The approximate $1.0 million initial issuance discount is being amortized through interest expense over the 10 year life of the 6.875% Senior Notes. The proceeds from the 6.875% Senior Notes (net of issuance costs) were used to reduce the outstanding term loans under the senior credit facility from $400.0 million to $155.0 million. All material domestic wholly-owned subsidiaries fully and unconditionally guarantee the 6.875% Senior Notes (See Note 14. “Guarantor Subsidiaries”).

 

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Note 8. Derivatives

All derivatives are recognized in the Condensed Consolidated Balance Sheets at their estimated fair value. On the date it enters into a derivative contract, the Company designates the derivative either as a hedge of a recognized asset or liability (“fair value” hedge), a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge), or a hedge of the net investment in a foreign operation. The Company does not enter into derivatives for speculative purposes. Changes in the fair value of a derivative that qualify as a fair value hedge are recorded in earnings along with the gain or loss on the underlying hedged asset or liability. Changes in the fair value of a derivative that qualifies as a cash flow hedge are recorded in accumulated other comprehensive income in the Condensed Consolidated Balance Sheets, until earnings are affected by the variability of cash flows. Changes in the fair value of a derivative used to hedge the net investment in a foreign operation are recorded in the accumulated other comprehensive income accounts in the Condensed Consolidated Balance Sheets.

On October 9, 2007, the Company terminated a $100 million aggregate notional value floating to fixed interest rate swaps in order to reduce the mix of its fixed rate debt to total debt. The Company received $1.4 million on the termination as payment for full settlement of the fair value, which is being amortized over the remaining life of the original contracts.

In August 2006, the Company entered into cross-currency interest rate swap agreements (the “agreements”) between the U.S. dollar and the euro to hedge its net investment in European subsidiaries. In May 2007, the Company entered into further cross-currency interest rate swap agreements to hedge additional exposure on its net investments in European subsidiaries. The cross-currency interest rate swap agreements have a total notional value of €125.0 million and a maturity date of November 30, 2009. As of May 31, 2008 and 2007, the weakening of the U.S. dollar caused the cross-currency interest rate swaps to be in an unrealized loss position in the amount of $30.8 million and $4.5 million, respectively, which is included in Long-term Debt, less Current Maturities.

While the Company regularly hedges certain commodity risks, the fair values of such contracts were not significant at May 31, 2008.

Note 9. Employee Benefit Plans

The Company provides defined benefit pension and other postretirement benefits to certain employees of domestic businesses it acquired that were entitled to those benefits prior to acquisition. At May 31, 2008 and August 31, 2007, the defined benefit plans consisted of three plans. Most of the domestic defined benefit pension plans are frozen, and as a result, the majority of the plan participants no longer earn additional benefits. The postretirement medical plans consist of four plans, all of which are unfunded. Two of the plans require individuals receiving medical benefits under the plan to make contributions to defray a portion of the cost, and these retiree contributions are adjusted annually, while the other plans do not require retiree contributions.

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

 

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Components of net periodic benefit costs were as follows:

 

     Three Months Ended     Nine Months Ended  
     May 31,
2008
    May 31,
2007
    May 31,
2008
    May 31,
2007
 

Domestic Defined Benefit Pension Plans

        

Service Cost

   $ 21     $ 21     $ 62     $ 62  

Interest Cost

     563       550       1,690       1,650  

Expected return on assets

     (702 )     (631 )     (2,105 )     (1,893 )

Amortization of actuarial loss

     2       37       6       110  
                                

Net periodic benefit credit

   $ (116 )   $ (23 )   $ (347 )   $ (71 )
                                

Domestic Postretirement Medical Benefit Plans

        

Service Cost

   $ 6     $ 6     $ 18     $ 18  

Interest Cost

     57       60       170       180  

Amortization of prior service cost

     —         —         1       —    

Amortization of actuarial gain

     (109 )     (119 )     (327 )     (356 )
                                

Net periodic benefit credit

   $ (46 )   $ (53 )   $ (138 )   $ (158 )
                                

Foreign Defined Benefit Pension Plans

        

Service Cost

   $ 122     $ 149     $ 366     $ 448  

Interest Cost

     355       322       1,064       967  

Expected return on assets

     (80 )     (64 )     (240 )     (193 )

Amortization of actuarial loss

     1       6       3       19  
                                

Net periodic benefit cost

   $ 398     $ 413     $ 1,193     $ 1,241  
                                

The Company contributed approximately $1.6 million of cash and 120,000 shares of its common stock to various pension plans during the nine months ended May 31, 2008 and does not anticipate making any significant contributions for the balance of fiscal 2008.

Note 10. Earnings Per Share

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

 

     Three Months Ended    Nine Months Ended
     May 31,
2008
   May 31,
2007
   May 31,
2008
   May 31,
2007

Numerator:

           

Net Earnings

   $ 38,635    $ 29,582    $ 88,301    $ 73,600

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

     611      611      1,833      1,833
                           

Net earnings for diluted earnings per share

   $ 39,246    $ 30,193    $ 90,134    $ 75,433
                           

Denominator (in thousands):

           

Weighted average common shares outstanding for basic earnings per share

     55,874      54,684      55,766      54,646

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

     1,554      1,420      1,487      1,343

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

     7,517      7,517      7,517      7,517
                           

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

     64,945      63,621      64,770      63,506
                           

Basic Earnings Per Share:

   $ 0.69    $ 0.54    $ 1.58    $ 1.35
                           

Diluted Earnings Per Share:

   $ 0.60    $ 0.47    $ 1.39    $ 1.19
                           

 

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Note 11. Income Taxes

The Company’s income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are higher or lower than the U.S. federal statutory rate, state tax rates in the jurisdictions where we do business, and our ability to utilize various tax credits and net operating loss carryforwards. The effective income tax rate for the three and nine months ended May 31, 2008 was 25.8% and 31.6%, respectively, compared to 30.8% and 31.3% during the three and nine months ended May 31, 2007, respectively. The third quarter fiscal 2008 tax rate includes the benefit of tax reserve adjustments resulting from settling tax audits for amounts less than previously accrued, the lapsing of various tax statutes of limitations and favorable book provision to tax return adjustments. There were no similar adjustments for the three months ended May 31, 2007.

The effective income tax rate was higher in the nine months ended May 31, 2008 than the other periods presented primarily as a result of no tax benefit being recorded for the majority of the European Electrical restructuring charges.

We adopted the provisions of FIN 48 on September 1, 2007 which resulted in us recognizing a $9.4 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to September 1, 2007 retained earnings. The unrecognized tax benefit was $27.4 million and $20.8 million as of May 31, 2008 and September 1, 2007, respectively. Substantially all of these unrecognized tax benefits, if recognized, would affect the effective income tax rate. As a result of a review of current tax positions, we increased the reserve for unrecognized tax benefits by $2.3 million and $6.2 million for the three and nine months ended May 31, 2008, respectively.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of May 31, 2008 and September 1, 2007 we had accrued approximately $3.3 million and $3.1 million, respectively for the payment of interest and penalties related to unrecognized tax benefits. With few exceptions, we are no longer subject to U.S. federal, state and local, and foreign income tax examinations by tax authorities in our major tax jurisdictions for years before fiscal year 2003.

Note 12. Segment Information

The Company is a manufacturer of a broad range of industrial products and systems and is organized into four reportable segments: Industrial, Electrical, Actuation Systems, and Engineered Products.

The Industrial segment is primarily involved in the design, manufacture, and distribution of branded hydraulic tools to the industrial, oil & gas, power generation, infrastructure and production automation markets. Industrial also provides manpower services and tool rental to the global joint integrity market. The Electrical segment is primarily involved in the design, manufacture, and distribution of electrical tools and supplies to the retail electrical, wholesale, original equipment manufacturer (“OEM”), and marine markets. The Actuation Systems segment infrastructure focuses on developing and marketing highly engineered position and motion control systems for OEMs in the recreational vehicle, automotive, truck, and other industrial markets. The Engineered Products segment designs and manufactures various products for industrial markets. During the first quarter of fiscal 2008, the Company made an organizational change involving its Milwaukee Cylinder business unit, which resulted in it moving from the Engineered Products segment to the Industrial segment. All segment information has been adjusted to reflect this change. The Company evaluates segment performance based primarily on net sales and operating profit and has not aggregated individual operating segments due to the similar economic characteristics of the businesses.

 

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The following tables summarize financial information by reportable segment and reportable product lines.

 

     Three Months Ended
May 31,
    Nine Months Ended
May 31,
 
     2008     2007     2008     2007  

Net Sales by Segment:

        

Industrial

   $ 160,035     $ 115,852     $ 427,926     $ 316,287  

Electrical

     129,142       127,653       393,883       373,269  

Actuation Systems

     122,850       111,768       345,513       315,078  

Engineered Products

     32,629       29,817       92,106       64,459  
                                

Total

   $ 444,656     $ 385,090     $ 1,259,428     $ 1,069,093  
                                

Net Sales by Reportable Product Line:

        

High Force Hydraulic Tools

   $ 101,593     $ 73,556     $ 276,349     $ 203,126  

Joint Integrity

     58,442       42,296       151,577       113,161  

North American Electrical

     31,110       34,771       99,808       102,497  

European Electrical

     41,424       39,342       128,707       123,853  

Specialty Electrical

     30,404       23,320       88,904       62,182  

Professional Electrical

     26,204       30,220       76,464       84,737  

Automotive Actuation Systems

     42,105       36,194       107,312       97,282  

Recreational Vehicle Actuation Systems

     21,624       29,611       69,049       79,807  

Truck Actuation Systems

     49,336       36,853       140,282       112,198  

Other

     42,414       38,927       120,976       90,250  
                                

Total

   $ 444,656     $ 385,090     $ 1,259,428     $ 1,069,093  
                                

Operating Profit by Segment:

        

Industrial

   $ 43,692     $ 33,259     $ 114,425     $ 86,420  

Electrical

     8,074       9,907       19,265       24,914  

Actuation Systems

     13,705       10,994       32,065       27,562  

Engineered Products

     4,260       4,069       11,641       8,808  

Corporate

     (8,203 )     (5,755 )     (22,361 )     (14,804 )
                                

Total

   $ 61,528     $ 52,474     $ 155,035     $ 132,900  
                                
                 May 31,
2008
    August 31,
2007
 

Assets:

        

Industrial

       $ 573,722     $ 423,565  

Electrical

         464,619       454,946  

Actuation Systems

         398,765       355,764  

Engineered Products

         145,452       147,412  

Corporate

         106,708       119,089  
                    

Total

       $ 1,689,266     $ 1,500,776  
                    

 

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In addition to the impact of foreign currency rate changes, the comparability of the segment and product line data is impacted by the acquisitions discussed in Note 2, “Acquisitions”.

Corporate assets, which are not allocated, principally represent capitalized debt issuance costs, deferred income taxes, the fair value of derivative instruments and the retained interest in trade accounts receivable (subject to the accounts receivable program discussed in Note 4. “Accounts Receivable Securitization”).

Note 13. Contingencies and Litigation

The Company had outstanding letters of credit of $6.4 million and $6.5 million at May 31, 2008 and August 31, 2007, respectively. The letters of credit secure self-insured workers compensation liabilities.

The Company is a party to various legal proceedings that have arisen in the normal course of its business. These legal proceedings typically include product liability, environmental, labor, patent claims, and divestiture disputes. The Company has recorded reserves for loss contingencies based on the specific circumstances of each case. Such reserves are recorded when it is probable that a loss has been incurred as of the balance sheet date and such loss can be reasonably estimated. In the opinion of management, the resolution of these contingencies will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The Company, in the normal course of business, enters into certain real estate and equipment leases or guarantees such leases on behalf of its subsidiaries. In conjunction with the spin-off of a former subsidiary in fiscal 2000, the Company assigned its rights in the leases used by the former subsidiary, but was not released as a responsible party from all such leases by the lessors. All of these businesses were subsequently sold. The Company remains contingently liable for those leases if any of these businesses are unable to fulfill their obligations thereunder. The discounted present value of future minimum lease payments for such leases totals, assuming no offset for sub-leasing, approximately $5.6 million at May 31, 2008. The future undiscounted minimum lease payments for these leases are as follows: $0.8 million in calendar 2008; $1.1 million in calendar 2009 and 2010, $1.2 million in calendar 2011 and 2012; and $3.8 million thereafter.

The Company has facilities in numerous geographic locations that are subject to a range of environmental laws and regulations. Environmental costs that have no future economic value are expensed. Liabilities are recorded when environmental remediation is probable and the costs are reasonably estimable. Environmental expenditures over the last three years have not been material. Management believes that such costs will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Note 14. Guarantor Subsidiaries

On June 12, 2007, Actuant Corporation (the “Parent”) issued $250.0 million of 6.875% Senior Notes. All of our material domestic 100% owned subsidiaries (the “Guarantors”) fully and unconditionally guarantee the 6.875% Senior Notes on a joint and several basis. There are no significant restrictions on the ability of the Guarantors to make distributions to the Parent. The following tables present the condensed results of operations, financial position and cash flows of Actuant Corporation and its subsidiaries, the Guarantor and non-Guarantor entities, and the eliminations necessary to arrive at the information for the Company on a consolidated basis.

General corporate expenses have not been allocated to subsidiaries, and are all included under the Parent heading. As a matter of course, the Company retains certain assets and liabilities at the corporate level (Parent column in the following tables) which are not allocated to subsidiaries including, but not limited to, certain employee benefits, insurance, financing, and tax liabilities. Income tax provisions for domestic Actuant Corporation subsidiaries are typically recorded using an estimate and finalized in total with an adjustment recorded at the Parent level. Net sales reported for each of the headings only includes sales to third parties; sales between entities are not significant. Additionally, substantially all of the indebtedness of the Company has historically been, and continues to be, carried at the corporate level and is therefore included in the Parent column in the following tables. Substantially all accounts receivable of the Parent and Guarantors are sold into the accounts receivable program described in Note 4. “Accounts Receivable Securitization”. Allowances for doubtful accounts remains recorded at the Parent and Guarantors. Intercompany balances include receivables/payables incurred in the normal course of business in addition to investments and loans transacted between subsidiaries of the Company or with Actuant.

 

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CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS

(In thousands)

 

     Three Months Ended May 31, 2008
     Parent     Guarantors     Non-Guarantors    Eliminations     Consolidated

Net sales

   $ 67,572     $ 130,733     $ 246,351    $ —       $ 444,656

Cost of sales

     28,512       96,931       165,241      —         290,684
                                     

Gross profit

     39,060       33,802       81,110      —         153,972

Selling, administrative and engineering expenses

     23,382       23,194       41,845      —         88,421

Restructuring charges - European Electrical

     —         —         —        —         —  

Amortization of intangible assets

     591       1,712       1,720      —         4,023
                                     

Operating profit

     15,087       8,896       37,545      —         61,528

Financing costs, net

     8,552       6       632      —         9,190

Intercompany expense (income), net

     (7,404 )     6,284       1,120      —         —  

Other expense, net

     68       (482 )     615      —         201
                                     

Earnings (loss) before income tax expense and minority interest

     13,871       3,088       35,178      —         52,137

Income tax expense (benefit)

     3,582       798       9,085      —         13,465

Minority interest, net of income taxes

     —         —         37      —         37
                                     

Net earnings (loss) before equity in earnings of subsidiaries

     10,289       2,290       26,056      —         38,635

Equity in earnings of subsidiaries

     28,346       25,931       11,509      (65,786 )     —  
                                     

Net earnings

   $ 38,635     $ 28,221     $ 37,565    $ (65,786 )   $ 38,635
                                     
     Three Months Ended May 31, 2007
     Parent     Guarantors     Non-Guarantors    Eliminations     Consolidated

Net sales

   $ 52,023     $ 143,994     $ 189,073    $ —       $ 385,090

Cost of sales

     23,002       105,121       127,381      —         255,504
                                     

Gross profit

     29,021       38,873       61,692      —         129,586

Selling, administrative and engineering expenses

     18,187       22,355       33,230      —         73,772

Restructuring charges - European Electrical

     —         —         434      —         434

Amortization of intangible assets

     244       1,678       984      —         2,906
                                     

Operating profit

     10,590       14,840       27,044      —         52,474

Financing costs, net

     8,134       —         941      —         9,075

Intercompany expense (income), net

     (5,295 )     5,102       193      —         —  

Other expense, net

     275       69       316      —         660
                                     

Earnings before income tax expense and minority interest

     7,476       9,669       25,594      —         42,739

Income tax expense

     2,299       2,974       7,873      —         13,146

Minority interest, net of income taxes

     —         —         11      —         11
                                     

Net earnings before equity in earnings of subsidiaries

     5,177       6,695       17,710      —         29,582

Equity in earnings of subsidiaries

     24,405       15,031       323      (39,759 )     —  
                                     

Net earnings

   $ 29,582     $ 21,726     $ 18,033    $ (39,759 )   $ 29,582
                                     

 

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CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS

(In thousands)

 

     Nine Months Ended May 31, 2008  
     Parent     Guarantors     Non-Guarantors     Eliminations     Consolidated  

Net sales

   $ 182,428     $ 387,700     $ 689,300     $ —       $ 1,259,428  

Cost of sales

     81,521       289,304       459,958       —         830,783  
                                        

Gross profit

     100,907       98,396       229,342       —         428,645  

Selling, administrative and engineering expenses

     66,174       67,546       118,676       —         252,396  

Restructuring charges - European Electrical

     —         —         10,473       —         10,473  

Amortization of intangible assets

     1,736       5,136       3,869       —         10,741  
                                        

Operating profit

     32,997       25,714       96,324       —         155,035  

Financing costs, net

     25,505       69       1,948       —         27,522  

Intercompany expense (income), net

     (20,572 )     17,622       2,950       —         —    

Other expense, net

     539       (419 )     (1,699 )     —         (1,579 )
                                        

Earnings before income tax expense and minority interest

     27,525       8,442       93,125       —         129,092  

Income tax expense

     8,428       2,697       29,642       —         40,767  

Minority interest, net of income taxes

     —         —         24       —         24  
                                        

Net earnings before equity in earnings of subsidiaries

     19,097       5,745       63,459       —         88,301  

Equity in earnings of subsidiaries

     69,204       68,448       16,150       (153,802 )     —    
                                        

Net earnings

   $ 88,301     $ 74,193     $ 79,609     $ (153,802 )   $ 88,301  
                                        

 

     Nine Months Ended May 31, 2007
     Parent     Guarantors    Non-Guarantors     Eliminations     Consolidated

Net sales

   $ 143,337     $ 399,549    $ 526,207     $ —       $ 1,069,093

Cost of sales

     65,029       294,755      356,434       —         716,218
                                     

Gross profit

     78,308       104,794      169,773       —         352,875

Selling, administrative and engineering expenses

     50,106       63,228      94,503       —         207,837

Restructuring charges - European Electrical

     —         —        4,319       —         4,319

Amortization of intangible assets

     732       4,500      2,587       —         7,819
                                     

Operating profit

     27,470       37,066      68,364       —         132,900

Financing costs, net

     21,710       2      2,473       —         24,185

Intercompany expense (income), net

     (14,837 )     15,527      (690 )     —         —  

Other expense, net

     320       55      1,257       —         1,632
                                     

Earnings before income tax expense and minority interest

     20,277       21,482      65,324       —         107,083

Income tax expense

     6,344       6,726      20,410       —         33,480

Minority interest, net of income taxes

     —         —        3       —         3
                                     

Net earnings before equity in earnings of subsidiaries

     13,933       14,756      44,911       —         73,600

Equity in earnings of subsidiaries

     59,667       41,793      963       (102,423 )     —  
                                     

Net earnings

   $ 73,600     $ 56,549    $ 45,874     $ (102,423 )   $ 73,600
                                     

 

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CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

     May 31, 2008
     Parent     Guarantors     Non-Guarantors    Eliminations     Consolidated

ASSETS

           

Current Assets

           

Cash and cash equivalents

   $ 3,413     $ —       $ 87,666    $ —       $ 91,079

Accounts receivable

     (801 )     435       249,529      —         249,163

Inventories

     36,400       82,867       103,884      —         223,151

Deferred income taxes

     13,559       37       551      —         14,147

Other current assets

     3,246       1,312       9,252      —         13,810
                                     

Total Current Assets

     55,817       84,651       450,882      —         591,350

Property, Plant & Equipment, net

     17,460       33,936       84,912      —         136,308

Goodwill

     61,808       366,735       223,017      —         651,560

Other Intangibles, net

     37,293       166,489       96,570      —         300,352

Investment in Subsidiaries

     1,276,981       237,256       47,022      (1,561,259 )     —  

Other Long-term Assets

     8,723       215       758      —         9,696
                                     

Total Assets

   $ 1,458,082     $ 889,282     $ 903,161    $ (1,561,259 )   $ 1,689,266
                                     

LIABILITIES & SHAREHOLDERS’ EQUITY

           

Current Liabilities

           

Short-term borrowings

   $ —       $ —       $ 2,218    $ —       $ 2,218

Trade accounts payable

     25,852       43,099       109,926      —         178,877

Accrued compensation and benefits

     17,660       6,920       34,007      —         58,587

Income taxes payable (receivable)

     (4,988 )     2,602       30,562      —         28,176

Current maturities of long-term debt

     —         5       30      —         35

Other current liabilities

     19,273       16,370       35,682      —         71,325
                                     

Total Current Liabilities

     57,797       68,996       212,425      —         339,218

Long-term Debt, less Current Maturities

     584,865       —         11      —         584,876

Deferred Income Taxes

     89,850       (286 )     21,436      —         111,000

Pension and Post-retirement Benefit Liabilities

     5,675       —         17,551      —         23,226

Other Long-term Liabilities

     18,278       1,155       7,011      —         26,444

Intercompany Payable (Receivable)

     97,115       (224,300 )     127,185      —         —  

Shareholders’ Equity

     604,502       1,043,717       517,542      (1,561,259 )     604,502
                                     

Total Liabilities and Shareholders’ Equity

   $ 1,458,082     $ 889,282     $ 903,161    $ (1,561,259 )   $ 1,689,266
                                     

 

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CONDENSED CONSOLIDATING BALANCE SHEETS

(In thousands)

 

     August 31, 2007
     Parent     Guarantors     Non-Guarantors     Eliminations     Consolidated

ASSETS

          

Current Assets

          

Cash and cash equivalents

   $ 25,605     $ —       $ 61,075     $ —       $ 86,680

Accounts receivable

     (2,008 )     (1,463 )     198,246       —         194,775

Inventories

     23,078       82,704       91,757       —         197,539

Deferred income taxes

     14,088       37       702       —         14,827

Other current assets

     4,126       1,044       6,289       —         11,459
                                      

Total Current Assets

     64,889       82,322       358,069       —         505,280

Property, Plant & Equipment, net

     13,919       42,807       66,091       —         122,817

Goodwill

     47,389       366,729       185,723       —         599,841

Other Intangibles, net

     17,538       171,626       71,254       —         260,418

Investment in Subsidiaries

     1,167,055       274,894       67,400       (1,509,349 )     —  

Other Long-term Assets

     11,483       197       740       —         12,420
                                      

Total Assets

   $ 1,322,273     $ 938,575     $ 749,277     $ (1,509,349 )   $ 1,500,776
                                      

LIABILITIES & SHAREHOLDERS’ EQUITY

          

Current Liabilities

          

Short-term borrowings

   $ —       $ —       $ —       $ —       $ —  

Trade accounts payable

     21,955       46,964       84,286       —         153,205

Accrued compensation and benefits

     17,783       8,462       26,100       —         52,345

Income taxes payable (receivable)

     (7,962 )     10,728       17,543       —         20,309

Current maturities of long-term debt

     —         4       515       —         519

Other current liabilities

     15,563       18,272       30,614       —         64,449
                                      

Total Current Liabilities

     47,339       84,430       159,058       —         290,827

Long-term Debt, less Current Maturities

     560,604       4       530       —         561,138

Deferred Income Taxes

     83,459       (286 )     20,416       —         103,589

Pension and Post-retirement Benefit Liabilities

     7,171       —         20,266       —         27,437

Other Long-term Liabilities

     14,053       1,525       2,286       —         17,864

Intercompany Payable (Receivable)

     109,726       (98,504 )     (11,222 )     —         —  

Shareholders’ Equity

     499,921       951,406       557,943       (1,509,349 )     499,921
                                      

Total Liabilities and Shareholders’ Equity

   $ 1,322,273     $ 938,575     $ 749,277     $ (1,509,349 )   $ 1,500,776
                                      

 

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)

 

     Nine Months Ended May 31, 2008  
     Parent     Guarantors     Non-Guarantors     Eliminations     Consolidated  

Operating Activities

          

Net cash provided by operating activities

   $ 66,650     $ 34,463     $ 87,416     $ (63,337 )   $ 125,192  

Investing Activities

          

Proceeds from sale of property, plant & equipment

     1,436       8,173       4,067       —         13,676  

Capital expenditures

     (3,578 )     (4,694 )     (24,230 )     —         (32,502 )

Changes in intercompany receivables (payable)

     (41,326 )     3,679       37,647       —         —    

Business acquisitions, net of cash acquired

     (47,363 )     (237 )     (62,509 )     —         (110,109 )
                                        

Cash used in investing activities

     (90,831 )     6,921       (45,025 )     —         (128,935 )

Financing Activities

          

Net borrowings on revolving credit facilities and short-term borrowings

     —         —         2,155       —         2,155  

Principal repayments on term loans

     —         —         (1,008 )     —         (1,008 )

Intercompany dividends paid

     (2,221 )     (41,384 )     (21,953 )     63,337       (2,221 )

All other

     4,210       —         —         —         4,210  
                                        

Cash provided by financing activities

     1,989       (41,384 )     (20,806 )     63,337       3,136  

Effect of exchange rate changes on cash

     —         —         5,006       —         5,006  
                                        

Net increase in cash and cash equivalents

     (22,192 )     —         26,591       —         4,399  

Cash and cash equivalents - beginning of period

     25,605       —         61,075       —         86,680  
                                        

Cash and cash equivalents - end of period

   $ 3,413     $ —       $ 87,666     $ —       $ 91,079  
                                        

 

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)

 

     Nine Months Ended May 31, 2007  
     Parent     Guarantors     Non-Guarantors     Eliminations     Consolidated  

Operating Activities

          

Net cash provided by operating activities

   $ 55,683     $ 27,362     $ 65,775     $ (19,406 )   $ 129,414  

Investing Activities

          

Proceeds from sale of property, plant & equipment

     2,295       147       1,677       —         4,119  

Capital expenditures

     (3,558 )     (2,386 )     (14,550 )     —         (20,494 )

Changes in intercompany receivables (payable)

     (6,987 )     (5,717 )     12,704       —         —    

Business acquisitions, net of cash acquired

     (89,776 )     —         (42,814 )     —         (132,590 )
                                        

Cash used in investing activities

     (98,026 )     (7,956 )     (42,983 )     —         (148,965 )

Financing Activities

          

Net (repayments) borrowings on revolving credit facilities and short-term borrowings

     (80,229 )     —         (126 )     —         (80,355 )

Proceeds from issuance of term loans

     150,000       —         5,737       —         155,737  

Principal repayments on term loans

     —         —         (7,077 )     —         (7,077 )

Intercompany dividends paid

     (2,187 )     (19,406 )     —         19,406       (2,187 )

All other

     335       —         —         —         335  
                                        

Cash provided by financing activities

     67,919       (19,406 )     (1,466 )     19,406       66,453  

Effect of exchange rate changes on cash

     —         —         1,142       —         1,142  
                                        

Net increase in cash and cash equivalents

     25,576       —         22,468       —         48,044  

Cash and cash equivalents - beginning of period

     575       —         25,084       —         25,659  
                                        

Cash and cash equivalents - end of period

   $ 26,151     $ —       $ 47,552     $ —       $ 73,703  
                                        

 

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

We are a diversified global manufacturer of a broad range of industrial products and systems, organized into four reportable segments, Industrial, Electrical, Actuation Systems, and Engineered Products. The Industrial segment is primarily involved in the design, manufacture and distribution of branded hydraulic and mechanical tools to the maintenance, industrial, infrastructure, oil & gas, and production automation markets. In addition, this segment provides manpower services and product rental to the global joint integrity market. The Electrical segment is primarily involved in the design, manufacture, and distribution of electrical tools and supplies to the retail electrical, wholesale, original equipment manufacturer (“OEM”), and marine markets. The Actuation Systems segment focuses on developing and marketing highly engineered position and motion control systems for OEMs in the recreational vehicle, automotive, truck, and other industrial markets. The Engineered Products segment designs and manufactures a variety of products for industrial markets. The Company has not aggregated individual operating segments within these reportable segments. The Company evaluates segment performance based primarily on net sales and operating profit.

Our long-term goal is to grow annual diluted earnings per share excluding unusual or non-recurring items (“EPS”) faster than most multi-industry peers. We intend to leverage our leading market positions to generate annual internal sales growth that exceeds the annual growth rates of the gross domestic product in the geographic regions in which we operate. In addition to internal sales growth, we are focused on acquiring complementary businesses. Following an acquisition, we seek to drive cost reductions, develop additional cross-selling opportunities and deepen customer relationships. We also focus on profit margin expansion and cash flow generation to achieve our EPS growth goal. Our LEAD (“Lean Enterprise Across Disciplines”) process utilizes various continuous improvement techniques to drive out costs and improve efficiencies across all locations and functions worldwide, thereby expanding profit margins. Strong cash flow generation is achieved by maximizing returns on assets and minimizing primary working capital needs. The cash flow that results from efficient asset management and improved profitability is used to reduce debt and fund additional acquisitions and internal growth opportunities. Our application of this strategy has generated profitable growth over the past seven years.

Results of Operations for the Three and Nine Months Ended May 31, 2008 and 2007

The comparability of the operating results for the three and nine months ended May 31, 2008 to the prior year periods is impacted by acquisitions. Listed below are the acquisitions completed since September 1, 2006.

 

Business

  

Segment

  

Product Line

  

Acquisition Date

Maxima Technologies    Engineered Products    Other    December 22, 2006
Veha Haaksbergen B.V.    Industrial    High Force Hydraulic Tools    January 5, 2007
Injectaseal Deutschland GmbH    Industrial    Joint Integrity    January 22, 2007
T.T. Fijnmechanica B.V.    Industrial    High Force Hydraulic Tools    April 16, 2007
BH Electronics, Inc.    Electrical    Specialty Electrical    June 29, 2007
Templeton, Kenly & Co., Inc.    Industrial    High Force Hydraulic Tools    September 13, 2007
Superior Plant Services, LLC    Industrial    Joint Integrity    March 3, 2008

The operating results of acquired businesses are included in the Company’s reported results of operations only since their respective acquisition dates. In addition to the impact of acquisitions, changes in currency translation rates can impact the comparability of our results since approximately half of our sales are denominated in currencies other than the US dollar. The weakening of the US dollar has favorably impacted fiscal 2008 results compared to the prior year.

Consolidated net sales increased by $59.6 million, or 15%, from $385.1 million for the three months ended May 31, 2007 to $444.7 million for the three months ended May 31, 2008. Excluding $29.6 million of sales from acquired businesses and the $23.5 million favorable foreign currency impact, fiscal 2008 third quarter consolidated net sales increased 2%. Fiscal 2008 year-to-date sales increased by $190.3 million, or 18%, from $1,069.1 million in the comparable prior year period to $1,259.4 million in the current year. Excluding $100.1 million of sales from acquired businesses and the $58.5 million favorable impact of foreign currency exchange rate changes, sales for the nine months ended May 31, 2008 increased 3% compared to the prior year period. The changes in sales at the segment level are discussed in further detail below.

 

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Operating profit for the three months ended May 31, 2008 was $61.5 million, compared with $52.5 million for the three months ended May 31, 2007. Operating profit for the nine months ended May 31, 2008 was $155.0 million, compared to $132.9 million for the nine months ended May 31, 2007. The comparability between periods is impacted by acquisitions, foreign currency exchange rate changes, increased sales and profit margins. The nine month comparability is also impacted by European Electrical restructuring provisions recorded during the period. The changes in operating profit at the segment level are discussed in further detail below.

Segment Results

Net Sales

 

     Three Months Ended    Nine Months Ended
     May 31,
2008
   May 31,
2007
   May 31,
2008
   May 31,
2007

Net Sales:

           

Industrial

   $ 160.0    $ 115.8    $ 427.9    $ 316.3

Electrical

     129.2      127.6      393.9      373.3

Actuation Systems

     122.9      111.8      345.5      315.1

Engineered Products

     32.6      29.9      92.1      64.4
                           

Total

   $ 444.7    $ 385.1    $ 1,259.4    $ 1,069.1
                           

Industrial Segment

Industrial segment net sales increased by $44.2 million, or 38%, from $115.8 million for the three months ended May 31, 2007 to $160.0 million for the three months ended May 31, 2008. During the nine months ended May 31, 2008, Industrial net sales increased by $111.6 million, or 35%, from $316.3 million for the nine months ended May 31, 2007 to $427.9 million. Excluding sales from acquisitions and favorable impact of foreign currency rate changes, core sales grew 14% for both the three and nine months ended May 31, 2008 and 2007. The core sales growth reflects a continuation of strong global demand for Joint Integrity and High Force Hydraulic tools product lines, as well as services provided for the robust oil & gas and power generation markets, along with modest price increases.

Electrical Segment

Electrical net sales increased by $1.6 million, or 1%, from $127.6 million for the three months ended May 31, 2007 to $129.2 million for the three months ended May 31, 2008. During the nine months ended May 31, 2008, Electrical net sales increased by $20.6 million, or 6%, from $373.3 million for the nine months ended May 31, 2007 to $393.9 million. Excluding the acquisition of BH Electronics in June 2007 and the favorable impact of foreign currency rate changes, core sales declined 10% and 6% for the three and nine months ended May 31, 2008, respectively. The decline is the result of lower demand in the retail Do-It-Yourself (“DIY”), transformer, and marine markets. Approximately 65% of the Electrical Segment sales are generated in North America, where economic conditions have deteriorated since the prior year, including a sharp decline in consumer confidence. Year-over-year comparisons were also negatively affected by our strategic decision to exit low margin products in the European Electrical product line as part of our recently concluded restructuring program.

Actuation Systems Segment

Actuation Systems net sales increased by $11.1 million, or 10%, from $111.8 million for the three months ended May 31, 2007 to $122.9 million for the three months ended May 31, 2008. During the nine months ended May 31, 2008, Actuation Systems net sales increased by $30.4 million, or 10%, from $315.1 million to $345.5 million. Excluding the favorable impact of foreign currency rate changes, core sales grew 1% and 2% for the three and nine months ended May 31, 2008, respectively, reflecting strong demand from our global Truck and Auto customers offset by significantly lower Recreational Vehicle (“RV”) market sales volume. Truck sales increased due to robust European new truck build rates and higher prototype and replacement part volumes in North America, while Auto sales increased modestly as a result of new model launches. RV product line sales declined during the periods under review, including a 27% decrease in the three months ended May 31, 2008, due to the combined impact of higher fuel prices, reduced consumer confidence and economic conditions. We expect RV market demand to continue to be weak for the next few quarters based on RV OEM feedback.

Engineered Products Segment

Engineered Products net sales increased by $2.7 million, from $29.9 million for the three months ended May 31, 2007 to $32.6 million for the three months ended May 31, 2008. For the nine months ended May 31, 2008, Engineered Products net sales increased $27.7 million, to $92.1 million, due to the Maxima acquisition and core sales growth. Core sales grew 6% in the third quarter and 11% year-to-date over the comparable prior year periods, primarily due to strong demand in the agriculture, aerospace, container hardware, and utility markets.

 

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Operating Profit

 

     Three Months Ended     Nine Months Ended  
     May 31,
2008
    May 31,
2007
    May 31,
2008
    May 31,
2007
 

Operating Profit:

        

Industrial

   $ 43.7     $ 33.3     $ 114.4     $ 86.5  

Electrical

     8.1       9.9       19.3       24.9  

Actuation Systems

     13.7       11.0       32.1       27.5  

Engineered Products

     4.2       4.0       11.6       8.8  

Corporate

     (8.2 )     (5.7 )     (22.4 )     (14.8 )
                                

Total

   $ 61.5     $ 52.5     $ 155.0     $ 132.9  
                                

Industrial Segment

Industrial operating profit increased by $10.4 million, or 31%, from $33.3 million for the three months ended May 31, 2007 to $43.7 million for the three months ended May 31, 2008. For the nine months ended May 31, 2008, Industrial operating profit increased by $27.9 million, or 32%, from $86.5 million for the nine months ended May 31, 2007 to $114.4 million. Operating profit grew as a result of increased sales volumes from existing businesses, higher production levels resulting in increased absorption of fixed costs, price increases, acquisitions, operating efficiencies resulting from continuous improvement initiatives and the favorable impact of foreign exchange rates; partially offset by unfavorable sales and acquisition mix, higher intangible asset amortization, higher incentive compensation expense, increased cost of certain raw materials and investments in sales and marketing initiatives.

Electrical Segment

Electrical operating profit decreased by $1.8 million, or 18%, from $9.9 million for the three months ended May 31, 2007 to $8.1 million for the three months ended May 31, 2008. For the nine months ended May 31, 2008, Electrical operating profit decreased by $5.6 million, or 22%, from $24.9 million for the nine months ended May 31, 2007 to $19.3 million. Operating profit declined as a result of lower sales, production levels and unfavorable sales mix, despite margin improvements in the European Electrical product line. While we expect continued short term weakness in the Electrical segment due to weak consumer demand, we are continuing to reduce costs to counter the impact of lower volumes.

The European Electrical restructuring program was completed during the second quarter of fiscal 2008 at a cumulative pre-tax cost of $20.8 million. This program is expected to generate pre-tax savings of $7 to $8 million annually (See Note 3 “Restructuring”).

Actuation Systems Segment

Actuation Systems operating profit increased by $2.7 million, or 25%, from $11.0 million to $13.7 million for the three months ended May 31, 2007 and 2008, respectively. Actuation Systems operating profit increased by $4.6 million, or 16%, from $27.5 million to $32.1 million for the nine months ended May 31, 2007 and 2008, respectively. The operating profit improvement resulted from increased volumes, continued operating efficiency improvements, customer pricing and favorable foreign exchange rates. These were partially offset by facility consolidation costs and input material price inflation.

Engineered Products Segment

Engineered Products operating profit increased by $0.2 million, or 5% from $4.0 million for the three months ended May 31, 2007 to $4.2 million for the three months ended May 31, 2008. For the nine months ended May 31, 2008, Engineered Products operating profit increased by $2.8 million to $11.6 million from $8.8 million during the nine months ended May 31, 2007. The operating profit growth was due to higher sales volumes, customer price increases, and increased low cost country sourcing partially offset by the facility relocation and downsizing costs, increased cost of certain purchased components and higher incentive compensation costs.

Corporate

Corporate expenses increased by approximately $2.5 million to $8.2 million for the three months ended May 31, 2008 and by approximately $7.6 million to $22.4 million for the nine months ended May 31, 2008. The increases were the result of higher staffing levels to support business expansion, expenses to support corporate-wide training initiatives, higher incentive compensation expense, start-up costs for our Taicang, China facility, and increased income tax consulting fees.

 

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Financing Costs, net

Financing costs increased from $24.2 million to $27.5 million for the nine months ended May 31, 2008 when compared to the nine months ended May 31, 2007, a $3.3 million increase as a result of higher average debt levels due to timing of acquisitions.

Income Taxes

Our income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are higher or lower than the U.S. federal statutory rate, state tax rates in the jurisdictions where we do business, and our ability to utilize various tax credits and net operating loss carryforwards. The effective income tax rate for the three and nine months ended May 31, 2008 was 25.8% and 31.6% compared to 30.8% and 31.3% during the three and nine months ended May 31, 2007, respectively. The third quarter fiscal 2008 tax rate includes the benefit of tax reserve adjustments of $2.6 million resulting from favorable book provision to tax return adjustments, settling tax audits for amounts less than previously accrued and the lapsing of various tax statutes of limitations. There were no similar adjustments for the three month period ended May 31, 2007. The effective income tax rate was higher in the nine months ended May 31, 2008 than the other periods presented primarily as a result of no tax benefit being recorded for the majority of the European Electrical restructuring charges.

Restructuring

We initiated plans to restructure the European Electrical product line within the Electrical segment during the fourth quarter of fiscal 2006. These plans were designed to reduce operating costs and improve profitability. During the quarter ended February 29, 2008, we completed these restructuring activities resulting in cumulative pre-tax restructuring provisions totaling $20.8 million.

A rollforward of the European Electrical restructuring reserve follows:

 

Accrued restructuring costs as of August 31, 2007

   $ 2,150  

Restructuring charges

     10,473  

Cash payments

     (3,214 )

Product line and rationalization

     (3,051 )

Foreign currency impact

     643  
        

Accrued restructuring costs as of May 31, 2008

   $ 6,999  
        

The remaining $7.0 million of accrued restructuring costs at May 31, 2008 represents severance cost of approximately $0.6 million, lease exit costs of approximately $4.3 million, and product line rationalization costs of $2.1 million. The severance and product line rationalization costs will be paid during fiscal 2008 and 2009, while the lease exit costs will be paid over the remaining 12 year term of the lease.

Liquidity and Capital Resources

Cash and cash equivalents totaled $91.1 million and $86.7 million at May 31, 2008 and August 31, 2007, respectively.

We generated $125.2 million of cash from operating activities during the nine months ended May 31, 2008 compared to $129.4 million during the nine months ended May 31, 2007. Cash provided by operating activities is primarily used to fund capital expenditures, acquisitions and debt repayments. Despite net earnings growth in the current year, our net cash provided by operating activities declined modestly from the prior year due to an increase in our accounts receivable balance.

Cash used in investing activities totaled $128.9 million and $149.0 million during the nine months ended May 31, 2008 and 2007, respectively. We spent $110.1 million on acquisitions in the current year, including the purchase of TK and SPS. In the comparative prior year period, we completed four acquisitions, requiring cash funding of $132.6 million. Additionally, capital expenditures increased due to ERP system upgrades, rental fleet additions, and construction of a new facility in China. We funded a portion of these additions with approximately $9.5 million of proceeds generated from the sale of certain (including sale-leaseback) facilities during the nine months ended May 31, 2008.

 

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Table of Contents

Net cash provided by financing activities totaled $3.1 million and $66.4 million during the nine months ended May 31, 2008 and 2007, respectively. The cash provided by financing activities during fiscal 2007 primarily relates to the proceeds from $155.0 million of additional term loans offset by other debt repayments.

At May 31, 2008, we had approximately $250.0 million of availability under our bank revolving credit line. We believe that such availability, combined with our $91.1 million of cash on hand and future operating cash flows, will be adequate to meet operating needs, debt service, funding of tuck-in acquisitions, and capital expenditure requirements for the foreseeable future.

Primary Working Capital Management

We use primary working capital as a percentage of sales (“PWC%”) as a key indicator of working capital management. We define this metric as the sum of net accounts receivable, outstanding balances on the accounts receivable securitization facility, and net inventory less accounts payable, divided by annualized sales of the last three months. The following table summarizes Primary Working Capital:

 

     May 31,
2008
    PWC %     May 31,
2007
    PWC %  

Accounts receivable, net

   $ 249,163       $ 186,501    

Accounts receivable securitization

     61,562         64,084    
                    

Total accounts receivable

     310,725     17.5 %     250,585     16.2 %

Inventory, net

     223,151     12.5 %     194,506     12.6 %

Accounts payable

     (178,877 )   (10.1 )%     (154,765 )   (10.0 )%
                            

Net primary working capital

   $ 354,999     19.9 %   $ 290,326     18.8 %
                            

Our net primary working capital percentage increased from 18.8% to 19.9%, as a result of growth in our receivables (timing of sales in the quarter), and the impact of acquisitions on the working capital mix.

Commitments and Contingencies

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

In the normal course of business, we enter into certain real estate and equipment leases or guarantees such leases on behalf of its subsidiaries. In conjunction with the spin-off of a former subsidiary in fiscal 2000, the Company assigned its rights in the leases used by the former subsidiary, but was not released as a responsible party from all such leases by the lessors. All of these businesses were subsequently sold. The Company remains contingently liable for those leases if any of these businesses are unable to fulfill their obligations thereunder. The discounted present value of future minimum lease payments for such leases totals, assuming no offset for sub-leasing was approximately $5.6 million at May 31, 2008. The future undiscounted minimum lease payments for these leases are as follows: $0.8 million in calendar 2008; $1.1 million in calendar 2009 through 2010, $1.2 million in calendar 2011 and 2012; and $3.8 million thereafter.

As more fully discussed in Note 4, “Accounts Receivable Securitization”, in the Notes to Condensed Consolidated Financial Statements, we are a party to an accounts receivable securitization program. Trade receivables sold and being serviced by the Company were $61.6 million and $56.5 million at May 31, 2008 and August 31, 2007, respectively. If we had discontinued this securitization program at May 31, 2008 it would have been required to borrow approximately $61.6 million to finance the working capital increase. Total capacity under the securitization program is $65.0 million.

We had outstanding letters of credit of $6.4 million and $6.5 million at May 31, 2008 and August 31, 2007, respectively. The letters of credit secure self-insured workers compensation liabilities.

 

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Table of Contents

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in foreign currency exchange rates, interest rates and, to a lesser extent, commodity prices. To reduce such risks, we selectively use financial instruments and other proactive management techniques. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which strictly prohibit the use of financial instruments for trading or speculative purposes. A discussion of our accounting policies for derivative financial instruments is included within Note 1, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our fiscal 2007 Annual Report on Form 10-K.

Currency Risk —We have exposure to foreign currency exchange fluctuations. Approximately 50% and 48% of our revenues for the nine months ended May 31, 2008 and the year ended August 31, 2007, respectively, were denominated in currencies other than the U.S. dollar. Of those non-U.S. dollar denominated amounts, approximately 67% were denominated in euros, with the majority of the remainder denominated in British pounds. We selectively use cross-currency interest rate swaps to hedge the foreign currency exposure associated with its net investment in certain foreign operations (net investment hedges). Under the swaps, we receive interest based on a variable U.S. dollar rate and pay interest on variable euro rates on the outstanding notional principal amounts in dollars and euros. Foreign currency translation adjustments are recorded as a component of shareholders’ equity. (See Note 8. “Derivatives”).

Our identifiable foreign currency exchange exposure results primarily from the anticipated purchase of product from affiliates and third party suppliers and from the repayment of intercompany loans between subsidiaries denominated in foreign currencies. We periodically identify areas where we do not have naturally occurring offsetting positions and then may purchase hedging instruments to protect against anticipated exposures. There are no material hedging instruments in place as of the date of this filing. Our financial position is not materially sensitive to fluctuations in exchange rates as any gains or losses on foreign currency exposures are generally offset by gains and losses on underlying payables, receivables, and net investments in foreign subsidiaries.

Interest Rate Risk —We have earnings exposure related to interest rate changes on its outstanding floating rate debt instruments that are based on LIBOR and EURIBOR interest rates. We have periodically utilized interest rate swap agreements to manage overall financing costs and interest rate risk. (See Note 8, “Derivatives”). An increase or decrease of 25 basis points in the applicable interest rates on variable rate debt at May 31, 2008 would result in a change in pre-tax interest expense of approximately $0.5 million on an annual basis.

Commodity Risk —We source a wide variety of materials and components from a network of global suppliers. While such materials are typically available from numerous suppliers, commodity raw materials, such as steel, plastic resin, and copper, are subject to price fluctuations, which could have a negative impact on our results. We strive to pass along such commodity price increases to customers to avoid profit margin erosion. During 2008 we faced significant price increases for steel and copper components. We have historically, and continue to, raise prices to customers in order to counter the higher costs. In addition, continuous improvement initiatives further mitigate the impact of commodity raw material price fluctuations as improved efficiencies across all locations are achieved. We did not have any significant derivative contracts in place at May 31, 2008 or August 31, 2007 to hedge exposure to commodity risk.

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

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

Changes in Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). There have been no changes in our internal control over financial reporting that occurred during the quarter ended May 31, 2008 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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Table of Contents

PART II - OTHER INFORMATION

Items 1, 1A, 2, 3, 4 and 5 are inapplicable and have been omitted.

Item 6 – Exhibits

 

(a) Exhibits

See “Index to Exhibits” on page 33, which is incorporated herein by reference.

 

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Table of Contents

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 9, 2008   By:  

/s/ Andrew G. Lampereur

    Andrew G. Lampereur
    Executive Vice President and Chief Financial Officer
    (Principal Financial Officer)

 

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Table of Contents

ACTUANT CORPORATION

(the “Registrant”)

(Commission File No. 1-11288)

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED May 31, 2008

INDEX TO EXHIBITS

 

Exhibit

 

Description

  Incorporated
Herein
By Reference
To
  Filed
Herewith

10.1

  Amendment No. 17, dated May 9, 2008, to the Receivables Purchase Agreement dated May 31, 2001, among Actuant Receivables Corporation, as Seller, Actuant Corporation, as Initial Servicer, Blue Ridge Asset Funding Corporation and Wachovia Bank, N.A., as Agent     X
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     X
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     X
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     X
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     X

 

33

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