Actuant (ATU)

Q4 2011 Earnings Call

September 28, 2011 11:00 am ET

Executives

Andrew G. Lampereur - Chief Financial Officer and Executive Vice President

Robert C. Arzbaecher - Chairman, Chief Executive Officer and President

Karen Bauer - Director of Investor Relations

Mark E. Goldstein - Chief Operating Officer and Executive Vice President

Analysts

James Bank - Sidoti & Company

Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

Daniel Holland - Morningstar Inc., Research Division

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Wendy B. Caplan - SunTrust Robinson Humphrey, Inc., Research Division

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Charles D. Brady - BMO Capital Markets U.S.

Robert Barry - UBS Investment Bank, Research Division

Mark Barbalato - Vertical Research Partners Inc.

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Presentation

Operator

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Ladies and gentlemen, thank you for standing by, and welcome to Actuant Corporation's Fourth Quarter Fiscal 2011 Earnings Conference Call. We are conducting a live meeting to coincide with the audio conference. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, September 28, 2011. It is now my pleasure to turn the conference over to Ms. Karen Bauer, Actuant's Director, Investor Relations. Please go ahead.

Karen Bauer

Good morning, everyone, and welcome to Actuant's Fourth Quarter Fiscal 2011 Earnings Conference Call. On the call is Bob Arzbaecher, Actuant's Chief Executive Officer, who is on the road in Europe; and with me here is Mark Goldstein, Chief Operating Officer; and Andy Lampereur, Chief Financial Officer. I would like to point out that our earnings release and the slide presentation supplementing today's call are available in the Investors section of our website.

Before we start, let me offer the following cautionary note. During this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain, and that there are a number of factors that could cause actual results to differ materially from these statements. These factors are outlined in our SEC filings.

[Operator Instructions] And with that, I'd like to turn the call over to Bob.

Robert C. Arzbaecher

Thank you, Karen, and thanks for joining on today's call. By all measures, it was a great finish for 2011. We delivered double-digit core growth, 10%, for our sixth consecutive revenue -- for the sixth consecutive quarter despite some pretty tough comps. Both Energy and Industrial had strong double-digit core growth in the fourth quarter.

Our operating margins expanded again this quarter, which led to an increase in EPS from continuing operations to $0.50 a share, 61% higher than the prior year. And our cash flow for the year finished at strong $71 million, putting us at $158 million for the year, a new record. Free cash flow conversion to net income was 127%, extending our track record to 11 consecutive years of free cash flow conversion in excess of 100%. Finally, we announced a stock repurchase program, which I will explain later in detail on the call.

We haven't shown you this slide in a while, so I thought it was a good time to remind investors that our results reflect the execution of the same cash flow-focused business model that we've had since the spinoff. You can see very strong 2011 performance, driven by execution of our strategic initiatives, a rebound in industrial output, acquisition capital deployment and continuous improvement actions. Highlights for the year include core sales growth of 13%, operating margin expansion of 150 basis points, $313 million of capital deployed on acquisitions, yet debt leverage essentially unchanged from the prior year due to the great cash flow. Lastly, 56% year-over-year EPS growth from continuing operations, excluding prior year restructuring.

Actuant's cash flow is the one metric I'm the most proud of. We've completed the fifth consecutive year, including 2009 in the depths of the recession, a free cash flow around $150 million or better range. That totals $0.75 billion of free cash flow over the 5-year time frame. Consistent free cash flow generation is a hallmark of Actuant, and we believe this leads to long-term shareholder value creation.

With that summary, I'll turn it over to Andy and go through the quarterly details. Andy?

Andrew G. Lampereur

Thank you, Bob, and good morning, everyone. Results from continuing operations for the quarter exceeded our internal forecast, and I'll do the normal deep dive through them in a minute.

But first, I wanted to cover the gain in discontinued operations in the quarter. This relates to an adjustment to record the tax benefit on a retained lease from the Cat [ph] divestiture. It is nonrecurring in nature but will benefit us from a cash flow standpoint in the future. Previously, we didn't expect to receive this tax benefit. We've now determined we will, so this was an unexpected upside in the quarter. And this was the $4 million, or $0.05 a share gain, in discontinued operations in this quarter's income statement.

But for the balance of the call, we're going to focus our discussions on results from continuing operations. And as Bob led off with, sales, earnings and cash flow were strong and all exceeded our internal forecast.

Sales of $403 million were slightly above our guidance range on account to stronger sales by the Industrial and Energy segments. The other 2 segments were in line with our internal expectations. I'll dissect sales a little -- a few different ways shortly, explaining the 30% year-over-year top line increase.

Our fourth quarter operating profit margins increased year-over-year 120 basis points excluding prior year restructuring costs. The results include Weasler acquisition-related charges, which adversely impacted margins sequentially from the third quarter.

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