Enerpac Tool(EPAC) - 2020 Q3 - Quarterly Report

Part I—Financial Information Item 1—Condensed Consolidated Financial Statements (Unaudited) This section presents unaudited condensed consolidated financial statements and detailed notes for periods ended May 31, 2020 and 2019 Condensed Consolidated Statements of Operations The company reported a net loss of $5.0 million for the three months ended May 31, 2020, driven by a 43% sales decrease Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | Three Months Ended May 31, 2020 (in thousands) | Three Months Ended May 31, 2019 (in thousands) | Nine Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2019 (in thousands) | |:---|:---|:---|:---|:---| | Net sales | $101,879 | $178,095 | $381,939 | $496,435 | | Gross profit | $41,947 | $81,954 | $172,728 | $223,582 | | Operating (loss) profit | $(1,998) | $38,179 | $20,938 | $42,066 | | Net (loss) earnings | $(4,999) | $32,418 | $(716) | $17,719 | | Diluted (loss) earnings per share | $(0.08) | $0.52 | $(0.01) | $0.29 | - Net sales decreased by 43% for the three months and 23% for the nine months ended May 31, 2020, compared to the prior year, significantly impacting profitability[12] Condensed Consolidated Statements of Comprehensive (Loss) Income Comprehensive loss of $11.6 million for three months ended May 31, 2020, due to net loss and currency adjustments Condensed Consolidated Statements of Comprehensive (Loss) Income (in thousands) | Metric | Three Months Ended May 31, 2020 (in thousands) | Three Months Ended May 31, 2019 (in thousands) | Nine Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2019 (in thousands) | |:---|:---|:---|:---|:---|\ | Net (loss) earnings | $(4,999) | $32,418 | $(716) | $17,719 | | Foreign currency translation adjustments | $(6,779) | $(14,000) | $(1,533) | $(14,744) | | Total other comprehensive (loss) income, net of tax | $(6,586) | $(13,800) | $51,289 | $20,693 | | Comprehensive (loss) income | $(11,585) | $18,618 | $50,573 | $38,412 | - Foreign currency translation adjustments contributed to a comprehensive loss in the three-month period, while a significant recognition of foreign currency translation losses from divested businesses positively impacted the nine-month comprehensive income in 2020[14] Condensed Consolidated Balance Sheets Total assets decreased to $851.5 million at May 31, 2020, primarily due to discontinued operations divestiture Condensed Consolidated Balance Sheets (in thousands) | Metric | May 31, 2020 (in thousands) | August 31, 2019 (in thousands) | |:---|:---|:---|\ | Cash and cash equivalents | $163,603 | $211,151 | | Total current assets | $379,828 | $730,325 | | Total assets | $851,535 | $1,124,274 | | Total current liabilities | $122,539 | $300,401 | | Long-term debt, net | $286,497 | $452,945 | | Total liabilities | $515,253 | $823,095 | | Total shareholders' equity | $336,282 | $301,179 | - The decrease in total assets and liabilities is primarily attributable to the divestiture of assets and liabilities from discontinued operations, which were $285.6 million and $143.8 million, respectively, at August 31, 2019[17] Condensed Consolidated Statements of Cash Flows Cash used in operations was $15.7 million for nine months ended May 31, 2020, with significant investing inflows Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | Nine Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2019 (in thousands) | |:---|:---|:---|\ | Cash (used in) provided by operating activities | $(15,703) | $1,191 | | Cash provided by investing activities | $175,935 | $13,789 | | Cash used in financing activities | $(206,398) | $(62,523) | | Net decrease in cash and cash equivalents | $(47,548) | $(49,156) | - Investing activities saw a substantial increase in cash provided, driven by $208.4 million from discontinued operations in 2020, compared to $25.2 million in 2019[20] - Financing activities included a $175 million principal repayment on the term loan and $27.5 million in treasury share purchases in 2020[20] Notes to the Condensed Consolidated Financial Statements Detailed notes explain accounting policies, estimates, new pronouncements, and specific financial line items Note 1. Basis of Presentation Financial statements prepared under GAAP, with estimates impacted by COVID-19 and new lease accounting standards - The COVID-19 pandemic's full impact on the business, results of operations, and financial condition is highly uncertain and could be materially adverse, requiring management to make estimates that may change[23] - Adoption of ASU 2016-02 (Leases) on September 1, 2019, led to the recognition of a $60.8 million Right-of-Use (ROU) asset and operating lease liability on the balance sheet[24] - ASU 2018-02 (Income Statement-Reporting Comprehensive Income) adoption resulted in a $3.7 million increase to retained earnings with an offsetting increase in accumulated other comprehensive loss[24] Note 2. Revenue Recognition Revenue from product sales (point in time) and service/rental (over time) declined significantly in 2020 - Product sales revenue is generally recognized at a point in time when control is transferred, typically upon shipment, while service and rental sales are recognized over time as customers simultaneously receive and consume benefits[28] Disaggregated Revenue by Timing of Transfer (in thousands) | Revenue Type | Three Months Ended May 31, 2020 (in thousands) | Three Months Ended May 31, 2019 (in thousands) | Nine Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2019 (in thousands) | |:---|:---|:---|:---|:---|\ | Revenues recognized at point in time | $73,412 | $117,175 | $275,413 | $335,314 | | Revenues recognized over time | $28,467 | $60,920 | $106,526 | $161,121 | | Total | $101,879 | $178,095 | $381,939 | $496,435 | Note 3. Restructuring Charges Restructuring charges of $2.5 million and $5.6 million incurred for business integration and corporate efficiency - Restructuring charges for the three and nine months ended May 31, 2020, were $2.5 million and $5.6 million, respectively, significantly higher than the $1.1 million in the prior year periods[33] - The restructuring plan focuses on integrating Enerpac and Hydratight businesses, strategically exiting certain commodity services, and simplifying the corporate structure to enhance commercial and marketing processes[33] Restructuring Reserve Activity (in thousands) | Metric | Industrial Tools & Services (9 Months Ended May 31, 2020, in thousands) | Corporate (9 Months Ended May 31, 2020, in thousands) | |:---|:---|:---|\ | Balance as of August 31, 2019 | $2,912 | $0 | | Restructuring charges | $4,019 | $1,590 | | Cash payments | $(4,265) | $(871) | | Balance as of May 31, 2020 | $2,087 | $235 | Note 4. Acquisitions Acquisition of HTL Group for $33.3 million on January 7, 2020, added $10.1 million goodwill and $17.5 million intangibles - The acquisition of HTL Group on January 7, 2020, for $33.3 million, enhances the company's bolting products and European rental capabilities[35] - The preliminary purchase price allocation for HTL Group included $10.1 million in goodwill and $17.5 million in intangible assets (tradenames, customer relationships, patents)[35] - HTL Group contributed $1.9 million and $3.9 million in net sales for the three and nine months ended May 31, 2020, respectively, reported within the IT&S segment[35] Note 5. Discontinued Operations and Other Divestiture Activities Sale of EC&S segment for $214.5 million resulted in a $4.2 million net loss, aligning with divestiture strategy - The sale of the EC&S segment on October 31, 2019, for approximately $214.5 million, resulted in a net loss of $4.2 million, including a $22.4 million loss on net assets offset by an $18.2 million income tax benefit[37] Net (Loss) Earnings from Discontinued Operations (in thousands) | Metric | Three Months Ended May 31, 2020 (in thousands) | Three Months Ended May 31, 2019 (in thousands) | Nine Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2019 (in thousands) | |:---|:---|:---|:---|:---|\ | Net sales | $0 | $117,171 | $67,010 | $363,270 | | Operating (loss) earnings | $(85) | $9,181 | $(22,994) | $12,331 | | Net (loss) earnings from discontinued operations | $(69) | $5,560 | $(6,076) | $6,518 | - Other divestitures in fiscal 2020 included the UNI-LIFT product line (generating a $4.6 million benefit) and the Milwaukee Cylinder business (resulting in $4.6 million impairment charges)[40] Note 6. Goodwill, Intangible Assets and Long-Lived Assets Goodwill increased to $271.2 million due to HTL Group acquisition; intangible assets rose to $62.8 million Changes in Goodwill (in thousands) | Segment | August 31, 2019 (in thousands) | HTL Group Acquisition (in thousands) | Foreign Currency Impact (in thousands) | May 31, 2020 (in thousands) | |:---|:---|:---|:---|:---|\ | Industrial Tools & Services | $242,873 | $10,087 | $658 | $253,618 | | Other | $17,542 | $0 | $9 | $17,551 | | Total | $260,415 | $10,087 | $667 | $271,169 | Intangible Assets, Net (in thousands) | Asset Type | May 31, 2020 Net Book Value (in thousands) | August 31, 2019 Net Book Value (in thousands) | |:---|:---|:---|\ | Customer relationships | $36,405 | $29,412 | | Patents | $1,153 | $951 | | Trademarks and tradenames (amortizable) | $1,083 | $1,592 | | Tradenames (indefinite lived) | $24,192 | $20,420 | | Total | $62,833 | $52,375 | - Estimated amortization expense for future years is $8.0 million in fiscal 2021, $7.2 million in fiscal 2022, $5.7 million in fiscal 2023, $4.0 million in fiscal 2024, $3.3 million in fiscal 2025, and $8.3 million cumulatively thereafter[43] Note 7. Product Warranty Costs Product warranty reserve decreased to $738 thousand at May 31, 2020, due to lower provisions and payments Product Warranty Reserve Activity (in thousands) | Metric | Nine Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2019 (in thousands) | |:---|:---|:---|\ | Beginning balance | $1,145 | $931 | | Provision for warranties | $354 | $1,099 | | Warranty payments and costs incurred | $(735) | $(806) | | Ending balance | $738 | $1,202 | Note 8. Debt Senior indebtedness decreased to $287.6 million due to term loan repayment and subsequent Senior Notes redemption Long-Term Indebtedness (in thousands) | Debt Type | May 31, 2020 (in thousands) | August 31, 2019 (in thousands) | |:---|:---|:---|\ | Senior Credit Facility (Term Loan) | $0 | $175,000 | | 5.625% Senior Notes | $287,559 | $287,559 | | Total Senior Indebtedness | $287,559 | $462,559 | | Total long-term debt, net | $286,497 | $452,945 | - The $200 million term loan under the Senior Credit Facility was fully repaid in November 2019 using proceeds from the EC&S segment sale[48] - On June 15, 2020, the company borrowed $295 million under its revolving credit facility to redeem all outstanding 5.625% Senior Notes, aiming to reduce interest costs[52] Note 9. Fair Value Measurement Fair value of short-term assets/liabilities approximated book value; derivatives and Senior Notes are Level 2 - The fair value of foreign currency exchange contracts was a net asset of less than $0.1 million at both May 31, 2020, and August 31, 2019, classified as Level 2[53] - The fair value of the outstanding Senior Notes was $287.9 million at May 31, 2020, also classified as Level 2[53] Note 10. Derivatives Foreign currency exchange contracts manage market risk, with net foreign currency losses increasing significantly in 2020 Net Foreign Currency Loss from Derivatives (in thousands) | Metric | Three Months Ended May 31, 2020 (in thousands) | Three Months Ended May 31, 2019 (in thousands) | Nine Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2019 (in thousands) | |:---|:---|:---|:---|:---|\ | Foreign currency loss, net | $(842) | $(114) | $(1,393) | $(115) | - Foreign currency forward exchange contracts designated as net investment hedges had a notional value of $31.6 million as of May 31, 2020, with gains recorded in accumulated other comprehensive income[56] Note 11. Earnings per Share and Shareholders' Equity Share repurchases totaled $27.5 million for nine months; shareholders' equity increased to $336.3 million - The company repurchased 503,873 shares for $9.7 million in the three months and 1,343,662 shares for $27.5 million in the nine months ended May 31, 2020, under its share repurchase programs[57] Earnings Per Share Reconciliation (in thousands, except per share amounts) | Metric | Three Months Ended May 31, 2020 (in thousands, except per share amounts) | Three Months Ended May 31, 2019 (in thousands, except per share amounts) | Nine Months Ended May 31, 2020 (in thousands, except per share amounts) | Nine Months Ended May 31, 2019 (in thousands, except per share amounts) | |:---|:---|:---|:---|:---|\ | Net (loss) earnings | $(4,999) | $32,418 | $(716) | $17,719 | | Weighted average common shares outstanding - basic | 59,826 | 61,422 | 60,012 | 61,232 | | Diluted (loss) earnings per common share | $(0.08) | $0.52 | $(0.01) | $0.29 | Changes in Shareholders' Equity (in thousands) | Metric | August 31, 2019 (in thousands) | May 31, 2020 (in thousands) | |:---|:---|:---|\ | Total Shareholders' Equity | $301,179 | $336,282 | | Retained Earnings | $915,466 | $918,623 | | Accumulated Other Comprehensive Loss | $(171,672) | $(124,050) | | Treasury Stock | $(640,212) | $(667,732) | Note 12. Income Taxes Effective income tax rate was 7.6% (3 months) and 20.1% (9 months), influenced by profitability and tax benefits Income Tax Data (in thousands) | Metric | Three Months Ended May 31, 2020 (in thousands) | Three Months Ended May 31, 2019 (in thousands) | Nine Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2019 (in thousands) | |:---|:---|:---|:---|:---|\ | (Loss) earnings before income tax (benefit) expense | $(5,337) | $31,820 | $6,709 | $20,231 | | Income tax (benefit) expense | $(407) | $4,962 | $1,349 | $9,030 | | Effective income tax rate | 7.6% | 15.6% | 20.1% | 44.6% | - Excluding one-time charges/benefits, the effective tax rate was 12.8% for the three months and 14.5% for the nine months ended May 31, 2020, impacted by decreased profitability and non-recurring tax benefits[63] - The CARES Act, enacted in March 2020, did not have a material impact on the consolidated financial statements for the three or nine months ended May 31, 2020[63] Note 13. Segment Information IT&S segment sales and profit declined significantly in 2020 due to COVID-19 and volatile oil prices Net Sales by Reportable Segment & Product Line (in thousands) | Segment/Product Line | Three Months Ended May 31, 2020 (in thousands) | Three Months Ended May 31, 2019 (in thousands) | Nine Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2019 (in thousands) | |:---|:---|:---|:---|:---|\ | IT&S Product | $67,957 | $115,067 | $257,685 | $323,420 | | IT&S Service & Rental | $24,908 | $51,665 | $106,526 | $161,121 | | Total IT&S Segment | $92,865 | $166,732 | $351,819 | $464,908 | | Other Operating Segment | $9,014 | $11,363 | $30,120 | $31,527 | | Consolidated Total | $101,879 | $178,095 | $381,939 | $496,435 | Operating Profit (Loss) by Segment (in thousands) | Segment | Three Months Ended May 31, 2020 (in thousands) | Three Months Ended May 31, 2019 (in thousands) | Nine Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2019 (in thousands) | |:---|:---|:---|:---|:---|\ | Industrial Tools & Services Segment | $7,639 | $34,877 | $54,263 | $87,797 | | Other Operating Segment | $(790) | $13,072 | $(2,017) | $(13,336) | | General Corporate | $(8,847) | $(9,770) | $(31,308) | $(32,395) | | Consolidated Total | $(1,998) | $38,179 | $20,938 | $42,066 | Assets by Segment (in thousands) | Segment | May 31, 2020 (in thousands) | August 31, 2019 (in thousands) | |:---|:---|:---|\ | Industrial Tools & Services Segment | $622,113 | $553,615 | | Other Operating Segment | $62,105 | $54,484 | | General Corporate | $167,317 | $230,597 | | Consolidated Total | $851,535 | $838,696 | Note 14. Commitments and Contingencies Outstanding letters of credit total $11.9 million; contingent lease liabilities are $7.3 million - Outstanding letters of credit were $11.9 million at May 31, 2020, primarily for commercial contracts and self-insured workers' compensation programs[67] - The company is contingently liable for $7.3 million in future lease payments for previously divested businesses, extending to fiscal 2025, though it does not believe it will be required to satisfy these obligations[67] - An ongoing investigation by Netherlands authorities into sales to an Estonian customer for potential sanctions violations is not expected to have a material adverse effect on the company's financial position[71] Note 15. Leases ASC 842 adoption led to $50.9 million ROU assets and $52.1 million lease liabilities at May 31, 2020 Components of Lease Expense (in thousands) | Lease Cost | Three Months Ended May 31, 2020 (in thousands) | Nine Months Ended May 31, 2020 (in thousands) | |:---|:---|:---|\ | Operating lease cost | $3,818 | $11,966 | | Short-term lease cost | $343 | $1,108 | | Variable lease cost | $447 | $1,480 | | Total Lease Cost | $4,608 | $14,554 | Supplemental Balance Sheet Information Related to Leases (in thousands) | Metric | May 31, 2020 (in thousands) | |:---|:---|\ | Operating lease ROU assets (Other long-term assets) | $50,911 | | Total operating lease liabilities | $52,142 | | Weighted Average Remaining Lease Term | 7.6 years | | Weighted Average Discount Rate | 4.36% | Future Minimum Lease Payments (in thousands) | Fiscal Year | Operating Leases (in thousands) | |:---|:---|\ | 2020 (remaining) | $3,910 | | 2021 | $13,268 | | 2022 | $9,454 | | 2023 | $7,480 | | 2024 | $5,955 | | Thereafter | $21,862 | | Total minimum lease payments | $61,928 | | Less imputed interest | $(9,786) | | Present value of net minimum lease payments | $52,142 | Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, COVID-19 impact, restructuring, cash flows, and liquidity Company Overview Enerpac Tool Group is a global leader in industrial tools and services, operating through its IT&S segment - Enerpac Tool Group Corp. is a premier industrial tools and services company, founded in 1910, headquartered in Menomonee Falls, Wisconsin[75] - The company's sole reportable segment is Industrial Tools & Service (IT&S), which designs, manufactures, and distributes hydraulic and mechanical tools, and provides services and tool rental[75] COVID-19 Update COVID-19 significantly impacted demand; company implemented cost savings and debt covenant amendments - The COVID-19 pandemic has caused a substantial negative impact on global demand for products and services, though key facilities remain open due to servicing essential industries[76] - Mitigation measures include canceling the fiscal 2020 bonus plan, employee furloughs, reducing capital expenditures, applying for governmental assistance, and cutting discretionary spending[76] - The company proactively amended debt covenants and prepaid Senior Notes to improve future liquidity and reduce interest expense[76] General Business Update EC&S segment sold for $215 million; expanded restructuring targets $12-15 million annual savings per phase - The sale of the EC&S segment was completed on October 31, 2019, for approximately $215 million, with final working capital negotiations concluded in Q3 fiscal 2020[77] - An expanded restructuring plan, focused on IT&S integration and corporate efficiency, incurred $2 million and $6 million in charges for the three and nine months ended May 31, 2020, respectively, and is expected to yield $12 million to $15 million in annual savings from each phase[77] - Changes in foreign currency exchange rates significantly impact financial results, with a weakening U.S. dollar favorably affecting sales, cash flow, and earnings due to over half of sales being generated outside the U.S[77][79] Results of Operations Consolidated net sales decreased by 43% in Q3 and 23% for nine months due to COVID-19 and oil prices Consolidated Results of Continuing Operations (in millions, except per share amounts) | Metric | Three Months Ended May 31, 2020 (in millions, except per share amounts) | Three Months Ended May 31, 2019 (in millions, except per share amounts) | Nine Months Ended May 31, 2020 (in millions, except per share amounts) | Nine Months Ended May 31, 2019 (in millions, except per share amounts) | |:---|:---|:---|:---|:---|\ | Net sales | $102 | $178 | $382 | $496 | | Gross profit | $42 | $82 | $173 | $223 | | Operating (loss) profit | $(2) | $38 | $21 | $42 | | Net (loss) earnings from continuing operations | $(5) | $27 | $5 | $11 | | Diluted (loss) earnings per share from continuing operations | $(0.08) | $0.43 | $0.09 | $0.18 | - Core sales decreased by 38% in the third quarter and 17% for the nine months, driven by reduced sales volume due to the COVID-19 pandemic and volatility in oil prices, impacting both product and service sales[80] - Gross profit margins decreased by 5% in the third quarter due to under absorption, product mix, and restructuring charges, but remained flat year-to-date due to benefits from divesting low-profit-margin product lines[80] Segment Results IT&S segment net sales decreased by 44% in Q3 and 24% year-to-date due to COVID-19 and oil prices IT&S Segment Results (in millions) | Metric | Three Months Ended May 31, 2020 (in millions) | Three Months Ended May 31, 2019 (in millions) | Nine Months Ended May 31, 2020 (in millions) | Nine Months Ended May 31, 2019 (in millions) | |:---|:---|:---|:---|:---|\ | Net sales | $93 | $167 | $352 | $465 | | Operating profit | $8 | $35 | $54 | $88 | | Operating profit % | 8.2% | 20.9% | 15.4% | 18.9% | - Core sales for the IT&S segment decreased by 39% in the third quarter and 18% year-over-year, driven by demand impacts from COVID-19, volatile oil pricing, and anticipated service declines[82][84] - Operating profit percentage for IT&S decreased by 12.7% in the third quarter due to reduced volumes and under absorption, despite lower SAE costs from restructuring and COVID-19 responses[83] Corporate Corporate expenses decreased by $1.0 million (3 months) and $1.1 million (9 months) due to cost savings - Corporate expenses decreased to $8.8 million for the three months and $31.3 million for the nine months ended May 31, 2020, from $9.8 million and $32.4 million in the prior year periods, respectively[86] - The decrease was driven by positive medical claims experience, reduced legal and consulting expenses, and cost savings measures related to the COVID-19 pandemic, partially offset by restructuring charges and business development costs[86] Financing Costs, net Net financing costs decreased to $5 million (3 months) and $16 million (9 months) due to lower debt balances - Net financing costs decreased due to lower outstanding balances on the Senior Credit Facility, resulting from the early payoff of the term loan in November 2019 after the EC&S segment divestiture[87] - The benefit from lower cash interest expense was partially offset by expensing $0.6 million of remaining capitalized debt issuance costs upon the term loan repayment[87] Income Tax Expense Effective income tax rate was 7.6% (3 months) and 20.1% (9 months), influenced by profitability and tax benefits Income Tax Data (in millions) | Metric | Three Months Ended May 31, 2020 (in millions) | Three Months Ended May 31, 2019 (in millions) | Nine Months Ended May 31, 2020 (in millions) | Nine Months Ended May 31, 2019 (in millions) | |:---|:---|:---|:---|:---|\ | (Loss) earnings before income tax expense | $(5) | $32 | $7 | $20 | | Income tax (benefit) expense | $0 | $5 | $1 | $9 | | Effective income tax rate | 7.6% | 15.6% | 20.1% | 44.6% | - Excluding one-time charges/benefits, the effective tax rate was 12.8% for the three months and 14.5% for the nine months ended May 31, 2020, primarily due to decreased profitability from COVID-19 and non-recurring tax benefits[89] - The CARES Act did not have a material impact on the consolidated financial statements for the three or nine months ended May 31, 2020[89] Cash Flows and Liquidity Operating cash flow used $16 million; investing provided $176 million; financing used $206 million, with adequate liquidity Summary of Cash Flows (in millions) | Activity | Nine Months Ended May 31, 2020 (in millions) | Nine Months Ended May 31, 2019 (in millions) | |:---|:---|:---|\ | Net cash (used in) provided by operating activities | $(16) | $1 | | Net cash provided by investing activities | $176 | $14 | | Net cash used in financing activities | $(206) | $(63) | | Net decrease in cash and cash equivalents | $(48) | $(49) | - Investing activities were significantly boosted by $209 million in proceeds from the sale of the EC&S segment and $10 million from non-core product lines in fiscal 2020[92] - Financing activities included a $175 million early repayment of the term loan and $28 million in share repurchases in fiscal 2020[92] - The company had $395 million available under its revolving credit facility at May 31, 2020, and believes it has adequate liquidity for the foreseeable future[92][93] Primary Working Capital Management Primary working capital as a percentage of sales increased to 29% at May 31, 2020 Primary Working Capital (in millions) | Metric | May 31, 2020 (in millions) | PWC% | August 31, 2019 (in millions) | PWC% | |:---|:---|:---|:---|:---|\ | Accounts receivable, net | $94 | 23% | $126 | 20% | | Inventory, net | $79 | 19% | $77 | 12% | | Accounts payable | $(52) | (13)% | $(77) | (12)% | | Net primary working capital | $121 | 29% | $126 | 20% | Commitments and Contingencies Contingent lease liabilities are $7 million; outstanding letters of credit total $12 million - The company is contingently liable for $7 million in lease payments for previously divested businesses, with payments extending to fiscal 2025[94] - Outstanding letters of credit totaled $12 million at May 31, 2020[94] Critical Accounting Estimates Management deems accounting estimates reasonable and appropriate, recognizing their critical impact on financial results - Management considers estimates related to allowance for doubtful accounts, inventory valuation, warranty reserves, fair value of stock-based awards, goodwill, intangible and long-lived asset valuations, and income tax liabilities as critical[23][99] Item 3—Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate, foreign currency, and commodity risks, using derivatives for currency exposure - The company manages interest rate risk through a mixture of fixed-rate and variable-rate debt, with no variable-rate debt outstanding at May 31, 2020, but $295 million borrowed on June 15, 2020[100] - Foreign currency risk is managed using foreign currency exchange contracts; a hypothetical 10% decrease in all foreign exchange rates against the U.S. dollar would result in a $4 million lower quarterly sales, $2 million lower operating profit, and a $44 million reduction to equity[100] - Commodity cost risk, particularly for steel and plastic resin, is managed by striving to pass price increases to customers to avoid profit margin erosion[100] Item 4—Controls and Procedures Disclosure controls and procedures were effective as of May 31, 2020, with no material changes in internal control - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of May 31, 2020[102] - No changes in internal control over financial reporting occurred during the quarter ended May 31, 2020, that materially affected or are reasonably likely to materially affect internal control over financial reporting[102] Part II—Other Information Item 1A.—Risk Factors Significant risks from COVID-19 pandemic and volatile oil markets adversely impact demand and operations - The COVID-19 pandemic is adversely affecting the business through reduced demand for products and services, potential supply chain interruptions, and operational inefficiencies from employee protection measures[104] - The recent disruption in global oil markets and substantial price decline have negatively impacted the company's business, especially customers in the oil & gas industry[104] Item 2—Unregistered Sales of Equity Securities and Use of Proceeds Company repurchased 503,873 shares for $9.7 million in March 2020; 5,200,770 shares remain authorized Share Repurchases (Three Months Ended May 31, 2020) | Period | Shares Repurchased | Average Price Paid per Share ($) | |:---|:---|:---|\ | March 1 to March 30, 2020 | 503,873 | $19.25 | | April 1 to April 30, 2020 | — | — | | May 1 to May 31, 2020 | — | — | | Total | 503,873 | $19.25 | - As of May 31, 2020, the maximum number of shares that may yet be purchased under the programs is 5,200,770 shares[106][107] Item 6—Exhibits Exhibits include CEO/CFO certifications (Sarbanes-Oxley Act) and Inline XBRL financial data - Key exhibits include Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[107] - The report also includes Inline Extensible Business Reporting Language (Inline XBRL) formatted financial statements and notes[107]