UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended May 31, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission File No. 1-11288
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(Exact name of registrant as specified in its charter)
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| (State of incorporation) | (I.R.S. Employer Id. No.) | |||||||
Mailing address: P. O. Box 3241, Milwaukee, Wisconsin 53201
(Address of principal executive offices)
(262 ) 293-1500
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Ticker Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated Filer | ☐ | ||||||||||||||||||
| Non-accelerated Filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No ☒
The number of shares outstanding of the registrant’s Class A Common Stock as of June 20, 2024 was 54,300,146 .
TABLE OF CONTENTS
| Page No. | |||||
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS
This quarterly report on Form 10-Q contains certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include statements regarding expected financial results and other planned events, including, but not limited to, anticipated liquidity, anticipated restructuring costs and related savings, anticipated future charges and anticipated capital expenditures. The terms “may,” “should,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “objective,” “plan,” “project” and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. We disclaim any obligation to publicly update or revise any forward-looking statements as a result of new information, future events or any other reason.
The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements:
•supply chain issues, including shortages of adequate component supply that increase our costs or cause delays in our ability to fulfill orders;
•failure to estimate customer demand properly may result or could have an adverse impact on our business and operating results and our relationship with customers;
•the deterioration of, or instability in, the domestic and international economy and/or in our various end markets, including as a result of geopolitical activity, including the invasion of Ukraine by Russia and international sanctions imposed in response thereto, the armed conflict involving Hamas and Israel, and the attacks on commercial ships in the Red Sea;
•decreased demand from customers in the oil & gas industry, including as a result of significant volatility in oil prices resulting from disruptions in the oil markets;
•uncertainty over global tariffs or the financial impact of tariffs;
•our ability to execute on restructuring actions and on the objectives related to the ASCEND transformation program in order to achieve anticipated incremental operating profit;
•logistics challenges, including global freight capacity shortages, significant increases in freight costs or other delays in our ability to fulfill orders and the previously mentioned attacks on commercial ships in the Red Sea;
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•failure to collect on accounts receivable, including in certain foreign jurisdictions where sales are concentrated to a limited number of distributors or agents;
•risks related to our reliance on independent agents and distributors for the distribution and service of products;
•a significant failure in our information technology (IT) infrastructure, such as unauthorized access to financial and other sensitive data or cybersecurity threats;
•a material disruption at a significant manufacturing facility;
•competition in the markets we serve;
•currency exchange rate fluctuations, export and import restrictions, transportation disruptions or shortages, and other risks inherent in our international operations;
•regulatory and legal developments, including litigation, such as product liability and warranty claims;
•failure to develop new products and the extent of market acceptance of new products and price increases
•our ability to execute on our growth strategy;
•our ability to successfully identify, consummate and integrate acquisitions and realize anticipated benefits/results from acquired companies as part of our portfolio management process;
•the effects of divestitures and/or discontinued operations, including retained liabilities from, or indemnification obligations with respect to, disposed businesses;
•if the operating performance of our businesses were to fall significantly below normalized levels, the potential for a non-cash impairment charge of goodwill and/or other intangible assets, as they represent a substantial amount of our total assets;
•a global economic recession;
•the impact of rapidly rising interest rates and material, labor, or overhead cost increases;
•our ability to comply with the covenants in our debt agreements and fluctuations in interest rates;
•our ability to attract, develop, and retain qualified employees;
•inadequate intellectual property protection or infringement of the intellectual property of others;
•our ability to access capital markets; and
•other matters, including those of a political, economic, business, competitive and regulatory nature contained from time to time in our U.S. Securities and Exchange Commission ("SEC") filings, including, but not limited to, those factors listed in the "Risk Factors" section within Item 1A of Part I of our Form 10-K for the fiscal year ended August 31, 2023 filed with the SEC on October 20, 2023.
When used herein, the terms “we,” “us,” “our” and the “Company” refer to Enerpac Tool Group Corp. and its subsidiaries. Reference to fiscal years, such as "fiscal 2024," are to the fiscal year ending on August 31 of the specified year. Enerpac Tool Group Corp. provides free-of-charge access to its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto, through its website, www.enerpactoolgroup.com, as soon as reasonably practicable after such reports are electronically filed with the SEC.
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PART I—FINANCIAL INFORMATION
Item 1—Financial Statements
ENERPAC TOOL GROUP CORP.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of products sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Restructuring charges | |||||||||||||||||||||||
| Impairment & divestiture charges | |||||||||||||||||||||||
| Operating profit | |||||||||||||||||||||||
| Financing costs, net | |||||||||||||||||||||||
| Other expense, net | |||||||||||||||||||||||
| Earnings before income tax expense | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net earnings from continuing operations | |||||||||||||||||||||||
| Earnings (loss) from discontinued operations, net of income taxes | ( | ( | |||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share from continuing operations | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Earnings (loss) per share from discontinued operations | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings per share* | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| *The total of Earnings per share from continuing operations and Earnings (loss) per share from discontinued operations may not equal Earnings per share due to rounding. | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ENERPAC TOOL GROUP CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ||||||||||||||||||||||
| Pension and other postretirement benefit plans | |||||||||||||||||||||||
| Cash flow hedges | ( | ||||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | ( | ||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ENERPAC TOOL GROUP CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| (Unaudited) | |||||||||||
| May 31, 2024 | August 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Trade accounts payable | $ | $ | |||||||||
| Accrued compensation and benefits | |||||||||||
| Current maturities of debt | |||||||||||
| Income taxes payable | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Deferred income taxes | |||||||||||
| Pension and postretirement benefit liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Shareholders’ equity | |||||||||||
| Class A common stock, $0.20 par value per share, authorized 168,000,000 shares, issued 54,288,866 and 83,760,798 shares, respectively | |||||||||||
| Additional paid-in capital | |||||||||||
| Treasury stock, at cost, 0 and 28,772,715 shares, respectively | ( | ||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Stock held in trust | ( | ( | |||||||||
| Deferred compensation liability | |||||||||||
| Total shareholders' equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ENERPAC TOOL GROUP CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended | |||||||||||
| May 31, 2024 | May 31, 2023 | ||||||||||
| Operating Activities | |||||||||||
| Net earnings | $ | $ | |||||||||
| Less: Earnings (loss) from discontinued operations, net of income taxes | ( | ||||||||||
| Net earnings from continuing operations | |||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities - continuing operations: | |||||||||||
| Impairment & divestiture charges | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Amortization of debt issuance costs | |||||||||||
| Receivable reserve | |||||||||||
| Other non-cash expenses | |||||||||||
| Changes in components of working capital and other, excluding acquisitions and divestitures: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Trade accounts payable | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Income tax accounts | |||||||||||
| Accrued compensation and benefits | ( | ||||||||||
| Other accrued liabilities | ( | ( | |||||||||
| Cash provided by operating activities - continuing operations | |||||||||||
| Cash (used in) provided by operating activities - discontinued operations | ( | ||||||||||
| Cash provided by operating activities | |||||||||||
| Investing Activities | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Working capital adjustment from the sale of business assets | ( | ||||||||||
| Purchase of business assets | ( | ||||||||||
| Cash used in investing activities - continuing operations | ( | ( | |||||||||
| Cash used in investing activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Borrowings on revolving credit facility | |||||||||||
| Principal repayments on revolving credit facility | ( | ( | |||||||||
| Principal repayments on term loan | ( | ( | |||||||||
| Proceeds from issuance of term loan | |||||||||||
| Payment for redemption of revolver | ( | ||||||||||
| Swingline borrowings/repayments, net | ( | ||||||||||
| Payment of debt issuance costs | ( | ||||||||||
| Purchase of treasury shares | ( | ( | |||||||||
| Taxes paid related to the net share settlement of equity awards | ( | ( | |||||||||
| Stock option exercises & other | |||||||||||
| Payment of cash dividend | ( | ( | |||||||||
| Cash (used in) provided by financing activities - continuing operations | ( | ||||||||||
| Cash (used in) provided by financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents - beginning of period | |||||||||||
| Cash and cash equivalents - end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
General
Enerpac Tool Group Corp. (the "Company") is a premier industrial tools, services, technology and solutions company serving a broad and diverse set of customers in more than 100 countries. The Company has one reportable segment, Industrial Tools & Services ("IT&S"), and an Other operating segment, which does not meet the criteria to be considered a reportable segment.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated balance sheet data as of August 31, 2023 was derived from the Company’s audited financial statements but does not include all disclosures required by GAAP. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes in the Company’s fiscal 2023 Annual Report on Form 10-K.
In the opinion of management, all adjustments considered necessary for a fair statement of financial results have been made. Such adjustments consist of only those of a normal recurring nature. Operating results for the three and nine months ended May 31, 2024 are not necessarily indicative of the results that may be expected for the entire fiscal year ending August 31, 2024.
Accumulated Other Comprehensive Loss
The following is a summary of the Company's accumulated other comprehensive loss (in thousands):
| May 31, 2024 | August 31, 2023 | ||||||||||
| Foreign currency translation adjustments | $ | $ | |||||||||
| Pension and other postretirement benefit plans | |||||||||||
| Cash flow hedges | ( | ||||||||||
| Accumulated other comprehensive loss | $ | $ | |||||||||
Property Plant and Equipment
The following is a summary of the Company's components of property, plant and equipment (in thousands):
| May 31, 2024 | August 31, 2023 | ||||||||||
| Land, buildings and improvements | $ | $ | |||||||||
| Machinery and equipment | |||||||||||
| Gross property, plant and equipment | |||||||||||
| Less: Accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
Product Warranty Costs
The Company generally offers its customers an assurance warranty on products sold, although warranty periods may vary by product type and application. The reserve for future warranty claims, which is recorded within the "Other current liabilities" line in the Condensed Consolidated Balance Sheets, is based on historical claim rates and current warranty cost experience. The following summarizes the changes in product warranty reserves for the nine months ended May 31, 2024 and 2023, respectively (in thousands):
| Nine Months Ended | |||||||||||
| May 31, 2024 | May 31, 2023 | ||||||||||
| Beginning balance | $ | $ | |||||||||
| Provision for warranties | |||||||||||
| Warranty payments and costs incurred | ( | ( | |||||||||
| Impact of changes in foreign currency rates | |||||||||||
| Ending balance | $ | $ | |||||||||
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Note 2. Revenue from Contracts with Customers
Nature of Goods and Services
The Company generates its revenue under two principal activities, which are discussed below:
Product Sales: Sales of tools, heavy-lifting solutions, and biomedical textiles are recorded when control is transferred to the customer (i.e., performance obligation has been satisfied). For the majority of the Company’s product sales, revenue is recognized at a point in time when control of the product is transferred to the customer, which generally occurs when the product is shipped from the Company to the customer. For certain other products that are highly customized and have a limited alternative use, and for which the Company has an enforceable right of reimbursement for performance completed to date, revenue is recognized over time. We consider the input measure (efforts-expended or cost-to-cost) or output measure as a fair measure of progress for the recognition of over-time revenue associated with these custom products. For a majority of the Company’s custom products, machine hours and labor hours (efforts-expended measurement) are used as a measure of progress.
Service & Rental Sales: Service contracts consist of providing highly trained technicians to perform bolting, technical services, machining and joint-integrity work for our customers. These revenues are recognized over time as our customers simultaneously receive and consume the benefits provided by the Company. We consider the input measure (efforts-expended or cost-to-cost) or output measure as a fair measure of progress for the recognition of over-time revenue associated with service contracts. For a majority of the Company’s service contracts, labor hours (efforts-expended measurement) is used as the measure of progress when it is determined to be a better depiction of the transfer of control to the customer due to the timing and pattern of labor hours incurred. Revenue from rental contracts (less than a year and non-customized products) is generally recognized ratably over the contract term, depicting the customer’s consumption of the benefit related to the rental equipment.
Disaggregated Revenue and Performance Obligations
The Company disaggregates revenue from contracts with customers by reportable segment and product line and by the timing of when goods and services are transferred. See Note 12, "Segment Information" for information regarding our revenue disaggregation by reportable segment and product line.
The following table presents information regarding revenues disaggregated by the timing of when goods and services are transferred (in thousands):
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues recognized at point in time | $ | $ | $ | $ | |||||||||||||||||||
| Revenues recognized over time | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Contract Balances
The Company's contract assets and liabilities are as follows (in thousands):
| May 31, 2024 | August 31, 2023 | |||||||||||||
| Receivables, which are included in accounts receivable, net | $ | $ | ||||||||||||
| Contract assets, which are included in other current assets | ||||||||||||||
| Contract liabilities, which are included in other current liabilities | ||||||||||||||
Receivables: The Company performs its obligations under a contract with a customer by transferring goods or services in exchange for consideration from the customer. The Company typically invoices its customers as soon as control of an asset is transferred and a receivable for the Company is established. Accounts receivable, net is recorded at face amount of customer receivables less an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for expected losses as a result of customers’ inability to make required payments. Management evaluates the aging of customer receivable balances, the financial condition of its customers, historical trends and the time outstanding of specific balances to estimate the amount of receivables that may be collected in the future and records the appropriate provision. The allowance for doubtful accounts was $15.8 million and $16.8 million at May 31, 2024 and August 31, 2023, respectively.
As indicated in the "Concentration of Credit Risk" section below, as of May 31, 2024 and May 31, 2023, the Company was exposed to a concentration of credit risk with an agent as a result of its continued payment delinquency. As of May 31, 2024 and May 31, 2023, the Company had a total bad debt reserve of $13.2 million related to this agent. The allowance for doubtful accounts for this particular agent as of May 31, 2024 represents management's best estimate of the amount probable of collection and considers various factors with the respect to this matter, including, but not limited to: (i) the lack of payment by the agent since the fiscal quarter ended February 28, 2021; (ii) our due diligence on balances due to the agent from its end customers related to sales of our services and
8
products and the known markup on those sales from agent to end customer; (iii) the status of ongoing negotiations with the agent to secure payments; and (iv) legal recourse available to secure payment. Actual collections from the agent may differ from the Company's estimate.
Concentration of Credit Risk: The Company sells products and services through distributors and agents. In certain jurisdictions, those third parties represent a significant portion of our sales in their respective country, which can pose a concentration of credit risk if these larger distributors or agents are not timely in their payments. As of May 31, 2024, the Company was exposed to a concentration of credit risk as a result of the payment delinquency of one of our agents whose accounts receivable represent 10.6 % of the Company's outstanding accounts receivable. As of May 31, 2024, the Company has fully reserved for the amounts due from this agent.
Contract Assets: Contract assets relate to the Company’s rights to consideration for work completed but not billed as of the reporting date on contracts with customers. The contract assets are transferred to receivables when the rights become unconditional. The Company has contract assets on contracts that are generally long-term and have revenues that are recognized over time.
Contract Liabilities: As of May 31, 2024, the Company had certain contracts where there were unsatisfied performance obligations and the Company had received cash consideration from customers before the performance obligations were satisfied. The majority of these contracts relate to long-term customer contracts (project durations of greater than three months) and are recognized over time. The Company estimates that substantially all of the $2.4 million of contract liabilities will be recognized in net sales from satisfying those performance obligations within the next twelve months.
Timing of Performance Obligations Satisfied at a Point in Time: The Company evaluates when the customer obtains control of the product based on shipping terms, as control will transfer, depending upon such terms, at different points between the Company's manufacturing facility or warehouse and the customer’s location. The Company considers control to have transferred upon shipment or delivery because (i) the Company has a present right to payment at that time; (ii) the legal title has been transferred to the customer; (iii) the Company has transferred physical possession of the product to the customer; and (iv) the customer has significant risks and rewards of ownership of the product.
Variable Consideration: The Company estimates whether it will be subject to variable consideration under the terms of the contract and includes its estimate of variable consideration in the transaction price based on the expected value method when it is deemed probable of being realized based on historical experience and trends. Types of variable consideration may include rebates, incentives and discounts, among others, which are recorded as a reduction to net sales at the time when control of a performance obligation is transferred to the customer.
Practical Expedients & Exemptions: The Company elected to expense the incremental cost to obtaining a contract when the amortization period for such contracts would be one year or less. The Company does not disclose the value of unperformed obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed.
Note 3. ASCEND Transformation Program
In March 2022, the Company announced the launch of ASCEND, a transformation program focused on driving accelerated earnings growth and efficiency across the business with the goal of delivering an estimated incremental $40 to $50 million of annual operating profit once fully implemented. In March 2023, the Company announced this estimate had been revised to an incremental $50 to $60 million of annual operating profit as a result of additional ASCEND initiatives and high success rate. As part of ASCEND, the Company is focusing on the following key initiatives: (i) accelerating organic growth go-to-market strategies, (ii) improving operational excellence and production efficiency by utilizing a lean approach and (iii) driving greater efficiency and productivity in SG&A expenses by better leveraging resources to create a more efficient and agile organization.
9
Note 4. Restructuring Charges
The Company has undertaken or committed to various restructuring initiatives, including workforce reductions, leadership changes, plant consolidations to reduce manufacturing overhead, satellite office closures, the continued movement of production and product sourcing to low-cost alternatives, and the centralization and standardization of certain administrative functions. Liabilities for severance are generally to be paid within twelve months, while future lease payments related to facilities vacated as a result of restructuring are to be paid over the underlying remaining lease terms.
On June 27, 2022, the Company approved a new restructuring plan in connection with the initiatives identified as part of the ASCEND transformation program (see Note 3, “ASCEND Transformation Program”) to drive greater efficiency and productivity in global selling, general and administrative resources. The total costs of this plan were then estimated at $6 to $10 million, constituting predominately severance and other employee-related costs to be incurred as cash expenditures impacting both IT&S and Corporate. On September 23, 2022, the Company approved an updated restructuring plan. The restructuring costs of this updated plan (which includes the amounts for the plan approved in June 2022) are estimated at $10 to $15 million. These costs are expected to be incurred over the expected duration of the transformation program, ending in the fourth quarter of fiscal year 2024. The Company recorded $1.6 million and $4.4 million in the three and nine months ended May 31, 2024, respectively, and $2.3 million and $6.2 million in the three and nine months ended May 31, 2023, respectively, of restructuring charges associated with the ASCEND transformation program.
The following summarizes restructuring reserve activity (which for the nine months ended May 31, 2023 excludes $0.6 million of charges associated with ASCEND transformation plan, respectively, associated with the accelerated vesting of equity awards which has no impact on the restructuring reserve) for the IT&S segment and Corporate for the nine months ended May 31, 2024 (in thousands):
| Nine Months Ended May 31, 2024 | |||||||||||
| IT&S | Corporate | ||||||||||
| Balance as of August 31, 2023 | $ | $ | |||||||||
| Restructuring charges | |||||||||||
| Cash payments | ( | ( | |||||||||
| Impact of changes in foreign currency rates | |||||||||||
| Balance as of May 31, 2024 | $ | $ | |||||||||
| Nine Months Ended May 31, 2023 | |||||||||||
| IT&S | Corporate | ||||||||||
| Balance as of August 31, 2022 | $ | $ | |||||||||
| Restructuring charges | |||||||||||
| Cash payments | ( | ( | |||||||||
| Impact of changes in foreign currency rates | |||||||||||
| Balance as of May 31, 2023 | $ | $ | |||||||||
Note 5. Discontinued Operations and Other Divestiture Activities
On October 31, 2019 , as part of our overall strategy to become a pure-play industrial tools and services company, the Company completed the sale of the businesses comprising its former Engineered Components & Systems ("EC&S") segment. This divestiture was considered part of our strategic shift to become a pure-play industrial tools and services company, and therefore, the results of operations are recorded as a component of "Earnings (loss) from discontinued operations, net of income taxes" in the Condensed Consolidated Statements of Earnings for all periods presented. All discontinued operations activity included within the Condensed Consolidated Statements of Earnings and the Condensed Consolidated Statements of Cash Flows for the periods presented relate to impacts from certain retained liabilities.
10
The following represents the detail of "Earnings (loss) from discontinued operations, net of income taxes" within the Condensed Consolidated Statements of Earnings (in thousands):
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Selling, general and administrative (benefit) expenses | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Impairment & divestiture benefit | ( | ||||||||||||||||||||||
| Operating income (loss) | ( | ( | |||||||||||||||||||||
| Other loss, net | |||||||||||||||||||||||
| Earnings (Loss) before income tax expense | ( | ( | |||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Earnings (Loss) from discontinued operations, net of income taxes | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Other Divestiture Activities
On July 11, 2023 , the Company completed the sale of the Cortland Industrial business, which had been included in the Other operating segment, for net cash proceeds of $20.1 million. In connection with the completion of the sale, the Company recorded a net gain of $6.0 million, inclusive of $0.1 million of purchase price from the customary finalization of working capital negotiations in the first quarter of fiscal 2024. The historical results of the Cortland Industrial business (which had net sales of $6.9 million and $20.2 million, for three and nine months ended May 31, 2023, respectively) are not material to the consolidated financial results.
Note 6. Goodwill, Intangible Assets and Long-Lived Assets
Changes in the gross carrying value of goodwill and intangible assets result from changes in foreign currency exchange rates, business acquisitions, divestitures and impairment charges. The changes in the carrying amount of goodwill for the nine months ended May 31, 2024 are as follows (in thousands):
| IT&S | Other | Total | |||||||||||||||
| Balance as of August 31, 2023 | $ | $ | $ | ||||||||||||||
| Impact of changes in foreign currency rates | |||||||||||||||||
| Balance as of May 31, 2024 | $ | $ | $ | ||||||||||||||
The gross carrying value and accumulated amortization of the Company’s intangible assets are as follows (in thousands):
| May 31, 2024 | August 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Weighted Average Amortization Period (Years) | Gross Carrying Value | Accumulated Amortization | Net Book Value | Gross Carrying Value | Accumulated Amortization | Net Book Value | |||||||||||||||||||||||||||||||||||
| Amortizable intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Patents | |||||||||||||||||||||||||||||||||||||||||
| Trademarks and tradenames | |||||||||||||||||||||||||||||||||||||||||
| Indefinite lived intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| Tradenames | N/A | ||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
11
Note 7. Debt
The following is a summary of the Company’s long-term indebtedness (in thousands):
| May 31, 2024 | August 31, 2023 | ||||||||||
| Senior Credit Facility | |||||||||||
| Revolver | |||||||||||
| Term Loan | |||||||||||
| Total Senior Indebtedness | |||||||||||
| Less: Current maturities of long-term debt | ( | ( | |||||||||
| Debt issuance costs | ( | ( | |||||||||
| Total long-term debt, less current maturities | $ | $ | |||||||||
Senior Credit Facility
On September 9, 2022, the Company refinanced its previous senior credit facility with a new $600 million senior credit facility, comprised of a $400 million revolving line of credit and a $200 million term loan, which is scheduled to mature in September 2027. The Company has the option to request up to $300 million of additional revolving commitments and/or term loans under the new facility, subject to customary conditions, including the commitment of the participating lenders. This facility replaces LIBOR with adjusted term SOFR as the interest rate benchmark and provides for interest rate margins above adjusted term SOFR ranging from 1.125 % to 1.875 % per annum depending on the Company’s net leverage ratio. In addition, a non-use fee is payable quarterly on the average unused amount of the revolving line of credit ranging from 0.15 % to 0.3 % per annum, based on the Company's net leverage. Borrowings under the credit facility bear interest at adjusted term SOFR plus 1.125 % per annum.
The facility contains financial covenants requiring the Company to not permit (i) the net leverage ratio, determined as of the end of each of its fiscal quarters, to exceed 3.75 to 1.00 (or, at the Company’s election and subject to certain conditions, 4.25 to 1.00 for the covenants period during which certain material acquisitions occur and the next succeeding four testing periods) or (ii) the interest coverage ratio, determined as of the end of each of its fiscal quarters, to be less than 3.00 to 1.00 . Borrowings under the facility are secured by substantially all personal property assets of the Company and its domestic subsidiary guarantors (other than certain specified excluded assets) and certain of the equity interests of certain subsidiaries of the Company. The Company was in compliance with all covenants under the credit facility at May 31, 2024.
At May 31, 2024, there were $196.3 million in borrowings outstanding under the term loans, no borrowings outstanding under the revolving line of credit and $398.8 million available for borrowing under the revolving line of credit facility after reduction for $1.2 million of outstanding letters of credit issued under the facility.
Note 8. Fair Value Measurements
The Company assesses the inputs used to measure the fair value of financial assets and liabilities using a three-tier hierarchy. Level 1 inputs include unadjusted quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level 3 inputs are not observable in the market and include management’s own judgments about the assumptions market participants would use in pricing an asset or liability.
Note 9. Derivatives
All derivatives are recognized in the balance sheet at their estimated fair value. The Company does not enter into derivatives for speculative purposes. Changes in the fair value of derivatives (not designated as hedges) are recorded in earnings along with the gain or loss on the hedged asset or liability.
12
The Company is exposed to market risk for changes in foreign currency exchange rates due to the global nature of its operations. In order to manage this risk, the Company utilizes foreign currency exchange contracts to reduce the exchange rate risk associated with recognized non-functional currency balances. The effects of changes in exchange rates are reflected concurrently in earnings for both the fair value of the foreign currency exchange contracts and the related non-functional currency asset or liability. These derivative gains and losses offset foreign currency gains and losses from the related revaluation of non-functional currency assets and liabilities (amounts included in "Other expense, net" in the Condensed Consolidated Statements of Earnings). The U.S. dollar equivalent notional value of these short duration foreign currency exchange contracts was $6.7 million and $13.8 million at May 31, 2024 and August 31, 2023, respectively. The fair value of outstanding foreign currency exchange contracts was a net asset of less than $0.1 million and net liability of less than $0.1 million at May 31, 2024 and August 31, 2023, respectively. Net foreign currency loss (included in "Other expense" in the Condensed Consolidated Statements of Earnings) related to these derivative instruments are as follows (in thousands):
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Foreign currency loss, net | $ | $ | $ | $ | |||||||||||||||||||
During December 2022, the Company entered into an interest rate swap, with a maturity date of November 30, 2025, for the notional amount of $60.0 million at a fixed interest rate of 4.022 % to hedge the floating interest rate of the Company's term loan. The interest rate swap was designated and qualified as a cash flow hedge. The Company uses the interest rate swap for the management of interest rate risk exposure, as an interest rate swap effectively converts a portion of the Company's debt from a floating rate to a fixed rate.
The Company records the fair value of the interest rate swap as an asset or liability on its balance sheet. The change in the fair value of the interest rate swap, a net gain of $0.1 million and less than $0.1 million for the three and nine months ended May 31, 2024, respectively, and a net loss of $0.5 million and a net gain of less than $0.1 million for the three and nine months ended May 31, 2023, respectively, is recorded in other comprehensive income (loss).
The Company also uses interest-rate derivatives to hedge portions of our net investments in non-U.S. subsidiaries (net investment hedge) against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For derivatives that are designated and qualify as a net investment hedge in a foreign operation, the net gains or losses attributable to the hedge changes are recorded in other comprehensive income (loss) where they offset gains and losses recorded on our net investments where the entity has non-U.S. dollar functional currency. As of May 31, 2024, the notional amount of cross-currency swaps designated as net investment hedges was $30.5 million. The change in the fair value of the net investment hedge, a net loss of $0.8 million and a net gain $0.1 million for the three and nine months ended May 31, 2024, respectively, and a net loss of $0.3 million and $0.6 million for the three and nine months ended May 31, 2023, respectively, is recorded in other comprehensive income (loss).
Note 10. Earnings per Share and Shareholders' Equity
The Company's Board of Directors has authorized the repurchase of shares of the Company's common stock under publicly announced share repurchase programs. Since the inception of the initial share repurchase program in fiscal 2012, the Company has repurchased 29,938,482 shares of common stock for $833.2 million. The Company suspended the initial share repurchase program in response to the COVID-19 pandemic in the third quarter of fiscal 2020. In March 2022, the Company's Board of Directors rescinded its prior share repurchase authorization and approved a new share repurchase program authorizing the repurchase of a total of 10,000,000 shares of the Company's outstanding common stock. The Company repurchased 1,165,767 shares for $32.7 million in the nine months ended May 31, 2024 and repurchased 843,689 shares for $20.8 million in the nine months ended May 31, 2023. As of May 31, 2024, the maximum number of shares that may yet be purchased under the program is 2,860,748 shares.
In December 2023, the Company's Board of Directors authorized the retirement of the Company's repurchased shares, and the Company retired 29,841,209 treasury shares. The initial share retirement resulted in reductions of $6.0 million in Class A Common Stock and $824.6 million in Retained Earnings reflected in the Condensed Consolidated Balance Sheets at May 31, 2024. Shares repurchased after December 18, 2023 were retired upon repurchase. The Company repurchased and retired 71,536 shares during the three months ended May 31, 2024.
13
The reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share amounts):
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net earnings from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
| Net earning (loss) from discontinued operations | ( | ( | |||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares outstanding - basic | |||||||||||||||||||||||
| Net effect of dilutive securities - stock based compensation plans | |||||||||||||||||||||||
| Weighted average common shares outstanding - diluted | |||||||||||||||||||||||
| Earnings per share from continuing operations: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Earnings (Loss) per share from discontinued operations: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings per share:* | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Anti-dilutive securities from stock based compensation plans (excluded from earnings per share calculation) | |||||||||||||||||||||||
| *The total of Earnings per share from continuing operations and Loss per share from discontinued operations may not equal Earnings per share due to rounding. | |||||||||||||||||||||||
14
The following table illustrates the changes in the balances of each component of shareholders' equity for the nine months ended May 31, 2024 (in thousands):
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Stock Held in Trust | Deferred Compensation Liability | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issued Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock contribution to employee benefit plans and other | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of equity awards | ( | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividend ($0.04 per share) true-up | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchases | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax effect related to net share settlement of equity awards | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued to, acquired for and distributed from rabbi trust | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at November 30, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock contribution to employee benefit plans and other | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of equity awards | ( | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax effect related to net share settlement of equity awards | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued to, acquired for and distributed from rabbi trust | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchases | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock retired | ( | ( | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at February 29, 2024 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock contribution to employee benefit plans and other | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of equity awards | ( | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax effect related to net share settlement of equity awards | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchased and retired | ( | ( | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at May 31, 2024 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
15
The following table illustrates the changes in the balances of each component of shareholders' equity for the nine months ended May 31, 2023 (in thousands):
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Stock Held in Trust | Deferred Compensation Liability | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Issued Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock contribution to employee benefit plans and other | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of equity awards | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Tax effect related to net share settlement of equity awards | — | — | ( | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock issued to, acquired for and distributed from rabbi trust | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at November 30, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock contribution to employee benefit plans and other | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of equity awards | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Tax effect related to net share settlement of equity awards | — | — | ( | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock issued to, acquired for and distributed from rabbi trust | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at February 28, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock contribution to employee benefit plans and other | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of equity awards | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock repurchases | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Tax effect related to net share settlement of equity awards | — | — | ( | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock issued to, acquired for and distributed from rabbi trust | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at May 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
16
Note 11. Income Taxes
The Company's global operations, acquisition activity (as applicable) and specific tax attributes provide opportunities for continuous global tax planning initiatives to maximize tax credits and deductions. Comparative earnings before income taxes, income tax expense and effective income tax rates from continuing operations are as follows (dollars in thousands):
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Earnings from continuing operations before income tax expense | $ | $ | $ | $ | |||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Effective income tax rate | % | % | % | % | |||||||||||||||||||
The Company’s earnings from continuing operations before income taxes include earnings from both U.S. and foreign jurisdictions. As several foreign tax rates are higher than the U.S. tax rate of 21 %, the annual effective tax rate is impacted by foreign rate differentials, withholding taxes, losses in jurisdictions where no benefit can be realized, and various aspects of the U.S. Tax Cuts and Jobs Act, such as the Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income provisions.
The effective tax rate for the three months ended May 31, 2024 was 23.1 %, compared to 21.6 % for the comparable prior-year period. The effective tax rate in each time period was impacted by year-to-date losses and deductions in jurisdictions where no tax benefit can be realized. The higher effective tax rate for the three months ended May 31, 2024 was primarily driven by the full year impacts of withholding tax related to current and future distributions, while the effective tax rate for the nine months ended May 31, 2024 is comparable to the prior-year period. Both the current and prior-year effective income tax rates include the impact of non-recurring items.
Note 12. Segment Information
The Company is a global manufacturer of a broad range of industrial products and solutions. The IT&S reportable segment is primarily engaged in the design, manufacture and distribution of branded hydraulic and mechanical tools and in providing services and tool rental to the infrastructure; industrial maintenance; repair and operations; oil & gas; mining; alternative and renewable energy; civil construction and other markets. The Other segment is included for purposes of reconciliation of the respective balances below to the condensed consolidated financial statements.
The following tables summarize financial information by reportable segment and product line (in thousands):
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net Sales by Reportable Segment & Product Line | |||||||||||||||||||||||
| IT&S Segment | |||||||||||||||||||||||
| Product | $ | $ | $ | $ | |||||||||||||||||||
| Service & Rental | |||||||||||||||||||||||
| Other Segment | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Operating Profit (Loss) | |||||||||||||||||||||||
| IT&S Segment | $ | $ | $ | $ | |||||||||||||||||||
| Other Segment | |||||||||||||||||||||||
| Corporate | ( | ( | ( | ( | |||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
17
| May 31, 2024 | August 31, 2023 | ||||||||||
| Assets | |||||||||||
| IT&S Segment | $ | $ | |||||||||
| Other Segment | |||||||||||
| Corporate | |||||||||||
| $ | $ | ||||||||||
In addition to the impact of changes in foreign currency exchange rates, the comparability of segment and product line information is impacted by acquisition/divestiture activities, impairment and divestiture charges, restructuring costs and related benefits. Corporate assets, which are not allocated, principally represent cash and cash equivalents, property, plant and equipment, Right of Use ("ROU") assets, capitalized debt issuance costs and deferred income taxes.
Note 13. Commitments and Contingencies
The Company had outstanding letters of credit of $8.0 million and $8.6 million at May 31, 2024 and August 31, 2023, respectively, the majority of which relate to commercial contracts and self-insured workers' compensation programs.
As part of the Company's global sourcing strategy, we have entered into agreements with certain suppliers that require the supplier to maintain minimum levels of inventory to support certain products for which we require a short lead time to fulfill customer orders. We have the ability to notify the supplier that they no longer need maintain the minimum level of inventory should we discontinue manufacturing of a product during the contract period; however, we must purchase the remaining minimum inventory levels the supplier was required to maintain within a defined period of time.
The Company is a party to various legal proceedings that have arisen in the normal course of business. These legal proceedings include regulatory matters, product liability, breaches of contract, employment, personal injury and other disputes. The Company has recorded reserves for loss contingencies based on the specific circumstances of each case. Such reserves are recorded when it is probable a loss has been incurred and can be reasonably estimated. The Company maintains a policy to exclude from such reserves an estimate of legal defense costs. In the opinion of management, resolution of these contingencies is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Additionally, in fiscal 2019, the Company provided voluntary self-disclosures to both Dutch and U.S. authorities related to sales of products and services linked to the Crimea region of Ukraine, which sales potentially violated European Union and U.S. sanctions provisions. Although the U.S. investigation closed without further implication, the Dutch investigation continued. The Dutch Investigator concluded his investigation in March 2022 and provided the results to the Public Prosecutor's office for review. Specifically, the Investigator concluded that the sales transactions violated EU sanctions. The conclusion in the Investigator's report was consistent with the Company's understanding of what could be stated in the report and supported the Company to record an expense in the fiscal year-ended August 31, 2021, representing the low end of a reasonable range of financial penalties the Company may incur as no other point within the range was deemed more probable. The Company has not adjusted its estimate of financial penalties as a result of the completion of the investigation in the nine months ended May 31, 2024. While there can be no assurance of the ultimate outcome of the matter, the Company currently believes that there will be no material adverse effect on the Company's financial position, results of operations or cash flows from this matter.
Note 14. Leases
The Company has operating leases for real estate, vehicles, manufacturing equipment, IT equipment and office equipment (the Company does not have any significant financing leases). Our leases typically range in term from 3 to 15 years and may contain renewal options for periods up to 5 years at our discretion. Operating leases are recorded as operating lease ROU assets in “Other long-term assets” and operating lease liabilities in “Other current liabilities” and “Other long-term liabilities” of the Condensed Consolidated Balance Sheets. There have been no material changes to our operating lease ROU assets and operating lease liabilities during the nine months ended May 31, 2024.
The components of lease expense were as follows (in thousands):
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Lease Cost: | |||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Short-term lease cost | |||||||||||||||||||||||
| Variable lease cost | |||||||||||||||||||||||
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| Nine Months Ended May 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for new lease liabilities: | |||||||||||
| Operating leases | |||||||||||
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Enerpac Tool Group Corp. is a premier industrial tools, services, technology, and solutions company serving a broad and diverse set of customers and end markets for mission-critical applications in more than 100 countries. The Company makes complex, often hazardous jobs possible safely and efficiently. The Company's businesses are global leaders of high pressure hydraulic tools, controlled force products and solutions for precise positioning of heavy loads that help customers safely and reliably tackle some of the most challenging jobs around the world. The Company was founded in 1910 and is headquartered in Menomonee Falls, Wisconsin. The Company has one reportable segment, the Industrial Tools & Services Segment ("IT&S"). The IT&S segment is primarily engaged in the design, manufacture and distribution of branded hydraulic and mechanical tools and in providing services and tool rental to the oil & gas/petrochemical; general industrial; industrial maintenance, repair and operations (“MRO”), machining & manufacturing; power generation, infrastructure, mining and other markets. Financial information related to the Company's reportable segment is included in Note 12, "Segment Information" in the notes to the condensed consolidated financial statements. The Company has an Other operating segment, which does not meet the criteria to be considered a reportable segment.
Our businesses provide an array of products and services across multiple markets and geographies, which results in significant diversification. The IT&S segment and the Company are well-positioned to drive shareholder value through a sustainable business strategy built on well-established brands, broad global distribution and end markets, clear focus on the core tools and services business and disciplined capital deployment.
Our Business Model
Our long-term goal is to create sustainable returns for our shareholders through above-market growth in our core business, expanding our margins, generating strong cash flow, and being disciplined in the deployment of our capital. We intend to grow through execution of our organic growth strategy, focused on key vertical markets that benefit from long-term macro trends, driving customer driven innovation, expansion of our digital ecosystem to acquire and engage customers, and an expansion in emerging markets such as Asia Pacific. In addition to organic growth, we also focus on margin expansion through operational efficiency techniques, including lean, continuous improvement and 80/20, to drive productivity and lower costs, as well as optimizing our selling, general and administrative expenses through consolidation and shared service implementation. We also apply these techniques and pricing actions to offset commodity increases and inflationary pricing. Finally, cash flow generation is critical to achieving our financial and long-term strategic objectives. We believe driving profitable growth and margin expansion will result in cash flow generation, which we seek to supplement through minimizing primary working capital. We intend to allocate the cash flow that results from the execution of our strategy in a disciplined way toward investment in our businesses, maintaining our strong balance sheet, disciplined M&A and opportunistically returning capital to shareholders. We anticipate the compounding effect of reinvesting in our business will fuel further growth and profitable returns.
General Business Update
In March 2022, the Company announced the start of its ASCEND transformation program (“ASCEND”). ASCEND’s key initiatives include accelerating organic growth strategies, improving operational excellence and production efficiency by utilizing a Lean approach, and driving greater efficiency and productivity in selling, general and administrative expense by better leveraging resources to create a more efficient and agile organization. In support of the ASCEND initiatives, the Company anticipates investing
approximately $70 to $75 million over the life of the program, which is expected to be fully implemented by the end of the fourth quarter of fiscal 2024, with an expected annual operating profit improvement from the program in the range of $50 to $60 million. Through the end of fiscal 2023, the Company had realized approximately $54 million of annual operating profit and had invested approximately $60 million as part of the program.
In June 2022, the Company approved a restructuring plan in connection with the initiatives identified as part of the ASCEND transformation program (see Note 3, “ASCEND Transformation Program” in the notes to the consolidated financial statements) to drive greater efficiency and productivity in global selling, general and administrative resources. The total costs of this plan were then estimated at $6 to $10 million, constituting predominately severance and other employee-related costs to be incurred as cash
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expenditures and impacting both IT&S and Corporate. On September 23, 2022, the Company approved an updated restructuring plan. The restructuring costs of this updated plan (which includes the amounts for the plan approved in June 2022) are estimated at $10 to $15 million. These costs are expected to be incurred over the expected duration of the transformation program, ending in the fourth quarter of fiscal 2024. For fiscal 2024, we expect to incur $10 to $15 million of ASCEND transformation program costs, which is inclusive of $3 to $5 million of restructuring costs.
Results of Operations
The following table sets forth our results of continuing operations (dollars in millions, except per share amounts):
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||||||||||||||||||||||||||
Results from Continuing Operations (1) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 150 | 100 | % | $ | 156 | 100 | % | $ | 431 | 100 | % | $ | 438 | 100 | % | |||||||||||||||||||||||||||||||
| Cost of products sold | 73 | 48 | % | 78 | 50 | % | 207 | 48 | % | 221 | 51 | % | |||||||||||||||||||||||||||||||||||
| Gross profit | 78 | 52 | % | 78 | 50 | % | 224 | 52 | % | 216 | 49 | % | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 42 | 28 | % | 49 | 31 | % | 125 | 29 | % | 154 | 35 | % | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 1 | 1 | % | 1 | 1 | % | 2 | 1 | % | 4 | 1 | % | |||||||||||||||||||||||||||||||||||
| Restructuring charges | 2 | 1 | % | 2 | 1 | % | 4 | 1 | % | 6 | 1 | % | |||||||||||||||||||||||||||||||||||
| Impairment & divestiture charges | — | — | % | — | — | % | — | — | % | — | — | % | |||||||||||||||||||||||||||||||||||
| Operating profit | 33 | 22 | % | 25 | 16 | % | 92 | 21 | % | 52 | 12 | % | |||||||||||||||||||||||||||||||||||
| Financing costs, net | 3 | 2 | % | 3 | 2 | % | 11 | 3 | % | 9 | 2 | % | |||||||||||||||||||||||||||||||||||
| Other expense, net | 1 | — | % | 1 | 1 | % | 2 | 0 | % | 2 | — | % | |||||||||||||||||||||||||||||||||||
| Earnings before income tax expense | 29 | 20 | % | 22 | 14 | % | 79 | 18 | % | 41 | 9 | % | |||||||||||||||||||||||||||||||||||
| Income tax expense | 7 | 5 | % | 5 | 3 | % | 20 | 5 | % | 10 | 2 | % | |||||||||||||||||||||||||||||||||||
| Net earnings | 23 | 15 | % | 17 | 11 | % | 59 | 14 | % | 31 | 7 | % | |||||||||||||||||||||||||||||||||||
| Diluted earnings per share from continuing operations | $ | 0.41 | $ | 0.30 | $ | 1.07 | $ | 0.53 | |||||||||||||||||||||||||||||||||||||||
(1) Results are from continuing operations and exclude the financial results of previously divested businesses reported as discontinued operations. The summation of the individual components may not equal the total due to rounding.
Consolidated net sales for the third quarter of fiscal 2024 were $150 million, a decrease of $6 million or 4% compared to the prior-year comparable period. The effect of the strengthening U.S. dollar on foreign currency rates compared to the third quarter of fiscal 2023 unfavorably impacted sales by approximately $1 million or 1%, and the divestiture of the Cortland Industrial business during the fourth quarter of fiscal 2023 unfavorably impacted sales by $7 million, or 4%, resulting in organic sales growth of 1% year-over-year. Management refers to sales adjusted to exclude the impact of these items (foreign currency changes and recent acquisitions and divestitures) as "organic sales" (which we formerly referred to as "core sales"). In the third quarter of fiscal 2024, product sales declined $8 million, or 6%, with foreign currency unfavorably impacting sales approximately $1 million, and the divestiture of the Cortland Industrial business during the fourth quarter of fiscal 2023 unfavorably impacted sales by $7 million or 5%, resulting in flat product organic sales compared to the prior-year period. Although total product sales were flat, IT&S product sales increased from the prior-year, due to the impact of pricing actions and mix within the IT&S product offerings. This increase was fully offset by sales decline in the Cortland Medical business. In the third quarter of fiscal 2024, service sales increased $2 million, or 7%, with immaterial impact of foreign currency, resulting in 7% organic sales growth year-over-year. Gross profit as a percentage of sales was approximately 52% for the third quarter of fiscal 2024 compared to 50% in the third quarter of fiscal 2023. The increase in gross profit as a percentage of sales was driven by operational improvements related to ASCEND, favorable sales mix, the impact of pricing actions, and the divestiture of the Cortland Industrial business. Operating profit for the third quarter of fiscal year 2024 was $33 million, an increase of $8 million compared to the third quarter of fiscal 2023. The increase in operating profit was mainly driven by a $7 million decrease in Selling, general & administrative expense ("SG&A") year-over-year. The SG&A decreases were a result of $4 million in lower ASCEND transformation program charges, $1 million of lower restructuring charges, and decreases in personnel costs and discretionary spend as the Company continues to responsibly manage its spending.
Consolidated net sales were $431 million for the nine months ended May 31, 2024, a decrease of $7 million compared to nine months ended May 31, 2023. The effect of the weakening U.S. dollar on foreign currency rates compared to the same nine months of fiscal 2023 favorably impacted net sales by $2 million, or 0.4%, and the divestiture of Cortland Industrial unfavorably impacted sales by $20 million, or 5%, resulting in organic sales growth of 3%. Compared to the prior-year period, product sales declined 4% for the nine months ended May 31, 2024, with the effect of foreign currency rates unfavorably impacting sales by approximately $1 million, or 0.2%, and the divestiture of Cortland Industrial unfavorably impacting product sales by $20 million, or 6%, resulting in product organic sales growth of 2%. Service sales increased 7% compared to the prior-year period, favorably impacted by foreign currency rates of approximately $1 million, or 2%, resulting in 6% organic sales growth year-over-year. Year-to-date gross profit as a percentage of sales of 52% was approximately 250 basis points higher for the nine months ended May 31, 2024 compared to
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approximately 49% for the nine months ended May 31, 2023. The gross profit percent increase is driven by operational improvement, favorable sales mix and the divestiture of the Cortland Industrial business in the fourth quarter or fiscal 2023. SG&A has decreased $31 million year-over-year as a result of $22 million of lower ASCEND transformation program charges, $2 million of lower restructuring charges, personnel cost and discretionary spend as the Company continues to responsibly manage its spending.
Segment Results
IT&S Segment
The IT&S segment is a global supplier of branded hydraulic and mechanical tools and services to a broad array of end markets, including oil & gas/petrochemical; general industrial; industrial MRO, machining & manufacturing; power generation, infrastructure, mining and other markets. Its primary products include branded tools, cylinders, pumps, hydraulic torque wrenches, highly engineered heavy lifting technology solutions and other tools (Product product line). The segment provides maintenance and manpower services to meet customer-specific needs and rental capabilities for certain of our products (Service & Rental product line). The following table sets forth the results of operations for the IT&S segment (dollars in millions):
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | $ | 146 | $ | 144 | $ | 418 | $ | 402 | |||||||||||||||
| Operating profit | 41 | 36 | 114 | 93 | |||||||||||||||||||
| Operating profit % | 28.1 | % | 25.1 | % | 27.3 | % | 23.2 | % | |||||||||||||||
IT&S segment net sales for the third quarter of fiscal 2024 increased by $2 million, or 1%, compared to the third quarter of fiscal 2023. The strengthening of the U.S. dollar unfavorably impacted sales by approximately $1 million or 1%, resulting in 2% organic sales growth. Organic sales growth was driven by the impact of pricing actions and favorable mix. Operating profit was $41 million compared to $36 million in the third quarter of fiscal 2023. This increase was due to pricing actions, mix and reduction in SG&A.
IT&S segment net sales for the nine months ended May 31, 2024 increased by $15 million, or 4%, compared to the nine months ended May 31, 2023. The weakening of the U.S. dollar favorably impacted sales by approximately $2 million or 0.2%, resulting in 3% organic sales growth. Organic sales growth was driven by the impact of pricing actions and favorable mix. Operating profit was $114 million compared to $93 million in the first nine months of fiscal 2023. The increase was due to pricing actions and mix and reduction in SG&A.
Corporate
Corporate expenses were $9 million and $13 million for the third quarter of fiscal 2024 and 2023, respectively, and $26 million compared to $46 million for the nine months ended May 31, 2024 and 2023, respectively. The decrease in expenses for both the three and nine months ended May 31, 2024 were driven by lower ASCEND transformation program charges.
Financing Costs, net
Net financing costs were $3 million in both the three months ended May 31, 2024 and 2023. For the nine months ended May 31, 2024 and 2023, net financing costs were $11 million and $9 million, respectively. Financing costs increased due to higher debt balances and higher interest rates.
Income Tax Expense
The Company's global operations, acquisition activity (as applicable) and specific tax attributes provide opportunities for continuous global tax planning initiatives to maximize tax credits and deductions. Comparative earnings before income taxes, income tax expense and effective income tax rates from continuing operations are as follows (dollars in millions):
| Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Earnings from continuing operations before income tax expense | $ | 29 | $ | 22 | $ | 79 | $ | 41 | |||||||||||||||
| Income tax expense | 7 | 5 | 20 | 10 | |||||||||||||||||||
| Effective income tax rate | 23.1 | % | 21.6 | % | 25.3 | % | 24.8 | % | |||||||||||||||
The Company’s earnings from continuing operations before income taxes include earnings from both U.S. and foreign jurisdictions. As several foreign tax rates are higher than the U.S. tax rate of 21%, the annual effective tax rate is impacted by foreign rate differentials, withholding taxes, losses in jurisdictions where no benefit can be realized, and various aspects of the U.S. Tax Cuts and Jobs Act, such as the Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income provisions.
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The effective tax rate for the three months ended May 31, 2024 was 23.1%, compared to 21.6% for the comparable prior-year period. The effective tax rate in each time period was impacted by year-to-date losses and deductions in jurisdictions where no tax benefit can be realized. The higher effective tax rate for the three months ended May 31, 2024 was primarily driven by the full year impacts of withholding tax related to current and future distributions, while the effective tax rate for the nine months ended May 31, 2024 is comparable to the prior-year period. Both the current and prior-year effective income tax rates include the impact of non-recurring items.
Cash Flows and Liquidity
At May 31, 2024, we had $132 million of cash and cash equivalents, of which $120 million was held by our foreign subsidiaries and $12 million was held domestically. The following table summarizes our cash flows provided by operating, investing and financing activities (dollars in millions):
| Nine Months Ended | |||||||||||
| May 31, 2024 | May 31, 2023 | ||||||||||
| Cash provided by operating activities | $ | 37 | $ | 27 | |||||||
| Cash used in investing activities | (8) | (8) | |||||||||
| Cash (used in) provided by financing activities | (51) | 4 | |||||||||
| Effect of exchange rate changes on cash | — | (2) | |||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (22) | $ | 21 | |||||||
Net cash provided by operating activities was $37 million for the nine months ended May 31, 2024 and $27 million May 31, 2023, respectively. Cash flow from operations was higher than the prior year driven by higher earnings in between the comparable periods.
Net cash used in investing activities was $8 million for both the nine months ended May 31, 2024 and 2023, respectively. The first nine months of fiscal year 2024 investing activities included capital expenditures, purchase of business assets and final payments received from the sale of the Cortland Industrial business in July 2023. The prior-year nine-month period cash flows used in investing were for capital expenditures.
Net cash used in financing activities was $51 million for the nine months ended May 31, 2024 compared to $4 million of net cash provided by financing activities for the nine months ended May 31, 2023. The net cash used in financing activities for the nine months ended May 31, 2024 is mainly driven by the $19 million of net payments on borrowings and $32 million of payments to acquire treasury shares. Net cash used in financing activities for the nine months ended May 31, 2023 consisted of $31 million increase in total borrowings offset by $21 million of payments to acquire treasury shares, $2 million in debt issuance costs, $2 million payment of the annual cash dividend and net $1 million of stock options and taxes paid on equity awards.
On September 9, 2022, the Company refinanced its previous senior credit facility with a $600 million senior credit facility, comprised of a $400 million revolving line of credit and a $200 million term loan, which is scheduled to mature in September 2027. The Company has the option to request up to $300 million of additional revolving commitments and/or term loans under the new facility, subject to customary conditions, including the commitment of the participating lenders. The senior credit facility contains restrictive covenants and financial covenants. See Note 7, "Debt" in the notes to the condensed consolidated financial statements for further details regarding the senior credit facility.
At May 31, 2024, there were no borrowings and $399 million available under the revolving line of credit facility after reduction for $1 million of outstanding letters of credit issued under the senior credit facility. The Company was in compliance with all covenants under the senior credit facility at May 31, 2024.
We believe that the revolving credit line, combined with our existing cash on hand and anticipated operating cash flows, will be adequate to meet operating, debt service, acquisition and capital expenditure funding requirements for the foreseeable future.
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Primary Working Capital Management
We use primary working capital as a percentage of sales (PWC %) as a key metric of working capital management. We define this metric as the sum of net accounts receivable and net inventory less accounts payable, divided by the past three months sales annualized. The following table shows a comparison of primary working capital (dollars in millions):
| May 31, 2024 | PWC% | August 31, 2023 | PWC% | ||||||||||||||||||||
| Accounts receivable, net | $ | 108 | 18 | % | $ | 98 | 15 | % | |||||||||||||||
| Inventory, net | 79 | 13 | % | 75 | 12 | % | |||||||||||||||||
| Accounts payable | (42) | (7) | % | (51) | (8) | % | |||||||||||||||||
| Net primary working capital | $ | 145 | 24 | % | $ | 122 | 19 | % | |||||||||||||||
Commitments and Contingencies
Given our desire to allocate cash flow and revolver availability to fund growth initiatives, we have historically leased most of our facilities and some operating equipment. We lease certain facilities, computers, equipment and vehicles under various operating lease agreements, generally over periods ranging from one to twenty years. Under most arrangements, we pay the property taxes, insurance, maintenance and expenses related to the leased property. Many of our leases include provisions that enable us to renew the
leases at contractually agreed rates or, less commonly, based upon market rental rates on the date of expiration of the initial leases.
We had outstanding letters of credit totaling $8 million and $9 million at May 31, 2024 and August 31, 2023, respectively, the majority of which relate to commercial contracts and self-insured workers' compensation programs.
We are also subject to certain contingencies with respect to legal proceedings and regulatory matters which are described in Note 13, "Commitments and Contingencies" in the notes to the condensed consolidated financial statements. While there can be no assurance of the ultimate outcome of these matters, the Company believes that there will be no material adverse effect on the Company's results of operations, financial position or cash flows.
Contractual Obligations
Our contractual obligations have not materially changed at May 31, 2024 from what was previously disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Contractual Obligations” in our fiscal 2023 Annual Report on Form 10-K.
Critical Accounting Estimates
Management has evaluated the accounting estimates used in the preparation of the Company's condensed consolidated financial statements and related notes and believe those estimates to be reasonable and appropriate. Certain of these accounting estimates are considered by management to be the most critical in understanding judgments involved in the preparation of our condensed consolidated financial statements and uncertainties that could impact our results of operations, financial position and cash flow. For information about more of the Company’s policies, methodology and assumptions related to critical accounting policies refer to the Critical Accounting Policies in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our fiscal 2023 Annual Report on Form 10-K.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
The diverse nature of our business activities necessitates the management of various financial and market risks, including those related to changes in interest rates, foreign currency exchange rates and commodity costs.
Interest Rate Risk: As of May 31, 2024, long-term debt consisted of no borrowing under the revolving line of credit (variable rate debt) and $196 million of term loan debt bearing interest based on SOFR (variable rate). An interest-rate swap effectively converts the SOFR-based rate of $60 million of term borrowings under our credit facility to a fixed rate. A ten percent increase in the average costs of our variable rate debt would have resulted in less than $1 million of an increase in financing costs for the three months ended May 31, 2024.
Foreign Currency Risk: We maintain operations in the U.S. and various foreign countries. Our more significant non-U.S. operations are located in Australia, the Netherlands, the United Kingdom, United Arab Emirates and China, and we have foreign currency risk relating to receipts from customers, payments to suppliers and intercompany transactions denominated in foreign currencies. Under certain conditions, we enter into hedging transactions (primarily foreign currency exchange contracts) that enable us to mitigate the potential adverse impact of foreign currency exchange rate risk (see Note 9, “Derivatives” in the notes to the consolidated financial statements for further information). We do not engage in trading or other speculative activities with these transactions, as established policies require that these hedging transactions relate to specific currency exposures.
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The strengthening of the U.S. dollar against most currencies can have an unfavorable impact on our results of operations and financial position as foreign denominated operating results are translated into U.S. dollars. To illustrate the potential impact of changes in foreign currency exchange rates on the translation of our results of operations, quarterly sales and operating profit were re-measured assuming a ten percent decrease in all foreign exchange rates compared with the U.S. dollar. Using this assumption, quarterly sales would have been lower by $7 million and operating profit would have been lower by approximately $1 million, respectively, for the three months ended May 31, 2024. This sensitivity analysis assumes that each exchange rate would change in the same direction relative to the U.S. dollar and excludes the potential effects that changes in foreign currency exchange rates may have on sales levels or local currency prices. Similarly, a ten percent decline in foreign currency exchange rates versus the U.S. dollar would result in a $33 million reduction to equity (accumulated other comprehensive loss) as of May 31, 2024, as a result of non-U.S. dollar denominated assets and liabilities being translated into U.S. dollars, our reporting currency.
Commodity Cost Risk: We source a wide variety of materials and components from a network of global suppliers. While such materials are typically available from numerous suppliers, commodity raw materials, such as steel and plastic resin, are subject to price fluctuations, which could have a negative impact on our results. We strive to pass along such commodity price increases to customers to avoid profit margin erosion.
Item 4 – Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our senior management, including our chief executive officer and interim principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and interim principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our chief executive officer and interim principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). There have been no changes in our internal control over financial reporting that occurred during the quarter ended May 31, 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The Company's Board of Directors has authorized the repurchase of shares of the Company's common stock under publicly announced share repurchase programs. Since the inception of the initial share repurchase program in fiscal 2012, the Company has repurchased 29,938,482 shares of common stock for $833 million. The Company suspended the initial share repurchase program in response to the COVID-19 pandemic in the third quarter of fiscal 2020. In March 2022, the Company's Board of Directors rescinded its prior share repurchase authorization and approved a new share repurchase program authorizing the repurchase of a total of 10,000,000 shares of the Company's outstanding common stock. The Company repurchased 1,165,767 shares for $33 million in the nine months ended May 31, 2024 and repurchased 843,689 shares for $21 million in the nine months ended May 31, 2023. As of May 31, 2024, the maximum number of shares that may yet be purchased under the program is 2,860,748 shares.
In December 2023, the Company's Board of Directors authorized the retirement of the Company's repurchased shares, and the Company retired 29,841,209 treasury shares. The initial share retirement resulted in reductions of $6 million in Class A Common Stock and $825 million in Retained Earnings reflected in the Condensed Consolidated Balance Sheets at May 31, 2024. Shares repurchased after December 18, 2023 were retired upon repurchase. The Company repurchased and retired 71,536 shares during the three months ended May 31, 2024.
| Period | Shares Repurchased | Average Price Paid per Share | Maximum Number of Shares That May Yet Be Purchased Under the Program | |||||||||||||||||
| March 1 to March 31, 2024 | — | $ | — | 2,932,284 | ||||||||||||||||
| April 1 to April 30, 2024 | 44,184 | 36.15 | 2,888,100 | |||||||||||||||||
| May 1 to May 31, 2024 | 27,352 | 35.97 | 2,860,748 | |||||||||||||||||
| 71,536 | $ | 36.11 | ||||||||||||||||||
Item 5 – Other Information
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Item 6 – Exhibits
| Exhibit | Description | Incorporated Herein By Reference To | Filed Herewith | Furnished Herewith | ||||||||||||||||||||||
| Form of Restricted Stock Unit Award (RSU) Agreement under the 2017 Omnibus Incentive Plan (for awards commencing in 2024) | X | |||||||||||||||||||||||||
| Form of Performance Share Award (PSU) Agreement under the 2017 Omnibus Incentive Plan (Total Shareholder Return) (for awards commencing in 2024) | X | |||||||||||||||||||||||||
| Form of Performance Share Award (PSU) Agreement under the 2017 Omnibus Incentive Plan (Return on Invested Capital) (for awards commencing in 2024) | X | |||||||||||||||||||||||||
| Form of Performance Share Award (PSU) Agreement under the 2017 Omnibus Incentive Plan (Earnings Per Share) (for awards commencing in 2024) | X | |||||||||||||||||||||||||
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||
| Certification of Interim Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||
| Certification of Interim Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||
| The following materials from the Enerpac Tool Group Corp. Form 10-Q for the three and nine months ended May 31, 2024 and 2023 formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) the Condensed Consolidated Statements of Earnings, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Condensed Consolidated Financial Statements. | X | |||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted as Exhibit 101) | |||||||||||||||||||||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ENERPAC TOOL GROUP CORP. | |||||||||||
| (Registrant) | |||||||||||
| Date: June 25, 2024 | By: | /S/ P. SHANNON BURNS | |||||||||
| P. Shannon Burns | |||||||||||
| Head of Financial Planning, Operations and Decision Support (Interim Principal Financial Officer) | |||||||||||
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