UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 28, 20182019
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-11288
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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)
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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):
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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 March 31, 20182019 was 60,686,435.61,418,202.
TABLE OF CONTENTS
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 uncertaintydeterioration of, or a prolonged economic downturn;instability in, the domestic and international economy;
end marketchallenging conditions in our various end markets, including the industrial, oil & gas, and energy power generation, infrastructure, commercial construction, truck, automotive, specialty vehicle, mining and agriculture industries;markets;
integrating our historic three segment structure into two new operating segments;
competition in the markets we serveserve;
failure to develop new products 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, laborincreases in the costs of commodities and overhead cost increases;raw materials;
uncertainty over global tariffs, or the financial impact of tariffs;
our international operations present special risks, primarily fromincluding currency exchange rate fluctuations exposure to local economic and political conditions, export and import restrictions and controls on repatriation of cash;restrictions;
regulatory and legal developments, including changes to United States taxation rules, conflict mineral supply chain compliance, environmental lawsrules;
our ability to successfully identify, consummate and governmental climate change initiatives;integrate acquisitions and realize anticipated benefits/results from acquired companies as part of our portfolio management process;
the effects of divestitures and/or discontinued operations, including retained liabilities from, or indemnification obligations with respect to, businesses that we sell;
uncertainty with respect to the consummation of announced divestiture plans, including the terms and timing of any such transactions;
the potential for a non-cash asset impairment charge, if the operating performance or the outlook for one or more of our businesses were to fall significantly below current levels;levels or impairment of goodwill and other intangible assets as they represent a substantial amount of our total assets;
our ability to execute restructuring actions and the realization of anticipated cost savings from those restructuring actions and cost reduction efforts;
savings;
a significant failure in information technology (IT) infrastructure, and systems,such as 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 ourheavy reliance on suppliers involves certain risks;for components used in the manufacture and sale of our products;
litigation, including product liability and warranty claims;
our ability to attract, develop, and retain qualified employees;
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, 2017.29, 2018.
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.
PART I—FINANCIAL INFORMATION
Item 1—Financial Statements
ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| | | Three Months Ended February 28, | | Six Months Ended February 28, | Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 275,165 |
| | $ | 258,869 |
| | $ | 564,120 |
| | $ | 524,662 |
| $ | 271,907 |
| | $ | 275,165 |
| | $ | 564,438 |
| | $ | 564,120 |
|
Cost of products sold | 185,469 |
| | 171,543 |
| | 373,513 |
| | 344,269 |
| 174,421 |
| | 185,469 |
| | 361,944 |
| | 373,513 |
|
Gross profit | 89,696 |
| | 87,326 |
| | 190,607 |
| | 180,393 |
| 97,486 |
| | 89,696 |
| | 202,494 |
| | 190,607 |
|
Selling, administrative and engineering expenses | 68,502 |
| | 66,957 |
| | 142,980 |
| | 135,561 |
| 70,745 |
| | 68,287 |
| | 143,936 |
| | 142,765 |
|
Amortization of intangible assets | 5,168 |
| | 5,069 |
| | 10,299 |
| | 10,330 |
| 3,441 |
| | 5,168 |
| | 7,720 |
| | 10,299 |
|
Director & officer transition charges | — |
| | — |
| | — |
| | 7,784 |
| |
Restructuring charges | 3,450 |
| | 2,101 |
| | 10,079 |
| | 5,048 |
| 60 |
| | 3,450 |
| | 463 |
| | 10,079 |
|
Impairment & divestiture charges | 2,987 |
| | — |
| | 2,987 |
| | — |
| 6,886 |
| | 2,987 |
| | 43,339 |
| | 2,987 |
|
Operating profit | 9,589 |
| | 13,199 |
| | 24,262 |
| | 21,670 |
| 16,354 |
| | 9,804 |
| | 7,036 |
| | 24,477 |
|
Financing costs, net | 7,604 |
| | 7,334 |
| | 15,118 |
| | 14,467 |
| 7,153 |
| | 7,604 |
| | 14,448 |
| | 15,118 |
|
Other expense (income), net | 367 |
| | 591 |
| | 696 |
| | (38 | ) | |
Earnings before income tax expense (benefit) | 1,618 |
| | 5,274 |
| | 8,448 |
| | 7,241 |
| |
Income tax expense (benefit) | 19,839 |
| | 200 |
| | 21,443 |
| | (2,798 | ) | |
Net (loss) earnings | $ | (18,221 | ) | | $ | 5,074 |
| | $ | (12,995 | ) | | $ | 10,039 |
| |
Other expense, net | | 656 |
| | 582 |
| | 1,568 |
| | 911 |
|
Earnings (loss) before income tax expense | | 8,545 |
| | 1,618 |
| | (8,980 | ) | | 8,448 |
|
Income tax expense | | 5,792 |
| | 19,839 |
| | 5,719 |
| | 21,443 |
|
Net earnings (loss) | | $ | 2,753 |
| | $ | (18,221 | ) | | $ | (14,699 | ) | | $ | (12,995 | ) |
| | | | | | | | | | | | | | |
(Loss) earnings per share | | | | | | | | |
Earnings (loss) per share | | | | | | | | |
Basic | $ | (0.30 | ) | | $ | 0.09 |
| | $ | (0.22 | ) | | $ | 0.17 |
| $ | 0.04 |
| | $ | (0.30 | ) | | $ | (0.24 | ) | | $ | (0.22 | ) |
Diluted | $ | (0.30 | ) | | $ | 0.08 |
| | $ | (0.22 | ) | | $ | 0.17 |
| $ | 0.04 |
| | $ | (0.30 | ) | | $ | (0.24 | ) | | $ | (0.22 | ) |
| | | | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | |
Weighted average common shares outstanding | | | | | | | | |
Basic | 60,318 |
| | 59,368 |
| | 60,095 |
| | 59,170 |
| 61,243 |
| | 60,318 |
| | 61,137 |
| | 60,095 |
|
Diluted | 60,318 |
| | 60,146 |
| | 60,095 |
| | 59,881 |
| 61,607 |
| | 60,318 |
| | 61,137 |
| | 60,095 |
|
| | | | | | | | | | | | | | |
SeeThe accompanying Notes to Condensed Consolidated Financial Statementsnotes are an integral part of these condensed consolidated financial statements.
ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net (loss) earnings | $ | (18,221 | ) | | $ | 5,074 |
| | $ | (12,995 | ) | | $ | 10,039 |
|
Other comprehensive income (loss), net of tax | | | | | | | |
Foreign currency translation adjustments | 13,237 |
| | 2,909 |
| | 16,135 |
| | (23,749 | ) |
Foreign currency translation due to divested business | 67,645 |
| | — |
| | 67,645 |
| | — |
|
Pension and other postretirement benefit plans | 127 |
| | 202 |
| | 254 |
| | 738 |
|
Total other comprehensive income (loss), net of tax | 81,009 |
| | 3,111 |
| | 84,034 |
| | (23,011 | ) |
Comprehensive income (loss) | $ | 62,788 |
| | $ | 8,185 |
| | $ | 71,039 |
|
| $ | (12,972 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net earnings (loss) | $ | 2,753 |
| | $ | (18,221 | ) | | $ | (14,699 | ) | | $ | (12,995 | ) |
Other comprehensive income, net of tax | | | | | | | |
Foreign currency translation adjustments | 7,433 |
| | 13,237 |
| | (743 | ) | | 16,135 |
|
Foreign currency translation due to divested business | 34,909 |
| | 67,645 |
| | 34,909 |
| | 67,645 |
|
Pension and other postretirement benefit plans | 95 |
| | 127 |
| | 327 |
| | 254 |
|
Total other comprehensive income, net of tax | 42,437 |
| | 81,009 |
| | 34,493 |
| | 84,034 |
|
Comprehensive income | $ | 45,190 |
| | $ | 62,788 |
| | $ | 19,794 |
| | $ | 71,039 |
|
SeeThe accompanying Notes to Condensed Consolidated Financial Statementsnotes are an integral part of these condensed consolidated financial statements.
ACTUANT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| | | | February 28, 2018 | | August 31, 2017 | | February 28, 2019 | | August 31, 2018 |
ASSETS | | | | | | | | |
Current assets | | | | | | | | |
Cash and cash equivalents | | $ | 153,595 |
| | $ | 229,571 |
| | $ | 170,388 |
| | $ | 250,490 |
|
Accounts receivable, net | | 210,650 |
| | 190,206 |
| | 210,174 |
| | 187,749 |
|
Inventories, net | | 166,227 |
| | 143,651 |
| | 161,646 |
| | 156,356 |
|
Assets held for sale | | — |
| | 21,835 |
| | 56,113 |
| | 23,573 |
|
Other current assets | | 60,569 |
| | 61,663 |
| | 54,863 |
| | 42,732 |
|
Total current assets | | 591,041 |
| | 646,926 |
| | 653,184 |
| | 660,900 |
|
Property, plant and equipment | | | | | | | | |
Land, buildings and improvements | | 48,457 |
| | 43,737 |
| | 42,238 |
| | 47,468 |
|
Machinery and equipment | | 241,393 |
| | 227,535 |
| | 217,134 |
| | 229,445 |
|
Gross property, plant and equipment | | 289,850 |
| | 271,272 |
| | 259,372 |
| | 276,913 |
|
Less: Accumulated depreciation | | (187,439 | ) | | (176,751 | ) | | (176,240 | ) | | (186,693 | ) |
Property, plant and equipment, net | | 102,411 |
| | 94,521 |
| | 83,132 |
| | 90,220 |
|
Goodwill | | 546,135 |
| | 530,081 |
| | 480,208 |
| | 512,412 |
|
Other intangibles, net | | 216,370 |
| | 220,489 |
| | 150,035 |
| | 181,037 |
|
Other long-term assets | | 24,348 |
| | 24,938 |
| | 36,498 |
| | 36,769 |
|
Total assets | | $ | 1,480,305 |
| | $ | 1,516,955 |
| | $ | 1,403,057 |
| | $ | 1,481,338 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Current liabilities | | | | | | | | |
Trade accounts payable | | $ | 136,941 |
| | $ | 133,387 |
| | $ | 122,486 |
| | $ | 130,838 |
|
Accrued compensation and benefits | | 41,518 |
| | 50,939 |
| | 37,402 |
| | 54,508 |
|
Current maturities of debt and short-term borrowings | | 30,000 |
| | 30,000 |
| |
Current maturities of debt | | | 30,000 |
| | 30,000 |
|
Income taxes payable | | 7,687 |
| | 6,080 |
| | 8,548 |
| | 4,091 |
|
Liabilities held for sale | | — |
| | 101,083 |
| | 20,820 |
| | 44,225 |
|
Other current liabilities | | 58,368 |
| | 57,445 |
| | 58,871 |
| | 67,299 |
|
Total current liabilities | | 274,514 |
| | 378,934 |
| | 278,127 |
| | 330,961 |
|
Long-term debt, net | | 517,318 |
| | 531,940 |
| | 455,573 |
| | 502,695 |
|
Deferred income taxes | | 23,262 |
| | 29,859 |
| | 18,973 |
| | 21,933 |
|
Pension and postretirement benefit liabilities | | 19,338 |
| | 19,862 |
| | 14,371 |
| | 14,869 |
|
Other long-term liabilities | | 56,592 |
| | 55,821 |
| | 50,383 |
| | 52,168 |
|
Total liabilities | | 891,024 |
| | 1,016,416 |
| | 817,427 |
| | 922,626 |
|
Commitments and contingencies (Note 14) | | | | | | | | |
Shareholders’ equity | | | | | | | | |
Class A common stock, $0.20 par value per share, authorized 168,000,000 shares, issued 81,087,904 and 80,200,110 shares, respectively | | 16,218 |
| | 16,040 |
| |
Class A common stock, $0.20 par value per share, authorized 168,000,000 shares, issued 81,831,531 and 81,423,584 shares, respectively | | | 16,364 |
| | 16,285 |
|
Additional paid-in capital | | 155,974 |
| | 138,449 |
| | 174,418 |
| | 167,448 |
|
Treasury stock, at cost, 20,439,434 shares | | (617,731 | ) | | (617,731 | ) | | (617,731 | ) | | (617,731 | ) |
Retained earnings | | 1,178,047 |
| | 1,191,042 |
| | 1,152,331 |
| | 1,166,955 |
|
Accumulated other comprehensive loss | | (143,227 | ) | | (227,261 | ) | | (139,752 | ) | | (174,245 | ) |
Stock held in trust | | (2,848 | ) | | (2,696 | ) | | (2,989 | ) | | (2,450 | ) |
Deferred compensation liability | | 2,848 |
| | 2,696 |
| | 2,989 |
| | 2,450 |
|
Total shareholders’ equity | | 589,281 |
| | 500,539 |
| | 585,630 |
| | 558,712 |
|
Total liabilities and shareholders’ equity | | $ | 1,480,305 |
| | $ | 1,516,955 |
| | $ | 1,403,057 |
| | $ | 1,481,338 |
|
SeeThe accompanying Notes to Condensed Consolidated Financial Statementsnotes are an integral part of these condensed consolidated financial statements.
ACTUANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | Six Months Ended February 28, | Six Months Ended February 28, |
| 2018 | | 2017 | 2019 | | 2018 |
Operating Activities | | | | | | |
Net (loss) earnings | $ | (12,995 | ) | | $ | 10,039 |
| |
Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities: | | | | |
Impairment & divestiture charges, including tax expense | 12,385 |
| | — |
| |
Net loss | | $ | (14,699 | ) | | $ | (12,995 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
Impairment & divestiture charges, net of tax effect | | 40,524 |
| | 12,385 |
|
Depreciation and amortization | 20,385 |
| | 21,625 |
| 16,341 |
| | 20,385 |
|
Stock based compensation expense | 8,292 |
| | 12,177 |
| |
(Benefit) expense for deferred income taxes | (7,124 | ) | | 551 |
| |
Stock-based compensation expense | | 7,162 |
| | 8,292 |
|
Benefit for deferred income taxes | | (1,445 | ) | | (7,124 | ) |
Amortization of debt issuance costs | 826 |
| | 826 |
| 602 |
| | 826 |
|
Other non-cash adjustments | 200 |
| | 715 |
| 63 |
| | 200 |
|
Changes in components of working capital and other, excluding acquisitions and divestitures: | | | | |
Changes in components of working capital and other, excluding acquisitions and divestitures | | | | |
Accounts receivable | (16,872 | ) | | (20,897 | ) | (36,436 | ) | | (16,872 | ) |
Inventories | (18,433 | ) | | (394 | ) | (24,797 | ) | | (18,433 | ) |
Trade accounts payable | (1,753 | ) | | 12,276 |
| (2,810 | ) | | (1,753 | ) |
Prepaid expenses and other assets | (9,168 | ) | | (10,819 | ) | (9,421 | ) | | (9,168 | ) |
Income taxes payable/receivable | 17,505 |
| | (6,918 | ) | |
Income tax accounts | | 1,531 |
| | 17,505 |
|
Accrued compensation and benefits | (9,959 | ) | | (3,704 | ) | (16,440 | ) | | (9,959 | ) |
Other accrued liabilities | (5,395 | ) | | (795 | ) | (11,489 | ) | | (5,395 | ) |
Cash (used in) provided by operating activities | (22,106 | ) | | 14,682 |
| |
Cash used in operating activities | | (51,314 | ) | | (22,106 | ) |
Investing Activities | | | | | | |
Capital expenditures | (12,547 | ) | | (14,695 | ) | (15,667 | ) | | (12,547 | ) |
Proceeds from sale of property, plant and equipment | 113 |
| | 244 |
| 52 |
| | 113 |
|
Rental asset buyout for Viking divestiture | (27,718 | ) | | — |
| — |
| | (27,718 | ) |
Proceeds from sale of business, net of transaction costs | 8,780 |
| | — |
| 36,159 |
| | 8,780 |
|
Cash paid for business acquisitions, net of cash acquired | (16,517 | ) | | — |
| — |
| | (16,517 | ) |
Cash used in investing activities | (47,889 | ) | | (14,451 | ) | |
Cash provided by (used in) investing activities | | 20,544 |
| | (47,889 | ) |
Financing Activities | | | | | | |
Principal repayments on term loan | (15,000 | ) | | (7,500 | ) | (47,500 | ) | | (15,000 | ) |
Stock option exercises and other | 10,305 |
| | 5,949 |
| 1,031 |
| | 10,305 |
|
Taxes paid related to the net share settlement of equity awards | (1,107 | ) | | (920 | ) | (1,489 | ) | | (1,107 | ) |
Cash dividend | (2,390 | ) | | (2,358 | ) | (2,439 | ) | | (2,390 | ) |
Cash used in financing activities | (8,192 | ) | | (4,829 | ) | (50,397 | ) | | (8,192 | ) |
Effect of exchange rate changes on cash | 2,211 |
| | (3,116 | ) | 1,065 |
| | 2,211 |
|
Net decrease in cash and cash equivalents | (75,976 | ) | | (7,714 | ) | (80,102 | ) | | (75,976 | ) |
Cash and cash equivalents - beginning of period | 229,571 |
| | 179,604 |
| 250,490 |
| | 229,571 |
|
Cash and cash equivalents - end of period | $ | 153,595 |
| | $ | 171,890 |
| $ | 170,388 |
| | $ | 153,595 |
|
SeeThe accompanying Notes to Condensed Consolidated Financial Statementsnotes are an integral part of these condensed consolidated financial statements.
NOTES TO THE 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 United States generally accepted accounting principles ("GAAP") 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 principlesGAAP for complete financial statements. The condensed consolidated balance sheet data as of August 31, 20172018 was derived from the Company’s audited financial statements, but does not include all disclosures required by United States generally accepted accounting principles.GAAP. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes in the Company’s fiscal 20172018 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 and six months ended February 28, 20182019 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2018.2019.
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 operations 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 three and six months ended February 28, 2018, we recorded $1.3 million and $1.5 million, respectively, in excess tax deficiency as an increase to our income tax expense. This requirement was applied prospectively;
excess tax benefits are now presented as operating activities in the statement of cash flows, rather than as financing activities. The Company chose to apply this requirement retrospectively, and as a result, reclassified approximately $0.6 million of excess tax benefits recognized during the six months ended February 28, 2017 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. Customers. Under ASU 2014-09 and subsequent updates included in ASU 2016-10, ASU 2016-12, ASU 2017-13 and ASU 2017-14 (collectively referred to as Accounting Standards Codification 606 “ASC 606”), 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 beginningwas adopted by the Company on September 1, 2018 using the modified retrospective method and was applied to contracts that were not completed or after December 15, 2017 (fiscal 2019substantially complete as of September 1, 2018. Results for the Company)reporting period beginning after September 1, 2018 are presented under ASC 606, while prior year amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting policy in accordance with ASC 605 Revenue Recognition. The Company has begun assessing its various revenue streamsreported a net increase to identify performance obligations under these ASUs and the key aspectsopening retained earnings of $0.1 million on September 1, 2018 as a result of the standard that willcumulative impact of adopting ASC 606. See Note 2, “Revenue Recognition,” for further discussion of the Company's revenue recognition process. Based upon our preliminary assessments, these standards may impact our allocationadoption 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 upon adoption.ASC 606.
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 forwas adopted by the Company) and interim periods within those annual periods. The amendment is to be applied retrospectively.Company on September 1, 2018. Due to a majority of the Company's defined benefit pension orand 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 willdid not have a significantmaterial impact on the financial statements of the Company. However, prior year amounts have been retrospectively adjusted to reflect this change in accounting principle.
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
periods within those fiscal years. This update will requirewas adopted on September 1, 2018. The adoption on a retrospective basis unless it is impracticable to apply. The Company doesdid not believe that this guidance will have a significantan impact on its presentationthe financial statements of the statement of cash flows.Company.
In February 2016, the FASB issued ASU 2016-02, Leases (and subsequentsubsequently ASU 2018-01)2018-01 and ASU 2019-01), 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 acertain qualitative and quantitative disclosures are required along with modified retrospective approach using a cumulative effect adjustment in the yearrecognition and measurement of adoption.impacted leases. The Company is currently gathering, documenting and analyzing lease agreements subject to this ASU andguidance, as well as working through system implementation steps. The Company 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.leases.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded income tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings in their consolidated financial statements. This guidance is effective for fiscal years beginning after December 15, 2018 (fiscal
(fiscal 2020 for the Company), including interim periods within those fiscal years. We areThe Company is currently evaluating the impact of this new standard on our consolidated financial statements. and whether we will elect to reclassify the stranded income taxes.
Accumulated Other Comprehensive Loss
The following is a summary of the Company's accumulated other comprehensive loss (in thousands): | | | | February 28, 2018 | August 31, 2017 | | February 28, 2019 | | August 31, 2018 |
Foreign currency translation adjustments | | $ | 124,024 |
| $ | 207,804 |
| | $ | 124,331 |
| | $ | 158,497 |
|
Pension and other postretirement benefit plans, net of tax | | 19,203 |
| 19,457 |
| | 15,421 |
| | 15,748 |
|
Accumulated other comprehensive loss | | $ | 143,227 |
| $ | 227,261 |
| | $ | 139,752 |
| | $ | 174,245 |
|
Note 2. Director & Officer Transition ChargesRevenue Recognition
DuringSignificant Accounting Policies
The Company recognizes revenue when it satisfies a performance obligation in a contract by transferring control of a distinct good or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation and revenue is measured based on the six months ended February 28, 2017,consideration that the Company expects to be entitled to in exchange for the goods or services transferred. When contracts include multiple products or services to be delivered to the customer, the consideration for each element is generally allocated on the standalone transaction prices of the separate performance obligations, using the adjusted market assessment approach.
Under normal circumstances, the Company invoices the customer once transfer of control has occurred and has a right to payment. The typical payment terms vary based on the customer and the types of goods and services in the contract. The period of time between invoicing and when payment is due is not significant, as our standard payment terms are less than one year. Amounts billed and due from customers are classified as receivables on the balance sheet.
Taxes Collected: Taxes collected by the Company from a customer concurrent with revenue-producing activities are excluded from revenue.
Shipping and Handling Costs: The Company records costs associated with shipping its products after control over a product has transferred to a customer and are accounted for as fulfillment costs. These costs are reported in the Condensed Consolidated Statements of Operations in "Cost of products sold."
Nature of Goods and Services
The Company generates its revenue under two principal activities, which are discussed below:
Product Sales: Sales of tools, components and systems are recorded separationwhen control is transferred to the customer (i.e. performance obligation has been satisfied) in both segments. For the majority of the Company’s product sales, revenue is recognized at a point in time when control of the product is transferred to the customer, which generally occurs when the product is shipped from the Company to the customer. Due to the highly customized nature and transition chargeslimited alternative use of $7.8 million in connectioncertain products, for which the Company has an enforceable right of reimbursement for performance completed to date, revenue is recognized over time. We consider the input measure (efforts-expended or cost-to-cost) or output measure as a fair measure of progress for the recognition of over time revenue associated with these custom products. For a majority of the retirementCompany’s custom products, machine hours and labor hours (efforts-expended measurement) are used as a measure of one directorprogress.
Service & Rental Sales: Service contracts consist of providing highly trained technicians to perform bolting, technical services, machining and joint integrity work for our customers. These revenues are recognized over time as our customers simultaneously receive and consume the benefits provided by the Company. We consider the input measure (efforts-expended or cost-to-cost) or output measure as a fair measure of progress for the recognition of over time revenue associated with service contracts. For a majority of the Company’s service contracts, labor hours (efforts-expended measurement) is used as the measure of progress when it is determined to be a better depiction of the transfer of control to the customer due to the timing and pattern of labor hours incurred. Revenue from rental contracts (less than a year and non-customized products) is generally recognized ratably over the contract term, depicting the customer’s consumption of the benefit related to the rental equipment. The majority of the Company’s service and rental sales are generated by its Industrial Tools & Services (“IT&S”) segment, with a limited number of service sales within the Engineered Components & Systems (“EC&S”) segment.
Disaggregated Revenue and Performance Obligations
The Company disaggregates revenue from contracts with customers by reportable segment and product line and by the timing of when goods and services are transferred.
The following table presents information regarding our revenue disaggregation by reportable segment and product line (in thousands):
|
| | | | | | | | |
| | Three Months Ended February 28, | | Six Months Ended February 28, |
Net Sales by Reportable Product Line & Segment: | | 2019 | | 2019 |
Industrial Tools & Services | | | | |
Product | | $ | 105,584 |
| | $ | 208,352 |
|
Service & Rental | | 43,937 |
| | 89,824 |
|
| | 149,521 |
| | 298,176 |
|
| | | | |
Engineered Components & Systems (1) | | | | |
On-Highway | | $ | 55,013 |
| | $ | 115,604 |
|
Agriculture, Off-Highway and Other | | 52,448 |
| | 106,332 |
|
Rope & Cable Solutions | | 11,386 |
| | 27,552 |
|
Concrete Tensioning | | 3,539 |
| | 16,774 |
|
| | 122,386 |
| | 266,262 |
|
Total | | $ | 271,907 |
| | $ | 564,438 |
|
(1) The majority of the EC&S segment revenues are product sales, with an immaterial number of service sales.
The following table presents information regarding revenues disaggregated by the timing of when goods and services are transferred is as follows (in thousands):
|
| | | | | | | | |
| | Three Months Ended February 28, | | Six Months Ended February 28, |
| | 2019 | | 2019 |
Revenues recognized at point in time | | $ | 221,377 |
| | $ | 462,000 |
|
Revenues recognized over time | | 50,530 |
| | 102,438 |
|
Total | | $ | 271,907 |
| | $ | 564,438 |
|
Contract Balances
The opening and closing balances of the Company's Boardcontract assets and liabilities are as follows:
|
| | | | | | | | |
| | February 28, 2019 | | August 31, 2018 |
Receivables, which are included in accounts receivable, net | | $ | 210,174 |
| | $ | 187,749 |
|
Contract assets, which are included in other current assets | | 9,245 |
| | 6,367 |
|
Contract liabilities, which are included in other current liabilities | | 13,395 |
| | 16,484 |
|
Receivables: The Company performs its obligations under a contract with a customer by transferring goods or services in exchange for consideration from the customer. The Company typically invoices its customers as soon as control of Directorsan asset is transferred and a receivable for the Company is established.
Contract Assets: Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed as of the reporting date on contracts with customers. The contract assets are transferred to receivables when the rights become unconditional. The Company typically only has contract assets on contracts that are generally long-term and have revenues that are recognized over time.
Contract Liabilities: As of February 28, 2019, the Company had certain contracts where there were unsatisfied performance obligations and the transitionCompany had received cash consideration from customers before the performance obligations were satisfied. The majority of these contracts related to long-term customer contracts (project durations of greater than three months) and were recognized over time. The Company estimates that $13.2 million will be recognized from satisfying those performance obligations through the remainder of fiscal 2019 with an insignificant amount recognized in years thereafter.
Significant Judgments
Timing of Performance Obligations Satisfied at a Point in Time: The Company evaluates when the customer obtains control of the Executive Vice President/Chief Financial Officer.product based on shipping terms, as control will transfer, depending upon such terms, at different points between the Company's manufacturing facility or warehouse and the customer’s location. The charges were mainly comprisedCompany considers control to have transferred upon shipment
or delivery because (i) the Company has a present right to payment at that time; (ii) the legal title has been transferred to the customer; (iii) the Company has transferred physical possession of compensationthe product to the customer; and (iv) the customer has significant risks and rewards of ownership of the product.
Variable Consideration: The Company estimates whether it will be subject to variable consideration under the terms of the contract and includes its estimate of variable consideration in the transaction price based on the expected value method when it is deemed probable of being realized based on historical experience and trends. Types of variable consideration may include rebates, incentives and discounts, among others, which are recorded as a reduction to net sales at the time when control of a performance obligation is transferred to the customer.
Practical Expedients & Exemptions: The Company elected to expense the incremental cost to obtaining a contract for accelerated equity vesting, severance, outplacement, legal, signing bonuswhen the amortization period for such contracts would be one year or less. The Company does not disclose the value of unperformed obligations for (i) contracts with an original expected length of one year or less and relocation costs.(ii) contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed.
Note 3. Restructuring Charges
The Company has undertaken or committed to various restructuring initiatives including workforce reductions,reductions; leadership changes,changes; plant consolidations to reduce manufacturing overhead, satellite office closures, the continued movement of production and product sourcing to low cost alternativesalternatives; and the centralization and standardization of certain administrative functions. Total restructuring charges for these activities were $4.3$0.1 million and $2.1$4.3 million in the three months ended February 28, 20182019 and 2017,2018, respectively. Year-to-date restructuring charges totaled $10.9$0.5 million and $5.0$10.9 million for fiscal 2019 and 2018, and 2017.respectively. Approximately $0.8 million of the restructuring charges recognized in the three and six months ended February 28, 2018 were reported in the Consolidated Statements of Operations in “Cost"Cost of products sold,”" with the balance of the charges reported in “Restructuring"Restructuring charges.”" 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): | | | | Six Months Ended February 28, 2018 | | Six Months Ended February 28, 2019 |
| | Industrial | | Energy | | Engineered Solutions | | Corporate | | Total | | Industrial Tools & Services | | Engineered Components & Systems | | Corporate | | Total |
Balance as of August 31, 2017 | | $ | 202 |
| | $ | 3,613 |
| | $ | 1,792 |
| | $ | 30 |
| | $ | 5,637 |
| |
Balance as of August 31, 2018 | | | $ | 1,687 |
| | $ | 1,592 |
| | $ | 415 |
| | $ | 3,694 |
|
Restructuring charges | | 2,951 |
| | 3,205 |
| | 486 |
| | 4,271 |
| | 10,913 |
| | 21 |
| | 442 |
| | — |
| | 463 |
|
Cash payments | | (868 | ) | | (2,666 | ) | | (1,517 | ) | | (1,648 | ) | | (6,699 | ) | | (1,052 | ) | | (314 | ) | | (97 | ) | | (1,463 | ) |
Other non-cash uses of reserve | | (490 | ) | (1 | ) | (473 | ) | | (192 | ) | | (2,007 | ) | (1) | (3,162 | ) | |
Other non-cash uses/reclasses of reserve | | | (79 | ) | | 53 |
| | (370 | ) | | (396 | ) |
Impact of changes in foreign currency rates | | (10 | ) | | (83 | ) | | 21 |
| | — |
| | (72 | ) | | (18 | ) | | (28 | ) | | — |
| | (46 | ) |
Balance as of February 28, 2018 | | $ | 1,785 |
| | $ | 3,596 |
| | $ | 590 |
| | $ | 646 |
| | $ | 6,617 |
| |
Balance as of February 28, 2019 | | | $ | 559 |
| | $ | 1,745 |
| | $ | (52 | ) | | $ | 2,252 |
|
|
| | | | | | | | | | | | | | | | |
| | Six Months Ended February 28, 2018 |
| | Industrial Tools & Services | | Engineered Components & Systems | | Corporate | | Total |
Balance as of August 31, 2017 | | $ | 1,499 |
| | $ | 4,108 |
| | $ | 30 |
| | $ | 5,637 |
|
Restructuring charges | | 2,929 |
| | 3,710 |
| | 4,274 |
| | 10,913 |
|
Cash payments | | (1,750 | ) | | (3,301 | ) | | (1,648 | ) | | (6,699 | ) |
Other non-cash uses of reserve | | (354 | ) | | (801 | ) | | (2,007 | ) | (1) | (3,162 | ) |
Impact of changes in foreign currency rates | | (6 | ) | | (66 | ) | | — |
| | (72 | ) |
Balance as of February 28, 2018 | | $ | 2,318 |
| | $ | 3,650 |
| | $ | 649 |
| | $ | 6,617 |
|
(1) Majority of non-cash uses of reserve represents accelerated equity vesting in connection with employee severance agreements.
On March 21, 2019, the Company announced a new restructuring plan focused on the integration of the Enerpac and Hydratight businesses (IT&S segment) as well as driving efficiencies within the overall corporate structure. We expect to achieve $12-$15 million of annual savings with estimated restructuring costs of $15-$20 million and anticipate completing these actions within 18-24 months. The annual benefit of these gross cost savings may be impacted by a number of factors, including sales and production volume variances and annual bonus expense differentials.
|
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended February 28, 2017 |
| | Industrial | | Energy | | Engineered Solutions | | Corporate | | Total |
Balance as of August 31, 2016 | | $ | 1,343 |
| | $ | 3,021 |
| | $ | 1,863 |
| | $ | 46 |
| | $ | 6,273 |
|
Restructuring charges | | 1,372 |
| | 48 |
| | 3,546 |
| | 82 |
| | 5,048 |
|
Cash payments | | (1,394 | ) | | (973 | ) | | (2,312 | ) | | (83 | ) | | (4,762 | ) |
Other non-cash uses of reserve | | (438 | ) | | (14 | ) | | (16 | ) | | (36 | ) | | (504 | ) |
Impact of changes in foreign currency rates | | (21 | ) | | 44 |
| | (8 | ) | | — |
| | 15 |
|
Balance as of February 28, 2017 | | $ | 862 |
| | $ | 2,126 |
| | $ | 3,073 |
| | $ | 9 |
| | $ | 6,070 |
|
Note 4. Acquisitions
TheDuring fiscal 2018, the Company acquired the stock and certain assets of Mirage Machines, Ltd. ("Mirage") on December 1, 2017 for a purchase price of $16.5 million, net of cash acquired and subject to closing working capital adjustments plus potential future performance-based consideration. This Energy segment tuck-in acquisition is a provider of industrial and energy maintenance tools. This acquisitioncompleted two acquisitions which resulted in the recognition of goodwill in the Company’s condensed consolidated financial statements because thetheir purchase priceprices reflected the future earnings and cash flow potential of Mirage,the acquired companies, as well as the complementary strategic fit and resulting synergies. The Company incurred acquisition transaction costs of $0.3 million in the six months ended February 28, 2018 (included in selling, administrative and engineering expenses in the condensed consolidated statement of operations) related to this acquisition.
The Company makes an initial allocation of the purchase price, at the date of acquisition, based upon the fair value of the acquired assets and assumed liabilities. The Company obtains this information during due diligence and through other sources. If additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), the Company will refine its estimates of fair value and adjust the purchase price allocation accordingly.as appropriate.
The preliminaryCompany acquired the stock and certain assets of Mirage Machines, Ltd. ("Mirage") on December 1, 2017 for a purchase price of $17.4 million, net of cash acquired. This Industrial Tools & Services segment tuck-in acquisition is a provider of industrial and energy maintenance tools. The final purchase price allocation resulted in $8.9$10.3 million of goodwill (which is not deductible for tax purposes) and $4.1 million of intangible assets. The intangible assets includingwere comprised of $2.3 million of indefinite lived tradenames and $1.8 million of amortizable customer relationships.
NetThe Company acquired the stock of Equalizer International, Limited ("Equalizer") on May 11, 2018 for a purchase price of $5.8 million, net of cash acquired. This Industrial Tools & Services segment tuck-in acquisition is a provider of industrial and energy maintenance tools, expanding our pipe and flange alignment offerings. The purchase price allocation resulted in $2.4 million of goodwill (a portion of which is not deductible for tax purposes) and $2.1 million of intangible assets. The intangible assets were comprised of $0.8 million of indefinite lived tradenames and $1.3 million of amortizable customer relationships and patents.
The Company incurred acquisition transaction costs of $0.1 million and $0.4 million in the three and six months ended February 28, 2018, respectively, (included in "Selling, administrative and engineering expenses" in the Condensed Consolidated Statements of Operations) related to these acquisitions.
The acquired businesses generated combined net sales of $1.9$3.4 million are included in our consolidated financial resultsand $6.9 million for the three and six months ended February 28, 2019, respectively. Net sales for both the three and six months ended February 28, 2018 related to Mirage.for Mirage were $1.9 million. Because the net sales and earnings impact of the Mirage acquisitionboth acquired businesses are not material to the three and six month periodsmonths ended February 28, 20182019 and 2017, respectively,2018, the Company has not included the pro forma operating result disclosures otherwise required for acquisitions. The following table summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed, at the date of acquisition, for Mirage (in thousands):
|
| | | |
| Total |
Accounts receivable, net | $ | 1,090 |
|
Inventories, net | 3,004 |
|
Other current assets | 90 |
|
Property, plant & equipment | 2,014 |
|
Goodwill | 8,856 |
|
Other intangible assets, net | 4,126 |
|
Trade accounts payable | (1,299 | ) |
Accrued compensation and benefits | (97 | ) |
Income taxes payable | (586 | ) |
Deferred income taxes | (681 | ) |
Cash paid, net of cash acquired | $ | 16,517 |
|
Note 5. Divestiture Activities
During the fourth quarter of fiscal 2018, the Cortland Fibron business (EC&S segment) met the criteria for assets held for sale treatment. The Company completed the sale of the Cortland Fibron business on December 19, 2018 for $12.5 million in cash. The transaction could be subject to additional divestiture charges consisting of closing working capital adjustments in the third quarter of fiscal 2019.
During the first quarter of fiscal 2019, the Company determined that the Precision Hayes and Cortland U.S. businesses (EC&S segment) were non-core assets, did not align with the strategic objectives of the Company and, as a result, the Company committed to a plan to sell these businesses. The Company completed the sale of the Precision Hayes business on December 31, 2018 for $23.6 million cash net of final transaction costs, working capital adjustments, accelerated vesting of equity compensation, completion bonuses and other adjustments which were recognized in the second quarter of fiscal 2019. In addition, the related assets and liabilities of the Cortland U.S. business to be sold are classified as assets/liabilities held for sale in the condensed consolidated balance sheet as of February 28, 2019 and approximate the estimated fair value, less cost to sell.
On January 24, 2019, the Company announced its intention to focus solely on its IT&S segment, and as a result, initiated a process to potentially divest the remaining EC&S segment. However, the assets and liabilities of the remaining EC&S segment have not been classified as held for sale as there is no assurance that a transaction will result from the sale process. Material charges reflecting a write down of the EC&S net assets to their net realizable value could result in non-cash impairment charges in future periods. The Company is unable to estimate the total amount or range of amounts of the potential impairment charges in future periods in connection with this action, as no assurance can be given that a transaction will result from the EC&S sale process or as to its timing. As a result of the Company’s interim impairment analysis of the EC&S asset group, an indication of impairment was not present as of February 28, 2019 and, therefore, there were no non-cash impairment charges recorded during the second quarter of fiscal 2019. The Company intends to comment on, or provide updates regarding, these matters (including the status of the divestiture or size of impairment) only when it determines that further disclosure is appropriate or required. Year-to-date, the Company has incurred pre-tax divestiture charges of $2.3 million relating to the contemplated EC&S segment divestiture.
The Company recognized $6.9 million of impairment & divestiture charges in the second quarter of fiscal 2019, comprised of: (i) a $3.5 million charge representing the excess of the net book value of assets held for sale to the anticipated proceeds of the Cortland U.S. business, (ii) $2.5 million of other divestiture charges (primarily working capital adjustments, accelerated vesting of equity compensation and completion bonuses) related to the divestiture of the Precision Hayes and Cortland Fibron businesses and (iii) $0.9 million related to the divestiture of the remaining EC&S segment. These charges generated an income tax benefit of $0.2 million in the second quarter of fiscal 2019. Year-to-date, the Company has recognized $43.4 million of impairment & divestiture charges in fiscal 2019, comprised of: (i) a $24.6 million charge representing the excess of the net book value of assets held for sale to the anticipated proceeds; (ii) a non-cash impairment charge of $13.7 million related to the recognition in earnings of the cumulative effect
of foreign currency rate changes since acquisition and (iii) $5.1 million of other divestiture charges. These charges generated a fiscal 2019 year-to-date income tax benefit of $2.8 million.
The following is a summary of the assets and liabilities held for sale (in thousands):
|
| | | | | | | | |
| | February 28, 2019 (1) | | August 31, 2018 (2) |
Accounts receivable, net | | $ | 6,640 |
| | $ | 2,924 |
|
Inventories, net | | 10,756 |
| | 2,597 |
|
Other current assets | | 938 |
| | 3,267 |
|
Property, plant & equipment, net | | 7,110 |
| | 2,186 |
|
Goodwill and other intangible assets, net | | 30,669 |
| | 12,464 |
|
Other long-term assets | | — |
| | 135 |
|
Assets held for sale | | $ | 56,113 |
| | $ | 23,573 |
|
| | | | |
Trade accounts payable | | $ | 3,795 |
| | $ | 3,915 |
|
Accrued compensation and benefits | | 662 |
| | 1,414 |
|
Reserve for cumulative translation adjustment | | 13,182 |
| | 35,346 |
|
Other current liabilities | | 394 |
| | 1,269 |
|
Deferred income taxes | | 2,766 |
| | 2,281 |
|
Other long-term liabilities | | 21 |
| | — |
|
Liabilities held for sale | | $ | 20,820 |
| | $ | 44,225 |
|
(1) Represents the consolidated assets and liabilities for the Cortland U.S. business held for sale at February 28, 2019.
(2) Represents the Cortland Fibron business held for sale at August 31, 2018.
The historical results of the Precision Hayes and Cortland businesses are not material to the condensed consolidated financial results of the Company and are included in continuing operations. The Precision Hayes and Cortland businesses had combined net sales of $14.9 million and $28.1 million in the three months ended February 28, 2019 and 2018, respectively and $44.3 million and $56.1 million in the six months ended February 28, 2019 and 2018, respectively. Additional charges are anticipated upon the completion of the sale of the Cortland U.S. business and include, but are not limited to, items such as liabilities triggered only upon sale completion, changes in the composition of the net asset disposal groups and changes to estimated sales proceeds. The Precision Hayes and Cortland Fibron businesses could incur immaterial additional divestiture charges in the third quarter of fiscal 2019 relative to the final settlement of net asset disposal groups and other divestiture charges.
On December 1, 2017, the Company completed the sale of the Viking business for net cash proceeds of $8.8 million, netwhich resulted in an after-tax impairment & divestiture charge of transaction costs of $1.6$12.4 million subject to closing working capital adjustments. Inin the second quarter of fiscal 2018, we recognized an after-tax impairment and divestiture charge of $12.4 million comprised of real estate lease exit charges of $3.0 million related to retained facilities that became vacant as a result of the Viking divestiture ($3.0 million) and approximately $9.4 million of associated discrete income
tax expense. The divestiture results in the Company's exit from the offshore mooring market and will significantly limit our exposure to the upstream, offshore oil & gas market.
Thehistorical 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(which had net sales of $6.0 million and $11.5 million in the three and six months ended February 28, 2017, respectively. In addition, net sales were $2.7 million forin the six months ended February 28, 2018.2018) are not material to the condensed consolidated financial results and are included in continuing operations.
As part of our portfolio management process, we routinely review our businesses with respect to our strategic initiatives and long-term objectives and are taking actions that are anticipated to improve the operational performance of the Company. The aforementioned divestitures and any potential future divestitures pose risks and challenges that could negatively impact our business, including required separation or carve-out activities and costs, disputes with buyers or potential impairment charges.
Note 6. Goodwill, Intangible Assets and Long-Lived Assets
Changes in the gross carrying value of goodwill and 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 six months ended February 28, 20182019 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Industrial | | Energy | | Engineered Solutions | | Total |
Balance as of August 31, 2017 | $ | 103,875 |
| | $ | 188,830 |
| | $ | 237,376 |
| | $ | 530,081 |
|
Business acquisitions | — |
| | 8,856 |
| | — |
| | 8,856 |
|
Impact of changes in foreign currency rates | 968 |
| | 4,180 |
| | 2,050 |
| | 7,198 |
|
Balance as of February 28, 2018 | $ | 104,843 |
| | $ | 201,866 |
| | $ | 239,426 |
| | $ | 546,135 |
|
|
| | | | | | | | | | | |
| Industrial Tools & Services | | Engineered Components & Systems | | Total |
Balance as of August 31, 2018 | $ | 248,705 |
| | $ | 263,707 |
| | $ | 512,412 |
|
Purchase accounting adjustments | 253 |
| | — |
| | 253 |
|
Impairment charge | — |
| | (13,678 | ) | | (13,678 | ) |
Reclassification of assets held for sale | — |
| | (16,672 | ) | | (16,672 | ) |
Impact of changes in foreign currency rates | 420 |
| | (2,526 | ) | | (2,106 | ) |
Balance as of February 28, 2019 | $ | 249,378 |
| | $ | 230,830 |
| | $ | 480,208 |
|
The gross carrying value and accumulated amortization of the Company’s other intangible assets are as follows (in thousands):
| | | | February 28, 2018 | | August 31, 2017 | | February 28, 2019 | | August 31, 2018 |
| Weighted Average Amortization Period (Years) | | Gross Carrying Value | | Accumulated Amortization | | Net Book Value | | Gross Carrying Value | | Accumulated Amortization | | Net Book Value | 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 | | $ | 268,105 |
| | $ | 163,676 |
| | $ | 104,429 |
| | $ | 263,498 |
| | $ | 153,003 |
| | $ | 110,495 |
| 15 | | $ | 188,974 |
| | $ | 126,738 |
| | $ | 62,236 |
| | $ | 230,601 |
| | $ | 147,451 |
| | $ | 83,150 |
|
Patents | 10 | | 30,538 |
| | 24,918 |
| | 5,620 |
| | 30,401 |
| | 24,027 |
| | 6,374 |
| 11 | | 20,946 |
| | 19,041 |
| | 1,905 |
| | 30,355 |
| | 25,327 |
| | 5,028 |
|
Trademarks and tradenames | 18 | | 21,396 |
| | 10,015 |
| | 11,381 |
| | 21,498 |
| | 9,396 |
| | 12,102 |
| 15 | | 6,904 |
| | 5,083 |
| | 1,821 |
| | 20,823 |
| | 15,347 |
| | 5,476 |
|
Other intangibles | 3 | | 6,777 |
| | 6,458 |
| | 319 |
| | 6,672 |
| | 6,234 |
| | 438 |
| 3 | | 5,191 |
| | 5,172 |
| | 19 |
| | 5,946 |
| | 5,816 |
| | 130 |
|
Indefinite lived intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Tradenames | N/A | | 94,621 |
| | — |
| | 94,621 |
| | 91,080 |
| | — |
| | 91,080 |
| N/A | | 84,054 |
| | — |
| | 84,054 |
| | 87,253 |
| | — |
| | 87,253 |
|
| | $ | 421,437 |
| | $ | 205,067 |
| | $ | 216,370 |
| | $ | 413,149 |
| | $ | 192,660 |
| | $ | 220,489 |
| | $ | 306,069 |
| | $ | 156,034 |
| | $ | 150,035 |
| | $ | 374,978 |
| | $ | 193,941 |
| | $ | 181,037 |
|
The Company estimates that amortization expense will be $10.4$6.7 million for the remaining six months of fiscal 2018.2019. Amortization expense for future years is estimated to be: $20.2$12.9 million in fiscal 2019, $19.5 million in 2020, $18.6$12.2 million in fiscal 2021, $16.6$10.5 million in fiscal 2022, $13.6$7.7 million in fiscal 2023, $6.6 million in fiscal 2024 and $22.9$9.3 million cumulatively thereafter. The future amortization expense amounts represent estimates and may be impacted by future acquisitions, divestitures or changes in foreign currency exchange rates.rates, among other causes.
Fiscal 2019 Impairment Charge
During the first quarter of fiscal 2019, within the EC&S segment, the Company recognized impairment charges related to the Precision Hayes and Cortland U.S. businesses in conjunction with meeting the criteria for assets classified as held for sale. As a result of meeting the held for sale criteria, the Company reassessed the weighted-average holding period for the associated assets which resulted in a change in our current estimated fair value. Also, the Company recognized an additional impairment charge related to the Cortland Fibron business based on a change in the anticipated sales proceeds. Accordingly, we recognized a $21.1 million impairment charge, for the quarter ended November 30, 2018, representing the excess of net book value of assets held for sale over anticipated proceeds.
During the second quarter of fiscal 2019, within the EC&S segment, the Company recognized impairment charges related to the Cortland U.S. business as a result of changes in the composition of the net asset disposal groups. Accordingly, we recognized a $3.5 million impairment charge during the quarter ended February 28, 2019, representing the excess of net book value of assets held for sale over anticipated proceeds. See Note 5, “Divestiture Activities,” for further discussion of impairment & divestiture charges.
A summary of the six months ended February 28, 2019, impairment charges by reporting unit is as follows (in thousands):
|
| | | | | | | | | | | | |
| | Cortland (1) | | Precision Hayes | | Total |
Goodwill | | $ | 13,709 |
| | $ | — |
| | $ | 13,709 |
|
Amortizable intangible assets | | — |
| | 8,264 |
| | 8,264 |
|
Assets held for sale | | 1,477 |
| | — |
| | 1,477 |
|
Fixed assets | | — |
| | 1,230 |
| | 1,230 |
|
Total | | $ | 15,185 |
| | $ | 9,494 |
| | $ | 24,679 |
|
(1) The Cortland reporting unit is representative of the Cortland U.S. and Cortland Fibron businesses. The goodwill impairment charge related to Cortland U.S. for the six months ended February 28, 2019 and the assets held for sale impairment charge related to Cortland Fibron for the three months ended November 30, 2019.
To the extent actual proceeds on the divestiture are less than current projections, or there are changes in the composition of the asset disposal group, further write-downs of the carrying value of the Cortland U.S. reporting unit may be required.
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, which is recorded within the "Other current liabilities" line on the Condensed Consolidated Balance Sheets, is based on historical claim rates and current warranty cost experience. The following is a rollforward of the product warranty reserves for the six months ended February 28, 2019 and 2018, and 2017respectively (in thousands):
| | | Six Months Ended February 28, | Six Months Ended February 28, |
| 2018 | | 2017 | 2019 | | 2018 |
Beginning balance | $ | 6,616 |
| | $ | 5,592 |
| $ | 4,417 |
| | $ | 6,616 |
|
Provision for warranties | 3,403 |
| | 1,482 |
| 3,059 |
| | 3,403 |
|
Warranty payments and costs incurred | (3,582 | ) | | (3,096 | ) | (2,960 | ) | | (3,582 | ) |
Warranty activity for divested businesses | | (160 | ) | | — |
|
Reclass of liabilities held for sale | | (33 | ) | | — |
|
Impact of changes in foreign currency rates | 213 |
|
| (101 | ) | 28 |
|
| 213 |
|
Ending balance | $ | 6,650 |
| | $ | 3,877 |
| |
Ending Balance | | $ | 4,351 |
| | $ | 6,650 |
|
Note 8. Debt
The following is a summary of the Company’s long-term indebtedness (in thousands):
| | | February 28, 2018 | | August 31, 2017 | February 28, 2019 | | August 31, 2018 |
Senior Credit Facility | | | | | | |
Revolver | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
|
Term Loan | 262,500 |
| | 277,500 |
| 200,000 |
| | 247,500 |
|
Total Senior Credit Facility | 262,500 |
| | 277,500 |
| 200,000 |
| | 247,500 |
|
5.625% Senior Notes | 287,559 |
| | 287,559 |
| 287,559 |
| | 287,559 |
|
Total Senior Indebtedness | 550,059 |
| | 565,059 |
| 487,559 |
| | 535,059 |
|
Less: Current maturities of long-term debt | (30,000 | ) | | (30,000 | ) | (30,000 | ) | | (30,000 | ) |
Debt issuance costs | (2,741 | ) | | (3,119 | ) | (1,986 | ) | | (2,364 | ) |
Total long-term debt, net | $ | 517,318 |
| | $ | 531,940 |
| |
Total long-term debt, less current maturities | | $ | 455,573 |
| | $ | 502,695 |
|
The Company’s Senior Credit Facility matures on May 8, 2020 and provides a $600$300 million revolver, an amortizinga $300 million 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 a spread of 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 February 28, 2018,2019, the borrowing spread on LIBOR based borrowings was 2.00%1.75% (aggregating to a 3.69%4.25% 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 February 28, 2018,2019, the unused credit line and amount available for borrowing
under the revolver was $597.1 million, of which $83.7 million was available for borrowing.$298.8 million. 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 substantially 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 February 28, 2018.2019.
During the three months ended February 28, 2019, in addition to the quarterly term loan principal payment of $7.5 million, the Company prepaid $32.5 million against the remaining principal balance of the term loan.
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(currently ranging from 100.0%100.00% to 102.8%101.88%), plus accrued and unpaid interest. The Company was in compliance with all the terms of the Senior Notes at February 28, 2019.
On March 29, 2019, the Company refinanced its credit facility resulting in a new $600 million senior credit facility, comprised of a $400 million revolving line of credit and a $200 million term loan. The new facility, which will mature in March 2024, includes a reduction in pricing, bears an initial interest rate of LIBOR + 1.625bps, and expands the revolving credit facility from $300 million to $400 million. In addition, the new credit facility contains financial covenants that are consistent with the prior facility, with enhancements that improve overall liquidity, and provides the option for future expansion through a $300 million accordion on the revolver. Borrowings under the credit agreement are secured by substantially all personal property assets of the Company and its domestic subsidiary guarantors and certain equity interests owned by the foreign law pledgors.
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 February 28, 20182019 and August 31, 20172018 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 liabilityasset of $0.1 million and $0.2$0.4 million at February 28, 20182019 and August 31, 2017,2018, respectively. 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 $293.3$290.6 million and $295.8$293.5 million at February 28, 20182019 and August 31, 2017,2018, 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.
At February 28, 2019, the assets and liabilities of the Cortland U.S. business are classified as held for sale and therefore are valued at fair value, less costs to sell. In determining the fair value of the assets and liabilities the Company utilized generally accepted valuation techniques. Specifically for the Cortland U.S. business, a market approach valuation was utilized, in which a trading multiple was applied to the forecasted EBITDA (earnings before interest, income taxes, depreciation and amortization). These valuations represent Level 3 assets measured at fair value on a nonrecurring basis.
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
of cash flow hedges are recorded in accumulated other comprehensive loss, until earnings are affected by the variability of cash flows.
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). However, there were no cash flow hedges outstanding at February 28, 2018 and August 31, 2017.
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 (income) expense in the condensed consolidated statementstatements of operations). The U.S. dollar equivalent notional value of these short duration foreign currency exchange contracts (fair value hedges or non-designated hedges) was $26.5$19.6 million and $22.0$17.0 million at February 28, 20182019 and August 31, 2017,2018, respectively. The fair value of outstanding foreign currency exchange contracts was a net liabilityasset of $0.1 million and $0.2$0.4 million at February 28, 20182019 and August 31, 2017,2018, respectively. Net foreign currency gain (loss) related to these derivative instruments were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | 2017 | | 2018 | | 2017 |
Foreign currency (loss) gain, net | $ | (74 | ) | | $ | (474 | ) | | $ | 140 |
| | $ | (1,966 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2019 | | 2018 | | 2019 | | 2018 |
Foreign currency gain (loss), net | $ | 297 |
| | $ | (74 | ) | | $ | 667 |
| | $ | 140 |
|
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 publicly 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 February 28, 2018,2019, 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 and six months ended February 28, 2018.2019.
The reconciliation between basic and diluted (loss) earnings per share is as follows (in thousands, except per share amounts): | | | Three Months Ended February 28, | | Six Months Ended February 28, | Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | | | | | | | | | | | | | | |
Net (loss) earnings | $ | (18,221 | ) | | $ | 5,074 |
| | $ | (12,995 | ) | | $ | 10,039 |
| |
Net earnings (loss) | | $ | 2,753 |
| | $ | (18,221 | ) | | $ | (14,699 | ) | | $ | (12,995 | ) |
Denominator: | | | | | | | | | | | | | | |
Weighted average common shares outstanding - basic | 60,318 |
| | 59,368 |
| | 60,095 |
| | 59,170 |
| 61,243 |
| | 60,318 |
| | 61,137 |
| | 60,095 |
|
Net effect of dilutive securities - stock based compensation plans (1) | — |
| | 778 |
| | — |
| | 711 |
| 364 |
| | — |
| | — |
| | — |
|
Weighted average common shares outstanding - diluted | 60,318 |
| | 60,146 |
| | $ | 60,095 |
| | $ | 59,881 |
| 61,607 |
| | 60,318 |
| | 61,137 |
| | 60,095 |
|
| | | | | | | | | | | | | | |
Basic (loss) earnings per share | $ | (0.30 | ) | | $ | 0.09 |
| | $ | (0.22 | ) | | $ | 0.17 |
| |
Diluted (loss) earnings per share | (0.30 | ) | | 0.08 |
| | (0.22 | ) | | 0.17 |
| |
Basic earnings (loss) per share | | $ | 0.04 |
| | $ | (0.30 | ) | | $ | (0.24 | ) | | $ | (0.22 | ) |
Diluted earnings (loss) per share | | $ | 0.04 |
| | $ | (0.30 | ) | | $ | (0.24 | ) | | $ | (0.22 | ) |
| | | | | | | | | | | | | | |
Anti-dilutive securities from stock based compensation plans (excluded from earnings per share calculation) | 3,397 |
| | 2,011 |
| | 2,613 |
| | 1,987 |
| |
Anti-dilutive securities from stock based compensation plans (excluded from earnings (loss) per share calculation) (1) | | 1,503 |
| | 1,829 |
| | 2,986 |
| | 1,981 |
|
(1)As a result of the net lossimpairment & divestiture and restructuring charges for the three and six monthsmonth period ended February 28, 2018 and the six month periods ended February 28, 2019 and 2018, which caused net losses for these periods, shares from stock based compensation plans are excluded from the calculation of diluted (loss) earningsloss per share, as the result would be anti-dilutive.
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 lowerdifferent than the U.S. federal statutory rate, permanent items, state tax rates changes in tax laws, acquisitions and divestitures 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 (loss) before income taxes, income tax expense or benefit and effective income tax rates are as follows (amounts in thousands):
| | | Three Months Ended February 28, | | Six Months Ended February 28, | Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Earnings (loss) before income taxes | $ | 1,618 |
| | $ | 5,274 |
| | $ | 8,448 |
| | $ | 7,241 |
| $ | 8,545 |
| | $ | 1,618 |
| | $ | (8,980 | ) | | $ | 8,448 |
|
Income tax expense (benefit) | 19,839 |
| | 200 |
| | 21,443 |
| | (2,798 | ) | |
Income tax expense | | 5,792 |
| | 19,839 |
| | 5,719 |
| | 21,443 |
|
Effective income tax rate | 1,226.1 | % | | 3.8 | % | | 253.8 | % | | (38.6 | )% | 67.8 | % | | 1,226.1 | % | | (63.7 | )% | | 253.8 | % |
The Company’s income tax expense and effective tax rates duringrate for the three and six months ended February 28, 20182019 were impacted by the Tax Cuts and Jobs Act (the “Act”), which was enacted into law on December 22, 2017. The Act includes significant changes to the U.S. corporate income tax system which reduce the U.S. federal corporate income tax rate from 35.0%35% to 21.0%21% as of January 1, 2018; shifts to a modified territorial tax regime which requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously deferred from U.S. income tax; and creates new minimum taxes on certain foreign-sourced earnings. The decrease in theearnings that were previously deferred from U.S. federal corporate income tax rate from 35.0% to 21.0% results in a blended statutory tax rate of 25.7% for the fiscal year ending August 31, 2018. The new taxes for certain foreign-sourced earningstax. New provisions under the Act are effective for the Company infor fiscal 2019.
2019 and include the Global Intangible Low-Taxed Income tax effects resulting from changes in tax laws are accounted for by(“GILTI”) provision, the Company inForeign-Derived Intangible Income (“FDII”) benefit, the period in whichBase Erosion Anti-Abuse Tax (“BEAT”), the law is enactedlimitation on interest expense deductions and certain executive compensation, and the effects are recorded as a componentelimination of incomeU.S. tax expense or benefit. As a result,on dividends received from certain foreign subsidiaries.
During the Company recorded provisional income tax expense resulting from the Act totaling $8.4 million during the three and six months ended February 28, 2018, which includes (i) asecond quarter, final transition tax of $16.2 million on the Company’s total post-1986 earnings and profits (“E&P”)regulations were issued, which prior to the Act, were previously deferred from U.S. income tax, (ii) a $16.7 million decreaseresulted in income tax expense as a result of the re-measurement of the Company’s deferred tax assets and liabilities to the new corporate tax rate of 21% and (iii) $8.9 million in valuation allowances recorded against foreign tax credits as future utilization is now uncertain.
The amounts recorded are provisional and represent the Company’s best estimate of the tax effects of the Act as of February 28, 2018. Amounts recorded are based in part on a reasonable estimate of the effects on its transition tax and existing deferred tax balances which are subject to change and modification. Provisional amounts recorded may change as a result of the following:
The amount recorded for thean adjusted transition tax liability is a provisional amount based on current estimates of total post-1986 foreign E&P and the income tax pools for all foreign subsidiaries which will continue to be refined over the coming periods. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets as of August 31, 2018. Further interpretations from U.S. federal and state governments and regulatory organizations may change the provisional tax$3.0 million. The liability or the accounting treatment of the provisional tax liability. It is anticipated that the amounts resulting from the transition tax will be fully offset by available foreign tax credits and will not result in future cash tax payments. In addition, there is a foreign tax credit carryforward on the balance sheet after the calculation of the transition tax liability. The Company is continuing to analyze the new provisions in order to determine future utilization of the credits and is anticipating further interpretive guidance in connection with the utilization of foreign tax credits going forward. As such, we are not yet able to reasonably estimate the future utilization of the foreign tax credits and have recorded the aforementioned valuation allowance.
The Company is still analyzing certain aspectscomparability of earnings (loss) before income taxes, income tax expense and the related effective income tax rates are impacted by the Act as described above, along with impairment & divestiture charges. Results included $6.9 million and refining the estimate$43.3 million ($6.7 million and $40.5 million after tax, respectively) of the expected revaluation of its deferred tax balances. This can potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. In addition, the Act provides for accelerated first year expensing of certain capital expenditures for which an estimate has been included in the estimated deferred balancesimpairment & divestiture charges for the year but will continue to be refined as the year progresses. The Act also provides changes related to the limits of deduction for employee compensation. The Company is treating any future non-deductible compensation as impacting deductible compensation expenses in the period incurred until further guidance is provided.
The Act also includes a provision designed to tax global intangible low taxed income (GILTI) which will be effective in fiscal 2019. Under the provision, a U.S. shareholder is required to include in gross income the amount of its GILTI, which
is generally the net income of its controlled foreign corporations in excess of a 10% return on depreciable tangible assets after identification of other income subject to non-deferral rules. Due to the complexity of the new GILTI tax rulesthree and uncertainty of the application of the foreign tax credit rules in relation to GILTI, we are continuing to evaluate this provision of the Act, the application of ASC 740, and are considering available accounting policy alternatives to either record the U.S. income tax effect of future GILTI inclusions in the period in which they arise or establish deferred taxes with respect to the expected future tax liabilities associated with future GILTI inclusions. Our accounting policies depend, in part, on analyzing our global income to determine whether we expect a tax liability resulting from the application of this provision, and, if so, whether and when to record related current and deferred income taxes. Whether we intend to recognize deferred tax liabilities related to the GILTI provisions is dependent, in part, on our assessment of the Company's future operating structure. In addition, we are awaiting further interpretive guidance in connection with the computation of the GILTI tax. For these reasons, we are not yet able to reasonably estimate the effect of this provision of the Act. Therefore, we have not made any adjustments relating to potential GILTI tax in our consolidated financial statements and have not made a policy decision regarding our accounting for GILTI.
Prior to the Act, our practice and intention was to reinvest the earnings in our non-U.S. subsidiaries outside of the U.S., and no U.S. deferred income taxes or foreign withholding taxes were recorded. The transition tax noted above will result in the previously untaxed foreign earnings being included in the federal and state fiscal 2018 taxable income. We are currently analyzing our global working capital requirements and the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent, which may include withholding taxes, local country taxes and potential U.S. state taxation. Furthermore, the transition tax will reduce the outside basis differences in our foreign corporations and any remaining temporary difference will potentially have some interaction with the GILTI tax noted above. For these reasons, we are not yet able to reasonably estimate the effect of this provision of the Act and have not recorded any withholding or state tax liabilities, any deferred taxes attributable to GILTI (as noted above) or any deferred taxes attributable to our investment in our foreign subsidiaries.
We are also currently analyzing certain additional provisions of the Act that come into effect in fiscalsix months ended February 28, 2019 and will determine if$3.0 million ($12.4 million after tax) impairment & divestiture charges for the three and how these items would impactsix months ended February 28, 2018. Excluding the impairment & divestiture charges, the effective tax rate infor the yearthree and six months ended February 28, 2019 was 38.8% and 24.8%, respectively, as compared to 226.8% and 105.3% for the three and six months ended February 28, 2018. The income or expense occurs. These provisions include the Base Erosion Anti-Abuse Tax (BEAT), eliminating U.S. federal income taxes on dividends from foreign subsidiaries, the new provision that could limit the amount of deductible interest expense, and the limitations on the deductibility of certain executive compensation.
The effective tax ratebenefit without impairment & divestiture charges for the six months ended February 28, 2018 was 253.8% compared2019 is significantly impacted by a $2.6 million benefit related to (38.6)% for the comparable prior year period. The effective tax rate for the current year results in significantly greater tax expense than the comparable prior year period due to recording the effects of the Act, as described above. Additionally,compared to the six months ended February 28, 2018 also include discrete incomewhich includes $1.5 million of tax expense of $9.4 million related to the Viking divestiture and $1.5 million related to the shortfall of tax benefits on deductible equity compensation and the expiration of unexercised stock options. Bothoptions and $7.9 million of tax expense related to the Act. Additionally, both the current and prior year effective income tax rates were impacted by the proportion of earnings in foreign jurisdictions (withwith income tax rates lowerdifferent than the U.S. federal income tax rate)rate. The Company's earnings (loss) before income taxes include approximately 70% and tax benefits derived75% of earnings from tax planning initiatives which were comparable between years. In addition,foreign jurisdictions for the Company may release a material valuation allowance in a foreign jurisdiction in late fiscal 2018 or inestimated full-year fiscal 2019 ifand 2018, respectively. This foreign income tax rate differential had a minimal impact to the Company determines that it is more likely than noteffective income tax rate as a result of the deferrednew U.S. statutory rate of 21% for the six months ended February 28, 2019; however, for the six months ended February 28, 2018, the foreign income tax assets will be realized.rate differential had the effect of reducing the effective income tax rate from the 25.7% U.S. statutory tax rate by 5.2%.
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:systems. The Industrial Energy and Engineered Solutions. The IndustrialTools & Services segment is primarily involvedengaged in the design, manufacture and distribution of branded hydraulic and mechanical tools and in providing services and tool rental to the industrial, 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 generationenergy and other markets. Divestiture of the Viking business during the quarter resulted in the elimination of the sale and rental of customized off-shore vessel mooring solutions. The Engineered SolutionsComponents & Systems segment provides highly engineered positioncomponents for on-highway, off-highway, agriculture, medical, concrete tensioning (divested December 31, 2018) and motion control systems to original equipment manufacturers ("OEM") inother vertical markets. All of the aforementioned markets are supported through our various on and off-highway vehicle markets, as well as a variety of other products to the industrial and agricultural markets.segment product lines outlined below.
The following tables summarize financial information by reportable segment and product line (in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net Sales by Reportable Product Line & Segment: | | | | | | | |
Industrial Segment: | | | | | | | |
Industrial Tools | $ | 87,438 |
| | $ | 78,679 |
| | $ | 171,949 |
| | $ | 157,718 |
|
Heavy Lifting Technology | 11,643 |
| | 12,969 |
| | 24,048 |
| | 21,220 |
|
| 99,081 |
| | 91,648 |
| | 195,997 |
| | 178,938 |
|
Energy Segment: | | | | | | | |
Energy Maintenance & Integrity | 48,889 |
| | 51,590 |
| | 105,598 |
| | 116,411 |
|
Other Energy Solutions | 17,103 |
| | 21,294 |
| | 36,235 |
| | 41,119 |
|
| 65,992 |
| | 72,884 |
| | 141,833 |
| | 157,530 |
|
Engineered Solutions Segment: | | | | | | | |
On-Highway | 59,297 |
| | 50,611 |
| | 124,179 |
| | 102,242 |
|
Agriculture, Off-Highway and Other | 50,795 |
| | 43,726 |
| | 102,111 |
| | 85,952 |
|
| 110,092 |
| | 94,337 |
| | 226,290 |
| | 188,194 |
|
| $ | 275,165 |
| | $ | 258,869 |
| | $ | 564,120 |
| | $ | 524,662 |
|
Operating Profit (Loss): | | | | | | | |
Industrial | $ | 16,781 |
| | $ | 18,380 |
| | $ | 35,024 |
| | $ | 37,155 |
|
Energy (1) | (4,513 | ) | | (579 | ) | | (4,220 | ) | | 2,632 |
|
Engineered Solutions | 2,209 |
| | 1,816 |
| | 8,543 |
| | 2,571 |
|
General Corporate | (4,888 | ) | | (6,418 | ) | | (15,085 | ) | | (20,688 | ) |
| $ | 9,589 |
| | $ | 13,199 |
| | $ | 24,262 |
| | $ | 21,670 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net Sales by Reportable Product Line & Segment | | | | | | | |
Industrial Tools & Services | | | | | | | |
Product | $ | 105,584 |
| | $ | 105,302 |
| | $ | 208,352 |
| | $ | 206,422 |
|
Service & Rental | 43,937 |
| | 31,685 |
| | 89,824 |
| | 72,556 |
|
| 149,521 |
| | 136,987 |
| | 298,176 |
| | 278,978 |
|
Engineered Components & Systems | | | | | | | |
On-Highway | 55,013 |
| | 59,297 |
| | 115,604 |
| | 124,179 |
|
Agriculture, Off-Highway and Other | 52,448 |
| | 50,795 |
| | 106,332 |
| | 102,111 |
|
Rope & Cable Solutions | 11,386 |
| | 17,101 |
| | 27,552 |
| | 33,488 |
|
Concrete Tensioning | 3,539 |
| | 10,983 |
| | 16,774 |
| | 22,617 |
|
Off Shore Mooring | — |
| | 2 |
| | — |
| | 2,747 |
|
| 122,386 |
| | 138,178 |
| | 266,262 |
| | 285,142 |
|
| $ | 271,907 |
| | $ | 275,165 |
| | $ | 564,438 |
| | $ | 564,120 |
|
| | | | | | | |
Operating Profit (Loss) | | | | | | | |
Industrial Tools & Services | $ | 26,546 |
| | $ | 18,963 |
| | $ | 52,920 |
| | $ | 39,800 |
|
Engineered Components & Systems (1) | (1,412 | ) | | (4,448 | ) | | (29,704 | ) | | (413 | ) |
General Corporate | (8,780 | ) | | (4,711 | ) | | (16,180 | ) | | (14,910 | ) |
| $ | 16,354 |
| | $ | 9,804 |
| | $ | 7,036 |
| | $ | 24,477 |
|
(1) EnergyEngineered Components & Systems segment operating (loss) profit includeslosses include impairment and& divestiture charges of $6.9 million and $3.0 million for both the three months ended February 28, 2019 and 2018, respectively. For the six months ended February 28, 2018.2019 and 2018, impairment & divestiture charges were $43.3 million and $3.0 million, respectively.
|
| | | | | | | |
| February 28, 2018 | | August 31, 2017 |
Assets by Segment: | | | |
Industrial | $ | 324,477 |
| | $ | 329,134 |
|
Energy | 464,018 |
| | 482,963 |
|
Engineered Solutions | 548,547 |
| | 531,068 |
|
General Corporate | 143,263 |
| | 173,790 |
|
| $ | 1,480,305 |
| | $ | 1,516,955 |
|
|
| | | | | | | |
| February 28, 2019 | | August 31, 2018 |
Assets: | | | |
Industrial Tools & Services | $ | 622,346 |
| | $ | 589,932 |
|
Engineered Components & Systems | 618,854 |
| | 657,370 |
|
General Corporate | 161,857 |
| | 234,036 |
|
| $ | 1,403,057 |
| | $ | 1,481,338 |
|
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 & officer transitiondivestiture 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.
Note 14. Commitments and Contingencies
The Company had outstanding letters of credit of $23.416.8 million and $22.123.6 million at February 28, 20182019 and August 31, 20172018, respectively, the majority of which relate to commercial contracts and self-insured workersworkers' 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 claimsbreaches of contract, employment, personal injury 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 areis not expected to have a material adverse effect on the Company’s financial condition,position, 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 at February 28, 2019 was $12.1$10.0 million using a weighted average discount rate of 3.15% at February 28, 20183.01%.
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.
As previously disclosed in the Annual Report on Form 10-K for the year ended August 31, 2018, in October 2018, the Company filed a voluntary self-disclosure ("VSD") with the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) regarding transactions related to otherwise authorized sales of tools and other products totaling approximately $0.5 million by certain of its foreign subsidiaries to two Iranian distributors. It is possible that certain limited transactions relating to the authorized sales fell outside the scope of General License H under the Iranian Transaction and Sanctions Regulations, 31 C.F.R. Part 560. The VSD also included information about additional transactions by certain of the Company's Dutch subsidiaries with a counterparty in Estonia that may have been in violation of E.O. 13685, as certain sales of products and services may have been diverted to the Crimea region of Ukraine. OFAC is currently reviewing the Company’s disclosures to determine whether any violations of U.S. economic sanctions laws may have occurred and, if so, to determine the appropriate enforcement response. At this time, the Company cannot predict when OFAC will conclude its review of the VSD or the nature of its enforcement response.
Additionally, the Company has self-disclosed the sales to its Estonian customer to relevant authorities in the Netherlands as potentially violating applicable sanctions laws in that country and the European Union. The investigation by authorities in the Netherlands is ongoing and also may result in penalties. At this time, the Company cannot predict when the investigation will be completed or reasonably estimate what penalties, if any, will be assessed.
While there can be no assurance of the ultimate outcome of the above matters, the Company currently believes that there will be no 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 February 28, 2018. All of our2019. 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-Guarantorsthe subsidiaries that do not guarantee the 5.625% Senior Notes (the "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 Corporationthe Parent, the Guarantors and its subsidiaries, the Guarantor and non-Guarantor entities,non-Guarantors and the eliminations necessary to arrive at the information for the Company on a consolidated basis.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | Three Months Ended February 28, 2018 | Three Months Ended February 28, 2019 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net sales | $ | 36,219 |
| | $ | 83,072 |
| | $ | 155,874 |
| | $ | — |
| | $ | 275,165 |
| $ | 41,091 |
| | $ | 80,230 |
| | $ | 150,586 |
| | $ | — |
| | $ | 271,907 |
|
Cost of products sold | 5,848 |
| | 63,979 |
| | 115,642 |
| | — |
| | 185,469 |
| 9,979 |
| | 59,701 |
| | 104,741 |
| | — |
| | 174,421 |
|
Gross profit | 30,371 |
| | 19,093 |
| | 40,232 |
| | — |
| | 89,696 |
| 31,112 |
| | 20,529 |
| | 45,845 |
| | — |
| | 97,486 |
|
Selling, administrative and engineering expenses | 18,190 |
| | 17,232 |
| | 33,080 |
| | — |
| | 68,502 |
| 22,614 |
| | 16,079 |
| | 32,052 |
| | — |
| | 70,745 |
|
Amortization of intangible assets | 318 |
| | 2,861 |
| | 1,989 |
| | — |
| | 5,168 |
| 318 |
| | 1,867 |
| | 1,256 |
| | — |
| | 3,441 |
|
Restructuring charges | 194 |
| | 909 |
| | 2,347 |
| | — |
| | 3,450 |
| — |
| | — |
| | 60 |
| | — |
| | 60 |
|
Impairment & divestiture charges | 4,217 |
| | — |
| | (1,230 | ) | | — |
| | 2,987 |
| |
Impairment & divestiture (income) charges | | (904 | ) | | 3,187 |
| | 4,603 |
| | — |
| | 6,886 |
|
Operating profit (loss) | 7,452 |
| | (1,909 | ) | | 4,046 |
| | — |
| | 9,589 |
| 9,084 |
| | (604 | ) | | 7,874 |
| | — |
| | 16,354 |
|
Financing costs (income), net | 7,777 |
| | 22 |
| | (195 | ) | | — |
| | 7,604 |
| 7,275 |
| | — |
| | (122 | ) | | — |
| | 7,153 |
|
Intercompany (income) expense, net | (5,042 | ) | | 5,419 |
| | (377 | ) | | — |
| | — |
| (6,117 | ) | | 8,866 |
| | (2,749 | ) | | — |
| | — |
|
Other expense, net | 90 |
| | 49 |
| | 228 |
| | — |
| | 367 |
| |
Earnings (loss) before income taxes | 4,627 |
| | (7,399 | ) | | 4,390 |
| | — |
| | 1,618 |
| |
Intercompany dividends | | (246,248 | ) | | — |
| | — |
| | 246,248 |
| | — |
|
Other (income) expense, net | | (166 | ) | | 1 |
| | 821 |
| | — |
| | 656 |
|
Earnings (loss) before income tax expense (benefit) | | 254,340 |
| | (9,471 | ) | | 9,924 |
| | (246,248 | ) | | 8,545 |
|
Income tax expense (benefit) | 10,612 |
| | (2,234 | ) | | 11,461 |
| | — |
| | 19,839 |
| 420 |
| | (1,348 | ) | | 6,720 |
| | — |
| | 5,792 |
|
Net loss before equity in loss of subsidiaries | (5,985 | ) | | (5,165 | ) | | (7,071 | ) | | — |
| | (18,221 | ) | |
Equity in loss of subsidiaries | (12,236 | ) | | (9,454 | ) | | (1,459 | ) | | 23,149 |
| | — |
| |
Net loss | $ | (18,221 | ) | | $ | (14,619 | ) | | $ | (8,530 | ) | | $ | 23,149 |
| | $ | (18,221 | ) | |
Net earnings (loss) before equity in (loss) earnings of subsidiaries | | 253,920 |
| | (8,123 | ) | | 3,204 |
| | (246,248 | ) | | 2,753 |
|
Equity in (loss) earnings of subsidiaries | | (251,167 | ) | | 4,086 |
| | 1,372 |
| | 245,709 |
| | — |
|
Net earnings (loss) | | $ | 2,753 |
| | $ | (4,037 | ) | | $ | 4,576 |
| | $ | (539 | ) | | $ | 2,753 |
|
Comprehensive income (loss) | $ | 62,788 |
| | $ | (14,619 | ) | | $ | 74,820 |
| | $ | (60,201 | ) | | $ | 62,788 |
| $ | 45,190 |
| | $ | (3,966 | ) | | $ | 46,755 |
| | $ | (42,789 | ) | | $ | 45,190 |
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | Three Months Ended February 28, 2017 | Three Months Ended February 28, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net sales | $ | 34,953 |
| | $ | 80,973 |
| | $ | 142,943 |
| | $ | — |
| | $ | 258,869 |
| $ | 36,219 |
| | $ | 83,072 |
| | $ | 155,874 |
| | $ | — |
| | $ | 275,165 |
|
Cost of products sold | 10,049 |
| | 61,821 |
| | 99,673 |
| | — |
| | 171,543 |
| 5,848 |
| | 63,979 |
| | 115,642 |
| | — |
| | 185,469 |
|
Gross profit | 24,904 |
| | 19,152 |
| | 43,270 |
| | — |
| | 87,326 |
| 30,371 |
| | 19,093 |
| | 40,232 |
| | — |
| | 89,696 |
|
Selling, administrative and engineering expenses | 18,553 |
| | 16,549 |
| | 31,855 |
| | — |
| | 66,957 |
| 17,975 |
| | 17,232 |
| | 33,080 |
| | — |
| | 68,287 |
|
Amortization of intangible assets | 318 |
| | 2,918 |
| | 1,833 |
| | — |
| | 5,069 |
| 318 |
| | 2,861 |
| | 1,989 |
| | — |
| | 5,168 |
|
Restructuring charges | 372 |
| | 441 |
| | 1,288 |
| | — |
| | 2,101 |
| 194 |
| | 909 |
| | 2,347 |
| | — |
| | 3,450 |
|
Impairment & divestiture charges (income) | | 4,217 |
| | — |
| | (1,230 | ) | | — |
| | 2,987 |
|
Operating profit (loss) | 5,661 |
| | (756 | ) | | 8,294 |
| | — |
| | 13,199 |
| 7,667 |
| | (1,909 | ) | | 4,046 |
| | — |
| | 9,804 |
|
Financing costs (income), net | 7,430 |
| | — |
| | (96 | ) | | — |
| | 7,334 |
| 7,777 |
| | 22 |
| | (195 | ) | | — |
| | 7,604 |
|
Intercompany (income) expense, net | (7,882 | ) | | 11,242 |
| | (3,360 | ) | | — |
| | — |
| (5,042 | ) | | 5,419 |
| | (377 | ) | | — |
| | — |
|
Intercompany dividends | — |
| | (4,258 | ) | | — |
| | 4,258 |
| | — |
| |
Other (income) expense, net | (48 | ) | | (4 | ) | | 643 |
| | — |
| | 591 |
| |
Earnings (loss) before income taxes | 6,161 |
| | (7,736 | ) | | 11,107 |
| | (4,258 | ) | | 5,274 |
| |
Other expense, net | | 305 |
| | 49 |
| | 228 |
| | — |
| | 582 |
|
Earnings (loss) before income tax expense (benefit) | | 4,627 |
| | (7,399 | ) | | 4,390 |
| | — |
| | 1,618 |
|
Income tax expense (benefit) | 151 |
| | (667 | ) | | 716 |
| | — |
| | 200 |
| 10,612 |
| | (2,234 | ) | | 11,461 |
| | — |
| | 19,839 |
|
Net earnings (loss) before equity in (loss) earnings of subsidiaries | 6,010 |
| | (7,069 | ) | | 10,391 |
| | (4,258 | ) | | 5,074 |
| |
Equity in earnings (loss) of subsidiaries | (936 | ) | | 8,057 |
| | (268 | ) | | (6,853 | ) | | — |
| |
Net earnings | $ | 5,074 |
| | $ | 988 |
| | $ | 10,123 |
| | $ | (11,111 | ) | | $ | 5,074 |
| |
Comprehensive income | $ | 8,185 |
| | $ | 1,324 |
| | $ | 12,828 |
| | $ | (14,152 | ) | | $ | 8,185 |
| |
Net loss before equity in loss of subsidiaries | | (5,985 | ) | | (5,165 | ) | | (7,071 | ) | | — |
| | (18,221 | ) |
Equity in loss of subsidiaries | | (12,236 | ) | | (9,454 | ) | | (1,459 | ) | | 23,149 |
| | — |
|
Net loss | | $ | (18,221 | ) | | $ | (14,619 | ) | | $ | (8,530 | ) | | $ | 23,149 |
| | $ | (18,221 | ) |
Comprehensive income (loss) | | $ | 62,788 |
| | $ | (14,619 | ) | | $ | 74,820 |
| | $ | (60,201 | ) | | $ | 62,788 |
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | Six Months Ended February 28, 2018 | Six Months Ended February 28, 2019 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net sales | $ | 71,929 |
| | $ | 170,906 |
| | $ | 321,285 |
| | $ | — |
| | $ | 564,120 |
| $ | 81,381 |
| | $ | 176,052 |
| | $ | 307,005 |
| | $ | — |
| | $ | 564,438 |
|
Cost of products sold | 12,811 |
| | 128,553 |
| | 232,149 |
| | — |
| | 373,513 |
| 19,860 |
| | 130,297 |
| | 211,787 |
| | — |
| | 361,944 |
|
Gross profit | 59,118 |
| | 42,353 |
| | 89,136 |
| | — |
| | 190,607 |
| 61,521 |
| | 45,755 |
| | 95,218 |
| | — |
| | 202,494 |
|
Selling, administrative and engineering expenses | 37,905 |
| | 35,680 |
| | 69,395 |
| | — |
| | 142,980 |
| 43,579 |
| | 34,393 |
| | 65,964 |
| | — |
| | 143,936 |
|
Amortization of intangible assets | 636 |
| | 5,722 |
| | 3,941 |
| | — |
| | 10,299 |
| 637 |
| | 4,559 |
| | 2,524 |
| | — |
| | 7,720 |
|
Restructuring charges | 5,550 |
| | 1,078 |
| | 3,451 |
| | — |
| | 10,079 |
| |
Impairment & divestiture charges | 4,217 |
| | — |
| | (1,230 | ) | | — |
| | 2,987 |
| |
Restructuring (income) charges | | — |
| | (93 | ) | | 556 |
| | — |
| | 463 |
|
Impairment & divestiture (income) charges | | (904 | ) | | 13,407 |
| | 30,836 |
| | — |
| | 43,339 |
|
Operating profit (loss) | 10,810 |
| | (127 | ) | | 13,579 |
| | — |
| | 24,262 |
| 18,209 |
| | (6,511 | ) | | (4,662 | ) | | — |
| | 7,036 |
|
Financing costs (income), net | 15,400 |
| | 43 |
| | (325 | ) | | — |
| | 15,118 |
| 14,826 |
| | — |
| | (378 | ) | | — |
| | 14,448 |
|
Intercompany (income) expense, net | (9,919 | ) | | 10,903 |
| | (984 | ) | | — |
| | — |
| (10,170 | ) | | 15,357 |
| | (5,187 | ) | | — |
| | — |
|
Other expense, net | 40 |
| | 94 |
| | 562 |
| | — |
| | 696 |
| |
Earnings (loss) before income taxes | 5,289 |
| | (11,167 | ) | | 14,326 |
| | — |
| | 8,448 |
| |
Income tax expense (benefit) | 10,327 |
| | (1,797 | ) | | 12,913 |
| | — |
| | 21,443 |
| |
Net (loss) earnings before equity in loss of subsidiaries | (5,038 | ) | | (9,370 | ) | | 1,413 |
| | — |
| | (12,995 | ) | |
Loss in earnings of subsidiaries | (7,957 | ) | | (661 | ) | | (1,505 | ) | | 10,123 |
| | — |
| |
Intercompany dividends | | (246,248 | ) | | — |
| | — |
| | 246,248 |
| | — |
|
Other (income) expense, net | | (381 | ) | | 8 |
| | 1,941 |
| | — |
| | 1,568 |
|
Earnings (loss) before income tax (benefit) expense | | 260,182 |
| | (21,876 | ) | | (1,038 | ) | | (246,248 | ) | | (8,980 | ) |
Income tax (benefit) expense | | (2,287 | ) | | (1,450 | ) | | 9,456 |
| | — |
| | 5,719 |
|
Net earnings (loss) before equity in (loss) earnings of subsidiaries | | 262,469 |
| | (20,426 | ) | | (10,494 | ) | | (246,248 | ) | | (14,699 | ) |
Equity in (loss) earnings of subsidiaries | | (277,168 | ) | | (9,046 | ) | | 2,627 |
| | 283,587 |
| | — |
|
Net loss | $ | (12,995 | ) | | $ | (10,031 | ) | | $ | (92 | ) | | $ | 10,123 |
| | $ | (12,995 | ) | $ | (14,699 | ) | | $ | (29,472 | ) | | $ | (7,867 | ) | | $ | 37,339 |
| | $ | (14,699 | ) |
Comprehensive income (loss) | $ | 71,039 |
| | $ | (10,031 | ) | | $ | 86,386 |
| | $ | (76,355 | ) | | $ | 71,039 |
| $ | 19,794 |
| | $ | (29,400 | ) | | $ | 26,636 |
| | $ | 2,764 |
| | $ | 19,794 |
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended February 28, 2017 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net sales | $ | 66,682 |
| | $ | 165,249 |
| | $ | 292,731 |
| | $ | — |
| | $ | 524,662 |
|
Cost of products sold | 17,143 |
| | 123,237 |
| | 203,889 |
| | — |
| | 344,269 |
|
Gross profit | 49,539 |
| | 42,012 |
| | 88,842 |
| | — |
| | 180,393 |
|
Selling, administrative and engineering expenses | 36,520 |
| | 33,185 |
| | 65,856 |
| | — |
| | 135,561 |
|
Amortization of intangible assets | 636 |
| | 5,994 |
| | 3,700 |
| | — |
| | 10,330 |
|
Restructuring charges | 727 |
| | 1,164 |
| | 3,157 |
| | — |
| | 5,048 |
|
Director & officer transition charges | 7,784 |
| | — |
| | — |
| | — |
| | 7,784 |
|
Operating profit | 3,872 |
| | 1,669 |
| | 16,129 |
| | — |
| | 21,670 |
|
Financing costs (income), net | 14,756 |
| | — |
| | (289 | ) | | — |
| | 14,467 |
|
Intercompany (income) expense, net | (12,950 | ) | | 10,156 |
| | 2,794 |
| | — |
| | — |
|
Intercompany dividends | — |
| | (59,401 | ) | | — |
| | 59,401 |
| | — |
|
Other expense (income), net | 2,037 |
| | (74 | ) | | (2,001 | ) | | — |
| | (38 | ) |
Earnings before income taxes | 29 |
| | 50,988 |
| | 15,625 |
| | (59,401 | ) | | 7,241 |
|
Income tax (benefit) expense | (2,563 | ) | | (697 | ) | | 462 |
| | — |
| | (2,798 | ) |
Net earnings before equity in earnings of subsidiaries | 2,592 |
| | 51,685 |
| | 15,163 |
| | (59,401 | ) | | 10,039 |
|
Equity in earnings of subsidiaries | 7,447 |
| | 13,682 |
| | 2,862 |
| | (23,991 | ) | | — |
|
Net earnings | $ | 10,039 |
| | $ | 65,367 |
| | $ | 18,025 |
| | $ | (83,392 | ) | | $ | 10,039 |
|
Comprehensive (loss) income | $ | (12,972 | ) | | $ | 47,616 |
| | $ | 13,459 |
| | $ | (61,075 | ) | | $ | (12,972 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended February 28, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net sales | $ | 71,929 |
| | $ | 170,906 |
| | $ | 321,285 |
| | $ | — |
| | $ | 564,120 |
|
Cost of products sold | 12,811 |
| | 128,553 |
| | 232,149 |
| | — |
| | 373,513 |
|
Gross profit | 59,118 |
| | 42,353 |
| | 89,136 |
| | — |
| | 190,607 |
|
Selling, administrative and engineering expenses | 37,690 |
| | 35,680 |
| | 69,395 |
| | — |
| | 142,765 |
|
Amortization of intangible assets | 636 |
| | 5,722 |
| | 3,941 |
| | — |
| | 10,299 |
|
Restructuring charges | 5,550 |
| | 1,078 |
| | 3,451 |
| |
|
| | 10,079 |
|
Impairment & divestiture charges (income) | 4,217 |
| | — |
| | (1,230 | ) | | — |
| | 2,987 |
|
Operating profit (loss) | 11,025 |
| | (127 | ) | | 13,579 |
| | — |
| | 24,477 |
|
Financing costs (income), net | 15,400 |
| | 43 |
| | (325 | ) | | — |
| | 15,118 |
|
Intercompany (income) expense, net | (9,919 | ) | | 10,903 |
| | (984 | ) | | — |
| | — |
|
Other expense, net | 255 |
| | 94 |
| | 562 |
| | — |
| | 911 |
|
Earnings (loss) before income tax expense (benefit) | 5,289 |
| | (11,167 | ) | | 14,326 |
| | — |
| | 8,448 |
|
Income tax expense (benefit) | 10,327 |
| | (1,797 | ) | | 12,913 |
| | — |
| | 21,443 |
|
Net (loss) earnings before equity in loss of subsidiaries | (5,038 | ) | | (9,370 | ) | | 1,413 |
| | — |
| | (12,995 | ) |
Equity in loss of subsidiaries | (7,957 | ) | | (661 | ) | | (1,505 | ) | | 10,123 |
| | — |
|
Net loss | $ | (12,995 | ) | | $ | (10,031 | ) | | $ | (92 | ) | | $ | 10,123 |
| | $ | (12,995 | ) |
Comprehensive income (loss) | $ | 71,039 |
| | $ | (10,031 | ) | | $ | 86,386 |
| | $ | (76,355 | ) | | $ | 71,039 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
| | | February 28, 2018 | February 28, 2019 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
ASSETS | | | | | | | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 4,276 |
| | $ | — |
| | $ | 149,319 |
| | $ | — |
| | $ | 153,595 |
| $ | 9,426 |
| | $ | — |
| | $ | 160,962 |
| | $ | — |
| | $ | 170,388 |
|
Accounts receivable, net | 19,641 |
| | 52,171 |
| | 138,838 |
| | — |
| | 210,650 |
| 22,057 |
| | 44,345 |
| | 143,772 |
| | — |
| | 210,174 |
|
Inventories, net | 26,915 |
| | 61,363 |
| | 77,949 |
| | — |
| | 166,227 |
| 28,088 |
| | 52,849 |
| | 80,709 |
| | — |
| | 161,646 |
|
Assets held for sale | | — |
| | 53,714 |
| | 2,399 |
| | — |
| | 56,113 |
|
Other current assets | 14,186 |
| | 3,263 |
| | 43,120 |
| | — |
| | 60,569 |
| 14,829 |
| | 2,000 |
| | 38,034 |
| | — |
| | 54,863 |
|
Total current assets | 65,018 |
| | 116,797 |
| | 409,226 |
| | — |
| | 591,041 |
| 74,400 |
| | 152,908 |
| | 425,876 |
| | — |
| | 653,184 |
|
Property, plant and equipment, net | 8,076 |
| | 31,661 |
| | 62,674 |
| | — |
| | 102,411 |
| |
Property, plant & equipment, net | | 7,800 |
| | 16,859 |
| | 58,473 |
| | — |
| | 83,132 |
|
Goodwill | 38,846 |
| | 201,578 |
| | 305,711 |
| | — |
| | 546,135 |
| 38,847 |
| | 184,120 |
| | 257,241 |
| | — |
| | 480,208 |
|
Other intangibles, net | 7,521 |
| | 132,320 |
| | 76,529 |
| | — |
| | 216,370 |
| 6,247 |
| | 96,065 |
| | 47,723 |
| | — |
| | 150,035 |
|
Investment in subsidiaries | 1,902,303 |
| | 1,274,274 |
| | 806,292 |
| | (3,982,869 | ) | | — |
| 1,630,688 |
| | 1,234,687 |
| | 798,879 |
| | (3,664,254 | ) | | — |
|
Intercompany receivable | — |
| | 564,517 |
| | 208,983 |
| | (773,500 | ) | | — |
| — |
| | 406,039 |
| | 210,522 |
| | (616,561 | ) | | — |
|
Other long-term assets | 7,407 |
| | 1,864 |
| | 15,077 |
| | — |
| | 24,348 |
| 12,992 |
| | 320 |
| | 23,186 |
| | — |
| | 36,498 |
|
Total assets | $ | 2,029,171 |
| | $ | 2,323,011 |
| | $ | 1,884,492 |
| | $ | (4,756,369 | ) | | $ | 1,480,305 |
| $ | 1,770,974 |
| | $ | 2,090,998 |
| | $ | 1,821,900 |
| | $ | (4,280,815 | ) | | $ | 1,403,057 |
|
LIABILITIES & SHAREHOLDERS' EQUITY | LIABILITIES & SHAREHOLDERS' EQUITY | | | | | | | | | LIABILITIES & SHAREHOLDERS' EQUITY | | | | | | | | |
Current liabilities | | | | | | | | | |
|
| |
|
| |
|
| |
|
| |
|
|
Trade accounts payable | $ | 15,469 |
| | $ | 31,079 |
| | $ | 90,393 |
| | $ | — |
| | $ | 136,941 |
| 16,600 |
| | 17,390 |
| | 88,496 |
| | — |
| | 122,486 |
|
Accrued compensation and benefits | 13,376 |
| | 5,239 |
| | 22,903 |
| | — |
| | 41,518 |
| 12,028 |
| | 4,330 |
| | 21,044 |
| | — |
| | 37,402 |
|
Current maturities of debt and short-term borrowings | 30,000 |
| | — |
| | — |
| | — |
| | 30,000 |
| |
Current maturities of debt | | 30,000 |
| | — |
| | — |
| | — |
| | 30,000 |
|
Income taxes payable | 152 |
| | — |
| | 7,535 |
| | — |
| | 7,687 |
| — |
| | — |
| | 8,548 |
| | — |
| | 8,548 |
|
Liabilities held for sale | | — |
| | 7,634 |
| | 13,186 |
| | — |
| | 20,820 |
|
Other current liabilities | 13,683 |
| | 7,951 |
| | 36,734 |
| | — |
| | 58,368 |
| 16,321 |
| | 6,650 |
| | 35,900 |
| | — |
| | 58,871 |
|
Total current liabilities | 72,680 |
| | 44,269 |
| | 157,565 |
| | — |
| | 274,514 |
| 74,949 |
| | 36,004 |
| | 167,174 |
| | — |
| | 278,127 |
|
Long-term debt, net | 517,318 |
| | — |
| | — |
| | — |
| | 517,318 |
| |
Long-term debt | | 455,573 |
| | — |
| | — |
| | — |
| | 455,573 |
|
Deferred income taxes | 17,631 |
| | — |
| | 5,631 |
| | — |
| | 23,262 |
| 15,526 |
| | — |
| | 3,447 |
| | — |
| | 18,973 |
|
Pension and postretirement benefit liabilities | 11,942 |
| | — |
| | 7,396 |
| | — |
| | 19,338 |
| |
Pension and post-retirement benefit liabilities | | 7,405 |
| | — |
| | 6,966 |
| | — |
| | 14,371 |
|
Other long-term liabilities | 48,651 |
| | 383 |
| | 7,558 |
| | — |
| | 56,592 |
| 45,820 |
| | 271 |
| | 4,292 |
| | — |
| | 50,383 |
|
Intercompany payable | 771,668 |
| | — |
| | 1,832 |
| | (773,500 | ) | | — |
| 586,071 |
| | 30,490 |
| | — |
| | (616,561 | ) | | — |
|
Shareholders’ equity | 589,281 |
| | 2,278,359 |
| | 1,704,510 |
| | (3,982,869 | ) | | 589,281 |
| 585,630 |
| | 2,024,233 |
| | 1,640,021 |
| | (3,664,254 | ) | | 585,630 |
|
Total liabilities and shareholders’ equity | $ | 2,029,171 |
| | $ | 2,323,011 |
| | $ | 1,884,492 |
| | $ | (4,756,369 | ) | | $ | 1,480,305 |
| $ | 1,770,974 |
| | $ | 2,090,998 |
| | $ | 1,821,900 |
| | $ | (4,280,815 | ) | | $ | 1,403,057 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
| | | August 31, 2017 | August 31, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
ASSETS | | | | | | | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 34,715 |
| | $ | — |
| | $ | 194,856 |
| | $ | — |
| | $ | 229,571 |
| $ | 67,649 |
| | $ | — |
| | $ | 182,841 |
| | $ | — |
| | $ | 250,490 |
|
Accounts receivable, net | 17,498 |
| | 50,749 |
| | 121,959 |
| | — |
| | 190,206 |
| 19,969 |
| | 54,822 |
| | 112,958 |
| | — |
| | 187,749 |
|
Inventories, net | 23,308 |
| | 48,492 |
| | 71,851 |
| | — |
| | 143,651 |
| 22,570 |
| | 59,391 |
| | 74,395 |
| | — |
| | 156,356 |
|
Assets held for sale | — |
| | — |
| | 21,835 |
| | — |
| | 21,835 |
| — |
| | — |
| | 23,573 |
| | — |
| | 23,573 |
|
Other current assets | 23,576 |
| | 3,619 |
| | 34,468 |
| | — |
| | 61,663 |
| 7,358 |
| | 4,759 |
| | 30,615 |
| | — |
| | 42,732 |
|
Total current assets | 99,097 |
| | 102,860 |
| | 444,969 |
| | — |
| | 646,926 |
| 117,546 |
| | 118,972 |
| | 424,382 |
| | — |
| | 660,900 |
|
Property, plant & equipment, net | 7,049 |
| | 26,130 |
| | 61,342 |
| | — |
| | 94,521 |
| 7,937 |
| | 26,408 |
| | 55,875 |
| | — |
| | 90,220 |
|
Goodwill | 38,847 |
| | 200,499 |
| | 290,735 |
| | — |
| | 530,081 |
| 38,847 |
| | 203,543 |
| | 270,022 |
| | — |
| | 512,412 |
|
Other intangibles, net | 8,156 |
| | 138,042 |
| | 74,291 |
| | — |
| | 220,489 |
| |
Other intangible assets, net | | 6,884 |
| | 121,793 |
| | 52,360 |
| | — |
| | 181,037 |
|
Investment in subsidiaries | 1,832,472 |
| | 1,186,715 |
| | 805,016 |
| | (3,824,203 | ) | | — |
| 1,836,954 |
| | 1,211,781 |
| | 789,917 |
| | (3,838,652 | ) | | — |
|
Intercompany receivable | — |
| | 589,193 |
| | 205,183 |
| | (794,376 | ) | | — |
| |
Intercompany receivables | | — |
| | 622,646 |
| | 200,173 |
| | (822,819 | ) | | — |
|
Other long-term assets | 8,377 |
| | 812 |
| | 15,749 |
| | — |
| | 24,938 |
| 12,955 |
| | 366 |
| | 23,448 |
| | — |
| | 36,769 |
|
Total assets | $ | 1,993,998 |
| | $ | 2,244,251 |
| | $ | 1,897,285 |
| | $ | (4,618,579 | ) | | $ | 1,516,955 |
| $ | 2,021,123 |
| | $ | 2,305,509 |
| | $ | 1,816,177 |
| | $ | (4,661,471 | ) | | $ | 1,481,338 |
|
| | | | | | | | | | |
LIABILITIES & SHAREHOLDERS' EQUITY | | | | | | | | | | LIABILITIES & SHAREHOLDERS' EQUITY | | | | | | | | |
Current liabilities | | | | | | | | | | | | | | | | | | |
Trade accounts payable | $ | 15,412 |
| | $ | 27,168 |
| | $ | 90,807 |
| | $ | — |
| | $ | 133,387 |
| $ | 15,890 |
| | $ | 29,022 |
| | $ | 85,926 |
| | $ | — |
| | $ | 130,838 |
|
Accrued compensation and benefits | 19,082 |
| | 7,672 |
| | 24,185 |
| | — |
| | 50,939 |
| 22,171 |
| | 9,804 |
| | 22,533 |
| | — |
| | 54,508 |
|
Current maturities of debt and short-term borrowings | 30,000 |
| | — |
| | — |
| | — |
| | 30,000 |
| |
Current maturities of debt | | 30,000 |
| | — |
| | — |
| | — |
| | 30,000 |
|
Income taxes payable | 153 |
| | — |
| | 5,927 |
| | — |
| | 6,080 |
| — |
| | — |
| | 4,091 |
| | — |
| | 4,091 |
|
Liabilities held for sale | — |
| | — |
| | 101,083 |
| | — |
| | 101,083 |
| — |
| | — |
| | 44,225 |
| | — |
| | 44,225 |
|
Other current liabilities | 18,512 |
| | 7,169 |
| | 31,764 |
| | — |
| | 57,445 |
| 17,379 |
| | 11,078 |
| | 38,842 |
| | — |
| | 67,299 |
|
Total current liabilities | 83,159 |
| | 42,009 |
| | 253,766 |
| | — |
| | 378,934 |
| 85,440 |
| | 49,904 |
| | 195,617 |
| | — |
| | 330,961 |
|
Long-term debt | 531,940 |
| | — |
| | — |
| | — |
| | 531,940 |
| 502,695 |
| | — |
| | — |
| | — |
| | 502,695 |
|
Deferred income taxes | 24,164 |
| | — |
| | 5,695 |
| | — |
| | 29,859 |
| 17,467 |
| | — |
| | 4,466 |
| | — |
| | 21,933 |
|
Pension and post-retirement benefit liabilities | 12,540 |
| | — |
| | 7,322 |
| | — |
| | 19,862 |
| 7,765 |
| | — |
| | 7,104 |
| | — |
| | 14,869 |
|
Other long-term liabilities | 48,692 |
| | 352 |
| | 6,777 |
| | — |
| | 55,821 |
| 45,483 |
| | 359 |
| | 6,326 |
| | — |
| | 52,168 |
|
Intercompany payable | 792,964 |
| | — |
| | 1,412 |
| | (794,376 | ) | | — |
| 803,561 |
| | 19,258 |
| | — |
| | (822,819 | ) | | — |
|
Shareholders’ equity | 500,539 |
| | 2,201,890 |
| | 1,622,313 |
| | (3,824,203 | ) | | 500,539 |
| 558,712 |
| | 2,235,988 |
| | 1,602,664 |
| | (3,838,652 | ) | | 558,712 |
|
Total liabilities and shareholders’ equity | $ | 1,993,998 |
| | $ | 2,244,251 |
| | $ | 1,897,285 |
| | $ | (4,618,579 | ) | | $ | 1,516,955 |
| $ | 2,021,123 |
| | $ | 2,305,509 |
| | $ | 1,816,177 |
| | $ | (4,661,471 | ) | | $ | 1,481,338 |
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
| | | Six Months Ended February 28, 2018 | Six Months Ended February 28, 2019 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Operating Activities | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | (14,509 | ) | | $ | 6,923 |
| | $ | (14,520 | ) | | $ | — |
| | $ | (22,106 | ) | $ | (79,539 | ) | | $ | 305,640 |
| | $ | (31,167 | ) | | $ | (246,248 | ) | | $ | (51,314 | ) |
Investing Activities | | | | | | | | | | | | | | | | | | |
Capital expenditures | (1,982 | ) | | (5,274 | ) | | (5,291 | ) | | — |
| | (12,547 | ) | (950 | ) | | (6,478 | ) | | (8,239 | ) | | — |
| | (15,667 | ) |
Proceeds from sale of property, plant and equipment | — |
| | 83 |
| | 30 |
| | — |
| | 113 |
| 8 |
| | (31 | ) | | 75 |
| | — |
| | 52 |
|
Rental asset buyout for Viking divestiture | — |
| | — |
| | (27,718 | ) | | — |
| | (27,718 | ) | |
Proceeds from sale of business, net of transactions costs | 198 |
| | — |
| | 8,582 |
| | — |
| | 8,780 |
| |
Cash paid for business acquisitions, net of cash acquired | — |
| | (1,732 | ) | | (14,785 | ) | | — |
| | (16,517 | ) | |
Intercompany investment | | 52,883 |
| | — |
| | — |
| | (52,883 | ) | | — |
|
Proceeds from sale of business, net of transaction costs | | 23,611 |
| | — |
| | 12,548 |
| | — |
| | 36,159 |
|
Cash used in investing activities | (1,784 | ) | | (6,923 | ) | | (39,182 | ) | | — |
| | (47,889 | ) | 75,552 |
| | (6,509 | ) | | 4,384 |
| | (52,883 | ) | | 20,544 |
|
Financing Activities | | | | | | | | | | | | | | | | | | |
Principal repayments on term loan | (15,000 | ) | | — |
| | — |
| | — |
| | (15,000 | ) | (47,500 | ) | | — |
| | — |
| | — |
| | (47,500 | ) |
Stock option exercises and other | 10,305 |
| | — |
| | — |
| | — |
| | 10,305 |
| |
Stock option exercises, related tax benefits and other | | 1,031 |
| | — |
| | — |
| | — |
| | 1,031 |
|
Taxes paid related to the net share settlement of equity awards | (1,107 | ) | | — |
| | — |
| | — |
| | (1,107 | ) | (1,489 | ) | | — |
| | — |
| | — |
| | (1,489 | ) |
Cash dividend | (2,390 | ) | | — |
| | — |
| | — |
| | (2,390 | ) | |
Cash Dividends | | (2,439 | ) | | (246,248 | ) | | — |
| | 246,248 |
| | (2,439 | ) |
Intercompany loan activity | (5,954 | ) | | — |
| | 5,954 |
| | — |
| | — |
| (3,839 | ) | | — |
| | 3,839 |
| | — |
| | — |
|
Intercompany capital contribution | | — |
| | (52,883 | ) | | — |
| | 52,883 |
| | — |
|
Cash (used in) provided by financing activities | (14,146 | ) | | — |
| | 5,954 |
| | — |
| | (8,192 | ) | (54,236 | ) | | (299,131 | ) | | 3,839 |
| | 299,131 |
| | (50,397 | ) |
Effect of exchange rate changes on cash | — |
| | — |
| | 2,211 |
| | — |
| | 2,211 |
| — |
| | — |
| | 1,065 |
| | — |
| | 1,065 |
|
Net decrease in cash and cash equivalents | (30,439 | ) | | — |
| | (45,537 | ) | | — |
| | (75,976 | ) | (58,223 | ) | | — |
| | (21,879 | ) | | — |
| | (80,102 | ) |
Cash and cash equivalents—beginning of period | 34,715 |
| | — |
| | 194,856 |
| | — |
| | 229,571 |
| 67,649 |
| | — |
| | 182,841 |
| | — |
| | 250,490 |
|
Cash and cash equivalents—end of period | $ | 4,276 |
| | $ | — |
| | $ | 149,319 |
| | $ | — |
| | $ | 153,595 |
| $ | 9,426 |
| | $ | — |
| | $ | 160,962 |
| | $ | — |
| | $ | 170,388 |
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
| | | Six Months Ended February 28, 2017 | Six Months Ended February 28, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Operating Activities | | | | | | | | | | | | | | | | | | |
Net provided by operating activities | $ | 59,275 |
| | $ | 5,902 |
| | $ | 8,906 |
| | $ | (59,401 | ) | | $ | 14,682 |
| |
Net cash (used in) provided by operating activities | | $ | (14,509 | ) | | $ | 6,923 |
| | $ | (14,520 | ) | | $ | — |
| | $ | (22,106 | ) |
Investing Activities | | | | | | | | | | | | | | | | | | |
Capital expenditures | (2,156 | ) | | (6,108 | ) | | (6,431 | ) | | — |
| | (14,695 | ) | (1,982 | ) | | (5,274 | ) | | (5,291 | ) | | — |
| | (12,547 | ) |
Proceeds from sale of property, plant and equipment | — |
| | 135 |
| | 109 |
| | — |
| | 244 |
| — |
| | 83 |
| | 30 |
| | — |
| | 113 |
|
Rental asset buyout for Viking divestiture | | — |
| | — |
| | (27,718 | ) | | — |
| | (27,718 | ) |
Proceeds from sale of business, net of transaction costs | | 198 |
| | — |
| | 8,582 |
| | — |
| | 8,780 |
|
Cash paid for business acquisitions, net of cash acquired | | — |
| | (1,732 | ) | | (14,785 | ) | | — |
| | (16,517 | ) |
Cash used in investing activities | (2,156 | ) | | (5,973 | ) | | (6,322 | ) | | — |
| | (14,451 | ) | (1,784 | ) | | (6,923 | ) | | (39,182 | ) | | — |
| | (47,889 | ) |
Financing Activities | | | | | | | | | | | | | | | | | | |
Principal repayments on term loan | (7,500 | ) | | — |
| | — |
| | — |
| | (7,500 | ) | (15,000 | ) | | — |
| | — |
| | — |
| | (15,000 | ) |
Stock option exercises, related tax benefits and other | | 10,305 |
| | — |
| | — |
| | — |
| | 10,305 |
|
Taxes paid related to the net share settlement of equity awards | (920 | ) | | — |
| | — |
| | — |
| | (920 | ) | (1,107 | ) | | — |
| | — |
| | — |
| | (1,107 | ) |
Stock option exercises and other | 5,949 |
| | — |
| | — |
| | — |
| | 5,949 |
| |
Cash dividend | (2,358 | ) | | — |
| | (59,401 | ) | | 59,401 |
| | (2,358 | ) | |
Cash dividends | | (2,390 | ) | | — |
| | — |
| | — |
| | (2,390 | ) |
Intercompany loan activity | (53,734 | ) | | — |
| | 53,734 |
| | — |
| | — |
| (5,954 | ) | | — |
| | 5,954 |
| | — |
| | — |
|
Cash used in financing activities | (58,563 | ) | | — |
| | (5,667 | ) | | 59,401 |
| | (4,829 | ) | (14,146 | ) | | — |
| | 5,954 |
| | — |
| | (8,192 | ) |
Effect of exchange rate changes on cash | — |
| | — |
| | (3,116 | ) | | — |
| | (3,116 | ) | — |
| | — |
| | 2,211 |
| | — |
| | 2,211 |
|
Net decrease in cash and cash equivalents | (1,444 | ) | | (71 | ) | | (6,199 | ) | | — |
| | (7,714 | ) | (30,439 | ) | | — |
| | (45,537 | ) | | — |
| | (75,976 | ) |
Cash and cash equivalents—beginning of period | 7,953 |
| | 71 |
| | 171,580 |
| | — |
| | 179,604 |
| 34,715 |
| | — |
| | 194,856 |
| | — |
| | 229,571 |
|
Cash and cash equivalents—end of period | $ | 6,509 |
| | $ | — |
| | $ | 165,381 |
| | $ | — |
| | $ | 171,890 |
| $ | 4,276 |
| | $ | — |
| | $ | 149,319 |
| | $ | — |
| | $ | 153,595 |
|
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 operatingtwo reportable segments: Industrial EnergyTools & Services ("IT&S") and Engineered Solutions.Components & Systems ("EC&S"). The Industrial Tools & Services segment is primarily involvedengaged 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 ropeproviding services and cable solutionstool rentals to the globalindustrial, maintenance, infrastructure, oil & gas, power generationenergy and other energy markets. The Engineered SolutionsComponents & Systems segment provides highly engineered positioncomponents for on-highway, off-highway, agriculture, energy, medical, construction 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 agriculturalvertical 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 IndustrialBoth the IT&S and Engineered SolutionsEC&S segments continue to benefit from improvementimprovements within the broad industrial landscape, mining, infrastructure, commercial and off-highway vehicle and agriculture markets. We expect continued growth, though at a moderated pace, in these markets which began in the second half of fiscal 2017 and continued through the first half of fiscal 2018. We anticipate a moderate growth rate in these markets during the second half of fiscal 2018, while we expect the on-highway vehicle markets to slow on weaker demand and more difficult comparisons.2019. Reduced capital and maintenance spending in the oil & gas and energy markets in the form of project cancellations, deferrals and scope reductions are expected to be a continuing headwindwere headwinds throughout much of fiscal 2018, though quarterly core sales declines2018. However, we are expecting to see stabilization of the oil & gas and energy markets in fiscal 2019, which should moderate as fiscal 2018 progresses.result in an improvement in maintenance spending. As a result, we expect consolidated fiscal 20182019 core sales (sales growth (sales excluding the impact of acquisitions, divestitures and changes in foreign currency exchange rates) growth of 2%3% to 4%5%, compared to a 4%6% core sales declinegrowth in fiscal 2017.2018.
We continue to pursueremain focused on pursuing both organic and inorganic growth opportunities aligned with our strategic objectives. This includesThe organic opportunities include the advancement of our commercial effectiveness initiatives along with new product development efforts associated withefforts. We also remain focused on our offerings of mission critical solutions to customers. We are also revitalizing lean efforts across our manufacturing, assembly and service operations. The Industrialoperations to improve our operational efficiency. Our IT&S 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 tiersecond-tier brands. Within the Energy segment,In addition, we continue to geographically diversify and expand capabilities within the maintenance tools and services offerings while alsoremain focused on redirecting sales, marketing and engineering resources to various non-oil & gas vertical markets. During the quarter, we completed the divestituremarkets and providing new and existing customers with critical products, rentals, services and solutions in a dynamic energy environment. We continue to expect IT&S segment year-over-year core sales growth of our Viking business, thus exiting the offshore mooring business and significantly limiting our exposure3% to the upstream, offshore oil & gas market. Also during the quarter, we completed the acquisition of Mirage, a provider of industrial and energy maintenance tools.5% in fiscal 2019. The Engineered SolutionsEC&S segment is capitalizing on their served end market demand recovery, while also expanding content and engineering capabilities across customers and geographies. We continuegeographies, resulting in an expected 2% to analyze5% core sales growth in fiscal 2019.
As part of our portfolio management process, we routinely review our businesses in line with respect to our strategic initiatives and long-term objectives and are taking portfolio management actions that are anticipated to simplify and improve the operational performance of the Company. For example, the anticipated divestiture of our Company.
We remain focused on improvingremaining Cortland business in fiscal 2019 will represent a substantial exit from the upstream oil & gas market. In addition, the divestiture of the Precision Hayes business represents our financial positionexit of the Concrete Tensioning product line and flexibility by adjusting our cost structureallows us to reflect changes in demand levels and by proactively managing working capital and cash flow generation. Acrossredirect resources to other core product lines. On January 24, 2019, the Company announced its intent to divest the EC&S segment to pursue a strategy as a pure-play industrial tools and services company. Divestitures pose risks and challenges that could negatively impact our business, including required separation or carve-out activities and costs, disputes with buyers or potential impairment charges.
During the three months ended February 28, 2019 and 2018, we are continuing the cost reduction programs initiated at the beginningincurred $0.1 million and $3.5 million of fiscal 2016. Restructuring charges related to these initiatives totaled approximately $33 million in fiscal 2016, fiscal 2017 and the first half of fiscal 2018, combined. Totalrestructuring costs, respectively, associated with previously announced restructuring initiatives. Year-to-date restructuring charges were $4.3totaled $0.5 million and $10.9 million in the threefor fiscal 2019 and six months ended February 28, 2018, respectively. These restructuring costs related primarily to executive leadership changes, facility consolidation,consolidations, 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 second half of fiscal 2018, including approximately $2 million to $4 million of additional restructuring charges during that time.
improvements. Pre-tax cost savings realized from executing these restructuring initiatives totaled approximately $19$32 million in fiscalfiscals 2016, fiscal 2017 and 2018, and the first half of fiscal 2018,2019 combined. Realized cost savings were comprised of $5$12 million within the IndustrialIT&S segment, $7$17 million within the EnergyEC&S segment $6and $3 million within the Engineered Solutions segment and $1 million within Corporate expenses.Corporate. The Company anticipates realizing an incremental $10 million to $15 million in pre-tax cost savings of approximately $1 million for the second halfbalance of fiscal 2018 and in fiscal 2019 for all previously executed restructuring initiatives implemented in fiscals 2016, 2017 and 2018 and to be implemented in the second half of fiscal 2018. Thirtyinitiatives. Seventy-five percent of the anticipated future cost savings are expected to benefit the IndustrialIT&S segment another 50%and the remaining 25% are expected to benefit the Energy segment, another 5% are expectedEC&S segment.
On March 21, 2019, we announced a new restructuring plan focused on the integration of the Enerpac and Hydratight businesses (IT&S segment) as well as driving efficiencies within the overall corporate structure. We expect to achieve $12-$15 million of annual savings with a restructuring cost of $15-$20 million and anticipate completing these actions within 18-24 months. The annual benefit the Engineered Solutions segment and the remaining 15% are expected to benefit Corporate expenses. Theseof these gross cost savings are routinely offsetmay be impacted by variations between yearsa number of factors, including sales and production volume variances and annual bonus expense differential and corresponding re-investment of savings into other initiatives.
differentials.
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. A strengthening of the U.S. dollar has the opposite effect on our sales, cash flow, earnings and financial position.
Results of Operations
The following table sets forth our results of operations (in millions, except per share amounts):
| | | Three Months Ended February 28, | | Six Months Ended February 28, | Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | | | 2017 | | | | 2018 | | | | 2017 | | | 2019 | | | | 2018 | | | | 2019 | | | | 2018 | | |
Net sales | $ | 275 |
| | 100 | % | | $ | 259 |
| | 100 | % | | $ | 564 |
| | 100 | % | | $ | 525 |
| | 100 | % | $ | 272 |
| | 100 | % | | $ | 275 |
| | 100 | % | | $ | 564 |
| | 100 | % | | $ | 564 |
| | 100 | % |
Cost of products sold | 185 |
| | 67 | % | | 172 |
| | 66 | % | | 374 |
| | 66 | % | | 344 |
| | 66 | % | 174 |
| | 64 | % | | 185 |
| | 67 | % | | 362 |
| | 64 | % | | 374 |
| | 66 | % |
Gross profit | 90 |
| | 33 | % | | 87 |
| | 34 | % | | 190 |
| | 34 | % | | 181 |
| | 34 | % | 98 |
| | 36 | % | | 90 |
| | 33 | % | | 202 |
| | 36 | % | | 190 |
| | 34 | % |
Selling, administrative and engineering expenses | 69 |
| | 25 | % | | 67 |
| | 26 | % | | 143 |
| | 25 | % | | 136 |
| | 26 | % | 71 |
| | 26 | % | | 69 |
| | 25 | % | | 144 |
| | 26 | % | | 143 |
| | 25 | % |
Amortization of intangible assets | 5 |
| | 2 | % | | 5 |
| | 2 | % | | 10 |
| | 2 | % | | 10 |
| | 2 | % | 3 |
| | 1 | % | | 5 |
| | 2 | % | | 8 |
| | 1 | % | | 10 |
| | 2 | % |
Director & officer transition charges | — |
| | — | % | | — |
| | — | % | | — |
| | — | % | | 8 |
| | 2 | % | |
Restructuring charges | 3 |
| | 1 | % | | 2 |
| | 1 | % | | 10 |
| | 2 | % | | 5 |
| | 1 | % | — |
| | — | % | | 3 |
| | 1 | % | | — |
| | — | % | | 10 |
| | 2 | % |
Impairment & divestiture charges | 3 |
| | 2 | % | | — |
| | — | % | | 3 |
| | 1 | % | | — |
| | — | % | 7 |
| | 3 | % | | 3 |
| | 1 | % | | 43 |
| | 8 | % | | 3 |
| | 1 | % |
Operating profit | 10 |
| 0.03636363636 |
| 4 | % | | 13 |
| | 5 | % | | 24 |
| | 4 | % | | 22 |
| | 4 | % | 17 |
| | 6 | % | | 10 |
| | 4 | % | | 7 |
| | 1 | % | | 24 |
| | 4 | % |
Financing costs, net | 8 |
| | 3 | % | | 7 |
| | 3 | % | | 15 |
| | 3 | % | | 14 |
| | 3 | % | 7 |
| | 3 | % | | 8 |
| | 3 | % | | 14 |
| | 2 | % | | 15 |
| | 3 | % |
Other expense, net | — |
| 0.02909090909 |
| — | % | | 1 |
| | — | % | | 1 |
| | — | % | | — |
| | — | % | 1 |
| | — | % | | — |
| | — | % | | 2 |
| | — | % | | 1 |
| | — | % |
Earnings before income tax expense (benefit) | 2 |
| — |
| 1 | % | | 5 |
| | 2 | % | | 8 |
| | 1 | % | | 7 |
| | 1 | % | |
Income tax expense (benefit) | 20 |
| 0.007272727273 |
| 7 | % | | — |
| | — | % | | 21 |
| | 4 | % | | (3 | ) | | (1 | )% | |
Net (loss) earnings | $ | (18 | ) | 0.03636363636 |
| (7 | )% | | $ | 5 |
| | 2 | % | | $ | (13 | ) | | (2 | )% | | $ | 11 |
| | 2 | % | |
Earnings (loss) before income tax expense | | 9 |
| | 3 | % | | 2 |
| | 1 | % | | (9 | ) | | (2 | )% | | 8 |
| | 1 | % |
Income tax expense | | 6 |
| | 2 | % | | 20 |
| | 7 | % | | 6 |
| | 1 | % | | 21 |
| | 4 | % |
Net earnings (loss) | | $ | 3 |
| | 1 | % | | $ | (18 | ) | | (7 | )% | | $ | (15 | ) | | (3 | )% | | $ | (13 | ) | | (2 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted (loss) earnings per share | $ | (0.30 | ) | | | $ | 0.08 |
| | | | $ | (0.22 | ) | | | | $ | 0.17 |
| | | |
Diluted earnings (loss) per share | | $ | 0.04 |
| | | | $ | (0.30 | ) | | | | $ | (0.24 | ) | | | | $ | (0.22 | ) | | |
Consolidated sales for the second quarter of fiscal 20182019 were $275$272 million, an increasea decrease of $16$3 million from the prior year, while year-to-date sales were $564 million, an increase of $39 million(1%) from the prior year. For the three months ended February 28, 2019, foreign currency exchange rates unfavorably impacted sales by 4% and a net 4% reduction to sales from acquisitions and divestitures resulted in a core sales increase of 7%. The consolidated net sales decrease for the three months ended February 28, 2019 compared to the prior year was the result of the current year divestitures of our Precision Hayes and Cortland Fibron businesses, offset by the increased sales in the IT&S segment, specifically in the Service & Rental product line. Gross profit margins increased slightly to 36% in the second quarter of fiscal 2019 compared to 33% in the prior year period due to favorable sales mix, price realization net of tariff and commodity cost increases, the non-recurrence of cost overruns associated with the heavy lifting product offering, and to a lesser extent the realization of benefits from restructuring activities. The three months ended February 28, 2019 included impairment & divestiture charges of $7 million, related primarily to impairment charges for the anticipated sale of the Cortland U.S. business and divestiture charges related to the sale of the Precision Hayes and Cortland Fibron businesses (as described in Note 5, "Divestiture Activities"), while the three months ended February 28, 2018 included restructuring charges of $4 million and impairment charges of $3 million mainly related to the Viking divestiture. As a result, operating profit margins increased to 6% for the three months ended February 28, 2019 from 4% for the three months ended February 28, 2018.
Year-to-date consolidated sales remained flat at $564 million compared to the prior year. Changes in foreign currency exchange rates unfavorably impacted sales by 3% and the net impact from acquisitions and divestitures reduced sales by 1%, for the six months ended February 28, 2018, foreign currency exchange rates favorably impacted sales by 5% and 4%, respectively. However, the net acquisition and divestiture activity reduced sales by 2% and 1% for the three and six months ended February 28, 2018, respectively.2019. As a result, core sales were up 3% for the second quarter and 5%increased 4% year-to-date compared to prior year. The minimal changes in consolidated corenet sales increasefor the six months was the result of a strong end marketthe recent divestitures of our Precision Hayes and Cortland Fibron businesses and slower demand and volume in both the Industrial and Engineered Solutions segments, which more than offset the expected decline in the EnergyEC&S segment, specifically the On-Highway product line, offset by the increased sales in the IT&S segment. OperatingGross profit margins stayed relatively consistent year-over-year. Non-recurring director & officer transition charges of $8 million were included inincreased slightly to 36% for the six months ended February 28, 2017,2019 compared to 34% in the prior year period due to favorable sales mix, price realization net of tariff and commodity cost increases, the non-recurrence of cost overruns associated with the heavy lifting product offering, and to a lesser extent the realization of benefits from restructuring activities. The six months ended February 28, 2019 included impairment & divestiture charges of $43 million, largely related to impairment charges on the sale of our Precision Hayes and Cortland Fibron businesses and the anticipated sale of the Cortland U.S. business (as described in Note 5, "Divestiture Activities"), and minimal restructuring charges, while the six months ended February 28, 2018 included increasedboth restructuring charges of $7$11 million year-over-yearrelated to executive leadership charges and $3 million of impairment charges related tofor the Viking divestiture. Additionally,As a result, operating profit margins decreased to 1% for the second quarter of fiscal 2018 included an increased effective income tax rate compared to prior year due to a one-time provisional tax chargesix months ended February 28, 2019 from 4% for U.S. Tax Reform (see Note 12, "Income Taxes" for further discussion) and $9 million of tax expense associated with the Viking divestiture.six months ended February 28, 2018.
Segment Results
Industrial Tools & Services Segment
The IndustrialIT&S segment is a global supplier of branded hydraulic and mechanical tools to a broad array of end markets, including general maintenance and repair, industrial, oil & gas,energy, mining infrastructure and production automation.automation markets. Its primary products include high-force hydraulicbranded tools, production automation solutions and concrete stressing components and systems (collectively "Industrial Tools") and highly engineered heavy lifting technology solutions, ("Heavy Lifting Technology")connectors for oil & gas, as well as hydraulic torque wrenches (Product product line). On the services side, we provide energy maintenance and manpower services to meet customer-specific needs and rental capabilities for some of our products (Service & Rental product line). The following table sets forth the results of operations for the IndustrialIT&S segment (in millions):
| | | Three Months Ended February 28, | | Six Months Ended February 28, | Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 99 |
| | $ | 92 |
| | $ | 196 |
| | $ | 179 |
| $ | 150 |
| | $ | 137 |
| | $ | 298 |
| | $ | 279 |
|
Operating profit | 17 |
| | 18 |
| | 35 |
| | 37 |
| 27 |
| | 19 |
| | 53 |
| | 40 |
|
Operating profit % | 17.0 | % | | 20.1 | % | | 17.9 | % | | 20.8 | % | 17.8 | % | | 13.8 | % | | 17.7 | % | | 14.3 | % |
IndustrialThe IT&S segment second quarter sales were $99$150 million, an increase of 8%$13 million (9%) from the prior year, while year-to-date sales were $196$298 million, an increase of 10%$19 million (7%) from the prior year. Second quarter core sales were up 4%, excluding a 4% benefit fromChanges in foreign currency exchange rates unfavorably impacted sales comparison by 3% for both the three and six month periods, while year-to-datethe Mirage and Equalizer acquisitions increased net sales by 2% for the six months ended February 28, 2019. As a result, IT&S segment core sales were up 6%, excluding a 4% benefit from foreign currency exchange rates. Overall demand for the Industrial Tools product line remained strong globally and across our diverse set of end markets, with particular strength in the bolting and OEM service tool categories and weakness within concrete tensioning product sales. Core sales within the Industrial Tools product line increased $6$16 million (7%(12%) and $10$21 million (6%(8%) compared to the prior year for the three and six months ended February 28, 2018 and 2017,2019, respectively. The Industrial segment core sales growth represents both broad market strengthincrease of $13 million (43%) and $19 million (28%) compared to the impact of new product and commercial coverage activities. The segment's overall core sales growth percentage was slightly diminished by the core sales decline in the Heavy Lifting Technology product line of $2 million (-16%)prior year for the three months ended February 28, 2018 and an increase of $1 million (7%) for the six months ended February 28, 2018.2019, respectively, in the Service & Rental product line was the result of continued strength of our end markets and investments in commercial effectiveness, largely in the Americas and Middle East regions. Core sales within the Product product line increased $3 million (3%) and $2 million (1%) compared to the prior year for the three and six months ended February 28, 2019, respectively. The decreaseincrease in sales was largely in the Americas region, offset partially by lower sales in Europe resulting from our decision to focus on standard product (versus large one off projects) in regard to our heavy lifting product offering.
The increases in operating profit for the three and six months ended February 28, 20182019 were the result of approximately $2 million in long-term specialtyincremental gross profit on higher sales volumes, the elimination of prior year discrete charges associated with heavy lifting project cost overrunsprojects, pricing benefits net of increased tariff and production inefficiencies and lower volumes in concrete tensioning. Incremental commercial and engineering investments to support growth of $2 million for the three months ended February 28, 2018 further contributed to lower comparative operating profit. Restructuring charges totaled $3 million and $1 million for the six months ended February 28, 2018 and 2017, respectively.
Energy Segment
The Energy segment provides products and maintenance services to the global energy markets, where safety, reliability, up-time and productivity are key value drivers. Products include joint integrity tools and connectors for oil & gas and power generation installations and high performance ropes, cables and umbilicals. In addition to these products, the Energy segment also provides joint integrity tools under rental arrangements, as well as technical manpower solutions. The following table sets forth comparative results of operations for the Energy segment (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net sales | $ | 66 |
| | $ | 73 |
| | $ | 142 |
| | $ | 158 |
|
Operating (loss) profit (1) | (5 | ) | | (1 | ) | | (4 | ) | | 3 |
|
Operating (loss) profit % | (6.8 | )% | | (0.8 | )% | | (3.0 | )% | | 1.7 | % |
(1)Operating (loss) profit includes impairment and divestiture charges of $3 million for both the three and six months ended February 28, 2018.
Energy segment second quarter sales decreased 9% from the prior year, while year-to-date sales decreased 10%. Changes in foreign currency exchange rates favorably impacted sales comparisons by 4% and 3% for the three and six month periods. In addition, the net impact on sales from the Viking divestiture and Mirage acquisition resulted in a $6 million (-5%) and $11 million (-4%) headwind for the three and six months ended February 28, 2018, respectively. As a result, Energy segment core sales declined 8% for the second quarter and 9% year-to-date. Core sales from our Energy Maintenance & Integrity product line decreased $7 million (12%) and $16 million (13%) for the three and six months ended February 28, 2018, respectively. The decrease in both periods was due to the continuation of customer maintenance deferrals and scope reductions, most notably in the Asia Pacific region with modestly improving activity levels limited to the Middle East region. Core sales in our Other Energy Solutions product line, consisting of umbilical & rope solutions, increased by $1 million (7%)commodity costs and $3 million (10%) in the three and six month periods, due to higher medical demand along with improving offshore oil & gas rope and cable activity. Energy segment operating loss was $5 million and $1 million for the three months ended February 28, 2018 and 2017, respectively. Year-to-date operating loss was $4
million and operating profit was $3 million for fiscal 2018 and 2017, respectively. Operating losses in the three and six month periods included impairment and divestiturelower restructuring charges of $3 million relatedcompared to the Viking divestiture. Excluding the impairment and divestiture charge, Energy segment results were an operating loss of $2 million and $1 million for the three and six months ended February 28, 2018. The adjusted operating losses for fiscal 2018 were the result of lower volumes and increased restructuring charges, partially offset by the absence of prior year Viking losses and the benefit of prior cost reduction actions. Restructuring costs to consolidate facilities and reduce headcount were $3 million for the six months ended February 28, 2018 and insignificant for the six months ended February 28, 2017.year.
Engineered SolutionsComponents & Systems Segment
The Engineered SolutionsEC&S segment is a leading global designer, manufacturer and assembler of system critical position and motion control systems, high performance ropes, cables and umbilicals and other customized industrial productscomponents, to various vehicle, construction, agricultural, energy, medical and other niche markets. The segment focuses on providing technical and highly engineered products, including actuation systems, mechanical power transmission products, engine air flow management systems, human to machine interface solutions, and other rugged electronic instrumentation, concrete tensioning (divested December 31, 2018) and rope and cable. Products in the EC&S segment are primarily marketed directly to OEM customers.OEMs and other diverse customers through our technical sales organization. The following table sets forth comparative results of operations for the Engineered SolutionsEC&S segment (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net sales | $ | 110 |
| | $ | 94 |
| | $ | 226 |
| | $ | 188 |
|
Operating profit | 2 |
| | 2 |
| | 9 |
| | 3 |
|
Operating profit % | 2.0 | % | | 1.9 | % | | 3.8 | % | | 1.4 | % |
|
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 122 |
| | $ | 138 |
| | $ | 266 |
| | $ | 285 |
|
Operating loss | (1 | ) | | (4 | ) | | (30 | ) | | — |
|
Operating loss % | (1.2 | )% | | (3.2 | )% | | (11.2 | )% | | (0.1 | )% |
Engineered Solutions
The EC&S segment second quarter net sales increaseddecreased $16 million (17%(11%), to $110$122 million, versus the prior year, and year-to-date sales decreased $19 million (7%), to $266 million, compared to the prior year. Changes in foreign currency rates unfavorably impacted sales by 2% and 3% for the three and six months ended February 28, 2019, respectively. The divestitures of Precision Hayes and Cortland Fibron in fiscal 2019 and the divestiture of Viking in fiscal 2018 decreased sales by 9% and 4% for the three and six months ended February 28, 2019 and 2018, respectively. Excluding changes in foreign currency rates and divestiture activity, EC&S segment core sales were flat for the three month period compared to the prior year and increased 1% for the six months ended February 28, 2019 compared to the prior year. Core sales growth of 6% and 7% for the three and six months ended February 28, 2019, respectively, in the Off-Highway product line was driven by healthy demand, ramp up of new platform wins and price increases initiated in the second half of fiscal 2018. The On-Highway product line core sales decreased 2% and 3% for the three and six months ended February 28, 2019, respectively, due to slower demand in the on-road European truck market offset by China truck market demand stabilization. The core sales decrease of 11% and 10%in the Rope & Cable Solutions product line for the three and six months ended February 28, 2019, respectively, was primarily the result ofthe divestiture of Cortland Fibron. The divestiture of Precision Hayes in the second quarter while year-to-date sales increased $38of fiscal 2019 represents our exit of the Concrete Tensioning product line.
Operating losses of $1 million (20%)and $30 million for the three and six months ended February 28, 2019, respectively, included impairment & divestiture charges of $7 million and $43 million for the three and six months ended February 2019, respectively, related to $226 million.the sale of our Precision Hayes and Cortland Fibron businesses, as well as the anticipated divestitures of our Cortland U.S. and remaining EC&S businesses. Excluding the 7%impairment & divestiture charges, the EC&S segment operating profit margin was 4.5% and 5% favorable impact5.3% for the three and six months ended February 28, 2019, respectively. Operating losses of changes in foreign currency exchange rates$4 million and $0.4 million for the three and six months ended February 28, 2018 respectively, core sales increased 10% forincluded $3 million of impairment & divestiture charges related to the second quartersale of Viking. Excluding these impairment & divestiture charges, the EC&S segment operating profit margin was 0.9% and 15% year-to-date. Strong sales and growth continued globally across our Agricultural, Off-Highway and Other product line with core sales increasing $6 million (13%) and $14 million (16%)2.2% for the three and six months ended February 28, 2018. On-Highway product line core sales increased $4 million (7%) for the second quarter and $15 million (14%) year-to-date2018, respectively. The year-over-year improvement in operating margins was due to high growth in Europe, partially offset by anticipated lower China volumes. Operating profit was $9the benefit of price realization, savings from prior period restructuring initiatives and operating efficiencies. Restructuring charges were $0.4 million and $3$3.7 million for the six months ended February 28, 2019 and 2018, and 2017, respectively, which is primarily the result of higher volumes. Restructuring charges were insignificant for the six months ended February 28, 2018 and $4 million for the six months ended February 28, 2017.respectively.
Corporate
Corporate expenses decreased $2increased by $4 million and $6$1 million from the prior year for the three and six months ended February 28, 2018.2019, respectively. The quarter-to-date increase related to increased medical, stock compensation and consulting expenses. The year-to-date decrease in corporateincrease is the result of the previously mentioned expenses was primarily due to the benefit of executive cost reduction actions, lower incentive compensation and non-recurring director & officer transition charges of $8 million recognized in the prior year, offset by restructuring charges of $4 million primarily related tofor executive leadership changes in the six months ended February 28,fiscal 2018.
Financing Costs, net
Net financing costs were $8$7.2 million and $7$7.6 million for the three months ended February 28, 20182019 and 2017,2018, respectively. For the six months ended February 28, 20182019 and 2017,2018, net financing costs were $14 million and $15 million, and $14 million, respectively.
Income Tax Expense
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, changes in tax laws, acquisitions and divestitures 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 (loss) before income taxes, income tax expense or benefit and effective income tax rates are as follows (amounts in(in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2018 | | 2017 | | 2018 | | 2017 |
Earnings before income taxes | $ | 2 |
| | $ | 5 |
| | $ | 8 |
| | $ | 7 |
|
Income tax expense (benefit) | 20 |
| | — |
| | 21 |
| | (3 | ) |
Effective income tax rate | 1,226.1 | % | | 3.8 | % | | 253.8 | % | | (38.6 | )% |
|
| | | | | | | | | | | | | | | |
| Three Months Ended February 28, | | Six Months Ended February 28, |
| 2019 | | 2018 | | 2019 | | 2018 |
Earnings (loss) before income taxes | $ | 9 |
| | $ | 2 |
| | $ | (9 | ) | | $ | 8 |
|
Income tax expense | 6 |
| | 20 |
| | 6 |
| | 21 |
|
Effective income tax rate | 67.8 | % | | 1,226.1 | % | | (63.7 | )% | | 253.8 | % |
The Company’scomparability of earnings (loss) before income taxes, income tax expense and the related effective income tax rates duringare impacted by the Act, as described above, along with impairment & divestiture charges. Results included $6.9 million and $43.3 million ($6.7 million and $40.5 million after tax, respectively) of impairment & divestiture charges for the three and six months ended February 28, 2018 were impacted by2019 and $3.0 million ($12.4 million after tax) impairment & divestiture charges for the Tax Cutsthree and Jobs Act (the “Act”), which was enacted into law on December 22, 2017. See further discussion ofsix months ended February 28, 2018. Excluding the effects ofimpairment & divestiture charges, the Act under “Note 12. Income Taxes.”
The effective tax rate for the three and six months ended February 28, 2019 was 38.8% and 24.8%, respectively, as compared to 226.8% and 105.3% for the three and six months ended February 28, 2018. The income tax benefit without impairment & divestiture charges for the six months ended February 28, 2018 was 253.8% compared2019 is significantly impacted by a $2.6 million benefit related to (38.6)% for the comparable prior year period. The effective tax rate for the current year results in significantly greater tax expense than the comparable prior year period due to recording the effects of the Act, as described in "Note 12. Income Taxes." Additionally,compared to the six months ended February 28, 2018 also include discrete incomewhich includes $1.5 million of tax expense of $9 million related to the Viking divestiture and $2 million related to the shortfall of tax benefits on deductible equity compensation and the expiration of unexercised stock options. Bothoptions and $7.9 million of tax expense related to the Act. Additionally, both the current and prior year effective income tax rates were impacted by the proportion of earnings in foreign jurisdictions (withwith income tax rates lowerdifferent than the U.S.
federal income tax rate)rate. The Company's earnings (loss) before income taxes include approximately 70% and tax benefits derived75% of earnings from tax planning initiatives which were comparable between years. In addition,foreign jurisdictions for the Company may release a material valuation allowance in a foreign jurisdiction in late fiscal 2018 or inestimated full-year fiscal 2019 ifand 2018, respectively. This foreign income tax rate differential had a minimal impact to the Company determines that it is more likely than noteffective income tax rate as a result of the deferrednew U.S. statutory rate of 21% for the six months ended February 28, 2019; however, for the six months ended February 28, 2018, the foreign income tax assets will be realized.rate differential had the effect of reducing the effective income tax rate from the 25.7% U.S. statutory tax rate by 5.2%.
Cash Flows and Liquidity
At February 28, 2018,2019, we had $170 million of cash and cash equivalents. Cash and cash equivalents included $149$159 million of cash held by our foreign subsidiaries and $4$11 million held domestically. We periodically utilize income tax safe harborsafe-harbor provisions to make temporary short-term intercompany advances from our foreign subsidiaries to our U.S. parent. At February 28, 2018, we did not have anyThere were no temporary intercompany advances compared to the $5 million we had outstanding at February 28, 2019 or August 31, 2017.2018. The following table summarizes our cash flows fromprovided by (used in) operating, investing and financing activities (in millions):
| | | Six Months Ended February 28, | Six Months Ended February 28, |
| 2018 | | 2017 | 2019 | | 2018 |
Net cash (used in) provided by operating activities | $ | (22 | ) | | $ | 15 |
| |
Net cash used in investing activities | (48 | ) | | (15 | ) | |
Net cash used in operating activities | | $ | (51 | ) | | $ | (22 | ) |
Net cash provided by (used in) investing activities | | 20 |
| | (48 | ) |
Net cash used in financing activities | (8 | ) | | (5 | ) | (50 | ) | | (8 | ) |
Effect of exchange rates on cash | 2 |
| | (3 | ) | 1 |
| | 2 |
|
Net decrease in cash and cash equivalents | $ | (76 | ) | | $ | (8 | ) | $ | (80 | ) | | $ | (76 | ) |
Cash flows used in operating activities were $22$51 million for the six months ended February 28, 2018, a decrease of $372019. Net cash used in operating activities increased $29 million fromas compared to the prior year primarily due to lowerincreases in primary working capital and increased year-over-year annual incentive pay-out. Net cash earnings andprovided (used in) investing activities increased $68 million as a result of divestitures offset by higher capital expenditures in fiscal 2019 compared to cash used for inventoriesacquisitions and accounts payable,lease buyouts related to the Viking divestiture partially offset by reduced cash tax payments.provided by divestitures in fiscal 2018.
Net cash used in financing activities was $50 million for the six months ended Feb 28, 2019 compared to $8 million for the six months ended Feb 28, 2018. The increase in cash used in financing activities was primarily due to incremental principal repayments on the term loan of $33 million and approximately $9 million lower year-over-year cash received as a result of stock option exercises. Existing cash balances along with $10 million from stock options exercises and $9 million from the sale of business, funded the $28 million rental asset lease buyout for the Viking divestiture, $17 million of business acquisitions, $13$16 million of capital expenditures, and $15$48 million of principal loan repayments.repayments and $2 million annual cash dividend.
Our Senior Credit Facility, which matures on May 8, 2020, includes a $600$300 million revolving credit facility, an amortizingrevolver, a $300 million term loan and a $450 million expansion option, subject to certain conditions.option. Quarterly principal payments of $4 million on the term loan commenced on June 30, 2016, increased to $8 million per quarter on June 30, 2017 and extend through March 31, 2020, with the remaining principal due at maturity. At February 28, 2018, we had $154 million of cash and cash equivalents. Unused revolver capacity and amount available for borrowing was $597$299 million at February 28, 2018,2019.
During the three months ended February 28, 2019, the Company repaid a total of which $84$40 million was available for borrowing. of the term loan, reducing the remaining principal due to $200 million.
We believe that the revolver,
combined with our existing cash on hand and anticipated operating cash flowflows, will be adequate to meet operating, debt service, acquisition and capital expenditure funding requirements for the foreseeable future.
Primary Working Capital Management
We use primary working capital as a percentage of sales (PWC %) as a key metric of working capital management. We define this metric as the sum of net accounts receivable and net inventory less accounts payable, divided by the past three months sales annualized. The second quarter working capital increase compared to August 31, 2017 is the result of core sales growth and seasonal inventory build most notable within the Industrial and Engineered Solutions segments. The following table shows a comparison of primary working capital (in millions):
| | | February 28, 2018 | | PWC% | | August 31, 2017 | | PWC% | February 28, 2019 | | PWC% | | August 31, 2018 | | PWC% |
Accounts receivable, net | $ | 211 |
| | 19 | % | | $ | 190 |
| | 17 | % | $ | 210 |
| | 19 | % | | $ | 188 |
| | 16 | % |
Inventory, net | 166 |
| | 15 | % | | 144 |
| | 13 | % | 162 |
| | 15 | % | | 156 |
| | 13 | % |
Accounts payable | (137 | ) | | (12 | )% | | (133 | ) | | (12 | )% | (122 | ) | | (11 | )% | | (131 | ) | | (11 | )% |
Net primary working capital | $ | 240 |
| | 22 | % | | $ | 201 |
| | 18 | % | $ | 250 |
| | 23 | % | | $ | 213 |
| | 18 | % |
Commitments and Contingencies
We have operations 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 and we believe that such costs will not have a material adverse effect on our financial position, results of operations or cash flows.
We remainare contingently liable for certain lease payments ofunder leases within businesses that we previously divested or spun-off, in the event that suchspun-off. If any of these businesses are unable todo not fulfill their future lease payment obligations under a lease, we could be liable for such obligations. The discountedAs of February 28, 2019, the present value of future minimum lease payments, for these leases was $12 million using a weighted average discount rate of 3.15% at February 28, 2018.3.01%, on previously divested or spun-off businesses was $10 million.
We had outstanding letters of credit outstanding of approximately $23totaling $17 million and $22$24 million at February 28, 20182019 and August 31, 2017,2018, respectively, the majority of which relate to commercial contracts and self-insured workersworkers' compensation programs.
We are also subject to certain contingencies with respect to legal proceedings and regulatory matters which are described in Note 14, "Commitments and Contingencies" in the notes to the condensed consolidated financial statements. In the opinion of management, there will be no material adverse effect on the Company's results of operations, financial position or cash flows.
Contractual Obligations
Our contractual obligations have not materially changed in fiscal 20182019 and are discussed in Part 1, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Contractual Obligations” in our Annual Report on Form 10-K for the year ended August 31, 2017.2018.
Critical Accounting Policies
The following policies are considered by management to be the most critical in understanding judgments involved in the preparation of our condensed consolidated financial statements and uncertainties that could impact our results of operations, financial position and cash flow. For information about more of the Company’s policies, methodology and assumptions related to critical accounting policies refer to the Critical Accounting Policies in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the year ended August 31, 2018.
Goodwill and Long-lived Assets:
Goodwill Impairment Review and Estimates:
A considerable amount of management judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of each reporting unit and the indefinite lived intangible assets. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore, impairment charges could be required. Significant negative industry or economic trends, disruptions to the Company's business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets or in entity structure and divestitures may adversely impact the assumptions used in the valuations and ultimately result in future impairment charges.
In estimating the fair value of a reporting unit, we generally use a discounted cash flow model, which calculates fair value as the sum of the projected discounted cash flows over a discrete seven year period plus an estimated terminal value. In certain circumstances, we also review a market approach in which a trading multiple is applied to either forecasted EBITDA (earnings before interest, income taxes, depreciation and amortization) or anticipated proceeds of the reporting unit to arrive at the estimated fair value. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded. The estimated fair value represents the amount we believe a reporting unit could be bought or sold for in a current transaction between willing parties on an arms-length basis.
Fiscal 2019 Impairment Charge:
During the second quarter of fiscal 2019, we determined the Cortland U.S. business continued to meet the criteria for assets held for sale treatment at February 28, 2019 and required additional impairment to recognize the business at its current estimated fair value less cost to sell. Also, in conjunction with the January 24, 2019 announcement of the potential divestiture of the remaining EC&S segment, interim “triggering events” occurred which required review of recoverability of goodwill and long-lived assets for the EC&S segment. See Note 5, “Divestiture Activities” in the notes to the condensed consolidated financial statements for further discussion.
During the first quarter of fiscal 2019, interim “triggering events” required review of recoverability of goodwill and long-lived assets for two reporting units (Precision Hayes and Cortland) in conjunction with the Precision Hayes and Cortland businesses meeting the assets held for sale treatment. See Note 5, “Divestiture Activities” in the notes to the condensed consolidated financial statements for further discussion.
EC&S Segment:Changes in certain assumptions used in our annual goodwill impairment analysis, which are linked, in part, to the recent announcement of the Company’s intent to divest the EC&S segment, resulted in a fair value estimate of the EC&S segment above its carrying value during the second quarter of fiscal 2019. As a result, impairment charges related to EC&S goodwill were not determined necessary given our assessment indicated recoverability of the EC&S business supporting no indications of goodwill impairment.
Cortland Reporting Unit: A change in the estimate for Cortland Fibron then anticipated proceeds combined with the Cortland U.S. held for sale treatment resulted in a combined $15 million impairment charge representing the excess net book value of assets held for sale over anticipated proceeds as a result of fiscal 2019 first and second quarter divestiture activities. The year-to-date impairment charge included $14 million related to goodwill. Subsequent to these impairment charges, there is $17 million remaining goodwill related to the Cortland reporting unit, which is recorded within the "Assets held for sale" line on the condensed consolidated balance sheets.
Precision Hayes Reporting Unit: The Precision Hayes reporting unit recognized impairment charges in conjunction with Precision Hayes’s held for sale classification, resulting in a $9 million impairment charge representing the excess net book value of assets held for sale over then anticipated proceeds. There was no impairment charges related to goodwill.
Fiscal 2018 Impairment Charge:
Our fourth quarter fiscal 2018 impairment review resulted in a review of the recoverability of the goodwill and long-lived assets of two reporting units (Precision Hayes and Cortland).
Precision Hayes Reporting Unit:Changes in certain assumptions used in our annual goodwill impairment analysis, which are linked, in part, to recent market share losses, resulted in a fair value estimate of the Precision Hayes reporting unit lower than its carrying value during the fourth quarter of fiscal 2018. As a result, we recognized a $17 million impairment charge related to the goodwill of the Precision Hayes business, which represented the entire goodwill balance of the reporting unit.
Cortland Reporting Unit:The Cortland reporting unit recognized impairment charges in conjunction with Cortland Fibron’s held for sale classification, resulting in a $10 million impairment charge representing the excess of net book value of assets held for sale over anticipated proceeds. This impairment charge included $4 million related to goodwill.
Indefinite-lived intangibles (tradenames):
Indefinite-lived intangible assets are also subject to annual impairment testing. On an annual basis or more frequently if a triggering event occurs, the fair value of indefinite lived assets, based on a relief of royalty valuation approach, are evaluated to determine if an impairment charge is required. We recognized impairment charges during the fourth quarter of fiscal 2018 to write-down the value of tradenames by $7 million in relation to the Cortland Fibron held for sale treatment.
Long-lived Assets (fixed assets and amortizable intangible assets):
We also review long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. If such indicators are present, we perform undiscounted operating cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value.
Fiscal 2019 Impairment Charge: During the second quarter of fiscal 2019, the undiscounted operating cash flows of the remaining EC&S asset group exceeded its carrying value suggesting there to be no indication of impairment of long-lived assets within the remaining EC&S segment.
During the first quarter of fiscal 2019, related to the held for sale treatment of our Precision Hayes business, we recognized a $9 million long-lived asset impairment consisting of $8 million and $1 million on amortizable intangible assets and fixed assets (primarily machinery and equipment), respectively, representing the excess net book value of assets held for sale over anticipated proceeds.
In relation to the held for sale treatment of our Cortland businesses, we recognized $13 million of non-cash impairment charges, which related to the recognition in earnings of the cumulative effect of foreign currency rate changes since acquisition at February 28, 2019.
Fiscal 2018 Impairment Charge: During the fourth quarter of fiscal 2018, the undiscounted operating cash flows of the Precision Hayes business did not exceed its carrying value resulting in a long-lived asset impairment charge of $6 million, consisting of $5 million and $1 million on amortizable intangible assets and fixed assets (primarily machinery and equipment), respectively. Also in the fourth quarter of fiscal 2018 and related to the held for sale treatment of our Cortland Fibron business, we recognized a $46 million long-lived asset impairment, representing the excess of net book value of assets held for sale over anticipated proceeds, which consisted of $35 million related to the recognition in earnings of the cumulative effect of foreign currency rate changes since acquisition.
To the extent actual proceeds on the divestiture are less than current projections, or there are changes in the composition of the asset disposal group, further write-downs of the carrying value of the Precision Hayes and Cortland reporting units may be required.
The Company intends to comment on, or provide updates regarding, potential EC&S divestiture matters (including the status of the divestiture or size of impairment) only when it determines that further disclosure is appropriate or required. Future performance of impairment analyses of the EC&S goodwill and long-lived assets could result in the Company recording non-cash impairment charges in future periods, reflecting a write down of the EC&S net assets to their net realizable value. No assurance can be given that any transaction will result from the EC&S sale process or as to its timing.
Refer to the Critical Accounting Policies in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Annual Report on Form 10-K for the year ended August 31, 20172018 for information about more of the Company’s policies, methodology and assumptions related to critical accounting policies.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
The diverse nature of our business activities necessitates the management of various financial and market risks, including those related to changes in interest rates, foreign currency exchange rates and commodity costs.
Interest Rate Risk: We manage interest expense using a mixture of fixed-rate and variable-rate debt. A change in interest rates impacts the fair value of our 5.625% Senior Notes, but not our earnings or cash flow, because the interest rate on such debt is fixed. Our variable-rate debt obligations consist primarily of revolver and term loan borrowings under our Senior Credit Facility. A ten percent increase in the average cost of our variable rate debt would result in a corresponding $0.3 million and $0.6$0.5 million increase in financing costs for the three and six months ended February 28, 2018,2019, respectively.
Foreign Currency Risk: We maintain operations in the U.S. and various foreign countries. Our more significant non-U.S. operations are located in Australia, the Netherlands, the United Kingdom, Mexico, United Arab Emirates and China, and have foreign currency risk relating to receipts from customers, payments to suppliers and intercompany transactions denominated in foreign currencies. Under certain conditions, we enter into hedging transactions (primarily foreign currency exchange contracts) that enable us to mitigate the potential adverse impact of foreign currency exchange rate risk (see Note 10, “Derivatives” for further information). We do not engage in trading or other speculative activities with these transactions, as established policies require that these hedging transactions relate to specific currency exposures.
The strengthening of the U.S. dollar against most currencies can have an unfavorable impact on our results of operations and financial position as foreign denominated operating results are translated into U.S. dollars. To illustrate the potential impact of changes in foreign currency exchange rates on the translation of our results of operations, quarterly sales and operating profit were remeasured assuming a ten percent decrease in all foreign exchange rates compared with the U.S. dollar. Using this assumption, quarterly sales would have been lower by $14$12 million and operating profit would have been lower by $4$1 million, respectively, for the three months ended February 28, 2018.2019. This sensitivity analysis assumes that each exchange rate would change in the same direction relative to the U.S. dollar and excludes the potential effects that changes in foreign currency exchange rates may have on sales levels or local currency prices. Similarly, a ten percent decline in foreign currency exchange rates versus the U.S. dollar would result in a $65$53 million reduction to equity (accumulated other comprehensive loss) as of February 28, 2018,2019, as a result of non U.S. dollar denominated assets and liabilities being translated into U.S. dollars, our reporting currency.
Commodity Cost Risk: We source a wide variety of materials and components from a network of global suppliers. While such materials are typically available from numerous suppliers, commodity raw materials, such as steel and plastic resin, are subject to price fluctuations, which could have a negative impact on our results. We strive to pass along such commodity price increases to customers to avoid profit margin erosion.
Item 4 – Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). There have been no changes in our internal control over financial reporting that occurred during the quarter ended February 28, 20182019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The Company's Board of Directors has authorized the repurchase of shares of the Company’s common stock under publicly 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 $618 million. As of February 28, 2018,2019, 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 and six months ended February 28, 2018.2019.
Item 6 – Exhibits
(a) Exhibits
See “Index to Exhibits” on page 34,39, which is incorporated herein by reference.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | |
| | ACTUANT CORPORATION |
| | (Registrant) |
Date: April 9, 20185, 2019 | | By: | /S/ RICK T. DILLONBRYAN R. JOHNSON |
| | | Rick T. DillonBryan R. Johnson |
| | | Executive Vice PresidentCorporate Controller and Chief FinancialPrincipal Accounting Officer |
| | | (Principal Financial Officer) |
ACTUANT CORPORATION
(the “Registrant”)
(Commission File No. 1-11288)
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 20182019
INDEX TO EXHIBITS
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Exhibit | | Description | | Incorporated Herein By Reference To | | Filed Herewith | | Furnished Herewith |
| | First Amendment to the Actuant Corporation 2017 Omnibus Incentive Plan | | Exhibit A to the Definitive Proxy Statement related to the Company's 2018 Annual Meeting of Shareholders, which was filed with the SEC on December 4, 2017 | | | | |
| | | | | | | | |
| | Agreement by and between Actuant Corporation and Southeastern Capital Management dated March 20, 2018 | | Exhibit 10.1 of Registrant's Form 8-K filed on March 21, 2018 | | | | |
| | | | | | | | |
| | Offer letter by and between Actuant Corporation and John Jeffery Schmaling dated January 18, 2018. | | | | X | | |
| | | | | | | | |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | X | | |
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| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | X | | |
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| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | X |
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| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | X |
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| | The following materials from the Actuant Corporation Form 10-Q for the quarterthree and six months ended February 28, 20182019 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Comprehensive Income, (Loss), (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Condensed Consolidated Financial Statements. | | X | | |
| | | | X | | |