Business Context and Reporting Period
The filing is Actuant Corporation’s unaudited Form 10-Q for the quarter and six months ended February 28, 2017. The company operates through Industrial, Energy, and Engineered Solutions segments and manufactures industrial products, hydraulic and mechanical tools, energy-related products and services, and engineered motion-control systems. The filing does not identify the registrant as Enerpac Tool Group Corp.; it identifies the registrant as Actuant Corporation.
Financial Performance and Position
| Metric | Three months ended Feb. 28, 2017 | Six months ended Feb. 28, 2017 |
|---|---|---|
| Net sales | $258.9 million | $524.7 million |
| Gross profit | $87.3 million; 33.7% margin | $180.4 million; 34.4% margin |
| Operating profit | $13.2 million; 5.1% margin | $21.7 million; 4.1% margin |
| Net earnings | $5.1 million | $10.0 million |
| Diluted EPS | $0.08 | $0.17 |
| Operating cash flow | Not separately provided | $14.0 million |
- Cash and equivalents were $171.9 million at February 28, 2017, including approximately $165 million held by foreign subsidiaries and $7 million domestically.
- Total debt was approximately $576.8 million before debt issuance costs, comprising a $288.8 million term loan and $288.1 million of 5.625% senior notes. Net long-term debt was $547.1 million.
- The company had a $600 million revolving facility, with $595.6 million unused and approximately $96.7 million immediately available under current covenant capacity. The company was in compliance with its debt covenants.
- Six-month investing cash usage was $14.5 million, primarily $14.7 million of capital expenditures. Financing cash usage was $4.2 million, including $7.5 million of term-loan repayments and $2.4 million of dividends.
- Primary working capital increased to $205 million, or 20% of sales, from $203 million, or 18%, at August 31, 2016, principally because of higher receivables and accounts payable.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined 2% to $258.9 million; six-month sales declined 8% to $524.7 million. Core sales declined 3% in the quarter and 9% year to date after adjusting for acquisitions, divestitures, and currency.
- The company returned to profitability compared with the prior-year quarter, when a $186.5 million impairment charge produced a $159.2 million net loss. Six-month net earnings were $10.0 million versus a $143.7 million loss in the prior year, also primarily reflecting the absence of that impairment charge.
- Gross margin decreased to 33.7% from 34.6% in the quarter and to 34.4% from 35.1% year to date. Management cited lower production levels, manufacturing-cost absorption, and unfavorable mix.
- Industrial sales increased 13% in the quarter and 5% year to date; segment operating margin was 20.1% versus 20.6% in the prior-year quarter.
- Energy sales declined 15% in the quarter and 21% year to date. Results were affected by reduced oil and gas spending, competitive pricing, unfavorable mix, and the non-recurrence of a large prior-year Middle East maintenance project.
- Engineered Solutions sales declined 2% in the quarter and 5% year to date, but core quarterly sales increased 2% excluding the Sanlo divestiture. The segment returned to operating profit after the prior-year $45.7 million impairment charge.
- The company recorded $7.8 million of director and officer transition charges in the first six months of fiscal 2017 and $5.0 million of restructuring charges, compared with $8.0 million of restructuring charges in the prior-year period.
- Operating cash flow fell to $14.0 million from $28.9 million, primarily because of lower earnings and a $20.9 million increase in accounts receivable.
Guidance, Outlook, Risks and Unusual Items
- Management expected full-year fiscal 2017 sales to decline modestly because of weak and inconsistent demand in mining, infrastructure, oil and gas, commercial construction, off-highway vehicles, and agriculture. It expected conditions to ease sequentially as the year progressed.
- Management anticipated approximately $2 million to $3 million of additional restructuring charges during the remainder of fiscal 2017 and $5 million to $10 million of incremental pretax savings during the balance of fiscal 2017 and fiscal 2018. No formal earnings-per-share guidance was provided in the filing.
- Restructuring programs include facility consolidation, workforce reductions, production transfers, sourcing changes, and administrative standardization. Management did not expect significant restructuring charges to continue into fiscal 2018.
- Key risks include global industrial and energy-market weakness, foreign-exchange volatility, pricing and margin pressure, supplier dependence, acquisitions and integration, divestitures and retained liabilities, impairment risk, cybersecurity and information-technology failures, litigation, environmental and regulatory matters, interest rates, leverage and debt-covenant compliance.
- Letters of credit totaled $16.6 million. The company also had $14.1 million of discounted future lease-payment obligations related to previously divested or spun-off businesses. Management did not expect environmental or legal matters to have a material adverse effect, although outcomes remain uncertain.
- Tax benefits from certain planning initiatives reduced the effective tax rate and were not expected to recur because related tax attributes were no longer available or tax laws had changed.
- Foreign-currency sensitivity was significant: a hypothetical 10% decline in foreign exchange rates versus the U.S. dollar would have reduced quarterly sales by approximately $12 million and operating profit by approximately $1 million.
Facts Investors Should Verify
- Confirm the registrant identity and whether this filing is intended to represent Enerpac Tool Group Corp. or the historical Actuant Corporation.
- Assess whether Energy-segment demand, oil and gas spending, product mix, and margins improve as management anticipated.
- Track operating cash conversion, receivables, working capital, and the company’s ability to fund debt service, capital expenditures, dividends, acquisitions, and any share repurchases.
- Verify progress against the restructuring timetable, the remaining $2 million to $3 million of expected charges, and the projected $5 million to $10 million of savings.
- Monitor leverage, covenant headroom, term-loan amortization increases beginning June 30, 2017, and the June 2022 maturity of the senior notes.
- Evaluate the sustainability of the unusually favorable tax rate and the potential effects of foreign-currency movements and future impairment testing.