Annual report pursuant to Section 13 and 15(d)

Employee Benefit Plans

v3.22.2.2
Employee Benefit Plans
 12 Months Ended
Aug. 31, 2022
Retirement Benefits [Abstract]  
Employee Benefit Plans
Note 12.    Employee Benefit Plans
U.S. Defined Benefit Pension Plans
All of the U.S. defined benefit pension plans are frozen, and as a result, plan participants no longer earn additional benefits. The following table provides detail of changes in the projected benefit obligations, the fair value of plan assets and the funded status of the Company’s U.S. defined benefit pension plans as of the respective August 31 measurement date (in thousands):
2022 2021
Reconciliation of benefit obligations:
Benefit obligation at beginning of year $ 47,147  $ 49,640 
Interest cost 1,165  1,156 
Actuarial (gain) loss (8,197) (729)
Benefits paid (2,980) (2,920)
Benefit obligation at end of year $ 37,135  $ 47,147 
Reconciliation of plan assets:
Fair value of plan assets at beginning of year $ 39,696  $ 39,935 
Actual return on plan assets (5,658) 1,990 
Company contributions 108  691 
Benefits paid from plan assets (2,980) (2,920)
Fair value of plan assets at end of year 31,166  39,696 
Funded status of the plans (underfunded) $ (5,969) $ (7,451)
The following table provides detail on the Company’s domestic net periodic benefit expense (in thousands):
  Year ended August 31,
  2022 2021 2020
Interest cost $ 1,165  $ 1,156  $ 1,331 
Expected return on assets (2,060) (1,610) (1,770)
Amortization of actuarial loss 1,219  1,322  1,212 
Net periodic benefit expense $ 324  $ 868  $ 773 
As of August 31, 2022 and 2021, $18.3 million and $19.5 million, respectively, of pension plan actuarial losses, which have not yet been recognized in net periodic benefit cost, were included in accumulated other comprehensive loss, net of income taxes. During fiscal 2023, $0.9 million of these actuarial losses are expected to be recognized in net periodic benefit cost.
Weighted-average assumptions used to determine U.S. pension plan obligations as of August 31 and weighted-average assumptions used to determine net periodic benefit cost for the years ended August 31 are as follows:
2022 2021 2020
Assumptions for benefit obligations:
Discount rate 4.75  % 2.55  % 2.40  %
Assumptions for net periodic benefit cost:
Discount rate 2.55  % 2.40  % 2.90  %
Expected return on plan assets 5.45  % 4.20  % 4.60  %
The Company's objective for its pension plan is to achieve an asset and liability duration match so that interim fluctuations in funded status should be limited by increasing the correlation between assets and liabilities. As such, the plan assets are invested to maintain funded ratios over the long term, while managing the risk that funded ratios fall meaningfully below 100%. In fiscal 2022, the plan assets were invested in a mix of 50% duration-matched fixed income securities and 50% equity securities. During fiscal 2021, the plan portfolio was invested in 70% fixed income securities and 30% equity securities. Cash balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis. At August 31, 2022, the Company’s overall expected long-term rate of return for assets in U.S. pension plans was 5.70%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The target return is based on historical returns adjusted to reflect the current view of the long-term investment market and our updated 50% investment mix between fixed income and equity securities.
The U.S. pension plan investment allocations by asset category were as follows (dollars in thousands):
  Year Ended August 31,
  2022 % 2021 %
Cash and cash equivalents $ —  —  % $ —  —  %
Income receivable 31  0.1  49  0.1 
Fixed income securities:
U.S. Treasury Securities 4,852  15.6  4,825  12.2 
Corporate Bonds —  —  —  — 
Mutual funds 11,395  36.6  23,564  59.3 
16,247  52.2  28,389  71.5 
Equity securities:
Mutual funds 14,888  47.7  11,258  28.4 
Total plan assets $ 31,166  100.0  % $ 39,696  100.0  %
The fair value of mutual funds are based on unadjusted quoted market prices and therefore are classified as Level 1 within the fair value hierarchy under US GAAP. U.S. Treasury Securities and Corporate Bonds are valued using Level 2 inputs, as defined in Note 9, “Fair Value Measurements.”
Projected benefit payments from plan assets to participants in the Company’s U.S. pension plans are $3.0 million for fiscal 2023 and $3.1 million per year for each of the next four years and $14.1 million in aggregate for the following five years. The Company made a contribution of $0.1 million to the U.S. pension plans in September of fiscal 2022. The Company does not plan to make a contribution to the plan in fiscal 2023.
Foreign Defined Benefit Pension Plans
The Company has eight significant foreign defined benefit pension plans which cover certain existing and former employees of businesses outside the U.S. Most of the participants in the foreign defined benefit pension plans are inactive and no longer earning additional benefits. The following table provides detail of changes in the projected benefit obligations, the fair value of plan assets and the funded status of the Company’s significant foreign defined benefit pension plans as of the respective August 31 measurement date (in thousands):
2022 2021
Reconciliation of benefit obligations:
Benefit obligation at beginning of year $ 14,421  $ 14,297 
Employer service costs 90  116 
Interest cost 159  198 
Actuarial (gain)/loss (3,859) 51 
Benefits paid (200) (293)
Settlements (480) — 
Currency impact (2,114) 52 
Benefit obligation at end of year $ 8,017  $ 14,421 
Reconciliation of plan assets:
Fair value of plan assets at beginning of year $ 9,396  $ 8,980 
Actual return on plan assets (1,159) 532 
Company contributions 44  56 
Benefits paid from plan assets (680) (293)
Currency impact (1,393) 121 
Fair value of plan assets at end of year 6,208  9,396 
Funded status of the plans (underfunded) $ (1,808) $ (5,025)
The following table provides detail on the Company’s foreign net periodic benefit expense (in thousands):
  Year ended August 31,
  2022 2021 2020
Employer service costs $ 90  $ 116  $ 284 
Interest cost 159  198  171 
Expected return on assets (316) (347) (357)
Amortization of net prior service credit 3  4  (18)
Amortization of net loss 112  139  205 
Settlement 145  —  — 
Income of special events —  —  (728)
Net periodic benefit expense (income) $ 193  $ 110  $ (443)
 
The weighted average discount rate utilized for determining the benefit obligation at August 31, 2022 and 2021 was 3.6% and 1.3%, respectively. The plan assets of these foreign pension plans consist primarily of participating units in fixed income and equity securities and insurance contracts. The Company’s overall expected long-term rate of return on these investments is 3.9%. During fiscal 2023, the Company does not anticipate contributing to these pension plans.
In fiscal 2020, the Company moved certain employees in a foreign pension plan into a multi-employer pension plan which triggered a curtailment. The curtailment resulted in a reduction to the projected benefit obligation of that plan of $1.7 million, of which $0.7 million was recorded as a component of Other expense (income), net within the Consolidated Statements of Earnings and the remaining $1.0 million was recorded through Other comprehensive income on the Consolidated Statements of Comprehensive Income (Loss).
Projected benefit payments to participants in the these foreign plans are $0.3 million in fiscal 2023, $0.2 million in each fiscal 2024, 2025 and 2026, $0.3 million in fiscal 2027 and $1.8 million in aggregate for the following five years.
Other Postretirement Health Benefit Plans
The Company provides other postretirement health benefits (“OPEB”) to certain existing and former employees of domestic businesses it acquired, who were entitled to such benefits prior to acquisition. These unfunded plans had a benefit obligation of $1.9 million and $2.3 million at August 31, 2022 and 2021, respectively. These obligations are determined utilizing assumptions consistent with those used for our U.S. pension plans and a health care cost trend rate of 6.3%, trending downward to 5.0% by the year 2026, and remaining level thereafter. Net periodic benefit costs for other postretirement benefits was income of $0.1 million, $0.2 million and $0.3 million for the year ended August 31, 2022, 2021 and 2020, respectively. Benefit payments from the plan are funded through participant contributions and Company contributions. Benefit payments are projected to be $0.2 million in fiscal 2023.
Defined Contribution Benefit Plans
The Company maintains a 401(k) plan for substantially all full time U.S. employees (the “401(k) Plan”). Under plan provisions, the Company can fund either cash or issue new shares of Class A common stock for its contributions. Amounts are allocated to accounts set aside for each employee’s retirement. Employees generally may contribute up to 50% of their compensation to individual accounts within the 401(k) Plan.
While contributions vary, the Company's match contribution is $0.50 for every $1 contributed by employees, up to 8% of the employees' eligible pay. These match contributions are made on every payroll run, meaning the contribution is immediately 100% vested. In response to the COVID-19 pandemic, the Company temporarily suspended its 401(k) match in May 2020 (fiscal 2020) and reinstated the 401(k) match in January 2021 (fiscal 2021). In addition, the Company may make an annual, discretionary contribution of up to 3% of employees' eligible pay to employees employed as of the end of the plan year. The discretionary contribution has a three-year vesting period. The Company elected not to provide a discretionary contribution for the year ended August 31, 2022. The Company also maintains a Restoration Plan that allows eligible highly compensated employees (as defined by the Internal Revenue Code) to receive a core contribution as if no IRS limits were in place. Company contributions to the Restoration Plan are made in the form of its Class A common stock and contributed into each eligible participant’s deferred compensation plan. The Company has not contributed in fiscal 2022, 2021 or fiscal 2020. Expense recognized related to the 401(k) plan totaled $2.2 million, $1.1 million and $1.4 million for the year ended August 31, 2022, 2021 and 2020, respectively.
In addition to the 401(k) plan, the Company sponsors a non-qualified supplemental executive retirement plan (“the SERP Plan”). The SERP Plan is an unfunded defined contribution plan that covers certain current and former executive employees
and has an annual contribution formula based on age and years of service (with Company contributions ranging from 3% to 6% of eligible wages). This unfunded plan had a $1.1 million and $1.3 million obligation at August 31, 2022 and 2021, respectively. Expense recognized for the SERP Plan was $0.2 million, $0.1 million and $0.3 million for fiscal 2022, 2021 and 2020, respectively.
Deferred Compensation Plan
The Company maintains a deferred compensation plan to allow eligible U.S. employees to defer receipt of current cash compensation and restricted stock units vesting in order to provide future savings benefits. Eligibility is limited to employees who earn compensation that exceeds certain pre-defined levels. Participants have the option to invest their deferrals in a fixed income investment, a defined set of mutual funds, and/or, with respect to deferrals of restricted stock units, in Company common stock. The fixed income and mutual fund portion of the plan is unfunded, and therefore all compensation deferred under the plan is held by the Company and commingled with its general assets. Liabilities of $12.9 million and $14.5 million are included in the Consolidated Balance Sheets at August 31, 2022 and 2021, respectively, to reflect the unfunded portion of the deferred compensation liability. The Company recorded expense in "Financing costs, net" of $0.7 million, $1.2 million and $1.1 million for the years ended August 31, 2022, 2021 and 2020, respectively, for the non-funded return on participant deferrals. Company common stock contributions to fund the plan are held in a rabbi trust, accounted for in a manner similar to treasury stock and are recorded at cost in “Stock held in trust” within shareholders’ equity on the Consolidated Balance Sheets with the corresponding deferred compensation liability also recorded within shareholders’ equity on the Consolidated Balance Sheets. Because no investment diversification is permitted within the trust, changes in fair value of Enerpac Tool Group common stock are not recognized.