Enerpac Tool Group Corp. is a premier industrial tools and services company serving a broad and diverse set of customers in more than 100 countries. The Company is a global leader in the engineering and manufacturing of high pressure hydraulic tools, controlled force products and solutions for precise positioning of heavy loads that help customers safely and reliably tackle some of the most challenging jobs around the world. The Company was founded in 1910 and is headquartered inMenomonee Falls, Wisconsin . The Company has one reportable segment, IT&S. This segment is primarily engaged in the design, manufacture and distribution of branded hydraulic and mechanical tools, as well as providing services and tool rental to the industrial, maintenance, infrastructure, oil & gas, alternative energy and other markets. Financial information related to the Company's reportable segment is included in Note 12, "Segment Information" in the notes to the condensed consolidated financial statements. Our businesses provide an array of products and services across multiple markets and geographies, which results in significant diversification. The IT&S segment and the Company are well-positioned to drive shareholder value through a sustainable business strategy built on well-established brands, broad global distribution and end-markets, clear focus on the core tools and services business and disciplined capital deployment. Our Business Model Our long-term goal is to create shareholder value and best in class returns through growth of our core businesses, driving efficiency and profitability, generating strong cash flow, and being disciplined in the deployment of our capital.We intend to leverage our strong brand, market positions, and dealer and distribution networks to generate organic core sales growth that exceeds end-market growth rates. Organic growth is accomplished through a combination of market share capture and product innovation, as well as market expansion into new vertical markets, emerging industries and new geographic regions. In addition to organic growth, we also focus on profit margin expansion by utilizing continuous improvement techniques to drive productivity and lower costs and by enacting routine pricing initiatives to generate price realization and offset cost increases, such as commodity and tariff increases and general inflation. Finally, cash flow generation is critical to achieving our financial and long-term strategic objectives. Strong cash 17 -------------------------------------------------------------------------------- flow generation is achieved by maximizing returns on assets and minimizing primary working capital needs. The cash flow that results from efficient asset management and improved profitability is used to fund internal growth opportunities, strategic acquisitions, pay down of debt and opportunistic returns for shareholders. General Business Update During largely the second half of fiscal 2020 and through the first two quarters of fiscal 2021, our business, like many others around the world, experienced significant negative financial impacts from the COVID-19 pandemic. Beginning in the third quarter of fiscal 2021, we returned to year-over-year core growth in all regions. In the first quarter of fiscal 2022, we continued to see strong growth in theAmericas , however, there are still portions of ourMiddle East andAsia Pacific regions in which we operate that remain challenged by pandemic-related lockdowns or the lingering economic effects of the pandemic and growth. We continued to see growth in our standard product offerings in our European markets, but saw a year-over-year decrease in our service and rental sales as well as our heavy-lifting sales due to large projects in the first quarter of fiscal 2021 that did not repeat. Our key manufacturing facilities continue to operate with additional precautions in place to ensure the safety of our employees and prevent production disruptions. Like many other businesses around the world, increased demand as global economies have returned to more normalized levels has stressed our supply chain, and increased demand and pandemic related factors have also created challenges in freight lines and the overall logistics environment. We are closely monitoring our supply chain in order to ensure we can maintain competitive lead times and deliver products to customers timely. Despite pandemic related demand challenges in certain regions and the supply chain and logistics challenges we are currently experiencing, our balance sheet remains strong and the Company continues to focus on the execution of our strategic growth initiatives in the markets we serve. We remain focused on new product development, driving organic growth and pursuing disciplined acquisition opportunities. Results of Operations The following table sets forth our results of continuing operations (in millions, except per share amounts): Three Months Ended November 30, 2021 2020 Net sales $ 131 100 %$ 119 100 % Cost of products sold 71 54 % 64 54 % Gross profit 60 46 % 55 46 % Selling, general and administrative expenses 49 37 % 44 37 % Amortization of intangible assets 2 2 % 2 2 % Restructuring charges 3 2 % 0 0 % Impairment & divestiture charges (benefits) 0 0 % 0 0 % Operating profit 6 5 % 9 8 % Financing costs, net 1 1 % 2 2 % Other expense, net 0 0 % 0 0 % Earnings (loss) before income tax (benefit) expense 5 4 % 7 6 % Income tax expense 2 2 % 2 2 % Net earnings from continuing operations 3 2 % 5 4 % Diluted earnings per share from continuing operations $ 0.05$ 0.08 Consolidated net sales for the first quarter of fiscal 2022 were$131 million , an increase of$12 million , or 10%, from the prior-year comparable period. Core sales increased$11 million , or 9%, with minimal impact from foreign currency rates. The increase in core sales was due to the substantial increase in sales volume resulting from pandemic-related market recovery most notably inNorth America , and to a lesser extent, the results of pricing actions in response to increasing costs of raw materials, components, and freight. The continuation of supply chain and logistics challenges seen in the fourth quarter of fiscal 2021 led to longer lead times throughout the quarter and larger than usual backlogs atNovember 30, 2021 , which negatively impacted the quarter as compared to the first quarter of fiscal 2021. Core products sales increased 14%, while core service sales declined 3% as compared to the same period in the prior year. Gross profit margins remained flat as compared to the prior-year first quarter, as pricing actions were wholly offset by increased costs in the supply chain and logistics environments. Operating profit was$3 million lower in the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021. Selling, general, and administrative expenses increased$4 million primarily due to executive transition costs and non-repeating temporary cost savings actions taken in the first quarter of fiscal 2021 in response to the COVID-19 pandemic. Restructuring charges also increased$3 million as compared to the prior period as a result of charges to streamline and flatten the organizational structure in the first quarter of fiscal 2022. These increases in selling, general, and 18 -------------------------------------------------------------------------------- administrative expenses and restructuring charges more than offset the$5 million increase in gross profit as a result of the higher sales volumes in the first quarter of fiscal 2022. Segment Results IT&S Segment The IT&S segment is a global supplier of branded hydraulic and mechanical tools and services to a broad array of end markets, including infrastructure, industrial maintenance, repair, and operations, oil & gas, mining, alternative and renewable energy and construction markets. Its primary products include branded tools, cylinders, hydraulic torque wrenches, highly engineered heavy lifting technology solutions and other tools (Product product line). On the service and rental side, the segment provides maintenance and manpower services to meet customer-specific needs and rental capabilities for certain of our products (Service & Rental product line). The following table sets forth the results of operations for the IT&S segment (in millions): Three Months Ended November 30, 2021 2020 Net sales $ 121$ 112 Operating profit 18 17 Operating profit % 14.9 % 15.3 % IT&S segment net sales for the first quarter of fiscal 2022 increased by$9 million , or 8%. Core sales increased$9 million , or 8%, year over year due to the substantial increase in sales volume resulting from pandemic-related market recovery most notably inNorth America , and to a lesser extent, the results of pricing actions in response to increasing costs of raw materials, components, and freight. The continuation of supply chain and logistics challenges from the fourth quarter of fiscal 2021 led to longer lead times throughout the quarter and larger than usual backlogs atNovember 30, 2021 , which negatively impacted the first quarter of fiscal 2022. Operating profit percentage decreased 0.4% from the prior-year quarter as pricing actions were wholly offset by the increased costs in the supply chain and logistics environments. Corporate Corporate expenses were$10 million and$6 million in the three months endedNovember 30, 2021 and 2020, respectively, which represents an increase of$4 million year over year. The increase for the three months endedNovember 30, 2021 was a result of executive transition costs as well as restructuring costs incurred associated with our newly announced restructuring program to flatten and simplify the organizational structure. Financing Costs, net Net financing costs were$1 million and$2 million for the three months endedNovember 30, 2021 and 2020, respectively. Financing costs decreased as the outstanding amount on our revolver decreased$80 million as compared to the first quarter of fiscal 2021. Income Tax Expense The Company's global operations, acquisition activity (as applicable) and specific tax attributes provide opportunities for continuous global tax planning initiatives to maximize tax credits and deductions. Comparative earnings before income taxes, income tax expense and effective income tax rates from continuing operations are as follows (in thousands): Three
Ended months
2021 2020
Earnings from continuing operations before income tax
expense $ 5 $ 7
Income tax expense 2 2
Effective income tax rate 35.9 % 31.9 %
The Company's earnings from continuing operations before income taxes include
earnings from both U.S. and foreign jurisdictions. Though most foreign tax rates
are now in line with the U.S. tax rate of 21%, the annual effective tax rate is
impacted by withholding taxes, losses in jurisdictions where no benefit can be
realized, and various aspects of the U.S. Tax Cuts and Jobs Act, such as the
Global Intangible Low-Taxed Income, Foreign-Derived Intangible Income and Base
Erosion and Anti-Abuse Tax provisions.
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The effective tax rate for the three months ended November 30, 2021 was 35.9%,
compared to 31.9% for the comparable prior-year period. Overall, both time
periods are significantly impacted by year-to-date losses and deductions in
jurisdictions where no tax benefit can be realized. The increase in the
effective tax rate for the three months ended November 30, 2021 relative to the
prior comparable period was primarily driven by revaluing tax assets due to tax
rate changes. Additionally, both the current and prior-year effective income tax
rates were impacted by non-recurring items.
Cash Flows and Liquidity
At November 30, 2021 , we had $127 million of cash and cash equivalents of which
$125 million was held by our foreign subsidiaries and $2 million was held
domestically. The following table summarizes our cash flows provided by
operating, investing and financing activities (in millions):
Three
Ended months
2021 2020
Cash (used in) provided by operating activities $ (5) $ 9
Cash used in investing activities (3) (2)
Cash used in financing activities (4) (2)
Effect of exchange rate changes on cash (2) 1
Net (decrease) increase in cash and cash equivalents $ (14) $ 6
Net cash used in operating activities was $5 million for the three months ended
November 30, 2021 as compared to $9 million net cash provided by operating
activities for the three months ended November 30, 2020 . This is a result of the
payout in the first quarter of fiscal 2022 of the fiscal 2021 annual bonus plan
(the fiscal 2020 bonus plan was suspended in response to the COVID-19 pandemic,
as such, there was no such payment in the first quarter of fiscal 2021), as well
as greater cash used for primary working capital in the first quarter of fiscal
2022, predominantly associated with increased inventory as a result of logistics
challenges and increased accounts receivable due to the timing of billings on a
large contract in Europe .
Net cash used in investing activities was $3 million for the three months ended
November 30, 2021 as compared to $2 million for the three months ended November
30, 2020 . The cash used in investing activities for both fiscal years primarily
related to capital expenditures, for which we have currently approved higher
capital expenditures in fiscal 2022 as economic conditions normalize with
respect to the COVID-19 pandemic.
Net cash used in financing activities was $4 million for the three months ended
November 30, 2021 compared to $2 million for the three months ended November 30,
2020 . The net cash used in financing activities for the first quarter of fiscal
2022 predominantly consisted of $2 million paid for the annual dividend and $2
million for taxes paid related to the net share settlement of equity awards. The
net cash used in the first quarter of fiscal 2021 predominantly consisted of $2
million paid for the annual dividend partially offset by receipt of $1 million
for the final installment payment on the sale of the former EC&S segment.
The Company's Senior Credit Facility is comprised of a $400 million revolving
line of credit and previously provided for a $200 million term loan, both
scheduled to mature in March 2024 (see Note 7, "Debt" in the notes to the
condensed consolidated financial statements for further details of the Senior
Credit Facility). Outstanding borrowings under the Senior Credit Facility
revolving line of credit were $175 million as of November 30, 2021 . The unused
credit line and amount available for borrowing under the revolving line of
credit was $220 million at November 30, 2021 after reduction for $5 million of
outstanding letters of credit issued under the Senior Credit Facility.
We believe that the revolving credit line, combined with our existing cash on
hand and anticipated operating cash flows, will be adequate to meet operating,
debt service, acquisition and capital expenditure funding requirements for the
foreseeable future.
Primary Working Capital Management
We use primary working capital as a percentage of sales (PWC %) as a key metric
of working capital management. We define this metric as the sum of net accounts
receivable and net inventory less accounts payable, divided by the past three
months sales annualized. The following table shows a comparison of primary
working capital (in millions):
November 30, 2021 PWC%
Accounts receivable, net $ 112 21 % $ 103 18 %
Inventory, net 84 16 % 75 13 %
Accounts payable (63) (12) % (62) (11) %
Net primary working capital $ 133 25 % $ 116 20 %
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-------------------------------------------------------------------------------- Commitments and Contingencies We are contingently liable for certain lease payments under leases within businesses we previously divested or spun-off. If any of these businesses do not fulfill their future lease payment obligations under a lease, we could be liable for such obligations, however, the Company does not believe it is probable that it will be required to satisfy these obligations. Future minimum lease payments for these leases atNovember 30, 2021 were$5 million with monthly payments extending to fiscal 2025. We had outstanding letters of credit totaling$12 million at bothNovember 30, 2021 andAugust 31, 2021 , the majority of which relate to commercial contracts and self-insured workers' compensation programs. We are also subject to certain contingencies with respect to legal proceedings and regulatory matters which are described in Note 13, "Commitments and Contingencies" in the notes to the condensed consolidated financial statements. While there can be no assurance of the ultimate outcome of these matters, the Company believes that there will be no material adverse effect on the Company's results of operations, financial position or cash flows. Contractual Obligations Our contractual obligations have not materially changed atNovember 30, 2021 from what was previously disclosed in Part 1, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Contractual Obligations" in our Annual Report on Form 10-K for the year endedAugust 31, 2021 . Critical Accounting Estimates Management has evaluated the accounting estimates used in the preparation of the Company's condensed consolidated financial statements and related notes and believe those estimates to be reasonable and appropriate. Certain of these accounting estimates are considered by management to be the most critical in understanding judgments involved in the preparation of our condensed consolidated financial statements and uncertainties that could impact our results of operations, financial position and cash flow. For information about more of the Company's policies, methodology and assumptions related to critical accounting policies refer to the Critical Accounting Policies in Part 1, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Annual Report on Form 10-K for the year endedAugust 31, 2021 . Item 3 - Quantitative and Qualitative Disclosures about Market Risk The diverse nature of our business activities necessitates the management of various financial and market risks, including those related to changes in interest rates, foreign currency exchange rates and commodity costs. Interest Rate Risk: In the current economic environment, we manage interest expense using a mixture of variable-rate debt and fixed-interest-rate swaps. As ofNovember 30, 2021 , long-term debt consisted of$175 million of borrowing under the revolving line of credit (variable rate debt). Foreign Currency Risk: We maintain operations in theU.S. and various foreign countries. Our more significant non-U.S. operations are located inAustralia ,the Netherlands , theUnited Kingdom ,United Arab Emirates andChina , and we have foreign currency risk relating to receipts from customers, payments to suppliers and intercompany transactions denominated in foreign currencies. Under certain conditions, we enter into hedging transactions (primarily foreign currency exchange contracts) that enable us to mitigate the potential adverse impact of foreign currency exchange rate risk (see Note 9, "Derivatives" for further information). We do not engage in trading or other speculative activities with these transactions, as established policies require that these hedging transactions relate to specific currency exposures. The strengthening of theU.S. dollar against most currencies can have an unfavorable impact on our results of operations and financial position as foreign denominated operating results are translated intoU.S. dollars. To illustrate the potential impact of changes in foreign currency exchange rates on the translation of our results of operations, quarterly sales and operating profit were remeasured assuming a ten percent decrease in all foreign exchange rates compared with theU.S. dollar. Using this assumption, quarterly sales would have been lower by$6 million and operating profit would have been lower by$1 million , respectively, for the three months endedNovember 30, 2021 . This sensitivity analysis assumes that each exchange rate would change in the same direction relative to theU.S. dollar and excludes the potential effects that changes in foreign currency exchange rates may have on sales levels or local currency prices. Similarly, a ten percent decline in foreign currency exchange rates versus theU.S. dollar would result in a$43 million reduction to equity (accumulated other comprehensive loss) as ofNovember 30, 2021 , as a result of non-U.S. dollar denominated assets and liabilities being translated intoU.S. dollars, our reporting currency. Commodity Cost Risk: We source a wide variety of materials and components from a network of global suppliers. While such materials are typically available from numerous suppliers, commodity raw materials, such as steel and plastic resin, are subject to price fluctuations, which could have a negative impact on our results. We strive to pass along such commodity price increases to customers to avoid profit margin erosion. 21
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