Document

 
 
 
 
 
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, 2016
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 June 30, 2016 was 58,928,350.
 
 
 
 
 


Table of Contents

TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       Item 6—Exhibits
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;
challenging end market conditions in the industrial, oil & gas, energy, power generation, infrastructure, commercial construction, truck, automotive, specialty vehicle, mining and agriculture industries;
failure to realize anticipated cost savings from restructuring activities and cost reduction efforts;
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 pricing, operating inefficiencies, reduced production levels and material, labor and overhead cost increases;
our international operations present special risks, primarily from currency exchange rate fluctuations, exposure to local economic and political conditions, export and import restrictions and controls on repatriation of cash;
regulatory and legal developments including changes to United States taxation rules, conflict mineral supply chain compliance, environmental laws and governmental climate change initiatives;
the potential for a non-cash asset impairment charge, if operating performance or the outlook at one or more of our businesses were to fall significantly below current levels;
our ability to execute our share repurchase program, which depends in part, on our free cash flow, liquidity and changes in the trading price of our common stock;

1

Table of Contents

a significant failure in information technology (IT) infrastructure and systems, unauthorized access to financial and other sensitive data or cybersecurity threats;
litigation, including product liability and warranty claims;
inadequate intellectual property protection or if our products are deemed to infringe on the intellectual property of others;
our level of indebtedness, ability to comply with the financial and other covenants in our debt agreements and fluctuations in interest rates; and
numerous other matters including those of a political, economic, business, competitive and regulatory nature contained from time to time in U.S. Securities and Exchange Commission ("SEC") filings, including, but not limited to, those factors listed in the "Risk Factors" section within Item 1A of Part I of the Form 10-K filed with the SEC on October 28, 2015.
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 SEC.


2

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1—Financial Statements
ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Net sales
$
305,341

 
$
320,100

 
$
873,641

 
$
948,870

Cost of products sold
197,815

 
201,540

 
566,524

 
593,573

Gross profit
107,526

 
118,560

 
307,117

 
355,297

Selling, administrative and engineering expenses
70,120

 
69,569

 
210,202

 
227,809

Amortization of intangible assets
5,567

 
5,989

 
17,347

 
18,362

Restructuring charges
3,496

 

 
11,458

 

Impairment charges

 

 
186,511

 
84,353

Operating profit (loss)
28,343

 
43,002

 
(118,401
)
 
24,773

Financing costs, net
7,253

 
7,462

 
21,236

 
20,683

Other expense (income), net
751

 
569

 
1,605

 
(489
)
Earnings (loss) before income taxes
20,339

 
34,971

 
(141,242
)
 
4,579

Income tax (benefit) expense
(827
)
 
(2,987
)
 
(18,666
)
 
6,785

Net earnings (loss)
$
21,166

 
$
37,958

 
$
(122,576
)
 
$
(2,206
)
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.36

 
$
0.64

 
$
(2.08
)
 
$
(0.04
)
Diluted
$
0.36

 
$
0.63

 
$
(2.08
)
 
$
(0.04
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
58,923

 
59,617

 
59,034

 
61,911

Diluted
59,589

 
60,243

 
59,034

 
61,911

 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements


3

Table of Contents

ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Net earnings (loss)
$
21,166

 
$
37,958

 
$
(122,576
)
 
$
(2,206
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
15,314

 
(10,882
)
 
(20,182
)
 
(131,249
)
Pension and other postretirement benefit plans
(13
)
 
143

 
23

 
895

Cash flow hedges
21

 
40

 
396

 
(56
)
Total other comprehensive loss, net of tax
15,322

 
(10,699
)
 
(19,763
)
 
(130,410
)
Comprehensive income (loss)
$
36,488

 
$
27,259

 
$
(142,339
)

$
(132,616
)
See accompanying Notes to Condensed Consolidated Financial Statements

4

Table of Contents

ACTUANT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
May 31, 2016
 
August 31, 2015
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
137,089

 
$
168,846

Accounts receivable, net
 
200,102

 
193,081

Inventories, net
 
138,456

 
142,752

Deferred income taxes
 

 
12,922

Other current assets
 
60,086

 
42,788

Total current assets
 
535,733

 
560,389

Property, plant and equipment
 
 
 
 
Land, buildings and improvements
 
44,350

 
48,515

Machinery and equipment
 
277,174

 
269,983

Gross property, plant and equipment
 
321,524

 
318,498

Less: Accumulated depreciation
 
(203,296
)
 
(176,040
)
Property, plant and equipment, net
 
118,228

 
142,458

Goodwill
 
529,421

 
608,256

Other intangibles, net
 
255,921

 
308,762

Other long-term assets
 
28,117

 
17,052

Total assets
 
$
1,467,420

 
$
1,636,917

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Trade accounts payable
 
$
120,100

 
$
118,115

Accrued compensation and benefits
 
47,432

 
43,707

Current maturities of debt and short-term borrowings
 
15,000

 
3,969

Income taxes payable
 
1,249

 
14,805

Other current liabilities
 
58,880

 
54,460

Total current liabilities
 
242,661

 
235,056

Long-term debt, less current maturities
 
573,059

 
584,309

Deferred income taxes
 
55,532

 
72,941

Pension and postretirement benefit liabilities
 
15,689

 
17,828

Other long-term liabilities
 
56,630

 
53,782

Total liabilities
 
943,571

 
963,916

Shareholders’ equity
 
 
 
 
Class A common stock, $0.20 par value per share, authorized 168,000,000 shares, issued 79,347,614 and 78,932,533 shares, respectively
 
15,870

 
15,787

Additional paid-in capital
 
111,535

 
104,308

Treasury stock, at cost, 20,326,479 and 19,726,479 shares, respectively
 
(614,755
)
 
(600,630
)
Retained earnings
 
1,244,602

 
1,367,176

Accumulated other comprehensive loss
 
(233,403
)
 
(213,640
)
Stock held in trust
 
(2,963
)
 
(4,292
)
Deferred compensation liability
 
2,963

 
4,292

Total shareholders’ equity
 
523,849

 
673,001

Total liabilities and shareholders’ equity
 
$
1,467,420

 
$
1,636,917

See accompanying Notes to Condensed Consolidated Financial Statements

5

Table of Contents

ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine months ended
 
May 31, 2016
 
May 31, 2015
Operating Activities
 
 
 
Net loss
$
(122,576
)
 
$
(2,206
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
 
Depreciation and amortization
36,219

 
40,235

Stock-based compensation expense
7,568

 
9,237

Benefit (provision) for deferred income taxes
(2,225
)
 
3,666

Impairment charges, net of deferred tax benefits
169,056

 
82,635

Amortization of debt discount and debt issuance costs
1,239

 
1,329

Other non-cash adjustments
(460
)
 
413

Sources (uses) of cash from changes in components of working capital and other:
 
 
 
Accounts receivable
7,755

 
(11,315
)
Inventories
5,436

 
(5,076
)
Other assets
(7,982
)
 
(15,593
)
Trade accounts payable
(3,498
)
 
(8,278
)
Income taxes payable/refundable
(26,108
)
 
(47,983
)
Accrued compensation and benefits
3,730

 
(9,220
)
Other accrued liabilities
6,837

 
5,780

Cash provided by operating activities
74,991

 
43,624

Investing Activities
 
 
 
Proceeds from sale of property, plant and equipment
8,635

 
886

Capital expenditures
(15,623
)
 
(17,234
)
Business acquisitions, net of cash acquired
(80,674
)
 

Cash used in investing activities
(87,662
)
 
(16,348
)
Financing Activities
 
 
 
Net repayments on revolver and other debt
(210
)
 

Principal repayments on term loan

 
(3,375
)
Proceeds from term loan

 
213,375

Debt issuance cost

 
(1,875
)
Purchase of treasury shares
(14,125
)
 
(204,627
)
Taxes paid related to the net share settlement of equity awards
(1,344
)
 
(2,344
)
Stock option exercises, related tax benefits and other
5,729

 
5,046

Cash dividend
(2,376
)
 
(2,598
)
Cash (used in) provided by financing activities
(12,326
)
 
3,602

Effect of exchange rate changes on cash
(6,760
)
 
(31,765
)
Net decrease in cash and cash equivalents
(31,757
)
 
(887
)
Cash and cash equivalents – beginning of period
168,846

 
109,012

Cash and cash equivalents – end of period
$
137,089

 
$
108,125

See accompanying Notes to Condensed Consolidated Financial Statements

6

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
General
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, 2015 was derived from the Company’s audited financial statements, but does not include all disclosures required by 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 2015 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 nine months ended May 31, 2016 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2016.
New Accounting Pronouncements
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which amends the existing guidance to require presentation of deferred tax assets and liabilities as non-current within a classified statement of financial position. This guidance was adopted, on a prospective basis, at November 30, 2015. The adoption did not have a material impact on the financial statements of the Company.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which includes amendments that require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Under the new guidance, the recognition and measurement of debt issuance costs is not affected. This guidance is effective for fiscal years beginning on or after December 15, 2015. The adoption of this standard in fiscal 2017 is not expected to have a material impact on the financial statements of the Company.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to retrospectively account for changes to provisional amounts initially recorded in a business acquisition opening balance sheet. This guidance is effective for fiscal years beginning after December 15, 2015 (fiscal 2017 for the Company), including interim periods within fiscal years. The adoption of this standard is not expected to have a material impact on the financial statements of the Company.
In March 2016, the FASB issued ASU 2016-09, "Stock Compensation: Improvements to Employee Share-Based Payment Accounting," which will simplify several aspects of accounting for share-based payment transactions. The guidance will require, among other items, that all excess tax deficiencies or benefits be recorded as income tax expense or benefit in the statement of earnings, and not in additional paid-in capital (shareholder's equity). This guidance is effective for fiscal years beginning after December 15, 2016 (fiscal 2018 for the Company), and interim periods within those annual periods. Early adoption is permitted and the prospective transition method should be applied. The Company is currently evaluating the impact of adopting this standard.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years beginning on or after December 15, 2017 (fiscal 2019 for the Company). The Company is currently evaluating the impact of adopting this standard.
In February 2016, the FASB issued ASU 2016-02, Leases to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset. This guidance is effective for fiscal years beginning after December 15, 2018 (fiscal 2020 of the Company), including interim periods within those fiscal years. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company is currently evaluating the impact of adopting this standard.
Significant Accounting Policies
Financing Costs: Financing costs represent interest expense, financing fees and amortization of debt issuance costs net of interest income. Interest income was $0.4 million and $1.4 million for the three and nine months ended May 31, 2016, respectively, compared to $0.5 million and $1.4 million in the comparable prior year periods.

7

Table of Contents

Restructuring: The Company has committed to various restructuring initiatives including workforce reductions, plant consolidations to reduce manufacturing overhead, satellite office closures, the continued movement of production and product sourcing to low cost alternatives and the centralization and standardization of certain administrative functions. Total restructuring charges for these activities were $3.5 million and $11.5 million, for the three and nine months ended May 31, 2016, respectively. Liabilities for severance will be paid during the next twelve months, while facility consolidation costs (primarily reserves for future lease payments related to vacated facilities) will be paid over the underlying remaining lease terms.
The following rollforward summarizes current year restructuring activities, by segment, for the nine months ended May 31, 2016 (in thousands):
 
 
Industrial
 
Energy
 
Engineered Solutions
 
Corporate
 
Total
Balance as of August 31, 2015
 
$

 
$

 
$

 
$

 
$

Restructuring charges
 
1,792

 
4,877

 
4,528

 
261

 
11,458

Cash payments
 
(1,000
)
 
(1,122
)
 
(2,182
)
 
(200
)
 
(4,504
)
Other non-cash uses of reserve
 

 
(170
)
 
(304
)
 
(1
)
 
(475
)
Impact of changes in foreign currency rates
 
17

 
(14
)
 
18

 

 
21

Balance as of May 31, 2016
 
$
809

 
$
3,571

 
$
2,060

 
$
60

 
$
6,500

Goodwill and Long-Lived Assets: The Company's goodwill is tested for impairment annually, in the fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company generally utilizes a discounted cash flow model to estimate the fair value of reporting units, which is dependent on a number of assumptions including estimated future revenues and expenses, weighted average cost of capital, capital expenditures and other variables. The fair value of the reporting unit is then compared to its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the goodwill is potentially impaired and the Company then determines the implied fair value of goodwill, which is compared to the carrying value to determine if an impairment charge is required.
Indefinite lived intangible assets (tradenames) are also subject to an impairment review. On an annual basis, or more frequently if events or changes in circumstances indicate that indefinite lived intangible assets might not be recoverable, the fair value of the indefinite lived intangible assets, using a relief of royalty valuation approach, are compared to the carrying value to determine if an impairment charge is required.
Intangible assets with definite lives consist primarily of customer relationships, patents, trademarks and non-compete agreements while fixed assets include building improvements, rental assets (Energy segment) and machinery & equipment. The Company reviews these long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. If such indicators are present, the Company prepares an undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is recorded based on fair value.
A considerable amount of management judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of each reporting unit, intangible asset or fixed asset. While management believes the judgments and assumptions utilized in the fair value models are reasonable, different assumptions or adverse market developments could change the estimated fair values and ultimately result in future impairment charges.
As discussed in Note 3, "Goodwill and Other Intangible Assets," the Company recognized a $186.5 million and $84.4 million impairment charge in the second quarter of fiscal 2016 and 2015, respectively.
Note 2. Acquisitions
During fiscal 2016 the Company completed two acquisitions which resulted in the recognition of goodwill in the condensed consolidated financial statements because their purchase price reflected the future earnings and cash flow potential of the acquired companies, as well as the complementary strategic fit and resulting synergies the acquisitions are expected to bring to existing operations. The Company makes an initial allocation of the purchase price at the date of acquisition, based upon its understanding of the fair value of the acquired assets and assumed liabilities. If additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), through asset appraisals and other sources, the Company will refine its estimates of fair value and adjust the initial purchase price allocation.
The Company acquired the stock of Larzep, S.A. ("Larzep") on February 17, 2016 for a purchase price of $15.9 million net of cash acquired. This Industrial segment tuck-in acquisition is headquartered in Mallabia, Spain and is a supplier of hydraulic tools and solutions. The preliminary purchase price allocation resulted in $9.7 million of goodwill (which is not deductible for tax purposes) and $4.8 million of intangible assets, including $3.6 million of customer relationships and $1.2 million of tradenames. During the third

8

Table of Contents

quarter of fiscal 2016, goodwill related to this acquisition increased by $2.5 million, the result of purchase accounting adjustments to reflect the fair value of acquired assets and liabilities.
The Company acquired the assets of the Middle East, Caspian and the North African business of FourQuest Energy Inc. for $64.3 million on March 30, 2016. This Hydratight tuck-in acquisition was funded with existing cash and expands the geographic presence and service offerings of the Energy segment, including pipeline pre-commissioning, engineering, chemical cleaning and leak testing. The preliminary purchase price resulted in $35.4 million of goodwill (which is not deductible for tax purposes) and $8.7 million of intangible assets, including $8.0 million of customer relationships and $0.7 million of non-compete agreements.
The two acquisitions generated combined sales of $7.3 million for the three months ended May 31, 2016. The Company incurred acquisition transaction costs of $1.3 million and $2.7 million, for three and nine months ended May 31, 2016, respectively, related to various business acquisition activities (compared to less than $0.1 million for the comparable prior year periods).
The following unaudited pro forma operating results of the Company for the three and nine months ended May 31, 2016 and 2015, give effect to these acquisitions as though the transactions and related financing activities occurred on September 1, 2014 (in thousands, expect per share amounts):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Net sales
 
 
 
 
 
 
 
As reported
$
305,341

 
$
320,100

 
$
873,641

 
$
948,870

Pro forma
308,526

 
325,409

 
899,535

 
966,006

 
 
 
 
 
 
 
 
Net earnings (loss)
 
 
 
 
 
 
 
As reported
$
21,166

 
$
37,958

 
$
(122,576
)
 
$
(2,206
)
Pro forma
21,783

 
38,036

 
(118,520
)
 
(2,114
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
 
 
 
 
 
 
As reported
$
0.36

 
$
0.64

 
$
(2.08
)
 
$
(0.04
)
Pro forma
0.37

 
0.64

 
(2.01
)
 
(0.04
)
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
 
 
 
 
 
 
 
As reported
$
0.36

 
$
0.63

 
$
(2.08
)
 
$
(0.04
)
Pro forma
0.37

 
0.63

 
(2.01
)
 
(0.04
)
Note 3. Goodwill and Other Intangible Assets
Fiscal 2015 Interim Impairment Charges
The Cortland and Viking businesses (Energy segment) provide products and services to the global energy markets where safety, reliability, up-time and productivity are key value drivers. The dramatic decline in oil prices in 2015 caused a slowdown in upstream oil & gas activity as asset owners hesitated on starting new oil & gas exploration drilling and development projects, while certain existing projects were deferred or canceled and capital spending was reduced.  As a result of these unfavorable market conditions, in the second quarter of fiscal 2015 the Company recognized an $84.4 million impairment charge related to the write-down of goodwill and indefinite lived intangible assets of the Cortland and Viking businesses. The impairment charge, as a result of lower projected near-term sales and profits, consisted of a $78.0 million impairment of goodwill and $6.4 million impairment of indefinite lived intangible assets (tradenames).
Fiscal 2016 Interim Impairment Charges
The prolonged unfavorable conditions in the global oil & gas markets, including additional cuts in projected capital spending by energy customers, reduced exploration, drilling and commissioning activities and excess capacity in the industry (given continued low oil & gas prices) are expected to have an adverse impact on the future financial results of the Cortland and Viking businesses.  Accordingly, during the second quarter of fiscal 2016, the Company recognized a $140.8 million impairment charge (as a result of lower projected future sales and profits) related to the Cortland and Viking businesses.
The maximatecc business (Engineered Solutions segment), including the legacy North American business and the CrossControl (Europe) and Turotest (South America) acquisitions, manufactures severe-duty electronic instrumentation including displays and clusters, machine controls and sensors. Weakness in off-highway vehicle and agricultural markets, coupled with challenging overall

9

Table of Contents

industrial fundamentals, recent reductions in OEM customer build rates and production schedules (in order to reduce inventory levels) and delays in the start of production by certain European OEMs for new or updated design models have resulted in reduced sales and profitability of the maximatecc business. As a result of lower projected sales and profits, during the second quarter of fiscal 2016, the Company recognized a $45.7 million impairment charge related to the goodwill and intangible assets of the maximatecc business.
A summary of the second quarter fiscal 2016 impairment charge by reporting unit is as follows (in thousands):
 
Cortland
 
Viking
 
maximatecc
 
Total
Goodwill
$
34,502

 
$
39,099

 
$
44,521

 
$
118,122

Indefinite lived intangible assets
2,211

 
13,289

 
1,153

 
16,653

Amortizable intangible assets

 
27,952

 

 
27,952

Fixed assets

 
23,784

 

 
23,784

 
$
36,713

 
$
104,124

 
$
45,674

 
$
186,511

The changes in the carrying value of goodwill for the nine months ended May 31, 2016 are as follows (in thousands):

Industrial
 
Energy
 
Engineered Solutions
 
Total
Balance as of August 31, 2015
$
92,107

 
$
236,450

 
$
279,699

 
$
608,256

Business acquisitions
9,718

 
35,403

 

 
45,121

Impairment charge

 
(73,919
)
 
(44,543
)
 
(118,462
)
Impact of changes in foreign currency rates
(97
)
 
(4,493
)
 
(904
)
 
(5,494
)
Balance as of May 31, 2016
$
101,728

 
$
193,441

 
$
234,252

 
$
529,421

The gross carrying value and accumulated amortization of the Company’s other intangible assets are as follows (in thousands):
 
 
 
May 31, 2016
 
August 31, 2015
 
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
14
 
$
307,400

 
$
170,027

 
$
137,373

 
$
302,518

 
$
132,007

 
$
170,511

Patents
10
 
30,700

 
21,830

 
8,870

 
30,899

 
19,928

 
10,971

Trademarks and tradenames
18
 
21,233

 
7,658

 
13,575

 
21,604

 
7,055

 
14,549

Other intangibles
3
 
6,755

 
5,880

 
875

 
6,790

 
6,496

 
294

Indefinite lived intangible assets:

 

 

 

 

 

 

Tradenames
N/A
 
95,228

 

 
95,228

 
112,437

 

 
112,437

 
 
 
$
461,316

 
$
205,395

 
$
255,921

 
$
474,248

 
$
165,486

 
$
308,762

The Company estimates that amortization expense will be $5.6 million for the remaining three months of fiscal 2016. Amortization expense for future years is estimated to be: $21.3 million in fiscal 2017, $21.0 million in 2018, $20.7 million in fiscal 2019, $19.9 million in fiscal 2020, $18.8 million in fiscal 2021 and $53.4 million thereafter. The future amortization expense amounts represent estimates and may be impacted by potential future acquisitions, divestitures, impairment charges, changes in foreign currency exchange rates and other factors.

10

Table of Contents

Note 4. 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 product warranty reserve (in thousands):
 
Nine Months Ended May 31,
 
2016
 
2015
Beginning balance
$
3,718

 
$
4,056

Provision for warranties
3,225

 
4,198

Warranty reserve for acquired businesses
3

 

Warranty payments and costs incurred
(3,155
)
 
(3,505
)
Impact of changes in foreign currency rates
(35
)

(589
)
Ending balance
$
3,756

 
$
4,160

Note 5. Debt
The following is a summary of the Company’s long-term indebtedness (in thousands):
 
May 31, 2016
 
August 31, 2015
Senior Credit Facility
 
 
 
Revolver
$

 
$

Term Loan
300,000

 
300,000

Total Senior Credit Facility
300,000

 
300,000

5.625% Senior Notes
288,059

 
288,059

Total Senior Indebtedness
588,059

 
588,059

Less: current maturities of long-term debt
(15,000
)
 
(3,750
)
Total long-term debt, less current maturities
$
573,059

 
$
584,309

The Company’s Senior Credit Facility, which matures on May 8, 2020, includes a $600.0 million revolver, a $300.0 million term loan and a $450.0 million expansion option, subject to certain conditions. Borrowings are subject to a pricing grid, which can result in increases or decreases to the borrowing spread, depending on the Company’s leverage ratio, ranging from 1.00% to 2.25% in the case of loans bearing interest at LIBOR and from 0.00% to 1.25% in the case of loans bearing interest at the base rate. As of May 31, 2016, the borrowing spread on LIBOR based borrowings was 2.00% (aggregating to a 2.44% variable rate borrowing cost). In addition, a non-use fee is payable quarterly on the average unused credit line under the revolver ranging from 0.15% to 0.35% per annum. As of May 31, 2016, the unused credit line under the revolver was $592.1 million, of which $183.0 million was available for borrowing. Quarterly term loan principal payments of $3.8 million begin on June 30, 2016, and increase to $7.5 million on June 30, 2017, 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 3.5:1. The Company was in compliance with all financial covenants at May 31, 2016.
On April 16, 2012, the Company issued $300.0 million of 5.625% Senior Notes due 2022 (the “Senior Notes”), of which $288.1 million remains outstanding at May 31, 2016 and August 31, 2015. 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. The Senior Notes include a call feature that allows the Company to repurchase them anytime on or after June 15, 2017 at stated redemption prices (ranging from 100.0% to 102.8%), plus accrued and unpaid interest.
Note 6. 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. Level 3 inputs are not observable in the market and include management’s own judgments about the assumptions market participation would use in pricing an asset or liability.

11

Table of Contents

The fair value of the Company’s cash and cash equivalents, foreign currency derivatives, accounts receivable, accounts payable and variable rate long-term debt approximated book value at both May 31, 2016 and August 31, 2015 due to their short-term nature and the fact that the interest rates approximated market rates. The fair value of the Company’s outstanding Senior Notes was $296.0 million and $287.3 million at May 31, 2016 and August 31, 2015, respectively. The fair value of the Senior Notes was based on quoted inactive market prices and is therefore classified as Level 2 within the valuation hierarchy.
Note 7. Derivatives
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 hedges certain portions of its recognized balances and forecasted cash flows that are denominated in non-functional currencies. 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 U.S. dollar equivalent notional value of short duration foreign currency forward contracts (fair value hedges or non-designated hedges) was $80.5 million and $170.7 million, at May 31, 2016 and August 31, 2015, respectively. Net foreign currency gains (losses) related to these derivative instruments are as follows (in thousands):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Foreign currency gain (loss)
$
(394
)
 
$
2,310

 
$
(1,028
)
 
$
304

These derivative gains and losses offset foreign currency gains and losses from the related revaluation of non-functional currency assets and liabilities (amounts included in other income and expense in the condensed consolidated statement of earnings).
Note 8. Capital Stock and Share Repurchases
The Company's Board of Directors approved four separate authorizations (September 2011, March 2014, October 2014 and March 2015) to repurchase up to 7,000,000 shares per authorization of the Company's outstanding common stock. At May 31, 2016, shares repurchased under these authorizations totaled 20,326,479, leaving 7,673,521 shares available for repurchase under the existing share repurchase program.
The reconciliation between basic and diluted earnings (loss) per share is as follows (in thousands, except per share amounts):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net earnings (loss)
$
21,166

 
$
37,958

 
$
(122,576
)
 
$
(2,206
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
58,923

 
59,617

 
59,034

 
61,911

Net effect of dilutive securities - stock based compensation plans (1)
666

 
626

 

 

Weighted average common shares outstanding - diluted
59,589

 
60,243

 
$
59,034

 
$
61,911

 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
0.36

 
$
0.64

 
$
(2.08
)
 
$
(0.04
)
Diluted earnings (loss) per share
0.36

 
0.63

 
(2.08
)
 
(0.04
)
 
 
 
 
 
 
 
 
Anti-dilutive securities from stock based compensation plans (excluded from earnings per share calculation)
1,930

 
2,256

 
4,973

 
4,662

(1) As a result of the impairment charges which caused a net loss in both the nine months ended May 31, 2016 and 2015, shares from stock based compensation plans are excluded from the calculation of diluted earnings (loss) per share, as the result would be anti-dilutive.

12

Table of Contents

Note 9. 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's global operations, acquisition activity and specific tax attributes provide opportunities for continuous global tax planning initiatives to maximize tax credits and deductions. Both the current and prior periods include the benefits of tax planning initiatives. Comparative pre-tax earnings (loss), income tax expense (benefit) and effective income tax rates are as follows (amounts in thousands):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Earnings (loss) before income taxes
$
20,339

 
$
34,971

 
$
(141,242
)
 
$
4,579

Income tax (benefit) expense
(827
)
 
(2,987
)
 
(18,666
)
 
6,785

Effective income tax rate
(4.1
)%
 
(8.5
)%
 
13.2
%
 
148.2
%
The third quarter effective income tax rates are impacted by the proportion of taxable earnings generated in foreign jurisdictions with tax rates lower than the U.S., the amount of tax benefits derived from annual tax planning initiatives and discrete income tax adjustments. The income tax benefit for the three months ended May 31, 2016 is the result of current year tax planning (related to the deductibility of foreign currency losses for tax purposes) and a $2.3 million benefit from a discrete income tax adjustment (favorable provision to income tax return adjustments), which were partially offset by the provision for taxes due on current quarter earnings. The income tax benefit for the three months ended May 31, 2015 is the net result of a $19.2 million reduction in tax reserves from the lapsing of income tax statutes of limitations and the favorable resolution of income tax audits, which were partially offset by the current quarter income tax provision, a $5.0 million increase to the reserve for uncertain tax positions and a $5.2 million increase in valuation allowances due to uncertainty regarding utilization of foreign net operating losses.
The comparability of year-to-date pre-tax income (loss), income tax expense (benefit) and the related effective income tax rate are impacted by impairment charges, as fiscal 2016 results include a $186.5 million ($169.1 million after tax) impairment charge, while the prior year included an $84.4 million ($82.6 million after tax) impairment charge. Excluding the impairment charge, the fiscal 2016 year-to-date effective tax rate is lower than the prior year due to a favorable mix of taxable earnings, the benefits of tax planning initiatives and discrete tax adjustments. Both the current and prior year income tax provisions include a similar income tax benefit from global tax planning initiatives; however the impact on the effective tax rate was substantially larger in the current year, as pre-tax earnings (excluding the impairment charge) were down $43.7 million year-over-year. In addition, the tax provision for the nine months ended May 31, 2016 included 90% of earnings from foreign jurisdictions with tax rates lower than the U.S. federal income tax rate, compared to approximately 70% in the prior year, which had the impact of reducing the current year effective income tax rate.


13

Table of Contents

Note 10. 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 engaged 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 maintenance 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 original equipment manufacturers ("OEM") in various on and off-highway 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 May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Net Sales by Reportable Product Line & Segment:
 
 
 
 
 
 
 
Industrial Segment:
 
 
 
 
 
 
 
Industrial Tools
$
81,771

 
$
88,348

 
$
233,599

 
$
267,064

Integrated Solutions
13,980

 
15,198

 
32,210

 
35,384

 
95,751

 
103,546

 
265,809

 
302,448

Energy Segment:
 
 
 
 
 
 
 
Energy Maintenance & Integrity
73,377

 
62,644

 
210,762

 
182,985

Other Energy Solutions
27,923

 
36,653

 
90,526

 
128,044

 
101,300

 
99,297

 
301,288

 
311,029

Engineered Solutions Segment:
 
 
 
 
 
 
 
On-Highway
58,439

 
59,673

 
161,949

 
170,122

Agriculture, Off-Highway and Other
49,851

 
57,584

 
144,595

 
165,271

 
108,290

 
117,257

 
306,544

 
335,393

 
$
305,341

 
$
320,100

 
$
873,641

 
$
948,870

Operating Profit (Loss):
 
 
 
 
 
 
 
Industrial
$
21,712

 
$
29,165

 
$
58,994

 
$
79,386

Energy (1)
10,870

 
12,774

 
(115,803
)
 
(50,457
)
Engineered Solutions (2)
3,651

 
8,313

 
(37,943
)
 
16,601

General Corporate
(7,890
)
 
(7,250
)
 
(23,649
)
 
(20,757
)
 
$
28,343

 
$
43,002

 
$
(118,401
)
 
$
24,773

(1) Energy segment operating profit (loss) includes impairment charges of $140.8 million and $84.4 million for the nine months ended May 31, 2016 and 2015, respectively.
(2) Engineered Solutions segment operating profit (loss) includes an impairment charge of $45.7 million for the nine months ended May 31, 2016.
 
May 31, 2016
 
August 31, 2015
Assets by Segment:
 
 
 
Industrial
$
299,971

 
$
293,738

Energy
508,660

 
601,521

Engineered Solutions
529,275

 
588,200

General Corporate
129,514

 
153,458

 
$
1,467,420

 
$
1,636,917

In addition to the impact of foreign currency exchange rate changes, the comparability of segment and product line information is also impacted by acquisitions and impairment charges (Energy and Engineered Solutions segments).  Corporate assets, which are not allocated, principally represent cash and cash equivalents, capitalized debt issuance costs and deferred income taxes.

14

Table of Contents

Note 11. Contingencies and Litigation
The Company had outstanding letters of credit of $19.1 million and $18.1 million at May 31, 2016 and August 31, 2015, respectively, the majority of which relate to commercial contracts and self-insured workers compensation programs.
The Company is a party to various legal proceedings that have arisen in the normal course of business. Such 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, are not expected to 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 of businesses that it previously divested or spun-off, in the event that such businesses are unable to fulfill their lease payment obligations. The discounted present value of future minimum lease payments for these leases was $16.3 million at May 31, 2016.
Note 12. Guarantor Subsidiaries
As discussed in Note 5, “Debt” on April 16, 2012, Actuant Corporation (the “Parent”) issued $300.0 million of 5.625% Senior Notes, of which $288.1 million remains outstanding as of May 31, 2016. All of our material domestic wholly owned subsidiaries (the “Guarantors”) fully and unconditionally guarantee the 5.625% 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 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 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, non-cash intercompany dividends and the impact of foreign currency rate changes.

15

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(in thousands)
 
Three Months Ended May 31, 2016
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$
33,610

 
$
62,534

 
$
209,197

 
$

 
$
305,341

Cost of products sold
6,603

 
43,381

 
147,831

 

 
197,815

Gross profit
27,007

 
19,153

 
61,366

 

 
107,526

Selling, administrative and engineering expenses
17,172

 
13,606

 
39,342

 

 
70,120

Amortization of intangible assets
318

 
2,630

 
2,619

 

 
5,567

Restructuring charges
100

 
197

 
3,199

 

 
3,496

Operating profit
9,417

 
2,720

 
16,206

 

 
28,343

Financing costs, net
7,601

 

 
(348
)
 

 
7,253

Intercompany (income) expense, net
(4,990
)
 
1,254

 
3,736

 

 

Other expense, net
199

 
13

 
539

 

 
751

Earnings before income taxes
6,607

 
1,453

 
12,279

 

 
20,339

Income tax expense (benefit)
(929
)
 
115

 
(13
)
 

 
(827
)
Net earnings before equity in earnings of subsidiaries
7,536

 
1,338

 
12,292

 

 
21,166

Equity in earnings of subsidiaries
13,630

 
10,382

 
239

 
(24,251
)
 

Net earnings
$
21,166

 
$
11,720

 
$
12,531

 
$
(24,251
)
 
$
21,166

Comprehensive income
$
36,488

 
$
25,205

 
$
14,148

 
$
(39,353
)
 
$
36,488


16

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(in thousands)
 
Three Months Ended May 31, 2015
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$
40,011

 
$
58,896

 
$
221,193

 
$

 
$
320,100

Cost of products sold
11,749

 
40,360

 
149,431

 

 
201,540

Gross profit
28,262

 
18,536

 
71,762

 

 
118,560

Selling, administrative and engineering expenses
16,560

 
11,228

 
41,781

 

 
69,569

Amortization of intangible assets
318

 
2,394

 
3,277

 

 
5,989

Operating profit
11,384

 
4,914

 
26,704

 

 
43,002

Financing costs, net
7,769

 

 
(307
)
 

 
7,462

Intercompany (income) expense, net
(3,559
)
 
(1,187
)
 
4,746

 

 

Other expense, net
123

 
27

 
419

 

 
569

Earnings before income taxes
7,051

 
6,074

 
21,846

 

 
34,971

Income tax expense (benefit)
(11,957
)
 
914

 
8,056

 

 
(2,987
)
Net earnings before equity in earnings (loss) of subsidiaries
19,008

 
5,160

 
13,790

 

 
37,958

Equity in earnings (loss) of subsidiaries
18,950

 
12,757

 
(340
)
 
(31,367
)
 

Net earnings
$
37,958

 
$
17,917

 
$
13,450

 
$
(31,367
)
 
$
37,958

Comprehensive income
$
27,259

 
$
13,244

 
$
7,930

 
$
(21,174
)
 
$
27,259







17

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands)
 
Nine Months Ended May 31, 2016
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$
100,699

 
$
188,333

 
$
584,609

 
$

 
$
873,641

Cost of products sold
25,851

 
132,711

 
407,962

 

 
566,524

Gross profit
74,848

 
55,622

 
176,647

 

 
307,117

Selling, administrative and engineering expenses
54,049

 
41,113

 
115,040

 

 
210,202

Amortization of intangible assets
954

 
7,890

 
8,503

 

 
17,347

Restructuring charges
1,057

 
2,692

 
7,709

 

 
11,458

Impairment charges

 
49,012

 
137,499

 

 
186,511

Operating profit (loss)
18,788

 
(45,085
)
 
(92,104
)
 

 
(118,401
)
Financing costs, net
22,364

 

 
(1,128
)
 

 
21,236

Intercompany (income) expense, net
(16,284
)
 
(1,478
)
 
17,762

 

 

Other expense, net
802

 
44

 
759

 

 
1,605

Earnings (loss) before income taxes
11,906

 
(43,651
)
 
(109,497
)
 

 
(141,242
)
Income tax expense (benefit)
(1,986
)
 
420

 
(17,100
)
 

 
(18,666
)
Net earnings (loss) before equity in loss of subsidiaries
13,892

 
(44,071
)
 
(92,397
)
 

 
(122,576
)
Equity in earnings (loss) of subsidiaries
(136,468
)
 
(79,373
)
 
236

 
215,605

 

Net loss
$
(122,576
)
 
$
(123,444
)
 
$
(92,161
)
 
$
215,605

 
$
(122,576
)
Comprehensive loss
$
(142,339
)
 
$
(138,806
)
 
$
(97,165
)
 
$
235,971

 
$
(142,339
)


18

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands)
 
Nine Months Ended May 31, 2015
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$
119,612

 
$
207,162

 
$
622,096

 
$

 
$
948,870

Cost of products sold
33,792

 
145,800

 
413,981

 

 
593,573

Gross profit
85,820

 
61,362

 
208,115

 

 
355,297

Selling, administrative and engineering expenses
52,062

 
45,062

 
130,685

 

 
227,809

Amortization of intangible assets
954

 
7,964

 
9,444

 

 
18,362

Impairment charges

 
20,249

 
64,104

 

 
84,353

Operating profit (loss)
32,804

 
(11,913
)
 
3,882

 

 
24,773

Financing costs, net
21,583

 

 
(900
)
 

 
20,683

Intercompany expense (income), net
(14,389
)
 
896

 
13,493

 

 

Intercompany dividend income
(212
)
 
(243
)
 
(31
)
 
486

 

Other expense (income), net
342

 
(133
)
 
(698
)
 

 
(489
)
Earnings (loss) before income taxes
25,480

 
(12,433
)
 
(7,982
)
 
(486
)
 
4,579

Income tax expense (benefit)
(8,133
)
 
1,413

 
13,589

 
(84
)
 
6,785

Net earnings (loss) before equity in earnings (loss) of subsidiaries
33,613

 
(13,846
)
 
(21,571
)
 
(402
)
 
(2,206
)
Equity in earnings (loss) of subsidiaries
(35,819
)
 
(1,673
)
 
177

 
37,315

 

Net loss
$
(2,206
)
 
$
(15,519
)
 
$
(21,394
)
 
$
36,913

 
$
(2,206
)
Comprehensive loss
$
(132,616
)
 
$
(58,603
)
 
$
(80,728
)
 
$
139,331

 
$
(132,616
)


19

Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
 
May 31, 2016
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
8,199

 
$

 
$
128,890

 
$

 
$
137,089

Accounts receivable, net
13,367

 
33,889

 
152,846

 

 
200,102

Inventories, net
22,416

 
29,748

 
86,292

 

 
138,456

Other current assets
13,268

 
3,187

 
43,631

 

 
60,086

Total current assets
57,250

 
66,824

 
411,659

 

 
535,733

Property, plant and equipment, net
5,641

 
19,080

 
93,507

 

 
118,228

Goodwill
38,847

 
143,690

 
346,884

 

 
529,421

Other intangibles, net
9,747

 
98,411

 
147,763

 

 
255,921

Investment in subsidiaries
1,915,828

 
899,892

 
87,193

 
(2,902,913
)
 

Intercompany receivable

 
617,942

 
556,837

 
(1,174,779
)
 

Other long-term assets
9,877

 
7

 
18,233

 

 
28,117

Total assets
$
2,037,190

 
$
1,845,846

 
$
1,662,076

 
$
(4,077,692
)
 
$
1,467,420

LIABILITIES & SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Trade accounts payable
$
14,085

 
$
16,096

 
$
89,919

 
$

 
$
120,100

Accrued compensation and benefits
15,801

 
4,671

 
26,960

 

 
47,432

Current maturities of debt and short-term borrowings
15,000

 

 

 

 
15,000

Income taxes payable

 

 
1,249

 

 
1,249

Other current liabilities
23,187

 
4,937

 
30,756

 

 
58,880

Total current liabilities
68,073

 
25,704

 
148,884

 

 
242,661

Long-term debt, less current maturities
573,059

 

 

 

 
573,059

Deferred income taxes
34,641

 

 
20,891

 

 
55,532

Pension and postretirement benefit liabilities
10,228

 

 
5,461

 

 
15,689

Other long-term liabilities
47,083

 
593

 
8,954

 

 
56,630

Intercompany payable
780,257

 

 
394,522

 
(1,174,779
)
 

Shareholders’ equity
523,849

 
1,819,549

 
1,083,364

 
(2,902,913
)
 
523,849

Total liabilities and shareholders’ equity
$
2,037,190

 
$
1,845,846

 
$
1,662,076

 
$
(4,077,692
)
 
$
1,467,420


20

Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
 
August 31, 2015
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
18,688

 
$
523

 
$
149,635

 
$

 
$
168,846

Accounts receivable, net
16,135

 
33,748

 
143,198

 

 
193,081

Inventories, net
23,074

 
33,480

 
86,198

 

 
142,752

Deferred income taxes
9,256

 

 
3,666

 

 
12,922

Other current assets
18,020

 
2,967

 
21,801

 

 
42,788

Total current assets
85,173

 
70,718

 
404,498

 

 
560,389

Property, plant and equipment, net
6,363

 
23,691

 
112,404

 

 
142,458

Goodwill
38,847

 
189,337

 
380,072

 

 
608,256

Other intangibles, net
10,702

 
109,665

 
188,395

 

 
308,762

Investment in subsidiaries
2,067,438

 
1,017,418

 
27,552

 
(3,112,408
)
 

Intercompany receivable

 
619,198

 
565,968

 
(1,185,166
)
 

Other long-term assets
10,694

 

 
6,358

 

 
17,052

Total assets
$
2,219,217

 
$
2,030,027

 
$
1,685,247

 
$
(4,297,574
)
 
$
1,636,917

LIABILITIES & SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Trade accounts payable
$
14,700

 
$
19,213

 
$
84,202

 
$

 
$
118,115

Accrued compensation and benefits
16,479

 
2,952

 
24,276

 

 
43,707

Current maturities of debt and short-term borrowings
3,750

 

 
219

 

 
3,969

Income taxes payable
10,947

 

 
3,858

 

 
14,805

Other current liabilities
19,817

 
4,783

 
29,860

 

 
54,460

Total current liabilities
65,693

 
26,948

 
142,415

 

 
235,056

Long-term debt, less current maturities
584,309

 

 

 

 
584,309

Deferred income taxes
43,210

 

 
29,731

 

 
72,941

Pension and postretirement benefit liabilities
11,712

 

 
6,116

 

 
17,828

Other long-term liabilities
46,407

 
400

 
6,975

 

 
53,782

Intercompany payable
794,885

 

 
390,281

 
(1,185,166
)
 

Shareholders’ equity
673,001

 
2,002,679

 
1,109,729

 
(3,112,408
)
 
673,001

Total liabilities and shareholders’ equity
$
2,219,217

 
$
2,030,027

 
$
1,685,247

 
$
(4,297,574
)
 
$
1,636,917


21

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended May 31, 2016
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
Cash provided by operating activities
$
15,329

 
$
5,017

 
$
54,645

 
$

 
$
74,991

Investing Activities
 
 
 
 
 
 
 
 
 
Proceeds from sale of property, plant and equipment
13

 
3,337

 
5,285

 

 
8,635

Capital expenditures
(1,237
)
 
(3,091
)
 
(11,295
)
 

 
(15,623
)
Intercompany investment
(339
)
 
(6,125
)
 

 
6,464

 

Business acquisitions, net of cash acquired

 

 
(80,674
)
 

 
(80,674
)
Cash used in by investing activities
(1,563
)
 
(5,879
)
 
(86,684
)
 
6,464

 
(87,662
)
Financing Activities
 
 
 
 
 
 
 
 
 
Net repayments on revolver and other debt

 

 
(210
)
 

 
(210
)
Purchase of treasury shares
(14,125
)
 

 

 

 
(14,125
)
Taxes paid related to the net share settlement of equity awards
(1,344
)
 

 

 

 
(1,344
)
Stock option exercises, related tax benefits and other
5,729

 

 

 

 
5,729

Cash dividend
(2,376
)
 

 

 

 
(2,376
)
Intercompany loan activity
(12,139
)
 

 
12,139

 

 

Intercompany capital contribution

 
339

 
6,125

 
(6,464
)
 

Cash (used in) provided by financing activities
(24,255
)
 
339

 
18,054

 
(6,464
)
 
(12,326
)
Effect of exchange rate changes on cash

 

 
(6,760
)
 

 
(6,760
)
Net decrease in cash and cash equivalents
(10,489
)
 
(523
)
 
(20,745
)
 

 
(31,757
)
Cash and cash equivalents—beginning of period
18,688

 
523

 
149,635

 

 
168,846

Cash and cash equivalents—end of period
$
8,199

 
$

 
$
128,890

 
$

 
$
137,089


22

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended May 31, 2015
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
38,854

 
$
(39,865
)
 
$
44,635

 
$

 
$
43,624

Investing Activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(880
)
 
(3,495
)
 
(12,859
)
 

 
(17,234
)
Proceeds from sale of property, plant and equipment

 
203

 
683

 

 
886

Intercompany investment
(1,117
)
 

 

 
1,117

 

Cash used in investing activities
(1,997
)
 
(3,292
)
 
(12,176
)
 
1,117

 
(16,348
)
Financing Activities
 
 
 
 
 
 
 
 
 
Principal repayment on term loan
(3,375
)
 

 

 

 
(3,375
)
Proceeds from term loan
213,375

 

 

 

 
213,375

Purchase of treasury shares
(204,627
)
 

 

 

 
(204,627
)
Taxes paid related to the net share settlement of equity awards
(2,344
)
 

 

 

 
(2,344
)
Stock option exercises, related tax benefits and other
5,046

 

 

 

 
5,046

Debt issuance costs
(1,875
)
 

 

 

 
(1,875
)
Cash dividend
(2,598
)
 

 

 

 
(2,598
)
Intercompany loan activity
(58,569
)
 
40,796

 
17,773

 

 

Intercompany capital contribution

 

 
1,117

 
(1,117
)
 

Cash (used in) provided by financing activities
(54,967
)
 
40,796

 
18,890

 
(1,117
)
 
3,602

Effect of exchange rate changes on cash

 

 
(31,765
)
 

 
(31,765
)
Net (decrease) increase in cash and cash equivalents
(18,110
)
 
(2,361
)
 
19,584

 

 
(887
)
Cash and cash equivalents—beginning of period
27,931

 
3,325

 
77,756

 

 
109,012

Cash and cash equivalents—end of period
$
9,821

 
$
964

 
$
97,340

 
$

 
$
108,125



23

Table of Contents

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Actuant Corporation, headquartered in Menomonee Falls, Wisconsin, is a Wisconsin corporation and was incorporated in 1910. We are a global diversified company that designs, manufactures and distributes a broad range of industrial products and systems to various end markets. The Company is organized into three operating 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 other energy markets. The Engineered Solutions segment provides highly engineered position and motion control systems to original equipment manufacturers (“OEM”) in various on and off-highway vehicle markets, as well as a variety of other products to the industrial and agricultural markets. Financial information related to the Company's segments is included in Note 10, "Segment Information" in the notes to the condensed consolidated financial statements.
Our businesses provide an array of products and services across multiple markets and geographies which results in significant diversification. Sales in most of our end markets are expected to remain sluggish during the remainder of the fiscal year given the challenging and inconsistent demand we have experienced in most served markets including industrial, mining, infrastructure, oil & gas, commercial and off-highway vehicles and agriculture. Excluding the impact of acquisitions and foreign currency rate changes ("core sales"), we expect fourth quarter fiscal 2016 consolidated core sales to decline 9-10% from the prior year. As a result of these and other factors, we have implemented various cost reduction programs across all three segments to reduce the impact of lower customer demand on our profitability. We expect to incur $25 million of restructuring charges in fiscal 2016 and 2017 to simplify our organizational structure and reduce our fixed costs. Financial results for the nine months ended May 31, 2016 include $11 million of restructuring costs to consolidate facilities, reduce global headcount and simplify our businesses. We remain focused on maintaining our financial position and flexibility by adjusting our cost structure to reflect changes in demand levels and by proactively managing working capital and cash flow generation. 
Given our global geographic footprint, changes in foreign currency exchange rates could have a significant impact on our financial results, financial position and cash flow. Changes in foreign currency exchange rates will continue to add volatility as slightly over one-half of our sales are generated outside of the United States in currencies other than the U.S. dollar. The strengthening of the U.S. dollar unfavorably impacts our sales, cash flow and earnings given the translation of our international results into U.S. dollars. This also results in higher costs for certain international operations which incur costs or purchase components in U.S. dollars and reduces the dollar value of assets (including cash) and liabilities of our international operations included in our consolidated balance sheet.
Despite short-term challenges from weak end market demand and foreign currency headwinds, we continue to believe that our targeted energy, infrastructure, food/farm productivity and natural resources/sustainability strategies provide attractive long-term opportunities for sustainable growth. The long-term sales growth and profitability of our business is also dependent on our ability to identify, consummate and integrate strategic acquisitions, develop and market innovative new products, expand our business activity geographically and our ability to achieve operational excellence. Our priorities during the remainder of fiscal 2016 include continued execution of restructuring activities, managing costs and improving operational execution and investments in growth initiatives.

24

Table of Contents

Results of Operations
The following table sets forth our results of operations (in millions, except per share amounts):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
 
 
2015
 
 
 
2016
 
 
 
2015
 
 
Net sales
$
305

 
100
 %
 
$
320

 
100
 %
 
$
874

 
100
 %
 
$
949

 
100
 %
Cost of products sold
198

 
65
 %
 
202

 
63
 %
 
567

 
65
 %
 
594

 
63
 %
Gross profit
107

 
35
 %
 
118

 
38
 %
 
307

 
35
 %
 
355

 
37
 %
Selling, administrative and engineering expenses
70

 
23
 %
 
70

 
22
 %
 
210

 
24
 %
 
228

 
24
 %
Amortization of intangible assets
6

 
2
 %
 
6

 
2
 %
 
17

 
2
 %
 
18

 
2
 %
Restructuring charges
3

 
1
 %
 

 
 %
 
11

 
1
 %
 

 
 %
Impairment charges

 
 %
 
84

 
42
 %
 
187

 
21
 %
 
84

 
9
 %
Operating profit (loss)
28

 
9
 %
 
42

 
13
 %
 
(118
)
 
(14
)%
 
25

 
3
 %
Financing costs, net
7

 
2
 %
 
7

 
2
 %
 
21

 
2
 %
 
21

 
2
 %
Other expense, net
1

 
0
 %
 
1

 
0
 %
 
1

 
0
 %
 

 
0
 %
Earnings (loss) before income taxes
20

 
7
 %
 
34

 
11
 %
 
(140
)
 
(16
)%
 
4

 
 %
Income tax expense (benefit)
(1
)
 
0
 %
 
(3
)
 
(1
)%
 
(19
)
 
(3
)%
 
6

 
(1
)%
Net earnings (loss)
$
21

 
7
 %
 
$
37

 
12
 %
 
$
(121
)
 
(14
)%
 
$
(2
)
 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
$
0.36

 
 
 
$
0.63

 
 
 
$
(2.08
)
 
 
 
$
(0.04
)
 
 
Consolidated sales for the third quarter were $305 million, 5% lower than the prior year, while year-to-date sales were $874 million, a decrease of 8% from the prior year. Core sales for three and nine months ended May 31, 2016 were down 5% and 6% respectively, as a result of challenging end market conditions, including weak general industrial activity, reduced capital spending by customers in the global energy markets and lower demand and inventory destocking by OEMs in off-highway vehicles, mining, agriculture and other markets. The resulting lower production levels and absorption of manufacturing costs, as well as unfavorable sales mix and restructuring charges (as we adjust our cost structure by consolidating facilities and reducing headcount) resulted in reduced operating profit margins. Changes in foreign currency exchange rates unfavorably impacted sales comparisons by $3 million and $40 million for the three and nine months ended May 31, 2016, while current year acquisitions added sales of $7 million in fiscal 2016. Year-to-date fiscal 2016 and 2015 results include impairment charges related to the write-down of the acquired goodwill, intangible assets and long-lived assets of certain of our businesses. Fiscal 2016 financial results also include a lower effective income tax rate and fewer shares outstanding compared to the prior year.
Segment Results
Industrial Segment
The Industrial segment is a global supplier of branded hydraulic and mechanical tools to a broad array of end markets, including general maintenance and repair, industrial, oil & gas, mining, infrastructure and production automation. Its primary products include high-force hydraulic tools, production automation solutions and concrete stressing components and systems (collectively "Industrial Tools") and highly engineered heavy lifting solutions ("Integrated Solutions"). The following table sets forth the results of operations for the Industrial segment (in millions):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Net sales
$
96

 
$
104

 
$
266

 
$
302

Operating profit
22

 
29

 
59

 
79

Operating profit %
22.7
%
 
28.2
%
 
22.2
%
 
26.2
%
Industrial segment third quarter sales were $96 million, which was 8% below the prior year period, while year-to-date sales were $266 million, 12% lower than the prior year. Third quarter core sales were down 9%, and exclude a 2% benefit from the recent Larzep acquisition ($2 million of sales) and a 1% headwind from changes in foreign currency exchange rates. While the quarterly year-over-year core sales trend improved sequentially from -14% to -9%, reduced global industrial activity, challenging end market

25

Table of Contents

conditions and cautious spending patterns by customers for heavy lifting and large infrastructure projects have continued. Operating profit margins were 22.7% in the third quarter of fiscal 2016 compared to 28.2% in the prior year period. Lower production levels due to planned inventory reductions (absorption of fixed costs), unfavorable sales mix (which reduced margins by 125 basis points in the quarter), as well as restructuring charges of $1 million resulted in lower operating profit margins in fiscal 2016.
Energy Segment
The Energy segment provides products and maintenance services to the global energy markets, where safety, reliability, up-time and productivity are key value drivers. Products include joint integrity tools and connectors for oil & gas and power generation installations and high performance ropes, cables and umbilicals. In addition to these products, the Energy segment also provides mooring systems and joint integrity tools under rental arrangements, as well as technical manpower solutions. The following table sets forth comparative results of operations for the Energy segment (in millions):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Net sales
$
101

 
$
99

 
$
301

 
$
311

Operating profit (loss)
11

 
13

 
(116
)
 
(50
)
Operating profit %
10.7
%
 
12.9
%
 
(38.4
)%
 
(16.2
)%
Energy segment year-over-year core sales flattened in the third quarter after a strong first half of the fiscal year, resulting in 2% core sales growth for the first nine months of the fiscal 2016. Changes in foreign currency exchange rates unfavorably impacted sales comparisons by $3 million and $21 million for the three and nine months ended May 31, 2016, respectively, while the recent pipeline and process services acquisition added $5 million of sales to the third quarter. Core sales from our Energy Maintenance & Integrity product line increased $7 million (12%) in the third quarter, the result of continued strong demand for technical manpower services on maintenance projects and a large subsea connector order. However, core sales in our Other Energy Solutions product line, consisting of umbilical & rope solutions and offshore mooring, declined $7 million (21%) year-over-year due to the continued impact of reduced customer spending on exploration, drilling and commissioning activities and pricing pressures. Energy segment operating profit for the third quarter was $11 million and $13 million for fiscal 2016 and 2015, respectively. Unfavorable sales mix which reduced margins by 335 basis points due to sharply higher service revenue and reduced mooring rental activity and $2 million of restructuring expenses were somewhat offset by savings from previously completed restructuring actions. The operating loss for the nine months ended May 31, 2016 and 2015 includes impairment charges of $141 million and $84 million, respectively.
Engineered Solutions Segment
The Engineered Solutions segment is a global designer and assembler of customized position and motion control systems and other industrial products to various vehicle and other niche markets. The segment focuses on providing technical and highly engineered products, including actuation systems, mechanical power transmission products, engine air flow management systems, human to machine interface solutions and other rugged electronic instrumentation. The following table sets forth comparative results of operations for the Engineered Solutions segment (in millions):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Net sales
$
108

 
$
117

 
$
307

 
$
335

Operating profit (loss)
4

 
8

 
(38
)
 
17

Operating profit %
3.4
%
 
7.1
%
 
(12.4
)%
 
4.9
%
Fiscal 2016 third quarter Engineered Solutions segment net sales decreased $9 million (8%) year-over-year to $108 million, while year-to-date sales decreased $28 million (9%) year-over-year to $307 million. Excluding foreign currency rate changes, which unfavorably impacted sales comparison by $12 million year-to-date, core sales declined 8% and 5% for the three and nine months ended May 31, 2016, respectively. Recent core sales declines were the result of reduced build rates by OEMs to reduce inventory levels, coupled with unfavorable market conditions in off-highway vehicles and agriculture markets. Operating profit margins for the third quarter were adversely impacted by unfavorable product mix and reduced absorption on lower production volumes and inventory reduction efforts. Restructuring costs to consolidate facilities and reduce headcount were $1 million and $5 million, for the three and nine months ended May 31, 2016, respectively. The operating loss for the nine months ended May 31, 2016 included a $46 million impairment charge.

26

Table of Contents

Corporate
Corporate expenses increased $1 million in the third quarter and $3 million year-to-date compared to the prior year. On a year-to-date basis corporate expenses increased due to higher acquisition and incentive compensation expenses, partially offset by cost reduction benefits.
Financing Costs, net
Net financing costs were $7 million and $21 million for each of the comparative three and nine months ended May 31, 2016 and 2015, respectively.
Income Taxes Expense
Comparative pre-tax loss, income tax expense (benefit) and effective income tax rates are as follows (in millions):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Loss before income taxes
$
20

 
$
35

 
$
(141
)
 
$
5

Income tax (benefit) expense
(1
)
 
(3
)
 
(19
)
 
7

Effective income tax rate
(4.1
)%
 
(8.5
)%
 
13.2
%
 
148.2
%
The third quarter effective income tax rates are impacted by the proportion of taxable earnings generated in foreign jurisdictions with tax rates lower than the U.S., the amount of tax benefits derived from annual tax planning initiatives and discrete income tax adjustments. The income tax benefit for the three months ended May 31, 2016 is the result of current year tax planning (related to the deductibility of foreign currency losses for tax purposes) and a $2 million benefit from discrete income tax adjustments (favorable provision to income tax return adjustments), which were partially offset by the provision for taxes due on current quarter earnings. The income tax benefit for the three months ended May 31, 2015 is the net result of a $19 million reduction in tax reserves from the lapsing of income tax statutes of limitations and the favorable resolution of income tax audits, which were partially offset by the current quarter income tax provision, a $5 million increase to the reserve for uncertain tax positions and a $5 million increase in valuation allowances due to uncertainty regarding utilization of foreign net operating losses.
The comparability of year-to-date pre-tax income (loss), income tax expense (benefit) and the related effective income tax rate are impacted by impairment charges, as fiscal 2016 results include a $187 million ($169 million after tax) impairment charge, while the prior year included an $84 million ($83 million after tax) impairment charge. Excluding the impairment charge, the fiscal 2016 year-to-date effective tax rate is lower than the prior year due to a favorable mix of taxable earnings, the benefits of tax planning initiatives and discrete tax adjustments. Both the current and prior year income tax provisions included a similar sized income tax benefit from global tax planning initiatives; however the impact on the effective tax rate was substantially larger in the current year, as year to date pre-tax earnings (excluding the impairment charge) were $44 million lower in fiscal 2016. In addition, the tax provision for the nine months ended May 31, 2016 included 90% of earnings from foreign jurisdictions with tax rates lower than the U.S. federal income tax rate compared to approximately 70% in the prior year, which had the impact of reducing the current year effective income tax rate.
Cash Flows and Liquidity
At May 31, 2016, cash and cash equivalents included $129 million of cash held by our foreign locations and $8 million held domestically. We periodically utilize income tax safe harbor provisions to make temporary short-term intercompany advances from our foreign subsidiaries to our U.S. parent, including $91 million and $160 million at May 31, 2016 and August 31, 2015, respectively. The following table summarizes our cash flows from operating, investing and financing activities (in millions):
 
Nine Months Ended May 31,
 
2016
 
2015
Net cash provided by operating activities
$
75

 
$
44

Net cash used in investing activities
(88
)
 
(16
)
Net cash (used in) provided by financing activities
(12
)
 
4

Effect of exchange rates on cash
(7
)
 
(32
)
Net decrease in cash and cash equivalents
$
(32
)
 
$

Cash flows from operating activities were $75 million for the nine months ended May 31, 2016, an increase of $31 million compared to the prior year due to a $21 million reduction in income tax payments and improved working capital management. Cash

27

Table of Contents

flows from operations, proceeds from the sale leaseback of several facilities and existing cash balances were utilized to repurchase 600,000 shares of common stock ($14 million) and fund the FourQuest and Larzep acquisitions ($81 million of capital deployed) and $16 million of capital expenditures.
Cash flows from operating activities of $44 million were lower during the nine months ended May 31, 2015, primarily the result of higher income tax payments (partially attributable to fiscal 2014 divestitures) and a $24 million increase in working capital. Borrowings under the our Senior Credit Facility funded the repurchase of approximately 7 million shares ($205 million) of the Company’s common stock.
Our Senior Credit Facility, which matures on May 8, 2020, includes a $600 million revolver, a $300 million term loan and a $450 million expansion option. Quarterly term loan principal payments of $4 million begin on June 30, 2016, increasing to $8 million per quarter beginning on June 30, 2017, with the remaining principal due at maturity. At May 31, 2016, the unused credit line under the revolver was $592 million, of which $183 million was available for borrowing. We believe the $137 million of cash on hand, revolver availability and future operating cash flow will be adequate to meet operating, acquisition funding, debt service, stock buyback 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 metric of working capital management. We define this metric as the sum of net accounts receivable and net inventory less accounts payable, divided by the past three months sales annualized. The following table shows a comparison of primary working capital (in millions):
 
May 31, 2016
 
PWC%
 
August 31, 2015
 
PWC%
Accounts receivable, net
$
200

 
16
 %
 
$
193

 
16
 %
Inventory, net
138

 
11
 %
 
143

 
12
 %
Accounts payable
(120
)
 
(10
)%
 
(118
)
 
(10
)%
Net primary working capital
$
218

 
18
 %
 
$
218

 
18
 %
Commitments and Contingencies
We have operations 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 and we believe that such costs will not have a material adverse effect on our financial position, results of operations or cash flows.
We remain contingently liable for lease payments of businesses that were 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 $16 million at May 31, 2016.
We had outstanding letters of credit of approximately $19 million and $18 million at May 31, 2016 and August 31, 2015, respectively, the majority of which relate to commercial contracts and self-insured workers compensation programs.
Contractual Obligations
Our contractual obligations have not materially changed in fiscal 2016 and are discussed in Part 1, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Contractual Obligations” in our Annual Report on Form 10-K for the year ended August 31, 2015.
Critical Accounting Policies
Refer to the Critical Accounting Policies in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Annual Report on Form 10-K for the year-ended August 31, 2015 for information about the Company’s policies, methodology and assumptions related to critical accounting policies.
Goodwill Impairment Review, Estimates and Sensitivity: Our business acquisitions typically result in goodwill and other intangible assets, which are a significant portion of our total assets. On an annual basis, or more frequently if triggering events occur, we compare the estimated fair value of our reporting units to the carrying value to determine if a potential goodwill impairment exists. If the fair value of a reporting unit is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of the reporting unit’s goodwill. In estimating the fair value of a reporting unit, we generally use a discounted cash flow model, which is dependent on a number of assumptions including estimated future revenues and expenses, weighted average cost of capital, capital expenditures and other variables. The expected future revenue growth rates and operating profit margins are determined after taking into consideration our historical revenue growth rates and earnings levels,

28

Table of Contents

our assessment of future market potential and our expectations of future business performance. Under the discounted cash flow approach, the fair value is calculated as the sum of the projected discounted cash flows over a discrete seven year period plus an estimated terminal value. 
During the second quarter of fiscal 2016, we determined that there were interim “triggering events” that required a review of the recoverability of the long-lived assets, intangible assets and goodwill of three reporting units (Cortland, Viking and maximatecc). 
Cortland and Viking Reporting Units:  The Cortland business (acquired in September 2008) develops highly-engineered rope and cable solutions that maximize performance, safety and efficiency for customers in various markets including offshore oil & gas, heavy marine lift, ROV and seismic. The Viking business was acquired in August 2013 and provides customers with a comprehensive range of marine mooring equipment and services (inspection, design and installation) to meet the demands of offshore energy assets. Customer demand at these Energy segment businesses is susceptible to changes in oil & gas prices and capital spending patterns by global energy customers. Unfavorable market conditions, including continued cuts in oil & gas capital spending, reduced exploration, drilling and commissioning activities and excess capacity for mooring rental assets, resulted in a 33% core sales decline in the second quarter of fiscal 2016 at Viking and Cortland, which comprise our Other Energy Services product line. As a result of lower projected sales and profits, we recognized an impairment charge of $141 million during the second quarter of fiscal 2016. The impairment charge consisted of $74 million of goodwill, $16 million of indefinite lived intangibles (tradenames), $28 million of amortizable intangible assets and $24 million of fixed assets (primarily Viking rental assets). 
While we believe that the Energy segment's diverse products and services will generate positive cash flow and earnings in the long-term, the financial projections utilized in the interim impairment review were based on historical trends and incorporate current unfavorable market conditions and reduced expectations regarding future sales growth, including 3.0% in the terminal year. Estimated future cash flows from the Cortland business assume single digit core sales decline through fiscal 2017, following a 20% sales decline in fiscal 2015. Decisions by asset owners to significantly reduce exploration and drilling activities, have resulted in reduced near term sales expectations for Viking (projecting sales declines through fiscal 2017). Despite actions to adjust our cost structure for current sales volumes, near-term estimated future cash flows from Viking are expected to be challenged given the fixed cost nature of the business (rent and depreciation expense on rental assets).
The future financial results of these reporting units are dependent on a) the realization of savings from restructuring actions to consolidate facilities and reduce fixed overhead, b) the level of offshore exploration and drilling activity and c) our ability to retain or win new business in a market that currently has excess capacity. The assumptions that have the most significant impact on determination of the fair value of the Cortland and Viking reporting units are the discount rate (11.2% at February 29, 2016) and sales growth rate. A 100 basis point increase in the discount rate results in a reduction to the estimated fair value of each reporting unit by approximately 12% for Cortland and 6% for Viking, while a reduction in the terminal year sales growth rate assumption by 100 basis points would decrease the estimated fair value by approximately 8% for both Cortland and Viking.
Maximatecc Reporting Unit:  The maximatecc reporting unit, including the legacy North American business and acquisitions of CrossControl (Europe) and Turotest (South America), manufactures severe-duty electronic instrumentation including displays and clusters, machine controls and sensors. These products are primarily marketed to industrial vehicle original equipment manufacturers (“OEMs”) and system suppliers in a number of industries, including industrial, material hauling, construction, agriculture, forestry, mining, utility, cargo, marine and rail. Weakness in off-highway vehicle and agricultural markets, coupled with weak overall industrial fundamentals, recent OEM inventory destocking and delays in the launch of new models have resulted in reduced sales and profitability of the business. Financial projections for the business now assume core sales declines in fiscal 2016 and 2017, with a rebound to core sales growth in fiscal 2018 (driven by ramp up to full production volumes on new platform wins) and improved profitability in future years, driven by higher sales volume and the benefit of restructuring actions.
Future sales and profits of the maximatecc business are subject to OEM production levels that may change in response to end market conditions in industrial and off-highway markets. Specific market factors include the adoption rate of human to machine interface (“HMI”) technology as “options” on off-highway equipment, the level of new and used inventory at dealers and in the field, commodity pricing which impacts end-user demand and the timing and pace to full production volumes for recent new OEM platform wins.  The assumptions that have the most significant impact on the determination of the fair value of the reporting unit are the discount rate (10.5% at February 29, 2016) and sales growth rates (3% in the terminal year). A 100 basis point increase in the discount rate results in a decrease to the estimated fair values by approximately 15%, while a reduction in the terminal year sales growth rate assumption by 100 basis points would decrease the estimated fair values by approximately 11%.
Indefinite-lived intangibles (tradenames):  Indefinite lived intangible assets are also subject to annual impairment testing. On an annual basis or more frequently if a triggering event occurs, the fair value of indefinite lived assets, based on a relief of royalty valuation approach, are evaluated to determine if an impairment charge is required. In the second quarter of fiscal 2016 we recognized a $17 million impairment of the Viking, Cortland and maximatecc tradenames, the result of lower projected sales and profits. The valuation models assume reduced sales projections and royalty rates of 1.0%-1.5%, which reflected current and future profitability estimates and were lower than previous estimates.

29

Table of Contents

Long-lived assets (fixed assets and amortizable intangible assets):  We also review long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. If such indicators are present, we prepare an undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. The undiscounted operating cash flow analyses for Cortland and maximatecc exceeded the carrying value and therefore there was no impairment of fixed assets or amortizable intangible assets at February 29, 2016.  However, the undiscounted operating cash flows of Viking did not exceed the carrying value and therefore a $52 million impairment to long-lived assets was recognized in the second quarter of fiscal 2016, including $28 million of amortizable intangible assets and $24 million of fixed assets (primarily rental assets).
A considerable amount of management judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of each reporting unit and the indefinite lived intangible assets. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore, future additional impairment charges could be required. Weakening industry or economic trends, disruptions to our business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in the use of the assets or in entity structure and divestitures may adversely impact the assumptions used in the valuations and ultimately result in future impairment charges.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
The diverse nature of our business activities necessitates the management of various financial and market risks, including those related to changes in interest rates, foreign currency exchange rates and commodity costs.
Interest Rate Risk: We manage interest expense using a mixture of fixed-rate and variable-rate debt. A change in interest rates impacts the fair value of our 5.625% Senior Notes, but not our earnings or cash flow because the interest rate on such debt is fixed. Our variable-rate debt obligations consist primarily of revolver and term loan borrowings under our Senior Credit Facility. A ten percent increase in the average cost of our variable rate debt (from 2.44% to 2.68%) would have resulted in a corresponding $0.3 million and $0.8 million increase in financing costs for the three and nine months ended May 31, 2016, respectively.

Foreign Currency Risk: We maintain operations in the U.S. and various foreign countries. Our more significant non-U.S. operations are located in Australia, the Netherlands, the United Kingdom, Mexico and China, and have foreign currency risk relating to receipts from customers, payments to suppliers and intercompany transactions denominated in foreign currencies. Under certain conditions, we enter into hedging transactions (primarily forward foreign currency swaps) that enable us to mitigate the potential adverse impact of foreign currency exchange rate risk (see Note 7, “Derivatives” for further information). We do not engage in trading or other speculative activities with these transactions, as established policies require that these hedging transactions relate to specific currency exposures.
Similar to what we experienced during the last eighteen months, the strengthening of the U.S. dollar against most currencies can have an unfavorable impact on our results of operations and financial position as foreign denominated operating results are translated into U.S. dollars. To illustrate the potential impact of changes in foreign currency exchange rates on the translation of our results of operations, quarterly sales and operating profit were remeasured assuming a ten percent decrease in all foreign exchange rates compared with the U.S. dollar. Using this assumption, quarterly sales would have been lower by $16 million and operating profit would have been lower by $2 million, respectively, for the three months ended May 31, 2016. This sensitivity analysis assumes that each exchange rate would change in the same direction relative to the U.S. dollar and excludes the potential effects that changes in foreign currency exchange rates may have on sales levels or local currency prices. Similarly, a ten percent decline in foreign currency exchange rates on our May 31, 2016 financial position would have resulted in a $22 million reduction to equity (accumulated other comprehensive loss), as a result of non U.S. dollar denominated assets and liabilities being translated into U.S. dollars, our reporting currency.
Commodity Cost 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 and plastic resin, 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.
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

30

Table of Contents

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, 2016 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

31

Table of Contents

PART II—OTHER INFORMATION

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds    
The Company's Board of Directors has authorized the repurchase of shares of the Company’s common stock under publicly announced share repurchase programs. Since the inception of the initial share repurchase program in fiscal 2012, the Company has repurchased 20,326,479 shares of common stock (over 25% of its then outstanding shares) for $615 million. The following table summarizes share repurchases during the three months ended May 31, 2016:
 
 
Total Number
of Shares
Purchased
 
Average Price
Paid per Share
 
Maximum
Number of
Shares That
May Yet Be
Purchased
Under the
Program
March 1 to March 31, 2016
 
200,000

 
$
23.84

 
7,673,521

April 1 to April 30, 2016
 

 

 
7,673,521

May 1 to May 31, 2016
 

 

 
7,673,521

 
 
200,000

 
$
23.84

 
 
Item 6 – Exhibits
(a) Exhibits
See “Index to Exhibits” on page 34, which is incorporated herein by reference.

32

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 8, 2016
 
By:
/S/ ANDREW G. LAMPEREUR
 
 
 
Andrew G. Lampereur
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)


33

Table of Contents

ACTUANT CORPORATION
(the “Registrant”)
(Commission File No. 1-11288)
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED May 31, 2016
INDEX TO EXHIBITS
 
 
 
 
 
 
 
 
 
 
Exhibit
 
Description
 
Incorporated Herein By Reference To
 
Filed
Herewith
 
Furnished Herewith
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
 
 
 
 
 
 
 
 
 
101
 
The following materials from the Actuant Corporation Form 10-Q for the quarter ended May 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.
 
 
 
X
 
 


34