ENERPAC TOOL GROUP CORP (EPAC)

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 provider serving a broad and diverse set of customers and end markets for mission-critical applications in more than 100 countries. Enerpac Tool Group's businesses are global leaders in providing 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 Milwaukee, Wisconsin. The Company has one reportable segment, the Industrial Tools & Service Segment (“IT&S”), and an Other operating segment, which does not meet the criteria to be considered a reportable segment. 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 general industrial; refining and petrochemical; 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 11, “Segment Information” in the notes to the condensed consolidated financial statements.

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 program, and opportunistically returning capital to shareholders. We anticipate the compounding effect of reinvesting in our business will fuel further growth and profitable returns.

Results of Operations

The following table sets forth our results of operations:

(1) The summation of the individual components may not equal the total due to rounding. Period to period differences between line items included in the table may differ from the amount presented below due to rounding.

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Consolidated net sales for the three months ended May 31, 2026 were $168 million, an increase of $9 million, or 6%, compared to the prior-year comparable period. Management refers to sales adjusted to exclude the impact of foreign currency changes and recent acquisitions and divestitures as “organic sales”. The effect of the weakening U.S. dollar on foreign currency rates compared to the prior-year period favorably impacted sales by $4 million, or 2%. This resulted in an organic sales increase of approximately 3% in the quarter. In the three months ended May 31, 2026, product sales grew $11 million, or 8%, year-over-year, with foreign currency favorably impacting product sales by $3 million, or 2%, resulting in organic product sales growth of 6% over the prior-year quarter. Service sales were down $2 million, or 6%, year-over-year, with a favorable impact of foreign currency of $1 million, or 3%, resulting in an organic service sales decline of 8%. Gross profit as a percent of sales increased to 53.0%, compared to 50.4% in the third quarter of fiscal 2025; the increase in gross profit margin is due to the flow through of the growth in product sales along with tariff refunds recorded in the third quarter, partially offset by continued pressure in our service business, primarily in the EMEA region. Operating profit for the third quarter of fiscal year 2026 was $41 million, an increase of $10 million compared to the third quarter of fiscal 2025. The increase in operating profit is due to flow through of the growth in product sales along with tariff refunds recorded in the third quarter, partially offset by continued pressure in our service business.

Consolidated net sales for the nine months ended May 31, 2026 were $467 million, an increase of $17 million, or 4%, compared to the prior-year comparable period. The effect of the weakening U.S. dollar on foreign currency rates compared to the prior-year period favorably impacted sales by $12 million, or 3%. This resulted in organic sales increase of approximately 1% for the nine months ended May 31, 2026 compared to the prior-year period. Product sales for the nine months ended May 31, 2026 grew $31 million, or 9%, with foreign currency favorably impacting sales by $9 million, or 3%, resulting in organic product sales growth of 6% over the prior-year period. Service sales were down $13 million, or 15%, year-over-year, with a favorable impact of foreign currency of $3 million, or 3%, resulting in an organic service sales decline of 18%. Gross profit as a percent of sales remained relatively flat at 50.1%, compared to 50.7% in the nine months ended May 31, 2025; gross profit margin has remained flat as growth in product sales has been offset by activity declines in our service business. Operating profit for the first nine months of fiscal year 2026 was $95 million, a decrease of $1 million compared to the first nine months of fiscal 2025. Operating profit has remained flat as growth related to increased product sales has been offset by activity declines in our service business, primarily in the EMEA region.

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 general industrial; refining and petrochemical; 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:

IT&S segment net sales for the third quarter of fiscal 2026 increased by $8 million, or 5%, compared to the third quarter of fiscal 2025. The weakening of the U.S. dollar on foreign currency rates compared to the three months ended May 31, 2025 favorably impacted sales by $4 million, or 3%. This resulted in an organic sales increase of $4 million, or 2%, in the quarter. The organic sales increase is driven by growth in our product business, offset by declines in our service business. Service sales were down $2 million, or 6%, year-over-year, with a favorable impact of foreign currency of $1 million, or 3%, resulting in an organic service sales decline of 8% primarily attributable to lower activity. Product sales were up $9 million, or 7%, year-over-year, with a favorable impact of foreign currency of $3 million, or 2%, resulting in organic product sales growth of 5%. The organic sales increase was due to strong growth in our product business, especially in the Americas driven by our success in the power generation market. Operating profit for the three months ended May 31, 2026 was $49 million, compared to $40 million in the same period of the prior year. The increase in operating profit was mainly driven by the flow through of the growth in product sales along with tariff refunds recorded in the third quarter, partially offset by continued pressure in our service business.

IT&S segment net sales for the nine months ended May 31, 2026 increased by $13 million, or 3%, compared to the nine months ended May 31, 2025. The weakening of the U.S. dollar on foreign currency rates compared to the nine months ended May 31, 2025 favorably impacted sales by $12 million, or 3%. This resulted in an organic sales increase of $1 million, or 0.2%. The organic sales increase is driven by growth in our product business, partially offset by declines in our service business. Service sales were down $13 million, or 15%, year-over-year, with a favorable impact of foreign currency of $3 million, or 3%, resulting in an organic service sales decline of 18% primarily attributable to lower activity. Product sales were up $27 million, or 8%, year-over-year, with a

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favorable impact of foreign currency of $9 mill

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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis is intended to assist the reader in understanding our results of operations and financial condition. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data".

Background

The Company has one reportable segment, the Industrial Tools & Service ("IT&S") segment, and an Other operating segment, which does not meet the criteria to be considered a reportable segment. 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 refinery/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 16, "Business Segment, Geographic and Customer Information" in the notes to the consolidated financial statements.

Business Update

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 program 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 included 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.

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In October 2023, the Company announced that during fiscal 2023, the Company had realized approximately $54 million of annual operating profit from execution of the ASCEND program and would no longer be breaking out the ASCEND benefit from results going into fiscal 2024. The ASCEND program was completed as of August 31, 2024, with total program costs of $75 million, of which $19 million related to restructuring charges. The following summarizes ASCEND transformation charges (in thousands):

Historical Financial Data

The following table and corresponding year-over-year analysis sets forth our results of continuing operations (dollars in millions, except per share amounts):

(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.

Fiscal 2025 Compared to Fiscal 2024

Consolidated net sales for fiscal 2025 were $617 million, 5% higher than the prior-year sales of $590 million. The effect of the weakening U.S. dollar on foreign currency rates compared to the prior-year period favorably impacted sales by $2 million, or 1%, and the inclusion of DTA, acquired in the first quarter of fiscal 2025 favorably impacted sales by $20 million, or 3%. This resulted in organic consolidated sales growth of approximately 1% in the year. Management refers to sales adjusted to exclude the impact of these items (foreign currency changes and recent acquisitions and divestitures) as "organic sales". Product sales increased 6% to $500 million, compared to the prior fiscal year. Foreign currency rate changes favorably impacted product sales by $2 million, or less than 1%, and the acquisition of DTA favorably impacted product sales by $20 million, or 4%. This resulted in product organic sales growth of 1%. This increase in product organic sales was primarily due to growth in the Americas and APAC regions, and the Cortland Medical business. This was offset by declines in our EMEA region. Service sales were $117 million, an increase of 1% compared to the prior fiscal year. Foreign currency impact was nearly flat, resulting in a 1% increase in service organic sales over the prior fiscal year. The service organic sales increase in the service business was due to strong growth within our Americas region that was partially offset by declines in activity within our EMEA region.

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Gross profit as a percentage of sales was approximately 51% in fiscal 2025, remaining consistent with fiscal 2024.

Operating profit for fiscal 2025 was $133 million, approximately $11 million higher than the prior fiscal year operating profit of $122 million. The increase in operating profit is primarily due to the flow through of gross profit on the incremental current year sales and lower selling, general & administrative ("SG&A") expense as a percentage of revenue compared to the prior year.

Fiscal 2024 Compared to Fiscal 2023

Consolidated net sales for fiscal 2024 were $590 million, 1% lower than the prior-year sales of $598 million. The impact of foreign currency rates was nearly flat year-over-year, while the divestiture of the Cortland Industrial business during the fourth quarter of fiscal 2023 unfavorably impacted fiscal 2024 sales by approximately $23 million, or 4%. Product sales declined 3% compared to prior fiscal year to $474 million, with foreign currency impact of less than 1% and the Cortland Industrial divestiture unfavorably impacting sales by 5%, resulting in a 1% improvement in product organic sales. The increase in product organic sales was driven by pricing actions and mix within the IT&S product offerings; however, this was partially offset by a decrease in product organic sales in the Cortland Medical business due to softness in demand related to certain surgical procedures utilizing Cortland Biomedical products. Service sales were $116 million, an increase of 7% compared to the prior fiscal year. Foreign currency impact was nearly flat, resulting in a 7% increase in service organic sales over the prior fiscal year. The service organic sales increase was due to strong growth within our EMEA region from increased work scopes, higher maintenance activity in the North Sea and projects delayed from the prior fiscal year taking place during fiscal 2024.

Gross profit as a percentage of sales was approximately 51% in fiscal 2024, 2% higher than fiscal 2023. The increase in gross profit is primarily attributed to operational improvements from the ASCEND transformation program, as well as pricing actions and the disposition of Cortland Industrial.

Operating profit for fiscal 2024 was $122 million, approximately $38 million higher than the prior fiscal year of $84 million. Operating profit was impacted by the increased gross profit noted above, as well as a reduction of SG&A expense of $36 million compared to the prior fiscal year. The SG&A decrease was primarily due to lower ASCEND transformation program charges ($28 million), M&A charges ($1 million) and leadership transition charges ($1 million), as well as reduced incentive compensation expense.

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 refinery/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):

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