Actuant Corporation (now Enerpac Tool Group) — Fiscal 2016 Second-Quarter 10-Q
Reporting period: Three and six months ended February 29, 2016, compared with the periods ended February 28, 2015. The filing identifies the registrant as Actuant Corporation, a global manufacturer organized into Industrial, Energy, and Engineered Solutions segments.
Financial performance and liquidity
| Metric | Three months ended February 29, 2016 | Prior comparable period | Six months ended February 29, 2016 | Prior comparable period |
|---|---|---|---|---|
| Net sales | $263.3 million | $301.0 million | $568.3 million | $628.8 million |
| Gross profit | $91.0 million; 34.6% margin | $109.8 million; 36.5% margin | $199.6 million; 35.1% margin | $236.7 million; 37.7% margin |
| Operating loss | $(172.1) million | $(56.4) million | $(146.7) million | $(18.2) million |
| Net loss | $(159.2) million | $(64.8) million | $(143.7) million | $(40.2) million |
| Diluted loss per share | $(2.70) | $(1.05) | $(2.43) | $(0.64) |
| Cash provided by operating activities | Not separately provided for the quarter | Not separately provided | $28.9 million | $3.2 million |
Second-quarter core sales declined 8%; first-half core sales declined 4%, excluding acquisitions and foreign-currency effects. Gross margin declined because of lower production levels, reduced fixed-cost absorption, unfavorable mix, and restructuring activity.
The reported operating loss included $186.5 million of impairment charges, compared with $84.4 million in the prior-year quarter. Excluding impairment charges, adjusted operating profit was $14.4 million in the quarter and $39.8 million for the first six months, compared with $27.9 million and $66.1 million, respectively, in the prior-year periods.
At February 29, 2016, cash and cash equivalents were $154.7 million, including approximately $148 million held outside the United States. Total debt was approximately $588.1 million, consisting of a $300.0 million term loan and $288.1 million of 5.625% senior notes. The company reported $217.6 million of available revolver capacity and compliance with its debt covenants. Net debt was approximately $433.4 million.
Six-month investing cash outflows included $11.0 million of capital expenditures and $15.0 million for the Larzep acquisition. Financing cash outflows included $9.4 million of treasury-stock purchases and $2.4 million of dividends. Cash decreased by $14.2 million during the six months, including a $10.6 million foreign-exchange impact.
Material changes versus the prior comparable periods
- Revenue decreased 12.5% in the quarter and 9.6% year to date, driven by weak industrial, energy, infrastructure, mining, off-highway, and agricultural demand, OEM inventory reductions, and unfavorable currency translation.
- Industrial sales declined 16% in the quarter and 15% year to date; operating margin fell to 20.6% from 24.4%.
- Energy sales declined 14% in the quarter and 6% year to date. Energy maintenance and integrity revenue increased, but other energy services declined because of reduced oil and gas exploration, drilling, and commissioning activity.
- Engineered Solutions sales declined 8% in the quarter and 10% year to date, reflecting lower OEM build rates, extended shutdowns, and weakness in off-highway and agricultural markets.
- Restructuring charges were $3.6 million in the quarter and $8.0 million year to date; no comparable charges were recorded in the prior-year periods.
- Share repurchases were substantially lower than in the prior year: 400,000 shares costing $9.4 million during the first six months versus approximately 6 million shares costing $180.5 million in the prior year.
Impairments, acquisitions, outlook, and risks
The company recorded a $140.8 million impairment charge for the Cortland and Viking Energy businesses and a $45.7 million charge for the maximatecc Engineered Solutions business. The charges reflected lower projected sales and profits amid prolonged oil and gas weakness, excess offshore capacity, OEM inventory destocking, and reduced production expectations. No Viking goodwill remained after the charge; remaining goodwill was $37.1 million for Cortland and $18.0 million for maximatecc. Management noted that additional impairment charges remain possible if operating performance or market conditions deteriorate.
The company acquired Larzep, S.A. on February 17, 2016, for $14.6 million net of cash acquired plus $1.5 million of deferred purchase price. Subsequent to quarter-end, it acquired the Middle East, Caspian, and North African business of FourQuest Energy Inc. for $64.3 million, funded with existing cash.
Management expects fiscal 2016 consolidated core sales to decline 4% to 6% from the prior year. It expects sluggish demand through the remainder of the fiscal year and plans approximately $25 million of restructuring charges across fiscal 2016 and 2017. Priorities include restructuring execution, strategic acquisitions, growth investments, and cash-flow generation. Management stated that cash on hand, revolver availability, and expected operating cash flow should fund operating needs, acquisitions, debt service, share repurchases, and capital expenditures for the foreseeable future.
Principal risks include prolonged weakness in industrial and energy end markets, oil and gas capital-spending reductions, foreign-currency volatility, execution of restructuring programs, future impairment charges, acquisition integration, leverage and covenant compliance, interest-rate exposure, cybersecurity, litigation, product liability, environmental matters, and commodity costs. Outstanding letters of credit were $17.9 million, and discounted future lease obligations for previously divested businesses were $16.7 million.
Facts investors should verify
- Whether core sales and adjusted operating margins stabilize relative to management’s 4%–6% fiscal-year core-sales decline outlook.
- Whether the Cortland, Viking, and maximatecc businesses achieve the projections underlying the impairment testing and avoid further write-downs.
- The timing and effectiveness of the planned $25 million restructuring program and related cash costs.
- Liquidity after the $64.3 million FourQuest acquisition, future term-loan amortization, acquisitions, and any resumed share repurchases.
- Foreign-currency effects, given that more than half of sales are generated outside the United States and the company reported a $35.1 million year-to-date foreign-currency translation loss.
- Execution and integration of the Larzep and FourQuest acquisitions and their contribution to revenue and profitability.