| ACTUANT CORP Item 1A Risk Factors Market demand for our products may suffer cyclical declines |
| The level of market demand for our products depends on the general economic condition of the markets in which we compete |
| A substantial portion of our revenues is derived from customers in cyclical industries that typically are adversely affected by downward economic cycles, which may result in lower demand for products in the affected business segment |
| For example, we derive significant revenues from sales to OEMs in the heavy-duty truck, RV, automotive and construction industries |
| As a result, deterioration in the conditions in any of these industries, as well as in any of the other industries in which we operate, could adversely affect our businesses |
| If consumer confidence declines considerably, consumer discretionary spending on home, RV and automobile purchases and remodeling and other construction projects could be negatively impacted, which would adversely impact our sales to customers in these markets |
| Our indebtedness could harm our operating flexibility and competitive position |
| We have incurred, and we may in the future incur, significant indebtedness in connection with acquisitions |
| Our strategy includes maintaining a leverage ratio in the range of two to three times Debt to EBITDA We have, and will continue to have, a substantial amount of debt which will continue to require significant interest and principal payments |
| Our level of debt and the limitations imposed on us by our debt agreements could adversely affect our operating flexibility and put us at a competitive disadvantage |
| Our substantial debt level may adversely affect our future performance |
| 7 ______________________________________________________________________ [29]Table of Contents Our ability to make scheduled payments of principal of, to pay interest on, or to refinance our indebtedness, and to satisfy our other debt and lease obligations will depend upon our future operating performance, which will be affected by factors beyond our control |
| In addition, there can be no assurance that future borrowings or equity financings will be available to us on favorable terms or at all for the payment or refinancing of our indebtedness |
| If we are unable to service our indebtedness, our business, financial condition and results of operations will be materially adversely affected |
| Our ability to service our debt obligations would be harmed if we fail to comply with the financial and other covenants in our debt agreements |
| Our amended senior credit agreement and our other debt agreements contain a number of significant financial and other restrictive covenants |
| These covenants could adversely affect us by limiting our financial and operating flexibility as well as our ability to plan for and react to market conditions and to meet our capital needs |
| Our failure to comply with these covenants could result in events of default which, if not cured or waived, could result in our being required to repay indebtedness before its due date, and we may not have the financial resources or be able to arrange alternative financing to do so |
| Borrowings under our amended senior credit facility are secured by a pledge of stock of certain of our subsidiaries and guaranteed by certain other subsidiaries |
| If borrowings under our amended senior credit facility were declared or became due and payable immediately as the result of an event of default and we were unable to repay or refinance those borrowings, the lenders could foreclose on the pledged stock |
| Any event that requires us to repay any of our debt before it is due could require us to borrow additional amounts at unfavorable borrowing terms, cause a significant decrease in our liquidity, and impair our ability to pay amounts due on our indebtedness |
| Moreover, if we are required to repay any of our debt before it becomes due, we may be unable to borrow additional amounts or otherwise obtain the cash necessary to repay that debt, and any failure to pay that debt when due could seriously harm our business |
| Our businesses operate in highly competitive markets, so we may be forced to cut prices or incur additional costs |
| Our businesses generally face substantial competition in each of their respective markets |
| We may be forced to reduce prices, incur increased costs or lose market share in certain business units |
| We compete on the basis of product design, quality, availability, performance, customer service and price |
| Present or future competitors may have greater financial, technical or other resources which could put us at a disadvantage in the affected business or businesses |
| Our international operations pose currency and other risks |
| Our international operations present special risks, primarily from currency exchange rate fluctuations, exposure to local economic and political conditions, export and import restrictions, controls on repatriation of cash and exposure to local political conditions |
| In particular, our results of operations have been significantly affected by fluctuations in foreign currency exchange rates, especially the euro and British pound |
| To the extent that we expand our international presence, these risks from our international operations may increase |
| Future acquisitions may create integration challenges |
| Our business strategy includes growth through small, strategic acquisitions, although we may from time to time consider larger acquisitions |
| That strategy depends on the availability of suitable acquisition candidates at reasonable prices and our ability to quickly resolve challenges associated with integrating these acquired businesses into our existing business |
| These challenges include integration of product lines, sales forces and manufacturing facilities as well as decisions regarding divestitures, inventory write-offs and other charges |
| These challenges also pose risks with respect to employee turnover, disruption in product cycles and the loss of sales momentum |
| We cannot be certain that we will find suitable acquisition candidates or that we will consistently meet these challenges |
| 8 ______________________________________________________________________ [30]Table of Contents We may not be able to realize the anticipated benefits from acquired companies |
| We may not be able to realize the anticipated benefits from acquired companies |
| Achieving those benefits depends on the timely, efficient and successful execution of a number of post-acquisition events, including integrating the acquired business into our company |
| Factors that could affect our ability to achieve these benefits include: • Difficulties in integrating and managing personnel, financial reporting and other systems used by the acquired businesses into our company; • The failure of acquired businesses to perform in accordance with our expectations; • Any future goodwill impairment charges that we may incur with respect to the assets of acquired businesses; • Failure to achieve anticipated synergies between our business units and the business units of acquired businesses; • The loss of acquired business customers; and • The loss of any of the key managers of acquired businesses |
| If acquired businesses do not operate as we anticipate, it could materially harm our business, financial condition and results of operations |
| In addition, acquired businesses may operate in niche markets in which we have little or no experience |
| Accordingly, we will be highly dependent upon existing managers and employees to manage those businesses, and the loss of any key managers or employees of the acquired business could have a material adverse effect on our business |
| Environmental laws and regulations may result in additional costs |
| We are subject to federal, state, local and foreign laws and regulations governing public and worker health and safety and the indoor and outdoor environment |
| Any violations of these laws by us could cause us to incur unanticipated liabilities that could harm our operating results |
| Pursuant to such laws, governmental authorities have required us to contribute to the cost of investigating or remediating, or to investigate or remediate, third party as well as currently or previously owned and operated sites |
| In addition, we provided environmental indemnities in connection with the sale of certain businesses and product lines |
| Liability as an owner or operator, or as an arranger for the treatment or disposal of hazardous substances, can be joint and several and can be imposed without regard to fault |
| There is a risk that our costs relating to these matters could be greater than what we currently expect or exceed our insurance coverage, or that additional remediation and compliance obligations could arise which require us to make material expenditures |
| In particular, more stringent environmental laws, unanticipated remediation requirements or the discovery of previously unknown conditions could materially harm our financial condition and operating results |
| We are also required to comply with various environmental laws and maintain permits, some of which are subject to discretionary renewal from time to time, for many of our businesses, and our business operations could be restructured if we are unable to renew existing permits or to obtain any additional permits that we may require |
| Any loss of key personnel and the inability to attract and retain qualified employees could have a material adverse impact on our operations |
| We are dependent on the continued services of key executives such as our Chief Executive Officer, our Chief Financial Officer and our Executive Vice Presidents in charge of our groups |
| We do not currently have employment agreements with these or any other officers |
| The departure of key personnel without adequate replacement could severely disrupt our business operations |
| Additionally, we need qualified managers and skilled employees with technical and manufacturing industry experience to operate our businesses successfully |
| From time to time there may be shortages of skilled labor which may make it more difficult and expensive for us to attract and retain qualified employees |
| If we are unable to attract and retain qualified individuals or our costs to do so increase significantly, our operations would be materially adversely affected |
| 9 ______________________________________________________________________ [31]Table of Contents If our intellectual property protection is inadequate, others may be able to use our technologies and tradenames and thereby reduce our ability to compete, which could have a material adverse effect on us, our financial condition and results of operations |
| We regard much of the technology underlying our services and products and the trademarks under which we market our products as proprietary |
| The steps we take to protect our proprietary technology may be inadequate to prevent misappropriation of our technology, or third parties may develop similar technology independently |
| We rely on a combination of patents, trademark, copyright and trade secret laws, employee and third-party non- disclosure agreements and other contracts to establish and protect our technology and other intellectual property rights |
| The agreements may be breached or terminated, and we may not have adequate remedies for any breach, and existing trade secrets, patent and copyright law afford us limited protection |
| Policing unauthorized use of our intellectual property is difficult |
| A third party could copy or otherwise obtain and use our products or technology without authorization |
| Litigation may be necessary for us to defend against claims of infringement, to protect our intellectual property rights and could result in substantial cost to us, and diversion of our efforts |
| Further, we might not prevail in such litigation which could harm our business |
| Our products could infringe on the intellectual property of others, which may cause us to engage in costly litigation and, if we are not successful, could cause us to pay substantial damages and prohibit us from selling our products |
| Third parties may assert infringement or other intellectual property claims against us based on their patents or other intellectual property claims, and we may have to pay substantial damages, possibly including treble damages, if it is ultimately determined that they do |
| We may have to obtain a license to sell our products if it is determined that our products infringe upon another person’s intellectual property |
| We might be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay substantial royalties |
| Even if infringement claims against us are without merit, defending these types of lawsuits takes significant time, may be expensive and may divert management attention from other business concerns |
| Large or rapid increases in the costs of raw materials or substantial decreases in their availability could adversely affect our operations |
| The primary raw materials that we use include steel, plastic resin, copper, brass, steel wire and rubber |
| Consequently, we are vulnerable to fluctuations in prices of such raw materials |
| Market prices for certain materials such as steel, plastic resin and copper have been rising, which could have a negative effect on our operating results and ability to manufacture our respective products on a timely basis |
| We have not entered into any material derivative contracts to hedge our exposure to commodity risk |
| Factors such as supply and demand, freight costs and transportation availability, inventory levels, the level of imports and general economic conditions may affect the prices of raw materials that we need |
| If we experience any significant increases in raw material prices, or if we are unable to pass along any increases in raw material prices to our customers, then our results of operations could be adversely affected |
| Geopolitical unrest and terrorist activities may cause the economic conditions in the US or abroad to deteriorate, which could harm our business |
| Terrorist attacks against targets in the US or abroad, rumors or threats of war, other geopolitical activity or trade disruptions may impact our operations or cause general economic conditions in the US and abroad to deteriorate |
| A prolonged economic slowdown or recession in the US or in other areas of the world could reduce the demand for our products and, therefore, negatively affect our future sales |
| Any of these events could have a significant impact on our business, financial condition or results of operations and may result in the volatility of the market price for our common stock |
| 10 ______________________________________________________________________ [32]Table of Contents Our ability to continue to source low cost products from regions such as China may decline |
| An increasing portion of our products are sourced from low cost regions |
| Changes in export laws and disruption in transportation routes could adversely impact our results of operations |
| Risks Related to the Common Stock The market price for our Class A common stock may be volatile |
| The market price of our Class A common stock could fluctuate substantially in the future in response to a number of factors, including those discussed below |
| The market price of our Class A common stock has in the past fluctuated significantly and is likely to continue to fluctuate significantly |
| Some of the factors that may cause the price of our Class A common stock to fluctuate include: • variations in our and our competitors’ operating results; • changes in securities analysts’ estimates of our future performance and the future performance of our competitors; • announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; • gains or losses of significant customers; • additions or departure of key personnel; • events affecting other companies that the market deems comparable to us; • general conditions in industries in which we operate; • general conditions in the United States and abroad; • the presence or absence of short selling of our Class A common stock; • future sales of our Class A common stock or debt securities; • announcements by us or our competitors of technological improvements or new products; and • European electrical restructuring actions |
| The stock markets in general have experienced substantial price and trading fluctuations |
| These fluctuations have resulted in volatility in the market prices of securities that often has been unrelated or disproportionate to changes in operating performance |
| These broad market fluctuations may adversely affect the trading price of the Class A common stock |
| The market price of our Class A common stock could be affected by the substantial number of shares that are eligible for future sale |
| As of August 31, 2006, we had 27cmam295cmam372 shares of Class A common stock outstanding, excluding 2cmam154cmam765 shares issuable upon the exercise of outstanding options granted under our existing stock option plans, 2cmam688cmam403 additional shares reserved for issuance under existing stock option plans and other employee benefit plans, and 3cmam758cmam445 shares issuable upon conversion of our 2prca convertible senior subordinated debentures |
| In addition, the number of shares issuable upon conversion of these debentures may increase pursuant to anti-dilution provisions applicable to the debentures |
| We cannot predict the effect, if any, that future sales of shares of Class A common stock, including Class A common stock issuable upon the exercise of options or the conversion of the 2prca convertible senior subordinated debentures, or the availability of shares of Class A common stock for future sale, will have on the market price of our Class A common stock prevailing from time to time |
| 11 ______________________________________________________________________ [33]Table of Contents Our 2prca convertible senior subordinated debentures are convertible into Class A common stock, at the option of the holders, only upon the occurrence of certain specified events |
| Among other things, the debentures may be converted into Class A common stock during any fiscal quarter if the closing sale price of our Class A common stock exceeds approximately dlra47dtta89 for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter |
| If holders become entitled to convert their debentures into our Class A common stock, it could result in the issuance of up to 3cmam758cmam445 additional shares of Class A common stock, which could be dilutive to other stockholders and adversely affect the market price of our Class A common stock, perhaps substantially |
| Based on filings made with the SEC we are aware of four institutions that hold in excess of 5prca of our outstanding Class A common stock |
| We are not able to predict whether or when these institutions will sell substantial amounts of our Class A common stock |
| Sales of our Class A common stock by these institutions could adversely affect prevailing market prices for our Class A common stock |
| Some provisions of our charter and bylaws and of Wisconsin law may prevent a change in control or adversely affect our shareholders |
| Certain provisions of our articles of incorporation and bylaws and of the Wisconsin Business Corporation Law may discourage, delay or prevent a change of control that shareholders may consider favorable |
| Certain provisions of our articles of incorporation and bylaws and of the Wisconsin Business Corporation Law may discourage transactions that otherwise could provide for payment of a premium over the prevailing market price of our Class A common stock and also may limit the price that investors are willing to pay in the future for shares of our Class A common stock |
| For example, our articles of incorporation and bylaws: • do not provide for cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of our Class A common stock to elect some directors; • while currently not implemented, permit us to classify the board of directors into two or three classes serving staggered two or three-year terms, respectively, which may lengthen the time required to gain control of our board of directors; • require super-majority voting to effect amendments to provisions of our articles of incorporation and bylaws or to approve or adopt a merger or consolidation of us, or approve or adopt a sale or exchange of all or substantially all of our assets; • establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by shareholders at a shareholder meeting; and • allow the board to issue shares of Class B common stock (which would then have the right to elect a majority of the directors) and to issue and determine the terms of preferred stock |
| In addition, certain sections of the Wisconsin Business Corporation Law may discourage, delay or prevent a change in control by: • limiting the voting power of certain shareholders exercising 20prca or more of our voting power, • prohibiting us from engaging in certain business combinations with any interested stockholder, or • requiring a super-majority vote for any business combination that does not meet certain fair price standards |
| 12 ______________________________________________________________________ [34]Table of Contents Any issuance of preferred stock or Class B common stock could adversely affect the holders of our Class A common stock |
| Our board of directors is authorized to issue shares of preferred stock or Class B common stock without any action on the part of our shareholders |
| Our board of directors also has the power, without shareholder approval, to set specified terms of any series of preferred stock, including dividend rates, votes per share and amounts payable in the event of our dissolution, liquidation or winding up |
| Any preferred stock that we issue may have a preference over our Class A common stock with respect to the payment of dividends and upon our liquidation, dissolution or winding up and the holders of the preferred stock would be entitled to vote as a single class with the holders of our Class A common stock in the election of directors |
| As a result, our board of directors could issue preferred stock with dividend, liquidation and voting rights and with other terms that could adversely affect the interests of the holders of our Class A common stock |
| If any shares of Class B common stock are issued, our articles of incorporation provide that the Class B common shareholders, voting as a separate class, would be entitled to elect a majority of our board of directors, while the holders of our Class A common stock, voting as a single class with the holders of any outstanding preferred stock, would be entitled to elect a minority of our board of directors |
| As a result, the issuance of any Class B common stock would adversely affect the voting rights of holders of our Class A common stock |
| We do not currently intend to issue any preferred stock or Class B common stock |
| Persons holding our Class A common stock could have the voting power of their shares of Class A common stock on all matters significantly reduced under Wisconsin anti-takeover statutes, if the person holds in excess of 20prca of the voting power in the election of directors |
| Under the Wisconsin Business Corporation Law, if a person holds voting power of our company in excess of 20prca of the voting power in the election of directors, then that person’s voting power is limited (in voting on any matter) to 10prca of the full voting power of such excess shares, unless full voting rights have been restored to that person at a special meeting of the shareholders or certain other statutory exceptions are met |
| A person’s Class A common stock holdings as well as any shares issuable upon conversion of convertible securities or the exercise of options or warrants owned by that person are included in calculating such person’s voting power |
| Therefore, any shares issuable to a holder of our 2prca convertible senior subordinated debentures, as well as any shares acquired in this offering, will be included in determining whether such holder holds more than 20prca of our voting power |
| If a holder of Class A common stock holds more than 20prca of our outstanding Class A common stock, after taking into account any shares of Class A common stock that the holder acquires in this offering or that the holder would receive upon the exercise or conversion of outstanding options, warrants or 2prca convertible senior subordinated debentures, then the holder’s voting power could be significantly reduced under Wisconsin anti-takeover statutes |