Enerpac Tool(EPAC) - 2022 Q3 - Quarterly Report

Forward-Looking Statements and Cautionary Factors This section outlines forward-looking statements and associated risks, including commodity costs and supply chain disruptions - The report contains forward-looking statements regarding expected financial results, liquidity, restructuring costs, and capital expenditures, which involve risks and uncertainties[6] - Key risk factors include potential increases in commodity costs, reliance on suppliers, supply chain interruptions, decreased demand in oil & gas, global tariffs, IT infrastructure failures, competition, currency fluctuations, and regulatory developments[6][7] Part I—Financial Information This part presents the unaudited interim financial statements and management's analysis of financial condition and results of operations Item 1—Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes for the period Condensed Consolidated Statements of Earnings This statement details the company's revenues, costs, and profitability over the specified periods Condensed Consolidated Statements of Earnings (Unaudited, in thousands) | 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 | $151,894 | $143,149 | $419,395 | $383,233 | | Cost of products sold | $79,847 | $76,302 | $227,741 | $206,346 | | Gross profit | $72,047 | $66,847 | $191,654 | $176,887 | | Operating profit | $6,643 | $22,747 | $17,534 | $37,524 | | Net earnings from continuing operations | $4,061 | $25,257 | $9,367 | $33,663 | | Loss from discontinued operations | $(2,418) | $(226) | $(3,715) | $(852) | | Net earnings | $1,643 | $25,031 | $5,652 | $32,811 | | Basic EPS from continuing operations | $0.07 | $0.42 | $0.16 | $0.56 | | Diluted EPS from continuing operations | $0.07 | $0.42 | $0.15 | $0.56 | | Basic EPS | $0.03 | $0.42 | $0.09 | $0.55 | | Diluted EPS | $0.03 | $0.41 | $0.09 | $0.54 | - Net sales increased by 6% for the three months ended May 31, 2022, and by 9% for the nine months ended May 31, 2022, compared to the prior year[12] - Operating profit significantly decreased by 70.8% for the three months and 53.3% for the nine months ended May 31, 2022, primarily due to increased SG&A expenses[12] - Net earnings saw a substantial decline of 93.4% for the three months and 82.8% for the nine months ended May 31, 2022, compared to the prior year[12] Condensed Consolidated Statements of Comprehensive Income (Loss) This statement outlines net earnings and other comprehensive income changes, including foreign currency adjustments Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited, in thousands) | 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 earnings | $1,643 | $25,031 | $5,652 | $32,811 | | Foreign currency translation adjustments | $(16,397) | $6,373 | $(25,258) | $16,807 | | Pension, other postretirement benefit plans, and cash flow hedges | $367 | $165 | $928 | $517 | | Total other comprehensive (loss) income | $(16,030) | $6,538 | $(24,330) | $17,324 | | Comprehensive (loss) income | $(14,387) | $31,569 | $(18,678) | $50,135 | - The Company reported a comprehensive loss of $(14.4) million for the three months and $(18.7) million for the nine months ended May 31, 2022, driven by negative foreign currency translation adjustments[14] Condensed Consolidated Balance Sheets This statement presents a snapshot of the company's assets, liabilities, and shareholders' equity at a specific point in time Condensed Consolidated Balance Sheets (Unaudited, in thousands) | Asset/Liability/Equity | May 31, 2022 | August 31, 2021 | |:---|:---|:---| | Cash and cash equivalents | $123,705 | $140,352 | | Accounts receivable, net | $117,029 | $103,233 | | Inventories, net | $86,897 | $75,347 | | Total current assets | $366,288 | $357,435 | | Property, plant and equipment, net | $44,400 | $48,590 | | Goodwill | $267,199 | $277,593 | | Other intangible assets, net | $45,163 | $54,545 | | Total assets | $797,299 | $820,247 | | Total current liabilities | $134,526 | $134,764 | | Long-term debt, net | $205,000 | $175,000 | | Total liabilities | $431,027 | $408,049 | | Total shareholders' equity | $366,272 | $412,198 | - Total assets decreased by 2.8% from August 31, 2021, to May 31, 2022, primarily due to reductions in cash, goodwill, and other intangible assets[19] - Long-term debt increased by $30 million (17.1%) to $205 million, while total shareholders' equity decreased by 11.1% to $366.3 million[19] Condensed Consolidated Statements of Cash Flows This statement details the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) | Activity | Nine Months Ended May 31, 2022 | Nine Months Ended May 31, 2021 | |:---|:---|:---| | Cash provided by operating activities | $7,196 | $24,889 | | Cash (used in) provided by investing activities | $(5,812) | $15,808 | | Cash used in financing activities | $(11,865) | $(61,676) | | Effect of exchange rate changes on cash | $(6,166) | $5,088 | | Net decrease in cash and cash equivalents | $(16,647) | $(15,891) | | Cash and cash equivalents - end of period | $123,705 | $136,279 | - Cash provided by operating activities decreased significantly from $24.9 million in 2021 to $7.2 million in 2022, due to lower net earnings and increased working capital usage[22] - Investing activities shifted from providing $15.8 million in cash in 2021 (due to asset sales) to using $5.8 million in 2022[22] - Cash used in financing activities decreased from $61.7 million in 2021 to $11.9 million in 2022, mainly due to net borrowings offsetting share repurchases[22] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations of the accounting policies and financial data presented in the statements Note 1. Basis of Presentation This note describes the company's business, reporting segments, and the accounting principles used for interim reporting - Enerpac Tool Group Corp. operates as a premier industrial tools and services company with one reportable segment, Industrial Tools & Service (IT&S), serving over 100 countries[25] - The financial statements are prepared in accordance with GAAP for interim reporting and are impacted by the COVID-19 pandemic, supply chain issues, and sanctions against Russia[25] - The Company adopted ASU 2019-12 (Income Taxes) on September 1, 2021, with no material effect[26][27] Note 2. Revenue from Contracts with Customers This note details how revenue is generated and recognized from product sales and services - Revenue is primarily generated from Product Sales recognized at a point in time and Service & Rental Sales recognized over time[31] Disaggregated Revenue by Timing of Transfer (in thousands) | Revenue Type | Three Months Ended May 31, 2022 | Three Months Ended May 31, 2021 | Nine Months Ended May 31, 2022 | Nine Months Ended May 31, 2021 | |:---|:---|:---|:---|:---| | Revenues recognized at point in time | $117,156 | $107,316 | $322,247 | $284,823 | | Revenues recognized over time | $34,738 | $35,833 | $97,148 | $98,410 | | Total | $151,894 | $143,149 | $419,395 | $383,233 | - The allowance for doubtful accounts increased significantly to $18.3 million at May 31, 2022, primarily due to a $10.8 million reserve for a delinquent agent in the MENAC region[34] Note 3. ASCEND Transformation Program This note describes the strategic transformation program aimed at improving profitability and operational efficiency - The Company launched the ASCEND transformation program on March 23, 2022, aiming for an incremental $40 to $50 million in annual operating profit[36] - Total program investments are anticipated to be $60 to $65 million, with $3.9 million incurred in Q3 FY22[36] Note 4. Restructuring Charges This note details the costs associated with simplifying and streamlining the company's organizational structure - Restructuring charges for the nine months ended May 31, 2022, were $5.1 million, aimed at simplifying and streamlining the organizational structure[37] Restructuring Reserve Activity (in thousands) | Segment | Balance as of Aug 31, 2021 | Restructuring Charges | Cash Payments | Impact of FX Changes | Balance as of May 31, 2022 | |:---|:---|:---|:---|:---|:---| | IT&S | $1,737 | $2,818 | $(3,385) | $(79) | $1,091 | | Corporate | $26 | $1,050 | $(1,069) | $0 | $7 | Note 5. Discontinued Operations This note provides financial details related to the previously divested Engineered Components & Systems (EC&S) segment - The Company completed the sale of its former Engineered Components & Systems (EC&S) segment on October 31, 2019, to become a pure-play industrial tools and services company[40] Loss from Discontinued Operations (in thousands) | 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 | |:---|:---|:---|:---|:---| | Selling, general and administrative expenses | $2,944 | $102 | $4,605 | $956 | | Operating loss | $(2,944) | $(102) | $(4,605) | $(956) | | Loss from discontinued operations, net of income taxes | $(2,418) | $(226) | $(3,715) | $(852) | Note 6. Goodwill, Intangible Assets and Long-Lived Assets This note outlines changes in the carrying value of goodwill and intangible assets, including impairment charges Goodwill Carrying Value (in thousands) | Segment | Balance as of Aug 31, 2021 | Impact of FX Changes | Balance as of May 31, 2022 | |:---|:---|:---|:---| | IT&S | $265,087 | $(10,394) | $254,693 | | Other | $12,506 | $0 | $12,506 | | Total | $277,593 | $(10,394) | $267,199 | - Goodwill decreased by $10.4 million due to foreign currency exchange rate changes, and the Company recorded $1.1 million in impairment & divestiture charges[41][43] Note 7. Product Warranty Costs This note details the activity and balance of the company's product warranty reserve Product Warranty Reserve Activity (in thousands) | Metric | Nine Months Ended May 31, 2022 | Nine Months Ended May 31, 2021 | |:---|:---|:---| | Beginning balance | $1,300 | $892 | | Provision for warranties | $727 | $1,151 | | Warranty payments and costs | $(629) | $(893) | | Impact of FX changes | $(81) | $30 | | Ending balance | $1,317 | $1,180 | - The product warranty reserve increased slightly to $1.317 million at May 31, 2022, from $1.300 million at the beginning of the period[44] Note 8. Debt This note provides information on the company's long-term debt, credit facilities, and covenant compliance Long-Term Indebtedness (in thousands) | Debt Type | May 31, 2022 | August 31, 2021 | |:---|:---|:---| | Revolver | $205,000 | $175,000 | | Total | $205,000 | $175,000 | - The Company's Senior Credit Facility includes a $400 million revolving line of credit, with $205 million borrowed and $189.8 million available as of May 31, 2022[46] - The Company was in compliance with all financial covenants at May 31, 2022[46] Note 9. Fair Value Measurements This note explains the methods used to measure the fair value of financial instruments - The fair value of cash, receivables, payables, and variable rate debt approximated book value, with derivatives classified as Level 2 within the valuation hierarchy[48] Note 10. Derivatives This note discusses the use of derivative instruments, such as foreign currency contracts, to manage market risks - The Company uses foreign currency exchange contracts to manage foreign currency risk, with a net foreign currency loss of $(324) thousand for the nine months ended May 31, 2022[49][51] - An interest rate swap contract on $100 million of variable rate borrowings expired in August 2021[49] Note 11. Earnings per Share and Shareholders' Equity This note details share repurchase activities and changes in shareholders' equity - The Company repurchased 1,755,075 shares of common stock for $36.3 million during the three months ended May 31, 2022[50][95] Share Repurchase Activity (Three Months Ended May 31, 2022) | Period | Shares Repurchased | Average Price Paid per Share | |:---|:---|:---| | March 1 to March 31, 2022 | 80,000 | $21.98 | | April 1 to April 30, 2022 | 737,709 | $20.92 | | May 1 to May 31, 2022 | 937,366 | $20.32 | | Total | 1,755,075 | $20.65 | - Total shareholders' equity decreased from $412.2 million to $366.3 million, influenced by net earnings, other comprehensive loss, and treasury stock repurchases[55] Note 12. Income Taxes This note explains the components of income tax expense and the effective tax rate Income Tax Expense and Effective Tax Rate (in thousands) | 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 | |:---|:---|:---|:---|:---| | Earnings from continuing operations before income tax expense (benefit) | $5,438 | $20,867 | $13,862 | $31,531 | | Income tax expense (benefit) | $1,377 | $(4,390) | $4,495 | $(2,132) | | Effective income tax rate | 25.3% | (21.0)% | 32.4% | (6.8)% | - The effective income tax rate for the three months ended May 31, 2022, was 25.3%, a significant increase from (21.0)% in the prior-year period due to prior-year tax benefits[60] Note 13. Segment Information This note provides financial data for the company's reportable operating segments - The Company operates primarily through its IT&S segment, which designs, manufactures, and distributes hydraulic and mechanical tools and provides related services[61] Net Sales by Reportable Segment & Product Line (in thousands) | Segment/Product Line | Three Months Ended May 31, 2022 | Three Months Ended May 31, 2021 | Nine Months Ended May 31, 2022 | Nine Months Ended May 31, 2021 | |:---|:---|:---|:---|:---| | IT&S Product | $109,915 | $102,224 | $299,761 | $271,000 | | IT&S Service & Rental | $30,480 | $31,176 | $87,886 | $86,000 | | Other Operating Segment | $11,499 | $9,749 | $31,748 | $24,000 | | Total Net Sales | $151,894 | $143,149 | $419,395 | $383,200 | Operating Profit (Loss) by Segment (in thousands) | Segment | Three Months Ended May 31, 2022 | Three Months Ended May 31, 2021 | Nine Months Ended May 31, 2022 | Nine Months Ended May 31, 2021 | |:---|:---|:---|:---|:---| | IT&S Segment | $19,226 | $23,812 | $49,872 | $54,000 | | Other Operating Segment | $1,096 | $(65) | $173 | $(3,700) | | General Corporate | $(13,679) | $(1,000) | $(32,511) | $(13,500) | | Total Operating Profit | $6,643 | $22,747 | $17,534 | $37,000 | Note 14. Commitments and Contingencies This note discloses outstanding commitments, legal proceedings, and other contingent liabilities - Outstanding letters of credit totaled $10.8 million, and the Company is contingently liable for $4.1 million in future lease payments from divested businesses[63] - A Dutch investigation into sales linked to Crimea concluded that transactions violated EU sanctions, but no material adverse effect is considered probable[63] Note 15. Leases This note provides details on the company's operating leases for real estate, vehicles, and equipment - The Company has operating leases for real estate, vehicles, and equipment, with terms typically ranging from 3 to 15 years[64] Components of Lease Expense (in thousands) | Lease Cost Type | Three Months Ended May 31, 2022 | Three Months Ended May 31, 2021 | Nine Months Ended May 31, 2022 | Nine Months Ended May 31, 2021 | |:---|:---|:---|:---|:---| | Operating lease cost | $3,540 | $3,861 | $10,962 | $11,300 | | Short-term lease cost | $391 | $431 | $1,241 | $1,200 | | Variable lease cost | $843 | $803 | $2,857 | $2,500 | - In Q3 FY21, the Company recognized a net gain of $5.4 million from a sale-leaseback transaction of a manufacturing facility in China[64] Note 16. Subsequent Event This note describes significant events that occurred after the balance sheet date but before the financial statements were issued - On June 27, 2022, the Company approved a new restructuring plan with estimated costs of $6 to $10 million to be incurred over the next 24 months[68][97] Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides its perspective on the company's financial performance, condition, and operational results General Business Update This section provides an overview of business performance, market conditions, and strategic initiatives during the period - The Company experienced strong core growth in most regions despite pandemic effects, supply chain challenges, and increased costs[71][73] - The Russia-Ukraine conflict led to business suspension in Russia, and a $10.8 million bad debt reserve was recorded for a delinquent agent in the MENAC region[73] - The ASCEND transformation program was launched to drive accelerated growth and margin expansion, with a new restructuring plan approved post-period end[70][73] Results of Operations This section analyzes the consolidated financial results, comparing current period performance to the prior year Consolidated Results of Continuing Operations (in millions) | 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 | $152 | $143 | $419 | $383 | | Gross profit | $72 | $67 | $192 | $177 | | Selling, general and administrative expenses | $63 | $40 | $162 | $130 | | Operating profit | $7 | $23 | $18 | $38 | | Net earnings from continuing operations | $4 | $25 | $9 | $34 | | Diluted EPS from continuing operations | $0.07 | $0.42 | $0.15 | $0.56 | - Consolidated net sales increased 6% (10% core sales) for the three months and 9% (12% core sales) for the nine months ended May 31, 2022[75] - Operating profit decreased by $16 million for the three months and $20 million for the nine months, primarily due to a $23 million increase in SG&A expenses in the quarter[75][76] Segment Results This section provides a detailed analysis of the financial performance of the IT&S operating segment IT&S Segment Results (in millions) | 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 | $140 | $133 | $388 | $358 | | Operating profit | $19 | $24 | $50 | $55 | | Operating profit % | 13.7% | 17.9% | 12.9% | 15.3% | - IT&S segment net sales increased 5% (9% core sales) for the three months and 8% (10% core sales) for the nine months[78] - IT&S operating profit percentage decreased by 4.2% for the three months, primarily due to an $11 million discrete bad debt expense in the quarter[78] Corporate This section details corporate-level expenses not allocated to operating segments - Corporate expenses increased by $13 million for the three months and by $19 million for the nine months ended May 31, 2022[79] - The increase was mainly due to ASCEND program charges ($4 million), business review charges, leadership transition charges, and higher insurance costs[79] Financing Costs, net This section discusses the net interest and other costs associated with the company's debt and financing activities - Net financing costs decreased from $4 million to $3 million for the nine months ended May 31, 2022, due to a lower average outstanding debt balance[81] Income Tax Expense This section analyzes the effective tax rate and factors influencing income tax expense - The effective income tax rate for the nine months was 32.4% compared to (6.8)% in the prior year[82] - Both periods were significantly impacted by losses in jurisdictions where no tax benefit could be realized, with the prior year benefiting from tax position releases[82] Cash Flows and Liquidity This section reviews the company's cash flow activities, liquidity position, and capital resources Cash Flow Summary (in millions) | Activity | Nine Months Ended May 31, 2022 | Nine Months Ended May 31, 2021 | |:---|:---|:---| | Cash provided by operating activities | $7 | $25 | | Cash (used in) provided by investing activities | $(6) | $16 | | Cash used in financing activities | $(12) | $(62) | | Net decrease in cash and cash equivalents | $(17) | $(16) | - Operating cash flow decreased to $7 million from $25 million, due to lower net earnings and increased working capital[83] - Net cash used in financing activities decreased to $12 million from $62 million, due to $30 million in net borrowings partially offsetting $36 million in share repurchases[84] - The Company had $124 million in cash and $190 million in available borrowing capacity as of May 31, 2022[83][85] Primary Working Capital Management This section analyzes the components and management of the company's primary working capital Primary Working Capital (in millions) | Metric | May 31, 2022 | PWC% | August 31, 2021 | PWC% | |:---|:---|:---|:---|:---| | Accounts receivable, net | $117 | 19% | $103 | 18% | | Inventory, net | $87 | 14% | $75 | 13% | | Accounts payable | $(66) | (11)% | $(62) | (11)% | | Net primary working capital | $138 | 23% | $116 | 20% | - Net primary working capital increased from $116 million (20% of sales) to $138 million (23% of sales), indicating increased investment in working capital[86] Commitments and Contingencies This section reiterates the company's outstanding commitments and potential liabilities - The Company has $11 million in outstanding letters of credit and remains contingently liable for $4 million in lease payments from divested businesses[87] - Legal and regulatory matters are not expected to have a material adverse effect on the Company's financial position, results of operations, or cash flows[87] Contractual Obligations This section confirms that there have been no material changes to contractual obligations - Contractual obligations have not materially changed from those disclosed in the fiscal 2021 Annual Report on Form 10-K[88] Critical Accounting Estimates This section affirms the reasonableness of accounting estimates used in financial reporting - Management believes the accounting estimates used in the financial statements are reasonable and appropriate[89] Item 3—Quantitative and Qualitative Disclosures about Market Risk This section discusses the company's exposure to interest rate, foreign currency, and commodity cost risks - The Company manages interest rate risk through a mixture of variable-rate debt ($205 million) and fixed-interest-rate swaps[91] - Foreign currency risk is managed using hedging transactions; a 10% decrease in foreign exchange rates would lower quarterly sales by $6 million and equity by $42 million[91] - Commodity cost risk is managed by striving to pass price increases to customers to avoid profit margin erosion[91] Item 4—Controls and Procedures This section confirms the effectiveness of disclosure controls and reports on internal control over financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of May 31, 2022[93] - There were no material changes in internal control over financial reporting during the quarter ended May 31, 2022[93] Part II—Other Information This part contains other required information, including share repurchases, other events, and filed exhibits Item 2—Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activities during the quarter - The Company repurchased 1,755,075 shares of common stock for $36 million during the three months ended May 31, 2022[95] - As of May 31, 2022, 8,244,925 shares remained authorized for repurchase under the program[95] Share Repurchases (Three Months Ended May 31, 2022) | Period | Shares Repurchased | Average Price Paid per Share | |:---|:---|:---| | March 1 to March 31, 2022 | 80,000 | $21.98 | | April 1 to April 30, 2022 | 737,709 | $20.92 | | May 1 to May 31, 2022 | 937,366 | $20.32 | | Total | 1,755,075 | $20.65 | Item 5—Other Information This section reiterates the subsequent event regarding the new restructuring plan - On June 27, 2022, a new restructuring plan was approved as part of the ASCEND program, targeting $6 to $10 million in employee-related costs over 24 months[97] Item 6—Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL documents - The report includes certifications from the Chief Executive Officer and Chief Financial Officer and various XBRL taxonomy extension documents[99]