<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
Mark One
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended May 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-11288
APPLIED POWER INC.
-----------------
(Exact name of Registrant as specified in its charter)
Wisconsin 39-0168610
--------- ----------
(State of incorporation) (I.R.S. Employer Id. No.)
N22 W23685 Ridgeview Parkway West
Waukesha, Wisconsin 53188-1013
Mailing address: P. O. Box 325, Milwaukee, Wisconsin 53201
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(262) 523-7600
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- _____
The number of shares outstanding of the Registrant's Class A Common Stock as of
July 7, 2000 was 39,127,785.
This Form 10-Q/A (Amendment No. 1) contains the full text of Applied Power
Inc.'s Form 10-Q for the quarter ended May 31, 2000, as amended, to reflect
amendments in Item 1 (Financial Statements) and Item 2 (Management's Discussion
and Analysis of Financial Condition and Results of Operations) in Part I of this
report.
<PAGE>
APPLIED POWER INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page no.
------------------------------ --------
<S> <C>
Item 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Earnings -
For the Three and Nine Months Ended
May 31, 2000 and May 31, 1999............................................................3
Condensed Consolidated Balance Sheets -
As of May 31, 2000 and August 31, 1999...................................................5
Condensed Consolidated Statements of Cash Flows -
For the Nine Months Ended May 31, 2000 and May 31, 1999..................................6
Notes to Condensed Consolidated Financial Statements........................................7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.........................................17
PART II - OTHER INFORMATION
---------------------------
Item 2 - Changes in Securities..............................................................................18
Item 5 - Other Information..................................................................................18
Item 6 - Exhibits and Reports on Form 8-K...................................................................18
SIGNATURE...................................................................................................18
---------
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
------------------------------
APPLIED POWER INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
--------------------------- -------------------------------
2000 1999 2000 1999
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 178,527 $ 179,981 $ 535,655 $ 524,356
Cost of products sold 112,497 113,789 341,816 334,104
---------- ----------- ------------- -------------
Gross profit 66,030 66,192 193,839 190,252
Engineering, selling and administrative expenses 34,761 36,572 103,329 105,558
Amortization of intangible assets 1,946 2,210 5,902 6,656
Corporate reorganization expenses 962 - 4,449 -
Contract termination (recovery) costs - - (1,446) 7,824
---------- ----------- ------------- -------------
Operating earnings 28,361 27,410 81,605 70,214
Other expense(income):
Net financing costs 9,750 10,888 27,892 30,638
Other (income) expense - net (191) (125) (823) 179
---------- ----------- ------------- -------------
Earnings from continuing operations before income
tax expense 18,802 16,647 54,536 39,397
Income tax expense 7,226 6,567 19,584 14,663
---------- ----------- ------------ -------------
Earnings from continuing operations 11,576 10,080 34,952 24,734
Discontinued operations (Note B):
Earnings from discontinued operations of
Electronics Segment (less applicable income
taxes of $7,591, $5,754, $22,790 and $18,836,
respectively) 13,384 10,449 34,232 31,481
---------- ----------- ------------- -------------
Earnings before extraordinary item 24,960 20,529 69,184 56,215
Extraordinary loss on sale of subsidiary, net of
income tax benefit of $1,700 (12,186) - (12,186) -
---------- ----------- ------------- -------------
Net earnings $ 12,774 $ 20,529 $ 56,998 $ 56,215
========== =========== ============= =============
</TABLE>
(Continued on next page)
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE>
APPLIED POWER INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
----------------------------- ---------------------------------
2000 1999 2000 1999
------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Basic earnings per share:
Earnings per share from continuing operations $ 0.30 $ 0.26 $ 0.89 $ 0.64
Earnings per share from discontinued operations 0.34 0.27 0.88 0.81
------------- ------------- ---------------- ---------------
Earnings per share before extraordinary item 0.64 0.53 1.77 1.45
Extraordinary loss on sale of subsidiary,
net of income tax benefit (0.31) - (0.31) -
------------- ------------- ---------------- ---------------
Net earnings per share $ 0.33 $ 0.53 $ 1.46 $ 1.45
============= ============= ================ ===============
Weighted average common
shares outstanding (000's) 39,094 38,910 39,045 38,783
============= ============= ================ ===============
Diluted earnings per share:
Earnings per share from continuing operations $ 0.29 $ 0.25 $ 0.87 $ 0.62
Earnings per share from discontinued operations 0.33 0.26 0.85 0.78
------------- ------------- ---------------- ---------------
Earnings per share before extraordinary item 0.62 0.51 1.72 1.40
Extraordinary loss on sale of subsidiary,
net of income tax benefit (0.30) - (0.30) -
------------- ------------- ---------------- ---------------
Net earnings per share $ 0.32 $ 0.51 $ 1.42 $ 1.40
============= ============= ================ ===============
Weighted average common and equivalent
shares outstanding (000's) 40,234 40,130 40,302 40,204
============= ============= ================ ===============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
APPLIED POWER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
May 31, August 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,808 $ 7,256
Accounts receivable, net 79,732 63,502
Inventories, net 93,276 100,724
Prepaid expenses and deferred taxes 15,721 16,333
------------ ------------
Total current assets 195,537 187,815
Property, plant and equipment, net 70,679 78,998
Goodwill and other intangible assets, net 169,446 189,435
Net assets of discontinued operations 597,489 598,458
Other assets 2,385 5,166
------------ ------------
Total assets $ 1,035,536 $ 1,059,872
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ - $ 230
Trade accounts payable 55,730 52,361
Accrued compensation and benefits 16,448 20,340
Other current liabilities 19,582 23,591
------------ ------------
Total current liabilities 91,760 96,522
Long-term debt 456,907 521,016
Deferred income taxes 8,485 7,720
Other liabilities 15,620 16,785
Shareholders' equity:
Class A common stock, $0.20 par value, authorized 80,000,000 shares,
issued and outstanding 39,110,838 and 38,978,340
shares, respectively 7,822 7,796
Additional paid-in capital 14,255 12,388
Retained earnings 468,104 412,863
Accumulated other comprehensive loss (27,417) (15,218)
------------ ------------
Total shareholders' equity 462,764 417,829
------------ ------------
Total liabilities and shareholders' equity $ 1,035,536 $ 1,059,872
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
APPLIED POWER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
--------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Operating activities
--------------------
Net earnings $ 56,998 $ 56,215
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Earnings from discontinued operation (34,232) (31,481)
Depreciation and amortization 18,224 20,457
Gain on sale of assets - (124)
Extraordinary loss on sale of subsidiary 13,886 -
Changes in operating assets and liabilities, excluding
the effects of business acquisitions and divestitures:
Accounts receivable (14,849) 3,926
Inventories (4,971) (7,740)
Prepaid expenses and other assets 2,402 2,338
Trade accounts payable 7,268 (4,627)
Other liabilities (7,890) (2,280)
---------------- ----------------
Cash provided by operating activities of continuing operations 36,836 36,684
Cash provided by operating activities of discontinued operations 17,704 47,458
---------------- ----------------
Total net cash provided by operating activities 54,540 84,142
Investing activities
--------------------
Proceeds on the sale of property, plant and equipment 703 4,760
Additions to property, plant and equipment (9,170) (21,262)
Business acquisitions, net of cash acquired - (3,500)
Proceeds from the sale of subsidiaries and other 15,233 -
---------------- ----------------
Net cash provided by (used in) investing activities of continuing
operations 6,766 (20,002)
Net cash used in investing activities of discontinued operations (42,206) (409,078)
---------------- ----------------
Total net cash used in investing activities (35,440) (429,080)
Financing activities
--------------------
Net repayments of long-term debt (36,514) (27,130)
(Decrease in) additional receivables financing facility (9,656) 1,950
Dividends paid on common stock (1,757) (1,171)
Proceeds from stock option exercises 1,893 3,332
---------------- ----------------
Net cash used in financing activities of continuing operations (46,034) (23,019)
Net cash provided by financing activities of discontinued operations 11,657 377,053
---------------- ----------------
Total net cash (used in) provided by financing activities (34,377) 354,034
Effect of exchange rate changes on cash (173) 47
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (15,450) 9,143
Effect of change in cash of discontinued operations 15,002 1,280
Cash and cash equivalents - beginning of period 7,256 5,069
---------------- ----------------
Cash and cash equivalents - end of period $ 6,808 $ 15,492
================ ================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE>
APPLIED POWER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
------------------------------
The accompanying unaudited condensed consolidated financial statements of
Applied Power Inc. (the "Company" or Applied Power) have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and with the instructions of Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The condensed consolidated balance sheet data as of August 31, 1999
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. For additional
information, refer to the consolidated financial statements and footnotes
thereto in the Company's 1999 Annual Report on Form 10-K.
In the opinion of management, all adjustments considered necessary for a fair
presentation of financial results have been made. Such adjustments consist of
only those of a recurring nature. Operating results for the three and nine
months ended May 31, 2000 are not necessarily indicative of the results that may
be expected for the entire fiscal year ending August 31, 2000.
Note B - Discontinued Operations
--------------------------------
On January 27, 2000, the Company's board of directors authorized various actions
intended to enable the Company to distribute its Electronics segment ("APW
Ltd.") to its shareholders (the "Distribution "). In the Distribution, Applied
Power Inc. shareholders will receive, in the form of a special dividend, one
share of APW Ltd. common stock for each Applied Power Inc. common share held as
of July 21, 2000. As a result, APW Ltd. will become a separately traded,
publicly held company.
On July 7, 2000, Applied Power Inc.'s board of directors approved the
distribution of its Electronics businesses. Accordingly, the consolidated
financial statements and related notes have been reclassified to reflect the
Company's Electronics segment as a discontinued operation. Thus, the revenues,
costs and expenses, assets and liabilities, and cash flows of the Electronics
segment have been excluded from the respective captions in the accompanying
consolidated financial statements. The net operating results, of the Electronics
segment have been reported, net of applicable taxes, as "Earnings from
operations of discontinued Electronics segment." The net operating results of
the discontinued operations include financing costs related to the debt of the
Electronics segment." The net assets of the Electronics segment have been
reported in the Consolidated Balance Sheets as "Net assets of discontinued
operations."
For purposes of this presentation, the amount of debt allocated to continuing
and discontinued operations was determined based on preliminary estimates of the
amount of debt retained by the Company and expected to be allocated to APW Ltd.
in the Distribution. The allocation of interest to continuing and discontinued
operations was based on relative debt levels assigned. In conjunction with the
Distribution, the majority of the Company's existing credit facilities and notes
are anticipated to be replaced with new facilities and notes. There were no
general corporate expenses allocated to discontinued operations during the
periods presented.
The following unaudited selected financial data for the Electronics business
segment is presented for informational purposes only and does not necessarily
reflect what the results of operations and financial position would have been
had the segment operated as a stand-alone entity:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands) May 31, May 31,
2000 1999 2000 1999
----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 319,798 $ 260,524 $ 886,014 $ 773,763
Earnings before income tax expense 20,975 16,203 59,105 50,317
Income tax expense 7,591 5,754 22,790 18,836
Extraordinary loss, net of tax - - (2,083) -
Earnings from operations of discontinued
Electronics segment, net of taxes 13,384 10,449 34,232 31,481
May 31, August 31,
2000 1999
------------------------------------------------------
Total assets $1,170,102 $1,174,044
Total liabilities 572,613 575,586
Net assets of discontinued operations 597,489 598,458
</TABLE>
7
<PAGE>
In order to effect the Distribution, Applied Power Inc. and APW Ltd. will enter
into the following agreements:
. Contribution Agreement, Plan and Agreement of Reorganization and
Distribution
. General Assignment, Assumption and Agreement regarding Litigation, Claims,
and other Liabilities
. Transitional Trademark Use and License Agreement
. Insurance Matters Agreement
. Bill of Sale and Assumption of Liabilities
. Employee Benefits and Compensation Agreement
. Tax Sharing and Indemnification Agreement
. Interim Administrative Services Agreement
. Confidentiality and Non Disclosure Agreement
. Assumption of Applied Power Inc. Debt Obligation
These Agreements define the ongoing relationship between the parties after the
Distribution. Applied Power Inc. and APW Ltd. have established pricing terms for
services to be effective after the Distribution believed to be comparable to
what could be achieved through arm's-length negotiations. Following the
Distribution, additional or modified agreements, arrangements and transactions
may be entered into and such agreements and transactions will be negotiated on
an arm's-length basis.
Note C - Earnings Per Share
---------------------------
The reconciliations between basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
----------------------------- -----------------------------
Numerator: 2000 1999 2000 1999
------------ ------------- ------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Earnings from continuing operations $ 11,576 $ 10,080 $ 34,952 $ 24,734
Earnings from discontinued operations 13,384 10,449 34,232 31,481
------------ ------------- ------------- -------------
Earnings before extraordinary item 24,960 20,529 69,184 56,215
Extraordinary loss (12,186) - (12,186) -
------------ ------------- ------------- -------------
Net earnings for basic and diluted
earnings per share $ 12,774 $ 20,529 $ 56,998 $ 56,215
============ ============= ============= =============
Denominator:
Weighted average common shares outstanding for
basic earnings per share 39,094 38,910 39,045 38,783
Net effect of dilutive stock options based on the
treasury stock method using average market price 1,140 1,220 1,257 1,421
------------ ------------- ------------- -------------
Weighted average common and equivalent
shares outstanding for diluted earnings per share 40,234 40,130 40,302 40,204
============ ============= ============= =============
Basic Earnings Per Share:
Earnings from continuing operations $ 0.30 $ 0.26 $ 0.89 $ 0.64
Earnings from discontinued operations 0.34 0.27 0.88 0.81
------------ ------------- ------------- -------------
Basic earnings per share before extraordinary item 0.64 0.53 1.77 1.45
Extraordinary loss (0.31) - (0.31) -
------------ ------------- ------------- -------------
Basic earnings per share $ 0.33 $ 0.53 $ 1.46 $ 1.45
============ ============= ============= =============
Diluted Earnings Per Share:
Earnings from continuing operations $ 0.29 $ 0.25 $ 0.87 $ 0.62
Earnings from discontinued operations 0.33 0.26 0.85 0.78
------------ ------------- ------------- -------------
Diluted earnings per share before extraordinary
item 0.62 0.51 1.72 1.40
Extraordinary loss (0.30) - (0.30) -
------------ ------------- ------------- -------------
Diluted earnings per share $ 0.32 $ 0.51 $ 1.42 $ 1.40
============ ============= ============= =============
</TABLE>
8
<PAGE>
Note D - Comprehensive Income
-----------------------------
The components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net earnings $ 12,774 $ 20,529 $ 56,998 $ 56,215
Foreign currency translation adjustments (9,604) (7,475) (12,199) (5,712)
------------ ------------- ------------- -------------
Comprehensive income $ 3,170 $ 13,054 $ 44,799 $ 50,503
============ ============= ============= =============
</TABLE>
Note E - Sale of Business Unit
------------------------------
The company completed the sale of Air Cargo Equipment Corporation, a business
unit in the Engineered Solutions segment, to Teleflex Incorporated on May 26,
2000. The total consideration from the transaction, which was structured as both
a sale of stock of the Air Cargo Equipment Corporation and the sale of other
assets, was $12.0 million, resulting in an extraordinary loss of $13.9 million,
$12.2 million after-tax.
On November 23, 1999, a wholly-owned subsidiary of the Company completed the
sale of the assets of Samuel Groves & Co. Ltd., a business unit in the
Engineered Solutions segment. Total consideration from the transaction was
approximately $3.0 million, which approximated the book value of such assets.
Note F - Net Inventories
------------------------
The nature of the Company's products in several significant parts of its
business is such that they have a very short production cycle. Consequently, the
amount of work-in-process at any point in time is minimal. In addition, many
parts or components are ultimately either sold individually or assembled with
other parts making a distinction between raw materials and finished goods
unclear. At these locations, the Company has not deemed it necessary or cost
effective to categorize inventory by state of completion, but rather between
material, labor and overhead. Several other parts of the Company maintain and
manage their inventories using a job cost system where the distinction of
categories of inventory by state of completion is also not available.
As a result of these factors, it is neither practical nor cost effective to
segregate the amounts of raw materials, work-in-process or finished goods
inventories at the respective balance sheet dates as segregation would only be
possible as the result of physical inventories which are taken at dates
different from the balance sheet dates.
Note G - Financing
------------------
In connection with the Distribution, Applied Power Inc. will retire
substantially all of its existing debt. The Company has commenced an offer to
purchase its 8.75% Senior Subordinated Notes due 2009 (the "1999 Notes") for
cash and have conducted a concurrent consent solicitation designed to remove the
restrictions on Applied Power Inc.'s operations currently included in the
related indenture (the "Tender Offer"). In connection with the Distribution, the
Company also expects to repay other non-public debt including its existing
credit facility and accounts receivable financing facility. To finance the above
Tender Offer and other debt repayments, the Company intends to issue senior
subordinated notes as well as enter into a new senior secured credit facility.
APW Ltd. will enter into a separate credit facility, which will be used to fund
the debt realignment as contemplated with the Distribution.
Note H - Extraordinary Items
----------------------------
In May 2000 the Company recorded an extraordinary $13.9 million charge ($12.2
million net of $1.7 million tax benefit) related to the loss on the sale of Air
Cargo Equipment Corporation and related other assets. Applied Power Inc. had
acquired Air Cargo Equipment Corporation as part of the ZERO pooling of
interests on July 1, 1998. It is presented as an extraordinary item due to
meeting the following criteria: (i) the divestiture occurred within two years of
the pooling of interest, (ii) the divestiture was not planned at that time of
the pooling of interest and (iii) operations divested are material based on the
relative criteria. See note E -Sale of Business Units for additional
information.
9
<PAGE>
Note I - Segment Information
----------------------------
The Company had been reporting two business segments, Industrial and
Electronics. As a result of the Distribution, the Electronics segment is now
included, in its entirety, as discontinued operations. Subsequent to the
Distribution, the Company will be split into two reportable segments with
separate and distinct operating management and strategies. Tools & Supplies is
primarily involved in the design, manufacture and distribution of tools and
supplies to the construction, electrical wholesale, retail do-it-yourself,
retail automotive, industrial and production automation markets. Engineered
Solutions focuses on developing and marketing value-added, customized solutions
for original equipment manufacturers in the recreational vehicle, automotive,
truck, medical and industrial markets. "General corporate and other" as
indicated below primarily includes general corporate expenses, interest expense
and foreign currency exchange adjustments.
The following table summarizes financial information by reportable segment:
<TABLE>
<CAPTION>
-------------------------------------------
NET SALES :
-----------------------------------------------------------------------
(in thousands) Three Months Ended Nine Months Ended
-----------------------------------------------------------------------
May 31, May 31,
-----------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tools & Supplies $ 79,590 $ 78,804 $230,166 $234,587
Engineered Solutions 98,937 101,177 305,489 289,769
------------------- -------------------
Total net sales $178,527 $179,981 $535,655 $524,356
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------
EARNINGS BEFORE INCOME TAX EXPENSE:
-----------------------------------------------------------------------------
(in thousands) Three Months Ended Nine Months Ended
-----------------------------------------------------------------------------
May 31, May 31,
-----------------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tools & Supplies $ 14,976 $ 14,145 $ 41,248 $ 38,274
Engineered Solutions 17,793 16,290 55,412 41,009
General Corporate and other (13,967) (13,788) (42,124) (39,886)
-------------------- --------------------
Total EBIT $ 18,802 $ 16,647 $ 54,536 $ 39,397
==================== ====================
</TABLE>
Results for the nine months ended May 31, 1999 include a $7.8 million charge,
$4.7 million after-tax, related to a contract termination for the Engineered
Solutions segment. Results for the nine months ended May 31, 2000 for the
Engineered Solutions segment include a $1.4 million recovery settlement, $0.9
million after-tax, related to the contract termination.
In addition, "General corporate and other" includes corporate reorganization
expenses of $1.0 million, $0.6 million after tax, for the three months ended May
31, 2000, and $4.4 million, $2.8 million after tax, for the nine months ended
May 31, 2000. These corporate reorganization expenses relate to costs incurred
associated with the planned spin-off of the Electronics segment.
Note J - Subsequent Events
--------------------------
On June 30, 2000, Applied Power Inc. completed the sale of all outstanding
capital stock of Barry Wright Corporation, a wholly owned subsidiary of Applied
Power Inc. Barry Wright Corporation, comprised of the Barry Controls Aerospace
and Barry Controls Defense and Industrial divisions, and its UK subsidiary Barry
Controls Ltd., were sold to Hutchinson S.A., a subsidiary of the TotalFinaElf
Group, a French based multi-national corporation. The net of tax cash proceeds
were approximately $157.5 million.
On July 7, 2000, Applied Power Inc.'s Board of Directors approved the
Distribution. Shareholders of Applied Power Inc. common stock will receive one
share of APW Ltd. common stock for every Applied Power Inc. share owned on the
July 21, 2000 record date. APW Ltd. will trade separately on the New York Stock
Exchange (NYSE) as "APW" and Applied Power Inc. will continue to trade on the
NYSE, but will change its ticker symbol to "ATU" and will subsequently change
its name to Actuant Corporation during fiscal year 2001.
10
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Risk Factors That May Affect Future Results
-------------------------------------------
Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as statements
in other Company communications, which are not historical facts, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. The terms
"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 conditions and market conditions in the industrial production,
trucking, construction, aerospace, automotive, recreational vehicle, and defense
industries in North America, Europe and, to a lesser extent, Asia, market
acceptance of existing and new products, successful integration of acquisitions,
competitive pricing, foreign currency risk, interest rate risk, unforeseen costs
or consequences of latent Year 2000 issues during calendar year 2000, the
Company's ability to access capital markets, the spin-off of the Electronics
business, and other factors that may be referred to in the Company's reports
filed with the Securities and Exchange Commission.
Strategic Developments
----------------------
On January 27, 2000, the Company announced a plan to spin-off its Electronics
business segment (the "Distribution") to create a stand-alone public company
focused on being a global supplier in the high-growth electronics manufacturing
services (EMS) sector. The Electronics business will be a separate publicly
traded company incorporated in Bermuda, and will operate under the name APW Ltd.
Following the spin-off, Applied Power Inc. will continue to operate the
businesses making up the Engineered Solutions and Tools & Supplies segments.
On March 9, 2000, Applied Power Inc. announced plans for its Industrial
businesses to operate under the name of Actuant Corporation. Applied Power Inc.
intends to change its name to Actuant Corporation during fiscal 2001.
The Company has recently sold its vibration isolation businesses, known as Barry
Controls, and its aerospace cargo products business, known as Air Cargo
Equipment Corporation. These initiatives were effected to reduce debt and more
strategically focus the remaining Applied Power Inc. businesses. The Air Cargo
transaction closed on May 26, 2000 and the Barry Controls transaction closed on
June 30, 2000.
On July 7, 2000, Applied Power Inc.'s board of directors approved the
distribution of its Electronics businesses. Shareholders of Applied Power Inc.
common stock will receive one share of APW Ltd. common stock for every Applied
Power Inc. share owned as of the July 21, 2000 record date. APW Ltd. will trade
separately on the New York Stock Exchange (NYSE) as "APW" and Applied Power Inc.
will continue to trade on the NYSE, but will change its ticker symbol to "ATU"
in anticipation of the Actuant Corporation name change. The Distribution is
expected to be completed on July 31, 2000. Accordingly, the consolidated
financial statements and related notes have been reclassified to reflect the
Company's Electronics segment as a discontinued operation. Thus, the revenues,
costs and expenses, assets and liabilities, and cash flows of the Electronics
segment have been excluded from the respective captions in the accompanying
consolidated financial statements. The net operating results of the Electronics
segment have been reported, net of applicable taxes, as "Earnings from
operations of discontinued Electronics segment." The net operating results of
the discontinued operations include financing cost related to the debt of the
Electronics segment. The net assets of the Electronics segment have been
reported in the Consolidated Balance Sheets as "Net assets of discontinued
operations."
Pro forma financial information giving effect to the Distribution and other
transactions was filed separately by both Applied Power Inc. and APW Ltd. See
Item 6--Exhibits and Reports on Form 8-K.
Results of Operations
---------------------
The Company reported sales and earnings of $178.5 million and $12.8 million,
respectively, for the third quarter ended May 31, 2000. Net earnings for the
third quarter of fiscal 2000 decreased $7.7 million, or $0.19 per share on a
diluted basis, over the comparable prior year quarter. Excluding non-recurring
items recorded during the period, net earnings were $25.6 million, or $0.64 per
diluted share, an increase of 25% percent over the $20.5 million, or $0.51 per
diluted share, in the prior year third quarter.
The non-recurring items recorded during the quarter ended May 31, 2000 relate to
(i) a $1.0 million ($0.6 million after-tax) for costs incurred associated with
the spin-off of the Electronics business and incorporating APW Ltd. in Bermuda
and (ii) an extraordinary loss on the sale of a subsidiary of $12.2 million (net
of $1.7 million tax benefit) which is reported as an extraordinary item.
For the nine months ended May 31, 2000, net earnings were $57.0 million, or
$1.42 per diluted share. Excluding non-recurring items in both periods, net
earnings for the nine month period ended May 31, 2000 were $73.2 million, or
$1.82 per share on a diluted basis, a 20% increase over the $60.9 million or
$1.52 per diluted share for the first nine months of fiscal 1999.
The non-recurring item recorded during the first nine months of fiscal 1999
relates to the cancellation of a contract within the Engineered Solutions
segment in November 1998. In the first quarter of fiscal 1999, the Company
recorded to operating expense a contract termination charge of $7.8 million
pre-tax ($4.7 million after-tax, or $0.12 per diluted share). Non-recurring
items recorded during the first nine months of the current fiscal year relate to
(i) an extraordinary charge recorded in discontinued operations in the second
quarter relating to a make whole premium paid in connection with the early
retirement of debt of $2.1 million (net of $1.2 million tax benefit), or $0.05
per diluted share; (ii) an extraordinary charge recorded in the third quarter
relating to the loss on the sale of a subsidiary (mentioned above) of $12.2
million (net of $1.7 million tax benefit) or $0.30 per diluted share, (iii)
spin-off transaction costs of $4.4 million pre-tax, $2.8 million after tax or
$0.07 per diluted share, and (iv) a recovered portion of the contract
11
<PAGE>
termination charge received during the first quarter of fiscal 2000 in a
settlement of $1.4 million pre-tax ($0.9 million after-tax, or $0.02 per diluted
share).
With the approval of the spin-off of the Electronics business, the Company is
now managed and reported as two segments revenue space: Tools & Supplies and
Engineered Solutions. The Company had been reporting two business segments,
Industrial and Electronics. The Electronics segment is now included, in its
entirety, as discontinued operations. Tools & Supplies is primarily involved in
the design, manufacture and distribution of tools and supplies to the
construction, electrical wholesale, retail do-it-yourself, retail automotive,
industrial and production automation markets. Engineered Solutions focuses on
developing and marketing value-added, customized solutions for original
equipment manufacturers in the recreational vehicle, automotive, truck, medical
and industrial markets.
Reported financial information from continuous operations includes the results
of certain business units that the Company has sold, or will not be a part of
the Company following the Distribution, consisting of Samuel Groves, Air Cargo,
Barry Controls, and Magnets (the "Non-continuing Businesses"). As a result, the
reported financial information is not fully representative of the group of
business units that will comprise Actuant in the future. We have included in the
following tables certain adjusted financial information to show the effect of
these non-continuing businesses on reported results.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
NET SALES BY SEGMENT
-----------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended Nine Months Ended
-----------------------------------------------------------------------------------------------------------------------
May 31, May 31, May 31, May 31,
-----------------------------------------------------------------------------------------------------------------------
2000 1999 Change 2000 1999 Change
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tools & Supplies $ 79,590 $ 78,804 1.0 % $ 230,166 $ 234,587 (1.9)%
Engineered Solutions 98,937 101,177 (2.2)% 305,489 289,769 5.4%
Less: Non-continuing
Businesses 41,058 42,074 (2.5)% 129,600 126,025 2.8%
----------------------------- ----------------------------
Adjusted Engineered 57,879 59,103 (2.1)% 175,889 163,744 7.4%
Solutions
Total net sales 178,527 179,981 (0.8)% 535,655 524,356 2.2%
Less: Non-continuing
Businesses 41,058 42,074 (2.5)% 129,600 126,025 2.8%
----------------------------- ----------------------------
Adjusted net sales $ 137,469 $ 137,907 (0.3)% $ 406,055 $ 398,331 1.9%
</TABLE>
Total net sales increased by $11.3 million, or 2.2%, from $524.4 million for the
nine months ended May 31, 1999 to $535.7 million for the nine months ended May
31, 2000. Excluding the negative translation effect of the stronger U.S. dollar,
total net sales increased 4.8%. Excluding the Non-continuing Businesses,
adjusted net sales increased by 1.9%, due to continued growth in recreational
vehicle ("RV"), convertible top and truck product sales. Excluding currency
translation, adjusted net sales increased by 5.0%.
Net sales for Tools & Supplies grew modestly in the third quarter
and declined by $4.4 million, or 1.9% from $234.6 million for the nine months
ended May 31, 1999 to $230.2 million for the nine months ended May 31, 2000.
Excluding currency translation, Tools & Supplies net sales grew 2.8% and
declined 0.3% in the respective quarter and year-to-date periods. The modest
year-to-date reduction resulted primarily from the elimination of certain low
profit margin or unprofitable product lines and SKUs.
Net sales for Engineered Solutions declined by $2.2 million, or 2.2%, from
$101.2 million for the three months ended May 31, 1999 to $98.9 million for the
three months ended May 31, 2000. The decrease was primarily due to currency
translation, which impacted net sales growth by 3.1%, but was also due to the
timing of certain program/model roll-offs and new models in the convertible top
business. For the nine months ended May 31, 2000, Engineered Solutions net sales
increased by %15.7 million, or 5.4%, from 289.8 million to $305.5 million for
the nine months ended May 31, 1999. Excluding the Non-continuing Businesses,
adjusted Engineered Solutions net sales increased by $12.1 million, or 7.4%,
from $163.7 million for the nine months ended May 31, 1999 to $175.9 million for
the nine months ended May 31, 2000.
Excluding currency translation, adjusted Engineered Solutions, net sales
increased by $20.9 million, or 12.7% for the nine month period. Increased year-
to-date sales are primarily attributable to continued growth in the RV,
convertible top and truck product sales.
12
<PAGE>
Sales declines in the non-continuing businesses for the third quarter resulted
in a gross profit decrease of $0.8 million. Margins were negatively impacted by
a shift in sales within the aerospace unit from after-market products to
lower-margin OEM shipments.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
GROSS PROFIT BY SEGMENT
-----------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended Nine Months Ended
-----------------------------------------------------------------------------------------------------------------------
May 31, May 31, May 31, May 31,
-----------------------------------------------------------------------------------------------------------------------
2000 1999 Change 2000 1999 Change
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tools & Supplies $ 33,789 $ 33,697 0.3 % $ 94,238 $ 95,080 (0.9)%
Engineered Solutions 32,241 32,495 (0.8)% 99,601 95,172 4.7 %
Less: Non-continuing
Businesses 13,853 14,664 (5.5)% 46,161 46,361 (0.4)%
----------------------------- ---------------------------
Adjusted Engineered 18,388 17,831 3.1 % 53,440 48,811 9.5 %
Solutions
Total gross profit 66,030 66,192 (0.2)% 193,839 190,252 1.9 %
Less: Non-continuing
Businesses 13,853 14,664 (5.5)% 46,161 46,361 (0.4)%
----------------------------- ---------------------------
Adjusted gross profit $ 52,177 $ 51,528 1.3 % $ 147,678 $ 143,891 2.6 %
============================= ===========================
Gross Profit Margins
by Segment:
Tools & Supplies 42.5% 42.8% 40.9% 40.5%
Engineered Solutions 32.6 32.1 32.6 32.8
Adjusted Engineered Solutions 31.8 30.2 30.4 29.8
Total gross profit margin 37.0 36.8 36.2 36.3
Total adjusted gross profit
margin 38.0 37.4 36.4 36.1
</TABLE>
On July 7, 2000, Applied Power Inc.'s board of directors approved the
distribution of its Electronics businesses. According, the consolidated
financial statements and related notes have been reclassified to reflect the
Company's Electronics segment as a discontinued operation. Thus, the revenues,
costs and expenses, assets and liabilities, and cash flows of the Electronics
segment have been excluded from the respective captions in the accompanying
consolidated financial statements. The net operating results of the Electronics
segment have been reported, net of applicable taxes, as "Earnings from
operations of discontinued Electronics segment." The net operating results of
the discontinued operations include financing costs related to the debt of the
Electronics segment. The net assets of the Electronics segment have been
reported in the Consolidated Balance Sheets as "Net assets of discontinued
operations."
Total gross profit increased by $3.6 million, or 1.9%, from $190.3 million for
the nine months ended May 31, 1999 to $193.8 million for the nine months ended
May 31, 2000. This increase was due to the incremental net sales realized over
the same period. Total gross profit margin declined slightly from 36.3% to 36.2%
primarily as a result of sales mix changes in the Non-continuing Businesses.
Excluding the Non-continuing Businesses, adjusted gross profit increased by $3.8
million from $143.9 million to $147.7 million. Total adjusted gross profit
margin increased from 36.1% to 36.4% primarily as a result of modest cost
reductions in the nine months ended May 31, 2000.
Gross profit for Tools & Supplies decreased by $0.8 million from $95.1 million
for the nine months ended May 31, 1999 to $94.2 million for the nine months
ended May 31, 2000, reflecting lower sales over the corresponding periods and
the unfavorable impact of currency translation. Gross profit margins for Tools &
Supplies increased from 40.5% to 40.9% for the nine month periods ended May 31,
1999 and 2000, respectively. This increase was primarily attributable to the
elimination of low-profit margin and unprofitable SKUs and savings from closing
one manufacturing operation and two small warehouses. Tools and Supplies gross
profit margins in the third quarter declined from 42.8% in fiscal 1999 to 42.5%
in fiscal 2000. The strengthening of the U.S. dollar negatively impacted the
margins of Encrpac's European units as a portion of their materials is sourced
from the U.S.
Gross profit for Engineered Solutions increased by $4.4 million from $95.2
million for the nine months ended May 31, 1999 to $99.6 million for the nine
months ended May 31, 2000. The increase was due to net sales growth over the
corresponding periods. Excluding the Non-continuing Businesses, adjusted
Engineered Solutions gross profit increased by $4.6 million from $48.8 million
to $53.4 million. Adjusted Engineered Solutions gross profit margin increased
from 29.8% to 30.4%, reflecting leveraging of fixed manufacturing costs and
favorable product mix.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
ENGINEERING, SELLING AND ADMINISTRATIVE EXPENSES BY SEGMENT
-----------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended Nine Months Ended
-----------------------------------------------------------------------------------------------------------------------
May 31, May 31, May 31, May 31,
-----------------------------------------------------------------------------------------------------------------------
2000 1999 Change 2000 1999 Change
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tools & Supplies $ 17,896 $ 18,621 (3.9)% $ 50,215 $ 53,863 (6.8)%
Engineered Solutions 13,419 14,926 (10.1)% 42,507 42,626 (0.3)%
Less: Non-continuing
Businesses 8,522 8,793 (3.1)% 28,022 24,606 13.9 %
------------ ------------- ------------- -------------
Adjusted Engineered 4,897 6,133 (20.2)% 14,485 18,020 (19.6)%
Solutions
Combined segment
engineering, selling and
administrative expenses 31,315 33,547 (6.7)% 92,722 96,489 (3.9)%
General corporate expenses 3,237 3,025 7.0 % 9,182 9,069 1.2 %
Group expenses 209 - 1,425 -
Total engineering, selling
and administrative
expenses 34,761 36,572 (5.0)% 103,329 105,558 (2.1)%
Less: Non-continuing
Businesses 8,522 8,793 (3.1)% 28,022 24,606 13.9 %
------------ ------------- ------------- -------------
Adjusted engineering,
selling and
administrative expenses $ 26,239 $ 27,779 (5.5)% $ 75,307 $ 80,952 (7.0)%
</TABLE>
13
<PAGE>
Total engineering, selling and administrative expenses ("SAE expenses")
decreased by $2.2 million, or 2%, from $105.6 million for the nine months ended
May 31, 1999 to $103.3 million for the nine months ended May 31, 2000. This
decrease was negatively impacted by increases recorded in the Non-continuing
Businesses due to the acquisition of the Magnets business with Rubicon in
October 1999. Excluding the Non-continuing Businesses, adjusted SAE expenses
decreased by $5.6 million, or 7.0% from $81.0 million to $75.3 million. As a
percent of sales, adjusted SAE expenses decreased from 20.3% for the nine months
ended May 31, 1999 to 18.5% for the nine months ended May 31, 2000, reflecting
the cost reduction initiatives discussed below.
SAE expenses for Tools & Supplies decreased by $3.6 million, or 6.8%, from $53.9
million for the nine months ended May 31, 1999 to $50.2 million for the nine
months ended May 31, 2000. As a percentage of net sales, Tools & Supplies SAE
expenses decreased from 23.0% to 21.8%. This improvement reflects the continuing
benefits of earlier restructuring initiatives, including the combination of
Enerpac's and GB's Wisconsin-based sales and administrative offices, and
approximately $0.9 million due to currency translation effect.
SAE expenses for Engineered Solutions decreased by $0.1 million, or 0.3%, from
$42.6 million for the nine months ended May 31, 1999 to $42.5 million for the
nine months ended May 31, 2000. Excluding the Non-continuing Businesses,
adjusted SAE expenses for Engineered Solutions decreased by $3.5 million, or
19.6%, from $18.0 million for the nine months ended May 31, 1999 to $14.5
million for the nine months ended May 31, 2000. As a percentage of net sales,
adjusted SAE for Engineered Solutions decreased from 11.0% to 8.2% due primarily
to the benefits obtained from cost reduction initiatives, including significant
headcount reductions at our domestic, and approximately $0.7 million due to
currency translation effect.
GENERAL CORPORATE EXPENSES. All of the general corporate expenses incurred by
Applied Power Inc. are included in continuing operations as part of engineering,
selling and administrative expense. No portion of such expenses has been
allocated to the discontinued operation's financial results, which are included
in the Condensed Consolidated Statements of Earnings. Management does not
believe this level of expenses is reflective of those required to support
Actuant had it been operating independently for the fiscal periods presented.
AMORTIZATION EXPENSE. Total amortization expense for the nine months ended May
31, 2000 was lower than that recorded in the comparable prior year period as a
result of lower amortization expense recorded for certain non-compete agreements
which became fully amortized in fiscal 1999.
CORPORATE REORGANIZATION EXPENSES. Through the first nine months current fiscal
year, the company has recorded $4.4 million, $2.8 million after-tax, of fees and
expenses associated with the spin-off transaction and incorporating APW Ltd. in
Bermuda. Those fees and expenses represent investment banking, legal, accounting
and other fees incurred by the Company through May 31, 2000 for services related
to the spin-off transaction.
CONTRACT TERMINATION (RECOVERY) CHARGES. In the first quarter of fiscal 1999,
the Company recorded a $7.8 million contract termination charge, $4.7 million
after-tax, related to the cancellation of a contract in the Engineered Solutions
segment. In the first quarter of fiscal 2000, a portion of the contract
termination charge was recovered in a settlement of $1.4 million, $0.9 million
after-tax.
NET FINANCING COSTS. Fiscal 2000 third quarter Net Financing Costs is net of a
$1.2 million pre-tax gain related to the unwinding of interest rate swap
agreements during the second quarter of fiscal 2000. Through nine months, Net
Financing Costs include $6.5 million of pre-tax, recognized swap gains. The
interest rate swap agreements were unwound in anticipation of the spin-off of
the Electronics business segment. Gains relating to terminations of qualifying
hedges are deferred and recognized in income at the same time as the underlying
hedge transactions. In circumstances where the underlying anticipated
transaction is no longer expected to occur, any remaining deferred amounts are
recognized into income. This $6.5 million gain will be partially offset by
increased interest expense in the future. Excluding the interest rate swap
gains, net financing costs for the nine months ended May 31, 2000 increased over
the prior year period primarily as a result of a general increase in interest
rates throughout fiscal 2000. Other factors attributing to the increase in Net
Financing Costs in the first nine months fiscal 2000 versus fiscal 1999 are
borrowings incurred to finance acquisitions completed during and subsequent to
the first nine months of fiscal 1999, offset by net repayments of debt.
EXTRAORDINARY ITEMS. The first nine months of fiscal 2000 results include an
extraordinary charge of $13.9 million ($12.2 million net of a $1.7 million tax
benefit) related to the loss on the sale of an Engineered Solutions subsidiary.
The business was sold to reduce debt and more strategically focus the core
strategy of the remaining Applied Power Inc. businesses.
14
<PAGE>
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents totaled $6.8 million and $7.3 million at May 31, 2000
and August 31, 1999, respectively. In order to minimize net financing costs, the
Company intentionally maintains relatively low cash balances by using available
cash to reduce short-term bank borrowings.
Net cash generated from continuing operations, after considering non-cash items
and changes in operating assets and liabilities, totaled $36.8 million for the
nine months ended May 31, 2000.
Net cash provided from investing activities of continuing operations totaled
$6.3 million for the first nine months of fiscal 2000. Approximately $9.2
million was used for capital expenditures. Those uses of cash were offset by
$15.2 million in proceeds from the sale of subsidiaries and othe assets.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION (in thousands) May 31, 2000 August 31, 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Debt $ 456,907 49% $ 521,246 55%
Shareholders' Equity 462,764 50% 417,829 44%
Deferred Income Taxes 8,485 1% 7,720 1%
--------------------------------------------------------------------------------------------------------------------
Total $ 928,156 100% $ 946,795 100%
====================================================================================================================
</TABLE>
The capitalization structure of the Company detailed above will
significantly change after the Distribution. Pro forma financial information
giving effect to the Distribution and other transactions was filed separately by
both Applied Power Inc. and APW Ltd. See Item 6--Exhibits and Reports on Form
8-K.
Financing activities from continuing operations in the first nine months of
fiscal 2000 used $34.4 million of net cash during the period. In May 2000, the
Company removed the accounts receivable of the Barry Controls businesses from
its accounts receivable financing facility in anticipation of the sale of the
businesses. Accounts receivable on the Balance Sheet increased $13.2 million
from August 31, 1999 to May 31, 2000 as a result of this exclusion. This also is
reflected in the decrease in the receivable financing facility within the
Statement of Cash Flows. In addition, the Company paid $1.8 million in dividend
payments to shareholders and received $1.9 million in proceeds from stock option
exercises.
Total debt outstanding at May 31, 2000 totaled $456.9 million, a decrease of
approximately $64.3 million since the beginning of the fiscal year. At May 31,
2000, the Company had $404.9 million of funds available under multi-currency
credit agreements, unused non-committed lines of credit and receivable financing
facilities.
Debt Realignment
----------------
We intend to realign our debt concurrent with the Distribution. We will be
retiring our existing credit facilities and lines, and our accounts receivable
financing facility and up to all of the 1999 Notes as part of this debt
realignment with proceeds from new borrowings, proceeds from the sale of
business units and funding from APW Ltd. Our new borrowings will consist of a
new senior secured credit facility ("Actuant Credit Facility"), additional
issuance of senior subordinated notes (the "Notes") and international working
capital facilities. As part of the debt realignment, APW Ltd. will make
borrowings under its new credit facility it arranges in connection with the
Distribution, and transfer approximately $228.6 million of proceeds to Applied
Power to fund the debt realignment. Such borrowings under APW Ltd. credit
facilities will remain the obligation of APW Ltd. following the Distribution.
The Actuant Credit Facility will consist of a $100.0 million revolving credit
facility (the "Revolver") with a six-year maturity, a $115.0 million term loan
with a six-year maturity (the "Tranche A Term Loan") and a $135.0 million term
loan with an eight-year maturity (the "Tranche B Term Loan"). The Actuant Credit
Facility will be secured by substantially all of the assets of Actuant
Corporation and its domestic subsidiaries and 65% of the capital stock of its
foreign subsidiaries. Obligations under the Actuant Credit Facility will be
guaranteed by certain of Actuant Corporation's domestic subsidiaries who will
also guarantee the Notes. Interest on borrowings under the Revolver and the
Tranche A Term Loan will be initially incurred at floating rates of LIBOR plus
2.75% annually, with adjustments based on our debt-to-EBITDA ratio. Interest on
the Tranche B Term Loan will initially be incurred at a floating rate of LIBOR
plus 3.50%, with potential upward adjustment based on our debt-to-EBITDA ratio.
Interest payments are due quarterly. Borrowings under the Revolver will be
available on a revolving basis through the sixth anniversary of the
Distribution, with limits based on our debt-to-EBITDA ratio.
The Actuant Credit Facility will contain customary restrictions concerning
investments, capital expenditures, liens on assets, sales of assets, maximum
levels of debt and minimum levels of both interest and fixed charge coverages.
The Actuant Credit Facility will be subject to annual principal maturities
(payable quarterly) as follows: 2001--$12.0 million; 2002--$17.0 million; 2003--
$22.0 million; 2004--$22.0 million; 2005--$25.0 million, with the balance due in
years beyond 2005. The Notes are expected to mature ten years from the issue
date and bear interest payable semi-annually. There are expected to be no
scheduled principal payments on the Notes prior to their maturity. Redemption of
the Notes is expected to be subject to certain restrictions and premiums.
15
<PAGE>
Dividends
---------
During the third quarter a dividend of $1.8 million was paid to shareholders.
Following the Distribution, our dividend policy will be established by the board
of directors from time to time based on the results of operations, financial
condition and other business considerations that the board of directors deems
relevant. The Actuant Credit Facility will contain restrictions as to the
payment of dividends. Accordingly, we do not plan to pay a dividend in the near
future; instead we plan to use cash flow from operations to reduce debt.
Year 2000 Considerations
------------------------
In prior years, Applied Power had executed an action plan to ensure that its
computer systems were capable of processing the periods for the Year 2000 and
beyond. This action plan was completed in late calendar year 1999. As a result
of those planning and implementation efforts, Applied Power Inc. experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. While no disruption has developed as of
the date of this filing, Year 2000 problems may still surface through calendar
year 2000. We will continue to monitor mission critical computer applications
and those of our suppliers and vendors throughout calendar year 2000 to ensure
that any latent Year 2000 matters that arise are addressed promptly.
Recent Events
-------------
Applied Power Inc. recently announced its intention to acquire certain of
Ericsson's shelter integration businesses. The transaction is subject to a
number of significant conditions, including completion of due diligence and
execution of definitive agreements. If consummated, the assets will be purchased
by APW Ltd. from Ericsson after the Distribution. Regardless of whether final
agreements are executed or the transaction is completed or abandoned, any
obligations arising from or relating to this transaction, including payment of
the purchase price, will be the responsibility of APW Ltd. and not Actuant
Corporation.
16
<PAGE>
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
The Company is exposed to market risk from changes in foreign exchange and
interest rates. To reduce such risks, the Company selectively uses financial
instruments. All hedging transactions are authorized and executed pursuant to
clearly defined policies and procedures, which strictly prohibit the use of
financial instruments for trading purposes.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1999 within Note A - "Summary of Significant
Accounting Policies" in Notes to Consolidated Financial Statements, and further
disclosure relating to financial instruments is included in Note G - "Debt."
Currency Risk - The Company has significant international operations. In most
-------------
instances, the Company's products are produced at manufacturing facilities
located near the customer. As a result, significant volumes of finished goods
are manufactured in countries for sale into those markets. For goods purchased
from other Company affiliates, the Company denominates the transaction in the
functional currency of the producing operation.
The Company has adopted the following guidelines to manage its foreign exchange
exposures:
(i) increase the predictability of costs associated with goods whose purchase
price is not denominated in the functional currency of the buyer;
(ii) minimize the cost of hedging through the use of naturally offsetting
positions (borrowing in local currency), netting, pooling; and
(iii) where possible, sell product in the functional currency of the producing
operation.
The Company's identifiable foreign exchange exposures result primarily from the
anticipated purchase of product from affiliates and third-party suppliers along
with the repayment of intercompany loans with foreign subsidiaries denominated
in foreign currencies. The Company periodically identifies naturally occurring
offsetting positions and then purchases hedging instruments to protect against
anticipated exposures. The Company's financial position is not materially
sensitive to fluctuations in exchange rates as any gains or losses on foreign
currency exposures are generally offset by gains and losses on underlying
payables, receivables and net investments in foreign subsidiaries.
Interest Rate Risk - The Company periodically enters into interest rate swaps to
------------------
stabilize financing costs by minimizing the effect of potential interest rate
increases on floating-rate debt in a rising interest rate environment. Under
these agreements, the Company contracts with a counter party to exchange the
difference between a fixed rate and a floating rate applied to the notional
amount of the swap. The differential to be paid or received on interest rate
swap agreements is accrued as interest rates change and is recognized in net
income as an adjustment to interest expense. Gains relating to terminations of
qualifying hedges are deferred and recognized in income at the same time as the
underlying hedged transactions.
17
<PAGE>
PART II - OTHER INFORMATION
Item 2 - Changes in Securities
------------------------------
(a) See information concerning the Distribution above.
Item 5 - Other Information
--------------------------
(a) See information concerning the Distribution above.
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
(a) See Index to Exhibits on page 20, which is incorporated herein by
reference.
(b) On May 11, 2000, the Company filed a Current Report on Form 8-K dated as of
May 1, 2000 reporting under Item 5 that the Company had entered into
definitive agreements to sell Barry Wright Corporation and Air Cargo
Equipment Corporation to unaffiliated parties.
On June 8, 2000, the Company filed a Current Report on Form 8-K reporting
under Item 5 sales results for its fiscal third quarter and other financial
information in preparation of a research analyst meeting hosted by the
Company.
On July 5, 2000, the Company filed a Current Report on Form 8-K reporting
under Items 5. and 7. pro forma financial statements related to the
divestiture of the Barry Wright Corporation.
On July 7, 2000, the Company filed a Current Report on Form 8-K reporting
under Items 5. and 7. pro forma financial statements disclosing the pro
forma effect of the Distribution and the proposed Actuant $200 Million
Senior Subordinated Notes offering on the results of operations and
financial position of the Company.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLIED POWER INC.
------------------
(Registrant)
Date: August 7, 2000 By: /s/ Robert C. Arzbaecher
------------------------
Robert C. Arzbaecher
Senior Vice President
(Acting Principal Financial Officer
and duly authorized to sign
on behalf of the registrant)
18
<PAGE>
APPLIED POWER INC.
(the "Registrant")
(Commission File No. 1-11288)
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MAY 31, 2000
INDEX TO EXHIBITS
Incorporated Herein Filed
Exhibit Description By Reference To Herewith
----------- -------------------------- --------------------- ----------
27.1 Financial Data Schedule X(1)
(1) Filed with the original filing of this Form 10-Q.
19
