ENERPAC TOOL GROUP CORP. 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 13, "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 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. InMarch 2022 , the Company launched the ASCEND transformation program focused on driving accelerated growth and margin expansion through improvements on how we go to market, innovate, buy materials, manufacture product and serve customers.
General Business Update
During largely the second half of fiscal 2020 and through the first three
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 nine months of fiscal 2022, we
continued to see strong growth in most regions that we operate, however, there
are still regions that remain challenged by the lingering effects of the
pandemic, most notably on our European service business and Chinese operations
in the second quarter and third quarter of fiscal 2022, respectively. Our key
manufacturing facilities continue to operate with additional precautions in
place to ensure the safety of our
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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. This has led to increased raw material, components and logistics
costs, as well as longer lead times on orders. We continue to closely monitor
our supply chain in order to ensure we can maintain competitive lead times and
deliver products to customers timely.
In February 2022 , Russian forces invaded Ukraine , and in response, many
countries, including the member countries of NATO initiated a variety of
sanctions and export controls targeting Russia and associated entities.
Approximately 1% of our historical annual sales are to customers and
distributors associated with Russia and we had approximately $0.5 million of
receivables associated with those customers and distributors as of February 28,
2022 . The sanctions currently in place limit our ability to provide goods to
those customers and distributors and banking sanctions effectively negate our
ability to collect those receivables; as such, we recorded a full allowance for
doubtful accounts against those receivables as of February 28, 2022 and
indefinitely suspended doing business in Russia . We will continue to monitor the
situation with Russia to assess when and if we are able to resume business with
those customers and distributors, including collection of the outstanding
receivables. We also continue to monitor and manage the ancillary impact of the
Russia crisis on our business, which is primarily related to supply chain,
increased commodity costs, foreign exchange rate volatility and dealer
confidence particularly in Central Europe .
During the three and nine months ended May 31, 2022 , the Company recorded
through bad debt expense (included in "Selling, general and administrative
expenses" in the Condensed Consolidated Statements of Operations) a reserve of
$10.8 million and $13.2 million , respectively, to fully reserve for the
outstanding accounts receivable balance for an agent in our Middle East /North
Africa /Caspian ("MENAC") region. The allowance for doubtful accounts for this
particular agent as of May 31, 2022 represents management's best estimate of the
probable amount of collection and considers various factors with respect to this
matter, including, but not limited to, (i) the lack of payment by the agent in
the nine-month period ended May 31, 2022 , (ii) our due diligence on balances due
to the agent from its end customers related to sales of our services and
products and the known markup on those sales from the agent to end customers,
(iii) the status of ongoing negotiations with the agent to secure payments and
(iv) legal recourse available to us to secure payment. Actual collections from
the agent may differ from the Company's estimate. We have completely ceased our
relationship with this agent and have transitioned to serving our regional
customers through recently created direct operations within the region.
On June 27, 2022 , the Company approved a new restructuring plan in connection
with the initiatives identified as part of the ASCEND transformation program
(see Note 3, "ASCEND Transformation Program" ) to drive greater efficiency
and productivity in global selling, general and administrative resources. The
total costs of this plan are estimated at $6 to $10 million , will be
predominately employee-related costs impacting both IT&S and Corporate, and will
be incurred over the next 24 months, ending in the fourth quarter of fiscal year
2024.
Despite pandemic-related demand challenges, the supply chain and logistics
challenges we are currently experiencing, and the impact of the Ukraine conflict
and the associated sanctions on Russia , 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.
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--------------------------------------------------------------------------------Results of Operations
The following table sets forth our results of continuing operations (dollars in
millions, except per share amounts, the summation of the individual components
may not equal the total due to rounding):
Three Months Ended May 31, Nine Months Ended May 31,
2022 2021 2022 2021
Net sales $ 152 100 % $ 143 100 % $ 419 100 % $ 383 100 %
Cost of products sold 80 53 % 76 53 % 228 54 % 206 54 %
Gross profit 72 47 % 67 47 % 192 46 % 177 46 %
Selling, general and administrative expenses 63 41 % 40 28 % 162 39 % 130 34 %
Amortization of intangible assets 2 1 % 2 1 % 6 1 % 6 2 %
Restructuring charges 1 1 % 2 1 % 5 1 % 2 1 %
Impairment & divestiture charges 0 0 % 0 0 % 1 0 % 1 0 %
Operating profit 7 5 % 23 16 % 18 4 % 38 10 %
Financing costs, net 1 1 % 1 1 % 3 1 % 4 1 %
Other expense, net 0 0 % 1 1 % 1 0 % 2 1 %
Earnings before income tax expense (benefit) 5 3 % 21 15 % 14 3 % 32 8 %
Income tax expense (benefit) 1 1 % (4) (3) % 4 1 % (2) (1) %
Net earnings from continuing operations 4 3 % 25 17 % 9 2 % 34 9 %
Diluted earnings per share from continuing
operations $ 0.07 $ 0.42 $ 0.15 $ 0.56
Consolidated net sales for the third quarter of fiscal 2022 were $152 million ,
an increase of $9 million , or 6%, from the prior-year comparable period. Core
sales (sales excluding the impact of acquisitions, divestitures and foreign
currency rate changes) increased $13 million , or 10%, while the changes in
foreign currency exchange rates unfavorably impacted net sales by 4%. The
increase in core sales was due to the substantial increase in sales volume
resulting from pandemic-related market recovery, in addition to pricing actions
primarily in response to increasing costs of raw materials, components, and
freight. The continuation of supply chain and logistics challenges first seen in
the fourth quarter of fiscal 2021 continued to create longer lead times
throughout the third quarter of fiscal 2022 and larger than usual backlogs
remained at May 31, 2022 . Core products sales increased 12% and core service
sales increased 1% as compared to the same period in the prior year. Gross
profit margins remained flat as compared to the prior-year third quarter
primarily due to sales mix. Operating profit was $16 million lower in the third
quarter of fiscal 2022 as compared to the third quarter of fiscal 2021. The $5
million increase in gross profit and $1 million reduction in restructuring
charges were more than offset by the $23 million increase in SG&A. The $23
million increase in SG&A was primarily due to a $11 million discrete bad debt
charge taken (due to significant delinquency in payments from an agent in our
MENAC region), ASCEND transformation program charges related to the use of
external services for support in the design and development of the program ($4
million ), leadership transition & board search charges ($2 million ), and
business review charges related to external support for the deep-dive holistic
business review prior to the launch of the ASCEND program ($1 million ). SG&A
also included a $1 million gain on sale of a facility, net of transaction
charges in the third quarter of fiscal 2022, compared to a similar $5 million
gain in the prior year comparable period.
Consolidated net sales for the first nine months of fiscal 2022 were $419
million , an increase of $36 million or 9% from the prior-year comparable period.
Core sales increased $43 million , or 12%, while the changes in foreign currency
exchange rates unfavorably impacted net sales by 2%.The increase in core sales
was due to the substantial increase in sales volume resulting from
pandemic-related market recovery, in addition to 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 first nine months of fiscal 2022 and
larger than usual backlogs at May 31, 2022 , which negatively impacted the first
nine months of fiscal 2022. Core products sales increased 14% while core service
sales increased only 3% as compared to the same period in the prior year. Gross
profit margins remained flat compared to the first nine months of the prior year
as pricing actions in the first half of the fiscal year were only able to offset
increased costs in the supply chain and logistics environments. Operating profit
was $20 million lower in the first nine months of fiscal 2022 as compared to the
first nine months of fiscal 2021. Although gross profit increased $15 million
year-over year, SG&A expenses increased $32 million , restructuring charges
increased $3 million . The increase in SG&A expenses is primarily due to ASCEND
transformation program charges related to the use of external services for
support in the design and development of the program ($4 million ), leadership
transition & board search charges ($8 million ), discrete bad debt charges taken
due to significant delinquency in payments from an agent in our MENAC region and
also to reserve for collection risk for customers and distributors associated
with Russia ($14 million in aggregate, approximately $13 million related to the
agent in the MENAC region and less than $1 million for customers associated with
Russia ) and business review charges related to external support
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for the deep-dive holistic business review prior to the launch of the ASCEND
program ($3 million ), partially offset by a decrease in employee compensation
costs ($2 million ). SG&A also included a $1 million gain on sale of a facility,
net of transaction charges, in the first nine months of fiscal 2022, compared to
a similar $5 million gain in the prior year comparable period. Restructuring
charges increased $3 million as compared to the prior period as a result of
charges to streamline and flatten the organizational structure and we incurred
$4 million of ASCEND transformation program charges.
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 (dollars in millions):
Three Months Ended May 31, Nine Months Ended May 31,
2022 2021 2022 2021
Net sales $ 140 $ 133 $ 388 $ 358
Operating profit 19 24 50 55
Operating profit % 13.7 % 17.9 % 12.9 % 15.3 %
IT&S segment net sales for the third quarter of fiscal 2022 increased by $7
million , or 5%. Core sales increased $12 million , or 9%, year-over-year due to
the substantial increase in sales volume resulting from pandemic-related market
recovery, in addition to the results of pricing actions in response to
increasing costs of raw materials, components, and freight. The continuation of
supply chain and logistics challenges initially seen in the fourth quarter of
fiscal 2021 led to longer lead times throughout the third quarter of fiscal 2022
and larger than usual backlogs at May 31, 2022 .
Operating profit percentage decreased 4.2% from the prior-year quarter due to
$11 million of discrete bad debt expense that was recorded in the quarter,
offset by pricing actions, $1 million year-over-year reduction in restructuring
charges and a $1 million gain on sale of facility, net of transaction charges.
Year-to-date IT&S segment net sales increased by $30 million , or 8%. Core sales
increased $36 million , or 10%, year-over-year due to the substantial increase in
sales volume resulting from pandemic-related market recovery, in addition to 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 first nine months of fiscal 2022 and larger than usual backlogs
at May 31, 2022 .
Operating profit percentage decreased 2.4% from the prior-year nine-month period
due to $14 million of discrete bad debt expense recorded in the first nine
months of fiscal 2022, an increase of $1 million in restructuring charges to
flatten and streamline the organization and $1 million of leadership transition,
offset by a $1 million gain on sale of facility, net of transaction charges, and
pricing actions in the third quarter. Pricing actions the first half of the
fiscal year were largely offset by the increased costs in the supply chain and
logistics environments.
Corporate
Corporate expenses were $14 million and $1 million in the three months ended May
31, 2022 and 2021, respectively, and $33 million and $14 million for the nine
months ended May 31, 2022 and 2021, respectively. This represents an increase of
$13 million and $19 million for the three and nine months ended May 31, 2022 ,
respectively. The increase for the three months ended May 31, 2022 was primarily
the result of ASCEND transformation program charges related to the use of
external services for support in the design and development of the program ($4
million ), business review charges related to external support for the deep-dive
holistic business review prior to the launch of ASCEND ($1 million ) and
leadership transition & board search charges ($2 million ) and higher insurance
costs. In addition, the prior year third quarter included a gain on sale of
facility, net of transaction charges of $5 million . The increase for the nine
months ended May 31, 2022 was a result of the ASCEND transformation program
charges ($4 million ), business review charges related to external support for
the deep dive-holistic business review prior to the launch of ASCEND ($3
million ), leadership transition & board search charges ($8 million ) and an
increase in restructuring charges to streamline and flatten the Corporate
structure ($1 million ), partially offset by a decrease in incentive compensation
($2 million ). Additionally, the prior-year nine-month period ended May 31, 2021
included a gain on sale of facility, net of transaction charges ($5 million ).
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--------------------------------------------------------------------------------Financing Costs, net
Net financing costs were$1 million for both the three months endedMay 31, 2022 and 2021. For the nine months endedMay 31, 2022 and 2021, net financing costs were$3 million and$4 million , respectively. Financing costs decreased as the average outstanding amount on our revolver decreased year-over-year.
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 (benefit) and effective income tax rates from
continuing operations are as follows (dollars in millions):
Three Months Ended May 31, Nine Months Ended May 31,
2022 2021 2022 2021
Earnings from continuing operations
before income tax expense (benefit) $ 5 $ 21 $ 14 $ 32
Income tax expense (benefit) 1 (4) 4 (2)
Effective income tax rate 25.3 % (21.0) % 32.4 % (6.8) %
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.
The effective tax rate for the three months ended May 31, 2022 was 25.3%,
compared to (21.0)% 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 lower effective tax rate
for the three months ended May 31, 2021 was primarily driven by tax benefits
related to uncertain tax position releases related to audit closures and tax
planning strategies that included the carryback of net losses that offset income
from taxable years where the rate was 35%. Both the current and prior-year
effective income tax rates include the impact of non-recurring items.
Cash Flows and Liquidity
AtMay 31, 2022 , we had$124 million of cash and cash equivalents of which$116 million was held by our foreign subsidiaries and$8 million was held domestically. The following table summarizes our cash flows provided by (used in) operating, investing and financing activities (in millions): Nine
Months Ended
2022 2021
Cash provided by operating activities $ 7 $ 25
Cash (used in) provided by investing activities (6) 16
Cash used in financing activities (12) (62)
Effect of exchange rate changes on cash (6) 5
Net decrease in cash and cash equivalents $ (17) $ (16)
Net cash provided by operating activities was$7 million for the nine months endedMay 31, 2022 as compared to$25 million for the nine months endedMay 31, 2021 . This is a result of lower net earnings for the nine months endedMay 31, 2022 as compared to the same period in the prior year, the payment of the fiscal 2021 annual bonus in the first quarter of fiscal 2022 (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), payment of the Company-portion of social security taxes in the second quarter of fiscal 2022 that were originally deferred in calendar 2020 under section 2302 of the CARES Act, as well as greater cash used for primary working capital in the first nine months of fiscal 2022, predominantly associated with increased inventory levels as a result of rising supply chain costs, logistics challenges, and mitigation efforts to offset potential US port strikes during the summer of 2022, and increased accounts receivable linked to the sales volume growth experienced in the fiscal year. Net cash used in investing activities was$6 million for the nine months endedMay 31, 2022 primarily related to capital expenditures. Net cash provided by investing activities for the nine months endedMay 31, 2021 , was$16 million , reflecting the$22 million of cash proceeds from prior year's sale of a building inChina offset by capital expenditures. Net cash used in financing activities was$12 million for the nine months endedMay 31, 2022 compared to$62 million for the nine months endedMay 31, 2021 . The net cash used in financing activities for the first nine months of fiscal 2022 predominantly 23 -------------------------------------------------------------------------------- consisted of$2 million paid for the annual dividend,$3 million for taxes paid related to the net share settlement of equity awards, and$36 million paid for share repurchases partially offset by incremental net borrowings on the revolving credit facility of approximately$30 million . The net cash used in the first nine months of fiscal 2021 predominantly consisted of a net$60 million principal payment on our revolving credit facility with excess cash on hand,$2 million each for the annual dividend payment and for taxes paid related to the net share settlement of equity awards, 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 8, "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$205 million as ofMay 31, 2022 . The unused credit line and amount available for borrowing under the revolving line of credit was$190 million atMay 31, 2022 , 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.
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 (dollars in millions): May 31, 2022 PWC% August
31, 2021 PWC%
Accounts receivable, net $ 117 19 % $ 103 18 %
Inventory, net 87 14 % 75 13 %
Accounts payable (66) (11) % (62) (11) %
Net primary working capital $ 138 23 % $ 116 20 %
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 atMay 31, 2022 were$4 million with monthly payments extending to fiscal 2025. We had outstanding letters of credit totaling$11 million and$12 million atMay 31, 2022 andAugust 31, 2021 , respectively, 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 14, "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 atMay 31, 2022 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, methods 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 . 24
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