ENERPAC TOOL GROUP CORP. Actuant Corporation , doing business asEnerpac Tool Group , is a premier industrial tools and services company serving a broad and diverse set of customers in more than 90 countries. The Company is a global leader in the engineering and manufacturing of high pressure hydraulic tools, controlled force products and solutions for precise positioning of heavy loads that help customers safely and reliably tackle some of the most challenging jobs around the world. The Company was founded in 1910 and is headquartered inMenomonee Falls, Wisconsin . The Company has one reportable segment, IT&S. This segment is primarily engaged in the design, manufacture and distribution of branded hydraulic and mechanical tools, as well as providing services and tool rental to the industrial, maintenance, infrastructure, oil & gas, energy and other markets. Financial information related to the Company's reportable segment is included in Note 13, "Segment Information" in the notes to the condensed consolidated financial statements. Our businesses provide an array of products and services across multiple markets and geographies which results in significant diversification. The IT&S segment continues to have exposure within the broad industrial landscape, mining and infrastructure markets. Due to economic uncertainties driven by geopolitical uncertainties, such asU.S. /China trade negotiations, Brexit and the theU.S. political environment, we have experienced and continue to expect modest deceleration in demand for the majority of fiscal 2020 as compared to fiscal 2019. As a result, we still expect consolidated fiscal 2020 adjusted core sales (sales growth excluding the impact of acquisitions, divestitures, strategic exits of non-profitable product and service lines and changes in foreign currency exchange rates) growth of (3%) to 1%. We remain focused on pursuing both organic and acquisition-related growth opportunities aligned with our strategic objectives. This includes the advancement of our commercial effectiveness initiatives along with new product development efforts. We also remain focused on our lean efforts across our manufacturing, assembly and service operations. Our IT&S segment is focused on accelerating global sales growth through new product introductions and a continued emphasis on sales and marketing efforts. In addition, we remain focused on reducing our concentration in the oil & gas vertical markets by growing sales of critical products, rentals, and services with new and existing customers in other attractive vertical markets including power generation, and rescue. We continue to expect IT&S segment year-over-year adjusted core sales growth of (3%) to 1% in fiscal 2020. OnOctober 31, 2019 , the Company completed the previously announced sale of its former EC&S segment to wholly owned subsidiaries ofBRWS Parent LLC , aDelaware limited liability company and affiliate ofOne Rock Capital Partners II, LP , for a purchase price of approximately$215 million , with approximately$3 million due in four equal quarterly installments throughOctober 31, 2020 . OnMarch 21, 2019 , we announced a restructuring plan focused on i) the integration of the Enerpac andHydratight businesses (IT&S segment), ii) the strategic exit of certain commodity type services in our North America Services operation (IT&S segment), and iii) driving efficiencies within the overall corporate structure. Total restructuring charges associated with this restructuring plan were$1.5 million in the three months endedNovember 30, 2019 related primarily to headcount reductions and facility consolidations. The Company still expects to achieve a total of$12-$15 million of annual savings with total restructuring costs of$10-$15 million and we anticipate completing the remaining actions associated with this restructuring action in fiscal 2020. The annual benefit of these gross cost savings may be impacted by a number of factors, including sales and production volume variances and annual incentive compensation differentials. The Company also incurred$0.5 million of restructuring costs within the Other Segment in the three months endedNovember 30, 2019 associated with a facilities consolidation. The facility consolidation is ongoing and we expect to incur approximately$1 million of additional restructuring charges over the remainder of fiscal 2020. We anticipate realizing approximately$3 million of annual savings associated with the actions and expect to start realizing these savings in fiscal 2020. Given our global footprint, changes in foreign currency exchange rates could have a significant impact on our financial results, financial position and cash flow. Changes in foreign currency exchange rates will continue to add volatility as over one-half of our sales are generated outside ofthe United States in currencies other than theU.S. dollar. The weakening of theU.S. dollar favorably impacts our sales, cash flow and earnings given the translation of our international results intoU.S. dollars. This also results in lower costs for certain international operations, which incur costs or purchase components inU.S. dollars, and increases the dollar value of assets (including cash) and liabilities of our international operations. A strengthening of theU.S. dollar has the opposite effect on our sales, cash flow, earnings and financial position. 29
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Results of Operations The following table sets forth our results of continuing operations (in millions, except per share amounts):
Three Months Ended November 30,
2019 2018
Net sales $ 147 100 % $ 159 100 %
Cost of products sold 78 53 % 88 55 %
Gross profit 69 47 % 70 44 %
Selling, administrative and engineering expenses 52 35 % 53 33 %
Amortization of intangible assets 2 1 % 2 1 %
Restructuring charges 2 1 % - - %
Impairment & divestiture charges (benefit) (1 ) (1 )% 23 14 %
Operating profit (loss) 14 10 % (8 ) (5 )%
Financing costs, net 7 5 % 7 4 %
Other expense, net - - % 1 1 %
Earnings (loss) before income tax expense
(benefit) 7 5 % (16 ) (10 )%
Income tax expense 1 1 % - - %
Net earnings (loss) from continuing operations 6 4 % (16 ) (10 )%
Diluted earnings (loss) per share from continuing operations$ 0.11
Consolidated net sales for the first quarter of fiscal 2020 were$147 million , a decrease of$12 million (7%) from the prior year comparative. Core sales were flat year-over-year after adjusting for the$10 million (6%) decrease from divested product lines and strategic exits of certain service offerings. Changes in foreign currency exchange rates unfavorably impacted net sales comparisons by 1%. Gross profit margins increased 3% as a result of the aforementioned divested product lines and strategic exits. Operating profit was higher in fiscal 2020 as compared to fiscal 2019 largely as a result of restructuring savings of roughly$1 million from actions taken in last fiscal year's fourth quarter and decreased impairment & divestiture charges ($23 million of charges in fiscal 2019 as a result of the held for sale treatment of the CortlandU.S. business as compared to a net$1 million benefit in the current year from divestiture activities associated with non-core product lines and business) offset by higher restructuring charges in the current year. Segment Results Industrial Tools & Services Segment The IT&S segment is a global supplier of branded hydraulic and mechanical tools and services to a broad array of end markets, including industrial, energy, mining and production automation markets. Its primary products include branded tools, highly engineered heavy lifting technology solutions, and hydraulic torque wrenches (Product product line). On the services side, we provide energy maintenance and manpower services to meet customer-specific needs and rental capabilities for certain of our products (Service & Rental product line). The following table sets forth the results of operations for the IT&S segment (in millions): Three Months Ended November 30, 2019 2018 Net sales $ 136 $ 149 Operating profit 26 26 Operating profit % 19.2 % 17.7 % IT&S segment net sales for the first quarter of fiscal 2020 decreased by$13 million (9%). Strategic exits and divestitures of non-core product lines accounted for$10 million (6%) of the decrease and changes in foreign currency unfavorably impacted net sales by 1%. After consideration of the divestiture activities and the strategic exit of certain service offerings, core sales decreased by 1% predominantly as a result of decelerating demand in our North America Product product line amid macroeconomic uncertainty slightly offset by strong performance in our Middle East Service & Rental product line and stabilization of the European Product product line. 30
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Operating profit remained flat from the prior year despite the decrease in net sales as a result of the divestitures and strategic exit of certain product lines. The low profitability of these sales coupled with restructuring savings were offset by current quarter restructuring charges, resulting in flat profitability year-over-year. Corporate Corporate expenses increased by$0.5 million as a result of higher corporate development costs. Financing Costs, net Net financing costs were$6.7 million and$7.3 million for the three months endedNovember 30, 2019 and 2018, respectively. Financing costs decreased as a result of lower outstanding balances on our Senior Credit Facility, including the pay off of the term loan in early November. The benefit from lower cash interest expense was partially offset as a result of expensing the remaining$0.6 million of capitalized debt issuance costs associated with the term loan upon the early pay off of the outstanding principal balance. Income Tax Expense The Company's global operations, acquisition activity and specific tax attributes provide opportunities for continuous global tax planning initiatives to maximize tax credits and deductions. Comparative earnings (loss) before income taxes, income tax expense and effective income tax rates from continuing operations are as follows (in millions): Three Months
Ended
2019 2018
Earnings (loss) from continuing operations before
income tax expense $ 7 $ (16 )
Income tax expense 1 -
Effective income tax rate 13.0 % (0.4 )%
The Company's earnings (loss) before income taxes from continuing operations
includes earnings from foreign jurisdictions in excess of 85% of the
consolidated total for the estimated full-year fiscal 2020 and 2019. Overall,
the annual effective tax rate is not significantly impacted by differences in
foreign tax rates now that the U.S. tax rate of 21% is in line with the
Company's average foreign tax rate. Both the current and prior year effective
income tax rates were impacted by impairment & divestiture (benefit) charges.
Results included impairment & divestiture (benefit) charges of $(1) million and
$23 million ($(1) million and $23 million after tax) for the three months ended
November 30, 2019 and 2018, respectively, as well as accelerated debt issuance
costs of $0.6 million ($0.5 million after tax) for the three months ended
November 30, 2019 . Excluding the impairment & divestiture (benefit) charges and
accelerated debt issuance costs, the effective tax rate for the three months
ended November 30, 2019 and 2018 was 12.7% and 0.9%, respectively. The income
tax expense without impairment & divestiture (benefit) charges for the three
months ended November 30, 2018 is impacted by tax planning initiatives that are
not expected to repeat in future periods due to certain tax attributes that are
no longer available and subsequent changes in relevant tax law. Additionally, if
recent operational improvements continue in certain foreign jurisdictions, it is
reasonably possible that all, or a portion, of the related valuation allowances
will be released in the second half of fiscal 2020.
Cash Flows and Liquidity
At November 30, 2019 , we had $207 million of cash and cash equivalents. Cash and
cash equivalents included $195 million of cash held by our foreign subsidiaries
and $12 million held domestically. The following table summarizes our cash flows
(used in) provided by operating, investing and financing activities (in
millions):
Three Months Ended November 30,
2019 2018
Net cash used in operating activities $ (23 ) $ (29 )
Net cash provided by (used in) investing
activities 213 (8 )
Net cash used in financing activities (195 ) (10 )
Effect of exchange rates on cash 1 -
Net decrease in cash and cash equivalents* $ (4 ) $ (47 )
*The table above includes activity associated with our discontinued operations
(former EC&S segment), which was operational for the full period in the three
months ended November 30, 2018 and included activity through the divestiture on
October 31, 2019 in three month period ended November 30, 2019 .
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Net cash used in operating activities was$23 million for the three months endedNovember 30, 2019 as compared to$29 million in the three months endedNovember 30, 2018 . The net use of cash is consistent with historical results of operations in the first quarter due to increases in working capital amounts and the payment of our annual bonus compensation. The decrease in cash used by operating activities in the first quarter of fiscal 2020 as compared to fiscal 2019 was a result of a decreased bonus compensation payment and improved working capital management within our continuing operations. Net cash provided by (used in) investing activities increased$221 million as a result of divestiture proceeds net of transactions costs from the sale of the EC&S segment ($219 million ) and non-core product lines ($9 million ) in addition to lower capital expenditures in the first quarter of fiscal 2020 as compared to 2019 ($3 million ). Net cash used in financing activities was$195 million for the three months endedNovember 30, 2019 compared to$10 million for the three months endedNovember 30, 2018 . The cash used in financing activities for fiscal 2020 consisted primarily of the early pay off of the outstanding principal balance on the term loan of$175 million and treasury share repurchases of$18 million , which compared to$8 million of principal repayments on the term loan in the first quarter of fiscal 2019 and no share repurchase activity. The Company's$600 million Senior Credit Facility is comprised of a$400 million revolving line of credit and provided for a$200 million term loan which was scheduled to mature in March 2024 (see Note 8, "Debt" in the notes to the condensed consolidated financial statements for further details of the Senior Credit Facility). During the three months endedNovember 30, 2019 , the Company paid off the outstanding principal balance on the term loan. The unused credit line and amount available for borrowing under the revolving line of credit was$394 million atNovember 30, 2019 . We believe that the revolving line of credit, combined with our existing cash on hand and anticipated operating cash flows, will be adequate to meet operating, debt service, acquisition and capital expenditure funding requirements for the foreseeable future.Primary Working Capital Management We use primary working capital as a percentage of sales (PWC %) as a key metric of working capital management. We define this metric as the sum of net accounts receivable and net inventory less accounts payable, divided by the past three months sales annualized. The following table shows a comparison of primary working capital (in millions): November 30, 2019 PWC% August 31, 2019 PWC% Accounts receivable, net $ 122 21 % $ 126 20 % Inventory, net 80 14 % 77 12 % Accounts payable (69 ) (12 )% (77 ) (12 )% Net primary working capital $ 133 23 % $ 126
20 %
Commitments and Contingencies We are contingently liable for certain lease payments under leases within businesses we previously divested or spun-off. If any of these businesses do not fulfill their future lease payment obligations under a lease, we could be liable for such obligations. As ofNovember 30, 2019 , the present value of future minimum lease payments, using a weighted average discount rate of 2.13%, on previously divested or spun-off businesses was$9 million . We had outstanding letters of credit totaling$17 million and$18 million atNovember 30, 2019 andAugust 31, 2019 , respectively, the majority of which relate to commercial contracts and self-insured workers' compensation programs. We are also subject to certain contingencies with respect to legal proceedings and regulatory matters which are described in Note 14, "Commitments and Contingencies" in the notes to the condensed consolidated financial statements. While there can be no assurance of the ultimate outcome of these matters, the Company believes that there will be no material adverse effect on the Company's results of operations, financial position or cash flows. 32
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Contractual Obligations Our contractual obligations have materially changed in fiscal 2020 from what was previously disclosed in Part 1, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Contractual Obligations" in our Annual Report on Form 10-K for the year endedAugust 31, 2019 as a result of the divestiture of our EC&S segment, specifically related to lease commitments disclosed therein. See Note 15, "Leases" in the notes to the condensed consolidated financial statements for disclosure of our future contractual obligations from our continuing operations with respect to Leases as ofNovember 30, 2019 . Critical Accounting Estimates Management has evaluated the accounting estimates used in the preparation of the Company's condensed consolidated financial statements and related notes and believe those estimates to be reasonable and appropriate. Certain of these accounting estimates are considered by management to be the most critical in understanding judgments involved in the preparation of our condensed consolidated financial statements and uncertainties that could impact our results of operations, financial position and cash flow. For information about more of the Company's policies, methodology and assumptions related to critical accounting policies refer to the Critical Accounting Policies in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Annual Report on Form 10-K for the year endedAugust 31, 2019 . Item 3 - Quantitative and Qualitative Disclosures about Market Risk The diverse nature of our business activities necessitates the management of various financial and market risks, including those related to changes in interest rates, foreign currency exchange rates and commodity costs. Interest Rate Risk: We manage interest expense using a mixture of fixed-rate and variable-rate debt. A change in interest rates impacts the fair value of our 5.625% Senior Notes, but not our earnings or cash flow, because the interest rate on such debt is fixed. As ofNovember 30, 2019 , our variable-rate funding sources consisted primarily of the revolving line of credit under our Senior Credit Facility. However, we do not have any borrowings outstanding on the revolving line of credit as ofNovember 30, 2019 . Foreign Currency Risk: We maintain operations in theU.S. and various foreign countries. Our more significant non-U.S. operations are located inAustralia ,the Netherlands , theUnited Kingdom ,Mexico ,United Arab Emirates andChina , and we have foreign currency risk relating to receipts from customers, payments to suppliers and intercompany transactions denominated in foreign currencies. Under certain conditions, we enter into hedging transactions (primarily foreign currency exchange contracts) that enable us to mitigate the potential adverse impact of foreign currency exchange rate risk (see Note 10, "Derivatives" for further information). We do not engage in trading or other speculative activities with these transactions, as established policies require that these hedging transactions relate to specific currency exposures. The strengthening of theU.S. dollar against most currencies can have an unfavorable impact on our results of operations and financial position as foreign denominated operating results are translated intoU.S. dollars. To illustrate the potential impact of changes in foreign currency exchange rates on the translation of our results of operations, quarterly sales and operating profit were remeasured assuming a ten percent decrease in all foreign exchange rates compared with theU.S. dollar. Using this assumption, quarterly sales would have been lower by$6 million and operating profit would have been lower by$1 million , respectively, for the three months endedNovember 30, 2019 . This sensitivity analysis assumes that each exchange rate would change in the same direction relative to theU.S. dollar and excludes the potential effects that changes in foreign currency exchange rates may have on sales levels or local currency prices. Similarly, a ten percent decline in foreign currency exchange rates versus theU.S. dollar would result in a$39 million reduction to equity (accumulated other comprehensive loss) as ofNovember 30, 2019 , as a result of nonU.S. dollar denominated assets and liabilities being translated intoU.S. dollars, our reporting currency. Commodity Cost Risk: We source a wide variety of materials and components from a network of global suppliers. While such materials are typically available from numerous suppliers, commodity raw materials, such as steel and plastic resin, are subject to price fluctuations, which could have a negative impact on our results. We strive to pass along such commodity price increases to customers to avoid profit margin erosion. Item 4 - Controls and Procedures Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our 33
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Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time periods specified inSEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). There have been no changes in our internal control over financial reporting that occurred during the quarter endedNovember 30, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. 34
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