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The Industrial goods sector is a huge sector that serves as the backbone for all the industrial development in the modern world. This sector produces goods that are used in construction and manufacturing. The demand for such goods has cyclical tendencies and so does the sector's performance. With the U.S. economy showing signs of recovering from its most recent meltdown, cyclical stocks have suddenly become more pleasing to the general investors.

Due to its huge size, the industrial goods sector encompasses many different industries such as the diversified machinery industry. The diversified machinery industry is a smart industry for investors to look into as the economy is on the recovery path. This industry includes giants such as General Electric (NYSE:GE) and Illinois Tool Works (NYSE:ITW), which have both established themselves as successful companies. The economic recovery, however, holds more potential for small- to medium-capped companies because these companies have the ability to report greater returns than established giants. In our analysis today, we will focus on one such company that goes by the name of Actuant Corporation (NYSE:ATU).

Actuant Coporation

This $2.4B company is a diversified industrial company that serves customers in niche markets. Its products and services are highly specialized and are needed essentially in motion control systems and the energy markets.

Source: Company Presentations

The above pie chart shows the break up of Actuant Corporation's sales by region. Major sales are to North American and European customers but Actuant Corporation also has sizable demand from developing countries too.

Source: Company Presentations

The above chart shows the breakup of Actuant Corporation's sales on the basis of end market customers. The company's major customers are from the energy, industrial and trucking businesses whereas minor customers are from the auto, integrated solutions and the mining businesses.

Trouble at ATU - The Company's Latest Financial Trends

The company's latest trends have been worrying. We analyze these issues in detail below.

Source: Company Financial Statements

The table above shows the revenue profile of Actuant Corporation. Here we analyze the year-over-year change in each segment's result. The industrial segment reported almost similar sales as last year. Sales increased for the energy segment by 2.31%. For the engineered solutions, sales decreased by a small figure of 2.4%. So far, it seems like the company just had a no-growth quarter, but the problem lies with the electrical segment of the company. It reported a drop in sales of 9.34% and if we analyze its performance in detail, we will know that things are not going well for this segment.

Source: Company Presentation

The bar chart above shows the quarterly sales trend for the electrical segment of the company. We can easily see that the segment has been losing sales volume in recent quarters on a consistent basis.

Source: Company Presentation

The table above shows the financial snapshot of the electrical segment of the company. Not only did the sales show a year-over-year decrease but the operating income of the segment fell by 13% whereas the operating margin of the segment fell by 20 bps (0.2%). The change in the operating margin would not seem significant but it is reported in the financial statements of the company that net restructuring benefits improved the operating margins of the segment substantially. The segment is reporting decreasing sales for solar inverters and low voltage transformers, which are two of the main products that it manufactures.

Management Reaction

The management at Actuant Corporation has reacted quickly to the malignant electrical segment of the company. It has recently authorized a plan which calls for the divestiture of this segment. The segment would be classified as a discontinued operation in the third quarter of FY13. The company maintains that the sale of the electrical segment would allow it to streamline its strategy and help it focus on the three remaining segments. This way, the company would be able to take advantage of global growth trends, current business model and core competencies.

The electrical segment produces many premium brands, which makes it a very valuable asset. Therefore, Actuant Corporation expects hefty proceeds from the sale of the segment. The company plans to use the proceeds from the sale of the segment to fund acquisitions and to return capital to common shareholders by way of share repurchases. The sale of the segment is expected to be completed in FY14.

Future Outlook

Actuant Corporation was quick to recognize and react to a failing segment of the company. Divestiture would help the company get rid of the segment but if we recall the revenue profile table above, other segments of the company were also showing stagnated growth in sales. Therefore, management of the company has an immense task ahead of it if it wants the company to start growing again. Around the time when Actuant Corporation's management announced its plans to divest the electrical segment, it also provided hints to what the future course for the company would be.

It has been reported that management wants Actuant Corporation to grow in four areas of operations. The areas include infrastructure, energy, sustainability and natural resources. The company would be employing strategies to attain growth organically and through acquisitions. Targeting more emerging markets will help the company to diversify its regional presence, which will result in risk reduction and higher sales. The three remaining segments of Actuant Corporation are perfectly ready to follow this strategy.

Conclusion

Actuant Corporation belongs to an industry that follows the trending economic environment. This makes the company very sensitive to changes in the market conditions but also makes the general performance outlook of the company somewhat predictable. Therefore, when the U.S. economy started to recover, Actuant Corporation was on a takeoff course. The flight was, however, shortened by stagnating growth of the company's revenues. The electrical segment of the company was the worst performer. Recently the company's management has taken a wise step to divest that particular segment and to make a new strategic plan for the company. At the present moment, it is not expected for the company to improve its performance. In the longer run, however, we can see the results of the new strategic plan taking effect. I would, therefore, give the hold recommendation to investors.

Source: A Word We Won't Be Hearing From Actuant Corporation Soon: Growth