Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - ENERPAC TOOL GROUP CORP | atu-20171130exhibit322.htm |
EX-32.1 - EXHIBIT 32.1 - ENERPAC TOOL GROUP CORP | atu-20171130exhibit321.htm |
EX-31.2 - EXHIBIT 31.2 - ENERPAC TOOL GROUP CORP | atu-20171130exhibit312.htm |
EX-31.1 - EXHIBIT 31.1 - ENERPAC TOOL GROUP CORP | atu-20171130exhibit311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————————
FORM 10-Q
————————————
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2017
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-11288
————————————
ACTUANT CORPORATION
(Exact name of registrant as specified in its charter)
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Wisconsin | 39-0168610 | |
(State of incorporation) | (I.R.S. Employer Id. No.) |
N86 W12500 WESTBROOK CROSSING
MENOMONEE FALLS, WISCONSIN 53051
Mailing address: P. O. Box 3241, Milwaukee, Wisconsin 53201
(Address of principal executive offices)
(262) 293-1500
(Registrant’s telephone number, including area code)
————————————
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ¨ No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
The number of shares outstanding of the registrant’s Class A Common Stock as of December 31, 2017 was 60,007,521.
TABLE OF CONTENTS
Page No. | |
FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS
This quarterly report on Form 10-Q contains certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include statements regarding expected financial results and other planned events, including, but not limited to, anticipated liquidity, anticipated restructuring costs and related savings, anticipated future charges and capital expenditures. Words such as “may,” “should,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “plan,” “project” and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. We disclaim any obligation to publicly update or revise any forward-looking statements as a result of new information, future events or any other reason.
The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements:
• | economic uncertainty or a prolonged economic downturn; |
• | end market conditions in the industrial, oil & gas, energy, power generation, infrastructure, commercial construction, truck, automotive, specialty vehicle, mining and agriculture industries; |
• | competition in the markets we serve and market acceptance of existing and new products; |
• | a material disruption at a significant manufacturing facility; |
• | our ability to successfully identify and integrate acquisitions and realize anticipated benefits/results from acquired companies; |
• | divestitures and/or discontinued operations including retained liabilities from businesses that we sell; |
• | operating margin risk due to competitive pricing, operating inefficiencies, production levels and material, labor and overhead cost increases; |
• | our international operations present special risks, primarily from currency exchange rate fluctuations, exposure to local economic and political conditions, export and import restrictions and controls on repatriation of cash; |
• | regulatory and legal developments including changes to United States taxation rules, conflict mineral supply chain compliance, environmental laws and governmental climate change initiatives; |
• | the potential for a non-cash asset impairment charge, if operating performance or the outlook for one or more of our businesses were to fall significantly below current levels; |
• | our ability to execute restructuring actions and the realization of anticipated cost savings from those restructuring actions and cost reduction efforts; |
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• | a significant failure in information technology (IT) infrastructure and systems, unauthorized access to financial and other sensitive data or cybersecurity threats; |
• | due to the assembly nature of our operations we purchase a significant amount of components from suppliers and our reliance on suppliers involves certain risks; |
• | litigation, including product liability and warranty claims; |
• | inadequate intellectual property protection or if our products are deemed to infringe on the intellectual property of others; |
• | our level of indebtedness, ability to comply with the financial and other covenants in our debt agreements and fluctuations in interest rates; and |
• | numerous other matters including those of a political, economic, business, competitive and regulatory nature contained from time to time in U.S. Securities and Exchange Commission ("SEC") filings, including, but not limited to, those factors listed in the "Risk Factors" section within Item 1A of Part I of the Form 10-K filed with the SEC on October 26, 2017. |
When used herein, the terms “Actuant,” “we,” “us,” “our” and the “Company” refer to Actuant Corporation and its subsidiaries. Actuant Corporation provides free-of-charge access to its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto, through its website, www.actuant.com, as soon as reasonably practical after such reports are electronically filed with the SEC.
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PART I—FINANCIAL INFORMATION
Item 1—Financial Statements
ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Net sales | $ | 288,955 | $ | 265,793 | |||
Cost of products sold | 188,044 | 172,726 | |||||
Gross profit | 100,911 | 93,067 | |||||
Selling, administrative and engineering expenses | 74,478 | 68,602 | |||||
Amortization of intangible assets | 5,131 | 5,262 | |||||
Director & officer transition charges | — | 7,784 | |||||
Restructuring charges | 6,629 | 2,948 | |||||
Operating profit | 14,673 | 8,471 | |||||
Financing costs, net | 7,514 | 7,132 | |||||
Other expense (income), net | 329 | (628 | ) | ||||
Earnings before income tax expense (benefit) | 6,830 | 1,967 | |||||
Income tax expense (benefit) | 1,604 | (2,998 | ) | ||||
Net earnings | $ | 5,226 | $ | 4,965 | |||
Earnings per share | |||||||
Basic | $ | 0.09 | $ | 0.08 | |||
Diluted | $ | 0.09 | $ | 0.08 | |||
Weighted average common shares outstanding: | |||||||
Basic | 59,871 | 58,972 | |||||
Diluted | 60,609 | 59,616 | |||||
See accompanying Notes to Condensed Consolidated Financial Statements
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ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Net earnings | $ | 5,226 | $ | 4,965 | |||
Other comprehensive income (loss), net of tax | |||||||
Foreign currency translation adjustments | 2,898 | (26,658 | ) | ||||
Pension and other postretirement benefit plans | 127 | 536 | |||||
Total other comprehensive income (loss), net of tax | 3,025 | (26,122 | ) | ||||
Comprehensive income (loss) | $ | 8,251 | $ | (21,157 | ) |
See accompanying Notes to Condensed Consolidated Financial Statements
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ACTUANT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
November 30, 2017 | August 31, 2017 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 165,050 | $ | 229,571 | ||||
Accounts receivable, net | 201,317 | 190,206 | ||||||
Inventories, net | 154,246 | 143,651 | ||||||
Assets held for sale | 21,393 | 21,835 | ||||||
Other current assets | 76,330 | 61,663 | ||||||
Total current assets | 618,336 | 646,926 | ||||||
Property, plant and equipment | ||||||||
Land, buildings and improvements | 46,690 | 43,737 | ||||||
Machinery and equipment | 233,375 | 227,535 | ||||||
Gross property, plant and equipment | 280,065 | 271,272 | ||||||
Less: Accumulated depreciation | (181,077 | ) | (176,751 | ) | ||||
Property, plant and equipment, net | 98,988 | 94,521 | ||||||
Goodwill | 531,454 | 530,081 | ||||||
Other intangibles, net | 216,032 | 220,489 | ||||||
Other long-term assets | 25,431 | 24,938 | ||||||
Total assets | $ | 1,490,241 | $ | 1,516,955 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Trade accounts payable | $ | 141,745 | $ | 133,387 | ||||
Accrued compensation and benefits | 37,770 | 50,939 | ||||||
Current maturities of debt and short-term borrowings | 30,000 | 30,000 | ||||||
Income taxes payable | 6,642 | 6,080 | ||||||
Liabilities held for sale | 70,787 | 101,083 | ||||||
Other current liabilities | 56,975 | 57,445 | ||||||
Total current liabilities | 343,919 | 378,934 | ||||||
Long-term debt, net | 524,629 | 531,940 | ||||||
Deferred income taxes | 29,567 | 29,859 | ||||||
Pension and postretirement benefit liabilities | 19,539 | 19,862 | ||||||
Other long-term liabilities | 56,269 | 55,821 | ||||||
Total liabilities | 973,923 | 1,016,416 | ||||||
Commitments and contingencies (Note 14) | ||||||||
Shareholders’ equity | ||||||||
Class A common stock, $0.20 par value per share, authorized 168,000,000 shares, issued 80,396,432 and 80,200,110 shares, respectively | 16,079 | 16,040 | ||||||
Additional paid-in capital | 145,938 | 138,449 | ||||||
Treasury stock, at cost, 20,439,434 shares | (617,731 | ) | (617,731 | ) | ||||
Retained earnings | 1,196,268 | 1,191,042 | ||||||
Accumulated other comprehensive loss | (224,236 | ) | (227,261 | ) | ||||
Stock held in trust | (2,722 | ) | (2,696 | ) | ||||
Deferred compensation liability | 2,722 | 2,696 | ||||||
Total shareholders’ equity | 516,318 | 500,539 | ||||||
Total liabilities and shareholders’ equity | $ | 1,490,241 | $ | 1,516,955 |
See accompanying Notes to Condensed Consolidated Financial Statements
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ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Operating Activities | |||||||
Net earnings | $ | 5,226 | $ | 4,965 | |||
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: | |||||||
Depreciation and amortization | 10,090 | 10,896 | |||||
Stock based compensation expense | 5,420 | 9,554 | |||||
Benefit for deferred income taxes | (307 | ) | (2,865 | ) | |||
Amortization of debt issuance costs | 413 | 413 | |||||
Other non-cash adjustments | 113 | 464 | |||||
Changes in components of working capital and other: | |||||||
Accounts receivable | (11,478 | ) | (8,252 | ) | |||
Inventories | (11,628 | ) | (8,142 | ) | |||
Trade accounts payable | 6,204 | 6,768 | |||||
Prepaid expenses and other assets | (12,043 | ) | (5,485 | ) | |||
Income taxes payable/receivable | (1,714 | ) | (1,946 | ) | |||
Accrued compensation and benefits | (12,588 | ) | (2,757 | ) | |||
Other accrued liabilities | 1,834 | 8,850 | |||||
Cash (used in) provided by operating activities | (20,458 | ) | 12,463 | ||||
Investing Activities | |||||||
Capital expenditures | (7,904 | ) | (5,139 | ) | |||
Proceeds from sale of property, plant and equipment | 32 | 130 | |||||
Rental asset lease buyout for Viking divestiture | (27,718 | ) | — | ||||
Cash used in investing activities | (35,590 | ) | (5,009 | ) | |||
Financing Activities | |||||||
Principal repayments on term loan | (7,500 | ) | (3,750 | ) | |||
Stock option exercises and other | 2,231 | 964 | |||||
Taxes paid related to the net share settlement of equity awards | (282 | ) | (223 | ) | |||
Cash dividend | (2,390 | ) | (2,358 | ) | |||
Cash used in financing activities | (7,941 | ) | (5,367 | ) | |||
Effect of exchange rate changes on cash | (532 | ) | (4,820 | ) | |||
Net decrease in cash and cash equivalents | (64,521 | ) | (2,733 | ) | |||
Cash and cash equivalents - beginning of period | 229,571 | 179,604 | |||||
Cash and cash equivalents - end of period | $ | 165,050 | $ | 176,871 |
See accompanying Notes to Condensed Consolidated Financial Statements
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements of Actuant Corporation (“Actuant,” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial reporting and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The condensed consolidated balance sheet data as of August 31, 2017 was derived from the Company’s audited financial statements, but does not include all disclosures required by United States generally accepted accounting principles. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes in the Company’s fiscal 2017 Annual Report on Form 10-K.
In the opinion of management, all adjustments considered necessary for a fair statement of financial results have been made. Such adjustments consist of only those of a normal recurring nature. Operating results for the three months ended November 30, 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2018.
New Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting, to simplify several aspects of accounting for share-based payment transactions. Under the new guidance it is required, among other items, that all excess tax deficiencies or benefits be recorded as income tax expense or benefit in the statement of earnings and not in additional paid-in capital (shareholder's equity). This guidance was adopted on September 1, 2017 and the impact of adopting this guidance had the following effects:
• | for the quarter ended November 30, 2017, we recorded $0.2 million in excess tax deficiency as an increase to our income tax expense for the quarter. This requirement was applied prospectively; |
• | excess tax benefits are now presented as operating activities in the statement of cash flows, rather than financing activities. The Company chose to apply this requirement retrospectively, and as a result, reclassified approximately $0.4 million of excess tax benefits recognized during the three months ended November 30, 2016 from financing activities to operating activities in the condensed consolidated statement of cash flows; |
• | our computation of diluted earnings per share now excludes the excess tax benefits or deficiencies from the assumed proceeds available to repurchase shares. This requirement was applied prospectively. |
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Under ASU 2014-09 and subsequent updates included in ASU 2016-10, ASU 2016-12, ASU 2017-13 and ASU 2017-14, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years beginning on or after December 15, 2017 (fiscal 2019 for the Company). The Company has begun assessing its various revenue streams to identify performance obligations under these ASUs and the key aspects of the standard that will impact the Company's revenue recognition process. Based upon our preliminary assessments, these standards may impact our allocation of contract revenue between various products and services and the timing of when those revenues are recognized, but do not expect a material or significant impact to amounts recognized. Given the diversity of its commercial arrangements, the Company is continuing to assess the impact these standards may have on its consolidated results of operations, financial position, cash flows and related financial statement disclosures.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income statement. The new guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line items as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost are to be stated separately from service cost and outside of operating income. This guidance is effective for fiscal years beginning after December 15, 2017 (fiscal 2019 for the Company) and interim periods within those annual periods. The amendment is to be applied retrospectively. Due to a majority of the Company's defined benefit pension or other postretirement benefit plans being frozen and the net periodic benefit pension cost not being significant, the Company does not believe that adoption of this guidance will have a significant impact on the financial statements of the Company.
In August 2016, the FASB issued ASU 2016‑15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, to address how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for fiscal years beginning after December 15, 2017 (fiscal 2019 for the Company), including interim
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periods within those fiscal years. This update will require adoption on a retrospective basis unless it is impracticable to apply. The Company does not believe that this guidance will have a significant impact on its presentation of the statement of cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases, to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset. This guidance is effective for fiscal years beginning after December 15, 2018 (fiscal 2020 for the Company), including interim periods within those fiscal years. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented under a modified retrospective approach using a cumulative effect adjustment in the year of adoption. The Company is currently gathering, documenting and analyzing lease agreements subject to this ASU and anticipates material additions to the balance sheet (upon adoption) of right-of-use assets, offset by the associated liabilities, due to our routine use of operating leases over time.
Accumulated Other Comprehensive Loss
The following is a summary of the Company's accumulated other comprehensive loss (in thousands):
November 30, 2017 | August 31, 2017 | ||||||
Foreign currency translation adjustments | $ | 204,906 | $ | 207,804 | |||
Pension and other postretirement benefit plans, net of tax | 19,330 | 19,457 | |||||
Accumulated other comprehensive loss | $ | 224,236 | $ | 227,261 |
Note 2. Director & Officer Transition Charges
During the three months ended November 30, 2016, the Company recorded separation and transition charges of $7.8 million in connection with the retirement of one director of the Company's Board of Directors and the transition of the Executive Vice President/Chief Financial Officer. The charges were mainly comprised of compensation expense for accelerated equity vesting, severance, outplacement, legal, signing bonus and relocation costs.
Note 3. Restructuring Charges
The Company has committed to various restructuring initiatives including workforce reductions, leadership changes, plant consolidations to reduce manufacturing overhead, satellite office closures, the continued movement of production and product sourcing to low cost alternatives and the centralization and standardization of certain administrative functions. Total restructuring charges for these activities were $6.6 million and $2.9 million in the three months ended November 30, 2017 and 2016, respectively. Liabilities for severance will generally be paid during the next twelve months, while future lease payments related to facilities vacated as a result of restructuring will be paid over the underlying remaining lease terms.
The following rollforwards summarize restructuring reserve activity by segment (in thousands):
Three Months Ended November 30, 2017 | ||||||||||||||||||||
Industrial | Energy | Engineered Solutions | Corporate | Total | ||||||||||||||||
Balance as of August 31, 2017 | $ | 202 | $ | 3,613 | $ | 1,792 | $ | 30 | $ | 5,637 | ||||||||||
Restructuring charges | 1,239 | 931 | 285 | 4,174 | 6,629 | |||||||||||||||
Cash payments | (259 | ) | (1,398 | ) | (762 | ) | (345 | ) | (2,764 | ) | ||||||||||
Other non-cash uses of reserve | (492 | ) | 207 | (193 | ) | (2,019 | ) | (1) | (2,497 | ) | ||||||||||
Impact of changes in foreign currency rates | — | (161 | ) | (2 | ) | — | (163 | ) | ||||||||||||
Balance as of November 30, 2017 | $ | 690 | $ | 3,192 | $ | 1,120 | $ | 1,840 | $ | 6,842 |
(1) Majority of non-cash uses of reserve represents accelerated equity vesting in connection with employee severance agreements.
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Three Months Ended November 30, 2016 | ||||||||||||||||||||
Industrial | Energy | Engineered Solutions | Corporate | Total | ||||||||||||||||
Balance as of August 31, 2016 | $ | 1,343 | $ | 3,021 | $ | 1,863 | $ | 46 | $ | 6,273 | ||||||||||
Restructuring charges | 715 | 117 | 2,080 | 36 | 2,948 | |||||||||||||||
Cash payments | (333 | ) | (558 | ) | (1,802 | ) | (36 | ) | (2,729 | ) | ||||||||||
Other non-cash uses of reserve | (166 | ) | (6 | ) | (3 | ) | (13 | ) | (188 | ) | ||||||||||
Impact of changes in foreign currency rates | (25 | ) | 10 | (8 | ) | — | (22 | ) | ||||||||||||
Balance as of November 30, 2016 | $ | 1,534 | $ | 2,584 | $ | 2,130 | $ | 33 | $ | 6,282 |
Note 4. Acquisitions
During the fourth quarter of fiscal 2017, the Company signed a definitive agreement to purchase Mirage Machines, Ltd. ("Mirage"), a provider of industrial and energy maintenance tools. Subsequent to November 30, 2017, we completed the acquisition of Mirage for a purchase price of $17.3 million net of cash acquired, plus potential future performance-based consideration. The Company incurred acquisition transaction costs of $0.2 million in the three months ended November 30, 2017 (included in selling, administration and engineering expenses in the condensed consolidated statement of earnings), related to this acquisition.
Note 5. Divestiture Activities
During the fourth quarter of fiscal 2017, the Company signed a definitive agreement to sell the Viking business (Energy segment). Subsequent to quarter-end, on December 1, 2017, the Company completed the sale of the Viking business for $12.0 million, which was paid in cash at the closing of the transaction, subject to closing working capital adjustments, cash and indebtedness and other adjustments. We anticipate recognizing an additional $15.0 million to $20.0 million in after tax divestiture charges in the second quarter of fiscal 2018.
Due to the divestiture of the Viking business not closing until subsequent to quarter-end, the associated assets and liabilities are classified as held for sale in the condensed consolidated balance sheet. The divestiture will result in the Company's exit from the offshore mooring market and will significantly limit our exposure to the upstream, offshore oil & gas market.
The following is a summary of the assets and liabilities held for sale of the Viking business (in thousands):
November 30, 2017 | August 31, 2017 | |||||||
Accounts receivable, net | $ | 2,116 | $ | 2,426 | ||||
Inventories, net | 185 | 190 | ||||||
Property, plant & equipment, net | 7,434 | 7,534 | ||||||
Prepaid expenses and other current assets | 1,996 | 1,927 | ||||||
Other long-term assets | 9,662 | 9,758 | ||||||
Assets held for sale | $ | 21,393 | $ | 21,835 | ||||
Trade accounts payable | $ | 1,804 | $ | 1,883 | ||||
Other current liabilities (including divestiture accruals) | 1,338 | 1,637 | ||||||
Rental asset lease buyout liability | — | 28,644 | ||||||
Reserve for cumulative translation adjustment | 67,645 | 68,919 | ||||||
Liabilities held for sale | $ | 70,787 | $ | 101,083 |
The results of the Viking business are not material to the consolidated financial results of the Company and are included in continuing operations. The Viking business had net sales of $2.7 million and $5.5 million in the three months ended November 30, 2017 and 2016, respectively.
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Note 6. Goodwill, Intangible Assets and Long-Lived Assets
Changes in the gross carrying value of intangible assets and goodwill can result from changes in foreign currency exchange rates, business acquisitions, divestitures or impairment charges. The changes in the carrying amount of goodwill for the three months ended November 30, 2017 are as follows (in thousands):
Industrial | Energy | Engineered Solutions | Total | ||||||||||||
Balance as of August 31, 2017 | $ | 103,875 | $ | 188,830 | $ | 237,376 | $ | 530,081 | |||||||
Impact of changes in foreign currency rates | 65 | 1,925 | (617 | ) | 1,373 | ||||||||||
Balance as of November 30, 2017 | $ | 103,940 | $ | 190,755 | $ | 236,759 | $ | 531,454 |
The gross carrying value and accumulated amortization of the Company’s other intangible assets are as follows (in thousands):
November 30, 2017 | August 31, 2017 | ||||||||||||||||||||||||
Weighted Average Amortization Period (Years) | Gross Carrying Value | Accumulated Amortization | Net Book Value | Gross Carrying Value | Accumulated Amortization | Net Book Value | |||||||||||||||||||
Amortizable intangible assets: | |||||||||||||||||||||||||
Customer relationships | 15 | $ | 264,409 | $ | 158,245 | $ | 106,164 | $ | 263,498 | $ | 153,003 | $ | 110,495 | ||||||||||||
Patents | 10 | 30,448 | 24,476 | 5,972 | 30,401 | 24,027 | 6,374 | ||||||||||||||||||
Trademarks and tradenames | 18 | 21,324 | 9,637 | 11,687 | 21,498 | 9,396 | 12,102 | ||||||||||||||||||
Other intangibles | 3 | 6,712 | 6,328 | 384 | 6,672 | 6,234 | 438 | ||||||||||||||||||
Indefinite lived intangible assets: | |||||||||||||||||||||||||
Tradenames | N/A | 91,825 | — | 91,825 | 91,080 | — | 91,080 | ||||||||||||||||||
$ | 414,718 | $ | 198,686 | $ | 216,032 | $ | 413,149 | $ | 192,660 | $ | 220,489 |
The Company estimates that amortization expense will be $15.3 million for the remaining nine months of fiscal 2018. Amortization expense for future years is estimated to be: $19.9 million in fiscal 2019, $19.2 million in 2020, $18.3 million in fiscal 2021, $16.3 million in fiscal 2022, $13.3 million in fiscal 2023 and $21.9 million thereafter. The future amortization expense amounts represent estimates and may be impacted by future acquisitions, divestitures or changes in foreign currency exchange rates.
Note 7. Product Warranty Costs
The Company generally offers its customers a warranty on products sold, although warranty periods vary by product type and application. The reserve for future warranty claims is based on historical claim rates and current warranty cost experience. The following is a rollforward of the product warranty reserves for the three months ended November 30, 2017 and 2016 (in thousands):
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Beginning balance | $ | 6,616 | $ | 5,592 | |||
Provision for warranties | 1,531 | 777 | |||||
Warranty payments and costs incurred | (1,145 | ) | (2,309 | ) | |||
Impact of changes in foreign currency rates | (8 | ) | (105 | ) | |||
Ending balance | $ | 6,994 | $ | 3,955 |
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Note 8. Debt
The following is a summary of the Company’s long-term indebtedness (in thousands):
November 30, 2017 | August 31, 2017 | ||||||
Senior Credit Facility | |||||||
Revolver | $ | — | $ | — | |||
Term Loan | 270,000 | 277,500 | |||||
Total Senior Credit Facility | 270,000 | 277,500 | |||||
5.625% Senior Notes | 287,559 | 287,559 | |||||
Total Senior Indebtedness | 557,559 | 565,059 | |||||
Less: Current maturities of long-term debt | (30,000 | ) | (30,000 | ) | |||
Debt issuance costs | (2,930 | ) | (3,119 | ) | |||
Total long-term debt, net | $ | 524,629 | $ | 531,940 |
The Company’s Senior Credit Facility matures on May 8, 2020 and provides a $600 million revolver, an amortizing term loan and a $450 million expansion option, subject to certain conditions. Borrowings are subject to a pricing grid, which can result in increases or decreases to the borrowing spread, depending on the Company’s leverage ratio, ranging from 1.00% to 2.25% in the case of loans bearing interest at LIBOR and from 0.00% to 1.25% in the case of loans bearing interest at the base rate. As of November 30, 2017, the borrowing spread on LIBOR based borrowings was 2.00% (aggregating to a 3.38% variable rate borrowing cost on the outstanding term loan balance). In addition, a non-use fee is payable quarterly on the average unused credit line under the revolver ranging from 0.15% to 0.35% per annum. As of November 30, 2017, the unused credit line under the revolver was $597.1 million, of which $93.1 million was available for borrowing. Quarterly term loan principal payments of $3.8 million began on June 30, 2016, increased to $7.5 million starting on June 30, 2017 and extend through March 31, 2020, with the remaining principal due at maturity. The Senior Credit Facility, which is secured by substantially all of the Company’s domestic personal property assets, also contains customary limits and restrictions concerning investments, sales of assets, liens on assets, dividends and other payments. The two financial covenants included in the Senior Credit Facility agreement are a maximum leverage ratio of 3.75:1 and a minimum interest coverage ratio of 3.5:1. The Company was in compliance with all financial covenants at November 30, 2017.
On April 16, 2012, the Company issued $300 million of 5.625% Senior Notes due 2022 (the “Senior Notes”), of which $287.6 million remains outstanding. The Senior Notes require no principal installments prior to their June 15, 2022 maturity, require semiannual interest payments in December and June of each year and contain certain financial and non-financial covenants. The Senior Notes include a call feature that allows the Company to repurchase them anytime on or after June 15, 2017 at stated redemption prices (ranging from 100.0% to 102.8%), plus accrued and unpaid interest.
Note 9. Fair Value Measurement
The Company assesses the inputs used to measure the fair value of financial assets and liabilities using a three-tier hierarchy. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level 3 inputs are not observable in the market and include management’s own judgments about the assumptions market participation would use in pricing an asset or liability.
The fair value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and variable rate long-term debt approximated book value at both November 30, 2017 and August 31, 2017 due to their short-term nature and the fact that the interest rates approximated market rates. Foreign currency exchange contracts are recorded at fair value. The fair value of the Company's foreign currency exchange contracts was a net asset of $0.1 million at November 30, 2017 and a net liability of $0.2 million at August 31, 2017. The fair value of the foreign currency exchange contracts was based on quoted inactive market prices and is therefore classified as Level 2 within the valuation hierarchy. The fair value of the Company’s outstanding Senior Notes was $295.1 million and $295.8 million at November 30, 2017 and August 31, 2017, respectively. The fair value of the Senior Notes was based on quoted inactive market prices and is therefore classified as Level 2 within the valuation hierarchy.
Note 10. Derivatives
All derivatives are recognized in the balance sheet at their estimated fair value. On the date the Company enters into a derivative contract, it designates the derivative as a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The Company does not enter into derivatives for speculative purposes. Changes in the value of fair value hedges and non-designated hedges are recorded in earnings along with the gain or loss on the hedged asset or liability, while changes in the value
11
of cash flow hedges are recorded in accumulated other comprehensive loss, until earnings are affected by the variability of cash flows. However, there were no cash flow hedges outstanding at November 30, 2017 and August 31, 2017.
The Company is exposed to market risk for changes in foreign currency exchange rates due to the global nature of its operations. In order to manage this risk the Company has historically hedged portions of its forecasted inventory purchases and other cash flows that are denominated in non-functional currencies (cash flow hedges).
The Company also utilizes foreign currency exchange contracts to reduce the exchange rate risk associated with recognized non-functional currency balances. The effects of changes in exchange rates are reflected concurrently in earnings for both the fair value of the foreign currency exchange contracts and the related non-functional currency asset or liability. These derivative gains and losses offset foreign currency gains and losses from the related revaluation of non-functional currency assets and liabilities (amounts included in other expense in the condensed consolidated statement of earnings). The U.S. dollar equivalent notional value of these short duration foreign currency exchange contracts (fair value hedges or non-designated hedges) was $22.5 million and $22.0 million at November 30, 2017 and August 31, 2017, respectively. The fair value of outstanding foreign currency exchange contracts was a net asset of $0.1 million at November 30, 2017 and a net liability of $0.2 million at August 31, 2017. Net foreign currency gain (loss) related to these derivative instruments were as follows (in thousands):
Three Months Ended November 30, | ||||||||
2017 | 2016 | |||||||
Foreign currency gain (loss), net | $ | 214 | $ | (1,491 | ) |
Note 11. Capital Stock and Share Repurchases
The Company's Board of Directors authorized the repurchase of shares of the Company's common stock under publicy announced share repurchase programs. Since the inception of the initial share repurchase program in fiscal 2012, the Company has repurchased 20,439,434 shares of common stock for $617.7 million. As of November 30, 2017, the maximum number of shares that may yet be purchased under the programs is 7,560,566 shares. There were no share repurchases in the three months ended November 30, 2017.
The reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share amounts):
Three Months Ended November 30, | ||||||||
2017 | 2016 | |||||||
Numerator: | ||||||||
Net earnings | $ | 5,226 | $ | 4,965 | ||||
Denominator: | ||||||||
Weighted average common shares outstanding - basic | 59,871 | 58,972 | ||||||
Net effect of dilutive securities - stock based compensation plans | 738 | 644 | ||||||
Weighted average common shares outstanding - diluted | 60,609 | 59,616 | ||||||
Basic earnings per share | $ | 0.09 | $ | 0.08 | ||||
Diluted earnings per share | 0.09 | 0.08 | ||||||
Anti-dilutive securities from stock based compensation plans (excluded from earnings per share calculation) | 1,829 | 1,963 |
Note 12. Income Taxes
The Company's income tax expense or benefit is impacted by a number of factors, including the amount of taxable earnings generated in foreign jurisdictions with tax rates that are lower than the U.S. federal statutory rate, permanent items, state tax rates and the ability to utilize various tax credits and net operating loss carryforwards. The Company's global operations, acquisition activity and specific tax attributes provide opportunities for continuous global tax planning initiatives to maximize tax credits and deductions. Both fiscal 2018 and 2017 include the benefits of tax planning initiatives. Comparative earnings before income taxes, income tax expense (benefit) and effective income tax rates are as follows (amounts in thousands):
12
Three Months Ended November 30, | ||||||||
2017 | 2016 | |||||||
Earnings before income taxes | $ | 6,830 | $ | 1,967 | ||||
Income tax expense (benefit) | 1,604 | (2,998 | ) | |||||
Effective income tax rate | 23.5 | % | (152.4 | )% |
Both the current and prior year effective income tax rates were impacted by the proportion of earnings in foreign jurisdictions with income tax rates lower than the U.S. federal income tax rate and the amount of income tax benefits from tax planning initiatives. The Company's earnings before income taxes included approximately 80% of earnings from foreign jurisdictions for both the estimated full-year fiscal 2018 and fiscal 2017. This foreign income tax rate differential had the effect of reducing the 35% U.S. statutory tax rate by 12.2% and 22.4%, for the three months ended November 30, 2017 and 2016, respectively. In addition to tax planning initiatives (which yield an effective income tax rate lower than the federal income tax rate) in each year, the income tax benefit for the three months ended November 30, 2016 included a $2.9 million benefit related to the discrete director and officer transition costs. These factors, combined with year-to-date activity, yielded an income tax expense (benefit) of 23.5% and (152.4)% for the three months ended November 30, 2017 and 2016, respectively. The tax benefits related to tax planning initiatives are not expected to repeat in future periods due to certain tax attributes that are no longer available and subsequent changes in relevant tax laws. The Company may release a material valuation allowance in a foreign jurisdiction in late fiscal 2018 or in fiscal 2019, if the jurisdiction demonstrates sustained profitability and the Company determines that it is more likely than not the deferred tax assets will be realized.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Act”) was signed. The Act significantly changes the income tax environment for US multinational corporations. The Company is actively evaluating the corporate income tax provisions of the Act including the reduction in the US corporate income tax rate, limitation on deductibility of interest, repatriation of foreign earnings, the move to a territorial tax system, and other provisions. Due to the complexity of the Act, the Company will continue to assess the provisions as well as any prospectively released regulations and disclose the anticipated impact to income tax expense resulting from the Act in future filings.
13
Note 13. Segment Information
The Company is a global manufacturer of a broad range of industrial products and systems and is organized into three reportable segments: Industrial, Energy and Engineered Solutions. The Industrial segment is primarily involved in the design, manufacture and distribution of branded hydraulic and mechanical tools to the maintenance, industrial, infrastructure and production automation markets. The Energy segment provides joint integrity products and services, customized offshore vessel mooring solutions, as well as rope and cable solutions to the global oil & gas, power generation and other markets. The Engineered Solutions segment provides highly engineered position and motion control systems to original equipment manufacturers ("OEM") in various on and off-highway vehicle markets, as well as a variety of other products to the industrial and agricultural markets.
The following tables summarize financial information by reportable segment and product line (in thousands):
Three Months Ended November 30, | ||||||||
2017 | 2016 | |||||||
Net Sales by Reportable Product Line & Segment: | ||||||||
Industrial Segment: | ||||||||
Industrial Tools | $ | 84,510 | $ | 79,039 | ||||
Heavy Lifting Technology | 12,406 | 8,251 | ||||||
96,916 | 87,290 | |||||||
Energy Segment: | ||||||||
Energy Maintenance & Integrity | 56,710 | 64,821 | ||||||
Other Energy Solutions | 19,131 | 19,825 | ||||||
75,841 | 84,646 | |||||||
Engineered Solutions Segment: | ||||||||
On-Highway | 64,882 | 51,630 | ||||||
Agriculture, Off-Highway and Other | 51,316 | 42,227 | ||||||
116,198 | 93,857 | |||||||
$ | 288,955 | $ | 265,793 | |||||
Operating Profit (Loss): | ||||||||
Industrial | $ | 18,243 | $ | 18,776 | ||||
Energy | 293 | 3,210 | ||||||
Engineered Solutions | 6,334 | 755 | ||||||
General Corporate | (10,197 | ) | (14,270 | ) | ||||
$ | 14,673 | $ | 8,471 |
November 30, 2017 | August 31, 2017 | ||||||
Assets by Segment: | |||||||
Industrial | $ | 314,215 | $ | 329,134 | |||
Energy | 480,402 | 482,963 | |||||
Engineered Solutions | 539,978 | 531,068 | |||||
General Corporate | 155,646 | 173,790 | |||||
$ | 1,490,241 | $ | 1,516,955 |
In addition to the impact of foreign currency exchange rate changes, the comparability of segment and product line information is impacted by acquisition/divestiture activities, impairment charges, director and officer transition charges, restructuring costs and related benefits. Corporate assets, which are not allocated, principally represent cash and cash equivalents, capitalized debt issuance costs and deferred income taxes.
14
Note 14. Commitments and Contingencies
The Company had outstanding letters of credit of $14.3 million and $14.5 million at November 30, 2017 and August 31, 2017, respectively, the majority of which relate to commercial contracts and self-insured workers compensation programs.
The Company is a party to various legal proceedings that have arisen in the normal course of business. These legal proceedings typically include product liability, environmental, labor, patent claims and other disputes. The Company has recorded reserves for loss contingencies based on the specific circumstances of each case. Such reserves are recorded when it is probable that a loss has been incurred and can be reasonably estimated. In the opinion of management, resolution of these contingencies are not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
The Company remains contingently liable for lease payments under leases of businesses that it previously divested or spun-off, in the event that such businesses are unable to fulfill their future lease payment obligations. The discounted present value of future minimum lease payments for these leases was $12.8 million using a weighted average discount rate of 2.62% at November 30, 2017.
The Company has facilities in numerous geographic locations that are subject to a range of environmental laws and regulations. Environmental expenditures over the past two years have not been material. Management believes that such costs will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Note 15. Guarantor Subsidiaries
As discussed in Note 8, “Debt” on April 16, 2012, Actuant Corporation (the “Parent”) issued $300.0 million of 5.625% Senior Notes, of which $287.6 million remains outstanding as of November 30, 2017. All of our material, domestic wholly owned subsidiaries (the “Guarantors”) fully and unconditionally guarantee the 5.625% Senior Notes on a joint and several basis. There are no significant restrictions on the ability of the Guarantors to make distributions to the Parent.
Certain assets, liabilities and expenses have not been allocated to the Guarantors and non-Guarantors and therefore are included in the Parent column in the accompanying condensed consolidating financial statements. These items are of a corporate or consolidated nature and include, but are not limited to, tax provisions and related assets and liabilities, certain employee benefit obligations, prepaid and accrued insurance and corporate indebtedness. Intercompany activity primarily includes loan activity, purchases and sales of goods or services, investments and dividends. Intercompany balances also reflect certain non-cash transactions including transfers of assets and liabilities between the Parent, Guarantor and non-Guarantor, allocation of non-cash expenses from the Parent to the Guarantors and non-Guarantors, non-cash intercompany dividends and the impact of foreign currency rate changes.
The following tables present the results of operations, financial position and cash flows of Actuant Corporation and its subsidiaries, the Guarantor and non-Guarantor entities, and the eliminations necessary to arrive at the information for the Company on a consolidated basis.
15
CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(in thousands)
Three Months Ended November 30, 2017 | |||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 35,710 | $ | 87,834 | $ | 165,411 | $ | — | $ | 288,955 | |||||||||
Cost of products sold | 6,963 | 64,574 | 116,507 | — | 188,044 | ||||||||||||||
Gross profit | 28,747 | 23,260 | 48,904 | — | 100,911 | ||||||||||||||
Selling, administrative and engineering expenses | 19,715 | 18,448 | 36,315 | — | 74,478 | ||||||||||||||
Amortization of intangible assets | 318 | 2,861 | 1,952 | — | 5,131 | ||||||||||||||
Restructuring charges | 5,356 | 169 | 1,104 | — | 6,629 | ||||||||||||||
Operating profit | 3,358 | 1,782 | 9,533 | — | 14,673 | ||||||||||||||
Financing costs, net | 7,623 | 21 | (130 | ) | — | 7,514 | |||||||||||||
Intercompany (income) expense, net | (4,877 | ) | 5,484 | (607 | ) | — | — | ||||||||||||
Other (income) expense, net | (50 | ) | 45 | 334 | — | 329 | |||||||||||||
Earnings (loss) before income tax (benefit) expense | 662 | (3,768 | ) | 9,936 | — | 6,830 | |||||||||||||
Income tax (benefit) expense | (285 | ) | 437 | 1,452 | — | 1,604 | |||||||||||||
Net earnings (loss) before equity in earnings (loss) of subsidiaries | 947 | (4,205 | ) | 8,484 | — | 5,226 | |||||||||||||
Equity in earnings (loss) of subsidiaries | 4,279 | 8,793 | (46 | ) | (13,026 | ) | — | ||||||||||||
Net earnings | 5,226 | 4,588 | 8,438 | (13,026 | ) | 5,226 | |||||||||||||
Comprehensive income | $ | 8,251 | $ | 4,588 | $ | 11,566 | $ | (16,154 | ) | $ | 8,251 |
16
CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Three Months Ended November 30, 2016 | |||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 31,729 | $ | 84,276 | $ | 149,788 | $ | — | $ | 265,793 | |||||||||
Cost of products sold | 7,094 | 61,416 | 104,216 | — | 172,726 | ||||||||||||||
Gross profit | 24,635 | 22,860 | 45,572 | — | 93,067 | ||||||||||||||
Selling, administrative and engineering expenses | 17,967 | 16,636 | 33,999 | — | 68,602 | ||||||||||||||
Amortization of intangible assets | 318 | 3,076 | 1,868 | — | 5,262 | ||||||||||||||
Restructuring charges | 355 | 723 | 1,870 | — | 2,948 | ||||||||||||||
Director & officer transition charges | 7,784 | — | — | — | 7,784 | ||||||||||||||
Operating (loss) profit | (1,789 | ) | 2,425 | 7,835 | — | 8,471 | |||||||||||||
Financing costs (income), net | 7,326 | — | (194 | ) | — | 7,132 | |||||||||||||
Intercompany (income) expense, net | (5,068 | ) | (1,086 | ) | 6,154 | — | — | ||||||||||||
Intercompany dividends | — | (55,143 | ) | — | 55,143 | — | |||||||||||||
Other expense (income), net | 2,085 | (70 | ) | (2,643 | ) | — | (628 | ) | |||||||||||
(Loss) earnings before income tax benefit | (6,132 | ) | 58,724 | 4,518 | (55,143 | ) | 1,967 | ||||||||||||
Income tax benefit | (2,714 | ) | (30 | ) | (254 | ) | — | (2,998 | ) | ||||||||||
Net (loss) earnings before equity in earnings of subsidiaries | (3,418 | ) | 58,754 | 4,772 | (55,143 | ) | 4,965 | ||||||||||||
Equity in earnings of subsidiaries | 8,383 | 5,625 | 3,130 | (17,138 | ) | — | |||||||||||||
Net earnings | 4,965 | 64,379 | 7,902 | (72,281 | ) | 4,965 | |||||||||||||
Comprehensive (loss) income | $ | (21,157 | ) | $ | 46,292 | $ | 631 | $ | (46,923 | ) | $ | (21,157 | ) |
17
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
November 30, 2017 | |||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
ASSETS | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | 9,504 | $ | — | $ | 155,546 | $ | — | $ | 165,050 | |||||||||
Accounts receivable, net | 16,577 | 52,010 | 132,730 | — | 201,317 | ||||||||||||||
Inventories, net | 24,490 | 54,521 | 75,235 | — | 154,246 | ||||||||||||||
Assets held for sale | — | — | 21,393 | — | 21,393 | ||||||||||||||
Other current assets | 29,359 | 2,997 | 43,974 | — | 76,330 | ||||||||||||||
Total current assets | 79,930 | 109,528 | 428,878 | — | 618,336 | ||||||||||||||
Property, plant and equipment, net | 8,051 | 30,461 | 60,476 | — | 98,988 | ||||||||||||||
Goodwill | 38,847 | 200,499 | 292,108 | — | 531,454 | ||||||||||||||
Other intangibles, net | 7,839 | 135,181 | 73,012 | — | 216,032 | ||||||||||||||
Investment in subsidiaries | 1,839,467 | 1,196,261 | 804,946 | (3,840,674 | ) | — | |||||||||||||
Intercompany receivable | — | 577,424 | 206,969 | (784,393 | ) | — | |||||||||||||
Other long-term assets | 8,147 | 1,869 | 15,415 | — | 25,431 | ||||||||||||||
Total assets | $ | 1,982,281 | $ | 2,251,223 | $ | 1,881,804 | $ | (4,625,067 | ) | $ | 1,490,241 | ||||||||
LIABILITIES & SHAREHOLDERS' EQUITY | |||||||||||||||||||
Current liabilities | |||||||||||||||||||
Trade accounts payable | $ | 15,804 | $ | 28,772 | $ | 97,169 | $ | — | $ | 141,745 | |||||||||
Accrued compensation and benefits | 7,634 | 6,325 | 23,811 | — | 37,770 | ||||||||||||||
Current maturities of debt and short-term borrowings | 30,000 | — | — | — | 30,000 | ||||||||||||||
Income taxes payable | 307 | — | 6,335 | — | 6,642 | ||||||||||||||
Liabilities held for sale | — | — | 70,787 | — | 70,787 | ||||||||||||||
Other current liabilities | 20,521 | 8,140 | 28,314 | — | 56,975 | ||||||||||||||
Total current liabilities | 74,266 | 43,237 | 226,416 | — | 343,919 | ||||||||||||||
Long-term debt, net | 524,629 | — | — | — | 524,629 | ||||||||||||||
Deferred income taxes | 23,789 | — | 5,778 | — | 29,567 | ||||||||||||||
Pension and postretirement benefit liabilities | 12,209 | — | 7,330 | — | 19,539 | ||||||||||||||
Other long-term liabilities | 49,646 | 305 | 6,318 | — | 56,269 | ||||||||||||||
Intercompany payable | 781,424 | — | 2,969 | (784,393 | ) | — | |||||||||||||
Shareholders’ equity | 516,318 | 2,207,681 | 1,632,993 | (3,840,674 | ) | 516,318 | |||||||||||||
Total liabilities and shareholders’ equity | $ | 1,982,281 | $ | 2,251,223 | $ | 1,881,804 | $ | (4,625,067 | ) | $ | 1,490,241 |
18
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
August 31, 2017 | |||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
ASSETS | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | 34,715 | $ | — | $ | 194,856 | $ | — | $ | 229,571 | |||||||||
Accounts receivable, net | 17,498 | 50,749 | 121,959 | — | 190,206 | ||||||||||||||
Inventories, net | 23,308 | 48,492 | 71,851 | — | 143,651 | ||||||||||||||
Assets held for sale | — | — | 21,835 | — | 21,835 | ||||||||||||||
Other current assets | 23,576 | 3,619 | 34,468 | — | 61,663 | ||||||||||||||
Total current assets | 99,097 | 102,860 | 444,969 | — | 646,926 | ||||||||||||||
Property, plant & equipment, net | 7,049 | 26,130 | 61,342 | — | 94,521 | ||||||||||||||
Goodwill | 38,847 | 200,499 | 290,735 | — | 530,081 | ||||||||||||||
Other intangibles, net | 8,156 | 138,042 | 74,291 | — | 220,489 | ||||||||||||||
Investment in subsidiaries | 1,832,472 | 1,186,715 | 805,016 | (3,824,203 | ) | — | |||||||||||||
Intercompany receivable | — | 589,193 | 205,183 | (794,376 | ) | — | |||||||||||||
Other long-term assets | 8,377 | 812 | 15,749 | — | 24,938 | ||||||||||||||
Total assets | $ | 1,993,998 | $ | 2,244,251 | $ | 1,897,285 | $ | (4,618,579 | ) | $ | 1,516,955 | ||||||||
LIABILITIES & SHAREHOLDERS' EQUITY | |||||||||||||||||||
Current liabilities | |||||||||||||||||||
Trade accounts payable | $ | 15,412 | $ | 27,168 | $ | 90,807 | $ | — | $ | 133,387 | |||||||||
Accrued compensation and benefits | 19,082 | 7,672 | 24,185 | — | 50,939 | ||||||||||||||
Current maturities of debt and short-term borrowings | 30,000 | — | — | — | 30,000 | ||||||||||||||
Income taxes payable | 153 | — | 5,927 | — | 6,080 | ||||||||||||||
Liabilities held for sale | — | — | 101,083 | — | 101,083 | ||||||||||||||
Other current liabilities | 18,512 | 7,169 | 31,764 | — | 57,445 | ||||||||||||||
Total current liabilities | 83,159 | 42,009 | 253,766 | — | 378,934 | ||||||||||||||
Long-term debt | 531,940 | — | — | — | 531,940 | ||||||||||||||
Deferred income taxes | 24,164 | — | 5,695 | — | 29,859 | ||||||||||||||
Pension and post-retirement benefit liabilities | 12,540 | — | 7,322 | — | 19,862 | ||||||||||||||
Other long-term liabilities | 48,692 | 352 | 6,777 | — | 55,821 | ||||||||||||||
Intercompany payable | 792,964 | — | 1,412 | (794,376 | ) | — | |||||||||||||
Shareholders’ equity | 500,539 | 2,201,890 | 1,622,313 | (3,824,203 | ) | 500,539 | |||||||||||||
Total liabilities and shareholders’ equity | $ | 1,993,998 | $ | 2,244,251 | $ | 1,897,285 | $ | (4,618,579 | ) | $ | 1,516,955 |
19
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended November 30, 2017 | |||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Operating Activities | |||||||||||||||||||
Net cash (used in) provided by operating activities | $ | (9,838 | ) | $ | 3,580 | $ | (14,200 | ) | $ | — | $ | (20,458 | ) | ||||||
Investing Activities | |||||||||||||||||||
Capital expenditures | (1,478 | ) | (3,589 | ) | (2,837 | ) | — | (7,904 | ) | ||||||||||
Proceeds from sale of property, plant and equipment | — | 9 | 23 | — | 32 | ||||||||||||||
Rental asset lease buyout for Viking divestiture | — | — | (27,718 | ) | — | (27,718 | ) | ||||||||||||
Cash used in investing activities | (1,478 | ) | (3,580 | ) | (30,532 | ) | — | (35,590 | ) | ||||||||||
Financing Activities | |||||||||||||||||||
Repayments on term loan | (7,500 | ) | — | — | — | (7,500 | ) | ||||||||||||
Stock option exercises and other | 2,231 | — | — | — | 2,231 | ||||||||||||||
Taxes paid related to the net share settlement of equity awards | (282 | ) | — | — | — | (282 | ) | ||||||||||||
Cash dividend | (2,390 | ) | — | — | — | (2,390 | ) | ||||||||||||
Intercompany loan activity | (5,954 | ) | — | 5,954 | — | — | |||||||||||||
Cash (used in) provided by financing activities | (13,895 | ) | — | 5,954 | — | (7,941 | ) | ||||||||||||
Effect of exchange rate changes on cash | — | — | (532 | ) | — | (532 | ) | ||||||||||||
Net decrease in cash and cash equivalents | (25,211 | ) | — | (39,310 | ) | — | (64,521 | ) | |||||||||||
Cash and cash equivalents—beginning of period | 34,715 | — | 194,856 | — | 229,571 | ||||||||||||||
Cash and cash equivalents—end of period | $ | 9,504 | $ | — | $ | 155,546 | $ | — | $ | 165,050 |
20
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended November 30, 2016 | |||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Operating Activities | |||||||||||||||||||
Net provided by operating activities | $ | 61,380 | $ | 2,491 | $ | 3,736 | $ | (55,143 | ) | $ | 12,463 | ||||||||
Investing Activities | |||||||||||||||||||
Capital expenditures | (861 | ) | (2,607 | ) | (1,671 | ) | — | (5,139 | ) | ||||||||||
Proceeds from sale of property, plant and equipment | — | 46 | 84 | — | 130 | ||||||||||||||
Cash used in investing activities | (861 | ) | (2,561 | ) | (1,587 | ) | — | (5,009 | ) | ||||||||||
Financing Activities | |||||||||||||||||||
Principal repayments on term loan | (3,750 | ) | — | — | — | (3,750 | ) | ||||||||||||
Taxes paid related to the net share settlement of equity awards | (223 | ) | — | — | — | (223 | ) | ||||||||||||
Stock option exercises and other | 964 | — | — | — | 964 | ||||||||||||||
Cash dividend | (2,358 | ) | — | (55,143 | ) | 55,143 | (2,358 | ) | |||||||||||
Intercompany loan activity | (53,734 | ) | — | 53,734 | — | — | |||||||||||||
Cash used in financing activities | (59,101 | ) | — | (1,409 | ) | 55,143 | (5,367 | ) | |||||||||||
Effect of exchange rate changes on cash | — | — | (4,820 | ) | — | (4,820 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 1,418 | (71 | ) | (4,080 | ) | — | (2,733 | ) | |||||||||||
Cash and cash equivalents—beginning of period | 7,953 | 71 | 171,580 | — | 179,604 | ||||||||||||||
Cash and cash equivalents—end of period | $ | 9,371 | $ | — | $ | 167,500 | $ | — | $ | 176,871 |
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Actuant Corporation, headquartered in Menomonee Falls, Wisconsin, is a Wisconsin corporation and was incorporated in 1910. We are a global diversified company that designs, manufactures and distributes a broad range of industrial products and systems to various end markets. The Company is organized into three operating segments: Industrial, Energy and Engineered Solutions. The Industrial segment is primarily involved in the design, manufacture and distribution of branded hydraulic and mechanical tools to the maintenance, industrial, infrastructure and production automation markets. The Energy segment provides joint integrity products and services, as well as rope and cable solutions to the global oil & gas, power generation and other energy markets. Divestiture of the Viking business subsequent to quarter-end, resulted in the elimination of the sale and rental of customized off-shore vessel mooring solutions. The Engineered Solutions segment provides highly engineered position and motion control systems to original equipment manufacturers (“OEM”) in various on and off-highway vehicle markets, as well as a variety of other products to the industrial and agricultural markets. Financial information related to the Company's segments is included in Note 13, "Segment Information" in the notes to the condensed consolidated financial statements.
Our businesses provide an array of products and services across multiple markets and geographies which results in significant diversification. Our Industrial and Engineered Solutions segments continue to benefit from improvement within the broad industrial landscape, mining, infrastructure, commercial and off-highway vehicle and agriculture markets, which began in the second half of fiscal 2017 and continued through the first quarter of fiscal 2018. We expect continued growth in these markets in fiscal 2018, however, we anticipate the rate of growth to moderate as the fiscal year progresses. Reduced capital and maintenance spending in the oil & gas markets in the form of project cancellations, deferrals and scope reductions are expected to be a continuing headwind throughout much of fiscal 2018, though quarterly core sales declines should moderate as fiscal 2018 progresses. As a result, we expect consolidated fiscal 2018 core sales growth (sales excluding the impact of acquisitions, divestitures and changes in foreign currency exchange rates) of 1% to 3%, compared to a 4% core sales decline in fiscal 2017.
We continue to pursue both organic and inorganic growth opportunities aligned with our strategic objectives. This includes the advancement of our commercial effectiveness initiatives along with new product development efforts associated with our offerings of mission critical solutions to customers. We are also revitalizing lean efforts across our manufacturing, assembly and service operations. The Industrial segment is primarily focused on accelerating global sales growth through geographic expansion, continuing emphasis on sales and marketing efforts, new product introductions and regional growth via second tier brands. Within the Energy segment, we continue to geographically diversify and expand capabilities within the maintenance tools and services offerings while also redirecting sales, marketing and engineering resources to various non-oil & gas vertical markets. Subsequent to quarter-end, we completed the divestiture of our Viking business, thus exiting the offshore mooring business and significantly limiting our exposure to the upstream, offshore oil & gas market. Also subsequent to quarter-end, we completed the acquisition of Mirage Machines, Ltd. (“Mirage”), a provider of industrial and energy maintenance tools. The Engineered Solutions segment is capitalizing on their served end market demand recovery while also expanding content and engineering broad system capabilities across customers and geographies.
We remain focused on improving our financial position and flexibility by adjusting our cost structure to reflect changes in demand levels and by proactively managing working capital and cash flow generation. Across the Company, we are continuing the cost reduction programs initiated at the beginning of fiscal 2016. Restructuring charges related to these initiatives totaled approximately $28 million in fiscal 2016, fiscal 2017 and the first quarter of fiscal 2018, combined. During the three months ended November 30, 2017 and 2016, we incurred $7 and $3 million of restructuring costs, respectively. These restructuring costs related to executive leadership changes, facility consolidation, headcount reductions and operational improvement. Due to continuing challenging market conditions and operating results within our Energy segment, we are examining our cost structure, restructuring initiatives and service strategy to align our business with current market expectations and maximize available opportunities in the interim. Similarly we continue to examine other areas of our business that may require structural cost changes to improve performance and profitability. As such, the Company anticipates restructuring initiatives and related pre-tax charges continuing throughout the balance of fiscal 2018, including approximately $6 million to $8 million of additional restructuring charges during that time.
Pre-tax cost savings realized from executing these restructuring initiatives totaled approximately $17 million in fiscal 2016, fiscal 2017 and the first quarter of fiscal 2018, combined. Realized cost savings were comprised of $4 million within the Industrial segment, $7 million within the Energy segment, $5 million within the Engineered Solutions segment and $1 million within Corporate expenses. The Company anticipates realizing an incremental $12 million to $14 million in pre-tax cost savings for the balance of fiscal 2018 and in fiscal 2019 for all restructuring initiatives implemented in fiscals 2016, 2017 and 2018 and to be implemented in the remainder of fiscal 2018. Twenty-five percent of the anticipated future cost savings are expected to benefit the Industrial segment, another 45% are expected to benefit the Energy segment, another 10% are expected to benefit the Engineered Solutions segment and the remaining 20% are expected to benefit Corporate expenses. These gross cost savings are routinely offset by variations between years including sales and production volume variances, annual bonus expense differential and corresponding re-investment of savings into other initiatives.
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Given our global geographic footprint, changes in foreign currency exchange rates could have a significant impact on our financial results, financial position and cash flow. Changes in foreign currency exchange rates will continue to add volatility as over one-half of our sales are generated outside of the United States in currencies other than the U.S. dollar. The weakening of the U.S. dollar favorably impacts our sales, cash flow and earnings given the translation of our international results into U.S. dollars. This also results in lower costs for certain international operations which incur costs or purchase components in U.S. dollars and increases the dollar value of assets (including cash) and liabilities of our international operations.
Results of Operations
The following table sets forth our results of operations (in millions, except per share amounts):
Three Months Ended November 30, | ||||||||||||||
2017 |