Actuant Corporation (now associated with Enerpac Tool Group) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2018. The filing identifies the registrant as Actuant Corporation, not Enerpac Tool Group. Results are unaudited and are not necessarily indicative of full-year performance.
Business context
Actuant operated through three segments: Industrial, Energy, and Engineered Solutions. The company manufactures industrial tools, energy maintenance products, rope and cable solutions, and engineered position and motion-control systems. Industrial and Engineered Solutions benefited from improving industrial, infrastructure, mining, agriculture, and off-highway markets. Energy remained pressured by weak oil and gas capital and maintenance spending, although activity stabilized in the third quarter.
Financial performance and liquidity
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Net sales | $317.1 million, up 7% | $881.2 million, up 7% |
| Core sales growth | 4% | 5% |
| Gross profit / margin | $116.5 million / 36.7% | $307.1 million / 34.9% |
| Operating profit / margin | $32.6 million / 10.3% | $56.8 million / 6.5% |
| Net earnings | $29.0 million | $16.0 million |
| Diluted EPS | $0.48 | $0.26 |
| Operating cash flow | Not separately provided | $35.6 million |
- Third-quarter sales increased $21.7 million year over year; foreign currency contributed approximately 4%, while acquisition and divestiture activity reduced sales by approximately 1%.
- Industrial sales rose 8% to $108.3 million, with operating profit of $26.0 million and a 24.0% margin.
- Energy sales were approximately flat at $83.9 million; year-to-date sales declined 6% to $225.7 million. Third-quarter operating profit was $6.3 million, compared with $0.9 million in the prior year.
- Engineered Solutions sales increased 12% to $124.9 million, and year-to-date sales increased 17% to $351.2 million. Year-to-date operating margin improved to 5.0% from 3.6%.
- The nine-month effective tax rate was 52.1%, compared with a tax benefit rate of 26.5% in the prior year. Results included provisional Tax Cuts and Jobs Act effects, a $9.4 million tax charge related to the Viking divestiture, and other discrete tax items.
- Cash and cash equivalents were $189.5 million at May 31, 2018, down from $229.6 million at August 31, 2017. Approximately $153 million was held by foreign subsidiaries and $36 million domestically.
- Net primary working capital increased to $237 million, or 19% of sales, from $201 million, or 18%, at August 31, 2017, primarily due to sales growth and seasonal inventory buildup.
- Total senior indebtedness was $542.6 million, consisting of a $255.0 million term loan and $287.6 million of senior notes. Long-term debt, net, was $510.0 million, with $30.0 million classified as current maturities.
- The company was in compliance with its debt covenants. The credit facility had a maximum leverage ratio of 3.75:1 and minimum interest coverage ratio of 3.5:1.
Material changes versus the prior comparable period
- Third-quarter net earnings increased to $29.0 million from $22.5 million, and diluted EPS increased to $0.48 from $0.37.
- Nine-month net earnings declined to $16.0 million from $32.6 million, and diluted EPS declined to $0.26 from $0.54, primarily because of substantially higher income tax expense and divestiture-related charges.
- Nine-month operating profit increased to $56.8 million from $49.0 million. The prior-year period included $7.8 million of director and officer transition charges; the current year included higher restructuring charges and $3.0 million of impairment and divestiture charges.
- Operating cash flow declined to $35.6 million from $52.1 million, while cash used in investing increased to $59.8 million from $22.7 million. Investing included the Viking lease buyout, acquisitions, and capital expenditures.
- Restructuring charges increased to $12.1 million for the first nine months from $5.4 million in the prior-year period.
- The company completed the acquisitions of Mirage Machines and Equalizer International for combined consideration of approximately $23.3 million, net of cash acquired.
- The company sold its Viking business for net proceeds of $8.8 million, exited offshore mooring, and reduced exposure to upstream offshore oil and gas markets.
Guidance, outlook, risks, and unusual items
- Management expected fiscal 2018 core sales growth of 4% to 6%, compared with a 4% core sales decline in fiscal 2017.
- Management anticipated moderate growth in Industrial and Engineered Solutions markets, slower on-highway vehicle demand, and Energy sales growth in the fourth quarter as maintenance activity stabilized.
- An additional approximately $2 million to $3 million of restructuring charges was expected during the remainder of fiscal 2018. Management expected incremental pretax cost savings of approximately $7 million to $10 million through the remainder of fiscal 2018 and fiscal 2019.
- On June 22, 2018, after quarter-end, the company reduced revolver capacity from $600 million to $300 million. Available borrowing capacity was not affected. The company expected a fourth-quarter charge of approximately $1.0 million for deferred financing cost write-offs.
- Management believed cash, the reduced revolver, and anticipated operating cash flow would fund operations, debt service, acquisitions, and capital expenditures for the foreseeable future.
- Key risks include cyclical industrial and energy markets, competitive pricing, material, labor and tariff cost increases, foreign currency movements, supplier and manufacturing disruptions, acquisitions and divestitures, restructuring execution, cybersecurity, litigation, environmental matters, impairment risk, indebtedness, covenant compliance, and interest rates.
- The company had approximately $21.9 million of letters of credit and $11.5 million of discounted contingent lease obligations related to previously divested or spun-off businesses.
- A 10% increase in the average cost of variable-rate debt would have increased financing costs by approximately $0.3 million for the quarter and $0.9 million year to date. A 10% decline in foreign currency exchange rates would have reduced quarterly sales by approximately $15 million and operating profit by approximately $5 million.
Important facts for investors to verify
- Confirm the registrant identity and corporate name change from Actuant Corporation to Enerpac Tool Group, since the supplied filing is an Actuant Form 10-Q.
- Assess the sustainability of reported earnings excluding provisional tax benefits, the Viking tax charge, restructuring costs, and other discrete items.
- Monitor Energy segment recovery, particularly oil and gas maintenance demand and the effects of the Viking divestiture.
- Track working-capital consumption, inventory levels, and the decline in operating cash flow.
- Review debt maturities, variable-rate exposure, covenant headroom, and the effect of the revolver capacity reduction.
- Evaluate whether projected restructuring savings and the stated 4% to 6% core sales-growth outlook are achieved.
- Follow the finalization of Tax Cuts and Jobs Act accounting, foreign tax credit utilization, GILTI treatment, and any potential valuation allowance release.