Company Quick10K Filing
Quick10K
Actuant
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$21.38 61 $1,313
10-K 2019-08-31 Annual: 2019-08-31
10-Q 2019-05-31 Quarter: 2019-05-31
10-Q 2019-02-28 Quarter: 2019-02-28
10-Q 2018-11-30 Quarter: 2018-11-30
10-K 2018-08-31 Annual: 2018-08-31
10-Q 2018-05-31 Quarter: 2018-05-31
10-Q 2018-02-28 Quarter: 2018-02-28
10-Q 2017-11-30 Quarter: 2017-11-30
10-K 2017-08-31 Annual: 2017-08-31
10-Q 2017-05-31 Quarter: 2017-05-31
10-Q 2017-02-28 Quarter: 2017-02-28
10-Q 2016-11-30 Quarter: 2016-11-30
10-K 2016-08-31 Annual: 2016-08-31
10-Q 2016-05-31 Quarter: 2016-05-31
10-Q 2016-02-29 Quarter: 2016-02-29
10-Q 2015-11-30 Quarter: 2015-11-30
10-K 2015-08-31 Annual: 2015-08-31
10-Q 2015-05-31 Quarter: 2015-05-31
10-Q 2015-02-28 Quarter: 2015-02-28
10-Q 2014-11-30 Quarter: 2014-11-30
10-K 2014-08-31 Annual: 2014-08-31
10-Q 2014-05-31 Quarter: 2014-05-31
10-Q 2014-02-28 Quarter: 2014-02-28
10-Q 2013-11-30 Quarter: 2013-11-30
8-K 2019-11-05 Officers
8-K 2019-10-31 M&A, Other Events, Exhibits
8-K 2019-10-30 Amend Bylaw, Exhibits
8-K 2019-10-29 Officers, Exhibits
8-K 2019-09-26 Earnings, Exhibits
8-K 2019-09-25 Other Events
8-K 2019-07-30 Officers, Other Events, Exhibits
8-K 2019-07-30 Other Events
8-K 2019-07-18 Regulation FD
8-K 2019-07-17 Officers, Exhibits
8-K 2019-07-08 Enter Agreement, Impairments, Regulation FD, Exhibits
8-K 2019-06-26 Earnings, Exhibits
8-K 2019-04-12 Officers
8-K 2019-03-29 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2019-03-21 Earnings, Exhibits
8-K 2019-01-22 Shareholder Vote
8-K 2019-01-22 Shareholder Vote
8-K 2019-01-22 Exit Costs
8-K 2019-01-22 Exit Costs
8-K 2018-12-20 Earnings, Exhibits
8-K 2018-10-04 Earnings
8-K 2018-09-26 Earnings, Exhibits
8-K 2018-07-27 Exhibits
8-K 2018-07-27 Enter Agreement, Exhibits
8-K 2018-07-10 Officers
8-K 2018-06-20 Earnings, Exhibits
8-K 2018-03-20 Enter Agreement, Officers, Exhibits
8-K 2018-01-23 Officers, Shareholder Vote, Exhibits
DHR Danaher 97,653
CGNX Cognex 7,434
WWD Woodward 6,510
CW Curtiss Wright 5,205
KMT Kennametal 2,360
BRKS Brooks Automation 2,231
NANO Nanometrics 662
HPJ Highpower International 70
AETI American Electric Technologies 12
VJET Voxeljet Ag 8
ATU 2019-08-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1. Summary of Significant Accounting Policies
Note 2. Revenue From Contracts with Customers
Note 3. Restructuring Charges
Note 4. Acquisitions
Note 5. Divestiture Activities
Note 6. Goodwill, Intangible Assets and Long-Lived Assets
Note 7. Debt
Note 8. Fair Value Measurements
Note 9. Derivatives
Note 10. Leases
Note 11. Employee Benefit Plans
Note 12. Income Taxes
Note 13. Capital Stock and Share Repurchases
Note 14. Stock Plans
Note 15. Business Segment, Geographic and Customer Information
Note 16. Commitments and Contingencies
Note 17. Guarantor Subsidiaries
Note 18. Director & Officer Transition Charges
Note 19. Quarterly Financial Data (Unaudited)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors; Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
EX-4.2 atu10-k08312019ex42.htm
EX-21 atu10-k08312019ex21.htm
EX-23 atu10-k08312019ex23.htm
EX-31.1 atu10-k08312019ex311.htm
EX-31.2 atu10-k08312019ex312.htm
EX-32.1 atu10-k08312019ex321.htm
EX-32.2 atu10-k08312019ex322.htm

Actuant Earnings 2019-08-31

ATU 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 atu10-k08312019.htm 10-K Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2019
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to                             to                             
Commission File No. 1-11288
ACTUANT CORPORATION
(Exact name of Registrant as specified in its charter)
Wisconsin
 
39-0168610
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification 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)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Ticker Symbol(s)
Name of each exchange on which registered
 
 
Class A common stock, $0.20 par value per share
EPAC
NYSE
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.       
 Yes              No    
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15d of the Act.        
Yes              No    
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, and (2) has been subject to such filing requirements for the past 90 days.        Yes              No    
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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              No    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
Non-accelerated filer
 
 
Smaller reporting company
 
Emerging growth company
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     Yes      No  

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

As of February 28, 2019, the end of the Registrant's second fiscal quarter, the aggregate market value of the shares of Common Stock (based upon the closing price on the New York Stock Exchange on February 28, 2019) held by non-affiliates of the Registrant was approximately $1.50 billion.

There were 60,536,922 shares of the Registrant’s Class A Common Stock outstanding as of September 30, 2019.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on January 28, 2020 are incorporated by reference into Part III hereof.
 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
 
 
 
Item 15.
Item 16.











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



FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS
This annual report on Form 10-K 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. The terms “may,” “should,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “objective,” “plan,” “project” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to inherent risks and uncertainties that may cause actual results or events to differ materially from those contemplated by such forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that may cause actual results or events to differ materially from those contemplated by such forward-looking statements include, without limitation, general economic uncertainty, market conditions in the industrial, oil & gas, energy, power generation, infrastructure, commercial construction, truck and automotive industries, market acceptance of existing and new products, successful integration of acquisitions, divestitures and related restructuring, operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material, labor, or overhead cost increases, foreign currency risk, interest rate risk, commodity risk, the impact of geopolitical activity, tariffs, litigation matters, impairment of goodwill or other intangible assets, the Company’s ability to access capital markets and other factors that may be referred to or noted in the Company’s reports filed with the Securities and Exchange Commission from time to time, including those described under "Item 1A. Risk Factors" of this annual report on Form 10-K. 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.
When used herein, the terms “Actuant,” “we,” “us,” “our,” and the “Company” refer to Actuant Corporation and its subsidiaries.
PART I
Item  1.    Business
General
Actuant Corporation, doing business as Enerpac Tool Group, is a premier industrial tools and services company serving a broad and diverse set of customers in more than 90 countries. The Company is a global leader in the engineering and manufacturing of high pressure hydraulic tools, controlled force products and solutions for precise positioning of heavy loads that help customers safely and reliably tackle some of the most challenging jobs around the world. The Company was founded in 1910 and is headquartered in Menomonee Falls, Wisconsin.
During the fourth quarter of fiscal 2019, the Company’s financial reporting segments were modified to reflect changes in our reporting structure as a result of entering into a Securities Purchase Agreement ("SPA") to sell the remaining businesses within our legacy Engineered Components & Systems segment exclusive of Cortland U.S. The Company now has three operating segments; Industrial Tools & Services ("IT&S"), Other, and Engineered Components and Systems ("EC&S"). The IT&S segment remains unchanged from our previous segment structure and represents the only reportable segment. All prior period disclosures have been adjusted to reflect the one reportable segment. The IT&S reportable segment is primarily engaged in the design, manufacture and distribution of branded hydraulic and mechanical tools as well as providing services and tool rentals to the industrial, maintenance, infrastructure, oil & gas, energy and other markets. The Other operating segment is comprised of Cortland U.S., along with the Viking business which was divested on the first day of the second quarter of fiscal 2018. These two operating segments represent continuing operations within our consolidated financial statements. The EC&S segment, after the change in reporting structure, represents the businesses currently subject to the SPA with an anticipated closure date in the fourth calendar quarter of 2019, as well as the Cortland Fibron and Precision Hayes International ("PHI") businesses which were divested in fiscal 2019. As the pending divestiture of the remaining businesses within the EC&S segment in combination with the divestiture of Cortland Fibron and PHI represent a strategic shift in our operations, the EC&S segment consists entirely of businesses that are considered discontinued operations. All prior period financial statements have been adjusted to reflect this change. Financial information related to the Company's reportable segment is included in Note 15, "Business Segment, Geographic and Customer Information" in the notes to the consolidated financial statements.
Our Business Model
Our long-term goal is to grow diluted earnings per share faster than our peers. We intend to leverage our strong brand, our market positions, and our dealer and distribution networks to generate organic core sales growth that exceeds end-market growth rates. Organic growth is accomplished through a combination of share capture, product innovation and market expansion into emerging industries and geographic regions. In addition to organic growth, we also focus on profit margin expansion by utilizing continuous improvement techniques to drive productivity and lower costs and by enacting routine pricing initiatives to offset commodity and tariff increases. Finally, cash flow generation is critical to achieving our financial

1


and long-term strategic objectives. Strong cash flow generation is achieved by maximizing returns on assets and minimizing primary working capital needs. The cash flow that results from efficient asset management, improved profitability and loyal customers is used to fund internal growth opportunities, strategic acquisitions and opportunistic common stock repurchases.
Description of Business Segments
Industrial Tools & Services Reportable Segment
The IT&S segment is a global supplier of both products and services to a broad array of end markets, including industrial, energy, mining and production automation markets. Our primary products include branded tools, highly engineered heavy lifting technology solutions and hydraulic torque wrenches. On the services side of the segment, we provide energy maintenance and manpower services to meet customer-specific needs and rental capabilities for certain of our products. Our branded tools and services are primarily marketed primarily through the Enerpac, Hydratight, Larzep and Simplex brand names.
Our IT&S segment includes high-force hydraulic and mechanical tools (cylinders, pumps, valves and specialty tools) which are designed to allow users to apply controlled force and motion to increase productivity, reduce labor costs and make work safer and easier to perform. Our products also include bolt tensioners and other miscellaneous products. These tools operate at very high pressures of approximately 5,000 to 12,000 pounds per square inch. With our products used in a wide variety of end markets, they are often deployed in harsh operating conditions, such as oil & gas production, machining and infrastructure maintenance and repair, where safety is a key differentiator. As a result, we hold ourselves to a world class safety standard to ensure both our employees and our customers are safe.
In addition to providing a comprehensive line of tools and other products, the IT&S segment sustains a services and rental network providing highly trained technicians to perform bolting, machining and joint integrity work for our customers.
The segment delivers products and services primarily through our world-class, global network of distributors, as well as, direct sales to OEM's and select end users. Examples of industrial distributors include W.W. Grainger, MSC and Blackwoods.
Other Operating Segment
In light of the disposition of the Viking business during fiscal 2018, the remaining operations of the Other operating segment are those of our Cortland U.S. business, which primarily designs and manufactures high performance synthetic ropes and biomedical assemblies. The Other operating segment does not meet the quantitative or qualitative thresholds to be considered a reportable segment. Therefore, the results are not disclosed separately as would be required if considered a reportable segment and as the business is not closely related to the IT&S segment, results are not aggregated to be included in the results of the IT&S reportable segment. Certain information related to the Other operating segment will be disclosed within Note 15, "Business Segment, Geographic, and Customer Information" in order to comply with US GAAP requirements to reconcile certain required disclosures to the Consolidated Financial Statements.
Acquisitions and Divestitures
For a summary of recent acquisition and divestiture transactions impacting continuing operations, see footnote 2 to the table included in Item 6 Financial Data, as well as Note 4, "Acquisitions" and Note 5, "Divestiture Activities" in the notes to the consolidated financial statements.
International Business
The products and services for our continuing operations are generally available globally, with our principal markets outside the United States being Europe and Asia. In fiscal 2019, we derived 38% of our net sales from continuing operations from the United States, 20% from Europe, 13% from the Middle East, 12% from Asia and 17% from other geographic areas. We have operations around the world that allows us to draw on the skills of a global workforce, provides flexibility to our operations, allows us to drive economies of scale, provides revenue streams that may help offset economic trends that are specific to individual countries and offers us an opportunity to access new markets. Although international operations are subject to certain risks, we continue to believe that a global presence is key to maintaining strong relationships with many of our global customers. Financial information related to the Company's geographic footprint of our continuing operations is included in Note 15, "Business Segment, Geographic and Customer Information" in the notes to the consolidated financial statements.

2


Product Development and Engineering
We conduct research and development activities to develop new products and to enhance the functionality, effectiveness, ease of use and reliability of our existing products. We believe that our engineering and research and development efforts have been and continue to be key drivers of our success in the marketplace. Our advanced design and engineering capabilities contribute to the development of innovative and highly engineered products, maintain our technological leadership and enhance our ability to provide customers with unique and customized solutions and products. We anticipate that we will continue to make significant expenditures for research and development as we seek to provide new innovative tools and services to grow our market share. Research and development ("R&D") costs are expensed as incurred. For continuing operations, R&D costs were $9.3 million in fiscal 2019, an increase of 7% from $8.7 million in fiscal 2018 and an increase of 5% from $8.9 million in fiscal 2017. We target 10% of consolidated sales annually to be from new product development as a result of our research and development activities.
We also incur costs in connection with fulfilling custom orders and developing unique solutions for distinct customer needs, which are not included in these expense totals.
The Company holds numerous patents and trademarks; however, no individual patent or trademark is believed to be of such importance that its termination would have a material adverse effect on our business.
Competition
The markets for our products are highly competitive. We provide a diverse and broad range of industrial products and services to numerous global end markets, many of which are highly fragmented. Although we face larger competitors in several served markets, some of our competition is comprised of smaller companies which may lack the global footprint or financial resources to serve global customers. We compete for business principally on the basis of customer service, product quality and availability, engineering, along with research and development expertise. In addition, we believe that our cost structure, strategic global sourcing capabilities and global distribution support our competitive position.
Manufacturing and Operations
While we do have extensive manufacturing capabilities including machining and fabrication, our manufacturing consists primarily of light assembly of components we source from a network of global suppliers. We have implemented single piece flow processes in most of our plants, which reduces inventory levels, lowers “re-work” costs and shortens lead times to customers. Components are built to our highly engineered specifications by a variety of suppliers, including those in low cost countries such as China and India. We have built strong relationships with our key suppliers and, while we single source certain of our components, in most cases there are several qualified alternative sources.
Raw Material Costs and Inflation
We source materials and components from a network of global suppliers. These items are typically available from multiple suppliers. Raw materials that go into the components we source, such as steel, aluminum and plastic resin, are subject to price fluctuations and tariffs, which could have an impact on our results. While no meaningful measures of inflation specific to our products are available because we have significant operations in countries with diverse rates of inflation and currency rate movements, we have more than offset the impact of inflation in recent years with manufacturing efficiencies, cost reductions and pricing actions. In addition, several of our products have components from China subject to tariffs, however, to date we have been able to offset the majority of additional costs from tariffs through price increases to portions of our customer base. Furthermore, some of our components not sourced in China but for products manufactured in China are subject to Chinese tariffs. We have activities underway to mitigate these additional costs through identification of local Chinese suppliers.
Order Backlogs and Seasonality
Our operating segments that make up continuing operations have a relatively short order-to-ship cycle. We had order backlogs from continuing operations of $42 million and $51 million at August 31, 2019 and 2018, respectively. Substantially all orders are expected to be filled within twelve months. While we typically experience a stronger second half to our fiscal year, our consolidated sales are not subject to significant seasonal fluctuations.


3


Percentages of Sales from Continuing Operations by Fiscal Quarter
 
 
 
2019
 
2018
 
 
Quarter 1 (September - November)
 
24
%
 
24
%
 
 
Quarter 2 (December - February)
 
24
%
 
23
%
 
 
Quarter 3 (March - May)
 
27
%
 
27
%
 
 
Quarter 4 (June - August)
 
25
%
 
26
%
 
 
 
 
100
%
 
100
%
 
Employees
At August 31, 2019, we had approximately 4,700 employees, of which approximately 40% are expected to transition out of the Company as part of the EC&S divestiture. Our employees generally are not subject to collective bargaining agreements, with the exception of approximately 300 U.S. production employees and certain international employees covered by government mandated collective labor agreements. We believe we have a good working relationship with our employees globally.
Environmental Matters
Our operations, like those of most industrial businesses, are subject to federal, state, local and foreign laws and regulations relating to the protection of the environment, including those regulating discharges of hazardous materials into the air and water, the storage and disposal of such hazardous materials and the clean-up of soil and groundwater contamination. We believe that we are in material compliance with applicable environmental regulations. Compliance with these laws requires expenditures on an ongoing basis. However, environmental expenditures over the last three years have not been material. Soil and groundwater contamination has been identified at certain facilities that we operate or formerly owned or operated. We are also a party to certain state and local environmental matters, have provided environmental indemnifications for certain divested businesses and retain responsibility for certain potential environmental liabilities.
Executive Officers of the Registrant
The names, ages and positions of all of the executive officers of the Company as of October 15, 2019 are listed below.
Name
 
Age
 
Position
Randal W. Baker
 
56
 
President and Chief Executive Officer
Rick T. Dillon
 
48
 
Executive Vice President and Chief Financial Officer
Fabrizio R. Rasetti
 
53
 
Executive Vice President—General Counsel, Secretary and Global Human Resources
Roger A. Roundhouse
 
54
 
Executive Vice President—Engineered Components & Systems Segment
J. Jeffrey Schmaling
 
60
 
Executive Vice President—Industrial Tools & Services Segment
Barbara G. Bolens
 
58
 
Executive Vice President—Chief Strategy Officer
Randal W. Baker, President, Chief Executive Officer. Mr. Baker was appointed President and Chief Executive Officer of the Company in March 2016. Prior to joining the Company, Mr. Baker held multiple roles during a six year tenure at Joy Global, including most recently as Chief Operating Officer. Prior to Joy Global, Mr. Baker was an executive with Case New Holland Inc., holding a variety of roles including President and CEO of its agricultural equipment business. Mr. Baker also held diverse leadership roles in marketing, sales, product development and engineering at Komatsu America Corporation, Ingersoll-Rand and Sandvik Corporation.
Rick T. Dillon, Executive Vice President and Chief Financial Officer, joined the Company in December 2016. Prior to joining the Company, Mr. Dillon served as Executive Vice President and Chief Financial Officer of Century Aluminum Co. Prior to that, Mr. Dillon served as Vice President-Finance Global Surface Mining Group and Vice President-Controller and Chief Accounting Officer of Joy Global Inc. from 2009 to 2014. Prior to Joy Global, Mr. Dillon served as Vice President-Business Planning and Analysis and Vice President-Controller and Chief Accounting Officer at Newell Brands, and Vice President-Controller and Chief Accounting Officer at Briggs & Stratton Corporation.
Fabrizio R. Rasetti, Executive Vice President—General Counsel, Secretary and Global Human Resources, joined Actuant in May 2018 from Boart Longyear where he held the position of Senior Vice President, General Counsel and Secretary since 2006. For the ten years prior he worked at SPX Corporation in roles of increasing responsibility including Segment General Counsel & Vice President, Business Development, Flow Segment. Earlier in his career he worked in private law practice.
Roger A. Roundhouse, Executive Vice President—Engineered Components & Systems segment. Mr. Roundhouse joined the Company in 2014, from General Cable, where he most recently held the position of Senior Vice President and General Manager Utility Products. Mr. Roundhouse brings extensive automotive, industrial and OEM knowledge, as well as over 20

4


years of experience with global operations and mergers & acquisitions. Upon completion of the EC&S divestiture, Mr. Roundhouse will be transitioning out of the Company.
J. Jeffrey Schmaling, Executive Vice President—Industrial Tools & Services segment, joined Actuant in his current role in February 2018. Prior to Actuant he held the position of President, North America for Komatsu Mining Corporation (formerly Joy Global Inc.) since 2010. Prior to that, he served as Senior Director Dealer Development and Account Management at Case International Harvester, a Division of Fiat S.p.A. Earlier in his 30 plus year career he held various sales, marketing and product development roles.
Barbara G. Bolens, Executive Vice President—Chief Strategy Officer, joined the Company in August 2018 as Vice President of Investor Relations and Corporate Strategy and was appointed Executive Vice President—Chief Strategy Officer in October 2019. Prior to joining the Company, Ms. Bolens spent over six years at Komatsu Mining Corporation (formerly Joy Global Inc.) as its VP and Treasurer. Prior to Komatsu, she held financial leadership positions of progressive responsibility at several other multinational corporations as well as early career leadership roles in sales and marketing.
Item  1A.    Risk Factors
The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing the Company. If any of the events contemplated by the following risks actually occurs, our business, financial condition, or results of operations could be materially adversely affected. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may adversely impact our business.
Deterioration of, or instability in, the domestic and international economy and challenging end market conditions could impact our ability to grow the business and adversely impact our financial condition, results of operations and cash flows.
Our businesses and operating results have been, and will continue to be, affected by domestic and international economic conditions. The level of demand for our products depends, in part, on general economic conditions in our served end markets. A substantial portion of our revenues are derived from customers in cyclical industries (industrial and oil & gas) that typically are adversely affected by downward economic cycles. As global economic uncertainty continues, our customers may experience deterioration of their businesses, which may delay or lengthen sales cycles. Beginning in fiscal 2016, we experienced challenging and inconsistent demand in several of our served markets, including oil & gas and infrastructure markets. As a result of these and other factors, we implemented various restructuring initiatives aimed at reducing our cost structure and improving operational performance. While we have seen recovery in those end markets, we are still executing on restructuring initiatives previously announced. Further, we may implement additional restructuring initiatives in response to further market challenges to achieve additional efficiencies. Such initiatives could result in restructuring costs, including facility consolidations, workforce reductions and structural realignment. Although we expect that the related cost savings and realization of efficiencies will offset the restructuring related costs over time, we may not achieve the desired net benefits of these efforts (see Note 3, "Restructuring Charges" and "Business Update" within Item 7 for further discussion of our restructuring activities and future anticipated cost savings).
If we fail to develop new products, or customers do not accept our new products, our business could be adversely affected.
Our ability to develop innovative new products can affect our competitive position and often requires the investment of significant resources. Difficulties or delays in research, development, production or commercialization of new products, or failure to gain market acceptance of new products and technologies, may reduce future sales and adversely affect our competitive position. Operational excellence processes including effective product sourcing, lean manufacturing, acquisition integration and leadership development, along with other continuous improvement activities, are utilized to improve our businesses. There can be no assurance that we will have sufficient resources to make such investments, that we will be able to make the technological advances necessary to maintain competitive advantages or that we can recover major research and development expenses. If we fail to make innovations, launch products with quality problems, experience development cost overruns, or the market does not accept our new products, then our financial condition, results of operations, cash flows and liquidity could be adversely affected.
Divestitures and discontinued operations could negatively impact our business, and retained liabilities from businesses that we sell could adversely affect our financial results.
In connection with the execution of our strategy to become a pure-play industrial tools and services company, we have or are in the process of executing several divestitures, including the anticipated divestiture of the remaining businesses within the EC&S segment by the end of calendar 2019. These divestitures pose risks and challenges that could negatively impact our business, including required separation or carve-out activities and costs, disputes with buyers or potential impairment charges.

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After reaching an agreement with a buyer for the disposition of a business, we are also subject to satisfaction of pre-closing conditions, as well as necessary regulatory and governmental approvals on acceptable terms, which may prevent us from completing a transaction. Dispositions may also involve continued financial involvement, as we may be required to retain responsibility for, or agree to indemnify buyers against contingent liabilities related to businesses sold, such as lawsuits, tax liabilities, lease payments, product liability claims or environmental matters. Under these types of arrangements, performance by the divested businesses or other conditions outside of our control could affect future financial results. Further, with respect to the EC&S divestiture, we are required to perform certain transition services which, based on the uncertainty of the time period for which we will perform them, may inhibit our ability to timely execute the necessary actions to reduce our corporate cost structure to a level appropriate to the size of our remaining operations.
If we do not realize the expected benefits or synergies of any divestiture transaction, our consolidated financial position, results of operations and cash flows could be negatively impacted. Any divestiture may result in a dilutive impact to our future earnings if we are unable to offset the dilutive impact from the loss of revenue and profits associated with the divestiture, as well as significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition.
Our growth strategy includes strategic acquisitions. We may not be able to consummate future acquisitions or successfully integrate them.
A significant portion of our growth has come from strategic acquisitions of businesses. We plan to continue making acquisitions to enhance our global market position and broaden our industrial tools product offerings. Our ability to successfully execute acquisitions will be impacted by a number of factors, including the availability of financing on terms acceptable to us, our ability to identify acquisition candidates that meet our valuation parameters and increased competition for acquisitions. The process of integrating acquired businesses into our existing operations also may result in unforeseen operating difficulties and may require additional financial resources and attention from management that would otherwise be available for the ongoing development or expansion of our existing operations. Although we expect to successfully integrate any acquired businesses, we may not achieve the desired net benefit in the time-frame planned. Failure to effectively execute our acquisition strategy or successfully integrate the acquired businesses could have an adverse effect on our financial condition, results of operations, cash flows and liquidity.
We may not be able to realize planned benefits from acquired companies.
We may not be able to realize planned benefits from acquired companies. Achieving those benefits depends on the timely, efficient and successful execution of a number of post-acquisition events, including integrating the acquired business into the Company. Factors that could affect our ability to achieve these benefits include:
difficulties in integrating and managing personnel, financial reporting and other systems used by the acquired businesses;
the failure of acquired businesses to perform in accordance with our expectations;
failure to achieve anticipated synergies between our business units and the business units of acquired businesses;
the loss of customers of acquired businesses;
the loss of key managers of acquired businesses; or
other material adverse events in the acquired businesses.
If acquired businesses do not operate as we anticipate, it could materially impact our business, financial condition and results of operations. In addition, acquired businesses may operate in niche markets in which we have little or no experience. In such instances, we will be highly dependent on existing managers and employees to manage those businesses, and the loss of any key managers or employees of the acquired business could have a material adverse effect on our financial condition, results of operations, cash flows and liquidity.
The indemnification provisions of acquisition agreements may result in unexpected liabilities.
Certain acquisition agreements from past and current acquisitions require the former owners to indemnify us against certain liabilities related to the operation of each of their companies. In most of these agreements, the liability of the former owners is limited to specific warranties given in the agreement, as well as, in amount and duration and certain former owners may not be able to meet their indemnification responsibilities. These indemnification provisions may not fully protect us, and as a result we may face unexpected liabilities that adversely affect our profitability and financial position.

6


Our goodwill and other intangible assets represent a substantial amount of our total assets.
Our total assets reflect substantial intangible assets, primarily goodwill. At August 31, 2019, goodwill and other intangible assets totaled $313 million, or 28% of our total assets. The goodwill results from acquisitions, representing the excess of the purchase price over the fair value of the net tangible and other identifiable intangible assets we have acquired. We assess annually whether there has been impairment in the value of our goodwill or indefinite-lived intangible assets. If future operating performance at one or more of our reporting units were to fall below current levels, we could be required to recognize a non-cash charge to operating earnings to impair the related goodwill or other intangible assets. With respect to continuing operations, we recognized $22 million in non-cash impairment charges in fiscal 2019 related to the goodwill and intangible assets of several of our businesses (see Note 6, "Goodwill, Intangible Assets and Long-Lived Assets" and "Critical Accounting Policies" for further discussion on goodwill, intangible asset and long-lived asset impairments). Any future goodwill or intangible asset impairments could negatively affect our financial condition and results of operations.
Uncertainty over global tariffs, or the financial impact of tariffs, may negatively affect our results.
Changes in U.S. domestic and global tariff frameworks have increased our costs of producing goods and resulted in additional risks to our supply chain. More tariff changes also are possible. We have developed and implemented strategies thus far to mitigate previously implemented and, in some cases, proposed tariff increases, but there is no assurance we will be able to continue to mitigate prolonged tariffs. Further, uncertainties about future tariff changes could result in mitigation actions that prove to be detrimental to our business.
Our indebtedness could harm our operating flexibility and competitive position.
We have incurred, and may in the future incur, significant indebtedness in connection with acquisitions or other strategic growth initiatives. We have, and will continue to have, a substantial amount of debt which requires interest and principal payments. Our level of debt and the limitations imposed on us by our debt agreements could adversely affect our operating flexibility and put us at a competitive disadvantage.
Our ability to make scheduled principal and interest payments, refinance our indebtedness and satisfy our other debt and lease obligations will depend upon our future operating performance and credit market conditions, which could be adversely affected by factors beyond our control. In addition, there can be no assurance that future borrowings or equity financings will be available to us on favorable terms, or at all, for the payment or refinancing of our indebtedness. If we are unable to service our indebtedness, our business, financial condition and results of operations will be adversely affected.
The financial and other covenants in our debt agreements may adversely affect us.
Our senior credit agreement and our other debt agreement contain financial and other restrictive covenants. These covenants could adversely affect us by limiting our financial and operating flexibility as well as our ability to plan for and react to market conditions and to meet our capital needs. Our failure to comply with these covenants could result in events of default which, if not cured or waived, could result in us being required to repay indebtedness before its due date and we may not have the financial resources or be able to arrange alternative financing to do so. Borrowings under our senior credit facility are secured by most domestic personal property assets and are guaranteed by most of our domestic subsidiaries and by a pledge of the stock of most of our domestic and certain foreign subsidiaries. If borrowings under our senior credit facility were declared or became due and payable immediately as the result of an event of default and we were unable to repay or refinance those borrowings, the lenders could foreclose on the pledged assets and stock. Any event that requires us to repay any of our debt before it is due could require us to borrow additional amounts at unfavorable borrowing terms, cause a significant reduction in our liquidity and impair our ability to pay amounts due on our indebtedness. Moreover, if we are required to repay any of our debt before it becomes due, we may be unable to borrow additional amounts or otherwise obtain the cash necessary to repay that debt, when due, which could materially adversely affect our business, financial condition and liquidity.
Our businesses operate in highly competitive markets, so we may be forced to cut prices or incur additional costs.
Our businesses generally face substantial competition, domestically and internationally, in each of their respective markets. We may lose market share in certain businesses or be forced to reduce prices or incur increased costs to maintain existing business. We compete globally on the basis of product design, quality, availability, performance and customer service. Present or future competitors in our markets may have greater financial, technical or other resources which could put us at a competitive disadvantage. In addition, some of our competitors may be willing to reduce prices and accept lower margins in order to compete with us.

7


Our international operations pose currency and other risks.
We continue to focus on penetrating global markets as part of our overall growth strategy and expect sales from and into foreign markets to continue to represent a significant portion of our revenue. Approximately 60% of our net sales from continuing operations in fiscal 2019 were outside the United States. In addition, many of our manufacturing operations and suppliers are located outside the United States. 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. Changes in foreign currency exchange rates will continue to add volatility as over one-third of our sales from continuing operations are generated outside of the United States in currencies other than the U.S. dollar. In addition, United States tax reform has significantly changed how foreign operations are taxed in the United States. Therefore we continue to review how to transform our organizational structure in response. We earn a substantial portion of our income from international operations and therefore changes to where income is generated may have a material adverse effect on our liquidity and results of operations. To the extent that we expand our international presence, these risks may increase.
Geopolitical unrest and terrorist activities may cause the economic conditions in the U.S. or abroad to deteriorate, which could harm our business.
Terrorist attacks against targets in the U.S. or abroad, rumors or threats of war, other geopolitical activity or trade disruptions may cause general economic conditions in the U.S. or abroad to deteriorate. The occurrence of any of these events could result in a prolonged economic slowdown or recession in the U.S. or in other areas and could have a significant impact on our business, financial condition or results of operations.
Our significant reliance on third-party suppliers for components for the manufacture, assembly and sale of our products involves risks.
We rely on suppliers to secure component products and finished goods required for the manufacture and assembly of our products. A disruption in deliveries to or from key suppliers, or decreased availability of components or commodities, could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. Further, poor supplier quality or an insecure supply chain could adversely affect the reliability, performance and reputation of our products. Additionally, if demand for our products is less than we expect, we may experience excess inventories and be forced to incur additional charges and our profitability may suffer. Our business, competitive position, results of operations or financial condition could be negatively impacted if supply is insufficient for our operations, if we experience excess inventories or if we are unable to adjust our production schedules or our purchases from suppliers to reflect changes in customer demand and market fluctuations on a timely basis.
A material disruption at a significant manufacturing facility could adversely affect our ability to generate sales and result in increased costs that we cannot recover.
Our financial performance could be adversely affected as a result of our inability to meet customer demand for our products in the event of a material disruption at one of our significant manufacturing facilities. Equipment failures, natural disasters, power outages, fires, explosions, terrorism, adverse weather conditions, labor disputes or other influences could create a material disruption. Interruptions to production could increase our cost of sales, harm our reputation and adversely affect our ability to attract or retain our customers. Our business continuity plans may not be sufficient to address disruptions attributable to such risks. Any interruption in production capability could require us to make substantial capital expenditures to remedy the situation, which could adversely affect our financial condition and results of operations.
Large or rapid increases in the costs of commodities and raw materials, including impact of tariffs, or substantial decreases in their availability could adversely affect our operations.
The primary raw materials that are used in our products include steel, plastic resin, brass, steel wire and rubber. Most of our suppliers are not currently parties to long-term contracts with us. Consequently, we are vulnerable to fluctuations in prices of such raw materials, including the impact of tariffs. Factors such as supply and demand, freight costs and transportation availability, inventory levels, the level of imports and general economic conditions may affect the prices of raw materials that we need. If we experience a significant increase in raw material prices, or if we are unable to pass along increases in raw material prices to our customers, our results of operations could be adversely affected. In addition, an increasing portion of our products are sourced from low-cost regions. Changes in export regulations, taxes, tariffs and disruptions in transportation routes from regions that we source commodities and raw materials could adversely impact our results of operations.

8


We are subject to a wide variety of laws and regulations that may change in ways that are detrimental to our competitiveness or results.
Our businesses are subject to regulation under a broad range of U.S. and foreign laws and regulations. There is no assurance that such laws, regulations and policies will not be changed in ways that will require us to modify our business models and objectives or affect our results by restricting existing activities and products, subjecting them to escalating costs or prohibiting them outright. Particular legislative, regulatory or other areas that may have an effect on our structure, operations, markets, sales, liquidity, tax rate or the results of our businesses include export and import controls, anti-corruption law, competition law, data privacy regulations, currency controls and economic or political sanctions.
Costs and liabilities arising from legal proceedings could be material and adversely impact our financial results.
We are subject to a variety of legal and regulatory proceedings. We maintain insurance and have established reserves for these matters as appropriate and in accordance with applicable accounting standards and practices. Insurance coverage, to the extent it is available, may not cover all losses arising from such contingencies. Also, estimating legal reserves or possible losses involves significant judgment and may not reflect the full range of uncertainties and unpredictable outcomes inherent in litigation and investigations and the actual losses arising from particular matters may exceed our current estimates and adversely affect our results of operations. We also expect that additional legal proceedings and other contingencies will arise from time to time, and we cannot predict the magnitude and outcome of such additional matters. Moreover, we operate in jurisdictions where claims involving us may be adjudicated within legal systems that are less developed and less reliable than those of the U.S. or other more developed markets, and this can create additional uncertainty about the outcome of proceedings before courts or other governmental bodies in such markets.
Legal compliance risks could result in significant costs to our business or cause us to restrict current activities or curtail growth plans.
We and our representatives operate in industries, markets and jurisdictions in which we are exposed to inherent compliance risks and that are subject to significant scrutiny by regulators, governmental authorities and other persons. We continue to strengthen our risk management and compliance programs to mitigate such risks and operate in compliance with applicable laws, but the global and diverse nature of our operations, the complex and high-risk nature of some of our markets and the current enforcement environment mean that legal and compliance risks will continue to exist throughout our operations. The consequences of compliance risks could include enforcement actions or private litigation resulting in significant defense and investigation costs, fines and penalties, and a broad range of remedial actions, including potential restrictions on our operations and other adverse changes to our business plans. See Note 16, "Commitments and Contingencies" in the notes to the consolidated financial statements for additional information about compliance risks.
Health, Safety and Environmental laws and regulations may result in additional costs.
We are subject to federal, state, local and foreign laws and regulations governing public and worker health and safety. Violations of these laws could cause us to incur unanticipated liabilities that could harm our operating results. Pursuant to such laws, governmental authorities have required us to contribute to the cost of investigating or remediating certain matters at current or previously owned and operated sites. In addition, we provided environmental indemnities in connection with the sale of certain businesses and product lines. Liability as an owner or operator, or as an arranger for the treatment or disposal of hazardous substances, can be joint and several and can be imposed without regard to fault. There is a risk that costs relating to these matters could be greater than what we currently expect or exceed our insurance coverage, or that additional remediation and compliance obligations could arise which require us to make material expenditures. In particular, more stringent environmental laws, unanticipated remediation requirements or the discovery of previously unknown conditions could materially harm our financial condition and operating results. We are also required to comply with various environmental laws and maintain permits, some of which are subject to discretionary renewal from time to time, for many of our businesses, and our business operations could be restricted if we are unable to renew existing permits or to obtain any additional permits that we may require.
Our inability to attract, develop and retain qualified employees could have a material adverse impact on our operations.
Our ability to deliver financial results and drive growth and pursue competitive advantages in our business substantially depends on our ability to retain key employees and continually attract new talent to the business. If we experience losses of key employees, such as our Chief Executive Officer and Chief Financial Officer, or experience significant delays or difficulty in replacing them, our operations, competitive positions and financial results may be adversely affected. Competition for highly qualified personnel is intense and our competitors and others can be expected to attempt to hire our skilled employees from time to time. Additionally, we need qualified managers and skilled employees with technical and manufacturing industry experience to operate our businesses successfully. From time to time there may be shortages of skilled labor which may make it more difficult and expensive for us to attract and retain qualified employees or lead to increased labor costs.

9


Cyber security vulnerabilities, threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions, services and data. 
Increased global cyber security vulnerabilities, threats, computer viruses and more sophisticated and targeted cyber-related attacks, as well as cyber security failures resulting from human error and technological errors, pose a risk to our systems, products and data as well as potentially to our employees’, customers', partners', suppliers' and third-party service providers' data. An attack could result in security breaches, theft, lost or corrupted data, misappropriation of sensitive, confidential or personal data or information, loss of trade secrets and commercially valuable information, production downtimes and operational disruptions. We attempt to mitigate these risks by employing a number of measures, including employee training, monitoring and testing, and maintenance of protective systems and contingency plans, but we remain potentially vulnerable to additional known or unknown threats. There is no assurance the financial or operational impact from such threats will not be material.
Our intellectual property portfolio may not prevent competitors from developing products and services similar to or duplicative to ours, and the value of our intellectual property may be negatively impacted by external dependencies.
Our patents, trademarks and other intellectual property may not prevent competitors from independently developing or selling products and services similar to or duplicative of ours or that our intellectual property portfolio will adequately deter misappropriation or improper use of our innovations and technology. In addition, further steps we take to protect our intellectual property, including non-disclosure agreements, may not prevent the misappropriation of our business critical secrets and information. In such circumstances, our competitive position and the value of our brand may be negatively impacted.
Our competitors or other persons could assert that we have infringed their intellectual property rights.
We may be the target of enforcement of patents or other intellectual property rights by third parties. Regardless of the merit of such claims, responding to infringement claims can be expensive and time consuming. If we are found to infringe any third-party rights, we could be required to pay substantial damages or we could be enjoined from offering some of our current products and services.
Our customers and other business partners often require terms and conditions that expose us to significant risks and liabilities.
We operate in end-markets and industries in which our customers and business partners seek to contractually shift significant risks associated with their operations or projects to us. We continue to review and improve our commercial and contracting practices to manage the risks we are assuming, but we cannot assure that material liabilities will not arise from our contracts with our business partners. Also, as we impose more stringent contracting standards on our operations, we may experience market share losses or the reduction in growth opportunities.
Item  1B.    Unresolved Staff Comments
None.

Item  2.    Properties
As of August 31, 2019, we owned or leased the following facilities (square footage in thousands):
 
 
Number of Locations
 
Square Footage
 
 
 
 
Distribution /
Sales /
Admin
 
 
 
 
 
 
Manufacturing
 
Total
 
Owned
 
Leased
 
Total
Industrial Tools & Services
 
14

 
34

 
48

 
147

 
1,103

 
1,250

Engineered Components & Systems*
 
11

 
4

 
15

 
335

 
854

 
1,189

Corporate and Other
 
5

 
6

 
11

 
353

 
385

 
738

 
 
30

 
44

 
74

 
835

 
2,342

 
3,177

* These owned locations are currently classified as "Assets from discontinued operations" on our Consolidated Balance Sheet and we anticipate divesting these facilities prior to the end of calendar 2019. The leases associated with these facilities will be assumed or bought out by the buyer of the EC&S segment.
We consider our facilities suitable and adequate for the purposes for which they are used and do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities. Our largest facilities associated with our continuing operations are located in the United States, China, the United Kingdom, the Netherlands and Spain. We also maintain a presence in Australia, Azerbaijan, Brazil, Germany, India, Italy, Japan, Kazakhstan, Singapore, South Africa, South Korea and

10




the United Arab Emirates. See Note 10, “Leases” in the notes to the consolidated financial statements for information regarding our lease commitments.
Item  3.    Legal Proceedings
We are a party to various legal proceedings that have arisen in the normal course of business. These legal proceedings typically include product liability, breaches of contract, employment, personal injury and other disputes.
We have recorded reserves for estimated losses 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 the amount of the loss can be reasonably estimated. In our opinion, the resolution of these contingencies is not likely to have a material adverse effect on our financial condition, results of operations or cash flows. For further information refer to Note 16, “Commitments and Contingencies” in the notes to the consolidated financial statements.
Item  4.    Mine Safety Disclosures
Not applicable.

11



PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The Company’s Class A common stock is traded on the New York Stock Exchange under the symbol EPAC. At September 30, 2019, there were 1,193 shareholders of record of the Company's Class A common stock.
Dividends
In fiscal 2019, the Company declared a dividend of $0.04 per common share payable on October 14, 2019 to shareholders of record on September 27, 2019. In fiscal 2018, the Company declared a dividend of $0.04 per common share payable on October 15, 2018 to shareholders of record on September 28, 2018.
Share Repurchases
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 21,455,568 shares of common stock for $640 million. The following table summarizes share repurchases during the fourth quarter of fiscal 2019, all of which were purchased under publicly announced share repurchase programs.
Period
 
Shares Repurchased
 
Average Price Paid per Share
 
Maximum Number of Shares That May Yet Be Purchased Under the Program
June 1 to June 30, 2019
 

 
$

 
7,560,566

July 1 to July 31, 2019
 
426,935

 
22.79

 
7,133,631

August 1 to August 31, 2019
 
589,199

 
21.59

 
6,544,432

 
 
1,016,134

 
$
22.09

 
 
Securities Authorized for Issuance under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K is provided under Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, which is incorporated herein by reference.


12


Performance Graph:
The graph below compares the cumulative 5-year total return of the Company's Class A common stock with the cumulative total returns of the S&P 500 index and the Dow Jones US Diversified Industrials index. The graph tracks the performance of a $100 investment in our Class A common stock and in each of the indexes (assuming the reinvestment of all dividends) from August 31, 2014 to August 31, 2019.
chart-a6fc79ddb90556fc956a01.jpg
Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.



 
8/14
 
8/15
 
8/16
 
8/17
 
8/18
 
8/19
Actuant Corporation
 
$
100.00

 
$
63.64

 
$
70.90

 
$
71.68

 
$
87.91

 
$
66.39

S&P 500
 
100.00

 
100.48

 
113.09

 
131.45

 
157.30

 
161.89

Dow Jones US Diversified Industrials
 
100.00

 
99.88

 
126.40

 
124.97

 
112.01

 
100.78

The stock price performance included in this graph is not necessarily indicative of future stock price performance.


13



Item 6.    Selected Financial Data
The following selected historical financial data have been derived from the consolidated financial statements of the Company. The data should be read in conjunction with these financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
 
Year Ended August 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
(in millions, except per share data)
Statement of Operations Data(1)(2):
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
655

 
$
641

 
$
617

 
$
687

 
$
737

Gross profit
 
293

 
283

 
261

 
291

 
330

Selling, administrative and engineering expenses
 
209

 
210

 
208

 
203

 
222

Amortization of intangible assets
 
9

 
9

 
9

 
11

 
12

Director & officer transition charges
 

 

 
8

 

 

Restructuring charges
 
4

 
11

 
3

 
9

 

Impairment & divestiture charges
 
23

 
3

 
117

 
130

 
64

Operating profit (loss)
 
48

 
50

 
(84
)
 
(62
)
 
32

Earnings (loss) from continuing operations
 
8

 
5

 
(95
)
 
(62
)
 
9

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share from continuing operations
 
$
0.13

 
$
0.08

 
$
(1.60
)
 
$
(1.05
)
 
$
0.15

Cash dividends per share declared
 
$
0.04

 
$
0.04

 
$
0.04

 
$
0.04

 
$
0.04

 
 
 
 
 
 
 
 
 
 
 
Diluted weighted average common shares
 
61,607

 
61,028

 
59,436

 
59,010

 
62,055

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (at end of period)(2):
 
 
 
 
 
 
 
 
 
 
Cash
 
$
211

 
$
250

 
$
230

 
$
180

 
$
169

Assets
 
1,124

 
1,485

 
1,517

 
1,439

 
1,637

Debt
 
460

 
533

 
562

 
580

 
588

Net debt (debt less cash)
 
249

 
283

 
332

 
400

 
419

 _______________________
(1)
Results are from continuing operations and exclude the financial results of businesses classified as "Assets from discontinued operations" and "Liabilities from discontinued operations" on the Consolidated Balance Sheets and of previously divested businesses reported as discontinued operations.

(2)
We have completed various acquisitions and divestitures that impact the comparability of the selected financial data specifically related to earnings (loss) from continuing operations. The results of operations for these acquisitions and divestitures are included in our financial results for all periods subsequent to their acquisition or prior to their divestiture date. The following tables summarize the acquisitions and divestitures that were completed during the last five fiscal years (amounts in millions):
 
 
 
 
 
 
 
 
 
Acquisition
 
Segment
 
Date Completed
 
Sales (a)
 
Purchase Price
Equalizer
 
Industrial Tools & Services
 
May 2018
 
$
6

 
$
6

Mirage Machines
 
Industrial Tools & Services
 
December 2017
 
12

 
17

Pipeline and Process Services (b)
 
Industrial Tools & Services
 
March 2016
 
32

 
66

Larzep, S.A.
 
Industrial Tools & Services
 
February 2016
 
8

 
16

 _______________________
(a)Represents approximate annual sales at the time of the acquisition.
(b)Acquired the Middle East, Caspian and North Africa operations of Four Quest Energy Inc.
 
 
 
 
 
 
 
 
 
Divestiture
 
Segment
 
Date Completed
 
Sales (a)
 
Proceeds from Sale
Viking Business
 
Other
 
December 2017
 
$
19

 
$
9

(a)Represents annual sales in fiscal year prior to divestiture.

14



Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
Background
As discussed in Item 1, “Business,” during the fourth quarter of fiscal 2019, we realigned our Company’s financial reporting segments to reflect changes in our strategy related to the strategic disposition of the businesses comprising the EC&S segment. Therefore, we currently have only one reportable segment, IT&S. This segment is primarily engaged in the design, manufacture and distribution of branded hydraulic and mechanical tools, as well as providing services and tool rental to the industrial, maintenance, infrastructure, oil & gas, energy and other markets. Financial information related to the Company's reportable segment is included in Note 15, "Business Segment, Geographic and Customer Information" in the notes to the consolidated financial statements.
Business Update
Our businesses provide an array of products and services across multiple markets and geographies which results in significant diversification. The IT&S segment continues to have exposure within the broad industrial landscape, mining and infrastructure markets. Due to economic uncertainties driven by geopolitical uncertainties, such as China tariffs and Brexit, we expect deceleration in demand for the majority of fiscal 2020. As a result, we expect consolidated fiscal 2020 adjusted core sales (sales growth excluding the impact of acquisitions, divestitures, strategic exits of non-profitable product and service lines and changes in foreign currency exchange rates) growth of (3%) to 1%.
We remain focused on pursuing both organic and acquisition-related growth opportunities aligned with our strategic objectives. This includes the advancement of our commercial effectiveness initiatives along with new product development efforts. We also remain focused on our lean efforts across our manufacturing, assembly and service operations. Our IT&S segment is focused on accelerating global sales growth through new product introductions, a continued emphasis on sales and marketing efforts, and regional growth via second tier brands. In addition, we remain focused on reducing our concentration in the oil & gas vertical markets by growing sales of critical products, rentals, and services with new and existing customers in other attractive vertical markets including power generation, rescue, and mining. We expect IT&S segment year-over-year adjusted core sales growth of (3%) to 1% in fiscal 2020.
On January 24, 2019, the Company announced its intent to divest the remaining businesses within the EC&S segment to pursue an overall strategy as a pure-play industrial tools and services company and on July 9, 2019, entered into a SPA to sell these businesses at a sales price of approximately $214.5 million. We expect the divestiture will close in the fourth calendar quarter of 2019. We plan to use the divestiture proceeds to continue to execute our capital allocation strategy through debt reduction, share repurchases and strategic acquisition opportunities.
On March 21, 2019, we announced a new restructuring plan focused on i) the integration of the Enerpac and Hydratight businesses (IT&S segment), ii) the strategic exit of certain commodity type services in our North America Services operation (IT&S segment), and iii) driving efficiencies within the overall corporate structure. Total restructuring charges associated with the new restructuring plan were $4 million in fiscal 2019 related primarily to headcount reductions and facility consolidations (predominantly related to the exit of certain non-profitable North America Service operations). Pre-tax cost savings realized from the fiscal 2019 announced restructuring plan totaled approximately $1 million benefiting the IT&S segment. The Company expects to achieve a total of $12-$15 million of annual savings with total restructuring costs of $15-$20 million and we anticipate completing the majority of these actions within fiscal 2020. The annual benefit of these gross cost savings may be impacted by a number of factors, including sales and production volume variances and annual incentive compensation differentials.

Total restructuring charges associated with previously announced restructuring initiatives, related to continuing operations, were $11 million and $3 million in fiscal 2018 and 2017, respectively. These restructuring costs related primarily to facility consolidations, headcount reductions and operational improvements throughout fiscal 2016 - 2018. Pre-tax cost savings, related to continuing operations, realized from executing the prior restructuring plans totaled approximately $25 million through fiscal 2019. Realized cost savings were comprised of $13 million within the IT&S segment, $8 million within the other operating segments and $3 million within Corporate.


15


Historical Financial Data (in millions)
 
 
Year Ended August 31,
 
 
2019
 
2018
 
2017
Statements of Earnings Data: (1)
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
655

 
100
 %
 
$
641

 
100
 %
 
$
617

 
100
 %
Cost of products sold
 
362

 
55
 %
 
358

 
56
 %
 
356

 
58
 %
Gross profit
 
293

 
45
 %
 
283

 
44
 %
 
261

 
42
 %
Selling, administrative and engineering expenses
 
209

 
32
 %
 
210

 
33
 %
 
208

 
34
 %
Amortization of intangible assets
 
9

 
1
 %
 
9

 
1
 %
 
9

 
1
 %
Director & officer transition charges
 

 
0
 %
 

 
0
 %
 
8

 
1
 %
Restructuring charges
 
4

 
1
 %
 
11

 
2
 %
 
3

 
0
 %
Impairment & divestiture charges
 
23

 
4
 %
 
3

 
0
 %
 
117

 
19
 %
Operating profit
 
48

 
7
 %
 
50

 
8
 %
 
(84
)
 
(14
)%
Financing costs, net
 
28

 
4
 %
 
31

 
5
 %
 
29

 
5
 %
Other expense, net
 
1

 
0
 %
 

 
0
 %
 
4

 
1
 %
Earnings (loss) before income tax expense (benefit)
 
19

 
3
 %
 
19

 
3
 %
 
(117
)
 
(19
)%
Income tax expense (benefit)
 
11

 
2
 %
 
14

 
2
 %
 
(23
)
 
(4
)%
Net earnings (loss) from continuing operations
 
8

 
1
 %
 
5

 
1
 %
 
(94
)
 
(15
)%
(Loss) earnings from discontinued operations, net of income taxes
 
(257
)
 
(39
)%
 
(26
)
 
(4
)%
 
29

 
5
 %
Net loss
 
$
(249
)
 
(38
)%
 
$
(21
)
 
(3
)%
 
$
(66
)
 
(11
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Financial Data: (1)
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation
 
$
11

 
 
 
$
11

 
 
 
$
14

 
 
Capital expenditures
 
15

 
 
 
11

 
 
 
17

 
 
(1) Results are from continuing operations and exclude the financial results of businesses classified as "Assets from discontinued operations" and "Liabilities from discontinued operations" on the Consolidated Balance Sheets and of previously divested businesses reported as discontinued operations.

Fiscal 2019 compared to Fiscal 2018
Consolidated sales from continuing operations in fiscal 2019 were $655 million, 2% higher than the prior year sales of $641 million. Core sales increased 4% due to solid core sales growth in the IT&S segment (5%). Changes in foreign currency exchange rates unfavorably impacted sales comparisons by 2%. Gross profit margins remained relatively consistent year-over-year. We benefited from our strategic exit of highly customized heavy lifting projects which provided lower gross profit margins, offset from higher service & rental sales which provide lower gross profit margins. Operating profit was lower in fiscal 2019 as compared to fiscal 2018 as a result of increased impairment and divestiture charges. In fiscal 2019, we incurred $14 million of goodwill impairment charges associated with triggering events impacting Cortland U.S., $6 million of impairment & divestiture charges associated with the impairment of a customer relationship intangible in connection with the strategic exit of certain North America service offerings and $3 million of trade name impairment & divestiture charges associated with a re-branding strategy which will ultimately eliminate the use of certain secondary brands within the IT&S segment that were previously determined to be indefinite lived. In fiscal 2018, we incurred $3 million of impairment & divestiture charges associated with the divestiture of our Viking business. Financing costs also decreased in fiscal 2019 as a result of the execution of our capital allocation strategy to utilize cash to reduce our debt by $73 million over the course of fiscal 2019 in addition to reduced interest costs on our new Senior Credit Facility. Our income tax expense also decreased in fiscal 2019 as discussed in further detail within the Income Tax Expense section below.


16


Fiscal 2018 compared to Fiscal 2017
Consolidated sales from continuing operations in fiscal 2018 were $641 million, 4% higher than the prior year sales of $617 million. Core sales were up $18 million (3%), as a result of a 3% core sales increase in the IT&S segment. Changes in foreign currency exchange rates also favorably impacted sales comparisons by $14 million, while the net impact from the Mirage and Equalizer acquisitions, net of the Viking divestiture, reduced core sales by $7 million. Gross profit margins increased from 42% in fiscal 2017 to 44% in fiscal 2018 as a result of a higher net sales and the realization of benefits from restructuring activities which were offset by project overruns and production inefficiencies. Additionally, fiscal 2018 results included $3 million of impairment & divestiture charges related to the sale of our Viking business, while fiscal 2017 results included $8 million of director and officer transition charges as well as $117 million of impairment and divestiture charges related to the then pending sale of Viking. Fiscal 2018 included an increase in our effective income tax rate compared to the prior year due to provisional tax charges for U.S. tax reform act enacted in December 2017, the non-recurrence of fiscal 2017 income tax planning benefits and the deductibility and timing related to impairment and divestiture charges in both comparable years.

Segment Results
Industrial Tools & Services Segment
The IT&S segment is a global supplier of branded hydraulic and mechanical tools and services to a broad array of end markets, including industrial, energy, mining and production automation markets. Its primary products include branded tools, highly engineered heavy lifting technology solutions, connectors for oil & gas, as well as hydraulic torque wrenches (Product product line). On the services side, we provide energy maintenance and manpower services to meet customer-specific needs and rental capabilities for certain of our products (Service & Rental product line). The following table sets forth the results of operations for the IT&S segment (in millions):

 
 
 
Year Ended August 31,
 
 
2019
 
2018
 
2017
Net Sales
 
$
610

 
$
591

 
$
553

Operating Profit
 
101

 
99

 
96

Operating Profit %
 
16.6
%
 
16.8
%
 
17.3
%
Fiscal 2019 compared to Fiscal 2018
Fiscal 2019 IT&S segment net sales increased by $19 million (3%) from fiscal 2018 to $610 million. Changes in foreign currency exchange rates unfavorably impacted sales comparisons by 3%, while the Mirage and Equalizer acquisitions increased net sales by 1%. The IT&S segment core sales increased $28 million (5%) on a year-over-year basis. Flat core sales for the Product product line reflected changing macroeconomic environments over the course of our fiscal year as strong growth in our core sales over the first three quarters of the fiscal year outweighed the strategic focus to exit heavy lifting technology projects which historically were at low margins, whereas the fourth quarter saw decelerating demand globally which was most reflected in our European operations. The core sales increase of 19% in the Service & Rental product line was the result of higher global maintenance activity levels as compared to the prior year, predominantly in our Middle East operations. Operating profit margins decreased from 16.8% in fiscal 2018 to 16.6% in fiscal 2019 primarily due to additional impairment & divestiture charges in fiscal 2019 as compared to 2018 (impairment & divestiture charges of $9 million related to tradename and customer relationship intangible impairments in 2019 with no impairment & divestiture charges in fiscal 2018) and sales mix, specifically the increased revenues from Middle East service & rental which have lower gross profit margins than our product sales, partially offset by increased margins in our product sales as a result of our strategic focus to exit heavy lifting technology projects which historically were at low margins. Restructuring charges were $4 million in both fiscal 2019 and 2018.

17


Fiscal 2018 compared to Fiscal 2017
Fiscal 2018 IT&S segment net sales increased by $39 million (7%) from fiscal 2017 to $591 million. Changes in foreign currency exchange rates favorably impacted sales comparisons by 2%, while the Mirage and Equalizer acquisitions increased net sales by 2%. The IT&S segment core sales increased 3% on a year-over-year basis. The core sales increase of 6% for the Product product line reflected broad based industrial tool demand across all major geographies and end markets and contributions from our commercial effectiveness and new product development efforts. This increase was offset by a core sales decrease of 4% in the Service & Rental product line as global maintenance activity levels declined from prior year. Operating profit margins decreased from 17.3% in fiscal 2017 to 16.8% in fiscal 2018, due to production inefficiencies and ongoing investments in commercial and engineering activities which were partially offset by the margin expansion impact of incremental volume. Restructuring charges were $4 million and $3 million in fiscal 2018 and 2017, respectively.
Corporate
Corporate consists of selling and administrative costs and expenses including executive, legal, finance, and technology that are not allocated to the segments based on their nature, as well as corporate costs previously allocated to the EC&S segment that must be excluded from discontinued operations based on their nature. Corporate expenses were $42 million in fiscal 2019 compared to $44 million in fiscal 2018. A decrease in annual incentive amounts and restructuring charges of $5 million in fiscal 2018 (no restructuring costs in fiscal 2019) partially offset by increased outsourced consulting fees resulted in a $2 million year-over-year cost reduction. Non-recurring director and officer transition charges of $8 million in fiscal 2017 were the primary reason for the $7 million decrease in fiscal 2018 from $50 million in fiscal 2017.
Financing Costs, Net
Net financing costs were $28 million, $31 million and $29 million in fiscal 2019, 2018 and 2017, respectively. Fiscal 2019 net financing costs decreased primarily from fiscal 2018 as a result of the $73 million of term loan principal payments made throughout fiscal 2019 and lower interest rates resulting from our March 2019 Senior Credit Facility refinancing. Fiscal 2018 net financing costs increased from fiscal 2017 resulting from increases in interest rates on our variable rate debt.
Income Tax Expense
The Company's income tax expense or benefit is impacted by a number of factors, including the amount of taxable earnings generated in foreign jurisdictions with tax rates that are different than the U.S. federal statutory rate, permanent items, state tax rates, changes in tax laws, acquisitions and divestitures 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. Income tax expense also includes the impact of provision to tax return adjustments, changes in valuation allowances and reserve requirements for unrecognized tax benefits. Pre-tax earnings (loss), income tax expense (benefit) and effective income tax rate from continuing operations for the past three years were as follows (in thousands):
 
 
Year Ended August 31,
 
 
2019
 
2018
 
2017
Earnings (loss) from continuing operations before income tax expense (benefit)
 
$
18,724

 
$
19,196

 
$
(117,889
)
Income tax expense (benefit)
 
10,657

 
14,450

 
(22,614
)
Effective income tax rate
 
56.9
%
 
75.3
%
 
19.2
%

The comparability of pre-tax earnings (loss), income tax expense (benefit) and the related effective income tax rates are impacted by impairment and other divestiture charges as well as the Tax Cuts and Jobs Act (the “Act”), which was enacted on December 22, 2017. Fiscal 2019 results included $23 million of impairment and divestiture charges, while fiscal 2018 and 2017 results included $3 million and $117 million, respectively. A substantial portion of these charges do not result in tax benefits. The fiscal 2019 tax provision included tax benefits of $2 million related to legislative changes and additional guidance related to the Act. The fiscal 2018 tax provision included net tax expense of approximately $6 million related to the revaluation of U.S. deferred taxes as a result of the Act and the establishment of valuation allowances against foreign tax credit carryforwards and net deferred tax assets of various jurisdictions.
Both the current and prior year income tax provisions were impacted by the mix of earnings in foreign jurisdictions with income tax rates different than the U.S. federal income tax rate and income tax benefits from global tax planning initiatives. The Company’s earnings (loss) before income taxes from continuing operations, excluding impairment and other divestiture charges, included approximately 80% of earnings from foreign jurisdictions for fiscal 2019 compared to 76% in fiscal 2018

18


which results in an effective tax rate that is higher than the current U.S. statutory tax rate of 21%. Excluding the impairment and divestiture charges, the fiscal 2019 effective tax rate was 30.2%, which increased from the fiscal 2018 effective tax rate of 22.8% due to one-time tax benefits related to the Act in fiscal 2018 that will not repeat in future periods.
Items Impacting Comparability
On December 1, 2017, the Company completed the sale of the Viking business which had net sales from continuing operations of $3 million and $19 million million for the years ended August 31, 2018 and 2017, respectively.
In fiscal 2018, the Company acquired the stock and certain assets of Mirage Machines, Ltd. ("Mirage") and the stock of Equalizer International, Limited ("Equalizer"). The acquired businesses generated combined net sales of $14 million and $9 million for the years ended August 31, 2019 and 2018, respectively.
Liquidity and Capital Resources
At August 31, 2019, cash and cash equivalents were $211 million, comprised of $163 million of cash held by foreign subsidiaries and $48 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. There were no temporary intercompany advances outstanding at August 31, 2019 and 2018. We had $5 million in temporary intercompany advances outstanding at August 31, 2017. The following table summarizes the cash flow attributable to operating, investing and financing activities (in millions):
 
 
Year Ended August 31,
 
 
2019
 
2018
 
2017
Net cash provided by operating activities
 
$
54

 
$
106

 
$
89

Net cash provided by (used in) investing activities
 
11

 
(63
)
 
(28
)
Net cash used in financing activities
 
(100
)
 
(18
)
 
(15
)
Effect of exchange rate changes on cash
 
(5
)
 
(4
)
 
4

Net (decrease) increase in cash and cash equivalents
 
$
(40
)
 
$
21

 
$
50

Cash flow provided by operations was $54 million in fiscal 2019, a decrease of $52 million from the prior year due primarily to higher cash taxes paid, higher incentive compensation payouts in fiscal 2019 from 2018 results, a change in the timing of our 401(k) plan Company match funding and additional cash usage associated with divestiture costs. We utilized the cash flow from operations, along with $36 million of cash from the sale of our PHI and Cortland Fibron businesses and excess cash on hand, for $73 million of principal payments on our outstanding term term loan ($43 million more than our required commitment as of August 31, 2018), $27 million of capital expenditures and to repurchase approximately 1 million shares of our outstanding common stock for approximately $22 million.
Cash flow from operations in fiscal 2018 was $106 million, an increase of $18 million from the prior year due to higher cash earnings and reduced net cash tax payments. We utilized the cash flow from operations to fund $23 million of business acquisitions, $21 million of capital expenditures, and $30 million of principal repayments on our term loan. In addition, in order to facilitate the sale of our Viking business, we used cash of approximately $27 million to buy out leases of rental assets.
On March 29, 2019, the Company refinanced its Senior Credit Facility, which is comprised of a $400 million revolving line of credit and a $200 million term loan (see Note 7, "Debt" in the notes to the consolidated financial statements for further details of the new Senior Credit Facility). The unused credit line and amount available for borrowing under the revolver was $399 million at August 31, 2019.
The $200 million term loan is required to be repaid in principal installments of $1.25 million per quarter beginning on August 31, 2019, increasing to $2.5 million per quarter beginning on May 31, 2020, increasing to $3.75 million per quarter beginning on May 31, 2021, and increasing to $5 million per quarter beginning on May 31, 2022, with the remaining balance due at maturity (March 29, 2024).
Borrowings under the Senior Credit Facility bear interest based on LIBOR or a base rate, with interest rate spreads above LIBOR or the base rate being subject to adjustments based on the Company’s net leverage ratio, ranging from 1.125% to 2.00% in the case of loans bearing interest at LIBOR and from 0.125% to 1.00% in the case of loans bearing interest at the base rate. In addition, a non-use fee is payable quarterly on the average unused revolving credit facility ranging from 0.15% to 0.30% per annum, based on the Company’s net leverage ratio.
The agreement governing the Senior Credit Facility contains customary limits and restrictions concerning investments, sales of assets, liens on assets and dividends and includes two financial covenants-a maximum net leverage ratio of 3.75:1.00

19


and a minimum interest coverage ratio of 3.50:1.00, in each case subject to adjustment in connection with certain transactions, including reduction of the minimum interest coverage ratio to 3.00:1.00 for any fiscal quarter ending within 12 months after the sale of the principal businesses comprising the EC&S segment and an increase to the leverage ratio from 3.75:1.00 to 4.25: 1.00 during the four fiscal quarters after a significant acquisition.
Subsequent to the refinancing of the Senior Credit Facility, in addition to the required term loan principal payment of $1 million, the Company utilized excess cash to prepay a total of $24 million, reducing the remaining principal due to $175 million at August 31, 2019.
We believe that the revolver, combined with our existing cash on hand and anticipated operating cash flows, will be adequate to meet operating, debt service, acquisition and capital expenditure funding requirements for the foreseeable future.
Primary Working Capital Management
We use primary working capital as a percentage of sales as a key metric for working capital efficiency. 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 our primary working capital (in millions):
 
 
August 31, 2019
 
August 31, 2018
 
 
$
 
PWC %
 
$
 
PWC %
Accounts receivable, net
 
$
126

 
20
 %
 
$
123

 
19
 %
Inventory, net
 
77

 
12
 %
 
72

 
11
 %
Accounts payable
 
(77
)
 
(12
)%
 
(70
)
 
(11
)%
Net primary working capital
 
$
126

 
20
 %
 
$
125

 
19
 %
Total primary working capital was $126 million at August 31, 2019 which stayed relatively consistent with the $125 million at August 31, 2018. Primary working capital increased slightly due to increased accounts receivable as a result of significant sales growth in the Middle East which has longer payment terms, increased inventory levels resulting from lower fourth quarter fiscal 2019 sales due to recent decelerating demand, offset by an increase in accounts payable as we continue to work with our supply chain to extend payment terms to be commensurate with those of our customers.
Our accounts receivable are derived from a diverse customer base spread across a number of industries, with our largest single customer generating approximately 3% of fiscal 2019 net sales from continuing operations.
Capital Expenditures
The majority of our manufacturing activities consist of assembly operations. We believe that our capital expenditure requirements are not as extensive as other industrial companies given the nature of our operations. Capital expenditures associated with continuing operations were $15 million, $11 million and $17 million in fiscal 2019, 2018 and 2017, respectively. Capital expenditures for fiscal 2020 are expected to be $10-$12 million, but could vary depending on business performance, changes in foreign currency exchange rates, growth opportunities and the amount of assets leased instead of purchased.
Commitments and Contingencies
Given our desire to allocate cash flow and revolver availability to fund growth initiatives, we have historically leased most of our operating equipment and facilities. We lease certain facilities, computers, equipment and vehicles under various operating lease agreements, generally over periods ranging from one to twenty years. Under most arrangements, we pay the property taxes, insurance, maintenance and expenses related to the leased property. Many of our leases include provisions that enable us to renew the leases based upon fair value rental rates on the date of expiration of the initial leases.
We are contingently liable for certain lease payments under leases within businesses we previously divested or spun-off. If any of these businesses do not fulfill their future lease payment obligations under a lease, we could be liable for such obligations. As of August 31, 2019, the present value of future minimum lease payments, using a weighted average discount rate of 1.89%, on previously divested or spun-off businesses was as follows: $2 million in each fiscal year for fiscal 2020 through 2024 and less than $1 million in aggregate thereafter.
We had outstanding letters of credit totaling $18 million and $24 million at August 31, 2019 and 2018, respectively, the majority of which relate to commercial contracts and self-insured workers' compensation programs.

20


Contractual Obligations
The timing of payments due under our contractual commitments is as follows (in millions): 
 
 
Payments Due
 
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
 
Total
Debt (short-term and long-term)
 
$
8

 
$
12

 
$
305

 
$
20

 
$
118

 
$

 
$
463

Interest on long-term debt
 
22

 
22

 
19

 
4

 
3

 

 
70

Operating leases*
 
23

 
19

 
16

 
10

 
7

 
35

 
110

 
 
$
53

 
$
53

 
$
340

 
$
34

 
$
128

 
$
35

 
$
643

 
*Table includes contractual obligations associated with leases of the EC&S segment held for sale as of August 31, 2019. Certain leases are currently in the name of Actuant Corporation or operating subsidiaries that will not be divested, and we are working proactively with the buyer to transfer leases into the name of a subsidiary to be divested or to buy out the lease with reimbursement of the cost from the buyer.
Interest on long-term debt assumes the current interest rate environment and revolver borrowings consistent with August 31, 2019 debt levels.
Our contractual obligations generally relate to amounts due under contracts with third-party service providers. These contracts are primarily for real estate leases, information technology services and telecommunications services. Only those obligations that are not cancelable are included in the table.
As part of our global sourcing strategy, we have entered into agreements with certain suppliers that require the supplier to maintain minimum levels of inventory to support certain products for which we require a short lead time to fulfill customer orders. We have the ability to notify the supplier that they no longer need to maintain the minimum level of inventory should we discontinue manufacture of a product during the contract period, however, we must purchase the remaining minimum inventory levels the supplier was required to maintain within a defined period of time. As these contracts allow for us to terminate with appropriate notice so long as we utilize the remaining inventory on hand at the supplier and there are no overall minimum volumes in these contracts other than what the supplier is required to maintain on hand at any given point in time, these contracts are excluded from the table above.
We have long-term obligations related to our deferred compensation, pension and postretirement plans that are excluded from this table and summarized in Note 11, “Employee Benefit Plans” in the notes to the consolidated financial statements.
Our liability for unrecognized tax benefits was $24 million at August 31, 2019, but is not included in the table of contractual obligations because the timing of the potential settlements of these uncertain tax positions cannot be reasonably estimated.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The following estimates are considered by management to be the most critical in understanding judgments involved in the preparation of our consolidated financial statements and uncertainties that could impact our results of operations, financial position and cash flow.
Inventories:  Inventory cost is determined using the last-in, first-out (“LIFO”) method for a portion of U.S. owned inventory (approximately 48% and 41% of total inventories at August 31, 2019 and 2018, respectively). If the LIFO method were not used, inventory balances would be higher than amounts presented in the consolidated balance sheet by $10 million and $5 million at August 31, 2019 and 2018, respectively. We perform an analysis on historical sales usage of individual inventory items on hand and record a reserve to adjust inventory cost to market value. The inventory valuation assumptions used are based on historical experience. We believe that such estimates are made based on consistent and appropriate methods; however, actual results may differ from these estimates under different assumptions or conditions.

21


Goodwill and Long-lived Assets:
Goodwill Impairment Review and Estimates: A considerable amount of management judgment is 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, impairment charges could be required. Significant negative industry or economic trends, disruptions to the Company's business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in 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.
In estimating the fair value of a reporting unit, we generally use a discounted cash flow model, which calculates fair value as the sum of the projected discounted cash flows over a discrete seven-year period plus an estimated terminal value. Significant assumptions include forecasted revenues, operating profit margins, and discount rates applied to the future cash flows based on the respective reporting unit's estimated weighted average cost of capital. In certain circumstances, we also review a market approach in which a trading multiple is applied to either forecasted EBITDA (earnings before interest, income taxes, depreciation and amortization) or anticipated proceeds of the reporting unit to arrive at the estimated fair value. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded. The estimated fair value represents the amount we believe a reporting unit could be bought or sold for in a current transaction between willing parties on an arms-length basis.
Fiscal 2019 Impairment Charges: As a result of a triggering event in fiscal 2019, we recorded a $14 million goodwill impairment charge associated with the Cortland U.S. reporting unit. See Note 6, "Goodwill, Intangible Assets, and Long-Lived Assets" in the notes to the consolidated financial statements for further discussion.
In addition, as a result of the EC&S reporting unit being held for sale as of August 31, 2019, we recorded a $210 million impairment charge representing the excess of the net book value of the net assets of the reporting unit as compared to the anticipated proceeds less costs to sell which is recorded within "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations.
The annual review of the reporting units representing continuing operations did not result in any reporting units having an estimated fair value that exceeded the carrying value (expressed as a percentage of the carrying value) by less than 30%.
Fiscal 2018 Impairment Charges: Our fourth quarter fiscal 2018 impairment review resulted in a review of the recoverability of the goodwill and long-lived assets of two reporting units (Cortland and PHI) for which the results of those assessments below are included in the results of discontinued operations.
Cortland Reporting Unit: The Cortland reporting unit recognized impairment charges in conjunction with Cortland Fibron’s held for sale classification, resulting in a $10 million impairment charge representing the excess of net book value of assets held for sale over anticipated proceeds. This impairment charge included $4 million related to goodwill. The impairment charge is recorded within "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations. See Note 5, “Divestiture Activities” in the notes to the consolidated financial statements for further discussion.
PHI Reporting Unit: The PHI business primarily designs, manufactures and distributes concrete tensioning products. Changes in certain assumptions used in our annual goodwill impairment analysis, which are linked, in part, to recent market share losses, resulted in a fair value estimate of the reporting unit lower than its carrying value. As a result, we recognized a $17 million impairment charge related to the goodwill of the PHI business, which represented the entire goodwill balance of the reporting unit. The impairment charge is recorded within "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations. See Note 5, “Divestiture Activities” in the notes to the consolidated financial statements for further discussion.
Fiscal 2017 Year-End Impairment Test: Our annual fiscal 2017 impairment review resulted in one reporting unit (Cortland) having an estimated fair value that exceeded the carrying value (expressed as a percentage of the carrying value) by less than 30%, however the test did not result in the need to record an impairment charge.
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. We recognized an impairment charge of $3 million in the fourth quarter of fiscal 2019 as a result of our determination that two secondary tradenames which were previously assumed to have an indefinite life would be phased out over the next 12-15 months and be re-branded with the Enerpac tradename.

22


The fiscal 2019 annual impairment review of the remaining indefinite-lived intangible assets (that represented components of continuing operations) did not result in any indefinite-lived assets having an estimated fair value that exceeded the carrying value (expressed as a percentage of the carrying value) by less than 30%.
We recognized impairment charges during the fourth quarter of fiscal 2018 to write-down the value of tradenames by $7 million in relation to the Cortland Fibron held for sale treatment (impairment charge recorded as a component of "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations).
A considerable amount of management judgment is required in performing 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.
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 perform undiscounted operating cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value.
In the fourth quarter of fiscal 2019, in connection with our North America service restructuring within the IT&S segment, we identified one customer relationship intangible asset associated with the component of the service business we intend to exit. As a result of our assessment, for which the primary assumption is the anticipated revenues associated with those customers, we determined that the fair value of the intangible asset was less than its carrying value, and therefore, recorded a $6 million impairment charge. See Note 6, "Goodwill, Intangible Assets, and Long-Lived Assets" in the notes to the consolidated financial statements for further discussion.
Also in the fourth quarter of fiscal 2019, in connection with the held-for-sale treatment of the remaining businesses within the EC&S segment, we recognized a $54 million impairment charge related to the recognition in earnings of the cumulative effect of foreign currency rate changes since acquisition of those businesses which is recorded in "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations. See Note 5, "Divestiture Activities" in the notes to the consolidated financial statements for further discussion.
In the fourth quarter of fiscal 2018, related to the held-for-sale treatment of our Cortland Fibron business, we recognized a $46 million long-lived asset impairment, representing the excess of net book value of assets held for sale over anticipated proceeds which consisted of i) $35 million related to the recognition in earnings of the cumulative effect of foreign currency rate changes since acquisition; ii) $10 million representing the excess of the net book value of assets held for sale to the anticipated proceeds and iii) $1 million of other divestiture charges. These charges are recorded as a component of "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations. See Note 5, "Divestiture Activities" in the notes to the consolidated financial ftatements for further discussion.
During the fourth quarter of fiscal 2018, the undiscounted operating cash flows of our PHI business did not exceed the carrying value of the net assets of the business, resulting in a long-lived asset impairment charge of $6 million (recorded as a component of "(Loss) earnings from discontinued operations" on the Consolidated Statements of Operations), consisting of charges of $5 million and $1 million on amortizable intangible assets and fixed assets (primarily machinery and equipment), respectively. See Note 5, "Divestiture Activities" in the notes to the consolidated financial statements for further discussion.
In the fourth quarter of fiscal 2017, related to the pending sale of our Viking business, we recognized an $85 million long-lived asset impairment, representing the excess of the net book value of assets held for sale over the anticipated proceeds which included $69 million related to the recognition in earnings of the cumulative effect of foreign currency rate changes since acquisition. See Note 5, "Divestiture Activities" in the notes to the consolidated financial statements for further discussion.
Significant management judgment is required in performing impairment tests, principally in determining the fair value of long-lived 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.

23


Business Combinations and Purchase Accounting: Business combinations are accounted for using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for certain acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using discounted cash flow methodology based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, profit margins and forecasted cash flows based on discount rates and terminal growth rates.
Employee Benefit Plans: We provide a variety of benefits to employees and former employees including, in some cases, pensions and postretirement health care. Plan assets and obligations are recorded based on an August 31 measurement date utilizing various actuarial assumptions such as discount rates, assumed rates of return on plan assets and health care cost trend rates. We determine the discount rate assumptions by referencing high-quality, long-term bond rates that are matched to the duration of our benefit obligations, with appropriate consideration of local market factors, participant demographics and benefit payment forecasts. At August 31, 2019 and 2018, the discount rates on domestic benefit plans were 2.90% and 4.05%, respectively. In estimating the expected return on plan assets, we consider historical returns, forward-looking considerations, inflation assumptions and the asset-allocation strategy in investing such assets. Domestic benefit plan assets consist primarily of participating units in mutual funds, index funds and bond funds. The expected return on domestic benefit plan assets was 5.75% and 7% for the fiscal years ended August 31, 2019 and 2018, respectively. A 25 basis point change in the assumptions for the discount rate or expected return on plan assets would not have materially changed the fiscal 2019 domestic benefit plan expense.
We review actuarial assumptions on an annual basis and make modifications based on current rates and trends, when appropriate. As required by GAAP, the effects of any modifications are recorded currently or amortized over future periods. Based on information provided by independent actuaries and other relevant sources, we believe that the assumptions used are reasonable; however, changes in these assumptions could impact our financial position, results of operations or cash flow. See Note 11, “Employee Benefit Plans” in the notes to the consolidated financial statements for further discussion.
Income Taxes: Judgment is required to determine the annual effective income tax rate, deferred tax assets and liabilities, reserves for unrecognized tax benefits and any valuation allowances recorded against net deferred tax assets. Our effective income tax rate is based on annual income, statutory tax rates, tax planning opportunities available in the various jurisdictions in which we operate and other adjustments. Our annual effective income tax rate includes the impact of discrete income tax matters including adjustments to reserves for uncertain tax positions and the benefits of various income tax planning activities.  Tax regulations require items to be included in our tax returns at different times than these same items reflected in our consolidated financial statements. As a result, the effective income tax rate in our consolidated financial statements differs from that reported in our tax returns. Some of these differences are permanent, such as expenses that are not tax deductible, while others are temporary differences, such as amortization and depreciation expenses.                        
Temporary differences create deferred tax assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not large enough to utilize the entire deduction or credit. Relevant factors in determining the realizability of deferred tax assets include future taxable income, the expected timing of the reversal of temporary differences, tax planning strategies and the expiration dates of the various tax attributes.    
Item  7A.    Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates and interest rates and, to a lesser extent, commodities. To reduce such risks, we selectively use financial instruments and other proactive management techniques. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which strictly prohibit the use of financial instruments for trading or speculative purposes. A discussion of our accounting policies for derivative financial instruments is included within Note 9, “Derivatives” in the notes to the consolidated financial statements.
Foreign Currency Risk—We maintain operations in the U.S. and various foreign countries. Our non-U.S. operations, the largest of which are located in the Netherlands (and other countries whose functional currency is the Euro), the United Kingdom, Australia, the United Arab Emirates and China, 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

24


foreign currency exchange rate risk (see Note 9, “Derivatives” in the notes to the consolidated financial statements 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.
The strengthening of the U.S. dollar 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, annual sales and operating profit were remeasured assuming a ten percent reduction in foreign exchange rates compared to the U.S. dollar. Under this assumption, annual sales would have been $26 million lower and operating profit would have been $3 million higher for the twelve months ended August 31, 2019. 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 actual sales or price levels. Similarly, a ten percent decline in foreign currency exchange rates relative to the U.S. dollar on our August 31, 2019 financial position would result in a $35 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.
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 would have resulted in an approximate $1 million increase in financing costs for the year-ended August 31, 2019.
Commodity Risk—We source a wide variety of materials and components from a network of global suppliers. While such materials are typically available from numerous suppliers, commodity raw materials, such as steel and plastic resin, are subject to price fluctuations which could have a negative impact on our results. We strive to timely pass along such commodity price increases to customers to avoid profit margin erosion.

25


Item 8.        Financial Statements and Supplementary Data 
 
Page
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INDEX TO FINANCIAL STATEMENT SCHEDULE
 
 
 
All other schedules are omitted because they are not applicable, not required or because the required information is included in the consolidated financial statements or notes thereto.

26


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Actuant Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Actuant Corporation and its subsidiaries (the “Company”) as of August 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity and cash flows for each of the three years in the period ended August 31, 2019, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


27


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill Impairment Assessment - Cortland U.S. Reporting Unit

As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated goodwill balance was $260.4 million as of August 31, 2019, and the goodwill associated with the Other segment was $17.5 million, which includes the Cortland U.S. reporting unit. Management tests goodwill for impairment annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded. In estimating fair value, management utilizes a discounted cash flow model, which is dependent on a number of assumptions including forecasted revenues, operating profit margins, and the weighted average costs of capital.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Cortland U.S. reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions, including the forecasted revenues, operating profit margins, and weighted average costs of capital. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting unit. These procedures also included, among others, testing management’s process for developing the fair value estimate; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the reasonableness of significant assumptions used by management, including the forecasted revenues, operating profit margins, and weighted average costs of capital. Evaluating management’s assumptions related to the forecasted revenues and operating profit margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model, and certain significant assumptions, including the weighted average cost of capital.



/s/ PricewaterhouseCoopers LLP

Milwaukee, Wisconsin
October 28, 2019

We have served as the Company’s auditor since 1997.








28


ACTUANT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
 
 
Year Ended August 31,
 
 
2019

2018

2017
Net sales
 
 
 
 
 
 
Product
 
478,946

 
489,623

 
460,390

Service & rental
 
175,812

 
151,680

 
156,201

Total net sales
 
654,758

 
641,303

 
616,591

Cost of products sold
 
 
 
 
 
 
Product
 
247,771

 
264,878

 
261,888

Service & rental
 
114,335

 
93,141

 
94,333

Total cost of products sold
 
362,106

 
358,019

 
356,221

Gross profit
 
292,652

 
283,284

 
260,370

 
 
 
 
 
 
 
Selling, administrative and engineering expenses
 
209,231

 
210,256

 
208,128

Amortization of intangible assets
 
8,922

 
9,280

 
9,097

Director & officer transition charges
 

 

 
7,784

Restructuring charges
 
4,156

 
10,555

 
3,234

Impairment & divestiture charges
 
22,827

 
2,987

 
116,979

Operating profit (loss)
 
47,516

 
50,206

 
(84,852
)
Financing costs, net
 
28,163

 
30,872

 
29,221

Other expense, net
 
629

 
138

 
3,816

Earnings (loss) before income tax expense (benefit)
 
18,724

 
19,196

 
(117,889
)
Income tax expense (benefit)
 
10,657

 
14,450

 
(22,614
)
Net earnings (loss) from continuing operations
 
8,067

 
4,746

 
(95,275
)
(Loss) earnings from discontinued operations, net of income taxes
 
(257,212
)
 
(26,394
)
 
29,062

Net loss
 
(249,145
)
 
(21,648
)
 
(66,213
)
 
 
 
 
 
 
 
Earnings (loss) per share from continuing operations
 
 
 
 
 
 
Basic
 
$
0.13

 
$
0.08

 
$
(1.60
)
Diluted
 
$
0.13

 
$
0.08

 
$
(1.60
)
 
 
 
 
 
 
 
(Loss) earnings per share from discontinued operations
 
 
 
 
 
 
Basic
 
(4.21
)
 
(0.44
)
 
0.49

Diluted
 
(4.18
)
 
(0.43
)
 
0.49

 
 
 
 
 
 
 
Loss per share
 
 
 
 
 
 
Basic
 
(4.07
)
 
(0.36
)
 
(1.11
)
Diluted
 
(4.04
)
 
(0.35
)
 
(1.11
)
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
Basic
 
61,151

 
60,441

 
59,436

Diluted
 
61,607

 
61,028

 
59,436


The accompanying notes are an integral part of these consolidated financial statements.


29


ACTUANT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)

 
 
Twelve Months Ended August 31,
 
 
2019
 
2018
 
2017
Net loss
 
$
(249,145
)
 
$
(21,648
)
 
$
(66,213
)
Other comprehensive income, net of tax
 
 
 
 
 
 
Foreign currency translation adjustments
 
(27,527
)
 
49,307

 
20,470

Foreign currency translation due to divested business
 
34,909

 

 

Pension and other postretirement benefit plans
 
(4,809
)
 
3,709

 
4,092

Total other comprehensive income, net of tax
 
2,573

 
53,016

 
24,562

Comprehensive (loss) income
 
$
(246,572
)
 
$
31,368

 
$
(41,651
)

The accompanying notes are an integral part of these consolidated financial statements.

30


ACTUANT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
August 31,
 
 
2019
 
2018
A S S E T S
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
211,151

 
$
250,490

Accounts receivable, net
 
125,883

 
123,261

Inventories, net
 
77,187

 
72,020

Assets from discontinued operations
 
285,578

 
568,933

Other current assets
 
30,526

 
32,529

Total current assets
 
730,325

 
1,047,233

Property, plant and equipment, net
 
56,729

 
54,974

Goodwill
 
260,415

 
280,132

Other intangible assets, net
 
52,375

 
71,657

Other long-term assets
 
24,430

 
31,221

Total assets
 
$
1,124,274

 
$
1,485,217

 
 
 
 
 
L I A B I L I T I E S  A N D  S H A R E H O L D E R S’  E Q U I T Y
 
 
 
 
Current Liabilities
 
 
 
 
Trade accounts payable
 
$
76,914

 
$
69,584

Accrued compensation and benefits
 
26,421

 
35,992

Current maturities of debt
 
7,500

 
30,000

Income taxes payable
 
4,838

 
4,091

Liabilities from discontinued operations
 
143,763

 
160,573

Other current liabilities
 
40,965

 
53,768

Total current liabilities
 
300,401

 
354,008

Long-term debt, net
 
452,945

 
502,695

Deferred income taxes
 
1,564

 
3,947

Pension and postretirement benefit liabilities
 
20,213

 
13,957

Other long-term liabilities
 
47,972

 
51,898

Total liabilities
 
823,095

 
926,505

Commitments and contingencies (Note 16)
 
 
 
 
Shareholders’ equity
 
 
 
 
Class A common stock, $0.20 par value per share, authorized 168,000,000 shares, issued 81,920,679 and 81,423,584 shares, respectively
 
16,384

 
16,285

Additional paid-in capital
 
181,213

 
167,448

Treasury stock, at cost, 21,455,568 and 20,439,434 shares, respectively
 
(640,212
)
 
(617,731
)
Retained earnings
 
915,466

 
1,166,955

Accumulated other comprehensive loss
 
(171,672
)
 
(174,245
)
Stock held in trust
 
(3,070
)
 
(2,450
)
Deferred compensation liability
 
3,070

 
2,450

Total shareholders' equity
 
301,179

 
558,712

Total liabilities and shareholders' equity
 
$
1,124,274

 
$
1,485,217

The accompanying notes are an integral part of these consolidated financial statements.

31


ACTUANT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Year Ended August 31,
 
 
2019
 
2018
 
2017
Operating Activities
 
 
 
 
 
 
Net loss
 
$
(249,145
)
 
$
(21,648
)
 
$
(66,213
)
Less: Net (loss) earnings from discontinued operations
 
(257,212
)
 
(26,394
)
 
29,062

Net earnings (loss) from continuing operations
 
8,067

 
4,746

 
(95,275
)
Adjustments to reconcile net earnings to net cash provided by operating activities - continuing operations:
 
 
 
 
 
 
Impairment & divestiture charges, net of tax effect
 
20,930

 
12,385

 
108,860

Depreciation and amortization
 
20,217

 
20,405

 
22,925

Stock-based compensation expense
 
10,882

 
11,333

 
14,939

Provision (benefit) for deferred income taxes
 
3,955

 
5,588

 
(8,706
)
Amortization of debt issuance costs
 
1,200

 
2,399

 
1,657

Other non-cash adjustments
 
405

 
285

 
505

Changes in components of working capital and other, excluding acquisitions and divestitures:
 
 
 
 
 
 
Accounts receivable
 
(4,993
)
 
(7,462
)
 
11,230

Inventories
 
(7,760
)
 
(1,142
)
 
(4,502
)
Trade accounts payable
 
6,858

 
(1,872
)
 
3,128

Prepaid expenses and other assets
 
5,269

 
(3,868
)
 
(5,026
)
Income tax accounts
 
(913
)
 
17,354

 
(5,085
)
Accrued compensation and benefits
 
(8,368
)
 
1,609

 
283

Other accrued liabilities
 
(14,846
)
 
10,156

 
3,159

Cash provided by operating activities - continuing operations
 
40,903

 
71,916

 
48,092

Cash provided by operating activities - discontinued operations
 
12,942

 
34,177

 
40,407

Cash provided by operating activities
 
53,845

 
106,093

 
88,499

 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
Capital expenditures
 
(14,923
)
 
(11,021
)
 
(17,238
)
Proceeds from sale of property, plant and equipment
 
1,462

 
104

 
448

Rental asset buyout for Viking divestiture
 

 
(27,718
)
 

Proceeds from sale of business, net of transaction costs
 

 
8,902

 

Cash paid for business acquisitions, net of cash acquired
 

 
(23,218
)
 

Cash used in investing activities - continuing operations
 
(13,461
)
 
(52,951
)
 
(16,790
)
Cash provided by (used in) investing activities - discontinued operations
 
24,507

 
(9,800
)
 
(10,835
)
Cash provided by (used in) investing activities
 
11,046

 
(62,751
)
 
(27,625
)
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
 
Payment for redemption of term loan
 
(200,000
)
 

 

Proceeds from issuance of term loan
 
200,000

 

 

Principal repayments on term loan
 
(72,500
)
 
(30,000
)
 
(18,750
)
Redemption of 5.625% senior notes
 

 

 
(500
)
Purchase of treasury shares
 
(22,481
)
 

 

Taxes paid related to the net share settlement of equity awards
 
(1,872
)
 
(1,284
)
 
(1,065
)
Stock option exercises & other
 
1,900

 
15,681

 
8,265

Payment of cash dividend
 
(2,439
)
 
(2,390
)
 
(2,358
)
Payment of debt issuance costs
 
(2,125
)
 

 

Cash used in financing activities - continuing operations
 
(99,517
)
 
(17,993
)
 
(14,408
)
Cash used in financing activities - discontinued operations
 

 

 
(742
)
Cash used in financing activities
 
(99,517
)
 
(17,993
)
 
(15,150
)
 
 
 
 
 
 
 
Effect of exchange rate changes on cash
 
(4,713
)
 
(4,430
)
 
4,243

Net (decrease) increase in cash and cash equivalents
 
(39,339
)
 
20,919

 
49,967

Cash and cash equivalents - beginning of period
 
250,490

 
229,571

 
179,604

Cash and cash equivalents - end of period
 
$
211,151

 
$
250,490

 
$
229,571

The accompanying notes are an integral part of these consolidated financial statements.

32






ACTUANT CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Stock
Held in
Trust
 
Deferred
Compensation
Liability
 
Total
Shareholders’
Equity
 
 
Issued
Shares
 
Amount
 
Balance at August 31, 2016
 
79,393

 
$
15,879

 
$
114,980

 
$
(617,731
)
 
$
1,259,645

 
$
(251,823
)
 
$
(2,646
)
 
$
2,646

 
$
520,950

Net loss
 

 

 

 

 
(66,213
)
 

 

 

 
(66,213
)
Other comprehensive income, net of tax
 

 

 

 

 

 
24,562

 

 

 
24,562

Stock contribution to employee benefit plans and other
 
17

 
3

 
890