Enerpac Tool Group Corp. 10-Q Summary
Business Context and Reporting Period
Enerpac Tool Group Corp. is a global industrial tools and services company operating primarily through its Industrial Tools & Services segment. It provides hydraulic and mechanical tools, heavy-lifting solutions, technical services and tool rentals in more than 90 countries. This filing covers the three and nine months ended May 31, 2020, the third quarter and first nine months of fiscal 2020. Results were substantially affected by COVID-19, lower oil prices and the divestiture of the former Engineered Components & Systems segment.
Financial Highlights
| Metric | Three Months Ended May 31, 2020 | Three Months Ended May 31, 2019 | Nine Months Ended May 31, 2020 | Nine Months Ended May 31, 2019 |
|---|---|---|---|---|
| Net sales | $101.9 million | $178.1 million | $381.9 million | $496.4 million |
| Gross profit | $41.9 million | $82.0 million | $172.7 million | $223.6 million |
| Gross margin | 41.2% | 46.0% | 45.2% | 45.0% |
| Operating profit (loss) | $(2.0) million | $38.2 million | $20.9 million | $42.1 million |
| Net earnings (loss) from continuing operations | $(4.9) million | $26.9 million | $5.4 million | $11.2 million |
| Net earnings (loss) | $(5.0) million | $32.4 million | $(0.7) million | $17.7 million |
| Diluted earnings (loss) per share | $(0.08) | $0.52 | $(0.01) | $0.29 |
Third-quarter sales declined 43%, while nine-month sales declined 23%. Management attributed the quarterly decline primarily to COVID-19-related volume reductions and oil-market volatility. Core product sales declined 35% and core service sales declined 47% in the quarter. The IT&S segment reported third-quarter sales of $92.9 million and operating profit of $7.6 million, compared with $166.7 million and $34.9 million, respectively, in the prior-year quarter; its operating margin fell to 8.2% from 20.9%.
Net cash used in operating activities was $15.7 million for the first nine months, compared with $1.2 million of cash provided in the prior-year period. Continuing operations generated $5.4 million of operating cash, but discontinued operations used $21.1 million. Investing activities provided $175.9 million, primarily from divestiture proceeds, while financing activities used $206.4 million, including $175.0 million of term-loan repayment and $27.5 million of share repurchases.
At May 31, 2020, cash and cash equivalents were $163.6 million, including approximately $156 million held by foreign subsidiaries. Total long-term debt, net of issuance costs, was $286.5 million, consisting primarily of $287.6 million of 5.625% Senior Notes. The Company had no borrowings under its revolving credit facility or term loan and approximately $394.9 million of revolving capacity available. On June 15, 2020, after the reporting date, it borrowed $295 million under the revolver to redeem the Senior Notes at par.
Material Changes Versus the Prior Comparable Period
- COVID-19 and lower oil prices sharply reduced customer demand, sales volumes and operating leverage.
- Gross margin declined approximately 480 basis points in the quarter because of under-absorption, product mix and restructuring charges recorded in cost of products sold.
- Lower selling, administrative and engineering expenses partially offset the gross-profit decline. Savings resulted from bonus-plan cancellation, furloughs, wage reductions, travel restrictions, lower commissions, discretionary-spending reductions and restructuring actions.
- The Company completed the sale of the EC&S segment on October 31, 2019 for approximately $214.5 million, resulting in discontinued-operations accounting and materially changing year-over-year comparability.
- The Company acquired HTL Group in January 2020 for a final purchase price of approximately $33.3 million. HTL contributed $1.9 million of quarterly sales and $3.9 million of nine-month sales.
- Restructuring charges increased to $2.4 million in the quarter and $6.3 million in the first nine months, compared with $1.1 million in each prior-year period.
- The Company adopted the new lease standard on September 1, 2019, recognizing a $60.8 million right-of-use asset and operating lease liability at adoption.
Outlook, Management Commentary, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance in the filing. It expects demand to remain affected for at least part of the remaining pandemic period but believes its essential-industry exposure and balance sheet position it for longer-term growth. Management stated that cash, available revolver capacity and anticipated operating cash flows should meet operating, debt-service, acquisition and capital-expenditure requirements for the foreseeable future.
The restructuring plan is expected to generate annual gross savings of $12 million to $15 million from its first phase and an additional $12 million to $15 million from the expanded and revised plan. Actions in the Other operating segment are expected to generate approximately $3 million to $5 million of annual savings.
- Key risks include the duration and severity of COVID-19, further demand weakness, supply-chain interruptions, facility restrictions and operating inefficiencies from health and safety measures.
- Oil-price volatility and continued weakness in oil and gas markets could materially reduce sales and profitability.
- Foreign currency movements are significant because more than half of sales are generated outside the United States. A hypothetical 10% decline in foreign exchange rates would have reduced quarterly sales by approximately $4 million and operating profit by approximately $2 million.
- The Company had $11.9 million of outstanding letters of credit and $7.3 million of contingent future lease payments associated with previously divested or spun-off businesses.
- A Netherlands investigation concerning potentially sanction-violating sales to an Estonian customer remains ongoing. The Company cannot estimate potential penalties, although it currently does not expect a material adverse effect.
- Goodwill and intangible assets totaled approximately $334.0 million at May 31, 2020, creating potential impairment exposure if operating performance deteriorates materially.
Important Facts for Investors to Verify
- Post-quarter-end refinancing: verify the effect of the $295 million revolver borrowing and Senior Notes redemption on interest expense, leverage and liquidity.
- Whether demand, particularly in oil and gas and service activities, recovered or remained depressed after May 31, 2020.
- Actual savings realized from restructuring actions versus the stated $27 million to $35 million potential annual savings range.
- Cash availability by jurisdiction, given that approximately $156 million of cash was held by foreign subsidiaries.
- Potential penalties or developments from the Netherlands sanctions investigation and other retained liabilities from divestitures.
- Future goodwill, intangible-asset and restructuring charges if pandemic-related or market weakness continues.