Business Context and Reporting Period
This filing is Actuant Corporation’s unaudited Form 10-Q for the quarter ended November 30, 2013, filed January 8, 2014. The request identifies Enerpac Tool Group Corp., but the filing is for Actuant Corporation, which operated three continuing segments: Industrial, Energy, and Engineered Solutions. The Electrical segment was classified as discontinued operations.
Financial Performance and Liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $339.6 million | $307.8 million | +10% |
| Gross profit | $131.8 million | $124.4 million | +6% |
| Gross margin | 38.8% | 40.4% | Down 160 bps |
| Operating profit | $43.6 million | $43.5 million | Flat |
| Operating margin | 12.9% | 14.1% | Down 120 bps |
| Earnings from continuing operations | $33.0 million | $30.6 million | +8% |
| Diluted continuing-operations EPS | $0.44 | $0.41 | +7% |
| Net earnings | $36.0 million | $36.3 million | Down slightly |
| Diluted EPS | $0.48 | $0.49 | Down slightly |
| Operating cash flow | $32.9 million | $12.3 million | +168% |
Cash and cash equivalents were $109.5 million at November 30, 2013, compared with $104.0 million at August 31, 2013. Capital expenditures were $11.3 million, and cash used in investing activities was $9.3 million. Financing activities used $20.1 million, including $12.0 million of revolver repayments, $15.4 million of treasury-stock repurchases, and a $2.9 million dividend.
Total senior indebtedness was $503.0 million, consisting of $203.0 million under the Senior Credit Facility and $300.0 million of 5.625% Senior Notes due 2022. Revolver borrowings were $113.0 million, with $483.0 million of available and unused capacity. The credit facility matures July 18, 2018; the company was in compliance with its 3.75:1 maximum leverage and 3.50:1 minimum interest-coverage covenants.
Material Changes Versus the Prior Comparable Period
- Core sales increased 5%; acquisitions contributed 6% and currency translation reduced sales by 1%.
- Energy sales increased 19% to $107.9 million, primarily reflecting the August 2013 Viking SeaTech acquisition, but operating margin declined to 8.3% from 17.0% because of acquisition mix, customer mix, and labor-utilization inefficiencies.
- Engineered Solutions sales increased 15% to $133.0 million, and operating margin improved to 9.9% from 6.6%, supported by higher volumes and prior restructuring benefits.
- Industrial sales declined 2% to $98.6 million, while operating margin improved to 27.3% from 26.7% through cost management and favorable mix.
- Consolidated margins declined because of unfavorable segment and product mix, restructuring costs, and inclusion of the lower-margin Viking operations.
- The effective tax rate from continuing operations fell to 7.7% from 16.3%, including a $7.3 million discrete tax benefit from the liquidation of a foreign entity.
- Operating cash flow improved by $20.7 million, primarily because the prior-year period included approximately $17 million of fiscal 2012 incentive-compensation payments.
Outlook, Commentary, Risks, and Unusual Items
Management expected single-digit core sales growth in Industrial and Energy during the remainder of fiscal 2014 and mid- to high-single-digit core sales growth in Engineered Solutions. Priorities included growth initiatives, new products, geographic expansion, acquisitions, operational excellence, restructuring, and cash-flow generation.
On December 13, 2013, after the reporting period, Actuant completed the sale of the Electrical segment for $258 million in cash, subject to a working-capital adjustment. Expected net proceeds were approximately $225 million after transaction costs and taxes and were intended to reduce net debt. Management expected a net gain on disposal.
The filing identifies risks related to economic conditions, end-market demand, competition, acquisition integration, pricing and operating-margin pressure, foreign exchange, interest rates, commodity costs, supply-chain conditions, regulatory developments, potential impairment charges, indebtedness, and compliance with debt covenants. A 10% decline in foreign exchange rates was estimated to reduce quarterly sales by approximately $20 million and operating profit by approximately $2 million.
Discontinued Electrical operations generated $3.0 million of after-tax income in the quarter versus $5.8 million in the prior year. The company had previously recorded a $159.1 million impairment charge related to the planned divestiture. Outstanding letters of credit were $11.2 million, and the present value of contingent lease obligations from previously divested businesses was $10.9 million. Management stated that existing liquidity, operating cash flow, and Electrical-sale proceeds should fund operations, debt service, repurchases, acquisitions, and capital expenditures for the foreseeable future.
Important Facts for Investors to Verify
- Confirm that the filing issuer is Actuant Corporation rather than Enerpac Tool Group Corp.
- Verify completion terms, working-capital adjustment, tax effects, and final gain from the December 13, 2013 Electrical-segment sale.
- Monitor post-acquisition Viking performance, Energy-segment margins, and integration costs.
- Assess leverage and debt reduction after applying the Electrical-sale proceeds.
- Separate recurring operating performance from the $7.3 million discrete tax benefit and other unusual items.
- Track foreign-exchange effects, restructuring costs, commodity inflation, and covenant compliance.