Enerpac Tool Group Corp. — Fiscal 2023 Third-Quarter Form 10-Q
Business Context and Reporting Period
Enerpac is a global industrial tools, services, technology and solutions company serving customers in more than 100 countries. Its primary reportable segment is Industrial Tools & Services (IT&S), which provides hydraulic and mechanical tools, heavy-lifting solutions, services and rentals. The filing covers the three and nine months ended May 31, 2023, compared with the corresponding periods ended May 31, 2022. Fiscal year-end is August 31.
Financial Performance and Liquidity
| Metric | Three Months Ended May 31, 2023 | Three Months Ended May 31, 2022 | Nine Months Ended May 31, 2023 | Nine Months Ended May 31, 2022 |
|---|---|---|---|---|
| Net sales | $156.3 million | $151.9 million | $437.6 million | $419.4 million |
| Gross profit | $77.9 million | $72.0 million | $216.1 million | $191.7 million |
| Gross margin | 49.8% | 47.4% | 49.4% | 45.7% |
| Operating profit | $25.4 million | $6.6 million | $51.7 million | $17.5 million |
| Operating margin | 16.3% | 4.4% | 11.8% | 4.2% |
| Net earnings from continuing operations | $17.0 million | $4.1 million | $30.5 million | $9.4 million |
| Net earnings | $12.4 million | $1.6 million | $24.3 million | $5.7 million |
| Diluted EPS from continuing operations | $0.30 | $0.07 | $0.53 | $0.15 |
| Diluted EPS | $0.22 | $0.03 | $0.42 | $0.09 |
Cash provided by operating activities was $27.0 million for the nine-month period, compared with $7.2 million in the prior-year period. Capital expenditures were $8.4 million, resulting in cash used in investing activities of $7.8 million. Cash increased by $21.3 million during the period to $142.0 million at May 31, 2023.
Total debt was $234.7 million, consisting primarily of $199.4 million of term debt and $36.0 million of revolver borrowings, net of current maturities and debt issuance costs as presented in the balance sheet. The company had $360.4 million of revolver availability after letters of credit and was in compliance with its debt covenants. The new $600 million senior credit facility matures in September 2027.
At May 31, 2023, current assets were $373.4 million and current liabilities were $140.2 million. Net primary working capital increased to $150 million, or 24% of sales, from $118 million, or 20%, at August 31, 2022. Cash held by foreign subsidiaries was $129 million of the total $142 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 3%; nine-month sales increased 4%. Core sales increased 4% in the quarter and 7% year to date, partly offset by unfavorable foreign currency effects of 1% and 3%, respectively.
- Product core sales increased 9% in the third quarter, supported partly by pricing actions. Service core sales decreased 13%, primarily because of more selective project quoting in the Middle East.
- Gross margin expanded by approximately 3 percentage points in both the quarter and year-to-date period, reflecting pricing and productivity improvements.
- Operating profit increased $18.8 million in the quarter and $34.2 million year to date. SG&A benefited from ASCEND-related personnel savings and the absence of a prior-year $10.8 million bad-debt charge related to a delinquent Middle East agent.
- Financing costs increased to $3.3 million in the quarter and $9.2 million year to date from $1.0 million and $2.7 million, respectively, due to higher debt balances and interest rates.
- Discontinued operations generated losses of $4.6 million in the quarter and $6.2 million year to date, primarily from retained liabilities associated with the former Engineered Components & Systems businesses.
- The company repurchased 843,689 shares for $20.8 million during the quarter. Remaining authorization at May 31, 2023 was 5,396,576 shares.
Guidance, Outlook, Commentary and Risks
The ASCEND transformation program is expected to produce incremental annual operating profit of $50 million to $60 million when fully implemented, with the full run rate expected as the company exits fiscal 2024. Expected cumulative investment increased to approximately $70 million to $75 million, including estimated restructuring costs of $10 million to $15 million. ASCEND expenses were approximately $8.2 million in the quarter and $32.9 million year to date.
Management states that cash on hand, the revolving credit facility and anticipated operating cash flow should be adequate for operating, debt-service, acquisition and capital-expenditure requirements for the foreseeable future. The filing does not provide formal revenue or earnings guidance for fiscal 2023.
- Key risks include supply-chain and logistics disruptions, component availability, commodity costs, tariffs, inflation, economic recession and weaker end-market demand, including oil and gas.
- Foreign exchange volatility affects reported sales, operating profit and equity; a hypothetical 10% decline in foreign exchange rates versus the U.S. dollar would have reduced quarterly sales by approximately $6 million and operating profit by approximately $1 million.
- Interest-rate exposure remains material because debt is primarily variable rate. A 10% increase in average variable-rate debt costs would have increased quarterly financing costs by approximately $0.9 million.
- One delinquent agent represented 10.7% of outstanding accounts receivable at May 31, 2023. The company had fully reserved the related amount, but actual collections may differ from management’s estimate.
- The company remains subject to legal and regulatory matters, including a continuing Dutch investigation related to historical sales linked to Crimea. Management does not currently expect a material adverse effect, but the ultimate outcome is uncertain.
- Goodwill and other intangible assets are significant, creating potential impairment risk if operating performance declines materially.
Important Facts for Investors to Verify
- Whether ASCEND delivers the targeted $50 million to $60 million of incremental annual operating profit and whether total investment remains within the $70 million to $75 million estimate.
- The sustainability of margin expansion after pricing benefits, cost savings and prior-year bad-debt charges no longer affect comparisons.
- Progress in reducing primary working capital, particularly the increase in inventories and the decline in trade accounts payable.
- Future interest expense, covenant compliance and available revolver capacity as variable-rate debt costs change.
- Collections from the delinquent agent and any changes to the associated reserve.
- Future losses or cash requirements related to discontinued operations, legal proceedings and the Dutch sanctions matter.
- The effect of foreign exchange movements and demand trends in service, Middle East, oil and gas, and other cyclical end markets.