NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Operations:
Actuant Corporation (“Actuant” or the “Company”) is a global manufacturer of a broad range of industrial products and systems, organized into
three
reportable segments. The Industrial segment is primarily engaged in the design, manufacture and distribution of branded hydraulic and mechanical tools to the maintenance, industrial, infrastructure and production automation markets. The Energy segment provides joint integrity products and services, customized offshore mooring solutions, as well as rope and cable solutions to the global oil & gas, energy and other markets. The Engineered Solutions segment provides highly engineered position and motion control systems to OEMs in various vehicle markets, as well as a variety of other products to the industrial and agriculture markets.
Consolidation and Presentation:
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. The results of companies acquired or disposed of during the year are included in the consolidated financial statements from the effective date of acquisition or until the date of divestiture. All intercompany balances, transactions and profits have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to current year presentation.
Cash Equivalents:
The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.
Inventories:
Inventories are comprised of material, direct labor and manufacturing overhead, and are stated at the lower of cost or market. Inventory cost is determined using the last-in, first-out (“LIFO”) method for a portion of the U.S. owned inventory (
18.0%
and
21.0%
of total inventories in
2017
and
2016
, respectively). The first-in, first-out or average cost methods are used for all other inventories. If the LIFO method were not used, inventory balances would be higher than reported amounts in the consolidated balance sheets by
$3.9 million
and
$3.7 million
at August 31,
2017
and
2016
, respectively.
The nature of the Company’s products is such that they generally 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 impractical to determine. Other locations 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.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, ranging from
ten
to
forty
years for buildings and improvements and
two
to
fifteen
years for machinery and equipment. Equipment includes assets (joint integrity tools) which are rented to customers of our Energy segment businesses. Leasehold improvements are amortized over the life of the related asset or the term of the lease, whichever is shorter.
Goodwill and Other Intangible Assets:
Other intangible assets with definite lives, consisting primarily of purchased customer relationships, patents, trademarks and non-compete agreements, are amortized over periods from one to twenty-five years. Goodwill and other intangible assets with indefinite lives are not subject to amortization, but are subject to annual impairment testing.
The Company’s goodwill is tested for impairment annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company performs impairment reviews for its reporting units using a fair value method based on management’s judgments and assumptions. In estimating the fair value, the Company utilizes a discounted cash flow model, which is dependent on a number of assumptions including estimated future revenues and expenses, weighted average cost of capital, capital expenditures and other variables. The estimated fair value of the reporting unit is compared to the carrying amount of the reporting unit, including goodwill. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recorded. Indefinite lived intangible assets are also subject to an annual impairment test. On an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired, the fair value of the indefinite lived intangible assets are evaluated by the Company to determine if an impairment charge is required. 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.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Product Warranty Costs
: The Company generally offers its customers a warranty on products sold, although warranty periods may vary by product type and application. The reserve for future warranty claims is based on historical claim rates and current warranty cost experience. The following is a rollforward of the changes in product warranty reserves for fiscal years
2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Beginning balance
|
|
$
|
5,592
|
|
|
$
|
3,719
|
|
Provision for warranties
|
|
5,608
|
|
|
5,985
|
|
Warranty payments and costs incurred
|
|
(4,714
|
)
|
|
(4,058
|
)
|
Impact of changes in foreign currency rates
|
|
130
|
|
|
(57
|
)
|
Warranty reserve of acquired business
|
|
—
|
|
|
3
|
|
Ending balance
|
|
$
|
6,616
|
|
|
$
|
5,592
|
|
Revenue Recognition:
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability of the sales price is reasonably assured. For product sales, delivery does not occur until the passage of title and risk of loss have transferred to the customer (generally when products are shipped). Revenue from services and rental contracts are recognized when the services are provided or ratably over the contract term. Revenue for highly custom product sales with a project duration greater than three months and exceeding a value of approximately
$0.5 million
is generally recognized under the percentage-of-completion method utilizing efforts expended or cost-to-cost input measures. Revenues for long-term contracts that do not meet these criteria are recognized under the completed contract method once delivery has occurred and passage of title and risk of loss have transfered to the customer. Unearned revenue related to long-term customer contracts was
$10.1 million
and
$7.7 million
at August 31, 2017 and 2016, respectively. Customer sales are recorded net of allowances for returns and discounts, which are recognized as a deduction from sales at the time of sale. The Company commits to one-time or on-going trade discounts and promotions with customers that require the Company to estimate and accrue the ultimate costs of such programs. The Company generally does not require collateral or other security for receivables and provides for an allowance for doubtful accounts based on historical experience and a review of its existing receivables. Accounts receivable are stated net of an allowance for doubtful accounts of
$11.2 million
and
$7.8 million
at August 31,
2017
and
2016
, respectively.
Shipping and Handling Costs:
The Company records costs associated with shipping its products in cost of products sold.
Research and Development Costs:
Research and development costs consist primarily of an allocation of overall engineering and development resources and are expensed as incurred. Such costs incurred in the development of new products or significant improvements to existing products were
$21.9 million
,
$18.3 million
and
$17.7 million
in fiscal
2017
,
2016
and
2015
, respectively. The Company also incurs significant costs in connection with fulfilling custom orders and developing solutions for unique customer needs which are not included in these research and development expense totals.
Other Income/Expense:
Other income and expense primarily consists of net foreign currency exchange transaction losses of
$3.1 million
,
$1.3 million
and
$0.1 million
in fiscal
2017
,
2016
and
2015
, respectively.
Financing Costs:
Financing costs represent interest expense, financing fees and amortization of debt issuance costs, net of interest income. Interest income was
$1.2 million
,
$1.7 million
and
$1.9 million
for fiscal
2017
,
2016
and
2015
, respectively.
Income Taxes:
The provision for income taxes includes federal, state, local and non-U.S. taxes on income. Tax credits, primarily for non-U.S. earnings, are recognized as a reduction of the provision for income taxes in the year in which they are available for U.S. tax purposes. Deferred taxes are provided on temporary differences between assets and liabilities for financial and tax reporting purposes as measured by enacted tax rates expected to apply when temporary differences are settled or realized. Future tax benefits are recognized to the extent that realization of those benefits is considered to be more likely than not. A valuation allowance is established for deferred tax assets for which realization is not more likely than not of being realized. The Company has not provided for any residual U.S. income taxes on unremitted earnings of non-U.S. subsidiaries as such earnings are intended to be indefinitely reinvested. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.
Foreign Currency Translation:
The financial statements of the Company’s foreign operations are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an appropriate weighted average exchange rate for each applicable period for revenues and expenses. Translation adjustments are reflected in the consolidated balance sheets and consolidated statements of shareholders' equity caption “Accumulated Other Comprehensive Loss.”
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Accumulated Other Comprehensive Loss:
The following is a summary of the Company's accumulated other comprehensive loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
2017
|
2016
|
Foreign currency translation adjustments
|
|
$
|
207,804
|
|
$
|
228,274
|
|
Pension and other postretirement benefit plans, net of tax
|
|
19,457
|
|
23,549
|
|
Accumulated other comprehensive loss
|
|
$
|
227,261
|
|
$
|
251,823
|
|
Use of Estimates:
The Company has recorded reserves for customer rebates, returns and discounts, doubtful accounts, inventory, incurred but not reported medical claims, environmental matters, warranty claims, workers compensation claims, product and non-product litigation and incentive compensation. These reserves require the use of estimates and judgment. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company believes that such estimates are made with consistent and appropriate assumptions. Actual results may differ from these estimates.
New Accounting Pronouncements
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
which includes amendments that require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Under the new guidance, the recognition and measurement of debt issuance costs is not affected. This guidance was adopted on September 1, 2016. As a result of adoption, debt issuance costs of
$3.9 million
were reclassified from other long-term assets to long-term debt, net (contra liability) on the balance sheet as of August 31, 2016. In August 2015, the FASB issued ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
, further clarifying that ASU 2015-03 relates only to the presentation of debt issuance costs related to term loans and does not relate to lines-of-credit or revolvers. As such, the debt issuance costs related to the Company's revolver remain classified in other long-term assets.
In September 2015, the FASB issued ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments,
which eliminates the requirement to retrospectively account for changes to provisional amounts initially recorded in a business acquisition opening balance sheet. This guidance was adopted on September 1, 2016. The adoption did not have a material impact on the financial statements of the Company.
In October 2016, the FASB issued ASU 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory
, which amends the existing guidance to prohibit immediate recognition of the current and deferred income tax impacts of intra-entity asset transfers. The ASU eliminates this prohibition for all intra-entity asset transfers, except inventory. This guidance was adopted, on a modified retrospective basis, at September 1, 2016. The adoption did not have a material impact on the cumulative retained earnings or on the condensed consolidated financial statements of the Company.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment,
which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance was adopted in the fourth quarter of fiscal 2017 in connection with our annual impairment testing, though no impairment charges resulted from our 2017 impairment testing.
In March 2017, the FASB issued ASU 2017-07,
Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income statement. The new guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line items as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost are to be stated separately from service cost and outside of operating income. This guidance is effective for fiscal years beginning after December 15, 2017 (fiscal 2019 for the Company) and interim periods within those annual periods. The amendment is to be applied retrospectively. Due to a majority of the Company's retirement benefit plans being frozen and the net periodic pension cost not being significant, the Company does not believe that adoption of this guidance will have a significant impact on the financial statements of the Company.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In March 2016, the FASB issued ASU 2016-09,
Stock Compensation: Improvements to Employee Share-Based Payment Accounting,
which will simplify several aspects of accounting for share-based payment transactions. The guidance will require, among other items, that all excess tax deficiencies or benefits be recorded as income tax expense or benefit in the statement of earnings and not in additional paid-in capital (shareholder's equity). This guidance is effective for fiscal years beginning after December 15, 2016 (fiscal 2018 for the Company) and interim periods within those annual periods. The impact of the adoption of this guidance will have the following effects:
|
|
•
|
add additional income tax expense (benefit) in the statement of operations which will create volatility in the Company's effective tax rate;
|
|
|
•
|
the Company will no longer reclassify the excess tax benefit from operating activities to financing activities in the consolidated statement of cash flows;
|
|
|
•
|
impact our computation of diluted earnings per share as the Company will exclude the excess tax benefit from the assumed proceeds available to repurchase shares.
|
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers.
Under ASU 2014-09 and subsequent updates included in ASU 2016-10, ASU 2016-12 and ASU 2017-13, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years beginning on or after December 15, 2017 (fiscal 2019 for the Company). The Company has begun assessing its various revenue streams to identify performance obligations under these ASUs and the key aspects of the standard that will impact the Company's revenue recognition process. Based upon our preliminary assessments, these standards may impact our allocation of contract revenue between various products and services and the timing of when those revenues are recognized, but do not expect a material or significant impact to amounts recognized. Given the diversity of its commercial arrangements, the Company is continuing to assess the impact these standards may have on its consolidated results of operation, financial position, cash flows and financial statement disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases,
to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset. This guidance is effective for fiscal years beginning after December 15, 2018 (fiscal 2020 for the Company), including interim periods within those fiscal years. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company is currently gathering, documenting and analyzing lease agreements related this ASU and anticipates material additions to the balance sheet upon adoption of right-of-use assets, offset by the associated liabilities, due to our routine use of operating leases over time.
In August 2016, the FASB issued ASU 2016‑15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
, to address how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for fiscal years beginning after December 15, 2017 (fiscal 2019 for the Company), including interim periods within those fiscal years. This update will require adoption on a retrospective basis unless it is impracticable to apply. The Company does not believe that this guidance will have a significant impact on its presentation of the statement of cash flows.
Note 2. Director & Officer Transition Charges
During the year-ended
August 31, 2017
, the Company recorded separation and transition charges of
$7.8 million
in connection with the retirement of one director of the Company's Board of Directors and the transition of the Executive Vice President/Chief Financial Officer. The charges were mainly comprised of compensation expense for accelerated equity vesting, severance, outplacement, legal, signing bonus and relocation costs.
Note 3. Restructuring Charges
The Company has committed to various restructuring initiatives including workforce reductions, plant consolidations to reduce manufacturing overhead, satellite office closures, the continued movement of production and product sourcing to low cost alternatives and the centralization and standardization of certain administrative functions. Total restructuring charges for these activities were
$7.2 million
and
$14.6 million
for the year-ended August 31, 2017 and 2016, respectively and impacted all segments. Liabilities for severance will generally be paid during the next twelve months, while future lease payments related to facilities vacated as a result of restructuring will be paid over the underlying remaining lease terms.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following rollforwards summarize restructuring reserve activity by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2017
|
|
|
Industrial
|
|
Energy
|
|
Engineered Solutions
|
|
Corporate
|
|
Total
|
Balance as of August 31, 2016
|
|
$
|
1,343
|
|
|
$
|
3,021
|
|
|
$
|
1,863
|
|
|
$
|
46
|
|
|
$
|
6,273
|
|
Restructuring charges
|
|
1,687
|
|
|
1,942
|
|
|
3,488
|
|
|
111
|
|
|
7,228
|
|
Cash payments
|
|
(2,384
|
)
|
|
(1,460
|
)
|
|
(3,582
|
)
|
|
(83
|
)
|
|
(7,509
|
)
|
Other non-cash uses of reserve
|
|
(436
|
)
|
|
(41
|
)
|
|
(6
|
)
|
|
(44
|
)
|
|
(527
|
)
|
Impact of changes in foreign currency rates
|
|
(8
|
)
|
|
151
|
|
|
29
|
|
|
—
|
|
|
172
|
|
Balance as of August 31, 2017
|
|
$
|
202
|
|
|
$
|
3,613
|
|
|
$
|
1,792
|
|
|
$
|
30
|
|
|
$
|
5,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2016
|
|
|
Industrial
|
|
Energy
|
|
Engineered Solutions
|
|
Corporate
|
|
Total
|
Balance as of August 31, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restructuring charges
|
|
3,158
|
|
|
5,544
|
|
|
5,411
|
|
|
458
|
|
|
14,571
|
|
Cash payments
|
|
(1,772
|
)
|
|
(2,345
|
)
|
|
(3,199
|
)
|
|
(203
|
)
|
|
(7,519
|
)
|
Other non-cash uses of reserve
|
|
(54
|
)
|
|
(166
|
)
|
|
(364
|
)
|
|
(209
|
)
|
|
(793
|
)
|
Impact of changes in foreign currency rates
|
|
11
|
|
|
(12
|
)
|
|
15
|
|
|
—
|
|
|
14
|
|
Balance as of August 31, 2016
|
|
$
|
1,343
|
|
|
$
|
3,021
|
|
|
$
|
1,863
|
|
|
$
|
46
|
|
|
$
|
6,273
|
|
Note 4. Acquisitions
During the fourth quarter of fiscal 2017, the Company signed a definitive agreement to purchase Mirage, a manufacturer of industrial and energy maintenance tools, for approximately
$16 million
, plus potential future performance-based consideration. The acquisition is expected to close in the first half of fiscal 2018, pending pre-close conditions.
The Company completed two business acquisitions during the last three years. These acquisitions resulted in the recognition of goodwill in the Company’s consolidated financial statements because the purchase prices reflected the future earnings and cash flow potential of these companies, as well as the complementary strategic fit and resulting synergies these businesses bring to existing operations.
The Company makes an initial allocation of the purchase price, at the date of acquisition, based upon the fair value of the acquired assets and assumed liabilities. The Company obtains this information during due diligence and through other sources. If additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), the Company will refine its estimates of fair value and adjust the purchase price allocation accordingly.
Fiscal 2016 Acquisitions:
The Company acquired the stock of Larzep, S.A. ("Larzep") on
February 17, 2016
for a purchase price of
$15.9 million
, net of cash acquired. This Industrial segment tuck-in acquisition is headquartered in Mallabia, Spain and is a supplier of hydraulic tools and solutions. The purchase price allocation resulted in
$9.7 million
of goodwill (which is not deductible for tax purposes) and
$4.8 million
of intangible assets, including
$3.6 million
of customer relationships and
$1.2 million
of tradenames.
The Company also acquired the assets of the Middle East, Caspian and the North African business of FourQuest Energy Inc. ("Pipeline and Process Services") for
$65.5 million
on
March 30, 2016
. This Hydratight tuck-in acquisition was funded with existing cash and expands the geographic presence and service offerings of the Energy segment, including pipeline pre-commissioning, engineering, chemical cleaning and leak testing. The purchase price resulted in
$37.4 million
of goodwill (which is not deductible for tax purposes) and
$8.7 million
of intangible assets, including
$8.0 million
of customer relationships and
$0.7 million
of non-compete agreements. During fiscal 2017, goodwill related to this acquisition increased by
$1.1 million
as a result of adjustments to reflect the fair value of acquired accounts receivable and accounts payable.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Total sales in fiscal 2017 and 2016 for these two acquired business were
$32.8 million
and
$19.1 million
, respectively. The Company incurred acquisition transaction costs of
$2.1 million
in fiscal
2016
(included in selling, administrative and engineering expenses in the consolidated statement of operations), related to these two acquisitions.
The following unaudited pro forma operating results give effect to these two acquisitions as though the transactions and related financing activities had occurred on September 1, 2014 (in thousands, except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Net Sales
|
|
|
|
|
As reported
|
|
$
|
1,149,410
|
|
|
$
|
1,249,254
|
|
Pro Forma
|
|
1,175,304
|
|
|
1,275,965
|
|
Net (loss) earnings
|
|
|
|
|
As reported
|
|
$
|
(105,174
|
)
|
|
$
|
19,872
|
|
Pro Forma
|
|
(100,927
|
)
|
|
20,361
|
|
Basic (loss) earnings pe
r share
|
|
|
|
|
As reported
|
|
$
|
(1.78
|
)
|
|
$
|
0.32
|
|
Pro Forma
|
|
(1.71
|
)
|
|
0.33
|
|
Diluted (loss) earnings per
share
|
|
|
|
|
As reported
|
|
$
|
(1.78
|
)
|
|
$
|
0.32
|
|
Pro Forma
|
|
(1.71
|
)
|
|
0.33
|
|
Note 5. Divestiture Activities
During the fourth quarter of fiscal
2017
, the Company signed a definitive agreement to sell the Viking business (Energy segment) for
$12 million
, net of estimated transaction costs and working capital adjustment. The divestiture results in the Company's exit from the offshore mooring market and significantly limits our exposure to upstream, offshore oil & gas. As a result, the Company recognized impairment and other divestiture charges in fiscal 2017 of
$117.0 million
, comprised of: (i)
$28.6 million
cash charge related to the operating lease buyout of certain rental assets; (ii) non-cash impairment charge of
$85.1 million
representing the excess of the net book value of assets held for sale to the anticipated proceeds which includes $
69.0 million
related to the recognition in earnings of the cumulative effect of foreign currency rate changes since acquisition and (iii)
$3.3 million
of other divestiture charges. The write down of net assets generated an income tax benefit of
$8.1 million
in fiscal 2017; see Note 12, “Income Taxes” for further discussion.
The following is a summary of the assets and liabilities held for sale of the Viking business (in thousands):
|
|
|
|
|
|
|
|
August 31, 2017
|
Accounts receivable, net
|
|
$
|
2,426
|
|
Inventories, net
|
|
190
|
|
Property, plant & equipment, net
|
|
7,534
|
|
Prepaid expenses and other current assets
|
|
1,927
|
|
Other long-term assets
|
|
9,758
|
|
Assets held for sale
|
|
$
|
21,835
|
|
|
|
|
Trade accounts payable
|
|
$
|
1,883
|
|
Other current liabilities (including divestiture accruals)
|
|
1,637
|
|
Rental asset lease buyout liability
|
|
28,644
|
|
Reserve for cumulative translation adjustment
|
|
68,919
|
|
Liabilities held for sale
|
|
$
|
101,083
|
|
The results of the Viking business (which had net sales of $
18.7 million
and operating loss of $
11.7 million
in fiscal
2017
) are not material to the consolidated financial results and are included in continuing operations. The sale transaction is expected
to close in the first half of fiscal 2018 (pending regulatory and governmental approvals) and we anticipate recognizing an additional
$15.0 million
to
$20.0 million
in after tax product line disposal charges upon closing.
On
August 25, 2016
, the Company completed the divestiture of its Sanlo business (Engineered Solutions segment) for
$9.7 million
in cash, net of transaction costs. This divestiture resulted in a
$5.1 million
pre-tax loss, but a
$1.6 million
gain net of tax. The results of the Sanlo business (which had net sales of
$10.8 million
and
$12.4 million
in fiscal 2016 and 2015, respectively) are not material to the consolidated financial results and are included in continuing operations.
Note 6. Goodwill, Intangible Assets and Long-Lived Assets
Changes in the gross carrying value of intangible assets and goodwill result from changes in foreign currency exchange rates, business acquisitions, divestitures and impairment charges. The changes in the carrying amount of goodwill for the years ended
August 31, 2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
Energy
|
|
Engineered Solutions
|
|
Total
|
Balance as of August 31, 2015
|
|
$
|
92,107
|
|
|
$
|
236,450
|
|
|
$
|
279,699
|
|
|
$
|
608,256
|
|
Business acquisitions
|
|
9,726
|
|
|
36,241
|
|
|
—
|
|
|
45,967
|
|
Impairment charge
|
|
—
|
|
|
(73,919
|
)
|
|
(44,543
|
)
|
|
(118,462
|
)
|
Business divestiture (Sanlo)
|
|
—
|
|
|
—
|
|
|
(3,778
|
)
|
|
(3,778
|
)
|
Impact of changes in foreign currency rates
|
|
(94
|
)
|
|
(11,451
|
)
|
|
(1,162
|
)
|
|
(12,707
|
)
|
Balance as of August 31, 2016
|
|
101,739
|
|
|
187,321
|
|
|
230,216
|
|
|
519,276
|
|
Purchase accounting adjustments
|
|
(59
|
)
|
|
1,144
|
|
|
—
|
|
|
1,085
|
|
Impact of changes in foreign currency rates
|
|
$
|
2,195
|
|
|
$
|
365
|
|
|
$
|
7,160
|
|
|
$
|
9,720
|
|
Balance as of August 31, 2017
|
|
$
|
103,875
|
|
|
$
|
188,830
|
|
|
$
|
237,376
|
|
|
$
|
530,081
|
|
The gross carrying amount and accumulated amortization of the Company’s intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Amortization Period (Year)
|
|
August 31, 2017
|
|
August 31, 2016
|
|
|
Gross
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Gross
|
|
Accumulated Amortization
|
|
Net Book Value
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
15
|
|
$
|
263,498
|
|
|
$
|
153,003
|
|
|
$
|
110,495
|
|
|
$
|
292,671
|
|
|
$
|
166,252
|
|
|
$
|
126,419
|
|
Patents
|
|
10
|
|
30,401
|
|
|
24,027
|
|
|
6,374
|
|
|
30,296
|
|
|
22,233
|
|
|
8,063
|
|
Trademarks and tradenames
|
|
18
|
|
21,498
|
|
|
9,396
|
|
|
12,102
|
|
|
21,283
|
|
|
7,936
|
|
|
13,347
|
|
Non-compete agreements & other
|
|
3
|
|
6,672
|
|
|
6,234
|
|
|
438
|
|
|
6,627
|
|
|
5,890
|
|
|
737
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
N/A
|
|
91,080
|
|
|
—
|
|
|
91,080
|
|
|
90,909
|
|
|
—
|
|
|
90,909
|
|
|
|
|
|
$
|
413,149
|
|
|
$
|
192,660
|
|
|
$
|
220,489
|
|
|
$
|
441,786
|
|
|
$
|
202,311
|
|
|
$
|
239,475
|
|
Amortization expense for future years is estimated to be:
$20.4 million
in fiscal year
2018
,
$19.8 million
in fiscal
2019
,
$19.2 million
in fiscal
2020
,
$18.3 million
in fiscal
2021
,
$16.3 million
in fiscal
2022
and
$35.4 million
in aggregate thereafter. The future amortization expense amounts represent estimates and may be impacted by future acquisitions, divestitures or changes in foreign currency exchange rates.
Fiscal 2016 Impairment Charge
The prolonged unfavorable conditions in the global oil & gas markets, including additional cuts in projected capital spending by energy customers, reduced exploration, drilling and commissioning activities and excess capacity in the industry (given continued low oil & gas prices) were expected to have an adverse impact on the future financial results of the Cortland and Viking businesses. Accordingly, during the second quarter of fiscal 2016, the Company recognized a
$140.9 million
impairment charge (as a result of lower projected future sales and profits) related to the Cortland and Viking businesses.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The maximatecc business (Engineered Solutions segment), manufactures severe-duty electronic instrumentation including displays and clusters, machine controls and sensors. Weakness in off-highway vehicle and agricultural markets, coupled with challenging overall industrial fundamentals, recent reductions in OEM customer build rates and production schedules (in order to reduce inventory levels) and delays in the start of production by certain European OEMs for new or updated design models resulted in reduced sales and profitability of the maximatecc business. As a result of lower projected sales and profits, during the second quarter of fiscal 2016, the Company recognized a
$45.7 million
impairment charge related to the goodwill and intangible assets of the maximatecc business.
A summary of the fiscal 2016 impairment charge by reporting unit is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cortland
|
|
Viking
|
|
maximatecc
|
|
Total
|
Goodwill
|
$
|
34,502
|
|
|
$
|
39,099
|
|
|
$
|
44,521
|
|
|
$
|
118,122
|
|
Indefinite lived intangible assets
|
2,211
|
|
|
13,289
|
|
|
1,153
|
|
|
16,653
|
|
Amortizable intangible assets
|
—
|
|
|
27,952
|
|
|
—
|
|
|
27,952
|
|
Fixed assets
|
—
|
|
|
23,784
|
|
|
—
|
|
|
23,784
|
|
|
$
|
36,713
|
|
|
$
|
104,124
|
|
|
$
|
45,674
|
|
|
$
|
186,511
|
|
Fiscal 2015 Impairment Charge
The dramatic decline in oil prices in 2015 caused a slowdown in upstream oil & gas activity as asset owners hesitated on starting new oil & gas exploration drilling and development projects, while certain existing projects were deferred or canceled and capital spending was reduced. As a result of these unfavorable market conditions, in fiscal 2015 the Company recognized an
$84.4 million
impairment charge related to the write-down of goodwill and indefinite lived intangible assets of the Cortland and Viking businesses. The impairment charge consisted of a
$78.5 million
impairment of goodwill and a
$6.4 million
impairment of indefinite lived intangible assets (tradenames).
Note 7. Debt
The following is a summary of the Company’s long-term indebtedness (in thousands):
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
2017
|
|
2016
|
Senior Credit Facility
|
|
|
|
Revolver
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan
|
277,500
|
|
|
296,250
|
|
|
277,500
|
|
|
296,250
|
|
5.625% Senior Notes
|
287,559
|
|
|
288,059
|
|
Total Senior Indebtedness
|
565,059
|
|
|
584,309
|
|
Less: current maturities of long-term debt
|
(30,000
|
)
|
|
(18,750
|
)
|
Debt issuance costs
|
(3,119
|
)
|
|
(3,878
|
)
|
Total long-term debt, less current maturities
|
$
|
531,940
|
|
|
$
|
561,681
|
|
The Company’s Senior Credit Facility matures on
May 8, 2020
, provides a
$600 million
revolver, a
$300 million
term loan and a
$450 million
expansion option, subject to certain conditions. Borrowings are subject to a pricing grid, which can result in increases or decreases to the borrowing spread, depending on the Company’s leverage ratio, ranging from a spread of
1.00%
to
2.25%
in the case of loans bearing interest at LIBOR and from
0.00%
to
1.25%
in the case of loans bearing interest at the base rate. As of
August 31, 2017
, the borrowing spread on LIBOR based borrowings was
2.00%
(aggregating to a
3.25%
variable rate borrowing cost on the outstanding term loan balance). In addition, a non-use fee is payable quarterly on the average unused credit line under the revolver ranging from
0.15%
to
0.35%
per annum. As of
August 31, 2017
, the unused credit line under the revolver was
$597.0 million
, of which
$101.5 million
was available for borrowings. Quarterly term loan principal payments of
$3.8 million
began on
June 30, 2016
, increased to
$7.5 million
per quarter on
June 30, 2017
and extend through March 31, 2020, with the remaining principal due at maturity. The Senior Credit Facility, which is secured by substantially all of the Company’s domestic personal property assets, also contains customary limits and restrictions concerning investments, sales of assets, liens on assets, dividends and other payments. The
two
financial covenants included in the Senior Credit Facility agreement are a maximum leverage ratio of
3.75
:1 and a minimum interest coverage ratio of
3.50
:1. The Company was in compliance with all financial covenants at
August 31, 2017
.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On
April 16, 2012
, the Company issued
$300 million
of
5.625%
Senior Notes due 2022 (the “Senior Notes”). The Senior Notes require no principal installments prior to their
June 15, 2022
maturity, require semiannual interest payments in December and June of each year and contain certain financial and non-financial covenants. The Senior Notes include a call feature that allows the Company to repurchase them anytime on or after
June 15, 2017
at stated redemption prices (ranging from
100.0%
to
102.8%
), plus accrued and unpaid interest. The Company repurchased
$0.5 million
and
$12 million
of the Senior Notes during fiscal 2017 and 2015, respectively.
The Company made cash interest payments of
$27.1 million
,
$27.2 million
and
$24.8 million
in fiscal 2017, 2016 and 2015, respectively.
Note 8. Fair Value Measurements
The Company assesses the inputs used to measure the fair value of financial assets and liabilities using a three-tier hierarchy. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level 3 inputs are not observable in the market and include management’s own judgments about the assumptions market participants would use in pricing the asset or liability.
The fair value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and its variable rate long-term debt approximated book value at August 31,
2017
and
2016
due to their short-term nature and the fact that the interest rates approximated year-end market rates. Foreign currency exchange contracts are recorded at fair value. The fair value of the Company's foreign currency exchange contracts was a net liability of
$0.2 million
and
$0.7 million
at August 31, 2017 and 2016, respectively. The fair value of the foreign currency exchange contracts was based on quoted inactive market prices and is therefore classified as Level 2 within the valuation hierarchy. The fair value of the Company’s outstanding
5.625%
Senior Notes was
$295.8 million
and
$299.6 million
at August 31,
2017
and
2016
, respectively. The fair value of the Senior Notes was based on quoted inactive market prices and are therefore classified as Level 2 within the valuation hierarchy.
Note 9. Derivatives
All derivatives are recognized in the balance sheet at their estimated fair value. On the date the Company enters into a derivative contract, it designates the derivative as a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The Company does not enter into derivatives for speculative purposes. Changes in the value of fair value hedges and non-designated hedges are recorded in earnings along with the gain or loss on the hedged asset or liability, while changes in the value of cash flow hedges are recorded in accumulated other comprehensive loss, until earnings are affected by the variability of cash flows.
The Company is exposed to market risk for changes in foreign currency exchange rates due to the global nature of its operations. In order to manage this risk the Company has historically hedged portions of its forecasted inventory purchases and other cash flows that are denominated in non-functional currencies (cash flow hedges). However, there were no cash flow hedges outstanding at
August 31, 2017
and
2016
.
The Company also utilizes forward foreign currency exchange contracts to reduce the exchange rate risk associated with recognized non-functional currency balances. The effects of changes in exchange rates are reflected concurrently in earnings for both the fair value of the foreign currency exchange contracts and the related non-functional currency asset or liability. The U.S. dollar equivalent notional value of these short duration foreign currency forward contracts (fair value hedges or non-designated hedges) was
$22.0 million
and
$143.4 million
, at
August 31, 2017
and
2016
, respectively. The fair value of outstanding foreign currency exchange contracts was a liability of
$0.2 million
and
$0.7 million
at
August 31, 2017
and
2016
, respectively. Net foreign currency losses related to these derivative instruments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
Foreign currency losses, net
|
$
|
(2,962
|
)
|
|
$
|
(1,520
|
)
|
|
$
|
(95
|
)
|
Note 10. Leases
The Company leases certain facilities, computers, equipment and vehicles under various lease agreements generally over periods of
one
to
twenty
years. Under most arrangements, the Company pays the property taxes, insurance, maintenance and
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
expenses related to the leased property. Many of the leases include provisions that enable the Company to renew the lease based upon fair value rental rates on the date of expiration of the initial lease.
As of
August 31, 2017
, future obligations under non-cancelable operating leases were as follows:
$28.0 million
in fiscal
2018
;
$22.9 million
in fiscal
2019
;
$18.6 million
in fiscal
2020
;
$13.3 million
in fiscal
2021
;
$10.7 million
in fiscal
2022
; and
$12.7 million
in aggregate thereafter. Total rental expense under operating leases was
$37.4 million
,
$37.6 million
and
$35.7 million
in fiscal
2017
,
2016
and
2015
, respectively.
As discussed in Note 16, “Commitments and Contingencies” the Company remains contingently liable for lease payments under leases of businesses that it previously divested or spun off.
Note 11. Employee Benefit Plans
U.S. Defined Benefit Pension Plans
All of the U.S. defined benefit pension plans are frozen, and as a result, plan participants no longer earn additional benefits. The following table provides detail of changes in the projected benefit obligations, the fair value of plan assets and the funded status of the Company’s U.S. defined benefit pension plans as of the respective August 31 measurement date (in thousands):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Reconciliation of benefit obligations:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
50,409
|
|
|
$
|
45,612
|
|
Interest cost
|
1,690
|
|
|
1,970
|
|
Actuarial (gain) loss
|
(1,997
|
)
|
|
5,604
|
|
Benefits paid
|
(3,296
|
)
|
|
(2,777
|
)
|
Benefit obligation at end of year
|
$
|
46,806
|
|
|
$
|
50,409
|
|
Reconciliation of plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
39,489
|
|
|
$
|
39,181
|
|
Actual return on plan assets
|
3,599
|
|
|
2,687
|
|
Company contributions
|
235
|
|
|
398
|
|
Benefits paid from plan assets
|
(3,296
|
)
|
|
(2,777
|
)
|
Fair value of plan assets at end of year
|
40,027
|
|
|
39,489
|
|
Funded status of the plans (underfunded)
|
$
|
(6,779
|
)
|
|
$
|
(10,920
|
)
|
The following table provides detail on the Company’s domestic net periodic benefit income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
Interest cost
|
$
|
1,690
|
|
|
$
|
1,970
|
|
|
$
|
1,920
|
|
Expected return on assets
|
(2,867
|
)
|
|
(2,997
|
)
|
|
(3,143
|
)
|
Amortization of actuarial loss
|
1,141
|
|
|
837
|
|
|
828
|
|
Net periodic benefit income
|
$
|
(36
|
)
|
|
$
|
(190
|
)
|
|
$
|
(395
|
)
|
At August 31,
2017
and
2016
,
$16.0 million
and
$18.4 million
, respectively, of pension plan actuarial losses, which have not yet been recognized in net periodic benefit cost, were included in accumulated other comprehensive loss, net of income taxes. During fiscal
2018
,
$0.7 million
of these net of tax actuarial losses are expected to be recognized in net periodic benefit cost.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Weighted-average assumptions used to determine U.S. pension plan obligations as of August 31 and weighted-average assumptions used to determine net periodic benefit cost for the years ended August 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Assumptions for benefit obligations:
|
|
|
|
|
|
Discount rate
|
3.60
|
%
|
|
3.45
|
%
|
|
4.45
|
%
|
Assumptions for net periodic benefit cost:
|
|
|
|
|
|
Discount rate
|
3.45
|
%
|
|
4.45
|
%
|
|
4.15
|
%
|
Expected return on plan assets
|
7.15
|
%
|
|
7.40
|
%
|
|
7.50
|
%
|
The Company employs a total return on investment approach for its pension plan assets whereby a mix of equity and fixed income investments are used to maximize the long-term return for plan assets, at a prudent level of risk. The investment portfolio contains a blend of equity and fixed income investments. Within the equity allocation, a blend of growth and value investments is maintained in a variety of market capitalizations and diversified between U.S. and non-U.S. stocks. The Company’s targeted asset allocation as a percentage of total plan assets is
60%
-
80%
in equity securities, with the remainder invested in fixed income securities and cash. Cash balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis. At
August 31, 2017
, the Company’s overall expected long-term rate of return for assets in U.S. pension plans was
7.00%
. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The target return is based on historical returns adjusted to reflect the current view of the long-term investment market.
The fair value of all U.S. pension plan assets is determined based on quoted market prices and therefore all plan assets are determined based on Level 1 inputs, except for fixed income securities which are valued based on Level 2 inputs, as defined in Note 8, “Fair Value Measurements.” The U.S. pension plan investment allocations by asset category were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
2017
|
|
%
|
|
2016
|
|
%
|
Cash and cash equivalents
|
|
$
|
395
|
|
|
1.0
|
%
|
|
$
|
347
|
|
|
0.9
|
%
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
8,475
|
|
|
21.2
|
|
|
8,372
|
|
|
21.2
|
|
Mutual funds
|
|
3,139
|
|
|
7.8
|
|
|
3,351
|
|
|
8.5
|
|
|
|
11,614
|
|
|
29.0
|
|
|
11,723
|
|
|
29.7
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
28,018
|
|
|
70.0
|
|
|
27,419
|
|
|
69.4
|
|
Total plan assets
|
|
$
|
40,027
|
|
|
100.0
|
%
|
|
$
|
39,489
|
|
|
100.0
|
%
|
Projected benefit payments from plan assets to participants in the Company’s U.S. pension plans are
$2.9 million
per year for each of the next five years and
$14.6 million
in aggregate for the following five years.
Foreign Defined Benefit Pension Plans
The Company has ten foreign defined benefit pension plans which cover certain existing and former employees of businesses outside the U.S. Most of the participants in the foreign defined benefit pension plans are current employees and are earning additional benefits. The funded status of these plans is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
2017
|
|
2016
|
Benefit obligation
|
|
$
|
14,645
|
|
|
$
|
16,808
|
|
Fair value of plan assets
|
|
7,950
|
|
|
8,502
|
|
Funded status of plans (underfunded)
|
|
$
|
(6,695
|
)
|
|
$
|
(8,306
|
)
|
Net periodic benefit cost for these foreign plans was
$1.0 million
,
$0.7 million
and
$1.0 million
in fiscal
2017
,
2016
and
2015
, respectively. The weighted average discount rate utilized for determining the benefit obligation at August 31,
2017
and
2016
was
2.3%
and
1.9%
, respectively. The plan assets of these foreign pension plans consist primarily of participating units in
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
fixed income and equity securities and insurance contracts. The Company’s overall expected long-term rate of return on these investments is
4.6%
. During fiscal
2018
, the Company anticipates contributing
$0.4 million
to these pension plans.
Projected benefit payments from plan assets to participants in the these foreign plans are
$0.3 million
for fiscal
2018
,
$0.3 million
for fiscal
2019
,
$0.4 million
for fiscal
2020
,
$0.5 million
for fiscal
2021
,
$0.6 million
for fiscal
2022
and
$2.6 million
in aggregate for the following five years.
Other Postretirement Health Benefit Plans
The Company provides other postretirement health benefits (“OPEB”) to certain existing and former employees of domestic businesses it acquired, who were entitled to such benefits prior to acquisition. These unfunded plans had a benefit obligation of
$3.8 million
and
$4.0 million
at August 31,
2017
and
2016
, respectively. These obligations are determined utilizing assumptions consistent with those used for our U.S. pension plans and a health care cost trend rate of
7.3%
, trending downward to
5.0%
by the year 2026, and remaining level thereafter. Net periodic benefit (income) costs for other postretirement benefits was less than
$0.2 million
for each of the fiscal years ended August 31,
2017
,
2016
and
2015
. Benefit payments from the plan are funded through participant contributions and Company contributions and are projected to be
$0.3 million
in fiscal
2018
.
Defined Contribution Benefit Plans
The Company maintains a 401(k) plan for substantially all full time U.S. employees (the “401(k) Plan”). Under plan provisions, the Company can fund either cash or issue new shares of Class A common stock for its contributions. Amounts are allocated to accounts set aside for each employee’s retirement. Employees generally may contribute up to
50%
of their compensation to individual accounts within the 401(k) Plan. While contributions vary, the Company generally makes core contributions to employee accounts equal to
3%
of each employee’s eligible annual cash compensation, subject to IRS limitations. In addition, the Company matches approximately
25%
of each employee’s contribution up to
6%
of the employee’s eligible compensation. The Company also maintains a Restoration Plan that allows eligible highly compensated employees (as defined by the Internal Revenue Code) to receive a core contribution as if no IRS limits were in place. Company contributions to the Restoration Plan are made in the form of Actuant common stock and are contributed into each eligible participant’s deferred compensation plan account. Expense recognized related to the 401(k) plan totaled
$4.7 million
,
$4.4 million
and
$4.3 million
for the years ended August 31,
2017
,
2016
and
2015
, respectively.
In addition to the 401(k) plan, the Company sponsors a non-qualified supplemental executive retirement plan (“the SERP Plan”). The SERP Plan is an unfunded defined contribution plan that covers certain executive employees and has an annual contribution formula based on age and years of service (with Company contributions ranging from
3%
to
6%
of eligible wages). This unfunded plan had a
$1.6 million
obligation at both
August 31, 2017
and
2016
, respectively. Expense recognized for the SERP Plan was
$0.3 million
per year for fiscal
2017
,
2016
and
2015
.
Deferred Compensation Plan
The Company maintains a deferred compensation plan to allow eligible U.S. employees to defer receipt of current cash compensation in order to provide future savings benefits. Eligibility is limited to employees that earn compensation that exceeds certain pre-defined levels. Participants have the option to invest their deferrals in a fixed income investment, in Company common stock, or a combination of the two. The fixed income portion of the plan is unfunded, and therefore all compensation deferred under the plan is held by the Company and commingled with its general assets. Liabilities of
$20.9 million
and
$22.2 million
are included in the consolidated balance sheets at August 31,
2017
and
2016
, respectively, to reflect the unfunded portion of the deferred compensation liability. The Company recorded expense in "Financing costs, net" of
$1.6 million
,
$1.6 million
and
$1.8 million
for the years ended August 31,
2017
,
2016
and
2015
, respectively, for non-funded interest on participant deferrals in the fixed income investment option. Company common stock contributions to fund the plan are held in a rabbi trust, accounted for in a manner similar to treasury stock and are recorded at cost in “Stock held in trust” within shareholders’ equity with the corresponding deferred compensation liability also recorded within shareholders’ equity. Since no investment diversification is permitted within the trust, changes in fair value of Actuant common stock are not recognized.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 12. Income Taxes
Income tax (benefit) expense is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
Currently payable:
|
|
|
|
|
|
Federal
|
$
|
(14,769
|
)
|
|
$
|
2,205
|
|
|
$
|
(126
|
)
|
Foreign
|
15,665
|
|
|
11,838
|
|
|
21,200
|
|
State
|
(850
|
)
|
|
912
|
|
|
(1,616
|
)
|
|
46
|
|
|
14,955
|
|
|
19,458
|
|
Deferred:
|
|
|
|
|
|
Federal
|
603
|
|
|
(12,470
|
)
|
|
(4,416
|
)
|
Foreign
|
(16,837
|
)
|
|
(23,797
|
)
|
|
(9,199
|
)
|
State
|
(290
|
)
|
|
(3,858
|
)
|
|
(324
|
)
|
|
(16,524
|
)
|
|
(40,125
|
)
|
|
(13,939
|
)
|
Income tax (benefit) expense
|
$
|
(16,478
|
)
|
|
$
|
(25,170
|
)
|
|
$
|
5,519
|
|
Income tax (benefit) expense recognized in the accompanying consolidated statements of operations differs from the amounts computed by applying the federal income tax rate to (loss) earnings before income tax (benefit) expense. A reconciliation of income taxes at the federal statutory rate to the effective tax rate is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
Federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of Federal effect
|
1.1
|
|
|
1.2
|
|
|
(0.2
|
)
|
Net effects of foreign tax rate differential and credits
(1)
|
(2.7
|
)
|
|
1.6
|
|
|
(58.4
|
)
|
Domestic manufacturing deduction
|
0.6
|
|
|
0.3
|
|
|
(5.1
|
)
|
Foreign branch currency (gains) losses
|
(0.3
|
)
|
|
4.9
|
|
|
—
|
|
Impairment and other divestiture charges
(2)
|
(11.2
|
)
|
|
(27.0
|
)
|
|
78.6
|
|
Valuation allowance additions and releases
(3)
|
(16.2
|
)
|
|
(0.7
|
)
|
|
15.5
|
|
Changes in liability for unrecognized tax benefits
(4)
|
(3.7
|
)
|
|
(0.9
|
)
|
|
(42.1
|
)
|
Taxable liquidation of foreign subsidiaries
(5)
|
22.1
|
|
|
—
|
|
|
—
|
|
Foreign non-deductible expenses
|
(4.6
|
)
|
|
—
|
|
|
—
|
|
Changes in tax rates
|
(2.1
|
)
|
|
—
|
|
|
—
|
|
Business divestitures
|
—
|
|
|
3.9
|
|
|
—
|
|
Other items
|
1.9
|
|
|
1.0
|
|
|
(1.6
|
)
|
Effective income tax rate
|
19.9
|
%
|
|
19.3
|
%
|
|
21.7
|
%
|
(1)
During fiscal 2015, the Company generated
$10.0 million
of foreign tax credits, the result of a non-recurring non-permanent loan from a foreign subsidiary (which were utilized to reduce fiscal 2015 tax obligations) and had a higher proportion of non-U.S. earnings.
(2)
Fiscal 2017, 2016 and fiscal 2015 net (loss) earnings include
$117.0 million
,
$186.5 million
and
$84.4 million
, respectively, in impairment and other divestiture charges related to goodwill, intangible assets, tangible assets and the cumulative effect of foreign currency rate changes of which
$47.9 million
,
$68.0 million
and
$6.3 million
, respectively, are deductible for income tax purposes.
(3)
Incremental valuation allowances of
$15.1 million
and
$5.7 million
were recorded in fiscal 2017 and 2015, respectively, due to uncertainty regarding utilization of foreign operating loss carryforwards, which were partially offset by a reduction of
$0.6 million
and
$2.3 million
of reserves for fiscal 2017 and 2015, respectively.
(4)
The liability for unrecognized tax benefits decreased
$9.5 million
in fiscal 2015 primarily due to settlements and lapsing of tax audit statutes.
(5)
During fiscal 2017, the Company generated a net benefit of
$14.9 million
, the result of taxable liquidations of foreign subsidiaries.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
2017
|
|
2016
|
Deferred income tax assets:
|
|
|
|
Operating loss and tax credit carryforwards
|
$
|
41,985
|
|
|
$
|
36,761
|
|
Compensation related liabilities
|
17,319
|
|
|
25,086
|
|
Postretirement benefits
|
14,359
|
|
|
8,727
|
|
Inventory
|
2,958
|
|
|
3,044
|
|
Book reserves and other items
|
14,224
|
|
|
8,317
|
|
Total deferred income tax assets
|
90,845
|
|
|
81,935
|
|
Valuation allowance
|
(22,671
|
)
|
|
(8,147
|
)
|
Net deferred income tax assets
|
68,174
|
|
|
73,788
|
|
Deferred income tax liabilities:
|
|
|
|
Depreciation and amortization
|
(77,548
|
)
|
|
(83,020
|
)
|
Other items
|
(1,910
|
)
|
|
(5,493
|
)
|
Deferred income tax liabilities
|
(79,458
|
)
|
|
(88,513
|
)
|
Net deferred income tax liability
|
$
|
(11,284
|
)
|
|
$
|
(14,725
|
)
|
The Company has
$62.7 million
of state loss carryforwards, which are available to reduce future state tax liabilities. These state net operating loss carryforwards expire at various times through 2037. The Company also has
$112.0 million
of foreign loss carryforwards which are available to reduce certain future foreign tax liabilities. Approximately one-half of the foreign loss carryforwards are not subject to any expiration dates, while the other balances expire at various times through 2027. The valuation allowance represents a reserve for deferred tax assets, including loss carryforwards, for which utilization is uncertain.
Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
29,174
|
|
|
$
|
29,924
|
|
|
$
|
39,509
|
|
Increases based on tax positions related to the current year
|
6,057
|
|
|
1,050
|
|
|
2,183
|
|
Increase for tax positions taken in a prior period
|
297
|
|
|
475
|
|
|
8,935
|
|
Decrease for tax positions taken in a prior period
|
(627
|
)
|
|
—
|
|
|
(633
|
)
|
Decrease due to lapse of statute of limitations
|
(4,008
|
)
|
|
(1,027
|
)
|
|
(4,464
|
)
|
Decrease due to settlements
|
—
|
|
|
—
|
|
|
(14,180
|
)
|
Changes in foreign currency exchange rates
|
553
|
|
|
(1,248
|
)
|
|
(1,426
|
)
|
Ending balance
|
$
|
31,446
|
|
|
$
|
29,174
|
|
|
$
|
29,924
|
|
Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2017, 2016 and 2015, the Company recognized
$2.9 million
,
$2.3 million
and
$1.8 million
, respectively for interest and penalties related to unrecognized tax benefits. The Company recognizes interest and penalties related to underpayment of income taxes as a component of income tax expense. With few exceptions, the Company is no longer subject to U.S. federal, state and foreign income tax examinations by tax authorities in major tax jurisdictions for years prior to fiscal 2007. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to
$4.6 million
throughout fiscal 2018.
The Company’s policy is to remit earnings from foreign subsidiaries only to the extent the remittance does not result in an incremental U.S. tax liability. Accordingly, the Company does not currently provide for the additional U.S. and foreign income taxes which would become payable upon remission of undistributed earnings of foreign subsidiaries. Undistributed earnings on which additional income taxes have not been provided amounted to
$213.7 million
at August 31, 2017. If all such undistributed earnings were no longer permanently reinvested, the Company would incur additional tax expense of
$21.7 million
to record the related deferred tax liability.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Loss) earnings before income taxes, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
$
|
12,635
|
|
|
$
|
(19,182
|
)
|
|
$
|
14,593
|
|
Foreign
|
(95,326
|
)
|
|
(111,162
|
)
|
|
10,798
|
|
|
$
|
(82,691
|
)
|
|
$
|
(130,344
|
)
|
|
$
|
25,391
|
|
Both domestic and foreign pre-tax earnings are impacted by changes in operating earnings, acquisition and divestiture activities, restructuring charges and the related benefits, growth investments, debt levels and the impact of changes in foreign currency exchange rates. In fiscal 2017, domestic earnings included
$7.8 million
of transition costs while foreign earnings included
$117.0 million
of impairment and other divestiture charges. In fiscal 2016, domestic earnings included a non-cash impairment charge of
$49.0 million
and a
$5.1 million
loss on the Sanlo divestiture while foreign earnings included a
$137.5 million
non-cash impairment charge. Fiscal 2015 domestic and foreign earnings included a non-cash impairment charge of
$20.3 million
and
$64.1 million
, respectively. Approximately
63%
,
53%
and
68%
of pre-tax earnings (excluding impairment and other divestiture charges) were generated in foreign jurisdictions with tax rates lower than the U.S. federal income tax rate during fiscal 2017, 2016 and 2015, respectively.
Cash paid for income taxes, net of refunds totaled
$11.8 million
,
$21.4 million
, and $
26.4 million
(including tax due on divestitures) during the years ended August 31, 2017, 2016 and 2015, respectively.
Note 13. Capital Stock and Share Repurchases
The authorized common stock of the Company as of
August 31, 2017
consisted of
168,000,000
shares of Class A common stock,
0.20
par value, of which
80,200,110
shares were issued and
59,760,676
outstanding;
1,500,000
shares of Class B common stock,
0.20
par value,
none
of which were issued and outstanding; and
160,000
shares of cumulative preferred stock,
1.00
par value (“preferred stock”),
none
of which have been issued. Holders of both classes of the Company’s common stock are entitled to dividends, as the Company’s Board of Directors may declare out of funds legally available, subject to any contractual restrictions on the payment of dividends or other distributions on the common stock. If the Company were to issue any of its preferred stock, no dividends could be paid or set apart on shares of common stock, unless paid in common stock, until dividends on all of the issued and outstanding shares of preferred stock had been paid or set apart for payment and provision had been made for any mandatory sinking fund payments.
The Company's Board of Directors approved four separate authorizations (September 2011, March 2014, October 2014 and March 2015) to repurchase up to
7,000,000
shares each of the Company’s outstanding common stock. At
August 31, 2017
, cumulative shares repurchased under these authorizations totaled
20,439,434
, leaving
7,560,566
shares authorized for future buy backs.
ACTUANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
Net (loss) earnings
|
$
|
(66,213
|
)
|
|
$
|
(105,174
|
)
|
|
$
|
19,872
|
|
Denominator:
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
59,436
|
|
|
59,010
|
|
|
61,262
|
|
Net effect of dilutive securities - stock based compensation plans
|
—
|
|
|
—
|
|
|
793
|
|
Weighted average common shares outstanding - diluted
|
59,436
|
|
|
59,010
|
|
|
62,055
|
|
|
|
|
|
|
|
Basic (Loss) Earnings Per Share:
|
$
|
(1.11
|
)
|
|
$
|
(1.78
|
)
|
|
$
|
0.32
|
|
Diluted (Loss) Earnings Per Share:
|
$
|
(1.11
|
)
|
|
$
|
(1.78
|
)
|
|
$
|
0.32
|
|
|
|
|
|
|
|
Anti-dilutive securities- stock based compensation plans (excluding from earnings per share calculation
) (1)
|
4,482
|
|
|
4,832
|
|
|
2,056
|
|
(1)
As a result of the impairment and other divestiture charges which caused a net loss in fiscal 2017 and 2016, shares from stock based compensation plans are excluded from the calculation of diluted earnings (loss) per share, as the result would be anti-dilutive.
Note 14. Stock Plans
Stock options may be granted to key employees and directors under the Actuant Corporation 2017 Omnibus Incentive Plan (the “Plan”). At
August 31, 2017
,
4,325,000
shares of Class A common stock were authorized for issuance under the plan plus an additional
1,800,000
shares being registered to cover shares, if any, that become issuable, pursuant to the terms of the Plan, upon the expiration, cancellation or forfeiture of existing awards under our previously registered stock plans, of which
4,524,027
shares were available for future award grants. The Plan permits the Company to grant share-based awards, including stock options, restricted stock, restricted stock units and performance shares (the "Performance Shares") to employees and directors. Options generally have a maximum term of
ten
years, an exercise price equal to
100%
of the fair market value of the Company’s common stock at the date of grant and generally vest
50%
after three years and
100%
after five years. The Company’s restricted stock grants prior to 2017 generally have similar vesting provisions as options while grants thereafter generally vest
33%
after one year,
66%
after two years and
100%
after three years. The Performance Shares include a
three
-year performance period, with vesting based
50%
on achievement of an absolute free cash flow conversion target and
50%
on the Company’s total shareholder return ("TSR") relative to the S&P 600 SmallCap Industrial index. The provisions of share-based awards may vary by individual grant with respect to vesting period, dividend and voting rights, performance conditions and forfeitures.
A summary of stock option activity during fiscal
2017
is as follows: