Enerpac Tool Group Corp. — Fiscal 2021 First-Quarter 10-Q
Business context and reporting period
The filing covers the three months ended November 30, 2020, the first quarter of fiscal 2021, compared with the three months ended November 30, 2019. Enerpac is a global industrial tools and services company operating in more than 100 countries. Its reportable segment is Industrial Tools & Services (IT&S), which provides hydraulic and mechanical tools, heavy-lifting solutions, services, and rentals.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $119.4 million | $146.7 million | Down 19% |
| Gross profit | $55.3 million | $68.7 million | Down 20% |
| Gross margin | 46.3% | 46.8% | Down 0.5 percentage points |
| Operating profit | $9.1 million | $14.4 million | Down 37% |
| Operating margin | 7.6% | 9.8% | Down 2.2 percentage points |
| Net earnings from continuing operations | $4.8 million | $6.4 million | Down 24% |
| Net earnings | $4.6 million | $2.1 million | Up 117% |
| Diluted EPS | $0.08 | $0.03 | Up $0.05 |
| Operating cash flow | $8.7 million | $(22.9) million | Improved $31.6 million |
Continuing-operations revenue declined primarily because of COVID-19-related volume reductions and lower oil prices. Core sales fell 18%; core product sales declined 16% and core service sales declined 24%. The HTL acquisition contributed approximately $2.4 million of revenue, while divestitures and strategic exits reduced revenue by approximately $6 million. Foreign exchange provided a favorable 2% sales impact.
Cash and cash equivalents were $158.6 million at November 30, 2020, including approximately $142 million held by foreign subsidiaries. Current assets were $357.8 million versus current liabilities of $109.7 million. Net primary working capital was $115 million, or 24% of sales, compared with $108 million, or 25%, at August 31, 2020.
Long-term debt was $255.0 million, consisting of borrowings under the revolving credit facility. The company had $139.9 million of additional borrowing capacity and was in compliance with its debt covenants. The $400 million revolving facility matures in March 2024. A swap effectively fixes the LIBOR-based interest rate on $100 million of borrowings through August 2021.
Capital expenditures were $1.9 million. Financing cash use was $1.8 million, primarily reflecting a $2.4 million dividend payment. No shares were repurchased during the quarter; 5.2 million shares remained authorized for repurchase.
Material changes versus the prior comparable period
- Revenue decreased $27.2 million, driven mainly by pandemic-related demand weakness, oil-price volatility, divestitures, and strategic service exits.
- IT&S revenue declined 17.3% to $112.2 million, while IT&S operating margin fell to 15.3% from 19.2%.
- Gross profit decreased $13.4 million. Under-absorption of fixed costs was partly offset by favorable product and service mix.
- Operating profit decreased $5.3 million, despite lower corporate costs, travel, incentive compensation, and discretionary spending.
- Net financing costs fell to $1.7 million from $6.7 million following repayment of the term loan and retirement of the 5.625% senior notes in fiscal 2020.
- The effective tax rate increased to 31.9% from 13.0%, principally because the prior-year period included nonrecurring U.S. tax benefits.
- Prior-year results included substantial discontinued-operations and divestiture activity related to the sale of the EC&S segment. The current quarter recorded a $0.2 million loss from discontinued operations versus a $4.3 million loss in the prior-year quarter.
- Restructuring charges declined to $0.2 million from $2.0 million. Management expects annual gross savings of $12 million to $15 million from the initial restructuring plan and an additional $12 million to $15 million from its expanded plan, subject to execution and incentive-compensation effects.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide a specific revenue or earnings forecast in the filing. It stated that COVID-19 continued to negatively affect demand and could continue to do so for the remainder of the pandemic, but that sequential financial improvement had occurred since the third quarter of fiscal 2020. Certain temporary cost-saving measures were removed, while reduced capital spending, lower discretionary spending, tax-payment deferrals, and governmental assistance initiatives continued.
Management believes cash on hand, the revolving credit facility, and anticipated operating cash flows will be adequate for operating, debt-service, acquisition, and capital-expenditure needs for the foreseeable future. However, the duration and severity of COVID-19 and its ultimate business impact could not be estimated.
Key risks include pandemic effects, weaker oil and gas demand, challenging end markets, raw-material costs and availability, tariffs, supply-chain disruption, foreign exchange, interest rates, debt-covenant compliance, acquisitions and divestitures, goodwill and intangible-asset impairment, litigation, product liability, cybersecurity, regulatory developments, and employee retention.
The company self-disclosed potentially sanction-violating sales to an Estonian customer whose products were diverted to Crimea. A Netherlands investigation remained ongoing, and the company recorded an estimated penalty expense during the quarter. Management currently believes the matter will not materially affect financial position, results, or cash flows.
Outstanding letters of credit totaled $11.9 million. The company also had potential obligations of approximately $6.5 million for leases associated with previously divested businesses, although management did not believe payment was probable. Legal proceedings and other contingencies were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether COVID-19-related demand weakness, particularly in services, oil and gas, and other cyclical markets, persists or improves.
- Progress toward the stated restructuring savings of up to approximately $24 million to $30 million annually.
- Liquidity, variable-rate debt exposure, covenant compliance, and the March 2024 maturity of the revolving facility.
- The effective tax rate and whether the elevated 31.9% rate normalizes after the prior-year tax benefit comparison.
- The outcome and potential financial penalty from the Netherlands sanctions investigation.
- Execution and integration of the HTL acquisition and the effects of prior divestitures and retained liabilities.
- Potential goodwill or intangible-asset impairment if operating performance remains below normalized levels.
- Availability of foreign-held cash and any restrictions on repatriation or use of the approximately $142 million held by foreign subsidiaries.