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ATU > SEC Filings for ATU > Form 10-K on 26-Oct-2012All Recent SEC Filings

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Form 10-K for ACTUANT CORP


26-Oct-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Background

As Discussed in Item 1, "Business," we are a global diversified company that manufactures a broad range of industrial products and systems and are organized into four reportable segments, Industrial, Energy, Electrical 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, as well as rope and cable solutions to the global oil & gas, power generation and energy markets. The Electrical segment designs, manufactures and distributes a broad range of electrical products to the retail DIY, wholesale, OEM, solar, utility, marine and other harsh environment markets. The Engineered Solutions segment provides highly engineered position and motion control systems to OEMs in various vehicle markets, as well as a variety of other products to the industrial and agricultural markets.

Our businesses provide a vast array of products and services across multiple customers and geographies which results in significant diversification. The long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment, but also on our ability to identify, consummate and integrate strategic acquisitions, develop and market innovative new products, expand our business activity geographically and continuously improve operational excellence. We remain focused on maintaining our financial strength by adjusting our cost structure to reflect changes in demand levels and by proactively managing working capital and cash flow generation. Our priorities during fiscal 2013 include a continued focus on operational excellence, cash flow generation and growth initiatives (new product development, market share gains and strategic acquisitions).

Results of Operations

The comparability of operating results has been impacted by acquisitions, divestitures and the economic conditions that exist in the end markets we serve. The operating results of acquired businesses are included in our consolidated financial statements only since their respective acquisition date. Additionally, changes in foreign currency exchange rates also influence our financial results as approximately one-half of our sales are denominated in currencies other than the U.S. dollar. The year-over-year weakening of the Euro during fiscal 2012 unfavorably impacted our operating results due to the translation of Euro denominated results. Impairment charges, restructuring costs and the related benefits from previously completed restructuring projects also impact the comparability of operating results. Since the global recession in 2009 and 2010, we have taken significant actions to address our cost structure, including workforce reductions, consolidation of facilities and the centralization of certain selling and administrative functions.


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Historical Financial Data (in millions)



                                                                   Year Ended August 31,
                                                   2012                    2011                    2010
Statements of Earnings Data:
Net sales                                    $ 1,605       100 %    $ 1,445        100 %    $ 1,161        100 %
Cost of products sold                            988        62 %        889         62 %        734         63 %

Gross profit                                     617        38 %        556         38 %        427         37 %
Selling, administration, and engineering
expenses                                         353        22 %        333         23 %        268         23 %
Restructuring charges                              3         0 %          2          0 %         15          1 %
Impairment charge                                 62         4 %         -           0 %         -           0 %
Amortization of intangible assets                 29         2 %         27          2 %         22          2 %

Operating profit                                 170        11 %        194         13 %        122         11 %
Financing costs, net                              30         2 %         32          2 %         32          3 %
Debt refinancing charges                          17         1 %         -           0 %         -           0 %
Other expense, net                                 3         0 %          2          0 %          1          0 %

Earnings from continuing operations before
income tax expense                               120         7 %        160         11 %         89          8 %
Income tax expense                                33         2 %         35          2 %         19          2 %

Earnings from continuing operations               87         5 %        125          9 %         70          6 %
Loss from discontinued operations, net of
income taxes                                      -          0 %        (13 )       -1 %        (46 )       -4 %

Net earnings                                 $    87         5 %    $   112          8 %    $    24          2 %

Other Financial Data:
Depreciation                                 $    25                $    25                 $    25
Capital expenditures                              23                     23                      20

Consolidated net sales increased by approximately $160 million (11%) from $1,445 million in fiscal 2011 to $1,605 million in fiscal 2012. Excluding the $118 million of sales from acquired businesses and the $24 million unfavorable impact of foreign currency exchange rate changes, fiscal 2012 consolidated core sales increased 5%. Consolidated net sales increased by approximately $284 million (25%) from $1,161 million in fiscal 2010 to $1,445 million in fiscal 2011. Excluding the $119 million of sales from acquired businesses and the $23 million favorable impact of foreign currency exchange rate changes, fiscal 2011 consolidated core sales increased 13% compared to the prior year. Changes in net sales at the segment level are discussed in further detail below.

Consolidated operating profit for fiscal 2012 was $170 million, compared to $194 million and $122 million for fiscal 2011 and 2010, respectively. In addition to the impact of economic conditions, the comparability of results between periods is impacted by acquisitions, changes in foreign currency exchange rates, $17 million of debt refinancing charges in fiscal 2012, the $62 million non-cash impairment charge recognized in fiscal 2012 and the timing and amount of restructuring charges and related benefits. Changes in operating profit at the segment level are discussed in further detail below.

Segment Results

Industrial Segment

While core sales growth in the Industrial segment moderated throughout fiscal 2012 (due in-part to tougher prior year comparables), the segment delivered four consecutive quarters of year-over-year core sales growth in fiscal 2012, driven by elevated industrial manufacturing activities. This core sales growth and operational improvements drove segment profitability. The Industrial segment continues to focus on providing customers with innovative integrated solutions, the commercialization of new products and the expansion of its business in


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fast growing regions and vertical markets. The following table sets forth summary results of operations for the Industrial segment (in millions):

                                            Year Ended August 31,
                                         2012        2011        2010
                   Net Sales            $  419      $  393      $  300
                   Operating Profit        115          98          66
                   Operating Profit %     27.4 %      25.0 %      22.0 %

Fiscal 2012 compared to Fiscal 2011

Fiscal 2012 Industrial segment net sales increased by $26 million (7%) to $419 million, the result of strong industrial tool demand across most geographies. Excluding the unfavorable impact of foreign currency exchange rates ($7 million), core sales growth for fiscal 2012 was 9%. Growth + Innovation initiatives, including targeted vertical market strategies (mining, industrial, infrastructure) and increased global demand for heavy lift and hydraulic systems (Integrated Solutions), also contributed to sales growth. These higher sales volumes, operational efficiencies, favorable product mix and lower incentive compensation costs resulted in operating profit margin expansion during fiscal 2012. Operating profit was $115 million in fiscal 2012, compared to $98 million in fiscal 2011, a $17 million (17%) increase.

Fiscal 2011 compared to Fiscal 2010

Fiscal 2011 Industrial segment net sales increased by $93 million (31%) to $393 million. The acquisition of two Integrated Solutions businesses (Hydrospex and Team Hydrotec) contributed $36 million of sales for the twelve months ended August 31, 2011. Excluding sales from these acquisitions and the favorable impact of the weaker U.S. dollar ($8 million), core sales grew 19% in fiscal 2011. In addition to generally improved macroeconomic conditions, the increased sales were the result of new product introductions and increased demand from end users in the mining, oil & gas and general maintenance industries. Industrial segment operating profit increased to $98 million for the year ended August 31, 2011 compared to $66 million in fiscal 2010. Fiscal 2011 operating profit comparisons were favorably impacted by increased sales volumes and a $6 million reduction in restructuring costs. The expansion of the Industrial segment operating profit margin, despite unfavorable acquisition mix and additional costs associated with growth initiatives, was the result of a lower cost structure from past restructuring actions and increased production levels (higher absorption of fixed manufacturing costs).

Energy Segment

Worldwide requirements for energy and supportive oil prices have encouraged Energy segment customers and asset owners to invest in capital projects, improve output and efficiencies and complete previously deferred maintenance activities. As a result, we have experienced broad based strength across this segment which generated year-over-year double digit core sales growth throughout fiscal 2012. The following table sets forth summary results of operations for the Energy segment (in millions):

                                            Year Ended August 31,
                                         2012        2011        2010
                   Net Sales            $  349      $  293      $  236
                   Operating Profit         62          49          31
                   Operating Profit %     17.8 %      16.8 %      13.1 %

Fiscal 2012 compared to Fiscal 2011

Energy segment net sales for the fiscal year ended August 31, 2012 increased $56 million (19%) to $349 million from $293 million a year ago. Excluding $7 million of sales from the Jeyco acquisition in 2012 and


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the impact of foreign currency rate changes (which unfavorably impacted sales by $5 million), core sales grew 19% in 2012. The core sales growth reflects market share gains and continued strong demand for our products, rental assets and technical manpower services across the global energy market. Energy segment operating profit increased $13 million (27%) to $62 million in fiscal 2012 compared to $49 million in fiscal 2011. The year-over-year improvement in operating profit margins is primarily the result of continued productivity improvements, increased operating leverage (driven by higher sales volumes), reduced incentive compensation costs and a favorable $3 million adjustment to an acquisition earn-out provision.

Fiscal 2011 compared to Fiscal 2010

Energy segment net sales in fiscal 2011 were $293 million, a $57 million (24%) increase over the prior year. Excluding sales from acquired businesses and foreign currency changes (which favorably impacted fiscal 2011 sales by $23 million), core sales increased 15% during fiscal 2011. This increase was the result of higher activity levels across nearly all of the segment's primary markets including capital project activity in the oil & gas market, maintenance related spending in North America and emerging markets and strong sales to the power generation market. Energy segment operating profit increased $18 million (58%) to $49 million in fiscal 2011 compared to $31 million in fiscal 2010. The year-over-year increase in operating profit margins is primarily the result of continued productivity improvements and significantly increased operating leverage, a $2 million reduction in restructuring charges and favorable acquisition mix, partially offset by higher incentive compensation costs.

Electrical Segment

During fiscal 2012, many of the end markets within the Electrical segment recovered modestly from recessionary lows. These improved end market conditions and certain pricing actions resulted in the Electrical segment delivering 7% core sales growth for the fiscal year. This segment continues to focus on driving cost savings from the recently completed manufacturing facility consolidation and being responsive to end market demand (including changes in European solar feed-in tariffs and end market demand in North America). The following table sets forth the summary results of operations for the Electrical segment (in millions):

                                                  Year Ended August 31,
                                               2012         2011       2010
             Net Sales                        $   329       $ 286      $ 234
             Operating Profit (Loss)              (35 )        21         20
             Adjusted Operating Profit(1)          28          21         20
             Adjusted Operating Profit %(1)       8.5 %       7.2 %      8.5 %

(1) Excludes fiscal 2012 non-cash asset impairment charge of $62 million.

Fiscal 2012 compared to Fiscal 2011

Electrical segment net sales increased $43 million (15%) in fiscal 2012 to $329 million. Excluding increased sales from the Mastervolt acquisition ($28 million) and changes in foreign currency exchange rates, core sales grew 7% in fiscal 2012. This was the result of price increases and modestly higher volumes in most sales channels. The Electrical segment generated a $35 million operating loss in fiscal 2012, compared to an operating profit of $21 million in fiscal 2011. Fiscal 2012 operating results were adversely impacted by a $62 million non-cash asset impairment charge related to the Mastervolt business. Despite unfavorable acquisition mix, higher incentive compensation costs and $4 million of restructuring costs incurred to consolidate transformer manufacturing facilities, adjusted operating profit margins expanded as a result of pricing actions, cost saving initiatives and favorable product mix.


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Fiscal 2011 compared to Fiscal 2010

Electrical segment net sales increased by $52 million (22%) to $286 million in fiscal 2011, with $49 million of sales growth due to the Mastervolt acquisition in December 2010. Excluding Mastervolt sales and favorable changes in foreign currency exchange rates, core sales were flat with fiscal 2010. Electrical segment operating profit increased by $1 million, to $21 million in fiscal 2011. Excluding restructuring costs, operating profit margins declined in fiscal 2011 primarily due to unfavorable mix resulting from the Mastervolt acquisition.

Engineered Solutions Segment

The Engineered Solutions segment experienced a core sales decline in fiscal 2012, reflecting lower production rates by truck and automotive OEMs. Despite strong demand during the first half of fiscal 2012, growth rates have since moderated in the global agriculture and North American truck and construction equipment end markets as major OEMs reduce production schedules. This segment continues to focus on integrating the recently acquired Turotest and CrossControl acquisitions and reducing its cost structure in line with reduced OEM build rates. The following table sets forth summary results of operations for the Engineered Solutions segment (in millions):

                                            Year Ended August 31,
                                         2012         2011       2010
                   Net Sales            $   508      $  473      $ 391
                   Operating Profit          61          64         32
                   Operating Profit %      12.0 %      13.4 %      8.2 %

Fiscal 2012 compared to Fiscal 2011

Net sales in the Engineered Solutions segment increased $35 million (7%) to $508 million in fiscal 2012. Excluding the $84 million of sales from acquired businesses and the impact of the weaker Euro (which unfavorably impacted sales by $12 million), core sales declined 9% from the prior year. The core sales decline reflects sharply lower demand and reduced production schedules from vehicle OEM's serving the convertible top auto and European and China heavy duty truck markets. Engineered Solutions segment operating profit was $61 million during fiscal 2012 compared to $64 million in the prior year. Segment operating profit declined from the prior year period, primarily the result of sales declines in some of its more profitable product lines, such as automotive and cab tilt trucks.

Fiscal 2011 compared to Fiscal 2010

Engineered Solutions segment net sales increased by $82 million (21%) to $473 million in fiscal 2011. Excluding the $8 million favorable impact of foreign currency rate changes and $26 million of sales from acquired businesses, core sales increased 12% in fiscal 2011. This growth reflects improved demand from vehicle OEMs in the global heavy-duty truck, agriculture and construction equipment markets. Engineered Solutions segment operating profit increased by $32 million from an operating profit of $32 million in fiscal 2010 to $64 million for fiscal 2011, primarily due to higher sales volume and favorable fixed cost leverage.

Restructuring Charges

In fiscal 2009 and 2010, in response to the dramatic downturn in the worldwide economy, we committed to various restructuring initiatives including workforce reductions, plant consolidations to reduce manufacturing capacity, the continued movement of production and product sourcing to low cost countries and the centralization of certain selling and administrative functions. These actions were substantially completed by August 31, 2010, with limited restructuring activity and expense in fiscal 2011 and 2012. Total restructuring costs were $4 million,


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$2 million and $17 million for the years ended August 31, 2012, 2011 and 2010, respectively. Restructuring charges in fiscal 2012 primarily relate to the closure of an Electrical segment manufacturing facility, including related severance and asset write-downs. We believe these restructuring actions better align our resources with strategic growth opportunities, optimize existing manufacturing capabilities, improve our overall cost structure and deliver increased free cash flow and profitability.

Impairment Charges

During the fourth quarter of fiscal 2012, we recognized a $62 million non-cash asset impairment charge related to the goodwill and indefinite lived intangible assets (tradename) of the Mastervolt business. The impairment was the result of business underperformance since its acquisition, reduced long-term Mastervolt profit and cash flow expectations, as well as weaker economic and credit conditions in Europe. While we believe the solar industry will continue to grow globally, we have reduced our long-term profitability expectations for Mastervolt (see Note 6, "Impairment Charges" for further information).

Financing Costs, Net

All debt is considered to be for general corporate purposes and therefore financing costs have not been allocated to our segments. Net financing costs were $30 million for the year ending August 31, 2012 and $32 million for each of the years ended August 31, 2011 and 2010. The reduction in interest expense in fiscal 2012 reflects the conversion of our 2% Convertible Notes into common stock, as well as the benefit of lower borrowing costs including the benefit of refinancing our Senior Notes.

Income Tax Expense

Our income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are lower than the U.S. federal statutory rate, state tax rates in the jurisdictions where we do business, tax minimization planning and our ability to utilize various tax credits and net operating loss carryforwards. Income tax expense also includes the impact of provision to return adjustments and changes in valuation allowances and reserve requirements for unrecognized tax benefits. The effective income tax rate for fiscal 2012 was 27.5% (22.4% excluding the debt refinancing and impairment charges), compared to 21.8% and 21.1% in fiscal 2011 and 2010, respectively.

Discontinued Operations

Discontinued operations includes the results of the divested European Electrical
business which was sold in fiscal 2010. See Note 3, "Discontinued Operations" in
the notes to the consolidated financial statements for further information. The
following table summarizes the results of discontinued operations (in millions):



                                                                 Year Ended
                                                                 August 31,
                                                              2011       2010
       Net sales                                              $  49      $ 106

       Net loss on disposal                                     (16 )       -
       Loss from operations of discontinued business (1)         (1 )      (41 )
       Income tax (expense) benefit                               4         (5 )

       Loss from discontinued operations, net of income tax   $ (13 )    $ (46 )

(1) Includes non-cash asset impairment charge of $36 million (European Electrical) in fiscal 2010.


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Liquidity and Capital Resources

The following table summarizes the cash flow attributable to operating, investing and financing activities (in millions):

                                                            Year Ended August 31,
                                                         2012         2011       2010
  Net cash provided by operating activities             $   182      $  172      $ 121
  Net cash used in investing activities                     (84 )      (331 )      (57 )
  Net cash provided by (used in) financing activities       (71 )       158        (37 )
  Effect of exchange rates on cash                           (3 )         5          2

  Net increase in cash and cash equivalents             $    24      $    4      $  29

Cash flows from operating activities in fiscal 2012 were a record $182 million, the result of strong cash earnings and effective working capital management, which were partially offset by the use of $30 million of cash related to the debt refinancing. This operating cash flow and the proceeds from the debt refinancing funded $63 million of share repurchases, $70 million of business acquisitions and the repayment of revolving credit facility borrowings. Proceeds from the sale of property, plant and equipment (which included the sale-leaseback of certain equipment and the sale of a vacant facility) were $9 million, while related capital expenditures were $23 million.

During fiscal 2011 we generated $172 million of cash flow from operations due to increased earnings from continuing operations and effective working capital management. We utilized this cash flow, borrowings under our Senior Credit Facility and the $4 million of proceeds from the sale of the European Electrical business to fund $313 million of acquisitions (Mastervolt and Weasler) and $23 million of capital expenditures.

In fiscal 2010, cash flows from operating activities totaled $121 million. Excluding the $37 million negative impact on working capital due to the expiration of our accounts receivable securitization program, net cash provided by operating activities increased relative to the prior year as a result of increased earnings from continuing operations, effective working capital management and the receipt of income tax refunds. This cash flow and the $8 million of proceeds from the sale of a portion of the European Electrical product line funded $46 million of acquisitions, $20 million of capital expenditures and $67 million of net debt repayments.

Primary Working Capital Management

We use primary working capital ("PWC") as a percentage of sales as a key
indicator 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 the components of the
metric (amounts in millions):



                                       August 31, 2012             August 31, 2011
                                       $           PWC %           $           PWC %
      Accounts receivable, net      $    235           15 %     $    224           14 %
      Inventory, net                     212           13 %          223           14 %
      Accounts payable                  (175 )        (11 %)        (170 )        (11 %)

      Net primary working capital   $    272           17 %     $    277           17 %


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Liquidity

Our Senior Credit Facility, which matures on February 23, 2016, includes a $600 million revolving credit facility, a $100 million term loan and a $300 million expansion option. Quarterly principal payments of $1.25 million began on the $100 million term loan on March 31, 2012, increasing to $2.5 million per quarter beginning on March 31, 2013, with the remaining principal due at maturity. At August 31, 2012, we had $68 million of cash and cash equivalents and $598 million of unused capacity on the revolver (all of which was available for borrowings). We believe that the availability under the Senior Credit Facility, combined with our existing cash on hand and anticipated operating cash flows will be adequate to meet operating, debt service, stock buyback, acquisition funding and capital expenditure requirements for the foreseeable future.

See Note 8, "Debt" in the notes to the consolidated financial statements for further discussion on the Senior Credit Facility.

Seasonality and Working Capital

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