Enerpac Tool(EPAC) - 2023 Q4 - Annual Report

PART I Business Overview Enerpac Tool Group Corp. is a global industrial tools, services, technology, and solutions company, primarily operating through its Industrial Tools & Services (IT&S) segment General - Enerpac Tool Group Corp. is a premier industrial tools, services, technology, and solutions company serving customers in over 100 countries, founded in 1910 and headquartered in Menomonee Falls, Wisconsin[23] - The company operates with one reportable segment, the Industrial Tools & Services Segment (IT&S), which designs, manufactures, and distributes branded hydraulic and mechanical tools, and provides services and tool rental to various industrial markets[23] Our Business Model - The long-term goal is to create sustainable returns for shareholders through above-market growth in the core business, expanding margins, generating strong cash flow, and disciplined capital deployment[25] - Growth strategies include organic growth in key vertical markets, customer-driven innovation, expansion of the digital ecosystem, and emerging market expansion (e.g., Asia Pacific)[25] - Margin expansion is pursued through operational efficiency techniques (Lean, continuous improvement, 80/20) and optimizing SG&A expenses, along with pricing actions to offset inflation[25][26] - The ASCEND transformation program, launched in March 2022, aims to accelerate organic growth, improve operational excellence, and drive SG&A efficiency[27] ASCEND Transformation Program Financials (through end of Fiscal 2023) | Metric | Amount | | :--- | :--- | | Anticipated total investment | $70-$75 million | | Expected annual operating profit improvement | $50-$60 million | | Realized annual operating profit improvement | ~$54 million | | Invested in program | ~$60 million | - An updated restructuring plan, part of ASCEND, estimates costs of $10-$15 million, primarily for severance and employee-related costs, expected to be incurred through Q4 fiscal 2024[28] Description of Business Segments - The IT&S segment supplies products and services to diverse end markets including infrastructure, industrial maintenance, oil & gas, mining, and alternative energy[29] - Primary products include high-force hydraulic and mechanical tools (cylinders, pumps, torque wrenches) and heavy lifting technology solutions, marketed under brands like Enerpac, Hydratight, Larzep, and Simplex[30][31] - Services include maintenance, manpower, bolting, machining, joint integrity, and tool rental, delivered through a global network of distributors and direct sales[31][32] - The 'Other Operating Segment' includes Cortland Industrial and Medical businesses, which design and manufacture high-performance synthetic ropes and biomedical textiles, but do not meet reportable segment thresholds[33] Acquisitions and Divestitures - For a summary of recent divestiture transactions impacting continuing operations, refer to Note 5, 'Discontinued Operations and Other Divestiture Activities' in the notes to the consolidated financial statements[35] International Business - The company's products and services are globally available, with principal markets outside the U.S. being Europe, the Middle East, and Asia[36] Net Sales by Geographic Region (Fiscal 2023) | Region | % of Net Sales | | :--- | :--- | | United States | 39% | | Europe | 25% | | Middle East | 14% | | Asia | 12% | | Other geographic areas | 10% | Product Development and Engineering - The company conducts research and development (R&D) to create new products and enhance existing ones, considering it a key driver of market success and technological leadership[37] R&D Costs (in millions) | Fiscal Year | R&D Costs | | :--- | :--- | | 2023 | $9 | | 2022 | $7 | | 2021 | $7 | - The company holds numerous patents and trademarks, with key trademarks like ENERPAC®, SIMPLEX®, HYDRATIGHT®, and LARZEP & DESIGN® being material to the business[38] Competition - The markets for the company's diverse industrial products and services are highly competitive and often fragmented[39] - Competition is based principally on customer service, product quality and availability, and engineering/R&D expertise[39] Manufacturing and Operations - Manufacturing primarily involves light assembly of components sourced from a global network of suppliers, with single piece flow processes implemented to reduce inventory and shorten lead times[40] Raw Material Costs, Inflation and Tariffs - Raw materials like steel, aluminum, and plastic resin are subject to price fluctuations and tariffs[41] - The company has offset inflation and tariff impacts through pricing actions, manufacturing efficiencies, and other cost reductions[41] Order Backlogs and Seasonality Order Backlogs (in millions) | Date | Amount | | :--- | :--- | | August 31, 2023 | $54 | | August 31, 2022 | $72 | - The decrease in order backlog in fiscal 2023 was primarily due to alleviated pressure on the supply chain[42] - Substantially all of the backlog at August 31, 2023, is expected to be filled within twelve months[42] - Consolidated sales are not subject to significant seasonal fluctuations, though the second half of the fiscal year typically experiences stronger sales[43] Percentages of Sales by Fiscal Quarter | Quarter | 2023 | 2022 | | :--- | :--- | :--- | | Quarter 1 (September - November) | 23% | 23% | | Quarter 2 (December - February) | 24% | 24% | | Quarter 3 (March - May) | 26% | 27% | | Quarter 4 (June - August) | 27% | 26% | Human Capital Management - The company had approximately 2,100 employees as of August 31, 2023[47] - Human capital strategy focuses on being an employer of choice, with initiatives in talent development, competitive compensation and benefits, Diversity, Equity, Inclusion & Belonging (DEIB), and employee safety[46][47][48][49][51] - The board of directors includes 30% female and 10% racially diverse individuals at the end of fiscal 2023[50] Total Case Incident Rate (TCIR) | Fiscal Year | TCIR | | :--- | :--- | | 2023 | 0.64 | | 2022 | 0.61 | Executive Officers of the Registrant Executive Officers (as of October 15, 2023) | Name | Age | Position | | :--- | :--- | :--- | | Paul E. Sternlieb | 51 | President and Chief Executive Officer | | Anthony P. Colucci | 53 | Executive Vice President and Chief Financial Officer | | James P. Denis | 49 | Executive Vice President, General Counsel, Company Secretary & Chief Compliance Counsel | | Markus Limberger | 53 | Executive Vice President, Operations | | Benjamin J. Topercer | 46 | Executive Vice President and Chief Human Resource Officer | - Markus Limberger, EVP, Operations, resigned effective December 1, 2023, and will be on leave until March 31, 2024[57] Risk Factors The company faces a range of material risks, including supply chain disruptions, economic instability, geopolitical conflicts, and tariff uncertainties Risks Related to Economic Conditions - Supply chain issues, including component shortages and increased costs, can adversely impact business and operating results, especially due to reliance on single/limited suppliers and those in China[60][61][62] - Deterioration in domestic and international economies, particularly in cyclical industries like industrial and oil & gas, can reduce or delay sales[63][64] - Uncertainty over global tariffs may negatively affect results by increasing production costs[65] Risks Related to Our Business and Operations - The company may not fully realize expected cost savings from the ASCEND transformation program and restructuring actions[66] - Logistics challenges, such as global freight capacity shortages and port delays, could increase costs or cause order fulfillment delays[67] - Collection risk for receivables in foreign jurisdictions is higher due to longer collection times and reliance on intermediary agents[69] - Failure to retain independent agents and distributors could inhibit effective marketing and lead to revenue/profitability decline[70] - Cybersecurity vulnerabilities and sophisticated attacks pose risks to systems, networks, operations, and data, potentially leading to financial losses or operational disruptions[71] - International operations are subject to political, currency, and regulatory risks, including unfavorable foreign currency fluctuations, adverse tax changes, and compliance with anti-corruption laws like the FCPA[74][75] Risks Related to the Execution of Our Strategy - Failure to develop new products or gain market acceptance for them could adversely affect the business and competitive position[79] - Strategic acquisitions may not be consummated or successfully integrated, potentially leading to unforeseen operating difficulties or failure to achieve planned benefits[80][81] - Divestitures and discontinued operations could negatively impact the business, and retained liabilities from sold businesses may adversely affect financial results[83][84] - Impairment of goodwill or other intangible assets, which represent a substantial portion of total assets ($304 million or 40% as of August 31, 2023), could negatively affect financial condition[85] Risks Related to Legal, Compliance and Regulatory Matters - The company is subject to numerous U.S. and foreign laws and regulations (tax, export/import controls, anti-corruption, data privacy) that may change and detrimentally impact competitiveness or results[86] - Legal compliance risks, including potential violations of law or enforcement actions, could result in significant costs, fines, and restrictions on operations[87] - Health, safety, and environmental laws may lead to additional costs, remediation requirements, or restrictions on business operations[89] - Unfavorable tax law changes could adversely affect results by impacting the effective tax rate or tax liabilities[90] - Costs and liabilities from legal proceedings, including product liability and warranty claims, could be material and adversely impact financial results, especially in less developed legal systems[91] Risks Related to Our Capital Structure - Significant indebtedness could harm operating flexibility and competitive position, and the ability to service debt depends on future operating performance and credit market conditions[92][93] - Financial and other covenants in debt agreements could limit financial and operating flexibility, with non-compliance potentially leading to accelerated debt repayment[94][95] - Variable rate debt exposes the company to increased interest expense if SOFR (Secured Overnight Financing Rate) rises[96] Risks Related to Ownership of Our Common Stock - The market price of common stock may be volatile due to various factors, including industry reports, investor perceptions, and general economic instability[97] - Significant quarterly variations in revenues and operating results, influenced by factors like demand, foreign currency, and expenses, could lead to stock price fluctuations[98] - Various anti-takeover provisions in the company's articles of incorporation and bylaws, as well as Wisconsin corporation law, could delay or prevent a change of control[99] General Risk Factors - Geopolitical unrest and terrorist activities, such as the Russia-Ukraine conflict or the Hamas-Israel conflict, could cause economic deterioration and harm the business[100] - Inability to attract, develop, and retain qualified employees, especially key executives and skilled labor, could materially adversely impact operations and financial results[101] - The intellectual property portfolio may not prevent competitors from developing similar products, and its value could be negatively impacted by external dependencies or infringement claims[102][103] Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[104] Properties As of August 31, 2023, Enerpac Tool Group Corp. operates 48 facilities globally, totaling 1,328 thousand square feet, with the majority being leased Company Facilities (as of August 31, 2023) | Category | Number of Locations | Square Footage (in thousands) | | :--- | :--- | :--- | | Industrial Tools & Services | 45 | 1,185 | | Corporate and Other | 3 | 143 | | Total | 48 | 1,328 | - Of the total square footage, 158 thousand is owned and 1,170 thousand is leased[105] - Largest facilities are located in the United States, the United Kingdom, the Netherlands, China, and Spain, with a presence in many other countries[105] Legal Proceedings The company is involved in various legal proceedings, including product liability, contract breaches, employment, and personal injury disputes, arising in the normal course of business - The company is a party to various legal proceedings, including product liability, breaches of contract, employment, and personal injury disputes, arising in the normal course of business[106] - Reserves for estimated losses are recorded when a loss is probable and can be reasonably estimated[107] - Management believes the resolution of these contingencies is not likely to have a material adverse effect on the company's financial condition, results of operations, or cash flows[107] Mine Safety Disclosures This item is not applicable to Enerpac Tool Group Corp - This item is not applicable[108] PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Enerpac Tool Group's Class A common stock trades on the NYSE under EPAC, declared a $0.04 per share dividend in fiscal 2023 and 2022, and has an active share repurchase program Dividends - The company declared a dividend of $0.04 per share of Class A common stock in fiscal 2023 and fiscal 2022[111] Share Repurchases - The Board of Directors approved a new share repurchase program in March 2022, authorizing the repurchase of 10,000,000 shares[112] - As of August 31, 2023, 4,026,515 shares may yet be purchased under this authorization[112][113] Share Repurchases (Q4 Fiscal 2023) | Period | Shares Repurchased | Average Price Paid per Share | | :--- | :--- | :--- | | June 1 to June 30, 2023 | 419,018 | $26.65 | | July 1 to July 31, 2023 | 366,787 | $26.93 | | August 1 to August 31, 2023 | 584,256 | $26.32 | | Total | 1,370,061 | $26.62 | - Since the inception of the initial share repurchase program in fiscal 2012, the company has repurchased 28,772,715 shares for $801 million[112] Performance Graph 5-Year Cumulative Total Return (August 31, 2018 - August 31, 2023) | Index | 8/18 | 8/19 | 8/20 | 8/21 | 8/22 | 8/23 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Enerpac Tool Group Corp. | $100.00 | $75.52 | $70.86 | $85.90 | $66.36 | $89.80 | | Russell 2000 Index | $100.00 | $87.11 | $92.35 | $135.83 | $111.54 | $116.73 | | S&P 600 Industrial Index | $100.00 | $86.12 | $89.51 | $129.60 | $120.21 | $145.45 | Reserved This item is intentionally left blank - Item 6 is reserved[118] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Enerpac Tool Group's financial performance for fiscal years 2023, 2022, and 2021, highlighting sales growth, operating profit improvement, liquidity, and critical accounting estimates Background - The company operates with one reportable segment, Industrial Tools & Service (IT&S), and an 'Other' operating segment[119] - The IT&S segment focuses on designing, manufacturing, and distributing branded hydraulic and mechanical tools, and providing services and tool rental[119] Business Update - The company's long-term goal is to create sustainable shareholder returns through above-market growth, margin expansion, strong cash flow, and disciplined capital deployment[121] - The ASCEND transformation program, launched in March 2022, aims for $50-$60 million in annual operating profit improvement with an anticipated investment of $70-$75 million, expected to be fully implemented by Q4 fiscal 2024[122] - Through the end of fiscal 2023, approximately $60 million was invested in ASCEND, resulting in about $54 million operating profit improvement[122] - An updated restructuring plan, part of ASCEND, estimates $10-$15 million in costs, including $3-$5 million for fiscal 2024[123] - The company indefinitely suspended business in Russia due to sanctions, recording a $0.5 million allowance for doubtful accounts in fiscal 2022[124] - A $13 million reserve was recorded in fiscal 2022 for outstanding accounts receivable from a MENAC region agent due to payment delinquency; the relationship with this agent has ceased[125] - The sale of the Cortland Industrial business was completed on July 11, 2023, for $20.1 million, resulting in a net gain of $6.2 million[127] Historical Financial Data Consolidated Statements of Earnings Data (Continuing Operations, in millions) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $598 | $571 | $529 | | Gross profit | $295 | $265 | $243 | | Operating profit | $84 | $31 | $51 | | Net earnings | $54 | $20 | $40 | - Fiscal 2023 net sales increased 5% YoY to $598 million, unfavorably impacted by foreign currency rates ($11 million or 2%) and Cortland Industrial divestiture ($6 million or 1%); core sales growth was primarily due to pricing actions and some volume contribution[130] - Gross profit as a percentage of sales increased to 49% in fiscal 2023 (up 3% from 2022), driven by pricing actions, volume, and production efficiencies from ASCEND[131] - Fiscal 2023 operating profit was $84 million, a $53 million increase YoY, due to higher gross profit and a $12 million reduction in SG&A expenses (personnel savings from ASCEND, lower prior-year charges)[132] - Fiscal 2022 net sales increased 8% YoY to $571 million, despite a $15 million (3%) unfavorable foreign currency impact, driven by product pricing actions and volume growth[133] - Fiscal 2022 gross profit margin remained flat at 46%, with improved product margins offset by lower service gross profit margins due to Russia-Ukraine conflict and service mix[134] - Fiscal 2022 operating profit decreased $20 million YoY, primarily due to $42 million incremental SG&A expenses (ASCEND charges, bad debt, leadership transition costs) partially offset by a $22 million increase in gross profit[135] Segment Results IT&S Segment Results (in millions) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Sales | $555 | $527 | $493 | | Operating Profit | $136 | $79 | $82 | | Operating Profit % | 24.5% | 14.9% | 16.6% | - Fiscal 2023 IT&S net sales increased 5% ($28 million) YoY, driven by product business growth (pricing actions, volume) despite a $11 million (3%) unfavorable foreign currency impact and a decline in service business due to 80/20 analysis in MENAC[137] - Fiscal 2023 IT&S operating profit increased $57 million to $136 million, driven by pricing actions, volume, and reduced SG&A expenses (personnel savings from ASCEND, lower prior-year bad debt charges)[138] - Fiscal 2022 IT&S net sales increased 7% ($34 million) YoY, including a $15 million (3%) unfavorable foreign currency impact, due to global market recovery and pricing actions[139] - Fiscal 2022 IT&S operating profit decreased $3 million (4%) YoY, primarily due to a $14 million increase in SG&A (bad debt charges for MENAC agent and Russia) offset by a $15 million increase in gross profit[140] - Corporate expenses were $63 million in fiscal 2023, up $14 million from $49 million in fiscal 2022, mainly due to ASCEND transformation program expenses and incentive compensation[141] Net financing costs Net Financing Costs (in millions) | Fiscal Year | Amount | | :--- | :--- | | 2023 | $12 | | 2022 | $4 | | 2021 | $5 | - The increase in fiscal 2023 net financing costs was due to higher interest rates and changes in debt mix[143] Income Tax Expense Income Tax Expense (in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Earnings before income tax expense | $68,898 | $23,992 | $43,975 | | Income tax expense | $15,249 | $4,401 | $3,763 | | Effective income tax rate | 22.1% | 18.3% | 8.6% | - The fiscal 2023 effective tax rate of 22.1% was higher than 2022 (18.3%) primarily due to one-time benefits in fiscal 2022[145] - The 2023 rate was slightly higher than the statutory 21% due to state income taxes and higher foreign tax rates, partially offset by one-time global tax planning benefits[145] Liquidity and Capital Resources Cash Flow Summary (in millions) | Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Cash provided by operating activities | $78 | $52 | $54 | | Cash provided by (used in) investing activities | $11 | $(7) | $13 | | Cash used in financing activities | $(53) | $(52) | $(82) | | Net increase (decrease) from cash and cash equivalents | $34 | $(20) | $(12) | - Cash and cash equivalents were $154 million at August 31, 2023, with $148 million held by foreign subsidiaries[146] - The company refinanced its credit facility in fiscal 2023 to a $600 million Senior Credit Facility, comprising a $400 million revolving line of credit and a $200 million term loan, maturing in September 2027[148] - At August 31, 2023, the unused credit line and amount available for borrowing under the revolving line of credit was $382 million[148] - Management believes existing cash, anticipated operating cash flows, and the revolving credit facility will be adequate for future funding requirements[150] Net Primary Working Capital (in millions) | Metric | August 31, 2023 | August 31, 2022 | | :--- | :--- | :--- | | Net primary working capital | $122 | $118 | | PWC % of sales | 19% | 20% | - Capital expenditures for continuing operations were $9 million (2023), $8 million (2022), and $12 million (2021)[152] - Outstanding letters of credit totaled $9 million (2023) and $11 million (2022)[154] Critical Accounting Estimates - Accounts receivable, net, was $98 million at August 31, 2023, net of a $17 million allowance for doubtful accounts; a $13 million reserve was recorded in fiscal 2022 for a delinquent MENAC agent[162] - Inventory cost is determined using the LIFO method for a portion of U.S. inventory (48% in 2023); if LIFO were not used, inventory balances would be $18 million higher in 2023[163] - Goodwill and indefinite-lived intangibles are tested annually for impairment using discounted cash flow models and market approaches; no impairment was recorded in fiscal 2023; $1 million goodwill impairment was recorded in fiscal 2022 for Cortland Industrial[164][165][166][167][168][169] - Business combinations are accounted for using the acquisition method, with assets and liabilities recorded at fair value, requiring significant judgment and estimates[171] - Defined benefit plans' assets and obligations are based on actuarial assumptions (discount rates, expected return on assets); U.S. discount rates were 5.4% (2023) and 4.8% (2022)[172] - Income taxes require judgment to determine the annual effective income tax rate, deferred tax assets/liabilities, and reserves for unrecognized tax benefits[174][175] Quantitative and Qualitative Disclosures About Market Risk Enerpac Tool Group manages market risks related to interest rates, foreign currency exchange rates, and commodity costs, using swaps and contracts to mitigate exposure Interest Rate Risk - Long-term debt includes $16 million of variable rate borrowings under the revolving line of credit and $200 million of SOFR-based term loan debt[177] - An interest-rate swap effectively converts $60 million of term borrowings to a fixed rate[177] - A 10% increase in the average costs of variable rate debt would have resulted in a $1 million increase in financing costs for fiscal 2023[177] Foreign Currency Risk - The company maintains operations in various foreign countries, with significant non-U.S. operations in Australia, the Netherlands, the United Kingdom, United Arab Emirates, and China[178] - Foreign currency exchange contracts are used to mitigate the potential adverse impact of foreign currency exchange rate risk[178] - A 10% reduction in foreign exchange rates compared to the U.S. dollar would have resulted in $26 million lower annual sales and $2 million lower operating profit for fiscal 2023[179] - A 10% decline in foreign currency exchange rates would result in a $38 million reduction to equity (accumulated other comprehensive loss)[179] Commodity Risk - Raw materials and components, such as steel and plastic resin, are subject to price fluctuations, which could negatively impact results[180] - The company strives to pass along commodity price increases to customers to avoid profit margin erosion[180] Financial Statements and Supplementary Data This section presents Enerpac Tool Group's audited consolidated financial statements for fiscal years 2023, 2022, and 2021, along with independent auditor reports and detailed notes on accounting policies and financial items Reports of Independent Registered Public Accounting Firm - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the period ended August 31, 2023[186] - Ernst & Young LLP also expressed an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of August 31, 2023[187][196] - The valuation of goodwill within the IT&S segment was identified as a critical audit matter due to the significant estimation required for fair value determination, particularly sensitive to forecasted revenues, operating profit margins, and the weighted average cost of capital[192] Consolidated Statements of Earnings Consolidated Statements of Earnings (in thousands, except per share amounts) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $598,204 | $571,223 | $528,660 | | Gross profit | $295,039 | $265,388 | $243,156 | | Operating profit | $83,922 | $30,660 | $51,113 | | Net earnings from continuing operations | $53,649 | $19,591 | $40,212 | | Loss from discontinued operations, net of income taxes | $(7,088) | $(3,905) | $(2,135) | | Net earnings | $46,561 | $15,686 | $38,077 | | Diluted Earnings per share from continuing operations | $0.94 | $0.33 | $0.67 | | Diluted Earnings per share | $0.82 | $0.26 | $0.63 | Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net income | $46,561 | $15,686 | $38,077 | | Foreign currency translation adjustments | $12,887 | $(46,092) | $5,910 | | Cash flow hedges | $(375) | — | — | | Pension and other postretirement benefit plans | $1,239 | $4,115 | $1,830 | | Total other comprehensive income (loss), net of tax | $13,751 | $(41,977) | $7,740 | | Comprehensive income (loss) | $60,312 | $(26,291) | $45,817 | Consolidated Balance Sheets Consolidated Balance Sheets (in thousands) | Asset/Liability | August 31, 2023 | August 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $154,415 | $120,699 | | Accounts receivable, net | $97,649 | $106,747 | | Inventories, net | $74,765 | $83,672 | | Total current assets | $355,640 | $342,380 | | Property, plant and equipment, net | $38,968 | $41,372 | | Goodwill | $266,494 | $257,949 | | Other intangible assets, net | $37,338 | $41,507 | | Total assets | $762,597 | $757,312 | | Trade accounts payable | $50,483 | $72,524 | | Total current liabilities | $148,120 | $153,188 | | Long-term debt, net | $210,337 | $200,000 | | Total liabilities | $435,977 | $438,701 | | Total shareholders' equity | $326,620 | $318,611 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (in thousands) | Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Cash provided by operating activities | $77,603 | $51,736 | $54,183 | | Cash provided by (used in) investing activities | $11,342 | $(7,241) | $13,301 | | Cash used in financing activities | $(53,130) | $(52,202) | $(81,516) | | Effect of exchange rate changes on cash | $(2,099) | $(11,946) | $2,214 | | Net increase (decrease) from cash and cash equivalents | $33,716 | $(19,653) | $(11,818) | | Cash and cash equivalents - end of period | $154,415 | $120,699 | $140,352 | Consolidated Statements of Shareholders' Equity - The statement details changes in common stock, additional paid-in capital, treasury stock, retained earnings, accumulated other comprehensive loss, stock held in trust, and deferred compensation liability over the fiscal years 2021-2023[213] - Key activities include net earnings, other comprehensive income/loss, stock contributions to employee benefit plans, vesting of equity awards, cash dividends, treasury stock repurchases, stock-based compensation expense, and stock option exercises[213] Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies - Enerpac Tool Group Corp. operates primarily through its Industrial Tools & Services (IT&S) segment, focusing on hydraulic and mechanical tools, services, and tool rental[215] - The consolidated financial statements include wholly-owned subsidiaries, with all intercompany balances and transactions eliminated[216] - The former Engineered Components & Systems (EC&S) segment's results are reported as discontinued operations following its sale in October 2019[217] - The Cortland Industrial business, part of the 'Other' operating segment, was sold on July 11, 2023[218] - Inventories are valued at the lower of cost or net realizable value, with a portion of U.S. inventory using the Last-In, First-Out (LIFO) method (48.1% in 2023)[219] Property, Plant and Equipment, Net (in thousands) | Category | August 31, 2023 | August 31, 2022 | | :--- | :--- | :--- | | Land, buildings and improvements | $14,070 | $14,121 | | Machinery and equipment | $136,566 | $141,571 | | Less: Accumulated depreciation | $(111,668) | $(114,320) | | Property, plant and equipment, net | $38,968 | $41,372 | - Operating leases are recognized as right-of-use (ROU) assets and liabilities, while leases with durations less than one year are expensed[222][225] - Goodwill and indefinite-lived intangible assets are tested annually for impairment, while definite-lived intangibles are amortized[226][227] Product Warranty Reserves (in thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Beginning balance | $1,140 | $1,300 | | Provision for warranties | $418 | $887 | | Warranty payments and costs incurred | $(723) | $(911) | | Ending balance | $856 | $1,140 | - Revenue is recognized when control of a distinct good or service is transferred to a customer, with customized products and services often recognized over time[229][242][243] - Research and development costs are expensed as incurred, totaling $9.0 million in fiscal 2023[234] - Income tax provision includes federal, state, local, and non-U.S. taxes, with deferred taxes provided on temporary differences[236] Note 2. Revenue from Contracts with Customers - Revenue is generated from product sales (tools, heavy-lifting solutions, rope solutions) and service & rental sales (bolting, technical services, machining, joint-integrity work)[242][243] - Product sales are generally recognized at a point in time (shipment/delivery), while highly customized products and service contracts are recognized over time[242][243] Revenues Disaggregated by Timing of Transfer (in thousands) | Timing of Transfer | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues recognized at point in time | $482,506 | $442,832 | $396,457 | | Revenues recognized over time | $115,698 | $128,391 | $132,203 | | Total | $598,204 | $571,223 | $528,660 | - Accounts receivable, net, was $97.6 million at August 31, 2023, with an allowance for doubtful accounts of $16.8 million[246][248] - A $13.2 million reserve was recorded in fiscal 2022 for a MENAC region agent's delinquent payments, which remained unchanged in fiscal 2023[249] - Contract assets were $3.989 million and contract liabilities were $2.927 million at August 31, 2023[246] Note 3. ASCEND Transformation Program - The ASCEND transformation program, launched in March 2022, aims to deliver an estimated incremental $50 to $60 million of annual operating profit[258] - Key initiatives include accelerating organic growth, improving operational excellence, and driving greater efficiency in SG&A expenses[258] - The company anticipates investing approximately $70 to $75 million over the program's life, expected to be finalized by the end of fiscal 2024[259] Total ASCEND Program Expenses (in millions) | Fiscal Year | Amount | | :--- | :--- | | 2023 | $43.1 | | 2022 | $16.7 | - For fiscal 2024, the company expects to incur $10 to $15 million of ASCEND transformation program costs, including $3 to $5 million of restructuring costs[259] Note 4. Restructuring Charges - Restructuring initiatives include workforce reductions, leadership changes, plant consolidations, and centralization of administrative functions[260] - A new restructuring plan, approved in June 2022 and updated in September 2022, is part of the ASCEND program, with estimated costs of $10 to $15 million[262] Total Restructuring Charges (in millions) | Fiscal Year | Amount | | :--- | :--- | | 2023 | $7.7 | | 2022 | $8.1 | | 2021 | $2.4 | Restructuring Reserve Activity (ASCEND Plan, in thousands) | Segment | Balance as of Aug 31, 2022 | Restructuring Charges | Cash Payments | Balance as of Aug 31, 2023 | | :--- | :--- | :--- | :--- | :--- | | IT&S | $2,008 | $6,035 | $(5,453) | $2,238 | | Corporate | $797 | $1,054 | $(1,779) | $74 | Note 5. Discontinued Operations and Other Divestiture Activities - The former EC&S segment's results are recorded as 'Loss from discontinued operations, net of income taxes' for all periods presented, relating to retained liabilities[266] Loss from Discontinued Operations, Net of Income Taxes (in thousands) | Fiscal Year | Amount | | :--- | :--- | | 2023 | $(7,088) | | 2022 | $(3,905) | | 2021 | $(2,135) | - The sale of the Cortland Industrial business was completed on July 11, 2023, for net cash proceeds of $20.1 million, resulting in a net gain of $6.2 million[269] Cortland Industrial Business Net Sales (in millions) | Fiscal Year | Net Sales | | :--- | :--- | | 2023 | $22.7 | | 2022 | $26.2 | | 2021 | $23.7 | Note 6. Goodwill, Intangible Assets and Long-Lived Assets Goodwill Carrying Value by Operating Segment (in thousands) | Segment | August 31, 2023 | August 31, 2022 | | :--- | :--- | :--- | | IT&S | $255,285 | $246,740 | | Other | $11,209 | $11,209 | | Total | $266,494 | $257,949 | Intangible Assets, Net Book Value (in thousands) | Asset Type | August 31, 2023 | August 31, 2022 | | :--- | :--- | :--- | | Customer relationships | $12,897 | $17,826 | | Patents | $559 | $604 | | Trademarks and tradenames (amortizable) | $537 | $803 | | Tradenames (indefinite-lived) | $23,345 | $22,274 | | Total | $37,338 | $41,507 | - No goodwill impairment charges were recorded in fiscal 2023[272] - In fiscal 2022, a $1.3 million goodwill impairment charge was recognized for the Cortland Industrial reporting unit, and a $1.1 million impairment charge on indefinite-lived intangible assets[273][274] Note 7. Debt Company Indebtedness (in thousands) | Category | August 31, 2023 | August 31, 2022 | | :--- | :--- | :--- | | Revolver | $16,000 | $200,000 | | Term Loan | $198,750 | — | | Short-term debt | — | $4,000 | | Total Senior Indebtedness | $214,750 | $204,000 | | Less: Current maturities of long-term debt | $(3,750) | — | | Less: Short-term debt | — | $(4,000) | | Less: Debt issuance costs | $(663) | — | | Total long-term debt, net | $210,337 | $200,000 | - On September 9, 2022, the company refinanced its credit facility with a new $600 million Senior Credit Facility, consisting of a $400 million revolving line of credit and a $200 million term loan, maturing in September 2027[276] - The new facility's interest rates are variable, based on adjusted term SOFR plus margins, and includes financial covenants for net leverage ratio and interest coverage ratio[276][277] - At August 31, 2023, $200 million in term loans and $16.0 million in revolving line of credit borrowings were outstanding, with $381.5 million available for borrowing[280] Cash Paid for Interest (in millions) | Fiscal Year | Amount | | :--- | :--- | | 2023 | $10.6 | | 2022 | $3.1 | | 2021 | $3.7 | Note 8. Fair Value Measurements - The company uses a three-tier hierarchy (Level 1, 2, 3) to measure the fair value of financial assets and liabilities[283] - Cash and cash equivalents, accounts receivable, accounts payable, and variable rate long-term debt approximated book value[284] - Foreign currency exchange contracts had a net liability of less than $0.1 million, an interest rate swap was an asset of $0.7 million, and a net investment hedge was a liability of $1.2 million at August 31, 2023[284] - All derivative contracts were classified as Level 2 within the valuation hierarchy[284] - Goodwill, tradenames, customer relationships, patents, and property, plant and equipment impairments were determined using Level 3 valuation techniques on a nonrecurring basis[285] Note 9. Derivatives - Derivatives are used to manage market risk from changes in foreign currency exchange rates and interest rates, not for speculative purposes[286] - Foreign currency exchange contracts had a U.S. dollar equivalent notional value of $13.8 million (2023) and a net liability fair value of less than $0.1 million (2023)[287] Net Foreign Currency Loss (Gain) from Derivatives (in thousands) | Fiscal Year | Amount | | :--- | :--- | | 2023 | $945 | | 2022 | $(319) | | 2021 | $(63) | - An interest rate swap for $60.0 million notional amount was entered in December 2022 to hedge the term loan, designated as a cash flow hedge, resulting in a net gain of $0.5 million in fiscal 2023 recorded in OCI[288][289] - Cross-currency swaps designated as net investment hedges had a notional amount of $30.5 million at August 31, 2023, resulting in a net loss of $0.9 million in fiscal 2023 recorded in OCI[290] Note 10. Leases - The company has operating leases for real estate, vehicles, manufacturing equipment, IT equipment, and office equipment, typically ranging from 3 to 15 years[292] Lease Cost (in thousands) | Lease Cost Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Operating lease cost | $13,155 | $14,316 | $15,170 | | Short-term lease cost | $2,318 | $1,714 | $1,611 | | Variable lease cost | $4,411 | $3,609 | $3,086 | Operating Lease Liabilities (in thousands) | Metric | August 31, 2023 | August 31, 2022 | | :--- | :--- | :--- | | Other long-term assets (ROU) | $37,714 | $43,273 | | Total operating lease liabilities | $39,031 | $44,186 | | Weighted Average Remaining Lease Term | 6.5 years | 6.4 years | | Weighted Average Discount Rate | 5.0% | 4.4% | Future Minimum Lease Payments (Operating Leases, in thousands) | Year | Amount | | :--- | :--- | | 2024 | $11,368 | | 2025 | $9,533 | | 2026 | $6,650 | | 2027 | $3,687 | | 2028 | $3,131 | | Thereafter | $11,540 | | Total minimum lease payments | $45,909 | Note 11. Employee Benefit Plans - All U.S. defined benefit pension plans are frozen, with a funded status (underfunded) of $(4.674) million in 2023[298] U.S. Defined Benefit Pension Plans Net Periodic Benefit Expense (in thousands) | Fiscal Year | Amount | | :--- | :--- | | 2023 | $588 | | 2022 | $324 | | 2021 | $868 | - Foreign defined benefit pension plans, mostly for inactive participants, had a funded status (underfunded) of $(1.889) million in 2023[301] Foreign Defined Benefit Pension Plans Net Periodic Benefit Expense (in thousands) | Fiscal Year | Amount | | :--- | :--- | | 2023 | $171 | | 2022 | $193 | | 2021 | $110 | - Other Postretirement Health Benefit Plans (OPEB) had an unfunded benefit obligation of $1.7 million in 2023[304] - The company's 401(k) plan includes a match contribution of $0.50 for every $1 contributed by employees, up to 8% of eligible pay, with immediate vesting[306] 401(k) Plan Expense (in millions) | Fiscal Year | Amount | | :--- | :--- | | 2023 | $2.1 | | 2022 | $2.2 | | 2021 | $1.1 | - The unfunded deferred compensation plan had liabilities of $11.0 million in 2023, with related expense in 'Financing costs, net' of $0.9 million[310] Note 12. Income Taxes Earnings Before Income Taxes from Continuing Operations (in thousands) | Region | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Domestic | $26,442 | $10,176 | $1,292 | | Foreign | $42,456 | $13,816 | $42,683 | | Total | $68,898 | $23,992 | $43,975 | Income Tax Expense from Continuing Operations (in thousands) | Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Currently payable | $14,740 | $9,753 | $(5,263) | | Deferred | $509 | $(5,352) | $9,026 | | Total | $15,249 | $4,401 | $3,763 | Effective Income Tax Rate | Fiscal Year | Rate | | :--- | :--- | | 2023 | 22.1% | | 2022 | 18.3% | | 2021 | 8.6% | Net Deferred Income Tax Asset (in thousands) | Date | Amount | | :--- | :--- | | August 31, 2023 | $10,040 | | August 31, 2022 | $10,564 | - The valuation allowance for deferred tax assets was $61.4 million in 2023[314] Gross Liability for Unrecognized Tax Benefits (in thousands) | Fiscal Year | Amount | | :--- | :--- | | 2023 | $14,754 | | 2022 | $15,380 | | 2021 | $15,658 | - Cash paid for income taxes, net of refunds, totaled $2.7 million in 2023[319] Note 13. Capital Stock and Share Repurchases - The company's authorized common stock includes 168,000,000 Class A shares ($0.20 par value), with 83,760,798 issued and 54,988,083 outstanding as of August 31, 2023[320] - A new share repurchase program authorized in March 2022 allows for the repurchase of 10,000,000 shares; 4,026,515 shares remained available as of August 31, 2023[321] - In fiscal 2023, the company repurchased 2,213,750 shares for $57.7 million[321] - Since fiscal 2012, 28,772,715 shares have been repurchased for $800.5 million[321] Earnings Per Share (Diluted) | Fiscal Year | From Continuing Operations | Total | | :--- | :--- | :--- | | 2023 | $0.94 | $0.82 | | 2022 | $0.33 | $0.26 | | 2021 | $0.67 | $0.63 | Note 14. Stock Plans - Share-based awards are granted under the Enerpac Tool Group Corp. 2017 Omnibus Incentive Plan, with 3,365,219 shares available for future grants as of August 31, 2023[325] Restricted Stock Units and Performance Shares Activity (Fiscal 2023) | Metric | Number of Shares | Weighted-Average Fair Value at Grant Date (Per Share) | | :--- | :--- | :--- | | Outstanding on August 31, 2022 | 1,098,026 | $20.73 | | Granted | 571,830 | $25.42 | | Forfeited | (218,158) | $22.18 | | Vested | (412,162) | $20.72 | | Outstanding on August 31, 2023 | 1,039,536 | $22.26 | Stock Option Activity (Fiscal 2023) | Metric | Shares | Weighted Average Exercise Price (Per Share) | | :--- | :--- | :--- | | Outstanding on September 1, 2022 | 947,807 | $26.85 | | Exercised | (43,633) | $22.30 | | Expired | (274,767) | $26.83 | | Outstanding on August 31, 2023 | 629,407 | $27.18 | | Exercisable on August 31, 2023 | 629,407 | $27.18 | - As of August 31, 2023, total unrecognized compensation cost related to share-based awards was $9.4 million, to be recognized over a weighted average period of 1.6 years[327] Note 15. Business Segment, Geographic and Customer Information Net Sales by Reportable Segment & Product Line (in thousands) | Segment/Product Line | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | IT&S Product | $447,603 | $410,245 | $376,353 | | IT&S Service & Rental | $107,575 | $117,097 | $116,772 | | Other Segment | $43,026 | $43,881 | $35,535 | | Total Net Sales | $598,204 | $571,223 | $528,660 | Operating Profit (Loss) by Reportable Segment (in thousands) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | IT&S Segment | $135,883 | $78,735 | $81,683 | | Other Segment | $10,954 | $729 | $(10,420) | | General Corporate | $(62,915) | $(48,804) | $(20,150) | | Total Operating Profit | $83,922 | $30,660 | $51,113 | Capital Expenditures by Segment (in thousands) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | IT&S Segment | $7,779 | $7,139 | $10,918 | | Other Segment | $599 | $710 | $768 | | General Corporate | $1,022 | $568 | $333 | | Total Capital Expenditures | $9,400 | $8,417 | $12,019 | Net Sales by Geographic Region (in thousands) | Region | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | United States of America | $231,093 | $226,020 | $188,070 | | United Kingdom | $34,085 | $29,316 | $39,896 | | Germany | $29,926 | $28,004 | $28,456 | | Canada | $29,643 | $19,651 | $17,348 | | Australia | $28,607 | $26,667 | $24,990 | | Saudi Arabia | $25,762 | $20,892 | $16,715 | | Brazil | $20,523 | $16,517 | $13,937 | | France | $14,606 | $14,854 | $13,368 | | China | $14,081 | $15,434 | $16,927 | | All Other | $169,877 | $173,868 | $168,953 | | Total Net Sales | $598,204 | $571,223 | $528,660 | - The company's largest customer accounted for approximately 3% of sales in each of the last three fiscal years[332] Note 16. Commitments and Contingencies Outstanding Letters of Credit (in millions) | Date | Amount | | :--- | :--- | | August 31, 2023 | $8.6 | | August 31, 2022 | $10.7 | - The company is a party to various legal proceedings, including product liability, contract breaches, and employment disputes, for which reserves are recorded when probable and estimable[335] - Environmental matters, including soil and groundwater contamination at current or former sites, are not expected to have a material adverse effect on financial position or results[336][338] - A Dutch investigation into sales linked to the Crimea region concluded EU sanctions were violated; an expense was recorded in fiscal 2021 for estimated financial penalties, with no material adverse effect expected[339] Schedule II—Valuation and Qualifying Accounts Allowance for Losses—Trade Accounts Receivable (in thousands) | Fiscal Year | Balance at Beginning of Period | Charged to Costs and Expenses (Income) | Accounts Written Off Less Recoveries | Other | Balance at End of Period | | :--- | :--- | :--- | :--- | :--- | :--- | | August 31, 2023 | $17,504 | $1,177 | $(2,230) | $362 | $16,781 | | August 31, 2022 | $4,235 | $14,277 | $(350) | $(658) | $17,504 | | August 31, 2021 | $4,991 | $8 | $(845) | $81 | $4,235 | Valuation Allowance—Income Taxes (in thousands) | Fiscal Year | Balance at Beginning of Period | Charged to Costs and Expenses (Income) | Deductions | Balance at End of Period | | :--- | :--- | :--- | :--- | | August 31, 2023 | $61,630 | $3,305 | $(3,503) | $61,432 | | August 31, 2022 | $66,155 | $925 | $(5,450) | $61,630 | | August 31, 2021 | $70,414 | $4,886 | $(9,145) | $66,155 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure matters - There were no changes in or disagreements with accountants on accounting and financial disclosure[343] Controls and Procedures Enerpac Tool Group's management concluded that disclosure controls and internal control over financial reporting were effective as of August 31, 2023, with no material changes reported Disclosure Controls and Procedures - The company's management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of August 31, 2023[344] Management's Report on Internal Control Over Financial Reporting - Management concluded that the company's internal control over financial reporting was effective as of August 31, 2023, based on the COSO framework[345] - Ernst & Young, LLP audited and issued an unqualified opinion on the company's internal control over financial reporting as of August 31, 2023[347] Changes in Internal Control Over Financial Reporting - There were no changes in the company's internal control over financial reporting during the fourth quarter of fiscal 2023 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[348] Other Information During the three months ended August 31, 2023, no directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - None of the company's directors or officers adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement" during the three months ended August 31, 2023[349] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Enerpac Tool Group Corp - This item is not applicable[350] PART III Directors; Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, Audit Committee, and corporate governance practices, including the code of ethics, is incorporated by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on January 25, 2024 - Information on directors, executive officers, Audit Committee, and corporate governance is incorporated by reference from the 2024 Annual Meeting Proxy Statement[353] - The company has a code of ethics applicable to its senior executive team, available on its website[354] Executive Compensation Information on executive compensation is incorporated by reference from specific sections of the 2024 Annual Meeting Proxy Statement, excluding the "Pay Versus Performance" section - Information required by this item is incorporated by reference from the "Election of Directors," "Corporate Governance Matters," "Executive Compensation" (excluding "Pay Versus Performance"), and "Non-Employee Director Compensation" sections of the 2024 Annual Meeting Proxy Statement[355] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details regarding security ownership of certain beneficial owners and management, along with equity compensation plan information, are incorporated by reference from the 2024 Annual Meeting Proxy Statement - Information on security ownership of certain beneficial owners and management, and equity compensation plan information, is incorporated by reference from the 2024 Annual Meeting Proxy Statement[356] Certain Relationships and Related Transactions, and Director Independence Information concerning certain relationships, related party transactions, and director independence is incorporated by reference from the "Corporate Governance Matters—Certain Relationships and Related Party Transactions" section of the 2024 Annual Meeting Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the "Corporate Governance Matters—Certain Relationships and Related Party Transactions" section of the 2024 Annual Meeting Proxy Statement[357] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the "Other Information—Independent Public Accountants" section of the 2024 Annual Meeting Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the "Other Information—Independent Public Accountants" section of the 2024 Annual Meeting Proxy Statement[358] PART IV Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the 10-K report, including consolidated financial statements, valuation and qualifying accounts, and various agreements and certifications - This item includes the Consolidated Financial Statements and Financial Statement Schedules[361] - A comprehensive list of exhibits is provided, including the Credit Agreement, various compensation plans, and executive agreements[362][363][364] - Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[364] - The financial statements are formatted in Inline Extensible Business Reporting Language (Inline XBRL)[366] Form 10-K Summary The company states that there is no Form 10-K Summary provided - No Form 10-K Summary is provided[367]