10-Q 1 atu-2014228x10q.htm 10-Q ATU-2014.2.28-10Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
——————————— 
FORM 10-Q
 ————————————
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2014
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.)
N86 W12500 WESTBROOK CROSSING
MENOMONEE FALLS, WISCONSIN 53051
Mailing address: P. O. Box 3241, Milwaukee, Wisconsin 53201
(Address of principal executive offices)
(262) 293-1500
(Registrant’s telephone number, including area code)
  ————————————
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large 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 March 31, 2014 was 71,016,289.
 
 
 
 
 



TABLE OF CONTENTS
 
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, and capital expenditures. Words such as “may,” “should,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “plan,” “project” and similar expressions are intended to identify 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 disclaim any obligation to publicly update or revise any forward-looking statements as a result of new information, future events or any other reason.
The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements:
economic uncertainty or a prolonged economic downturn;
the realization of anticipated cost savings from restructuring activities and cost reduction efforts;
market conditions in the truck, automotive, agricultural, industrial, production automation, oil & gas, energy, maintenance, power generation and infrastructure industries;
increased competition in the markets we serve and market acceptance of existing and new products;
our ability to successfully identify and integrate acquisitions and realize anticipated benefits/results from acquired companies;
operating margin risk due to competitive product pricing, operating efficiencies, reduced production levels and material, labor and overhead cost increases;
foreign currency, interest rate and commodity risk;
supply chain and industry trends, including changes in purchasing and other business practices by customers;
regulatory and legal developments including changes to United States taxation rules, health care reform and governmental climate change initiatives;
the potential for a non-cash asset impairment charge, if operating performance at one or more of our businesses were to fall significantly below current levels;

2


our level of indebtedness and ability to comply with the financial and other covenants in our debt agreements.
When used herein, the terms “Actuant,” “we,” “us,” “our” and the “Company” refer to Actuant Corporation and its subsidiaries. Our Form 10-K for the fiscal year ended August 31, 2013 contains an expanded description of these and other risks that may affect our business, financial position and results of operations under the section entitled “Risk Factors.”
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.


3


PART I—FINANCIAL INFORMATION
Item 1—Financial Statements
ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
2014
 
2013
 
2014
 
2013
Net sales
$
327,770

 
$
300,468

 
$
667,326

 
$
608,277

Cost of products sold
203,323

 
184,290

 
411,099

 
367,731

Gross profit
124,447

 
116,178

 
256,227

 
240,546

Selling, administrative and engineering expenses
79,240

 
73,339

 
161,158

 
148,199

Amortization of intangible assets
6,226

 
5,968

 
12,441

 
12,002

Operating profit
38,981

 
36,871

 
82,628

 
80,345

Financing costs, net
6,262

 
6,260

 
13,012

 
12,582

Other expense (income), net
1,326

 
(37
)
 
2,467

 
607

Earnings from continuing operations before income tax expense
31,393

 
30,648

 
67,149

 
67,156

Income tax expense
9,089

 
4,814

 
11,840

 
10,771

Earnings from continuing operations
22,304

 
25,834

 
55,309

 
56,385

Earnings from discontinued operations, net of income taxes
19,088

 
2,601

 
22,120

 
8,393

Net earnings
$
41,392

 
$
28,435

 
$
77,429

 
$
64,778

 
 
 
 
 
 
 
 
Earnings from continuing operations per share:
 
 
 
 
 
 
 
Basic
$
0.31

 
$
0.35

 
$
0.76

 
$
0.77

Diluted
$
0.30

 
$
0.35

 
$
0.74

 
$
0.76

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.57

 
$
0.39

 
$
1.07

 
$
0.89

Diluted
$
0.56

 
$
0.38

 
$
1.04

 
$
0.87

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
72,227

 
72,946

 
72,656

 
72,869

Diluted
73,773

 
74,416

 
74,392

 
74,343

 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements


4


ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
41,392

 
$
28,435

 
$
77,429

 
$
64,778

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
4,270

 
(11,945
)
 
21,317

 
144

Pension and other postretirement benefit plans
50

 
90

 
100

 
305

Cash flow hedges
77

 
(116
)
 
(17
)
 
(245
)
Total other comprehensive income, net of tax
4,397

 
(11,971
)
 
21,400

 
204

Comprehensive income
$
45,789

 
$
16,464

 
$
98,829

 
$
64,982

See accompanying Notes to Condensed Consolidated Financial Statements

5


ACTUANT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
February 28, 2014
 
August 31, 2013
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
155,017

 
$
103,986

Accounts receivable, net
 
233,951

 
219,075

Inventories, net
 
164,994

 
142,549

Deferred income taxes
 
16,326

 
18,796

Other current assets
 
30,116

 
28,228

Assets of discontinued operations
 

 
272,606

Total current assets
 
600,404

 
785,240

Property, plant and equipment
 
 
 
 
Land, buildings and improvements
 
54,575

 
52,669

Machinery and equipment
 
327,628

 
305,200

Gross property, plant and equipment
 
382,203

 
357,869

Less: Accumulated depreciation
 
(174,024
)
 
(156,373
)
Property, plant and equipment, net
 
208,179

 
201,496

Goodwill
 
749,782

 
734,952

Other intangibles, net
 
372,034

 
376,692

Other long-term assets
 
28,735

 
20,952

Total assets
 
$
1,959,134

 
$
2,119,332

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Trade accounts payable
 
$
153,726

 
$
154,049

Accrued compensation and benefits
 
45,824

 
43,800

Current maturities of long-term debt
 
2,250

 

Income taxes payable
 
32,849

 
14,014

Other current liabilities
 
63,646

 
56,899

Liabilities of discontinued operations
 

 
53,080

Total current liabilities
 
298,295

 
321,842

Long-term debt, less current maturities
 
387,750

 
515,000

Deferred income taxes
 
95,114

 
115,865

Pension and postretirement benefit liabilities
 
12,283

 
20,698

Other long-term liabilities
 
64,591

 
65,660

Shareholders’ equity
 
 
 
 
Class A common stock, $0.20 par value per share, authorized 168,000,000 shares, issued 78,169,316 and 77,001,144 shares, respectively
 
15,633

 
15,399

Additional paid-in capital
 
80,622

 
49,758

Treasury stock, at cost, 7,000,000 and 3,983,513 shares, respectively
 
(214,010
)
 
(104,915
)
Retained earnings
 
1,266,116

 
1,188,685

Accumulated other comprehensive loss
 
(47,260
)
 
(68,660
)
Stock held in trust
 
(4,123
)
 
(3,124
)
Deferred compensation liability
 
4,123

 
3,124

Total shareholders’ equity
 
1,101,101

 
1,080,267

Total liabilities and shareholders’ equity
 
$
1,959,134

 
$
2,119,332

See accompanying Notes to Condensed Consolidated Financial Statements

6


ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended February 28,
 
 
2014
 
2013
Operating Activities
 
 
 
 
Net earnings
 
$
77,429

 
$
64,778

Adjustments to reconcile net earnings to cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
31,965

 
28,898

Net gain on disposal of business
 
(26,339
)
 

Deferred income tax benefit
 
(11,064
)
 
(6,018
)
Stock-based compensation expense
 
10,612

 
7,128

Amortization of debt discount and debt issuance costs
 
983

 
992

Other non-cash adjustments
 
(743
)
 
(172
)
Sources (uses) of cash from changes in components of working capital and other:
 
 
 
 
Accounts receivable
 
4,769

 
(3,721
)
Inventories
 
(21,783
)
 
(4,152
)
Prepaid expenses and other assets
 
(1,071
)
 
(1,204
)
Trade accounts payable
 
(12,835
)
 
(22,281
)
Income taxes payable
 
(13,399
)
 
(2,722
)
Accrued compensation and benefits
 
3,673

 
(12,427
)
Other accrued liabilities
 
(5,314
)
 
(8,776
)
Net cash provided by operating activities
 
36,883

 
40,323

Investing Activities
 
 
 
 
Capital expenditures
 
(22,226
)
 
(11,726
)
Proceeds from sale of property, plant and equipment
 
2,008

 
1,177

Proceeds from sale of business, net of transaction costs
 
243,386

 

Business acquisitions, net of cash acquired
 

 
(83
)
Net cash provided by (used in) investing activities
 
223,168

 
(10,632
)
Financing Activities
 
 
 
 
Net repayments on revolver
 
(125,000
)
 

Principal repayments on term loan
 

 
(2,500
)
Purchase of treasury shares
 
(109,095
)
 
(8,821
)
Stock option exercises and related tax benefits
 
25,803

 
10,772

Payment of contingent acquisition consideration
 
(753
)
 
(1,350
)
Cash dividend
 
(2,919
)
 
(2,911
)
Net cash used in financing activities
 
(211,964
)
 
(4,810
)
Effect of exchange rate changes on cash
 
2,944

 
(2,242
)
Net increase in cash and cash equivalents
 
51,031

 
22,639

Cash and cash equivalents – beginning of period
 
103,986

 
68,184

Cash and cash equivalents – end of period
 
$
155,017

 
$
90,823

See accompanying Notes to Condensed Consolidated Financial Statements

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2013 was derived from the Company’s audited financial statements, but does not include all disclosures required by the United States generally accepted accounting principles. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes in the Company’s fiscal 2013 Annual Report on Form 10-K.
In the opinion of management, all adjustments considered necessary for a fair statement of financial results have been made. Such adjustments consist of only those of a normal recurring nature. Operating results for the three and six months ended February 28, 2014 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2014. Certain prior year amounts have been reclassified to conform to current year presentation, including amounts related to discontinued operations.
Note 2. Acquisitions
Acquisitions result in the recognition of goodwill in the Company’s consolidated financial statements because their purchase price reflects the future earnings and cash flow potential of these companies, as well as the complementary strategic fit and resulting synergies these businesses are expected to bring to existing operations. The Company makes an initial allocation of the purchase price at the date of a business acquisition, based upon its understanding of the fair value of the acquired assets and assumed liabilities. The Company obtains this information during due diligence and through other sources. If additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), including through asset appraisals and learning more about the newly acquired business, the Company will refine its estimates of fair value.
The Company acquired Viking SeaTech ("Viking") for $235.4 million on August 27, 2013. This Energy segment acquisition expanded the segment's geographic presence, technologies and services provided to the global offshore oil & gas industry. Headquartered in Aberdeen, Scotland, Viking is a support specialist providing a comprehensive range of equipment and services. Viking serves customers globally with primary markets in the North Sea (U.K. and Norway) and Australia. The majority of Viking's revenue is derived from offshore vessel mooring solutions which include design, rental, installation and inspection. Viking also provides survey, manpower and other marine services to offshore operators, drillers and energy asset owners. The purchase price allocation of the Viking acquisition resulted in the recognition of $87.7 million of goodwill (which is not deductible for tax purposes) and $65.4 million of intangible assets, including $40.5 million of customer relationships and $24.9 million of tradenames.
The following unaudited pro forma results of operations of the Company for the three and six months ended February 28, 2014 and 2013, give effect to the Viking acquisition as though the transaction and related financing activities had occurred on September 1, 2012 (in thousands, except per share amounts):
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
2014
 
2013
 
2014
 
2013
Net sales

 

 

 

As reported
$
327,770

 
$
300,468

 
$
667,326

 
$
608,277

Pro forma
327,770

 
321,923

 
667,326

 
654,665

Earnings from continuing operations

 

 

 

As reported
$
22,304

 
$
25,834

 
$
55,309

 
$
56,385

Pro forma
22,304

 
27,195

 
55,309

 
60,868

Basic earnings per share from continuing operations

 

 

 

As reported
$
0.31

 
$
0.35

 
$
0.76

 
$
0.77

Pro forma
0.31

 
0.37

 
0.76

 
0.84

Diluted earnings per share from continuing operations

 

 

 

As reported
$
0.30

 
$
0.35

 
$
0.74

 
$
0.76

Pro forma
0.30

 
0.37

 
0.74

 
0.82




8


Note 3. Discontinued Operations
The Electrical segment was primarily involved in the design, manufacture and distribution of a broad range of electrical products to the retail DIY, wholesale, OEM, solar, utility, marine and other harsh environment markets. On December 13, 2013, the Company completed the sale of the Electrical segment for net cash proceeds of $243.4 million, which resulted in a pre-tax gain on disposal of $34.5 million. Remaining transaction costs and income taxes payable on the divestiture gain will result in cash outflows of approximately $18.0 million in future quarters, such that net cash proceeds on the sale transaction will be approximately $225.0 million.

The following table summarizes the results of discontinued operations (in thousands), through the date of the sale, December 13, 2013:
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
2014
 
2013
 
2014
 
2013
Net sales
$
9,127

 
$
69,902

 
$
72,139

 
$
139,341

 

 
 
 

 

Operating income (loss) (1)
(10,102
)
 
5,073

 
(4,873
)
 
13,181

Gain on disposal
34,459

 

 
34,459

 

Income tax expense
5,269

 
2,472

 
7,466

 
4,788

Income from discontinued operations, net of taxes
$
19,088

 
$
2,601

 
$
22,120

 
$
8,393


(1) The operating loss for the three and six months ended February 28, 2014 includes certain divestiture costs and a non-cash charge for the accelerated vesting of equity compensation.

Note 4. Goodwill and Other Intangible Assets
The changes in the carrying value of goodwill for the six months ended February 28, 2014 are as follows (in thousands):
 
 
Industrial
 
Energy
 
Engineered
Solutions
 
Total
Balance as of August 31, 2013
 
$
82,611

 
$
341,903

 
$
310,438

 
$
734,952

Purchase accounting adjustments
 

 
(18
)
 

 
(18
)
Impact of changes in foreign currency rates
 
1,376

 
10,729

 
2,743

 
14,848

Balance as of February 28, 2014
 
$
83,987

 
$
352,614

 
$
313,181

 
$
749,782


The gross carrying value and accumulated amortization of the Company’s other intangible assets are as follows (in thousands):
 
 
 
 
February 28, 2014
 
August 31, 2013
 
 
Weighted Average
Amortization
Period (Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Book
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Book
Value
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
15
 
$
325,469

 
$
108,073

 
$
217,396

 
$
318,143

 
$
95,215

 
$
222,928

Patents
 
11
 
30,978

 
20,117

 
10,861

 
30,564

 
18,747

 
11,817

Trademarks and tradenames
 
18
 
24,288

 
8,132

 
16,156

 
24,088

 
7,356

 
16,732

Non-compete agreements and other
 
4
 
7,178

 
6,716

 
462

 
7,034

 
6,458

 
576

Indefinite lived intangible assets:
 

 

 

 

 

 

 

Tradenames
 
N/A
 
127,159

 

 
127,159

 
124,639

 

 
124,639

 
 
 
 
$
515,072

 
$
143,038

 
$
372,034

 
$
504,468

 
$
127,776

 
$
376,692

Amortization expense recorded on the intangible assets listed above was $6.2 million and $12.4 million for three and six months ended February 28, 2014, respectively and $6.0 million and $12.0 million for three and six months ended February 28, 2013, respectively. The Company estimates that amortization expense will be approximately $12.4 million for the remainder of

9


fiscal 2014. Amortization expense for future years is estimated to be as follows: $24.8 million in fiscal 2015, $24.7 million in 2016, $24.1 million in fiscal 2017, $23.3 million in fiscal 2018, $23.1 million in fiscal 2019 and $112.5 million thereafter. These future amortization expense amounts represent estimates, which may change based on future acquisitions, changes in foreign currency exchange rates or other factors.
Note 5. Product Warranty Costs
The Company generally offers its customers a warranty on products they purchase, although warranty periods vary by product type and application. The reserve for future warranty claims is based on historical claim rates and current warranty cost experience. The following is a rollforward of the accrued product warranty reserve from continuing operations (in thousands):
 
 
Six Months Ended February 28,
 
 
2014
 
2013
Beginning balance
 
$
7,413

 
$
5,121

Provision for warranties
 
1,208

 
3,647

Warranty payments and costs incurred
 
(3,079
)
 
(3,493
)
Impact of changes in foreign currency rates
 
63

 
42

Ending balance
 
$
5,605

 
$
5,317


Note 6. Debt
The following is a summary of the Company’s long-term indebtedness (in thousands):
 
 
February 28,
2014
 
August 31,
2013
Senior Credit Facility
 
 
 
 
Revolver
 
$

 
$
125,000

Term Loan
 
90,000

 
90,000

 
 
90,000

 
215,000

5.625% Senior Notes
 
300,000

 
300,000

Total Senior Indebtedness
 
390,000

 
515,000

Less: current maturities of long-term debt
 
(2,250
)
 

Total long-term debt, less current maturities
 
$
387,750

 
$
515,000

The Company’s Senior Credit Facility, which matures on July 18, 2018, includes a $600 million revolving credit facility, a $90 million term loan and a $350 million expansion option, subject to certain conditions. Borrowings are subject to a pricing grid, which can result in increases or decreases to the borrowing spread above LIBOR, depending on the Company’s leverage ratio, ranging from 1.00% to 2.50% in the case of loans bearing interest at LIBOR and from 0.00% to 1.50% in the case of loans bearing interest at the base rate. At February 28, 2014, the borrowing spread on LIBOR based borrowings was 1.50% (aggregating to approximately 1.70%). In addition, a non-use fee is payable quarterly on the average unused credit line under the revolver ranging from 0.15% to 0.40% per annum. At February 28, 2014, the available and unused credit line under the revolver was $596.7 million. Quarterly principal payments of $1.1 million will begin on the term loan on September 30, 2014, increasing to $2.3 million per quarter beginning on September 30, 2015, with the remaining principal due at maturity. The Senior Credit Facility, which is secured by substantially all of the Company’s domestic personal property assets, also contains customary limits and restrictions concerning investments, sales of assets, liens on assets, dividends and other payments. The two financial covenants included in the Senior Credit Facility agreement are a maximum leverage ratio of 3.75:1 and a minimum interest coverage ratio of 3.50:1. The Company was in compliance with all financial covenants at February 28, 2014.
On April 16, 2012, the Company issued $300 million of 5.625% Senior Notes due 2022 (the “Senior Notes”). The Senior Notes require no principal installments prior to their June 15, 2022 maturity, require semiannual interest payments in December and June of each year and contain certain financial and non-financial covenants.
Note 7. Fair Value Measurement
The Company assesses the inputs used to measure the fair value of financial assets and liabilities using a three-tier hierarchy. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves.

10


Level 3 inputs are not observable in the market and include management’s own judgments about the assumptions market participants would use in pricing the asset or liability. The following financial assets, measured at fair value, are included in the condensed consolidated balance sheet (in thousands):
 
 
February 28,
2014
 
August 31,
2013
Level 1 Valuation:
 
 
 
 
Cash equivalents
 
$
698

 
$
1,092

Investments
 
2,010

 
1,793

Level 2 Valuation:
 

 

Foreign currency derivatives
 
$
431

 
$
143

The fair value of the Company’s cash, accounts receivable, accounts payable, short-term borrowings and its variable rate long-term debt approximated book value at both February 28, 2014 and August 31, 2013 due to their short-term nature and the fact that the interest rates approximated market rates. The fair value of the Company’s outstanding $300 million of 5.625% Senior Notes was $309.8 million and $300.8 million February 28, 2014 and August 31, 2013, respectively. The fair value of the Senior Notes was based on quoted inactive market prices and are therefore classified as Level 2 within the valuation hierarchy.

Note 8. Derivatives
    
All derivatives are recognized in the balance sheet at their estimated fair value. On the date it enters into a derivative contract, the Company designates the derivative as a hedge of a recognized asset or liability ("fair value hedge") or a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"). The Company does not enter into derivatives for speculative purposes. Changes in the value of fair value hedges and non-designated hedges are recorded in earnings along with the gain or loss on the hedged asset or liability, while changes in the value of cash flow hedges are recorded in accumulated other comprehensive loss, until earnings are affected by the variability of cash flows. The fair value of outstanding foreign currency derivatives was an asset of $0.4 million and $0.1 million at February 28, 2014 and August 31, 2013, respectively.

The Company is exposed to market risk for changes in foreign currency exchange rates due to the global nature of its operations. In order to manage this risk the Company has hedged portions of its forecasted inventory purchases that are denominated in non-functional currencies through cash flow hedges. The U.S. dollar equivalent notional value of these foreign currency forward contracts was $4.9 million and $9.7 million, at February 28, 2014 and August 31, 2013, respectively. At February 28, 2014, unrealized losses of $0.1 million were included in accumulated other comprehensive loss and are expected to be reclassified to earnings during the next twelve months.

The Company also utilizes forward foreign currency exchange contracts to reduce the exchange rate risk associated with recognized non-functional currency balances. The effects of changes in exchange rates are reflected concurrently in earnings for both the fair value of the foreign currency exchange contracts and the related non-functional currency asset or liability. The U.S. dollar equivalent notional value of these short duration foreign currency forward contracts was $150.5 million and $383.6 million, at February 28, 2014 and August 31, 2013, respectively. Net foreign currency losses related to these derivative instruments were $2.6 million and $0.9 million for the three months ended February 28, 2014 and 2013, respectively and $11.3 million and $0.3 million for the six months ended February 28, 2014 and 2013, respectively. These derivative losses offset foreign currency gains from the related revaluation on non-functional currency assets and liabilities (amounts included in other income and expense in the condensed consolidated statement of earnings).


11


Note 9. Earnings Per Share
The reconciliations between basic and diluted earnings per share from continuing operations are as follows (in thousands, except per share amounts):
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Earnings from continuing operations
$
22,304

 
$
25,834

 
$
55,309

 
$
56,385

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
72,227

 
72,946

 
72,656

 
72,869

Net effect of dilutive securities—stock based compensation plans
1,546

 
1,470

 
1,736

 
1,474

Weighted average common shares outstanding - diluted
73,773

 
74,416

 
74,392

 
74,343

 
 
 
 
 
 
 
 
Earnings per common share from continuing operations:
 
 
 
 
 
 
 
        Basic
$
0.31

 
$
0.35

 
$
0.76

 
$
0.77

        Diluted
$
0.30

 
$
0.35

 
$
0.74

 
$
0.76

 
 
 
 
 
 
 
 
Anti-dilutive securities-stock based compensation plans (excluded from earnings per share calculation)
403

 
759

 
404

 
774

Note 10. 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, permanent items, state tax rates and the ability to utilize various tax credits and net operating loss carryforwards. The Company adjusts the quarterly provision for income taxes based on the estimated annual effective income tax rate and facts and circumstances known at each interim reporting period. The effective income tax rate from continuing operations is as follows:
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
2014
 
2013
 
2014
 
2013
Effective income tax rate
29.0
%
 
15.7
%
 
17.6
%
 
16.0
%
The increase in the second quarter effective income tax rate, relative to the prior year, is primarily due to discrete income tax reserve adjustments and to a lesser extent, changes in the mix of taxable earnings derived in foreign jurisdictions with tax rates that are lower than the U.S. Federal statutory rate. Income tax expense for the three months ended February 28, 2014 includes a $0.7 million benefit related to changes in foreign statutory tax rates, while the prior year comparable period included discrete tax benefits related to changes in tax laws and the reinstatement of the U.S. federal research and development tax credit (collectively $1.2 million) and a $2.4 million reversal of tax reserves. Effective income tax rates for the first half of fiscal 2014 and 2013 both reflect the benefits of tax minimization planning, increased foreign tax credits, the generation of net operating losses (from the liquidation of foreign legal entities) and discrete tax items.
The gross liability for unrecognized tax benefits, excluding interest and penalties, increased from $18.0 million at August 31, 2013 to $19.2 million at February 28, 2014. Substantially all of these unrecognized tax benefits, if recognized, would reduce the effective income tax rate. In addition, as of February 28, 2014 and August 31, 2013, the Company had liabilities totaling $3.4 million and $2.9 million, respectively, for the payment of interest and penalties related to its unrecognized income tax benefits.

12


Note 11. Segment Information
The Company is a global manufacturer of a broad range of industrial products and systems and is organized in three reportable segments: Industrial, Energy and Engineered Solutions. The Industrial segment is primarily involved in the design, manufacture and distribution of branded hydraulic and mechanical tools to the maintenance, industrial, infrastructure and production automation markets. The Energy segment provides joint integrity products and services, customized offshore vessel mooring solutions, as well as rope and cable solutions to the global oil & gas, power generation and energy markets. The Engineered Solutions segment provides highly engineered position and motion control systems to OEMs in various vehicle markets, as well as a variety of other products to the industrial and agricultural markets.
The following tables summarize financial information by reportable segment and product line (in thousands):
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
 
2014
 
2013
 
2014
 
2013
Net Sales by Segment:
 
 
 
 
 
 
 
 
Industrial
 
$
93,571

 
$
98,999

 
$
192,212

 
$
200,121

Energy
 
106,031

 
80,794

 
213,956

 
171,563

Engineered Solutions
 
128,168

 
120,675

 
261,158

 
236,593

 
 
$
327,770

 
$
300,468

 
$
667,326

 
$
608,277

Net Sales by Reportable Product Line:
 
 
 
 
 
 
 
 
Industrial
 
$
93,571

 
$
98,999

 
$
192,212

 
$
200,121

Energy
 
106,031

 
80,794

 
213,956

 
171,563

Vehicle Systems
 
67,278

 
56,468

 
138,927

 
114,498

Other
 
60,890

 
64,207

 
122,231

 
122,095

 
 
$
327,770

 
$
300,468

 
$
667,326

 
$
608,277

Operating Profit:
 
 
 
 
 
 
 
 
Industrial
 
$
26,477

 
$
26,350

 
$
53,374

 
$
53,356

Energy
 
9,504

 
9,677

 
18,427

 
25,064

Engineered Solutions
 
9,548

 
8,275

 
22,737

 
15,900

General Corporate
 
(6,548
)
 
(7,431
)
 
(11,910
)
 
(13,975
)
 
 
$
38,981

 
$
36,871

 
$
82,628

 
$
80,345

 
 
February 28, 2014
 
August 31, 2013
Assets:
 
 
 
 
Industrial
 
$
280,498

 
$
280,110

Energy
 
851,618

 
817,547

Engineered Solutions
 
690,537

 
652,581

General Corporate
 
136,481

 
96,488

Assets of Discontinued Operations
 

 
272,606

 
 
$
1,959,134

 
$
2,119,332

In addition to the impact of changes in foreign currency exchange rates, the comparability of segment and product line information is also impacted by acquisition/divestiture activities and restructuring costs and the related benefits. Corporate assets, which are not allocated, principally represent cash and cash equivalents, capitalized debt issuance costs and deferred income taxes.

13


Note 12. Contingencies and Litigation
The Company had outstanding letters of credit of $10.6 million and $10.7 million at February 28, 2014 and August 31, 2013, respectively, the majority of which secure self-insured workers compensation liabilities.
The Company is a party to various legal proceedings that have arisen in the normal course of business. These legal proceedings typically include product liability, environmental, labor, patent claims and other 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 can be reasonably estimated. In the opinion of management, the resolution of these contingencies, individually and in the aggregate, will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
The Company has facilities in numerous geographic locations that are subject to a range of environmental laws and regulations. Environmental expenditures over the past two 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.
The Company remains contingently liable for lease payments under leases of businesses that it previously divested or spun-off, in the event that such businesses are unable to fulfill their future lease payment obligations. The discounted present value of future minimum lease payments for these leases was $24.8 million at February 28, 2014 (including $14.5 million related to the recently divested Electrical segment).
Note 13. Subsequent Event
On March 17, 2014, the Company's Board of Directors approved a resolution authorizing the buyback from time to time of an additional 7,000,000 shares of Class A Common Stock. This followed the completion of the purchase of the remaining shares under the initial 7,000,000 share authorization approved in September 2011.
Note 14. Guarantor Subsidiaries
As discussed in Note 6, “Debt” on April 16, 2012, Actuant Corporation (the “Parent”) issued $300.0 million of 5.625% Senior Notes. All material domestic wholly owned subsidiaries (the “Guarantors”) fully and unconditionally guarantee (except for certain customary limitations) such debt 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 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.
Certain assets, liabilities and expenses have not been allocated to the Guarantors and non-Guarantors and therefore are included in the Parent column in the accompanying condensed consolidating financial statements. These items are of a corporate or consolidated nature and include, but are not limited to, tax provisions and related assets and liabilities, certain employee benefit obligations, prepaid and accrued insurance and corporate indebtedness. Intercompany activity in the condensed consolidating financial statements primarily includes loan activity, purchases and sales of goods or services, investments and dividends. Intercompany balances also reflect certain non-cash transactions including transfers of assets and liabilities between the Parent, Guarantor and non-Guarantor, allocation of non-cash expenses from the Parent to the Guarantors and non-Guarantors and the impact of foreign currency rate changes.

14


CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(in thousands)
 
 
Three Months Ended February 28, 2014
 
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
 
$
43,595

 
$
75,203

 
$
208,972

 
$

 
$
327,770

Cost of products sold
 
11,992

 
52,009

 
139,322

 

 
203,323

Gross profit
 
31,603

 
23,194

 
69,650

 

 
124,447

Selling, administrative and engineering expenses
 
19,399

 
13,753

 
46,088

 

 
79,240

Amortization of intangible assets
 
318

 
2,576

 
3,332

 

 
6,226

Operating profit
 
11,886

 
6,865

 
20,230

 

 
38,981

Financing costs, net
 
6,499

 

 
(237
)
 

 
6,262

Intercompany expense (income), net
 
(12,153
)
 
5,334

 
6,819

 

 

Other expense (income), net
 
669

 
(125
)
 
782

 

 
1,326

Earnings from continuing operations before income tax expense
 
16,871

 
1,656

 
12,866

 

 
31,393

Income tax expense
 
4,885

 
479

 
3,725

 

 
9,089

Net earnings before equity in earnings (loss) of subsidiaries
 
11,986

 
1,177

 
9,141

 

 
22,304

Equity in earnings (loss) of subsidiaries
 
50,097

 
(23,996
)
 
867

 
(26,968
)
 

Earnings (loss) from continuing operations
 
62,083

 
(22,819
)
 
10,008

 
(26,968
)
 
22,304

Earnings (loss) from discontinued operations, net of income taxes
 
(20,691
)
 
53,156

 
(13,377
)
 

 
19,088

Net earnings (loss)
 
$
41,392

 
$
30,337

 
$
(3,369
)
 
$
(26,968
)
 
$
41,392

Comprehensive income (loss)
 
$
45,789

 
$
34,943

 
$
(5,804
)
 
$
(29,139
)
 
$
45,789


15


CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(in thousands)
 
 
Three Months Ended February 28, 2013
 
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
 
$
47,407

 
$
66,709

 
$
186,352

 
$

 
$
300,468

Cost of products sold
 
14,938

 
47,395

 
121,957

 

 
184,290

Gross profit
 
32,469

 
19,314

 
64,395

 

 
116,178

Selling, administrative and engineering expenses
 
17,842

 
14,623

 
40,874

 

 
73,339

Amortization of intangible assets
 
318

 
2,657

 
2,993

 

 
5,968

Operating profit
 
14,309

 
2,034

 
20,528

 

 
36,871

Financing costs, net
 
6,409

 
1

 
(150
)
 

 
6,260

Intercompany expense (income), net
 
(4,651
)
 
(876
)
 
5,527

 

 

Other expense (income), net
 
(384
)
 
(53
)
 
400

 

 
(37
)
Earnings from continuing operations before income tax expense (benefit)
 
12,935

 
2,962

 
14,751

 

 
30,648

Income tax expense (benefit)
 
2,832

 
(785
)
 
2,767

 

 
4,814

Net earnings before equity in earnings (loss) of subsidiaries
 
10,103

 
3,747

 
11,984

 

 
25,834

Equity in earnings (loss) of subsidiaries
 
18,684

 
10,765

 
(589
)
 
(28,860
)
 

Earnings from continuing operations
 
28,787

 
14,512

 
11,395

 
(28,860
)
 
25,834

Earnings (loss) from discontinued operations, net of income taxes
 
(352
)
 
2,515

 
438

 

 
2,601

Net earnings
 
$
28,435

 
$
17,027

 
$
11,833

 
$
(28,860
)
 
$
28,435

Comprehensive income
 
$
16,464

 
$
4,840

 
$
12,009

 
$
(16,849
)
 
$
16,464


16


CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(in thousands)

 
 
Six months ended February 28, 2014
 
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
 
$
88,686

 
$
154,839

 
$
423,801

 
$

 
$
667,326

Cost of products sold
 
24,064

 
107,264

 
279,771

 

 
411,099

Gross profit
 
64,622

 
47,575

 
144,030

 

 
256,227

Selling, administrative and engineering expenses
 
36,257

 
29,705

 
95,196

 

 
161,158

Amortization of intangible assets
 
636

 
5,151

 
6,654

 

 
12,441

Operating profit
 
27,729

 
12,719

 
42,180

 

 
82,628

Financing costs, net
 
13,278

 
3

 
(269
)
 

 
13,012

Intercompany expense (income), net
 
(17,150
)
 
4,995

 
12,155

 

 

Other expense (income), net
 
11,086

 
(418
)
 
(8,201
)
 

 
2,467

Earnings from continuing operations before income tax expense
 
20,515

 
8,139

 
38,495

 

 
67,149

Income tax expense
 
5,893

 
2,274

 
3,673

 

 
11,840

Net earnings before equity in earnings (loss) of subsidiaries
 
14,622

 
5,865

 
34,822

 

 
55,309

Equity in earnings (loss) of subsidiaries
 
84,319

 
(10,663
)
 
4,067

 
(77,723
)
 

Earnings (loss) from continuing operations
 
98,941

 
(4,798
)
 
38,889

 
(77,723
)
 
55,309

Earnings (loss) from discontinued operations, net of income taxes
 
(21,512
)
 
56,494

 
(12,862
)
 

 
22,120

Net Earnings
 
$
77,429

 
$
51,696

 
$
26,027

 
$
(77,723
)
 
$
77,429

Comprehensive income
 
$
98,829

 
$
73,740

 
$
21,867

 
$
(95,607
)
 
$
98,829

















17


CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(in thousands)

 
 
Six Months Ended February 28, 2013
 
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
 
$
93,245

 
$
136,899

 
$
378,133

 
$

 
$
608,277

Cost of products sold
 
27,347

 
95,698

 
244,686

 

 
367,731

Gross profit
 
65,898

 
41,201

 
133,447

 

 
240,546

Selling, administrative and engineering expenses
 
34,959

 
29,726

 
83,514

 

 
148,199

Amortization of intangible assets
 
639

 
5,314

 
6,049

 

 
12,002

Operating profit
 
30,300

 
6,161

 
43,884

 

 
80,345

Financing costs, net
 
12,767

 
6

 
(191
)
 

 
12,582

Intercompany expense (income), net
 
(11,921
)
 
1,079

 
10,842

 

 

Other expense (income), net
 
(747
)
 
(464
)
 
1,818

 

 
607

Earnings from continuing operations before income tax expense (benefit)
 
30,201

 
5,540

 
31,415

 

 
67,156

Income tax expense (benefit)
 
6,008

 
(326
)
 
5,089

 

 
10,771

Net earnings before equity in earnings of subsidiaries
 
24,193

 
5,866

 
26,326

 

 
56,385

Equity in earnings of subsidiaries
 
41,235

 
28,664

 
435

 
(70,334
)
 

Earnings from continuing operations
 
65,428

 
34,530

 
26,761

 
(70,334
)
 
56,385

Earnings (loss) from discontinued operations, net of income taxes
 
$
(650
)
 
$
5,378

 
$
3,665

 
$

 
$
8,393

Net Earnings
 
$
64,778

 
$
39,908

 
$
30,426

 
$
(70,334
)
 
$
64,778

Comprehensive income
 
$
64,982

 
$
33,698

 
$
38,028

 
$
(71,726
)
 
$
64,982



18


CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
 
 
February 28, 2014
 
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
11,580

 
$
26

 
$
143,411

 
$

 
$
155,017

Accounts receivable, net
 
18,589

 
42,072

 
173,290

 

 
233,951

Inventories, net
 
32,100

 
45,070

 
87,824

 

 
164,994

Deferred income taxes
 
10,656

 

 
5,670

 

 
16,326

Other current assets
 
10,187

 
1,126

 
18,803

 

 
30,116

Total current assets
 
83,112

 
88,294

 
428,998

 

 
600,404

Property, plant and equipment, net
 
8,288

 
22,342

 
177,549

 

 
208,179

Goodwill
 
62,543

 
264,502

 
422,737

 

 
749,782

Other intangibles, net
 
12,611

 
136,107

 
223,316

 

 
372,034

Investment in subsidiaries
 
2,213,047

 
751,730

 
222,605

 
(3,187,382
)
 

Intercompany receivable
 

 
683,850

 
455,699

 
(1,139,549
)
 

Other long-term assets
 
12,957

 
22

 
15,756

 

 
28,735

Total assets
 
$
2,392,558

 
$
1,946,847

 
$
1,946,660

 
$
(4,326,931
)
 
$
1,959,134

LIABILITIES & SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
Trade accounts payable
 
$
20,342

 
$
29,988

 
$
103,396

 
$

 
$
153,726

Accrued compensation and benefits
 
10,439

 
3,183

 
32,202

 

 
45,824

Current maturities of long-term debt
 
2,250

 

 

 

 
2,250

Income taxes payable
 
35,187

 

 
(2,338
)
 

 
32,849

Other current liabilities
 
20,101

 
9,930

 
33,615

 

 
63,646

Total current liabilities
 
88,319

 
43,101

 
166,875

 

 
298,295

Long-term debt, less current maturities
 
387,750

 

 

 

 
387,750

Deferred income taxes
 
42,124

 

 
52,990

 

 
95,114

Pension and postretirement benefit liabilities
 
7,585

 

 
4,698

 

 
12,283

Other long-term liabilities
 
51,657

 
110

 
12,824

 

 
64,591

Intercompany payable
 
714,022

 

 
425,527

 
(1,139,549
)
 

Shareholders’ equity
 
1,101,101

 
1,903,636

 
1,283,746

 
(3,187,382
)
 
1,101,101

Total liabilities and shareholders’ equity
 
$
2,392,558

 
$
1,946,847

 
$
1,946,660

 
$
(4,326,931
)
 
$
1,959,134


19


CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
 
 
August 31, 2013
 
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
16,122

 
$

 
$
87,864

 
$

 
$
103,986

Accounts receivable, net
 
20,471

 
40,343

 
158,261

 

 
219,075

Inventories, net
 
27,343

 
38,948

 
76,258

 

 
142,549

Deferred income taxes
 
13,002

 

 
5,794

 

 
18,796

Other current assets
 
7,454

 
963

 
19,811

 

 
28,228

Assets of discontinued operations
 

 
192,129

 
80,477

 

 
272,606

Total current assets
 
84,392

 
272,383

 
428,465

 

 
785,240

Property, plant and equipment, net
 
7,050

 
22,801

 
171,645

 

 
201,496

Goodwill
 
62,543

 
264,502

 
407,907

 

 
734,952

Other intangibles, net
 
13,247

 
141,258

 
222,187

 

 
376,692

Investment in subsidiaries
 
2,086,534

 
201,779

 
96,333

 
(2,384,646
)
 

Intercompany receivable
 

 
480,633

 
360,620

 
(841,253
)
 

Other long-term assets
 
12,654

 
22

 
8,276

 

 
20,952

Total assets