S&P: Actuant Corp. Downgraded To 'BB' From 'BB+' On Weak Profitability And Limited Scale; Outlook Negative

S&P Global Ratings today lowered its corporate credit rating on U. S.-based Actuant Corp. to 'BB' from 'BB+'.

At the same time, we lowered our issue-level rating on the company's senior unsecured notes to 'BB-' from 'BB'. The '5' recovery rating is unchanged, indicating our expectation for modest recovery (10%-30%; rounded estimate: 20%) in the event of a payment default.

The downgrade reflects that Actuant compares unfavorably to other 'BB+' capital goods peers, specifically with regard to scale. Actuant's revenue base, just over $1 billion for fiscal year 2017, had limited growth over the last 12-18 months due to demand weakness in some of its cyclical end markets, particularly in its energy end markets. In addition, in December 2017, Actuant sold its Viking business (which generated about $90 million of revenue when acquired by Actuant, but only $20 million of revenue in 2017). Although this segment was unprofitable and the divestiture reduces the company's exposure to the upstream, offshore oil and gas market, the sale demonstrates the risks to the company's acquisition-based growth strategy. The $12 million sales price was far below the $235 million Actuant paid for the business in 2013. Moreover, Actuant said that it is exploring alternatives for a portion of its businesses that contribute around $100 million of revenue, which could further reduce the company's scale and product diversity.

The negative outlook on Actuant reflects the 1-in-3 possibility that we will downgrade the company over the next 12 months if it doesn't reduce leverage. The negative outlook also reflects our expectation that Actuant's profitability will remain challenged, which may limit its ability to reduce leverage. We expect Actuant's adjusted debt to EBITDA to be in the high-2x area by the end of fiscal years 2018 and 2019, as we expect the company will continue to pursue small bolt-on acquisitions and limit share repurchases.

We could further lower our ratings on Actuant if its debt to EBITDA remains above 3x with limited prospects for improvement. This could occur if Actuant's profitability is weaker than anticipated, or if the company chooses to pursue acquisitions or shareholder returns instead of reducing leverage. We could also lower the rating if the company reduces scale as measured by revenue base with divestitures.

We could revise our outlook on Actuant to stable over the next year if operating performance improves--particularly profitability--reducing leverage below 3x. This could occur if Actuant realizes the benefits of restructuring initiatives undertaken during fiscal year 2017 and the first half of fiscal year 2018, and we come to believe that the company is committed to maintaining financial policies that will support this level of leverage.
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