Enerpac Tool(EPAC) - 2020 Q2 - Quarterly Report

FORM 10-Q Filing Information This section provides basic identification details for Enerpac Tool Group Corp.'s Form 10-Q filing for the quarterly period ended February 29, 2020 Registrant Information Details Enerpac Tool Group Corp.'s identification, incorporation, and stock listing for its Form 10-Q filing - Enerpac Tool Group Corp. is a Wisconsin-incorporated company with Commission File No. 1-11288, filing a Quarterly Report on Form 10-Q for the period ended February 29, 2020[1] Registrant Status | Status | Indication | | :---------------------- | :--------- | | Large Accelerated Filer | ☒ | | Accelerated Filer | ☐ | | Non-accelerated Filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ | | Shell company | No ☒ | - The company's Class A common stock, with a $0.20 par value per share, is traded on the NYSE under the ticker symbol EPAC. As of March 20, 2020, there were 59,748,495 shares of Class A Common Stock outstanding[2][3] Table of Contents This section lists all major parts and items included in the Form 10-Q filing, providing an organizational overview of the report Forward-Looking Statements and Cautionary Factors This section outlines the nature of forward-looking statements within the report and identifies key risk factors that could cause actual results to differ materially Nature of Forward-Looking Statements This section clarifies that the report contains forward-looking statements, identified by specific linguistic cues, which are not guarantees of future performance and involve inherent risks - Forward-looking statements in this report involve risks and uncertainties, and actual future events or results may differ materially from those projected[7] Key Risk Factors The company identifies various factors that could cause actual results to differ materially from forward-looking statements, including economic instability, global pandemics, and operational challenges - Factors that could cause actual results to differ materially include deterioration of the domestic and international economy, potential impact from global pandemics (e.g., COVID-19), challenging end markets, and the ability to execute restructuring actions[7] - Other significant risks include competition, failure to develop new products, reliance on suppliers, operating margin risks due to costs, uncertainty over global tariffs, and special risks associated with international operations like currency fluctuations[7] - Further risks encompass regulatory and legal developments, successful integration of acquisitions, effects of divestitures, potential non-cash asset impairment charges (especially goodwill and intangible assets), IT infrastructure failures, litigation, attracting and retaining employees, intellectual property protection, and compliance with debt agreements[12] PART I—FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the reporting period Item 1—Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including the Statements of Operations, Comprehensive (Loss) Income, Balance Sheets, and Cash Flows Condensed Consolidated Statements of Operations Provides unaudited consolidated statements of operations, detailing net sales, gross profit, operating profit, and net earnings for the specified periods Condensed Consolidated Statements of Operations (Three Months Ended) | Metric | Feb 29, 2020 ($ thousands) | Feb 28, 2019 ($ thousands) | | :----------------------------------------- | :------------------------- | :------------------------- | | Net sales | 133,386 | 159,788 | | Cost of products sold | 71,293 | 88,473 | | Gross profit | 62,093 | 71,315 | | Operating profit | 8,567 | 12,439 | | Earnings (loss) before income tax expense | 4,724 | 4,767 | | Income tax expense | 806 | 4,002 | | Net earnings (loss) from continuing operations | 3,918 | 765 | | (Loss) earnings from discontinued operations, net of income taxes | (1,756) | 1,988 | | Net earnings (loss) | 2,162 | 2,753 | | Basic EPS from continuing operations | 0.07 | 0.01 | | Diluted EPS from continuing operations | 0.06 | 0.01 | | Basic EPS | 0.04 | 0.04 | | Diluted EPS | 0.04 | 0.04 | Condensed Consolidated Statements of Operations (Six Months Ended) | Metric | Feb 29, 2020 ($ thousands) | Feb 28, 2019 ($ thousands) | | :----------------------------------------- | :------------------------- | :------------------------- | | Net sales | 280,060 | 318,340 | | Cost of products sold | 149,278 | 176,712 | | Gross profit | 130,782 | 141,628 | | Operating profit | 22,937 | 3,887 | | Earnings (loss) before income tax expense | 12,046 | (11,589) | | Income tax expense | 1,756 | 4,068 | | Net earnings (loss) from continuing operations | 10,290 | (15,657) | | (Loss) earnings from discontinued operations, net of income taxes | (6,007) | 958 | | Net earnings (loss) | 4,283 | (14,699) | | Basic EPS from continuing operations | 0.17 | (0.26) | | Diluted EPS from continuing operations | 0.17 | (0.26) | | Basic EPS | 0.07 | (0.24) | | Diluted EPS | 0.07 | (0.24) | Condensed Consolidated Statements of Comprehensive (Loss) Income Presents unaudited consolidated statements of comprehensive (loss) income, including net earnings and other comprehensive income components Condensed Consolidated Statements of Comprehensive (Loss) Income (Three Months Ended) | Metric | Feb 29, 2020 ($ thousands) | Feb 28, 2019 ($ thousands) | | :------------------------------------------------------------------------ | :------------------------- | :------------------------- | | Net earnings (loss) | 2,162 | 2,753 | | Other comprehensive (loss) income, net of tax | | | | Foreign currency translation adjustments | (3,246) | 7,433 | | Recognition of foreign currency translation losses from divested businesses | — | 34,909 | | Pension and other postretirement benefit plans | 194 | 95 | | Total other comprehensive (loss) income, net of tax | (3,052) | 42,437 | | Comprehensive (loss) income | (890) | 45,190 | Condensed Consolidated Statements of Comprehensive (Loss) Income (Six Months Ended) | Metric | Feb 29, 2020 ($ thousands) | Feb 28, 2019 ($ thousands) | | :------------------------------------------------------------------------ | :------------------------- | :------------------------- | | Net earnings (loss) | 4,283 | (14,699) | | Other comprehensive (loss) income, net of tax | | | | Foreign currency translation adjustments | 5,246 | (743) | | Recognition of foreign currency translation losses from divested businesses | 51,994 | 34,909 | | Pension and other postretirement benefit plans | 635 | 327 | | Total other comprehensive (loss) income, net of tax | 57,875 | 34,493 | | Comprehensive (loss) income | 62,158 | 19,794 | Condensed Consolidated Balance Sheets Details the unaudited consolidated balance sheets, outlining assets, liabilities, and shareholders' equity as of the reporting dates Condensed Consolidated Balance Sheets (As of) | Asset/Liability/Equity | Feb 29, 2020 ($ thousands) | Aug 31, 2019 ($ thousands) | | :------------------------------------- | :------------------------- | :------------------------- | | ASSETS | | | | Cash and cash equivalents | 163,437 | 211,151 | | Accounts receivable, net | 113,294 | 125,883 | | Inventories, net | 78,046 | 77,187 | | Assets from discontinued operations | — | 285,578 | | Total current assets | 398,163 | 730,325 | | Property, plant and equipment, net | 63,065 | 56,729 | | Goodwill | 271,828 | 260,415 | | Other intangible assets, net | 66,501 | 52,375 | | Total assets | 879,342 | 1,124,274 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Trade accounts payable | 62,291 | 76,914 | | Liabilities from discontinued operations | — | 143,763 | | Total current liabilities | 129,561 | 300,401 | | Long-term debt, net | 286,367 | 452,945 | | Total liabilities | 524,977 | 823,095 | | Total shareholders' equity | 354,365 | 301,179 | | Total liabilities and shareholders' equity | 879,342 | 1,124,274 | Condensed Consolidated Statements of Cash Flows Provides unaudited consolidated statements of cash flows, categorizing cash activities into operating, investing, and financing sections Condensed Consolidated Statements of Cash Flows (Six Months Ended) | Activity | Feb 29, 2020 ($ thousands) | Feb 28, 2019 ($ thousands) | | :------------------------------------------------ | :------------------------- | :------------------------- | | Net earnings (loss) | 4,283 | (14,699) | | Net cash used in operating activities | (28,741) | (51,314) | | Cash provided by investing activities | 176,581 | 20,544 | | Cash used in financing activities | (196,399) | (50,397) | | Effect of exchange rate changes on cash | 845 | 1,065 | | Net decrease in cash and cash equivalents | (47,714) | (80,102) | | Cash and cash equivalents - beginning of period | 211,151 | 250,490 | | Cash and cash equivalents - end of period | 163,437 | 170,388 | Notes to the Condensed Consolidated Financial Statements This section provides detailed notes to the unaudited condensed consolidated financial statements, offering explanations on accounting policies and significant financial events Note 1. Basis of Presentation Explains the basis for preparing the unaudited interim financial statements and details the adoption of new accounting pronouncements - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial reporting and Form 10-Q instructions, not including all disclosures required for complete financial statements[30] - The Company adopted ASU 2016-02, Leases, on September 1, 2019, using a modified retrospective approach, resulting in the recognition of a $60.8 million ROU asset and operating lease liability on the balance sheet at adoption[31] - The Company also adopted ASU 2018-02, Income Statement-Reporting Comprehensive Income, on September 1, 2019, recording a $3.7 million increase to retained earnings with an offsetting increase in accumulated other comprehensive loss[31] Accumulated Other Comprehensive Loss (in thousands) | Component | Feb 29, 2020 | Aug 31, 2019 | | :------------------------------------------------- | :----------- | :----------- | | Foreign currency translation adjustments | $93,875 | $151,115 | | Pension and other postretirement benefit plans, net of tax | 23,589 | 20,557 | | Accumulated other comprehensive loss | $117,464 | $171,672 | Note 2. Revenue Recognition Describes the company's revenue recognition policies, disaggregating revenue by timing of transfer and detailing contract balances - Revenue is generated from two principal activities: Product Sales (tools, heavy-lifting, rope/cable solutions) recognized at a point in time upon shipment, and Service & Rental Sales (technical services, machining, joint integrity, rentals) recognized over time as benefits are consumed[36] Revenues Disaggregated by Timing of Transfer (in thousands) | Timing of Revenue Recognition | Three Months Ended Feb 29, 2020 ($ thousands) | Three Months Ended Feb 28, 2019 ($ thousands) | Six Months Ended Feb 29, 2020 ($ thousands) | Six Months Ended Feb 28, 2019 ($ thousands) | | :---------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Recognized at point in time | $109,883 | $109,883 | $202,001 | $218,139 | | Recognized over time | 49,905 | 49,905 | 78,059 | 100,201 | | Total | $159,788 | $159,788 | $280,060 | $318,340 | Contract Balances (in thousands) | Contract Balance Component | Feb 29, 2020 ($ thousands) | Aug 31, 2019 ($ thousands) | | :------------------------- | :------------------------- | :------------------------- | | Receivables, net | $113,294 | $125,883 | | Contract assets | 5,177 | 3,747 | | Contract liabilities | 1,334 | 3,707 | Note 3. Restructuring Charges Details the company's restructuring plan, including the nature of activities and the associated charges and reserve movements - The Company initiated a new restructuring plan in fiscal 2019, focusing on integrating Enerpac and Hydratight businesses, exiting certain commodity services in North America, and driving corporate efficiencies[43] - Total restructuring charges for this plan were $1.7 million for the three months and $3.1 million for the six months ended February 29, 2020[43] Restructuring Reserve Activity (in thousands) | Activity | Industrial Tools & Services (Feb 29, 2020, $ thousands) | Corporate (Feb 29, 2020, $ thousands) | | :---------------------------------------- | :------------------------------------------------------ | :------------------------------------ | | Balance as of August 31, 2019 | $2,912 | $— | | Restructuring charges | 2,189 | 939 | | Cash payments | (2,693) | (628) | | Other non-cash uses of reserve | (406) | (302) | | Impact of changes in foreign currency rates | (4) | — | | Balance as of February 29, 2020 | $1,998 | $9 | Note 4. Acquisitions Provides information on recent acquisition activities, including the purchase of HTL Group and its financial impact - On January 7, 2020, Enerpac Tool Group Corp. acquired 100% of HTL Group, a provider of controlled bolting products and services, for $33.4 million, net of cash acquired[45] - The acquisition enhances the Company's bolting product line and European rental capabilities, with preliminary purchase price allocation including $8.6 million in goodwill and $18.0 million in intangible assets[45] - HTL Group generated $2.0 million in net sales for the three months ended February 29, 2020, reported within the IT&S segment[45] Note 5. Discontinued Operations and Other Divestiture Activities Details the sale of the EC&S segment and other divestiture activities, including their impact on the consolidated financial statements - On October 31, 2019, the Company completed the sale of its former Engineered Components & Systems (EC&S) segment for approximately $214.5 million, resulting in a net loss of $4.2 million from the sale[46] - The results of operations for divested businesses (EC&S, Precision Hayes, Cortland Fibron) are recorded as 'Loss from discontinued operations' in the Condensed Consolidated Statements of Operations[48] Net (Loss) Earnings from Discontinued Operations (in thousands) | Metric | Three Months Ended Feb 29, 2020 ($ thousands) | Three Months Ended Feb 28, 2019 ($ thousands) | Six Months Ended Feb 29, 2020 ($ thousands) | Six Months Ended Feb 28, 2019 ($ thousands) | | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net sales | $— | $112,119 | $67,010 | $246,099 | | Operating (loss) earnings | (933) | 3,914 | (22,909) | 3,150 | | Net (loss) earnings from discontinued operations | (1,756) | 1,988 | (6,007) | 958 | - Other divestiture activities include the sale of the UNI-LIFT product line for $6.0 million (resulting in a $4.6 million benefit) and the Milwaukee Cylinder business for a negligible amount, and the Connectors product line for $2.7 million (resulting in a $1.3 million benefit)[50][52] Note 6. Goodwill, Intangible Assets and Long-Lived Assets Presents information on changes in goodwill, details of intangible assets, and estimated amortization expenses Changes in Goodwill (in thousands) | Activity | Industrial Tools & Services ($ thousands) | Other ($ thousands) | Total ($ thousands) | | :---------------------------------------- | :---------------------------------------- | :------------------ | :------------------ | | Balance as of August 31, 2019 | $242,873 | $17,542 | $260,415 | | Acquisition of HTL Group (Note 4) | 8,595 | — | 8,595 | | Impact of changes in foreign currency rates | 2,815 | 3 | 2,818 | | Balance as of February 29, 2020 | $254,283 | $17,545 | $271,828 | Intangible Assets (in thousands) | Intangible Asset Type | Weighted Average Amortization Period (Years) | Gross Carrying Value (Feb 29, 2020, $ thousands) | Accumulated Amortization (Feb 29, 2020, $ thousands) | Net Book Value (Feb 29, 2020, $ thousands) | | :-------------------------- | :------------------------------------------- | :----------------------------------------------- | :--------------------------------------------------- | :----------------------------------------- | | Customer relationships | 14 | $140,239 | $100,895 | $39,344 | | Patents | 12 | 14,068 | 12,723 | 1,345 | | Trademarks and tradenames* | 12 | 3,202 | 2,019 | 1,183 | | Indefinite lived tradenames | N/A | 24,629 | — | 24,629 | | Total | | $182,138 | $115,637 | $66,501 | - The Company estimates amortization expense to be $4.5 million for the remaining six months of fiscal 2020, and $8.0 million, $7.3 million, $5.8 million, $4.2 million, $3.4 million for fiscal years 2021-2025 respectively[54] Note 7. Product Warranty Costs Explains the company's product warranty policies and provides a reconciliation of the product warranty reserve activity - The Company provides assurance warranties on products, with reserves based on historical claim rates and current costs, recorded within 'Other current liabilities'[57] Product Warranty Reserve Activity (in thousands) | Activity | Six Months Ended Feb 29, 2020 ($ thousands) | Six Months Ended Feb 28, 2019 ($ thousands) | | :---------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Beginning balance | $1,145 | $931 | | Provision for warranties | 135 | 807 | | Warranty payments and costs incurred | (418) | (525) | | Warranty activity for divested businesses | (27) | — | | Reclass of liabilities held for sale | — | (33) | | Impact of changes in foreign currency rates | — | (9) | | Ending balance | $835 | $1,171 | Note 8. Debt Details the company's long-term indebtedness, including senior credit facilities and senior notes, and compliance with financial covenants Long-Term Indebtedness (in thousands) | Debt Component | Feb 29, 2020 ($ thousands) | Aug 31, 2019 ($ thousands) | | :---------------------------------- | :------------------------- | :------------------------- | | Senior Credit Facility - Revolver | $— | $— | | Senior Credit Facility - Term Loan | — | 175,000 | | Total Senior Credit Facility | — | 175,000 | | 5.625% Senior Notes | 287,559 | 287,559 | | Total Senior Indebtedness | 287,559 | 462,559 | | Less: Current maturities of long-term debt | — | (7,500) | | Debt issuance costs | (1,192) | (2,114) | | Total long-term debt, net | $286,367 | $452,945 | - The Company's $600 million Senior Credit Facility includes a $400 million revolving line of credit and previously a $200 million term loan. The term loan was paid off in November 2019 using proceeds from the EC&S segment sale[59][62] - The Senior Credit Facility has financial covenants: a maximum leverage ratio of 3.75:1 and a minimum interest coverage ratio of 3.5:1. The Company was in compliance with all financial covenants at February 29, 2020[60][61] - The Company has $287.6 million of 5.625% Senior Notes due 2022 outstanding, requiring semiannual interest payments[64] Note 9. Fair Value Measurement Describes the company's fair value measurement hierarchy and the fair values of financial instruments - The Company uses a three-tier hierarchy (Level 1, 2, 3) for fair value measurement. Cash and cash equivalents, accounts receivable, and accounts payable approximated book value due to their short-term nature[65] - The fair value of foreign currency exchange contracts was a net liability of $0.1 million at February 29, 2020, and a net asset of less than $0.1 million at August 31, 2019, classified as Level 2[65] - The fair value of the outstanding Senior Notes was $289.8 million at February 29, 2020, and $291.5 million at August 31, 2019, also classified as Level 2[65] Note 10. Derivatives Explains the company's use of foreign currency exchange contracts to manage market risk and their impact on financial results - The Company uses foreign currency exchange contracts to manage market risk from foreign currency fluctuations, not for speculative purposes, with changes in value recorded in earnings[66] Net Foreign Currency (Loss) Gain (in thousands) | Period | Feb 29, 2020 ($ thousands) | Feb 28, 2019 ($ thousands) | | :----------------- | :------------------------- | :------------------------- | | Three Months Ended | $(376) | $227 | | Six Months Ended | $(551) | $(2) | - Foreign currency forward exchange contracts are also used to hedge net investments in non-U.S. subsidiaries, with changes in value recorded in accumulated other comprehensive income (loss)[67] Note 11. Earnings per Share and Shareholders' Equity Provides a reconciliation of earnings per share and details changes in shareholders' equity, including share repurchase activities - The Company's Board of Directors authorized share repurchase programs, under which 22,295,357 shares totaling $658.0 million have been repurchased since fiscal 2012. During the six months ended February 29, 2020, 839,789 shares were repurchased for $17.8 million[69] Earnings (Loss) Per Share Reconciliation (in thousands, except per share amounts) | Metric | Three Months Ended Feb 29, 2020 ($ thousands) | Three Months Ended Feb 28, 2019 ($ thousands) | Six Months Ended Feb 29, 2020 ($ thousands) | Six Months Ended Feb 28, 2019 ($ thousands) | | :------------------------------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net earnings (loss) from continuing operations | $3,918 | $765 | $10,290 | $(15,657) | | Net (loss) earnings from discontinued operations | (1,756) | 1,988 | (6,007) | 958 | | Net earnings (loss) | 2,162 | 2,753 | 4,283 | (14,699) | | Weighted average common shares outstanding - basic | 60,130 | 61,243 | 60,106 | 61,137 | | Weighted average common shares outstanding - diluted | 60,513 | 61,607 | 60,557 | 61,137 | | Diluted EPS from continuing operations | $0.06 | $0.01 | $0.17 | $(0.26) | | Diluted EPS from discontinued operations | $(0.03) | $0.03 | $(0.10) | $0.02 | | Diluted EPS | $0.04 | $0.04 | $0.07 | $(0.24) | - Shareholders' equity increased from $301,179 thousand at August 31, 2019, to $354,365 thousand at February 29, 2020, driven by net earnings, other comprehensive income, and stock-based compensation, partially offset by treasury stock repurchases[72] Note 12. Income Taxes Presents income tax information, including effective tax rates and factors influencing tax expense for the reporting periods Income Tax Information (in thousands) | Metric | Three Months Ended Feb 29, 2020 ($ thousands) | Three Months Ended Feb 28, 2019 ($ thousands) | Six Months Ended Feb 29, 2020 ($ thousands) | Six Months Ended Feb 28, 2019 ($ thousands) | | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Earnings (loss) from continuing operations before income tax expense | $4,724 | $4,767 | $12,046 | $(11,589) | | Income tax expense | 806 | 4,002 | 1,756 | 4,068 | | Effective income tax rate | 17.1% | 84.0% | 14.6% | (35.1)% | - The effective income tax rates for both current and prior years were impacted by impairment & divestiture charges and accelerated debt issuance costs. Excluding these, the effective tax rate for the three months ended February 29, 2020, was 14.6% (vs. 48.2% prior year) and 13.4% for the six months (vs. 26.4% prior year)[75] - The lower income tax expense in fiscal 2020, excluding special charges, is attributed to valuation allowance releases due to operational improvements and the ability to utilize tax attributes[75] Note 13. Segment Information Provides financial information disaggregated by the company's reportable segment, Industrial Tools & Service (IT&S), and other operating segments - Enerpac Tool Group Corp. operates primarily through one reportable segment, Industrial Tools & Service (IT&S), which designs, manufactures, and distributes hydraulic and mechanical tools and provides related services and rentals[76] Net Sales by Reportable Segment & Product Line (in thousands) | Segment & Product Line | Three Months Ended Feb 29, 2020 ($ thousands) | Three Months Ended Feb 28, 2019 ($ thousands) | Six Months Ended Feb 29, 2020 ($ thousands) | Six Months Ended Feb 28, 2019 ($ thousands) | | :------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Industrial Tools & Services Segment: | | | | | | Product | $93,364 | $105,584 | $189,727 | $208,353 | | Service & Rental | 29,997 | 43,937 | 69,226 | 89,824 | | Total IT&S | 123,361 | 149,521 | 258,953 | 298,177 | | Other Operating Segment | 10,025 | 10,267 | 21,107 | 20,163 | | Total Net Sales | $133,386 | $159,788 | $280,060 | $318,340 | Operating Profit (Loss) by Segment (in thousands) | Segment & Product Line | Three Months Ended Feb 29, 2020 ($ thousands) | Three Months Ended Feb 28, 2019 ($ thousands) | Six Months Ended Feb 29, 2020 ($ thousands) | Six Months Ended Feb 28, 2019 ($ thousands) | | :------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Industrial Tools & Services Segment | $20,570 | $26,546 | $46,624 | $52,920 | | Other Operating Segment | (972) | (2,447) | (1,227) | (26,408) | | General Corporate | (11,031) | (11,660) | (22,460) | (22,625) | | Total Operating Profit | $8,567 | $12,439 | $22,937 | $3,887 | Note 14. Commitments and Contingencies Details the company's outstanding letters of credit, legal proceedings, and contingent liabilities related to divested businesses - The Company had outstanding letters of credit of $13.8 million at February 29, 2020, primarily for commercial contracts and self-insured workers' compensation programs[81] - The Company is party to various legal proceedings, including product liability and contract disputes, for which reserves are recorded when a loss is probable and estimable. Management believes resolution will not materially adversely affect financial position[81] - The Company remains contingently liable for $7.7 million in lease payments for previously divested businesses, extending to fiscal 2025, but does not believe it will be required to satisfy these obligations[83] - OFAC issued a Cautionary Letter regarding self-disclosed sales to Iranian distributors and potential diversions to Crimea, concluding the matter with no adverse financial impact. An investigation by Dutch authorities for the Estonian customer is ongoing[83] Note 15. Leases Explains the impact of adopting ASC 842 on leases, including lease expense components and balance sheet information - The Company adopted ASC 842 on September 1, 2019, recognizing operating leases for real estate, vehicles, and equipment as ROU assets and lease liabilities on the balance sheet[84] Components of Lease Expense (in thousands) | Lease Cost Component | Three Months Ended Feb 29, 2020 ($ thousands) | Six Months Ended Feb 29, 2020 ($ thousands) | | :------------------- | :-------------------------------------------- | :------------------------------------------ | | Operating lease cost | $3,894 | $8,147 | | Short-term lease cost | 310 | 765 | | Variable lease cost | 564 | 1,033 | Supplemental Balance Sheet Information Related to Leases (in thousands) | Metric | Feb 29, 2020 ($ thousands) | | :-------------------------------------- | :------------------------- | | Operating leases: | | | Other long-term assets | $53,555 | | Other current liabilities | 13,131 | | Other long-term liabilities | 42,105 | | Total operating lease liabilities | $55,236 | | Weighted Average Remaining Lease Term | 7.7 years | | Weighted Average Discount Rate | 4.33% | Future Minimum Lease Payments (in thousands) | Fiscal Year | Operating Leases ($ thousands) | | :---------- | :----------------------------- | | 2020 | $7,929 | | 2021 | 13,133 | | 2022 | 9,232 | | 2023 | 7,120 | | 2024 | 5,746 | | Thereafter | 22,507 | | Total minimum lease payments | 65,667 | | Less imputed interest | (10,431) | | Present value of net minimum lease payments | $55,236 | Note 16. Subsequent Events Discloses significant events occurring after the balance sheet date, specifically the impact of the COVID-19 pandemic and oil price decline - In March 2020, the COVID-19 pandemic and a substantial decline in oil prices occurred. These events are expected to negatively impact the Company's results of operations and financial condition, though the full extent cannot be reasonably estimated due to uncertainties[89] Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, discussing overall performance, segment results, and cash flows - Enerpac Tool Group Corp. is a global leader in high-pressure hydraulic tools and solutions, serving industrial, maintenance, infrastructure, oil & gas, and energy markets through its Industrial Tools & Service (IT&S) segment[91] - The Company is executing a strategy to drive best-in-class returns, demonstrated by the acquisition of HTL Group. However, the COVID-19 pandemic and volatile oil pricing have created market interruptions, preventing specific fiscal 2020 financial estimates[92] - Cost savings actions are being taken to achieve a targeted EBITDA margin run rate of 20% for the remainder of fiscal 2020[92] - The sale of the EC&S segment was completed on October 31, 2019, for approximately $215 million, aligning with the strategy to become a pure-play industrial tools and services company[93] Results of Operations Analyzes the consolidated results of continuing operations, including net sales, gross profit, operating profit, and diluted EPS Consolidated Results of Continuing Operations (in millions) | Metric | Three Months Ended Feb 29, 2020 ($ millions) | Three Months Ended Feb 28, 2019 ($ millions) | Six Months Ended Feb 29, 2020 ($ millions) | Six Months Ended Feb 28, 2019 ($ millions) | | :----------------------------------------- | :------------------------------------------- | :------------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Net sales | $133 | $160 | $280 | $318 | | Gross profit | 62 | 71 | 131 | 142 | | Operating profit | 9 | 12 | 23 | 4 | | Net earnings (loss) from continuing operations | 4 | 1 | 10 | (16) | | Diluted EPS from continuing operations | $0.06 | $0.01 | $0.17 | $(0.26) | - Consolidated net sales for the second quarter of fiscal 2020 decreased by $27 million (17%) year-over-year, with core sales down 10% after adjusting for divestitures and the HTL Group acquisition[98] - Gross profit margins increased by 3% in the second quarter and 2% year-to-date, primarily due to divested product lines and strategic exits[98] - Operating profit was lower in Q2 fiscal 2020 due to decreased volumes and increased restructuring charges, partially offset by lower SAE costs and decreased impairment & divestiture charges[98] Segment Results Discusses the financial performance of the Industrial Tools & Service (IT&S) segment and corporate expenses IT&S Segment Results (in millions) | Metric | Three Months Ended Feb 29, 2020 ($ millions) | Three Months Ended Feb 28, 2019 ($ millions) | Six Months Ended Feb 29, 2020 ($ millions) | Six Months Ended Feb 28, 2019 ($ millions) | | :----------------- | :------------------------------------------- | :------------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Net sales | $123 | $150 | $259 | $298 | | Operating profit | 21 | 27 | 47 | 53 | | Operating profit % | 16.7% | 17.8% | 18.0% | 17.7% | - IT&S segment net sales decreased by $27 million (17%) in Q2 fiscal 2020, with core sales down 11% due to global economic uncertainty and lower service sales from non-repeating large projects[102] - Year-to-date IT&S net sales decreased by $39 million (13%), with core sales down 6%, primarily due to global economic uncertainty and significantly lower service sales[104] - Corporate expenses decreased by $0.6 million in Q2 and $0.2 million year-to-date, driven by positive medical claims experience, reduced travel, and lower legal costs, partially offset by restructuring charges and business development costs[106] Financing Costs, net Explains the changes in net financing costs, primarily due to debt repayment and associated expenses Net Financing Costs (in millions) | Period | Feb 29, 2020 ($ millions) | Feb 28, 2019 ($ millions) | | :----------------- | :------------------------ | :------------------------ | | Three Months Ended | $4.6 | $7.2 | | Six Months Ended | $11.4 | $14.5 | - Financing costs decreased due to lower outstanding balances on the Senior Credit Facility, particularly the early payoff of the term loan in November 2019. This benefit was partially offset by expensing $0.6 million of capitalized debt issuance costs[107] Income Tax Expense Analyzes the income tax expense and effective tax rates, highlighting factors influencing year-over-year changes Income Tax Expense and Effective Rate (in millions) | Metric | Three Months Ended Feb 29, 2020 ($ millions) | Three Months Ended Feb 28, 2019 ($ millions) | Six Months Ended Feb 29, 2020 ($ millions) | Six Months Ended Feb 28, 2019 ($ millions) | | :---------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Earnings (loss) from continuing operations before income tax expense | $5 | $5 | $12 | $(12) | | Income tax expense | 1 | 4 | 2 | 4 | | Effective income tax rate | 17.1% | 84.0% | 14.6% | (35.1)% | - The effective tax rate for the three months ended February 29, 2020, was 17.1% (down from 84.0% in prior year) and 14.6% for the six months (up from -35.1% in prior year), influenced by impairment & divestiture benefits and accelerated debt issuance costs[109] - Excluding these charges, the effective tax rate was 14.6% for the three months and 13.4% for the six months ended February 29, 2020, benefiting from valuation allowance releases and improved tax attribute utilization[109] Cash Flows and Liquidity Reviews the company's cash flow activities from operations, investing, and financing, and assesses its liquidity position - At February 29, 2020, the Company had $163 million in cash and cash equivalents, with $154 million held by foreign subsidiaries and $9 million domestically[110] Summary of Cash Flows (in millions) | Activity | Six Months Ended Feb 29, 2020 ($ millions) | Six Months Ended Feb 28, 2019 ($ millions) | | :---------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Net cash used in operating activities | $(29) | $(51) | | Net cash provided by investing activities | 177 | 21 | | Net cash used in financing activities | (196) | (50) | | Net decrease in cash and cash equivalents | $(48) | $(80) | - The decrease in cash used in operating activities in fiscal 2020 was due to improved working capital management, the benefit from the EC&S segment divestiture, and decreased bonus compensation[110] - Net cash provided by investing activities increased by $156 million, primarily from the sale of the EC&S segment ($209 million) and non-core product lines ($9 million), partially offset by the HTL Group acquisition ($33 million)[110] - Net cash used in financing activities increased to $196 million, mainly due to the early payoff of the $175 million term loan and $18 million in treasury share repurchases[110] - The Company believes its revolving line of credit ($395 million unused at Feb 29, 2020), existing cash, and anticipated operating cash flows will be adequate for future funding requirements[112][113] Primary Working Capital Management Discusses the company's management of primary working capital, a key metric for operational efficiency - Primary working capital (PWC) as a percentage of sales is a key metric, defined as net accounts receivable plus net inventory minus accounts payable, divided by annualized past three months' sales[114] Primary Working Capital (in millions) | Component | Feb 29, 2020 ($ millions) | PWC% (Feb 29, 2020) | Aug 31, 2019 ($ millions) | PWC% (Aug 31, 2019) | | :---------------------------- | :------------------------ | :------------------ | :------------------------ | :------------------ | | Accounts receivable, net | $113 | 21% | $126 | 20% | | Inventory, net | 78 | 15% | 77 | 12% | | Accounts payable | (62) | (12)% | (77) | (12)% | | Net primary working capital | $129 | 24% | $126 | 20% | Commitments and Contingencies Outlines the company's contingent liabilities, outstanding letters of credit, and legal matters - The Company is contingently liable for $8 million in lease payments for previously divested businesses, with payments extending to fiscal 2025, but does not anticipate being required to satisfy these obligations[115] - Outstanding letters of credit totaled $14 million at February 29, 2020, mainly for commercial contracts and workers' compensation programs[115] - Legal and regulatory matters are not expected to have a material adverse effect on the Company's financial results[115] Contractual Obligations Notes material changes in contractual obligations, particularly related to lease commitments, following the EC&S segment divestiture - Contractual obligations have materially changed in fiscal 2020 due to the divestiture of the EC&S segment, particularly regarding lease commitments[116] Supplemental Guarantor Financial Information Provides summarized financial information for the parent company and its guarantor subsidiaries regarding outstanding Senior Notes - Enerpac Tool Group Corp. (Parent) has $288 million of Senior Notes outstanding, fully and unconditionally guaranteed by certain material, domestic wholly owned subsidiaries (Guarantors) on a joint and several basis[117] - The guarantees are senior unsecured obligations, effectively subordinated to any secured debt of the Guarantor. Non-Guarantor subsidiaries do not guarantee the Senior Notes[117][120] Summarized Statements of Operations (Parent and Guarantors, Feb 29, 2020, in millions) | Metric | Amount ($ millions) | | :-------------------------------------- | :------------------ | | Net sales | $98 | | Gross profit | 65 | | Earnings (loss) from continuing operations* | (3) | | Loss from discontinued operations | (4) | | Net loss | $(7) | Summarized Balance Sheet (Parent and Guarantors, in millions) | Asset/Liability/Equity | Feb 29, 2020 ($ millions) | Aug 31, 2019 ($ millions) | | :----------------------------- | :------------------------ | :------------------------ | | ASSETS | | | | Current assets | 90 | 272 | | Long-term assets | 167 | 138 | | LIABILITIES & SHAREHOLDERS' EQUITY | | | | Current liabilities | 43 | 98 | | Long-term liabilities* | 795 | 926 | Critical Accounting Estimates Identifies key accounting estimates that require significant management judgment and could impact financial results - Management has evaluated and believes the accounting estimates used in the condensed consolidated financial statements are reasonable and appropriate, with certain estimates considered critical for understanding judgments and potential impacts on financial results[124] Item 3—Quantitative and Qualitative Disclosures about Market Risk This section discusses the Company's exposure to various financial and market risks, including interest rate risk, foreign currency risk, and commodity cost risk, and how these are managed - The Company manages interest expense through a mix of fixed-rate (Senior Notes) and variable-rate debt (revolving line of credit), though no variable-rate debt was outstanding at February 29, 2020[125] - Foreign currency risk is managed using hedging transactions (primarily foreign currency exchange contracts) to mitigate adverse impacts from exchange rate fluctuations, particularly given over half of sales are non-U.S. dollar denominated[125] - A hypothetical 10% decrease in all foreign exchange rates against the U.S. dollar would result in a $5 million lower quarterly sales and $2 million lower operating profit for the three months ended February 29, 2020, and a $39 million reduction to equity[125] - Commodity cost risk, primarily from steel and plastic resin, is managed by striving to pass price increases to customers to maintain profit margins[125] Item 4—Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting - As of February 29, 2020, the Company's chief executive officer and chief financial officer concluded that disclosure controls and procedures were effective[126] - There have been no changes in internal control over financial reporting during the quarter ended February 29, 2020, that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting[127] PART II—OTHER INFORMATION This section contains additional information not covered in Part I, including risk factors, equity sales, and exhibits Item 1A.—Risk Factors This section highlights specific risk factors that could adversely affect the Company's business, particularly focusing on global public health epidemics and disruptions in oil markets - The Company's business and financial condition may be adversely affected by global public health epidemics, including COVID-19, which can disrupt employee, vendor, and customer activities[130] - The substantial decline in oil prices, resulting from weakened demand due to COVID-19 and political tensions, poses a material adverse impact, as a significant portion of the Company's revenues are derived from the oil & gas industry[130] Item 2—Unregistered Sales of Equity Securities and Use of Proceeds This section provides information on the Company's share repurchase programs and activity during the reporting period - Since fiscal 2012, the Company has repurchased 22,295,357 shares of common stock for $658.0 million under publicly announced programs[130] - As of February 29, 2020, 5,704,643 shares may still be purchased under the programs. No shares were repurchased in the three months ended February 29, 2020[130] [Item 6—Exhibits](index=33&type=section&id=Item%206%E2%80%94Exhibits