Enerpac Tool Group Corp. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Enerpac Tool Group Corp. (formerly Actuant Corporation) filed its Form 10-K for the fiscal year ended August 31, 2020. The company is a global industrial tools and services provider operating in more than 100 countries. Its reportable segment is Industrial Tools & Services (IT&S), which designs, manufactures and distributes hydraulic and mechanical tools and provides services and tool rentals. The Other segment primarily comprises the Cortland U.S. business.
The company continued its strategic transition to a pure-play industrial tools and services company. The former Engineered Components & Systems (EC&S) segment was sold on October 31, 2019, and its results, together with certain previously divested businesses, are presented as discontinued operations.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $493.3 million | $654.8 million | Down 25% |
| Gross profit | $217.2 million | $292.7 million | Down 26% |
| Gross margin | 44.0% | 44.7% | Down 70 basis points |
| Operating profit | $24.2 million | $47.5 million | Down 49% |
| Operating margin | 4.9% | 7.3% | Down 240 basis points |
| Net earnings from continuing operations | $5.6 million | $8.1 million | Down 31% |
| Diluted EPS from continuing operations | $0.09 | $0.13 | Down $0.04 |
| Total net earnings | $0.7 million | Net loss of $249.1 million | Improved, primarily due to discontinued operations |
| Operating cash flow | $(3.2) million | $53.8 million | Down $57.0 million |
| Capital expenditures | $12.1 million | $14.9 million | Down 19% |
| Cash and equivalents | $152.2 million | $211.2 million | Down $59.0 million |
| Debt | $255.0 million | $460.4 million | Down $205.4 million |
IT&S sales were $454.9 million, down 25% from $609.5 million, and IT&S operating profit was $65.5 million, down 35% from $101.4 million. IT&S operating margin declined to 14.4% from 16.6%. Product sales were $379.9 million and service and rental sales were $113.4 million.
Fiscal 2020 operating cash flow from continuing operations was $18.0 million, but cash used by discontinued operations was $21.2 million, resulting in total operating cash usage of $3.2 million. Investing cash flow was $176.1 million, primarily reflecting proceeds from the EC&S divestiture. Financing cash usage was $238.9 million, including debt repayments, the redemption of senior notes, share repurchases and dividends.
Material changes versus the prior comparable period
- Core sales declined 20%, principally because COVID-19 and volatile oil prices sharply reduced demand in the third and fourth quarters. Lower service sales also reflected the nonrecurrence of large Middle East and Asia projects completed in fiscal 2019.
- Strategic exits and divestitures, net of acquisitions, reduced sales by approximately 6%; foreign exchange favorably affected the comparison by approximately 1%.
- Gross margin was relatively resilient despite the volume decline because of exits from lower-margin product and service lines, temporary cost reductions and a greater impact on lower-margin service revenue.
- Selling, administrative and engineering expenses declined $28 million to $180.5 million due to restructuring benefits, lower commissions, canceled fiscal 2020 bonuses, furloughs, wage reductions and reduced discretionary spending.
- The company acquired HTL Group in January 2020 for $33.3 million. HTL contributed approximately $6.3 million of fiscal 2020 sales.
- The company sold its UNI-LIFT, Connectors and Milwaukee Cylinder businesses and recorded a net impairment and divestiture benefit of $3.2 million in continuing operations.
- The company used EC&S sale proceeds to repay the remaining $175 million term loan. In June 2020, it borrowed $295 million under the revolving facility to redeem its 5.625% senior notes.
Guidance, outlook, commentary and risks
Management did not provide a consolidated revenue or earnings outlook in the filing. It expects fiscal 2021 capital expenditures of approximately $10 million to $15 million, subject to business performance, foreign exchange, COVID-19 effects and the timing of leased versus purchased assets.
Management expects annual savings of approximately $12 million to $15 million from the first phase of the restructuring plan and an additional $12 million to $15 million from its expanded plan. The Other segment facility consolidation is expected to generate approximately $3 million to $5 million of annual savings.
Management stated that it remains focused on commercial effectiveness, new product development, facility optimization, reducing oil and gas concentration, and expanding in power generation, aerospace, rail and mining. The filing cautions that the timing and severity of the COVID-19 pandemic and economic recovery cannot be reasonably estimated.
- COVID-19 may reduce customer demand, disrupt operations and suppliers, and limit the company’s ability to meet customer requirements.
- Exposure to cyclical industrial, infrastructure and oil and gas markets remains significant, including the risk of further oil-price disruption.
- The company relies on third-party suppliers, including suppliers in China, and faces commodity, tariff, transportation and supply-chain risks.
- Debt totaled $255 million at year-end, all under the revolving credit facility, with approximately $139.9 million available. Borrowings are secured and subject to leverage and interest-coverage covenants. The company was in compliance at August 31, 2020.
- The minimum interest coverage covenant was reduced to 3.0 through October 2021 as a COVID-19-related precaution; the company’s stated long-term covenant is 3.5.
- Goodwill and other intangible assets totaled $343.5 million, or approximately 42% of total assets. No goodwill impairment was recorded in fiscal 2020, but future impairment remains a risk if operating performance deteriorates.
- The company disclosed an ongoing investigation by Dutch authorities concerning potentially sanction-violating sales to an Estonian customer. The potential penalties cannot be reasonably estimated.
- Legal, environmental, pension, tax, foreign-exchange, interest-rate, cybersecurity and retained divestiture liabilities could adversely affect results.
Most important facts for investors to verify
- Whether demand, particularly in oil and gas and service markets, recovered after the fiscal 2020 COVID-19-related decline.
- Progress toward the projected $27 million to $35 million of annual restructuring savings and the extent to which savings are recurring rather than temporary.
- Debt reduction, revolver availability, covenant headroom and the effect of variable interest rates.
- Operating cash flow generation, given the shift from $53.8 million of total operating cash flow in fiscal 2019 to $3.2 million of cash usage in fiscal 2020.
- Integration and performance of HTL Group and the strategic benefits of the EC&S divestiture.
- Potential goodwill or intangible-asset impairment under prolonged weak market conditions.
- Developments in the Dutch sanctions investigation, environmental matters, tax positions and liabilities retained from divested businesses.