Enerpac Tool Group Corp. — Fiscal 2021 Second-Quarter Form 10-Q
Business context and reporting period
Enerpac Tool Group is a global industrial tools and services company serving customers in more than 100 countries. Its sole reportable segment is Industrial Tools & Services (IT&S), which provides hydraulic and mechanical tools, engineered lifting solutions, services and tool rentals. The filing covers the three and six months ended February 28, 2021, compared with the prior-year periods ended February 29, 2020. The financial statements are unaudited and presented under U.S. GAAP.
Key financial metrics
| Metric | Three months ended Feb. 28, 2021 | Three months ended Feb. 29, 2020 | Six months ended Feb. 28, 2021 | Six months ended Feb. 29, 2020 |
|---|---|---|---|---|
| Net sales | $120.7 million | $133.4 million | $240.1 million | $280.1 million |
| Gross profit | $54.8 million | $62.1 million | $110.0 million | $130.8 million |
| Gross margin | 45.4% | 46.5% | 45.8% | 46.7% |
| Operating profit | $5.7 million | $8.6 million | $14.8 million | $22.9 million |
| Operating margin | 4.7% | 6.4% | 6.2% | 8.2% |
| Net earnings from continuing operations | $3.6 million | $3.9 million | $8.4 million | $10.3 million |
| Net earnings | $3.2 million | $2.2 million | $7.8 million | $4.3 million |
| Diluted EPS | $0.05 total; $0.06 continuing operations | $0.04 total; $0.06 continuing operations | $0.13 total; $0.14 continuing operations | $0.07 total; $0.17 continuing operations |
Six-month cash flow from continuing operations was $13.5 million, compared with cash used of $8.3 million in the prior-year period. Total operating cash flow was $13.2 million, versus negative $28.7 million previously. Capital expenditures were $5.6 million, and total investing cash flow was negative $5.0 million. Financing cash flow was negative $48.4 million, primarily reflecting a $45.0 million repayment on the revolving credit facility and a $2.4 million dividend payment.
Cash and cash equivalents were $115.3 million at February 28, 2021, including approximately $103 million held by foreign subsidiaries and $12 million domestically. Long-term debt was $210.0 million, all under the revolving credit facility, with approximately $185.7 million of available borrowing capacity. The company was in compliance with its debt covenants. The Senior Credit Facility matures in March 2024; the minimum interest coverage covenant was temporarily reduced to 3.0 through October 2021.
Material changes versus the prior comparable period
- Second-quarter sales declined 10% and six-month sales declined 14%, primarily because of COVID-19-related volume reductions, restricted job-site access and, in the first quarter, depressed oil prices.
- Second-quarter core product sales decreased 11% and core service sales decreased 12%. For the six-month period, core product sales decreased 12% and core service sales decreased 19%.
- Foreign currency translation benefited sales by approximately 2% in the quarter and 3% year to date.
- Gross margin declined approximately 1.1 percentage points in the quarter and 0.9 percentage points year to date because of sales mix, manufacturing variances and lower volume.
- Operating profit declined 33% in the quarter and 36% year to date. Cost reductions, lower discretionary spending and restructuring savings partially offset the effect of lower sales.
- Financing costs fell to $1.3 million in the quarter and $3.1 million year to date, from $4.6 million and $11.4 million, respectively, primarily because the company repaid its term loan and refinanced the Senior Notes with lower-cost revolving debt.
- The effective tax rate was 0.0% in the quarter and 21.2% year to date, compared with 17.1% and 14.6%, respectively, in the prior-year periods. The quarterly tax rate benefited from stock-option vesting and tax-planning items that management does not expect to recur.
- Restructuring charges declined to $0.6 million in the quarter and $0.9 million year to date, compared with $1.9 million and $3.9 million, respectively. 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 expansion, subject to factors including incentive compensation.
Guidance, outlook, risks and unusual items
Management did not provide specific revenue or earnings guidance in the filing. It reported sequential improvement since the third quarter of fiscal 2020 and expects demand to remain affected by the COVID-19 pandemic for the remainder of the pandemic, although the company believes its essential products, services and balance sheet position it for long-term growth.
- Key risks include continuing COVID-19 effects, economic weakness, oil-price volatility, challenging end markets, raw-material availability and costs, tariffs, manufacturing or supply-chain disruptions, foreign-exchange movements, interest rates, competition, litigation, cybersecurity and the ability to comply with debt covenants.
- The company remains exposed to retained liabilities from the divestiture of the former EC&S segment and contingent lease obligations of approximately $6.1 million extending to fiscal 2025. Management does not believe payment is probable.
- Outstanding letters of credit totaled $11.7 million. The company is involved in ordinary-course legal proceedings and believes they will not materially affect results, financial position or cash flows.
- The company self-disclosed potentially sanction-violating sales involving an Estonian customer and the Crimea region. It recorded an estimated penalty in the six months ended February 28, 2021; the Netherlands investigation remained ongoing, and the ultimate amount was unclear.
- In March 2021, an ongoing tax audit was successfully closed, expected to result in recognition of approximately $5.0 million of unrecognized tax benefits in the quarter ending May 31, 2021.
- Goodwill and other intangible assets totaled approximately $343.7 million, representing a substantial portion of total assets and creating potential impairment risk if operating performance deteriorates materially.
Facts investors should verify
- Whether COVID-19-related volume weakness, job-site restrictions and oil-and-gas exposure continue to affect orders and service activity.
- Progress toward the stated $24 million to $30 million of potential annual restructuring savings and the related execution costs.
- Sales, margin and cash-flow trends as demand recovers, including the effect of mix, manufacturing variances and commodity costs.
- Revolving debt balances, available capacity, variable interest rates and compliance with the 3.0 interest-coverage covenant through October 2021.
- The final penalty and resolution of the Netherlands sanctions investigation.
- Recognition and sustainability of the expected $5.0 million tax benefit and the unusually low quarterly effective tax rate.
- Potential impairment of goodwill and intangible assets and any additional liabilities retained from divested businesses.