Actuant Corporation (doing business as Enerpac Tool Group) — Q1 FY2020 10-Q Summary
Business context and reporting period
The filing covers the three months ended November 30, 2019, the first quarter of fiscal 2020. Actuant, operating as Enerpac Tool Group, is a global industrial tools and services company serving customers in more than 90 countries. Its primary reportable segment is Industrial Tools & Services (IT&S), which provides hydraulic and mechanical tools, heavy-lifting solutions, services and rentals.
The company continued its strategic shift toward a pure-play industrial tools and services business, including the October 31, 2019 sale of the former Engineered Components & Systems (EC&S) segment.
Financial results and key metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $146.7 million | $158.6 million | Down 7% |
| Gross profit | $68.7 million | $70.3 million | Down 2% |
| Gross margin | 46.8% | 44.4% | Up 2.4 percentage points |
| Operating profit (loss) | $14.4 million | $(8.6) million | Improved $22.9 million |
| Operating margin | 9.8% | (5.4)% | Improved 15.2 percentage points |
| Net earnings (loss) from continuing operations | $6.4 million | $(16.4) million | Improved $22.8 million |
| Net earnings (loss) | $2.1 million | $(17.5) million | Improved $19.6 million |
| Diluted EPS | $0.03 | $(0.29) | Improved $0.32 |
IT&S sales were $135.6 million, down 9%. After adjusting for divestitures, strategic exits and foreign exchange, IT&S core sales declined 1%. IT&S operating profit remained approximately $26.1 million, while its operating margin increased to 19.2% from 17.7%.
Operating results benefited from lower impairment and divestiture charges, divestiture of lower-profit activities and approximately $1 million of restructuring savings. These benefits were partly offset by $2.0 million of restructuring charges.
Cash and cash equivalents were $206.8 million at November 30, 2019, compared with $211.2 million at August 31, 2019. Cash used in operating activities was $22.9 million, including $4.1 million from continuing operations and $18.8 million from discontinued operations. Investing activities provided $213.3 million, primarily from divestiture proceeds. Financing activities used $195.2 million, including repayment of the $175 million term loan and $17.8 million of share repurchases.
Total debt was $286.2 million, consisting primarily of $287.6 million of 5.625% Senior Notes due 2022, net of debt issuance costs. The term loan was fully repaid during the quarter, and there were no revolving-credit borrowings outstanding at November 30, 2019. The company had $394.0 million available under its revolving credit facility and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales declined $11.9 million, primarily reflecting approximately $10 million from divested product lines and strategic service exits, plus a 1% unfavorable foreign-exchange impact. Management reported flat consolidated core sales after these adjustments.
- Gross margin expanded to 46.8% from 44.4%, reflecting the exit or divestiture of lower-margin activities.
- Operating profit improved from an $8.6 million loss to $14.4 million of profit. The prior-year period included approximately $23.5 million of impairment and divestiture charges, including a goodwill impairment related to Cortland U.S.; the current period included a net $1.4 million benefit.
- The EC&S sale generated approximately $214.5 million of purchase consideration, including approximately $3.0 million payable in installments. The company recorded a $4.3 million net loss from discontinued operations in the quarter, including the final sale-related accounting effects.
- The company sold the UNI-LIFT product line and Connectors product line and completed the sale of the Milwaukee Cylinder business on December 2, 2019. These activities were not material to consolidated sales.
- Share repurchases totaled 839,789 shares for $17.8 million. Up to 5,704,643 additional shares remained authorized for repurchase at November 30, 2019.
- The company adopted the new lease standard, recognizing a $60.8 million right-of-use asset and operating lease liability. The adoption had no significant reported impact on operating results or cash flows.
Guidance, outlook, commentary and risks
Management expects fiscal 2020 adjusted core sales growth of negative 3% to positive 1% for both the consolidated company and the IT&S segment. The outlook reflects expected modest demand deceleration associated with macroeconomic and geopolitical uncertainty, including U.S.-China trade negotiations, Brexit and the U.S. political environment.
The company expects $10 million to $15 million of total restructuring costs and $12 million to $15 million of annual savings from its IT&S and corporate restructuring plan, with remaining actions expected to be completed in fiscal 2020. Additional restructuring charges of approximately $1 million are expected for the Other segment, with approximately $3 million of annual savings anticipated.
Management believes cash on hand, the revolving credit facility and anticipated operating cash flows will be sufficient for operating needs, debt service, acquisitions and capital expenditures for the foreseeable future. However, operating cash flow was negative in the quarter, and cash was concentrated outside the United States, with approximately $195 million held by foreign subsidiaries and $12 million held domestically.
Key risks include cyclical and challenging end-market conditions, oil and gas exposure, foreign-exchange volatility, tariffs and commodity costs, competitive pricing and margin pressure, supplier dependence, manufacturing disruption, cybersecurity, litigation and product liability, execution of restructuring actions, goodwill and intangible-asset impairment, acquisition and divestiture integration, debt covenant compliance and interest-rate risk.
The company disclosed ongoing OFAC and Netherlands/EU reviews related to potentially noncompliant transactions involving Iran and the Crimea region. The timing and outcome of these matters, including any penalties, could not be predicted, although management did not expect a material adverse effect.
Most important facts for investors to verify
- Whether the $3 million of deferred EC&S sale consideration and final working-capital adjustments alter the reported divestiture loss.
- Progress toward the projected $12 million to $15 million of annual restructuring savings and the remaining fiscal 2020 charges.
- Whether core sales remain within the negative 3% to positive 1% fiscal 2020 outlook amid continued industrial-market softness.
- Post-divestiture operating cash generation, especially after discontinued-operations cash flows are removed.
- Refinancing or repayment plans for the $287.6 million of Senior Notes due in 2022.
- Potential outcomes and financial exposure from the OFAC, Netherlands and EU sanctions-related reviews.
- Future goodwill, intangible-asset and held-for-sale impairment risk, particularly if operating performance weakens.