Actuant Reports Third Quarter Results; Updates Fiscal 2016 Guidance

Randal W. Baker, President and CEO of Actuant commented, “Our third quarter results came in modestly better than expected and I am pleased with the execution by our team. The trends by end market remain largely consistent with prior quarters, with growth in our maintenance-driven Hydratight business as well as European truck being more than offset by upstream oil & gas, agriculture and general industrial weakness. Unfavorable segment sales mix and manufacturing underabsorption negatively impacted margins in the quarter. This year’s strategic tuck-in acquisitions were additive to third quarter sales but neutral to earnings due to related purchase accounting and acquisition transaction costs. End market demand remains sluggish, yet we are focused on the items that we can control, namely accelerating commercial effectiveness, improving operational execution and carefully managing costs to enhance shareholder value.”

Consolidated sales for the third quarter were $305 million, 5% lower than the $320 million in the comparable prior year quarter. Core sales declined 6% while acquisitions added 2% and foreign currency exchange rate changes reduced sales 1%. Fiscal 2016 third quarter net earnings were $21.2 million, or $0.36 per share compared to $38.0 million or $0.63 per share in the comparable prior year period. Excluding fiscal 2016 restructuring costs, third quarter fiscal 2016 adjusted EPS was $0.40 compared to $0.63 in the comparable prior year period (see attached reconciliation of earnings).

Sales for the nine months ended May 31, 2016 were $874 million, 8% lower than the $949 million in the comparable prior year period. Excluding the negative 4% impact of foreign currency rate changes, and 1% benefit from acquisitions, fiscal 2016 year-to-date core sales decreased 5% from the prior year. The fiscal 2016 year-to-date net loss was $122.6 million or $2.08 per share, compared to a net loss of $2.2 million or $0.04 per share in the prior year. Excluding impairment charges in both years, as well as fiscal 2016 year-to-date pre-tax restructuring charges of $11.5 million, or $0.14 per share, fiscal 2016 year-to-date adjusted EPS was $0.92 compared to $1.28 in the comparable prior year period (see attached reconciliation of earnings).

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Third quarter fiscal 2016 Industrial segment sales were $96 million, 8% lower than the prior year. Unfavorable currency translation was a 1% headwind and the Larzep acquisition added 2%, while core sales declined 9%. Demand remained sluggish globally across nearly all general industrial end markets, most notably in the Americas. Third quarter adjusted operating profit margin of 23.5% was in line with expectations given the impact on absorption of volume declines and inventory reduction efforts, as well as unfavorable sales mix (larger decline in our most profitable product lines).

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Fiscal 2016 third quarter Energy segment sales increased 2% year-over-year to $101 million. Excluding the 3% unfavorable impact of the stronger US dollar, and 5% benefit from the pipeline & process services acquisition, third quarter year-over-year core sales were flat. Core sales from our maintenance related business (Hydratight) increased at a double digit rate against easier comparisons on a year-over-year basis due to higher MRO and pipeline connector activity. Other Energy segment sales declined significantly due to the continued impact of low upstream capital spending on exploration, drilling, and field development. Third quarter Energy segment adjusted operating profit margin of 12.3% declined modestly from the prior year due to both pricing pressures and underabsorbed costs in our capital spending related product lines, partially offset by the benefit of cost reduction actions.

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Third quarter fiscal 2016 Engineered Solutions segment sales were $108 million, 8% below the prior year due entirely to the core sales decline. Heavy duty truck sales into Europe and China experienced continued modest growth. However, agriculture and off-highway equipment sales were impacted by low end-user demand as well as ongoing OEM destocking efforts, and saw sequential declines in the year-over-year rate of change from second quarter levels. Third quarter adjusted operating profit declined due to the impact on absorption of volume declines and inventory reduction efforts, as well as unfavorable sales mix (larger decline in our most profitable product lines).

Corporate expenses for the third quarter of fiscal 2016 were $7.9 million, or $0.6 million higher than the prior year due to incremental acquisition costs partially offset by the benefit of cost reduction actions. The effective income tax rate of approximately 1% for the third quarter of fiscal 2016 (excluding the tax benefit on restructuring charges) was in line with expectations and higher than the prior year’s negative 8% which included the benefit of larger foreign tax credits and favorable audit resolutions.

Net debt at May 31, 2016 was $451 million (total debt of $588 million less $137 million of cash). The increase in net debt of approximately $18 million during the quarter was due to $65 million of cash deployed on acquisitions, coupled with $5 million used to repurchase 0.2 million shares of common stock, partially offset by strong third quarter free cash flow. At May 31, 2016, the Company had net leverage of 2.7X for bank reporting purposes.

Baker continued, “We have seen stabilization in several of our end markets, yet upstream oil & gas and agriculture, in particular, continue to experience reduced spending, pricing and unpredictable demand levels. In addition, while our maintenance driven energy offerings have performed above expectations throughout the first nine months of fiscal 2016, we caution that demand is lumpy by region and end customer and we are currently expecting a lower level of activity in the fiscal fourth quarter than contemplated in our prior outlook. We are now projecting fourth quarter sales to be in the $270-280 million range, with adjusted EPS of $0.28-0.33 based on an anticipated 9-10% consolidated core sales decline. For the full year, sales are expected to be approximately $1.150 billion and adjusted EPS in the range of $1.20-1.25. Our adjusted EPS guidance excludes charges associated with the previously announced impairment and restructuring. We are confident in our ability to generate fiscal 2016 free cash flow in excess of 100% of net earnings, and anticipate free cash flow of approximately $105 million.

Consistent with past practice, all guidance excludes the impact of potential future acquisitions and share repurchases. I believe we have significant opportunities within Actuant to enhance operations, commercial effectiveness and shareholder value. These are all things we are actively working on and plan to review in detail with the investment community at our October Investor Day.”

Certain of the above comments represent forward-looking statements made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. The terms “may,” “should,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “objective,” “plan,” “project” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to inherent risks and uncertainties that may cause actual results or events to differ materially from those contemplated by such forward-looking statements. Management cautions that these statements are based on current estimates of future performance and are highly dependent upon a variety of factors, which could cause actual results to differ from these estimates. Actuant’s results are also subject to general economic conditions, variation in demand from customers, the impact of geopolitical activity on the economy, continued market acceptance of the Company’s new product introductions, the successful integration of acquisitions, restructuring, operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material and labor cost increases, foreign currency fluctuations and interest rate risk. See the Company’s Form 10-K filed with the Securities and Exchange Commission for further information regarding risk factors. Actuant disclaims any obligation to publicly update or revise any forward-looking statements as a result of new information, future events or any other reason.

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