ENERPAC TOOL GROUP CORP. Enerpac Tool Group Corp. is a premier industrial tools and services company serving a broad and diverse set of customers in more than 100 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, Industrial Tools & Service ("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 and the Company are well-positioned to drive shareholder value through a sustainable business strategy built on well-established brands, broad global distribution and end-markets, clear focus on the core tools and services business and disciplined capital deployment. COVID-19 Update During fiscal 2020 and the first quarter of fiscal 2021, our business, like many others around the world, has experienced significant negative financial impacts from the COVID-19 pandemic. Our key manufacturing facilities globally continued to operate with additional precautions in place to ensure the safety of our employees, and we have continued to supply our customers with the products and services they require. However, demand for our products has been significantly impacted, and we expect it will continue to be impacted to some extent for the remainder of the pandemic, as levels of uncertainty exist within our customers and our markets. In order to help mitigate the negative financial impact caused by the pandemic, we have executed a number of temporary cash and cost-savings measures. As our business has seen sequential improvement in our financial results since the third quarter of fiscal 2020, 18 -------------------------------------------------------------------------------- we have eliminated certain of the temporary cost savings actions put in place; however, we continue to execute on certain measures including reductions of capital expenditures, applications for governmental assistance programs, utilization of governmental regulations allowing for the deferral of certain tax payments and cuts to discretionary spend. While we believe that the essential products we provide, along with our current strong balance sheet, will allow us to be well positioned for long-term growth after the pandemic, we cannot reasonably estimate the duration and severity of the COVID-19 pandemic, and accordingly, the ultimate impact it will have on our business, results of operations, and financial condition. General Business Update 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$216 million (inclusive of working capital adjustments that were finalized in the third quarter of fiscal 2020), with approximately$3 million which was due in four equal quarterly installments, the last of which was received in the first fiscal quarter of 2021. OnMarch 21, 2019 , the Company 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 operations (IT&S segment) and (iii) driving efficiencies within the overall corporate structure. In the third quarter of fiscal 2020, the Company announced the expansion and revision of this plan, which further simplifies and flattens the corporate structure through elimination of redundancies between the segment and corporate functions, while enhancing our commercial and marketing processes to become even closer to our customers. Total restructuring charges associated with this restructuring plan were less than$1 million and approximately$1 million in the three months endedNovember 30, 2020 and 2019, respectively, related primarily to headcount reductions and facility consolidations. We anticipate achieving annual savings of$12 million to$15 million from the first phase of the plan and anticipate an additional annual savings of$12 million to$15 million from the expansion and revision of the plan. The annual benefit of these gross cost savings may be impacted by a number of factors, including annual incentive compensation differentials. 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. Results of Operations The following table sets forth our results of continuing operations (in millions, except per share amounts): Three Months Ended November 30, 2020 2019 Net sales $ 119 100 %$ 147 100 % Cost of products sold 64 54 % 78 53 % Gross profit 55 46 % 69 47 % Selling, administrative and engineering expenses 44 37 % 52 35 % Amortization of intangible assets 2 2 % 2 1 % Restructuring charges 0 0 % 2 1 % Impairment & divestiture charges (benefits) 0 0 % (1) (1) % Operating profit 9 8 % 14 10 % Financing costs, net 2 2 % 7 5 % Other expense, net 0 0 % 0 0 % Earnings before income tax expense 7 6 % 7 5 % Income tax expense 2 2 % 1 1 % Net earnings from continuing operations 5 4 % 6
4 %
Diluted earnings per share from continuing operations $ 0.08$ 0.11
Consolidated net sales for the first quarter of fiscal 2021 were
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sales $6 million (4%), partially offset by the $2 million (2%) increase in net
sales from the HTL Group acquisition and a 2% favorable impact to net sales due
to foreign currency exchange rates. The decrease in core sales was due to the
steep reduction in sales volume attributable to the impact of the COVID-19
pandemic on macroeconomic conditions including, but not limited to, the decrease
and volatility in oil prices. Core products sales declined 16% and core service
sales decreased 24%. Gross profit margins decreased 1% as a result of
under-absorption of fixed costs partially offset by the favorable mix of product
and service sales in the quarter. Operating profit was $5 million lower in the
first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020
largely as a result of the $14 million decrease in gross profit resulting from
the steep sales decline, partially offset through both short and long-term cost
savings actions including the realization of savings from restructuring actions,
lower travel and entertainment expenses, lower expense associated with our bonus
program and other discretionary spending initiatives.
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
cylinders, hydraulic torque wrenches, highly engineered heavy lifting technology
solutions and other tools (Product product line). On the services side, we
provide 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,
2020 2019
Net sales $ 112 $ 136
Operating profit 17 26
Operating profit % 15.3 % 19.2 %
IT&S segment net sales for the first quarter of fiscal 2021 decreased by $24
million (17.3%). Core sales decreased $22 million year-over-year (17%) due to
the sharp decline in volume from the impact of the COVID-19 pandemic on
macroeconomic conditions. Strategic exits and divestitures of non-core product
lines accounted for an additional $6 million (4%) decrease, offset by an
increase of $2 million (2%) associated with the acquisition of HTL Group .
Changes in foreign currency favorably impacted net sales by 2%.
Operating profit percentage decreased 3.9% from the prior-year period primarily
due to reduced volumes and under absorption partially offset by lower SAE costs
as a result of the realization of savings from restructuring actions, the
decrease in travel and entertainment expenses, lower expense associated with our
bonus program and other discretionary spending initiatives.
Corporate
Corporate expenses of $6 million decreased $5 million for the three months ended
November 30, 2020 from $11 million for the three months ended November 30, 2019 .
This decrease was the result of the realization of savings from restructuring
actions, lower annual bonus program expenses and reductions in discretionary
spend including consulting services and business development costs, of which
business development costs in the first quarter of fiscal 2020 included costs
with the eventual acquisition of HTL Group in January 2020 .
Financing Costs, net
Net financing costs were $2 million and $7 million for the three months ended
November 30, 2020 and November 30, 2019 , respectively. Financing costs decreased
as a result of the pay off of our outstanding term loan in November 2019 with
the cash received from the EC&S divestiture and the interest rate savings
realized from the retirement of our 5.625% Senior Notes in the fourth quarter of
fiscal 2020 through drawing on our revolving line of credit, which maintains a
lower interest rate in the current interest rate environment. We also expensed
$0.6 million of capitalized debt issuance costs associated with the early pay
off of the outstanding principal balance on the term loan in the first quarter
of fiscal 2020.
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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 before income
taxes, income tax expense and effective income tax rates from continuing
operations are as follows (in millions):
Three
Months Ended
2020 2019
Earnings from continuing operations before income tax expense $ 7 $ 7
Income tax expense 2 1
Effective income tax rate 31.9 % 13.0 %
The Company's earnings from continuing operations before income taxes include
earnings from foreign jurisdictions of 47% and 84% of the consolidated total for
the estimated full-year fiscal 2021 and full-year 2020, respectively. Though
most foreign tax rates are now in line with the U.S. tax rate of 21%, the annual
effective tax rate is impacted by withholding taxes, losses in jurisdictions
where no benefit can be realized, and various aspects of the U.S. Tax Cuts and
Jobs Act, such as the Global Intangible Low-Taxed Income, Foreign-Derived
Intangible Income and Base Erosion and Anti-Abuse Tax provisions.
The effective tax rate for the three months ended November 30, 2020 was 31.9%,
compared to 13.0% for the comparable prior-year period. The effective tax rate
for the current-year period resulted in a greater expense than the comparable
prior-year period primarily due to prior-year non-recurring benefits related to
the adoption of proposed tax regulations in the United States .
On March 27, 2020 , the U.S. government enacted tax legislation containing
provisions to support businesses during the COVID-19 pandemic (the "CARES Act"),
including deferment of the employer portion of certain payroll taxes, refundable
payroll tax credits, and technical amendments to tax depreciation methods for
qualified improvement property. The CARES Act did not have a material impact on
our consolidated financial statements for the three months ended November 30,
2020 . We are continuing to evaluate the future impact of the CARES Act
provisions on our consolidated financial statements.
Cash Flows and Liquidity
At November 30, 2020 , we had $159 million of cash and cash equivalents. Cash and
cash equivalents included $142 million of cash held by our foreign subsidiaries
and $17 million held domestically. The following table summarizes our cash flows
provided by (used in) operating, investing and financing activities (in
millions):
Three Months Ended
2020 2019
Net cash provided by (used in) operating activities $ 9 $ (23)
Net cash (used in) provided by investing activities (2) 213
Net cash used in financing activities (2) (195)
Effect of exchange rates on cash 1 (1)
Net increase (decrease) in cash and cash equivalents $ 6 $ (4)
Net cash provided by operating activities was $9 million for the three months
ended November 30, 2020 as compared to $23 million net cash used in operating
activities in three months ended November 30, 2019 . The change year-over-year is
predominantly a result of the divestiture of the EC&S segment, which generated a
use of cash of $19 million in the first quarter of fiscal 2020 prior to its
divestiture, and the termination of our fiscal 2020 bonus program in response to
COVID-19, which resulted in no bonus payment in the first quarter of fiscal 2021
($6 million paid in the first quarter of fiscal 2020 associated with the fiscal
2019 bonus program).
Net cash used in investing activities was $2 million for the three months ended
November 30, 2020 as compared to $213 million net cash provided by investing
activities for the three months ended November 30, 2019 . The cash provided by
investing activities in the prior year was generated from the sale of our EC&S
segment as well as our Connectors and UNI-LIFT product lines, slightly offset by
cash used for capital expenditures. We did not have any divestiture activity in
the first quarter of fiscal 2021 and incurred approximately $2 million of
capital expenditures.
Net cash used in financing activities was $2 million for the three months ended
November 30, 2020 compared to $195 million for three months ended November 30,
2019 . The cash used in financing activities in fiscal 2020 consisted primarily
of the early pay off of the outstanding principal balance on the term loan of
$175 million , $18 million of share repurchases, and $2 million for the payment
of our annual dividend. Net fiscal 2021 cash flow used in financing activities
resulted primarily from the payment of our annual dividend.
The Company's Senior Credit Facility is comprised of a $400 million revolving
line of credit and previously provided for a $200 million term loan, both
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). As previously noted, the Company paid off the outstanding
principal
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balance on the term loan in November 2019. Further, as noted in Note 8,
"Debt" , on June 15, 2020 , the Company borrowed $295 million under the Senior
Credit Facility revolving line of credit to fund the redemption of all of the
outstanding Senior Notes at par, plus the remaining accrued and unpaid interest.
Outstanding borrowings under the Senior Credit Facility revolving line of credit
were $255 million as of November 30, 2020 . The unused credit line and amount
available for borrowing under the revolving line of credit was $140 million at
November 30, 2020 .
We believe that the revolving credit line, 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, 2020 PWC%
Accounts receivable, net $ 91 19 % $ 84 19 %
Inventory, net 71 15 % 69 16 %
Accounts payable (47) (10) % (45) (10) %
Net primary working capital $ 115 24 % $ 108 25 %
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, however, the Company does not believe it is probable that
it will be required to satisfy these obligations. Future minimum lease payments
for these leases at November 30, 2020 were $7 million with monthly payments
extending to fiscal 2025.
We had outstanding letters of credit totaling $12 million at both November 30,
2020 and August 31, 2020 , 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.
Contractual Obligations
Our contractual obligations have not materially changed in fiscal 2021 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 ended
August 31, 2020 .
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 Part 1, 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 ended
August 31, 2020 .
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: In the current economic environment, we manage interest
expense using a mixture of variable-rate debt and fixed-interest-rate swaps. As
of November 30, 2020 , long term debt consisted of $255 million of borrowing
under the revolving line of credit (variable rate debt). We are the fixed rate
payor on an interest-rate swap that effectively fixes the LIBOR-based index on
$100 million of borrowings under our revolving line of credit.
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Foreign Currency Risk: We maintain operations in the U.S. and various foreign
countries. Our more significant non-U.S. operations are located in Australia ,
the Netherlands , the United Kingdom , United Arab Emirates and China , 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 the U.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 into U.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 the U.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 ended November 30, 2020 . This
sensitivity analysis assumes that each exchange rate would change in the same
direction relative to the U.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 the U.S. dollar would result in a $37 million reduction to equity
(accumulated other comprehensive loss) as of November 30, 2020 , as a result of
non-U.S. dollar denominated assets and liabilities being translated into U.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 Securities and
Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and
reported within the time periods specified in SEC 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 ended November 30, 2020 that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
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