EPAC

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended February 28, 2001, and the six months ended on that date. The registrant, formerly Applied Power Inc., changed its name to Actuant Corporation on January 9, 2001. On the same date, shareholders approved a five-for-one reverse stock split. The Company operates two primary segments: Tools & Supplies (hydraulic and electrical tools) and Engineered Solutions (customized systems for RV, truck, and automotive markets). The financial statements exclude the former Electronics segment (APW Ltd.), which was distributed to shareholders in July 2000 and is reported as discontinued operations.

Key Financial Metrics

Liquidity: Cash balances are intentionally low ($0.3 million) to minimize financing costs by reducing borrowings. The Company has approximately $41.5 million in availability under credit facilities.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 38.4% in the quarter and 35.4% year-to-date. Adjusted sales (excluding divested businesses) declined 14.9% in the quarter and 11.4% year-to-date.
• Segment Performance:
  • Tools & Supplies: Adjusted sales declined 9.3% (quarter) and 2.8% (six months), driven by a 16% drop at Gardner Bender and foreign currency impacts.
  • Engineered Solutions: Adjusted sales declined 22.4% (quarter) and 21.9% (six months), primarily due to a 50% drop in RV market sales and foreign currency headwinds.
• Profitability: Net earnings from continuing operations dropped significantly due to lower sales volumes and increased net financing costs ($12.5 million in the quarter vs. $7.7 million prior year) resulting from the new capital structure post-distribution.
• Divestitures: The prior year included results from Norelem, Barry Controls, and Air Cargo, which were divested in fiscal 2000, making direct comparisons difficult without adjustment.

Outlook, Risks, and Unusual Items

• Guidance: Management expects total debt reduction of $35.0 million in fiscal 2001. No dividends are expected in the near future; cash flow will be used for debt reduction and capital expenditures.
• Unusual Items:
  • Fire Loss: A fire in February 2001 damaged a facility in Oldenzaal, Netherlands. Costs and lost assets totaled $0.7 million, recorded as a receivable pending insurance recovery.
  • Contract Recovery: The prior year included a $1.4 million contract termination recovery in the Engineered Solutions segment.
• Risks:
  • High Leverage: The Company carries significant debt ($412.9 million), including 13% Senior Subordinated Notes, limiting financial flexibility.
  • Market Conditions: Results are sensitive to economic conditions in the RV, trucking, and automotive industries, particularly in North America.
  • Legal: An indemnification claim of approximately $6 million exists regarding the disposition of Barry Wright Corporation; management believes it has viable defenses.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with debt covenants given the high leverage and recent cash flow usage for debt repayment.
• RV Market Recovery: Monitor the North American recreational vehicle market, as a 50% sales drop in this sector significantly impacted the Engineered Solutions segment.
• Insurance Recovery: Confirm the timeline and amount of insurance proceeds for the Netherlands fire loss ($0.7 million).
• Acquisition Integration: Assess the impact of the March 1, 2001 acquisition of Dewald Manufacturing ($12.8 million) on future RV segment revenues.
• Divestiture Talks: Track the status of preliminary discussions regarding the potential sale of the Mox-Med business ($20 million annual sales).