Enerpac Tool Group Corp. — Fiscal 2023 First-Quarter 10-Q Summary
Reporting period: Three months ended November 30, 2022. The filing was dated December 22, 2022. Enerpac is a global industrial tools, services, technology and solutions company operating in more than 100 countries, with one reportable segment: Industrial Tools & Services (IT&S).
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $139.4 million | $130.9 million | +6% |
| Gross profit | $67.9 million | $59.6 million | +14% |
| Gross margin | 48.7% | 45.6% | +3.1 percentage points |
| Operating profit | $12.3 million | $6.4 million | +92% |
| Operating margin | 8.8% | 4.9% | +3.9 percentage points |
| Net earnings from continuing operations | $6.4 million | $3.2 million | +101% |
| Net earnings | $7.5 million | $2.8 million | +167% |
| Diluted EPS | $0.13 | $0.05 | +$0.08 |
| Operating cash flow | $17.5 million | $(4.7) million | +$22.3 million |
| Capital expenditures | $3.0 million | $3.3 million | Down modestly |
Core sales, excluding foreign exchange and recent acquisition or divestiture effects, increased 13%. Reported sales were reduced by approximately $7 million, or 6%, from the stronger U.S. dollar. Pricing actions and volume growth offset inflation in commodities, freight and energy costs.
IT&S sales increased to $127.3 million from $121.3 million, while segment operating profit increased to $26.6 million from $18.1 million. IT&S operating margin improved to 20.9% from 14.9%, primarily from pricing, favorable mix and productivity gains. Corporate expense increased to $15.8 million from $10.4 million, mainly due to ASCEND-related costs and incentive compensation.
The effective tax rate declined to 27.1% from 35.9%, primarily due to tax benefits from revaluing tax assets because of tax-rate changes. The filing states that both periods were affected by non-recurring items.
Liquidity, debt and cash flow
- Cash and cash equivalents were $129.2 million at November 30, 2022, compared with $120.7 million at August 31, 2022. Approximately $119 million was held by foreign subsidiaries and $10 million domestically.
- Cash provided by operating activities was $17.5 million, including $17.8 million from continuing operations. The improvement primarily reflected stronger collections, timing of large project billings and higher earnings.
- Cash used in investing activities was $2.5 million, principally capital expenditures.
- Cash used in financing activities was $5.7 million, including the annual dividend, debt issuance costs and debt-related activity.
- Total senior indebtedness was $203.0 million, consisting of a $200.0 million term loan and $3.0 million drawn on the revolver. Long-term debt, net of current maturities and issuance costs, was $200.4 million.
- On September 9, 2022, the Company refinanced its prior facility with a $600 million senior credit facility maturing in September 2027. The facility includes a $400 million revolver and a $200 million term loan, with interest initially based on adjusted term SOFR plus 1.125%.
- At quarter-end, $393.4 million was available under the revolver after outstanding letters of credit. The Company was in compliance with all financial covenants.
- Primary working capital was $114 million, or 20% of sales, unchanged as a percentage of sales from August 31, 2022, although inventory increased to $90.7 million from $83.7 million.
Material changes versus the prior comparable period
- Sales increased 6% on a reported basis and 13% on a core basis despite a $7 million foreign-exchange headwind.
- Gross margin expanded by approximately 3 percentage points due to pricing, sales mix and productivity efficiency.
- Operating profit nearly doubled, despite higher corporate expense and $10.4 million of ASCEND program expenses during the quarter.
- Restructuring charges declined to $1.0 million from $2.7 million.
- Financing costs increased to $2.8 million from $1.0 million because of higher debt balances and interest rates.
- Continuing-operations earnings more than doubled, while discontinued operations generated $1.0 million of earnings versus a $0.4 million loss in the prior-year quarter. The current-period benefit primarily reflected an impairment and divestiture benefit.
- Foreign currency translation produced $5.9 million of other comprehensive income, compared with a $10.4 million loss in the prior-year quarter.
- Weighted-average diluted shares declined to 57.3 million from 60.6 million, supporting the increase in diluted EPS.
Guidance, outlook, risks and unusual items
Management expects the ASCEND transformation program to generate $40 million to $50 million of incremental annual operating profit once fully implemented. The full run-rate benefit is expected as the Company exits fiscal 2024 and is incorporated into fiscal 2025 projections. Total ASCEND investment is expected to be approximately $60 million to $65 million, including estimated restructuring costs of $10 million to $15 million. The program is expected to conclude in the fourth quarter of fiscal 2024.
Management stated that cash on hand, the revolving credit facility and anticipated operating cash flow should be adequate for operating, debt-service, acquisition and capital-expenditure needs for the foreseeable future. No specific quarterly or annual sales or earnings guidance is provided in the filing.
- Supply-chain shortages, logistics constraints, freight costs, commodity inflation and demand-estimation errors could affect sales, costs and fulfillment.
- Higher interest rates increase financing costs and could affect covenant compliance and liquidity.
- Foreign-exchange volatility reduced reported sales and could continue to affect earnings, equity and balance-sheet translation.
- Demand in oil and gas and other cyclical end markets may weaken because of economic, geopolitical or commodity-price changes.
- Russia-related sanctions and export controls, including impacts on customer service and receivable collections, remain a risk.
- One agent represented 11.3% of outstanding accounts receivable and had a payment delinquency. The Company fully reserved the related $13.2 million balance; actual collections could differ from management’s estimate.
- The Company recorded a $13.2 million reserve for the delinquent agent within its $17.3 million allowance for doubtful accounts at November 30, 2022.
- The Company remains subject to legal, regulatory, product-liability and other contingencies. A Dutch investigation concerning sales linked to Crimea concluded that the transactions violated EU sanctions; management believes the matter will not have a material adverse effect, but the ultimate outcome is not certain.
- Letters of credit totaled $9.2 million. Contingent lease obligations related to previously divested businesses totaled approximately $3.2 million through fiscal 2025.
Facts investors should verify
- Whether ASCEND achieves its targeted $40 million to $50 million incremental annual operating-profit benefit and whether total program costs remain within the $60 million to $65 million estimate.
- Whether pricing and productivity gains continue to offset inflation, supply-chain costs and foreign-exchange pressure.
- Inventory growth, primary working capital and the sustainability of the improved operating cash flow.
- Interest expense, variable-rate debt exposure and continued compliance with the new credit facility’s leverage and interest-coverage covenants.
- Collections from the delinquent agent and the adequacy of the $13.2 million specific reserve.
- The outcome and potential financial impact of the Dutch sanctions matter and other legal contingencies.
- Whether discontinued-operation benefits recur, since the quarter’s consolidated earnings included a $1.0 million benefit from discontinued operations.