Business Context and Reporting Period
This Form 10-Q is for Actuant Corporation, the predecessor name of Enerpac Tool Group Corp., for the quarter ended November 30, 2015, the first quarter of fiscal 2016. Actuant operated through Industrial, Energy, and Engineered Solutions segments and served industrial, energy, infrastructure, vehicle, agricultural, and other end markets.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $305.0 million | $327.8 million |
| Gross profit / margin | $108.6 million / 35.6% | $127.0 million / 38.7% |
| Operating profit / margin | $25.4 million / 8.3% | $38.2 million / 11.7% |
| Net earnings | $15.4 million | $24.7 million |
| Diluted EPS | $0.26 | $0.38 |
| Operating cash flow | $20.4 million | $(19.2) million |
- Effective tax rate was 12.4%, compared with 24.0% in the prior-year quarter.
- Cash and equivalents were $171.9 million at November 30, 2015, including approximately $159 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. Current maturities were $7.5 million.
- The revolver had $589.0 million of unused capacity, of which $138.2 million was available for borrowing. The company was in compliance with its debt covenants.
- Capital expenditures were $5.5 million; investing cash outflow was $4.6 million. The company repurchased 200,000 shares for $4.7 million and paid a $2.4 million dividend.
- Primary working capital was $217 million, or 17% of sales, versus $218 million, or 18%, at August 31, 2015.
Material Changes Versus the Prior Comparable Period
- Sales declined 7.0% year over year, primarily because of unfavorable currency translation. Core sales were described as virtually unchanged overall.
- Gross margin decreased approximately 310 basis points, and operating margin decreased approximately 340 basis points. Management attributed the pressure to lower production and fixed-cost absorption, unfavorable mix, restructuring charges, incentive compensation, and foreign-currency-related material costs.
- Operating profit decreased 34% and net earnings decreased 37%; diluted EPS declined from $0.38 to $0.26. Lower average shares outstanding partly offset the earnings decline.
- Industrial sales declined 13%, with core sales down 9%; operating margin fell to 23.1% from 26.1%.
- Energy sales increased 2% as reported and core sales increased 13%, but operating margin declined to 8.9% from 11.2% because of unfavorable mix and restructuring costs.
- Engineered Solutions sales declined 10%, with core sales down 3%; operating margin fell to 3.4% from 5.5% because of lower demand, reduced absorption, and restructuring costs.
- Restructuring charges were $4.4 million, compared with none in the prior-year quarter. The restructuring reserve was $4.0 million at November 30, 2015.
- Operating cash flow improved by $39.5 million year over year, primarily because the prior-year period included substantial tax payments and working-capital uses.
- Foreign currency translation produced a $21.2 million loss in other comprehensive income in the quarter, contributing to a $5.5 million comprehensive loss.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fiscal 2016 consolidated core sales to decline 1% to 4% from the prior year, citing sluggish and inconsistent demand in industrial, mining, infrastructure, oil and gas, commercial, off-highway vehicle, and agricultural markets.
- The company expected approximately $25 million of restructuring charges during fiscal 2016 and fiscal 2017 to simplify its organization and reduce fixed costs.
- Management stated that cash on hand, revolver availability, and anticipated operating cash flow should fund operations, debt service, share repurchases, acquisitions, and capital expenditures for the foreseeable future.
- More than one-half of sales were generated outside the United States. Management identified currency volatility, especially a stronger U.S. dollar, as a continuing risk to sales, earnings, cash flow, and equity.
- Other key risks included weak end markets, competitive pricing and margin pressure, failure to achieve restructuring savings, acquisition integration, interest-rate and leverage risk, commodity costs, cybersecurity, litigation, product liability, intellectual property, environmental matters, and potential impairment charges.
- Outstanding letters of credit were $18.1 million. The company also remained contingently liable for certain divested-business lease obligations with a discounted present value of $16.8 million.
- The filing states that ordinary-course legal and environmental matters were not expected to have a material adverse effect on financial condition, results of operations, or cash flows.
Facts Investors Should Verify
- Confirm the company-name transition from Actuant Corporation to Enerpac Tool Group Corp. and the applicable reporting period.
- Assess whether the projected 1% to 4% fiscal 2016 core-sales decline and the $25 million restructuring program were achieved.
- Monitor recovery in Industrial and Engineered Solutions demand and the sustainability of Energy segment service-driven sales.
- Evaluate whether restructuring activities restore gross and operating margins after the reported decline.
- Verify debt reduction, revolver availability, covenant compliance, and the timing of term-loan amortization beginning June 30, 2016.
- Track foreign-exchange effects, cash held by foreign subsidiaries, and the company’s ability to repatriate or deploy that cash.
- Review share repurchases and acquisition spending against free cash flow and leverage objectives.