Actuant Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended May 31, 2013. The filing identifies the registrant as Actuant Corporation, although the request metadata refers to Enerpac Tool Group Corp. The statements are unaudited and use discontinued-operations presentation for the Electrical segment.
Business Context
Actuant is a global diversified industrial manufacturer operating through Industrial, Energy and Engineered Solutions segments. The company serves maintenance, infrastructure, energy, oil and gas, industrial, vehicle, agricultural and OEM markets. In the third quarter, Actuant committed to divest its entire Electrical segment and refocus on the remaining three segments.
Financial Metrics
| Metric | Three months ended May 31, 2013 | Three months ended May 31, 2012 | Nine months ended May 31, 2013 | Nine months ended May 31, 2012 |
|---|---|---|---|---|
| Net sales | $344.2 million | $343.3 million | $952.5 million | $954.2 million |
| Gross profit | $136.9 million | $138.8 million | $377.5 million | $381.9 million |
| Gross margin | 39.8% | 40.4% | 39.6% | 40.0% |
| Operating profit | $57.0 million | $58.9 million | $137.4 million | $154.8 million |
| Operating margin | 16.6% | 17.1% | 14.4% | 16.2% |
| Earnings from continuing operations | $46.1 million | $27.7 million | $102.5 million | $89.4 million |
| Diluted EPS from continuing operations | $0.62 | $0.36 | $1.38 | $1.19 |
| Net earnings (loss) | $(93.0) million | $34.4 million | $(28.2) million | $103.8 million |
| Diluted EPS | $(1.24) | $0.45 | $(0.38) | $1.39 |
Continuing-operations effective tax rates were 7.7% for the quarter and 12.5% year to date, compared with 13.8% and 19.8%, respectively, in the prior-year periods. The current-quarter rate benefited from tax-return adjustments and a $9.3 million reversal of prior-year tax reserves.
Cash flow and liquidity: Nine-month operating cash flow was $116.3 million, compared with $129.3 million in the prior year. Capital expenditures were $18.9 million, and net cash used in investing activities was $12.7 million. Net cash used in financing activities was $6.5 million, including $5.0 million of term-loan repayments, $13.7 million of share repurchases, $3.6 million of contingent consideration and $2.9 million of dividends. Cash increased to $161.4 million from $68.2 million at August 31, 2012.
Debt: Total senior indebtedness was $392.5 million, consisting of $92.5 million under the term loan and $300.0 million of 5.625% senior notes due 2022. The revolver was undrawn, with $596.7 million of available capacity. The company was in compliance with its debt covenants.
Balance sheet: Total assets were $1.919 billion and shareholders’ equity was $1.032 billion at May 31, 2013. Goodwill declined to $647.2 million from $866.4 million at August 31, 2012, primarily because of impairment charges and reclassification of Electrical assets to discontinued operations.
Material Changes Versus the Prior Comparable Period
- Reported sales were broadly flat in the quarter and down slightly year to date. Third-quarter core sales declined 2%; acquisitions added 3% and currency translation reduced sales by 1%. Year-to-date core sales declined 4%, excluding acquisition and currency effects.
- Operating profit declined 3% in the quarter and 11% year to date. Management cited unfavorable product mix, growth investments and the absence of a prior-year favorable acquisition earn-out adjustment.
- Continuing-operations earnings improved because of lower financing costs, lower taxes and the absence of the $16.8 million prior-year debt-refinancing charge.
- The Industrial segment delivered 2% core sales growth in the quarter and year to date, with a 29% quarterly operating margin.
- The Energy segment delivered 5% quarterly core sales growth and a 20% quarterly operating margin, supported by seismic, diving and oil-and-gas maintenance activity.
- Engineered Solutions sales declined 10% on a core basis in the quarter and 13% year to date. Its quarterly operating margin fell to 10% from 14%, reflecting weak European demand, OEM inventory destocking, lower volume and restructuring costs.
- Primary working capital increased to $212 million, or 16% of annualized recent sales, from $193 million, or 14%, at May 31, 2012, mainly because of higher receivables.
Guidance, Outlook, Risks and Unusual Items
- Management expected second-half fiscal 2013 operating results to improve relative to the first half as cost reductions and growth investments took effect.
- Industrial growth was expected to remain modest because of weak global industrial activity. Energy demand was supported by oil-and-gas maintenance and exploration, while non-energy markets such as defense, marine and aerospace remained soft.
- Engineered Solutions management expected sequentially improved fourth-quarter sales as OEM destocking abated and year-over-year comparisons became easier.
- The Electrical segment generated a $170.3 million pre-tax impairment charge, or $149.8 million after tax, related to the planned divestiture. The charge included $137.8 million of goodwill, $21.3 million of indefinite-lived tradenames and $11.2 million of amortizable intangible assets.
- Electrical segment results were reported as discontinued operations. The segment produced a $139.1 million after-tax loss for the quarter and a $130.7 million loss year to date, compared with prior-year income of $6.7 million and $14.4 million.
- Management expected to complete an Electrical segment sale within twelve months, subject to customary transaction terms, but warned that a sale may not occur on acceptable terms or at all. Further write-downs may be required if sale proceeds are below current estimates.
- Other restructuring costs were $1.5 million for the quarter and $2.0 million year to date. The company also sold the Nielsen Sessions business for $4.9 million, approximately equal to its carrying value.
- Key risks include economic weakness, competitive pricing and margin pressure, foreign currency and interest-rate exposure, commodity costs, supply-chain conditions, acquisition integration, debt covenant compliance, impairment risk and risks associated with the Electrical divestiture.
- Contingencies included $10.5 million of letters of credit and $11.9 million of discounted future lease obligations related to previously divested or spun-off businesses. Management stated that current litigation and environmental matters were not expected to be material.
Investor Verification Checklist
- Verify the registrant identity and whether this filing is being reviewed under Actuant Corporation or the later Enerpac Tool Group name.
- Track the timing, proceeds and final accounting for the planned Electrical segment divestiture, including any additional impairment charges.
- Separate continuing-operations performance from discontinued operations when evaluating revenue, earnings and margins.
- Assess whether Engineered Solutions’ sales recovery and expected reduction in OEM destocking occurred.
- Monitor cash conversion, elevated primary working capital, share repurchases and capital expenditures.
- Review debt maturities, the February 2016 credit-facility maturity, covenant headroom and interest-rate exposure.
- Evaluate the sensitivity of remaining goodwill and intangible assets to lower sales, margins, valuation multiples and discount rates.