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Enerpac Tool (EPAC) Lags on Q2 Earnings, Discontinues View

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Enerpac Tool Group Corp. EPAC reported weaker-than-expected results in second-quarter fiscal 2020 (ended Feb 29, 2020). Its earnings lagged estimates by 25% and sales missed the same by 2.8%. The weak bottom-line results came in after witnessing better-than-expected numbers in seven consecutive quarters.

In the quarter under review, the company’s adjusted earnings were 9 cents per share, surpassing the Zacks Consensus Estimate of 12 cents. On a year-over-year basis, the bottom-line figure declined 25% due to the adverse impacts of weak sales and operating profits.

Notably, the coronavirus outbreak impacted the company’s sales by $2 million and operating results by $1 million.

Segmental Performance

Enerpac Tool generated revenues of $133.4 million in the fiscal second quarter, reflecting a 16.5% decline from the year-ago figure. The top line also lagged the Zacks Consensus Estimate of $137.2 million by 2.8%. New products accounted for more than 10% of quarterly sales.

Organic sales in the quarter decreased 10% year over year due to a 28% fall in service revenues and a 4% decline in product sales.

Divestitures/acquisitions (net) adversely impacted revenues by 6%, while movements in foreign currencies had a negligible impact. It is worth noting here that Enerpac Tool completed the buyout of U.K.-based HTL Group in the quarter. The acquired firm is known for its controlled bolting products.

The segmental information is briefly discussed below:

Industrial Tools & Services (92.5% of second-quarter fiscal 2020 net sales): Revenues at the segment totaled $123.4 million, reflecting a 17.5% decline from the year-ago figure. The segment’s core sales decreased 11%.

Other (7.5% of second-quarter fiscal 2020 net sales): Revenues at the segment totaled $10 million, down 2.4% from the year-ago figure.

Margin Profile

In the reported quarter, Enerpac Tool’s cost of sales decreased 19.4% year over year to $71.3 million. It represented 53.4% of the quarter’s net sales compared with 55.4% in the year-ago quarter. Gross margin expanded 190 basis points (bps) year over year to 46.6%. Selling, administrative and engineering expenses decreased 6% year over year to $50.2 million.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $16 million, down 19.3% year over year. The adjusted EBITDA margin was 12% compared with 12.4% in the year-ago quarter. While adjusted operating income decreased 38% year over year to $9.9 million, adjusted operating margin contracted 260 bps to 7.4%. Net financing costs declined 35.3% year over year to $4.6 million.

Balance Sheet and Cash Flow

Exiting second-quarter fiscal 2020, Enerpac Tool’s cash and cash equivalents totaled $163.4 million, down 21% from $206.8 million at the end of the last reported quarter. Long-term debt inched up 0.1% sequentially to $286.4 million.

The company’s net debt to adjusted EBITDA was 1.3x at the second-quarter end versus 2.1x at the end of the year-ago quarter.

In the fiscal second quarter, the company used cash of $5.8 million for operating activities, down from $22.2 million used in the year-ago quarter. Capital spending totaled $3.8 million, down 52.8% year over year.

Outlook

Enerpac Tool remains committed to build a solid product portfolio, and focus on growth initiatives, cost-saving actions and exiting non-profitable businesses. Also, effective marketing and commercial actions might be boons.

However, global uncertainties related to volatile oil prices and the coronavirus outbreak remain concerning. Notably, Enerpac Tool discontinued its previous projections for fiscal 2020 (ending Aug 31, 2020).

Zacks Rank & Stocks to Consider

With a market capitalization of $1.1 billion, the company currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Industrial Products sector are Graco Inc. GGG, Tennant Company TNC and Tetra Tech, Inc. TTEK. While both Graco and Tennant currently sport a Zacks Rank #1 (Strong Buy), Tetra Tech carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for the companies have improved for the current year. Further, positive earnings surprise for the last four quarters, on average, was 0.40% for Graco, 26.60% for Tennant and 8.31% for Tetra Tech.

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