Actuant Corporation Fiscal Q1 2019 Form 10-Q Summary
Reporting context: The filing is for Actuant Corporation, not “Enerpac Tool Group Corp.” It covers the three months ended November 30, 2018, the first quarter of fiscal 2019. Actuant operated through Industrial Tools & Services (IT&S) and Engineered Components & Systems (EC&S).
Financial results and key metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $292.5 million | $289.0 million | 1% increase |
| Gross profit | $105.0 million | $100.9 million | 4% increase |
| Gross margin | 35.9% | 34.9% | 100 basis-point improvement |
| Operating profit/(loss) | $(9.3) million | $14.7 million | Decline |
| Operating margin | (3.2)% | 5.1% | Decline |
| Net earnings/(loss) | $(17.5) million | $5.2 million | Decline |
| Diluted EPS | $(0.29) | $0.09 | Decline |
| Cash used in operating activities | $(29.1) million | $(20.5) million | Higher use of cash |
- Reported sales growth included a 2% unfavorable foreign-exchange impact and minimal net acquisition/divestiture impact; core sales increased 3%.
- IT&S sales increased 5% to $148.7 million, while operating profit increased to $26.4 million from $20.8 million. Operating margin improved to 17.7% from 14.7%.
- EC&S sales decreased 2% to $143.9 million. The segment reported a $28.3 million operating loss, including $36.5 million of impairment and divestiture charges. Excluding those charges, EC&S operating margin was 6.0%, compared with 3.5% in the prior-year quarter.
- Gross margin benefited from sales mix, pricing net of tariff and commodity-cost increases, and restructuring benefits.
- Cash and cash equivalents were $203.4 million at November 30, 2018, down from $250.5 million at August 31, 2018. Approximately $162 million was held by foreign subsidiaries and $41 million domestically.
- Capital expenditures were $7.7 million, term-loan principal repayments were $7.5 million, and cash dividends were $2.4 million.
- Total senior indebtedness was $527.6 million, consisting of $240.0 million under the term loan and $287.6 million of 5.625% senior notes. Net long-term debt, excluding current maturities and debt issuance costs, was $495.4 million.
- The revolver had $298.8 million of unused capacity, of which $237.9 million was available for borrowing. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Operating results moved from a $14.7 million profit to a $9.3 million loss, primarily because Q1 FY2019 included $36.5 million of impairment and divestiture charges, while Q1 FY2018 included $6.6 million of restructuring charges.
- Net income changed to a $17.5 million loss from $5.2 million of earnings. The reported effective tax rate was 0.4%, versus 23.5% in the prior-year quarter; Q1 FY2019 included tax benefits related to divestiture charges and foreign tax-credit carryforwards.
- Operating cash use increased to $29.1 million from $20.5 million, driven primarily by greater working-capital investment and higher incentive compensation.
- Restructuring charges declined to $0.4 million from $6.6 million. Management stated that previously executed restructuring initiatives had generated approximately $30 million of cumulative pretax savings through Q1 FY2019.
- Assets held for sale increased to $106.2 million from $23.6 million as Precision Hayes and Cortland U.S. were classified for sale in addition to Cortland Fibron.
- The company adopted ASC 606 effective September 1, 2018. The adoption reduced Q1 FY2019 net sales by $0.4 million and increased opening retained earnings by $0.1 million.
Guidance, outlook, risks and unusual items
- Management projected fiscal 2019 consolidated core sales growth of 3% to 5%, compared with 6% in fiscal 2018.
- IT&S fiscal 2019 core sales growth was expected at 3% to 5%; EC&S core sales growth was expected at 2% to 5%.
- Management expected stabilization and modest improvement in oil and gas and energy maintenance spending, while anticipating continued but moderated growth in industrial, infrastructure, mining and off-highway markets.
- The company expected an additional $2 million to $4 million of pretax restructuring-related savings during the remainder of fiscal 2019 and stated that associated restructuring costs should not be material.
- Cortland Fibron was sold on December 19, 2018 for $12.5 million, and Precision Hayes was sold on December 31, 2018 for $23.6 million. Management anticipated an additional $2 million to $4 million of divestiture charges in Q2 FY2019, primarily for working-capital adjustments, accelerated equity vesting and completion bonuses.
- Further impairment or divestiture charges remained possible if actual sale proceeds or disposal-group composition differed from estimates.
- Key risks include foreign-currency volatility, tariffs and commodity costs, challenging oil and gas and energy markets, customer and supplier concentration, debt covenant and interest-rate exposure, execution of restructuring and divestitures, goodwill and intangible-asset impairment, cybersecurity, litigation, and regulatory matters.
- The company self-disclosed potentially sanction-related transactions involving Iran and the Crimea region to U.S., Dutch and European authorities. Reviews were ongoing, and potential penalties could not be estimated, although management did not expect a material adverse effect.
- Management stated that existing cash, revolver availability and anticipated operating cash flow should fund operations, debt service, acquisitions and capital expenditures for the foreseeable future.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is Actuant Corporation, whereas the request identifies Enerpac Tool Group Corp.
- Assess normalized profitability excluding the $36.5 million impairment and divestiture charge, while recognizing that additional divestiture charges were expected.
- Monitor EC&S performance, the effect of exiting Cortland and Precision Hayes, and whether projected 2% to 5% core sales growth is achieved.
- Evaluate liquidity and refinancing risk ahead of the Senior Credit Facility maturity in May 2020 and the $287.6 million senior notes maturity in June 2022.
- Verify the timing and proceeds of the completed divestitures, related working-capital adjustments, and final charges.
- Track foreign-exchange effects, tariff and commodity-cost recovery, working-capital conversion, and the sustainability of restructuring savings.
- Review the outcomes of the OFAC, Dutch and European sanctions-related investigations and any resulting penalties or compliance costs.