Actuant Corporation 2018 Form 10-K Summary
Reporting period: Fiscal year ended August 31, 2018; quarterly data includes the fourth quarter ended August 31, 2018. The filing is by Actuant Corporation, the predecessor issuer associated with Enerpac Tool Group. The company reorganized its reporting structure into two segments: Industrial Tools & Services and Engineered Components & Systems.
Business Context
Actuant designs, manufactures and distributes industrial tools, services, engineered components, motion-control systems, ropes, cables and related products. Fiscal 2018 sales were geographically diversified: 43% United States, 35% Europe, 9% Asia, 5% Middle East and 8% other regions. Approximately 5,300 employees were employed at year-end.
- Industrial Tools & Services: Hydraulic and mechanical tools, heavy-lifting solutions, industrial maintenance services and rentals.
- Engineered Components & Systems: Engineered components for on-highway, off-highway, agriculture, energy, medical, construction and other markets.
Financial Performance and Key Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $1,182.6 million | $1,095.8 million | Up 8% |
| Gross profit | $415.3 million | $379.7 million | Up 9% |
| Gross margin | 35.1% | 34.7% | Broadly stable |
| Operating profit/(loss) | $18.2 million | $(50.2) million | Improved |
| Net loss | $(21.6) million | $(66.2) million | Improved |
| Diluted loss per share | $(0.36) | $(1.11) | Improved |
| Net cash from operating activities | $106.1 million | $88.5 million | Up $17.6 million |
| Capital expenditures | $20.9 million | $28.2 million | Down $7.3 million |
| Cash and cash equivalents | $250.5 million | $229.6 million | Up $20.9 million |
| Total debt | Approximately $532.7 million gross | Approximately $561.9 million gross | Reduced |
| Net debt | $282.6 million | $332.4 million | Reduced |
The reported gross margin was approximately 35%. Results included $73.1 million of impairment and divestiture charges, $12.0 million of restructuring charges and $20.6 million of intangible amortization. Excluding impairment and divestiture charges, the company reported substantially improved underlying operating performance, although the filing does not present a single consolidated adjusted operating-profit measure.
Segment Results
| Segment | Fiscal 2018 sales | Fiscal 2017 sales | Fiscal 2018 operating result |
|---|---|---|---|
| Industrial Tools & Services | $591.1 million | $552.6 million | $99.4 million; 16.8% margin |
| Engineered Components & Systems | $591.5 million | $543.2 million | $(52.0) million, including $73.1 million of impairment and divestiture charges |
Industrial Tools & Services core sales increased 3%, driven by product demand, acquisitions and foreign currency benefits, but its margin declined from 17.3% to 16.8% because of production inefficiencies and commercial and engineering investments. Engineered Components & Systems core sales increased 9%, supported by off-highway, on-highway and rope and cable demand. Excluding impairment and divestiture charges, its operating margin improved to 4.2% from 1.6%.
Fourth-Quarter Results
- Net sales were $301.4 million, compared with $275.7 million in the fourth quarter of fiscal 2017.
- Gross profit was $108.1 million, compared with $96.5 million.
- Net loss was $37.7 million, or $(0.62) per diluted share, compared with a $98.8 million loss, or $(1.65) per share, in the prior-year quarter.
- Fiscal fourth-quarter 2018 results included $73.1 million of impairment and divestiture charges, principally related to Cortland Fibron and Precision-Hayes.
Material Changes Versus the Prior Comparable Period
- Sales increased $86.8 million, including 6% core sales growth and a $29 million favorable foreign-currency effect. Mirage and Equalizer acquisitions, net of the Viking divestiture, reduced the comparison by approximately $7 million.
- Operating results improved from a $50.2 million loss to an $18.2 million profit, despite continued special charges.
- Cash flow from operations increased to $106.1 million from $88.5 million, while capital expenditures declined.
- Debt declined through $30 million of term-loan principal repayments. The revolver capacity was reduced from $600 million to $300 million; approximately $255.7 million remained available for borrowing at year-end.
- The company acquired Mirage Machines and Equalizer for combined cash consideration of $23.2 million and completed the sale of Viking for approximately $8.8 million of net cash proceeds.
- Cortland Fibron was classified as held for sale, generating approximately $46.3 million of impairment and divestiture charges. The company also recognized approximately $23.7 million of impairment charges for Precision-Hayes.
- Research and development spending increased to $25.9 million from $21.9 million.
Liquidity, Debt and Cash Flow
Cash and cash equivalents were $250.5 million, including $182.8 million held by foreign subsidiaries and $67.6 million domestically. The company generated $106.1 million of operating cash flow, spent $62.8 million on investing activities and used $18.0 million in financing activities. Fiscal 2018 uses included acquisitions, capital expenditures, the Viking rental-asset lease buyout and $30 million of term-loan repayments.
Total debt consisted principally of a $247.5 million term loan and $287.6 million of 5.625% senior notes due 2022. The senior credit facility matures May 8, 2020. Management stated that cash, operating cash flow and revolver availability should be adequate for foreseeable operating, debt-service, acquisition and capital-expenditure requirements. The company was in compliance with its debt covenants at August 31, 2018.
Guidance, Outlook and Management Commentary
- Management expected fiscal 2019 consolidated core sales growth of 3% to 5%, versus 6% in fiscal 2018.
- Industrial Tools & Services fiscal 2019 core sales growth was expected at 3% to 5%.
- Engineered Components & Systems fiscal 2019 core sales growth was expected at 2% to 5%.
- Management expected continued, but moderated, improvement in industrial, mining, infrastructure, commercial, off-highway and agriculture markets.
- Oil and gas and energy markets remained headwinds in fiscal 2018; management expected stabilization and modest maintenance-spending improvement in fiscal 2019.
- Previously executed restructuring actions were expected to provide an additional $4 million to $7 million of pretax savings in fiscal 2019. Fiscal 2019 capital expenditures were expected at $25 million to $30 million.
Risks, Contingencies and Unusual Items
- Cyclical demand exposure includes industrial, oil and gas, energy, vehicles, agriculture, mining and infrastructure markets.
- Goodwill and other intangible assets totaled $693 million, or approximately 47% of total assets, creating material impairment risk if business performance or valuation assumptions deteriorate.
- Raw-material inflation, tariffs, supply-chain disruption, competitive pricing, foreign-currency movements and rising interest rates could pressure margins and cash flow.
- The company remains exposed to debt refinancing and covenant risks, including the 2020 credit-facility maturity and the 2022 senior-notes maturity.
- The company disclosed voluntary self-reporting to OFAC and Dutch and European authorities concerning potentially sanction-related transactions involving Iran and possible diversion of sales to Crimea. The authorities’ reviews were ongoing, and potential penalties could not be estimated.
- Outstanding letters of credit were approximately $23.6 million. The company also remained contingently liable for approximately $11.0 million of discounted future lease payments related to previously divested or spun-off businesses.
- The company reported no material unresolved staff comments and stated that legal proceedings were not expected to have a material adverse effect, although litigation, environmental and compliance outcomes remain uncertain.
Most Important Facts for Investors to Verify
- Whether fiscal 2019 core-sales guidance of 3% to 5% was achieved and whether growth remained broad-based.
- Whether Engineered Components & Systems sustained its improvement after excluding impairment and divestiture charges.
- Progress and final proceeds from the planned Cortland Fibron divestiture.
- Future goodwill, intangible-asset and long-lived-asset impairment exposure, particularly in the EC&S segment.
- Debt repayment, refinancing plans and covenant headroom ahead of the May 2020 credit-facility maturity.
- The ultimate outcome and potential financial impact of the OFAC, Dutch and European sanctions investigations.
- The final tax accounting effects of the Tax Cuts and Jobs Act, including foreign tax credits, GILTI, transition-tax estimates and valuation allowances.