Enerpac Tool Group Corp. — Form 10-Q Summary
Business context and reporting period
Enerpac Tool Group is a global industrial tools and services company operating primarily through its Industrial Tools & Services segment. It designs, manufactures and distributes hydraulic and mechanical tools, heavy-lifting solutions, and related services and rentals in more than 90 countries.
This filing covers the three and six months ended February 29, 2020, representing the second quarter and first six months of fiscal 2020. The filing was signed March 25, 2020. Results include the strategic divestiture of the former Engineered Components & Systems segment, completed October 31, 2019, and the January 2020 acquisition of HTL Group.
Financial performance and key metrics
| Metric | Three months ended Feb. 29, 2020 | Prior comparable period | Six months ended Feb. 29, 2020 | Prior comparable period |
|---|---|---|---|---|
| Net sales | $133.4 million | $159.8 million | $280.1 million | $318.3 million |
| Gross profit | $62.1 million | $71.3 million | $130.8 million | $141.6 million |
| Gross margin | 46.6% | 44.6% | 46.7% | 44.5% |
| Operating profit | $8.6 million | $12.4 million | $22.9 million | $3.9 million |
| Operating margin | 6.4% | 7.8% | 8.2% | 1.2% |
| Net earnings from continuing operations | $3.9 million | $0.8 million | $10.3 million | $(15.7) million |
| Net earnings, including discontinued operations | $2.2 million | $2.8 million | $4.3 million | $(14.7) million |
| Diluted EPS from continuing operations | $0.06 | $0.01 | $0.17 | $(0.26) |
- Second-quarter sales declined 17%; management attributed the decline to a 10% decrease in core sales, an 8% reduction from divestitures and strategic service exits, and a 1% contribution from HTL. Foreign exchange had minimal impact.
- Six-month sales declined 12%, including a 5% decline in core sales and a 7% reduction from divested product lines and strategic exits. HTL contributed approximately 1%.
- Second-quarter gross margin improved by approximately 200 basis points, principally because of the mix effect from exiting lower-margin businesses and services. Operating margin declined because of lower volumes and increased restructuring costs.
- Financing costs declined to $4.6 million in the quarter and $11.4 million year to date, compared with $7.2 million and $14.5 million, respectively, due largely to repayment of the term loan.
- The effective tax rate on continuing operations was 17.1% for the quarter and 14.6% year to date, compared with 84.0% and negative 35.1% in the prior periods. Comparability was affected by divestiture and impairment items, accelerated debt issuance-cost expense, and valuation allowance releases.
Cash flow, liquidity and capital structure
| Metric | Six months ended Feb. 29, 2020 | Six months ended Feb. 28, 2019 |
|---|---|---|
| Cash used in operating activities | $(28.7) million | $(51.3) million |
| Cash provided by investing activities | $176.6 million | $20.5 million |
| Cash used in financing activities | $(196.4) million | $(50.4) million |
| Capital expenditures | $7.0 million | $8.7 million |
| Ending cash and cash equivalents | $163.4 million | $170.4 million |
- Cash declined $47.7 million from August 31, 2019. Investing cash flow benefited from approximately $209 million of proceeds from the EC&S sale and $9 million from non-core product-line sales, partially offset by the $33.4 million HTL acquisition.
- Financing cash use included repayment of the $175 million term loan and $17.8 million of share repurchases. No shares were repurchased during the second quarter.
- At February 29, 2020, long-term debt consisted primarily of $287.6 million of 5.625% senior notes due June 2022. The term loan was fully repaid, and there were no revolver borrowings.
- The company reported $394.9 million of available borrowing capacity under its revolving credit facility and compliance with all debt covenants. Management stated that cash, the revolver and anticipated operating cash flow should fund foreseeable operating, debt-service, acquisition and capital-expenditure needs.
- Cash held by foreign subsidiaries was approximately $154 million, compared with $9 million held domestically.
Material changes versus the prior comparable period
- The company completed the EC&S divestiture and classified its results as discontinued operations. The divested businesses generated $67.0 million of sales and a $6.0 million net loss from discontinued operations in the first six months of fiscal 2020, primarily reflecting divestiture-related items.
- HTL Group was acquired for $33.4 million net of cash acquired. The acquisition contributed $2.0 million of second-quarter sales and added preliminary goodwill of $8.6 million and intangible assets of $18.0 million.
- Restructuring charges increased to $1.9 million in the quarter and $3.9 million year to date, compared with $0.1 million and less than $0.1 million, respectively, in the prior periods. The restructuring plan targets $12 million to $15 million of annual savings and $10 million to $15 million of total costs.
- Impairment and divestiture expense shifted from prior-year charges of $3.5 million in the quarter and $27.0 million year to date to a net benefit of $0.8 million and $2.1 million, respectively, in fiscal 2020.
- The company adopted the lease accounting standard on September 1, 2019, recognizing a $60.8 million right-of-use asset and operating lease liability at adoption. Total operating lease liabilities were $55.2 million at February 29, 2020.
Guidance, outlook, risks and unusual items
- Management withdrew specific fiscal 2020 estimates for core sales growth, operating profit and other financial metrics because of the COVID-19 pandemic and volatile oil prices.
- For the remainder of fiscal 2020, management is implementing cost actions intended to achieve a targeted EBITDA margin run rate of 20%. The filing does not provide a specific forecast for reported EBITDA or revenue.
- Management expects the principal restructuring plan to be substantially complete after actions taken in March 2020, with the targeted annual savings subject to sales, production volumes and incentive-compensation changes.
- The company warned that COVID-19, restrictions affecting employees, customers and suppliers, and the sharp decline in oil prices could materially adversely affect demand, facilities, supply channels, financial condition and results of operations. The magnitude and duration could not be reasonably estimated at the filing date.
- Other principal risks include global economic weakness, exposure to oil and gas markets, currency volatility, tariffs, commodity costs, supplier or manufacturing disruptions, cybersecurity, litigation, impairment of goodwill and intangible assets, acquisition integration, and compliance with debt covenants.
- The company recorded a $0.8 million benefit related to a previously divested business legal matter after determining that a loss was no longer probable. An ongoing Netherlands investigation concerning potentially diverted sales to Crimea may result in penalties, although management did not expect a material adverse effect.
- OFAC concluded a previously disclosed sanctions matter with a cautionary letter and no adverse financial impact. The company remains contingently liable for approximately $7.7 million of lease payments associated with previously divested businesses, although it does not believe payment is probable.
Investor verification checklist
- Verify the actual fiscal 2020 effects of COVID-19, oil-price weakness, customer demand changes and supply-chain disruptions against the company’s withdrawn guidance.
- Track whether the $12 million to $15 million restructuring savings target is achieved and compare realized savings with remaining restructuring costs.
- Monitor liquidity, revolver availability, compliance with the 3.75-to-1 leverage covenant and the June 2022 maturity of the $287.6 million senior notes.
- Assess the sustainability of reported margins after removing divestiture benefits, restructuring charges and other unusual items.
- Evaluate HTL’s contribution, integration progress and the finalization of its preliminary purchase-price allocation.
- Review discontinued-operation adjustments, retained liabilities from divestitures, the Netherlands sanctions investigation and contingent lease obligations.