Enerpac Tool Group Corp. — Fiscal 2024 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended May 31, 2024, compared with the corresponding periods ended May 31, 2023. Enerpac is a global industrial tools, services, technology and solutions company operating primarily through its Industrial Tools & Services (IT&S) segment and serving customers in more than 100 countries.
Financial performance
| Metric | Three months ended May 31, 2024 | Three months ended May 31, 2023 | Nine months ended May 31, 2024 | Nine months ended May 31, 2023 |
|---|---|---|---|---|
| Net sales | $150.4 million | $156.3 million | $430.8 million | $437.6 million |
| Gross profit | $77.9 million | $77.9 million | $223.6 million | $216.1 million |
| Gross margin | 51.8% | 49.8% | 51.9% | 49.4% |
| Operating profit | $33.4 million | $25.4 million | $91.5 million | $51.7 million |
| Operating margin | 22.2% | 16.3% | 21.2% | 11.8% |
| Net earnings from continuing operations | $22.6 million | $17.0 million | $58.8 million | $30.5 million |
| Net earnings | $25.8 million | $12.4 million | $61.3 million | $24.3 million |
| Diluted EPS from continuing operations | $0.41 | $0.30 | $1.07 | $0.53 |
| Total diluted EPS | $0.47 | $0.22 | $1.12 | $0.42 |
- Third-quarter sales declined 4%; management reported approximately 1% organic sales growth after adjusting for foreign currency and the Cortland Industrial divestiture.
- Nine-month sales declined 2%, while organic sales increased 3%.
- IT&S sales increased 1% in the quarter and 4% year to date. IT&S operating margin improved to 28.1% from 25.1% in the quarter and to 27.3% from 23.2% year to date.
- Service and rental sales grew 7% in the quarter and 7% year to date; product sales were flat organically in the quarter and grew 2% organically year to date.
- SG&A decreased by $6.7 million in the quarter and $29.1 million year to date, primarily due to lower ASCEND-related costs, lower restructuring costs, personnel savings and lower discretionary spending.
- The continuing-operations effective tax rate was 23.1% for the quarter and 25.3% year to date, compared with 21.6% and 24.8%, respectively, in the prior-year periods.
Cash flow, liquidity and capital structure
- Cash provided by operating activities was $37.0 million for the nine months, including $39.5 million from continuing operations, compared with $27.0 million in the prior-year period.
- Capital expenditures were $5.0 million, compared with $7.8 million in the prior-year period. Cash used in investing activities was $7.5 million.
- Cash used in financing activities was $51.4 million, driven primarily by $19.0 million of net debt repayments and $32.7 million of share repurchases.
- Cash and cash equivalents were $132.4 million at May 31, 2024, down from $154.4 million at August 31, 2023. Approximately $120 million was held by foreign subsidiaries and $12 million domestically.
- Total senior indebtedness was $196.3 million, consisting of the term loan; there were no revolver borrowings. The revolver provided approximately $398.8 million of availability after letters of credit.
- The senior credit facility matures in September 2027. Enerpac stated that it was in compliance with all debt covenants at May 31, 2024 and expects cash, revolver availability and operating cash flow to fund foreseeable requirements.
- Primary working capital increased to $145 million, or 24% of sales, from $122 million, or 19%, at August 31, 2023.
Material changes and unusual items
- The Cortland Industrial business was sold in July 2023. The divestiture reduced current-period sales comparisons by approximately $7 million in the quarter and $20 million year to date.
- Discontinued operations produced after-tax earnings of $3.2 million in the quarter and $2.5 million year to date, compared with losses of $4.6 million and $6.2 million, respectively, in the prior-year periods. These amounts primarily relate to retained liabilities from the former EC&S businesses.
- Enerpac retired 29.8 million treasury shares in December 2023. It repurchased 1.2 million shares for $32.7 million during the first nine months, with 2.9 million shares remaining authorized for repurchase at May 31, 2024.
- Accounts receivable increased to $107.6 million from $97.6 million and inventories increased to $79.1 million from $74.8 million. One delinquent agent represented 10.6% of outstanding receivables; the Company stated that amounts due from the agent were fully reserved, including a $13.2 million specific bad-debt reserve.
- Goodwill was $266.8 million and other intangible assets were $36.2 million at May 31, 2024. The filing notes that goodwill and intangible assets are substantial assets and could be subject to impairment if operating performance declines materially.
Guidance, outlook and risks
- ASCEND is expected to be fully implemented by the end of fiscal 2024. Management continues to target $50 million to $60 million of annual operating profit improvement and expects total fiscal 2024 program costs of $10 million to $15 million, including $3 million to $5 million of restructuring costs.
- Through fiscal 2023, management reported approximately $54 million of annual operating profit improvement and approximately $60 million of cumulative investment under ASCEND.
- Management cited pricing, favorable mix, operational improvements and lower SG&A as drivers of margin expansion.
- Key risks include demand volatility, economic recession, geopolitical events, tariffs, supply-chain and logistics disruptions, foreign currency movements, commodity and labor costs, interest rates, cybersecurity, manufacturing interruptions, distributor and agent credit risk, competition, litigation, regulatory matters and execution of ASCEND and restructuring initiatives.
- The Company maintains an interest-rate swap covering $60 million of term debt and foreign-exchange hedges. A 10% increase in average variable-rate debt costs would have increased quarterly financing costs by less than $1 million, according to the filing.
- Outstanding letters of credit totaled $8.0 million. Management stated that legal and regulatory contingencies, including a continuing Dutch investigation related to historical Crimea-related sales, are not expected to have a material adverse effect, although outcomes are not assured.
Important facts for investors to verify
- Whether ASCEND delivers the targeted $50 million to $60 million of annual operating profit improvement after program costs end.
- Whether organic growth persists, particularly in IT&S products and service and rental operations, despite lower reported sales after the divestiture and currency effects.
- Cash conversion and working-capital trends, including the increase in receivables and inventory and the concentrated exposure to the delinquent agent.
- Debt covenant compliance, variable-rate exposure and the Company’s ability to reduce term debt while continuing share repurchases.
- The ultimate cost and resolution of restructuring, retained discontinued-operation liabilities, legal matters and the Dutch sanctions-related investigation.
- Potential impairment risk associated with the Company’s substantial goodwill and intangible asset balances.