Enerpac Tool Group Corp. — Fiscal 2021 Form 10-K 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 Industrial Tools & Services (IT&S) segment designs, manufactures and distributes hydraulic and mechanical tools and provides technical services and tool rentals. The Other segment primarily comprises the Cortland U.S. business. The filing covers the fiscal year ended August 31, 2021; results are presented primarily from continuing operations.
The Company continued its strategic shift toward a pure-play industrial tools and services business following the divestiture of the former Engineered Components & Systems segment in fiscal 2020 and other non-core divestitures.
Key financial metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $528.7 million | $493.3 million | Up 7% |
| Gross profit | $243.2 million | $217.2 million | Up 12% |
| Gross margin | 46.0% | 44.0% | Up 2.0 percentage points |
| Operating profit | $51.1 million | $24.2 million | Up $26.9 million |
| Operating margin | 9.7% | 4.9% | Up 4.8 percentage points |
| Net earnings from continuing operations | $40.2 million | $5.6 million | Up $34.7 million |
| Diluted EPS from continuing operations | $0.67 | $0.09 | Up $0.58 |
| Net earnings | $38.1 million | $0.7 million | Up $37.4 million |
| Cash provided by operating activities | $54.2 million | $(3.2) million | Improved $57.3 million |
| Capital expenditures | $12.0 million | $12.1 million | Substantially flat |
| Cash and cash equivalents | $140.4 million | $152.2 million | Down $11.8 million |
| Long-term debt | $175.0 million | $255.0 million | Down $80.0 million |
Product sales were $411.9 million and service and rental sales were $116.8 million. IT&S sales increased 8% to $493.1 million, while IT&S operating profit increased 25% to $81.7 million, producing a 16.6% segment operating margin.
At August 31, 2021, total assets were $820.2 million and shareholders’ equity was $412.2 million. Goodwill and other intangible assets totaled $332.1 million, or approximately 40% of total assets.
Material changes versus the prior comparable period
- Sales recovered as COVID-19 disruption eased, with core sales increasing 5% company-wide and 7% in IT&S. Growth was strongest in the Americas and Europe during the second half of the fiscal year.
- Gross margin expanded because of higher volumes, improved overhead absorption and favorable product and service mix.
- SG&A declined by approximately $5.2 million despite higher IT&S selling expenses, primarily because of restructuring savings, lower corporate costs and a $10.0 million gain on the sale of a China manufacturing facility, partly offset by $4.6 million of related closing costs and taxes.
- Financing costs declined to $5.3 million from $19.2 million following repayment of the term loan, redemption of the Senior Notes and an $80 million reduction in revolver borrowings.
- The effective tax rate fell to 8.6% from 29.2%, mainly because of an $8 million benefit from the lapse of statutes of limitations on uncertain tax positions and a $4 million CARES Act net operating loss carryback benefit. These benefits are not expected to recur in the same manner.
- The Company recorded approximately $5.7 million of goodwill impairment related to the Cortland Industrial reporting unit and total impairment and divestiture charges of $6.2 million.
- Order backlog increased to $55 million at August 31, 2021 from $31 million, reflecting higher demand and logistical constraints.
- Primary working capital increased to $116 million, or 20% of sales, from $108 million, or 25% of sales, as receivables and inventory rose with the fourth-quarter sales recovery.
Liquidity, debt and cash flow
- Cash flow from operations was $54.2 million, including $54.9 million from continuing operations.
- Investing activities provided $13.3 million, including approximately $22.4 million from the sale of the China facility and $2.9 million from company-owned life insurance proceeds, offset by $12.0 million of capital expenditures.
- Financing activities used $81.5 million, primarily reflecting the $80 million revolver paydown and approximately $2.4 million of dividends.
- Outstanding revolver borrowings were $175 million, with approximately $220 million of available borrowing capacity. The facility matures in March 2024 and contains leverage and interest-coverage covenants. The Company was in compliance at August 31, 2021.
- The Company believes cash, revolver availability and anticipated operating cash flows will satisfy operating, debt-service, acquisition and capital-expenditure requirements for the foreseeable future.
Guidance, outlook, commentary and risks
Management did not provide formal revenue or earnings guidance in the filing. Fiscal 2022 capital expenditures were expected to be approximately $12 million to $15 million, subject to business performance, foreign exchange, COVID-19 developments and leasing decisions.
Management expects to pursue organic growth, new product development, commercial effectiveness initiatives, footprint optimization and disciplined acquisitions. The Company also expects annual gross savings of approximately $12 million to $15 million from each of the first phase and expanded phase of its restructuring plan, although the timing and realization of savings may vary.
- COVID-19, variants, employee availability, facility restrictions and customer-site access could continue to affect demand and operations.
- Supply shortages, freight capacity constraints, tariffs, commodity inflation and labor-cost increases could pressure margins and customer fulfillment.
- Approximately 36% of fiscal 2021 sales came from the United States, with significant exposure to Europe, the Middle East, Asia and other international markets. Foreign exchange, geopolitical conditions, China-related supply risks and Brexit remain relevant.
- An international agent with approximately $11 million of receivables, representing 10.4% of outstanding accounts receivable, had made no payments during the six months ended August 31, 2021. Management expects the agent to honor its obligations, but actual collections could differ from estimates.
- Goodwill and other intangible assets are substantial, and further impairment charges could result if operating performance or valuation assumptions deteriorate.
- The Company disclosed an ongoing Netherlands investigation concerning potentially sanction-violating sales involving Crimea. It recorded an expense for its estimated financial penalty but stated that it did not expect a material adverse effect.
- Legal, environmental, product liability, cybersecurity, tax, pension, acquisition-integration and divestiture-related liabilities could produce additional costs, although management did not expect existing legal proceedings to have a material adverse effect.
Most important facts for investors to verify
- Whether the post-COVID sales recovery and $55 million backlog convert into sustained revenue growth without a significant increase in working capital.
- Whether gross-margin improvement and restructuring savings persist after the China facility gain and other unusual items are excluded.
- The collectability and timing of the $11 million receivable from the delinquent international agent.
- Whether supply-chain, freight, commodity and labor pressures cause margin erosion or excess inventory.
- Progress on reducing the $175 million revolver balance before its March 2024 maturity and continued compliance with debt covenants.
- The recurrence risk from the unusually low 8.6% effective tax rate and the impact of future tax settlements.
- Potential additional goodwill impairments, particularly in the Other segment, and the outcome of the Netherlands sanctions investigation.