Actuant Corporation (now Enerpac Tool Group) — Fiscal 2019 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended May 31, 2019. The filing reports Actuant Corporation, a global manufacturer of industrial products and systems, with two segments: Industrial Tools & Services (IT&S) and Engineered Components & Systems (EC&S). The company later became Enerpac Tool Group.
Financial performance and liquidity
| Metric | Three months ended May 31, 2019 | Three months ended May 31, 2018 | Nine months ended May 31, 2019 | Nine months ended May 31, 2018 |
|---|---|---|---|---|
| Net sales | $295.3 million | $317.1 million | $859.7 million | $881.2 million |
| Gross profit | $111.9 million | $116.5 million | $314.4 million | $307.1 million |
| Gross margin | 37.9% | 36.7% | 36.6% | 34.9% |
| Operating profit | $47.4 million | $32.7 million | $54.4 million | $57.2 million |
| Operating margin | 16.0% | 10.3% | 6.3% | 6.5% |
| Net earnings | $32.4 million | $29.0 million | $17.7 million | $16.0 million |
| Diluted EPS | $0.52 | $0.48 | $0.29 | $0.26 |
Year-to-date operating cash flow was only $1.2 million, compared with $35.6 million in the prior-year period. Capital expenditures were $23.7 million, cash provided by investing activities was $13.8 million, and cash used in financing activities was $62.5 million. Cash declined to $201.3 million from $250.5 million at August 31, 2018.
At May 31, 2019, total debt was approximately $477.6 million, consisting of $190.0 million under the new term loan and $287.6 million of 5.625% senior notes. Net long-term debt, after current maturities and issuance costs, was $469.0 million. The company had $398.8 million available under its revolving credit facility and was in compliance with its debt covenants. Primary working capital increased to $245 million, or 20% of sales, from $213 million, or 18%, at fiscal year-end.
Material changes versus the prior comparable period
- Third-quarter sales declined 7%, primarily because foreign exchange reduced sales by 4% and divestitures reduced sales by 6%; core sales increased 3%.
- Nine-month sales declined 2%, while core sales increased 4% after a 3% foreign-exchange impact and a 3% net reduction from acquisitions and divestitures.
- Gross margin improved because of favorable mix, pricing net of tariff and commodity-cost increases, the absence of prior-year heavy-lifting cost overruns, and restructuring benefits.
- IT&S sales increased 5% in the quarter and 6% year to date; segment operating margin improved to 20.9% from 19.9% in the quarter and to 18.9% from 16.3% year to date.
- EC&S sales decreased 19% in the quarter and 11% year to date. Year-to-date segment operating loss was $10.1 million, including $32.7 million of impairment and divestiture charges.
- Net earnings benefited from a $10.6 million third-quarter impairment and divestiture benefit, primarily the reversal of the Cortland U.S. business held-for-sale classification. Year-to-date impairment and divestiture charges were $32.7 million.
- The company refinanced its senior credit facility on March 29, 2019, replacing the prior facility with a $400 million revolver and a $200 million term loan maturing in March 2024. It prepaid $10 million of term-loan principal during the quarter.
Guidance, outlook, commentary and unusual items
- Management expected continued but moderated IT&S growth and a fourth-quarter EC&S sales decline versus the prior year.
- Fiscal 2019 core-sales guidance was 6%–7% growth for IT&S, a 2%–3% decline for EC&S, and 2%–3% consolidated growth.
- The company announced a strategy to focus solely on IT&S and continued evaluating a divestiture of the remaining EC&S segment. Management cautioned that future impairment charges could be material.
- A restructuring plan focused on IT&S integration and corporate efficiencies was expected to cost $15–$20 million, generate $12–$15 million of annual savings, and be completed within 12–15 months. A further EC&S restructuring plan announced in June 2019 was expected to cost $2 million and generate approximately $3 million of annual savings.
- Management identified weakness in Chinese on-highway markets, North American agriculture, North American hydraulic fracturing, and oil-and-gas-related rope and cable demand. Foreign currency remained a significant exposure because more than half of sales were generated outside the United States.
- The company disclosed ongoing OFAC and Netherlands/EU reviews concerning potentially noncompliant transactions involving Iran and the Crimea region. The timing and outcome were uncertain, although management did not expect a material adverse effect.
- Other risks included economic and end-market volatility, tariffs, competition, supplier dependence, cybersecurity, litigation, product liability, employee retention, acquisition and divestiture execution, goodwill impairment, interest rates, foreign exchange, and debt covenant compliance.
Investor verification items
- Verify the completion, terms, timing, and proceeds of any planned EC&S divestiture and assess the potential for additional impairment charges.
- Reconcile reported earnings with the $10.6 million third-quarter benefit and $32.7 million year-to-date impairment and divestiture charges.
- Monitor operating cash conversion, working-capital requirements, and the concentration of cash in foreign subsidiaries.
- Confirm progress, total costs, and realized savings from the IT&S and EC&S restructuring programs.
- Assess fourth-quarter and fiscal 2019 performance against the disclosed core-sales guidance, particularly in IT&S and EC&S end markets.
- Review compliance with the new credit facility covenants and the 2022 senior-notes maturity.
- Follow the OFAC and Netherlands/EU sanctions reviews and any related penalties or remediation costs.