Actuant Corporation (doing business as Enerpac Tool Group) — Fiscal 2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended August 31, 2019. Actuant, operating as Enerpac Tool Group and traded under EPAC, is a global industrial tools and services company serving customers in more than 90 countries. Its principal reportable segment is Industrial Tools & Services (IT&S), which provides hydraulic and mechanical tools, heavy-load positioning solutions, maintenance services and rentals.
During the fourth quarter, the Company reorganized its reporting structure and classified the Engineered Components & Systems (EC&S) businesses as discontinued operations in connection with a planned divestiture. Prior-period information was recast accordingly.
Key financial metrics
| Continuing operations, $ millions except per-share data | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $654.8 | $641.3 | 2% |
| Gross profit | $292.7 | $283.3 | 3% |
| Gross margin | 44.7% | 44.2% | Improved |
| Operating profit | $47.5 | $50.2 | Down 5% |
| Operating margin | 7.3% | 7.8% | Down 50 bps |
| Earnings from continuing operations | $8.1 | $4.7 | Up 70% |
| Diluted EPS from continuing operations | $0.13 | $0.08 | Up $0.05 |
| Net loss, including discontinued operations | $(249.1) | $(21.6) | Materially worse |
| Diluted loss per share | $(4.04) | $(0.35) | Materially worse |
- IT&S sales increased to $609.5 million from $591.1 million, while segment operating profit increased to $101.4 million from $99.4 million. Segment operating margin declined to 16.6% from 16.8%.
- Product sales declined 2% to $478.9 million, while service and rental sales increased 16% to $175.8 million. IT&S core sales increased 5%; foreign exchange reduced reported sales by approximately 3% at the segment level.
- Net cash provided by operating activities was $53.8 million, down from $106.1 million. Continuing-operations operating cash flow was $40.9 million, compared with $71.9 million in the prior year.
- Capital expenditures were $14.9 million, compared with $11.0 million. Fiscal 2020 capital expenditures were expected to be approximately $10 million to $12 million.
- Cash and cash equivalents were $211.2 million at August 31, 2019, including $163.6 million held by foreign subsidiaries and $47.6 million domestically.
- Total debt was approximately $462.6 million, compared with $535.1 million at the prior year-end; reported net debt was $249 million. The Company repaid $72.5 million of term-loan principal and repurchased approximately 1.0 million shares for $22.5 million.
- Available borrowing capacity under the revolving credit facility was approximately $398.8 million at year-end.
Material changes versus the prior comparable period
- Sales growth was modest, but improved core demand and higher service and rental activity were partly offset by foreign exchange and the exit from lower-margin heavy-lifting projects.
- Operating profit declined despite higher gross profit because fiscal 2019 included $22.8 million of impairment and divestiture charges, compared with $3.0 million in fiscal 2018. Charges included approximately $14 million of goodwill impairment, $6 million related to a customer-relationship intangible asset and approximately $3 million related to secondary tradenames.
- Discontinued operations generated a $257.2 million net loss, principally due to a $264.5 million EC&S impairment and divestiture charge, including $210.0 million related to the expected sale value and $54.5 million related to accumulated foreign-currency translation losses.
- The Company refinanced its senior credit facility in March 2019 with a $400 million revolver and a $200 million term loan maturing in March 2024. The refinancing reduced pricing and expanded revolving capacity.
- Restructuring charges declined to $4.2 million from approximately $10.6 million. The new restructuring plan focuses on integrating Enerpac and Hydratight, exiting certain unprofitable North American service activities and reducing corporate costs.
- The Company adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by approximately $0.1 million. It expected fiscal 2020 adoption of the new lease standard to add approximately $55 million to $65 million of right-of-use assets and corresponding liabilities.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2020 adjusted core sales growth of negative 3% to positive 1%, citing economic uncertainty, China tariffs, Brexit and decelerating demand across most markets.
- Management expected annual restructuring savings of approximately $12 million to $15 million, with total restructuring costs of $15 million to $20 million and most actions completed during fiscal 2020.
- The EC&S businesses were subject to a purchase agreement for approximately $214.5 million, with closing expected in the fourth calendar quarter of 2019. Proceeds were intended for debt reduction, share repurchases and strategic acquisitions.
- The new credit agreement includes a maximum net leverage ratio of 3.75:1.00 and a minimum interest coverage ratio of 3.50:1.00, with specified transaction-related adjustments. The Company reported compliance with financial covenants at year-end.
- The Company disclosed a technical breach of a restrictive covenant related to asset transfers made in preparation for the EC&S divestiture; lenders subsequently provided waivers, restoring compliance as of the filing date.
- Key risks include cyclical industrial, oil and gas and infrastructure demand; tariff and supply-chain exposure; foreign-currency and interest-rate volatility; customer and supplier concentration risks; competitive pricing pressure; acquisition integration; divestiture execution; goodwill and intangible-asset impairment; litigation; environmental liabilities; sanctions and compliance investigations; and cybersecurity threats.
- The Company disclosed ongoing OFAC and Netherlands/EU reviews concerning potentially non-compliant transactions involving Iran and possible diversion of products to Crimea. Management could not predict the outcome or penalties but did not expect a material adverse effect.
- Goodwill and other intangible assets totaled $313 million, or approximately 28% of total assets, increasing sensitivity to future impairment assessments.
Most important facts for investors to verify
- Completion of the EC&S divestiture, actual proceeds received and the resulting effect on debt, liquidity and continuing earnings.
- Whether fiscal 2020 adjusted core sales remain within the stated negative 3% to positive 1% range amid weakening demand.
- Progress toward the $12 million to $15 million restructuring savings target and the associated $15 million to $20 million cost estimate.
- Debt repayment progress, compliance with leverage and interest-coverage covenants, and refinancing or repayment requirements for the $287.6 million of 5.625% senior notes due in 2022.
- Cash conversion and the decline in operating cash flow from $106.1 million to $53.8 million.
- Potential additional goodwill, intangible-asset, divestiture or restructuring charges.
- Resolution and potential financial impact of the disclosed sanctions and environmental contingencies.
- The filing’s audited financial statements and internal-control report: PwC issued an unqualified opinion and concluded that internal control over financial reporting was effective as of August 31, 2019.