Enerpac Tool Group Corp. 2022 Q3 Form 10-Q Summary
Business context and reporting period
Enerpac is a global industrial tools and services company operating in more than 100 countries. Its reportable segment is Industrial Tools & Service (IT&S), which provides hydraulic and mechanical tools, heavy-lifting solutions, services and rentals to industrial, infrastructure, maintenance, oil and gas, alternative energy and other markets.
The filing covers the three and nine months ended May 31, 2022, within fiscal 2022. Fiscal years end August 31. Results are unaudited and include continuing operations unless otherwise stated.
Key financial metrics
| Metric | Three months ended May 31, 2022 | Three months ended May 31, 2021 | Nine months ended May 31, 2022 | Nine months ended May 31, 2021 |
|---|---|---|---|---|
| Net sales | $151.9 million | $143.1 million | $419.4 million | $383.2 million |
| Gross profit | $72.0 million | $66.8 million | $191.7 million | $176.9 million |
| Gross margin | 47.4% | 46.7% | 45.7% | 46.2% |
| Operating profit | $6.6 million | $22.7 million | $17.5 million | $37.5 million |
| Operating margin | 4.4% | 15.9% | 4.2% | 9.8% |
| Net earnings from continuing operations | $4.1 million | $25.3 million | $9.4 million | $33.7 million |
| Net earnings | $1.6 million | $25.0 million | $5.7 million | $32.8 million |
| Diluted EPS from continuing operations | $0.07 | $0.42 | $0.15 | $0.56 |
Third-quarter sales increased 6%, while management reported core sales growth of 10%, partly offset by a 4% adverse foreign-exchange impact. Nine-month sales increased 9%, with core sales growth of 12% and a 2% adverse foreign-exchange impact.
Cash provided by operating activities was $7.2 million for the nine months, compared with $24.9 million in the prior-year period. Capital expenditures were $7.0 million. Cash and cash equivalents were $123.7 million at May 31, 2022, down from $140.4 million at August 31, 2021; approximately $116 million was held by foreign subsidiaries and $8 million domestically.
At May 31, 2022, accounts receivable were $117.0 million, inventory was $86.9 million and accounts payable were $65.7 million. Net primary working capital increased to $138 million, or 23% of sales, from $116 million, or 20%, at August 31, 2021.
Long-term debt was $205.0 million, entirely under the revolving credit facility, compared with $175.0 million at August 31, 2021. Available borrowing capacity was approximately $189.8 million after outstanding letters of credit. The facility matures in March 2024, and the Company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Sales growth reflected market recovery, higher volumes and pricing actions intended to offset raw-material, component and freight inflation.
- Gross margins were broadly stable, but operating profit fell sharply because selling, general and administrative expenses increased by $22.6 million in the quarter and $32.2 million year to date.
- SG&A included an $10.8 million third-quarter bad-debt provision for a delinquent MENAC-region agent, approximately $3.9 million of ASCEND program costs, $2 million of leadership-transition and board-search costs, and approximately $1 million of business-review costs.
- The allowance for doubtful accounts increased to $18.3 million from $4.2 million at August 31, 2021. The MENAC agent represented 9.7% of gross outstanding accounts receivable at May 31, 2022, and its balance was fully reserved.
- IT&S sales increased 5% in the quarter and 8% year to date, but segment operating margin declined to 13.7% from 17.9% in the quarter and to 12.9% from 15.3% year to date.
- Foreign-currency translation produced a $16.4 million comprehensive loss in the quarter and a $25.3 million loss year to date, contributing to accumulated other comprehensive loss of $117.3 million.
- The Company resumed share repurchases, buying 1.76 million shares for $36.3 million during the quarter at an average price of $20.65 per share. An additional 8.24 million shares remained authorized for repurchase.
- Discontinued operations generated a net loss of $2.4 million in the quarter and $3.7 million year to date, primarily from retained liabilities related to the divested EC&S businesses.
Guidance, outlook, commentary and risks
Management did not provide specific fiscal-year revenue or earnings guidance in the filing. The Company expects its revolving credit facility, cash on hand and anticipated operating cash flows to fund operating, debt-service, acquisition and capital-expenditure needs for the foreseeable future.
In March 2022, Enerpac launched the ASCEND transformation program, targeting incremental annual operating profit of $40 million to $50 million when fully implemented. The Company expects to invest approximately $60 million to $65 million across capital expenditures, restructuring, third-party support and incentive costs. Approximately $3.9 million of program expenses were recorded in the third quarter.
On June 27, 2022, after the reporting date, the Company approved an ASCEND-related restructuring plan expected to cost $6 million to $10 million, primarily for employee-related costs, over the 24 months ending in the fourth quarter of fiscal 2024. Additional restructuring actions may follow.
Supply-chain disruption, logistics constraints, longer lead times, elevated commodity and freight costs, port-related risks, COVID-19 effects, the Russia-Ukraine conflict, sanctions, foreign-exchange volatility and weaker regional demand remain significant risks. The Company reported larger-than-usual backlogs at May 31, 2022.
Management also identified risks relating to customer and distributor credit, cybersecurity, manufacturing disruptions, competition, acquisitions, goodwill and intangible-asset impairment, litigation, product liability, regulatory matters and compliance with debt covenants. The Dutch investigation into potentially sanction-violating Crimea-related transactions concluded that EU sanctions were violated; management believes the matter will not have a material adverse effect, but the ultimate outcome remains uncertain.
Most important facts for investors to verify
- Whether pricing actions and ASCEND initiatives can restore operating margins after significant SG&A and bad-debt charges.
- Actual collections, if any, from the MENAC agent and the adequacy of the $18.3 million total allowance for doubtful accounts.
- The timing, cash cost and realized savings from the $60 million to $65 million ASCEND investment plan and the subsequent $6 million to $10 million restructuring plan.
- Whether supply-chain constraints, inflation, freight costs and backlogs improve or continue to pressure service levels and margins.
- Liquidity and refinancing needs as the $205 million revolving facility approaches its March 2024 maturity, including the effect of variable interest rates.
- The financial and operational effects of Russia-related sanctions, suspended Russian business and foreign-exchange movements.
- The ultimate outcome and potential penalties associated with the Dutch sanctions investigation and other legal contingencies.