Enerpac Tool Group Corp. — Q3 Fiscal 2021 Form 10-Q Summary
Business context and reporting period
Enerpac Tool Group is a global industrial tools and services company operating in more than 100 countries. Its reportable segment, Industrial Tools & Services (IT&S), designs, manufactures and distributes hydraulic and mechanical tools and provides related services and rentals. The filing covers the three and nine months ended May 31, 2021, compared with the corresponding periods ended May 31, 2020. The company had 60.2 million Class A shares outstanding as of June 24, 2021.
Key financial metrics
| Metric | Three months ended May 31, 2021 | Three months ended May 31, 2020 | Nine months ended May 31, 2021 | Nine months ended May 31, 2020 |
|---|---|---|---|---|
| Net sales | $143.1 million | $101.9 million | $383.2 million | $381.9 million |
| Gross profit | $66.8 million | $41.9 million | $176.9 million | $172.7 million |
| Gross margin | 46.7% | 41.2% | 46.2% | 45.2% |
| Operating profit | $22.7 million | $(2.0) million | $37.5 million | $20.9 million |
| Operating margin | 15.9% | (2.0%) | 9.8% | 5.5% |
| Net earnings from continuing operations | $25.3 million | $(4.9) million | $33.7 million | $5.4 million |
| Net earnings (loss) | $25.0 million | $(5.0) million | $32.8 million | $(0.7) million |
| Diluted EPS | $0.41 | $(0.08) | $0.54 | $(0.01) |
IT&S sales were $133.4 million in the quarter and $358.3 million year to date. IT&S operating margin was 17.9% in the quarter versus 8.2% in the prior-year quarter and 15.3% year to date versus 15.4% in the prior-year period.
Cash provided by operating activities was $24.9 million for the nine months, including $25.4 million from continuing operations, versus total operating cash use of $15.7 million in the prior-year period. Capital expenditures were $9.5 million. Investing activities provided $15.8 million, primarily reflecting approximately $22.4 million of proceeds from the sale of a China manufacturing facility. Financing activities used $61.7 million, primarily reflecting $60.0 million of net debt repayments and $2.4 million of dividends.
Cash and cash equivalents were $136.3 million at May 31, 2021, down from $152.2 million at August 31, 2020. Approximately $124 million was held by foreign subsidiaries and $12 million domestically. The company had $195.0 million outstanding under its revolving credit facility and approximately $200.5 million of available capacity. No term loan or senior notes remained outstanding.
Total assets were $842.7 million and shareholders’ equity was $416.9 million at May 31, 2021. Accounts receivable increased to $112.6 million from $84.2 million at August 31, 2020, inventories increased to $74.7 million from $69.2 million, and current liabilities increased to $134.4 million from $105.5 million.
Material changes versus the prior comparable period
- Third-quarter sales increased 41%, with core sales up 36% and a 6% favorable foreign-currency impact. Core product sales increased 40% and core service sales increased 23%.
- Nine-month sales increased less than 1%; core sales declined 1% because the first two quarters remained affected by COVID-19, partially offset by a 2% favorable currency impact.
- Gross margin improved by approximately 550 basis points in the quarter and 100 basis points year to date, primarily due to higher fixed-cost absorption and product mix.
- Operating profit increased substantially, supported by higher volume, restructuring savings, lower discretionary spending and the net benefit from the China facility sale.
- Net financing costs declined to $1.3 million in the quarter and $4.4 million year to date from $4.6 million and $15.9 million, respectively, following the repayment of the term loan, redemption of the senior notes and subsequent debt reduction.
- Restructuring charges declined to $1.6 million in the quarter and $2.4 million year to date, compared with $3.3 million and $7.2 million, respectively, in the prior-year periods. Management expects annual gross savings of $12 million to $15 million from the initial plan and an additional $12 million to $15 million from its expansion.
- Year-to-date continuing-operations results benefited from nonrecurring tax items, including approximately $5 million from tax planning and loss carrybacks and $8 million from uncertain-tax-position releases, partly offset by a $3 million tax expense related to the China facility sale.
Guidance, outlook, commentary, risks and unusual items
Management stated that the company returned to year-over-year core growth in all regions during the third quarter, with particularly strong growth in the Americas and Europe. Parts of the Middle East and Asia-Pacific remained affected by pandemic lockdowns and economic weakness. Management expects to pursue organic growth, new product development and disciplined acquisitions, but the filing does not provide specific fiscal 2021 revenue or earnings guidance.
The company believes cash, available revolver capacity and anticipated operating cash flows will be adequate for operating needs, debt service, acquisitions and capital expenditures for the foreseeable future. It was in compliance with all debt covenants at May 31, 2021. The interest coverage covenant was temporarily reduced to 3.0 through October 2021; the facility otherwise includes a maximum leverage ratio of 3.75:1 and a minimum interest coverage ratio of 3.5:1.
Unusual items included a $10.0 million gain on the sale and leaseback of a China manufacturing facility, offset by $4.6 million of transaction-related costs and taxes, producing a net $5.4 million benefit in SG&A. The effective tax rate was negative 21.0% in the quarter and negative 6.8% year to date, and management stated that the principal tax benefits were not expected to recur.
Key risks include COVID-19 effects, supply-chain interruptions and shortages, commodity and raw-material inflation, transportation and currency volatility, challenging oil and gas and other end markets, cybersecurity, tariffs, regulatory matters, litigation, acquisition integration, goodwill and intangible-asset impairment, debt covenant compliance and interest-rate exposure. A $16.0 million interest-rate swap fixed the LIBOR index on $100.0 million of borrowings and expired in August 2021.
The company self-disclosed potentially sanction-violating sales involving an Estonian customer and products used in Crimea. It recorded an expense during the nine months for its estimated financial penalty; the investigation by Dutch authorities remained ongoing. The company also had $16.0 million of letters of credit and approximately $5.7 million of contingent lease-payment exposure related to previously divested businesses.
Important facts for investors to verify
- Whether the third-quarter recovery in core sales continued after May 31, 2021, particularly in challenged Middle East and Asia-Pacific markets.
- The sustainability of margin improvement after excluding the China facility sale gain, restructuring savings and nonrecurring tax benefits.
- Progress toward the stated $24 million to $30 million of annual gross restructuring savings.
- Post-quarter-end debt levels, borrowing costs, covenant headroom and the effect of the temporary interest-coverage covenant amendment.
- The final outcome and financial penalty related to the Netherlands sanctions investigation.
- Supply-chain, commodity-cost and labor availability trends, including the company’s ability to pass cost increases to customers.
- Cash repatriation and liquidity, given that most cash was held by foreign subsidiaries.
- Potential impairment or other charges affecting goodwill and intangible assets, which totaled approximately $344.6 million at May 31, 2021.