Enerpac Tool Group Corp. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Employee Benefit Plans

Employee Benefit Plans

12 Months Ended

Aug. 31, 2023

Retirement Benefits [Abstract]

Compensation and Employee Benefit Plans

Note 11. 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):


	2023		2022
Reconciliation of benefit obligations:
Benefit obligation at beginning of year	$	37,135	$	47,147
Interest cost	1,694		1,165
Actuarial (gain) loss	(2,337)		(8,197)
Benefits paid	(3,288)		(2,980)
Benefit obligation at end of year	$	33,204	$	37,135
Reconciliation of plan assets:
Fair value of plan assets at beginning of year	$	31,166	$	39,696
Actual return on plan assets	545		(5,658)
Company contributions	108		108
Benefits paid from plan assets	(3,289)		(2,980)
Fair value of plan assets at end of year	28,530		31,166
Funded status of the plans (underfunded)	$	(4,674)	$	(5,969)

The following table provides detail on the Company’s domestic net periodic benefit expense (in thousands):


	Year ended August 31,
	2023		2022		2021
Interest cost	$	1,694	$	1,165	$	1,156
Expected return on assets	(1,984)		(2,060)		(1,610)
Amortization of actuarial loss	878		1,219		1,322
Net periodic benefit expense	$	588	$	324	$	868

As of August 31, 2023 and 2022, $16.9 million and $18.3 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 2024, $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:


	2023		2022		2021
Assumptions for benefit obligations:
Discount rate	5.40	%	4.75	%	2.55	%
Assumptions for net periodic benefit cost:
Discount rate	4.75	%	2.55	%	2.40	%
Expected return on plan assets	5.70	%	5.45	%	4.20	%

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 2023, the plan assets were invested in a mix of 60% duration-matched fixed income securities and 40% equity securities. During fiscal 2022, the plan portfolio was invested in 50% fixed income securities and 50% 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, 2023, 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 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,
	2023		%		2022		%
Cash and cash equivalents	$	51	0.2	%	$	—	—	%
Income receivable	40		0.1		31		0.1
Fixed income securities:
U.S. Treasury Securities	4,659		16.3		4,852		15.6
Corporate Bonds	—		—		—		—
Mutual funds	11,269		39.5		11,395		36.6
	15,928		55.8		16,247		52.2
Equity securities:
Mutual funds	12,511		43.9		14,888		47.7
Total plan assets	$	28,530	100.0	%	$	31,166	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 8, “Fair Value Measurements.”

Projected benefit payments from plan assets to participants in the Company’s U.S. pension plans are $2.9 million for fiscal 2024, $3.0 million per year for each of the next three years, $2.9 million for fiscal 2028 and $13.4 million in aggregate for the following five years. The Company plans to make a contribution of $0.4 million to the U.S. pension plans in September of fiscal 2024. The Company did not make a contribution to the plan in fiscal 2023 or fiscal 2022.

Foreign Defined Benefit Pension Plans

The Company has seven 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):


	2023		2022
Reconciliation of benefit obligations:
Benefit obligation at beginning of year	$	8,017	$	14,421
Employer service costs	60		90
Interest cost	306		159
Actuarial gain	(494)		(3,859)
Benefits paid	(256)		(200)
Settlements	(213)		(480)
Currency impact	665		(2,114)
Benefit obligation at end of year	$	8,085	$	8,017
Reconciliation of plan assets:
Fair value of plan assets at beginning of year	$	6,208	$	9,396
Actual return on plan assets	(359)		(1,159)
Company contributions	286		44
Benefits paid from plan assets	(469)		(680)
Currency impact	529		(1,393)
Fair value of plan assets at end of year	6,195		6,208
Funded status of the plans (underfunded)	$	(1,889)	$	(1,808)

The following table provides detail on the Company’s foreign net periodic benefit expense (in thousands):


	Year ended August 31,
	2023		2022		2021
Employer service costs	$	60	$	90	$	116
Interest cost	306		159		198
Expected return on assets	(245)		(316)		(347)
Amortization of net prior service credit	3		3		4
Amortization of net loss	10		112		139
Settlement	37		145		—
Net periodic benefit expense	$	171	$	193	$	110

The weighted average discount rate utilized for determining the benefit obligation at August 31, 2023 and 2022 was 4.3% and 3.6%, 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 3.7%. During fiscal 2024, the Company does not anticipate contributing to these pension plans.

Projected benefit payments to participants in the these foreign plans are $0.3 million in each fiscal 2024, 2025, 2026 and 2027, $0.4 million in fiscal 2028 and $2.2 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 $1.7 million and $1.9 million at August 31, 2023 and 2022, 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 7.0%, 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 in both years ended August 31, 2023 and 2022 and $0.2 million for the year ended August 31, 2021. Benefit payments from the plan are funded through participant contributions and Company contributions. Benefit payments are projected to be $0.2 million in fiscal 2024.

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 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, 2023. 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 2023, 2022 or fiscal 2021. Expense recognized related to the 401(k) plan totaled $2.1 million, $2.2 million and $1.1 million for the years ended August 31, 2023, 2022 and 2021, 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 $1.0 million and $1.1 million obligation at August 31, 2023 and 2022, respectively. Expense recognized for the SERP Plan was $0.2 million in each of fiscal 2023 and 2022 and $0.1 million in fiscal 2021.

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 $11.0 million and $12.9 million are included in the Consolidated Balance Sheets at August 31, 2023 and 2022, respectively, to reflect the unfunded portion of the deferred compensation liability. The Company recorded expense in "Financing costs, net" of $0.9 million, $0.7 million and $1.2 million for the years ended August 31, 2023, 2022 and 2021, 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 the Company's common stock are not recognized.