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Item 7. Management’s Discussion and Analysis

2020-10-26 compared with 2019-10-29 · 139 added, 126 removed, 175 unchanged (60% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As discussed in Item 1, “Business,” during the fourth quarter of fiscal 2019, we realigned our Company’s financial reporting segments to reflect changes in our strategy related to the strategic disposition of the businesses comprising the EC&S segment.

Therefore, we currently have only one reportable segment, IT&S.

The Company has one reportable segment, Industrial Tools & Service ("IT&S").

This segment is primarily engaged in the design, manufacture and distribution of branded hydraulic and mechanical tools, as well as providing services and tool rental to the industrial, maintenance, infrastructure, oil & gas, energy and other markets.

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Our businesses provide an array of products and services across multiple markets and geographies which results in significant diversification.

The IT&S segment continues to have exposure within the broad industrial landscape, mining and infrastructure markets.

Due to economic uncertainties driven by geopolitical uncertainties, such as China tariffs and Brexit, we expect deceleration in demand for the majority of fiscal 2020.

As a result, we expect consolidated fiscal 2020 adjusted core sales (sales growth excluding the impact of acquisitions, divestitures, strategic exits of non-profitable product and service lines and changes in foreign currency exchange rates) growth of (3%) to 1%.

We remain focused on pursuing both organic and acquisition-related growth opportunities aligned with our strategic objectives.

The IT&S segment continues to have exposure within thirteen vertical markets.

We continue to execute our strategy to drive best in class returns for our shareholders, demonstrated by our acquisition of HTL Group in January 2020, our focus on improving commercial effectiveness, optimizing our global facility footprint and our heavy emphasis on new product development.

We remain focused on our long-term strategy of pursuing both organic and acquisition-related growth opportunities aligned with our strategic objectives.

This includes the advancement of our commercial effectiveness initiatives along with new product development efforts.

We also remain focused on our lean efforts across our manufacturing, assembly and service operations.

Our IT&S segment is focused on accelerating global sales growth through new product introductions, a continued emphasis on sales and marketing efforts, and regional growth via second tier brands.

In addition, we remain focused on reducing our concentration in the oil & gas vertical markets by growing sales of critical products, rentals, and services with new and existing customers in other attractive vertical markets including power generation, rescue, and mining.

We expect IT&S segment year-over-year adjusted core sales growth of (3%) to 1% in fiscal 2020.

On January 24, 2019, the Company announced its intent to divest the remaining businesses within the EC&S segment to pursue an overall strategy as a pure-play industrial tools and services company and on July 9, 2019, entered into a SPA to sell these businesses at a sales price of approximately $214.5 million .

We expect the divestiture will close in the fourth calendar quarter of 2019.

We plan to use the divestiture proceeds to continue to execute our capital allocation strategy through debt reduction, share repurchases and strategic acquisition opportunities.

On March 21, 2019, we announced a new restructuring plan focused on i) the integration of the Enerpac and Hydratight businesses (IT&S segment), ii) the strategic exit of certain commodity type services in our North America Services operation (IT&S segment), and iii) driving efficiencies within the overall corporate structure.

Total restructuring charges associated with the new restructuring plan were $4 million in fiscal 2019 related primarily to headcount reductions and facility consolidations (predominantly related to the exit of certain non-profitable North America Service operations).

Pre-tax cost savings realized from the fiscal 2019 announced restructuring plan totaled approximately $1 million benefiting the IT&S segment.

The Company expects to achieve a total of $12-$15 million of annual savings with total restructuring costs of $15-$20 million and we anticipate completing the majority of these actions within fiscal 2020.

The annual benefit of these gross cost savings may be impacted by a number of factors, including sales and production volume variances and annual incentive compensation differentials.

Total restructuring charges associated with previously announced restructuring initiatives, related to continuing operations, were $11 million and $3 million in fiscal 2018 and 2017 , respectively.

These restructuring costs related primarily to facility consolidations, headcount reductions and operational improvements throughout fiscal 2016 - 2018.

Pre-tax cost savings, related to continuing operations, realized from executing the prior restructuring plans totaled approximately $25 million through fiscal 2019.

Realized cost savings were comprised of $13 million within the IT&S segment, $8 million within the other operating segments and $3 million within Corporate.

We also remain focused on our safety, quality, cost and delivery metrics across our manufacturing, assembly and service operations.

Our IT&S segment is focused on accelerating global sales growth through new product introductions, a continued emphasis on sales effectiveness and more focused retail and wholesale marketing efforts.

COVID-19 Update

Over the past two quarters of fiscal 2020, our business, like many others around the world, has experienced the significant negative financial impacts of the COVID-19 pandemic.

Our key manufacturing facilities globally continued to operate with additional precautions in place to ensure the safety of our employees, and we have continued to supply our customers with the products and services they require.

However, demand for our products has been significantly impacted, and we expect it will continue to be impacted to some extent for the remainder of the pandemic, as levels of uncertainty exist within our customers and our markets.

In order to help mitigate the negative financial impact caused by the pandemic, we have executed, and continue to execute, a number of temporary cash and cost-savings measures including the cancellation of our fiscal 2020 bonus plan, employee furloughs, reduction of capital expenditures, suspension of employee benefit programs such as the 401(k) match, applications for governmental assistance programs, utilization of governmental regulations allowing for the deferral of certain tax payments and cuts to discretionary spend.

In addition, we proactively amended our interest coverage ratio covenant in our Senior Credit Facility to mitigate the risk of non-compliance with said covenant should the pandemic have a longer duration.

We will continue to evaluate and implement (if deemed necessary) cash and cost-savings measures in the near term in order to reduce the impact of the pandemic on our financial results.

While we believe that the essential products we provide, along with our current strong balance sheet, will allow us to be well positioned for long-term growth after the pandemic, we cannot reasonably estimate the duration and severity of the COVID-19 pandemic, and accordingly, the ultimate impact it will have on our business, results of operations, and financial condition.

General Business Update

On October 31, 2019, the Company completed the previously announced sale of its former EC&S segment to wholly owned subsidiaries of BRWS Parent LLC, a Delaware limited liability company and affiliate of One Rock Capital Partners II, LP, for a purchase price of approximately $216 million (inclusive of final working capital adjustments).

On March 21, 2019, the Company announced a restructuring plan focused on i) the integration of the Enerpac and Hydratight businesses (IT&S segment), ii) the strategic exit of certain commodity type services in our North America Services operation (IT&S segment), and iii) driving efficiencies within the overall corporate structure.

In the third quarter of fiscal 2020, the Company announced the expansion and revision of this plan, which further simplifies and flattens the corporate structure through elimination of redundancies between the segment and corporate functions, while enhancing our commercial and marketing processes to become even closer to our customers.

Total restructuring charges associated with this restructuring plan were $7 million for the year ended August 31, 2020, r elated primarily to headcount reductions and facility consolidations.

We anticipate achieving annual savings of $12 million to $15 million from the first phase of the plan and anticipate an additional annual savings of $12 million to $15 million from the expansion and revision of the plan.

The annual benefit of these gross cost savings may be impacted by a number of factors, including annual incentive compensation differentials.

The Company also incurred approximately $2 million of restructuring costs within the Other operating segment in the year ended August 31, 2020, associated with a facilities consolid ation.

We anticipate realizing approximately $3 million to $5 million of annual savings associated with the actions and have started realizing these savings in fiscal 2020.

Historical Financial Data (in millions)

Year Ended August 31,

2020 2019 2018

Statements of Earnings Data:

Net sales $ 493 100 % $ 655 100 % $ 641 100 %

Cost of products sold 276 56 % 362 55 % 358 56 %

Gross profit 217 44 % 293 45 % 283 44 %

Selling, administrative and engineering expenses 181 37 % 209 32 % 210 33 %

Amortization of intangible assets 8 2 % 9 1 % 9 1 %

Director & officer transition charges

Restructuring charges 7 1 % 4 1 % 11 2 %

Impairment & divestiture charges

Impairment & divestiture (benefit) charges (3) (1) % 23 4 % 3 0 %

Operating profit 24 5 % 48 7 % 50 8 %

Financing costs, net 19 4 % 28 4 % 31 5 %

Other expense, net

Earnings (loss) before income tax expense (benefit)

Income tax expense (benefit)

Net earnings (loss) from continuing operations

(Loss) earnings from discontinued operations, net of income taxes

Other (income) expense, net (3) (1) % 1 — % — 0 %

Earnings before income tax expense 8 2 % 19 3 % 19 3 %

Income tax expense 2 — % 11 2 % 14 2 %

Net earnings $ 6 1 % $ 8 1 % $ 5 1 %

Other Financial Data:

Depreciation $ 12 $ 11 $ 11

Capital expenditures 12 15 11

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Fiscal 2020 compared to Fiscal 2019

Consolidated sales from continuing operations in fiscal 2020 were $493 million, 25% lower than the prior-year sales of $655 million.

Core s ales decreased $117 million (20%) while strategic exits and divestitures of non-core product lines, net of current year acquisitions, accounted for a $38 million (6%) decrease in net sales.

Changes in foreign currency exchange rates favorably impacted sales comparisons by 1%.

The 20% decrease in core sales predominantly was a result of the significant declines in volume in the third and fourth quarter due to impacts of the COVID-19 pandemic and volatile oil prices.

In addition, global economic uncertainty, predominantly in North America, caused slight year-over-year declines from volume in the first half of the fiscal year, and there were lower year-over-year service sales in the fiscal year as large projects in the Middle East and Asia in fiscal 2019 did not repeat in fiscal 2020.

Gross profit margins remained relatively consistent year-over-year despite the substantial volume decrease as we benefited from the strategic exit of certain low-profit product and service lines in fiscal 2020, executed certain temporary cost-reduction actions such as furloughs and other temporary wage reduction measures, and we saw a greater impact from COVID-19 to our service revenue stream, which generally has lower gross profit margins than our product sales.

O perating profit was $24 million lower in fiscal 2020 as compared to fiscal 2019 as a result of the $76 million decrease in gross profit driven by the decline in net sales volume, offset by cost reduction actions to reduce selling, administrative, and engineering expenses ("SAE"), and impairment & divestiture benefits in the current year as opposed to charges in the prior year.

SAE decreased $28 million, predominantly due to the benefit from restructuring actions and a decrease in commissions expense as a result of the reduction in sales volumes, as well as temporary cost reduction measures in response to the COVID-19 pandemic including the termination of our fiscal 2020 bonus plan, furloughs and other temporary wage reduction programs, and other discretionary spending initiatives.

In addition, we received approximately $1.1 million of COVID-19 relief governmental support in certain foreign jurisdictions.

With respect to impairment and divestiture charges, in fiscal 2020, we incurred a net benefit of $3 million due to the benefit from the divestitures of our Connectors and UNI-LIFT product lines, partially offset by the impairment and divestiture charges associated with the divestiture of our Milwaukee Cylinder business.

relationship intangible in connection with the strategic exit of certain North America service offerings and $3 million of trade name impairment & divestiture charges associated with a re-branding strategy which will ultimately eliminate the use of certain secondary brands within the IT&S segment that were previously determined to be indefinite-lived.

Financing costs also decreased in fiscal 2020 as we utilized the proceeds from the sale of EC&S in the first quarter of the fiscal year to pay off the remaining $175 million principal on our term loan and in the fourth quarter of fiscal 2020 , we redeemed our 5.625% senior notes by drawing on our revolving credit facility which provided modest interest savings during our fourth quarter and will provide over $10 million of annual savings at current interest rates.

These savings were partially offset as we expensed $2 million of capitalized debt issuance costs associated with the accelerated repayment of our term loan and redemption of our senior notes.

Our income tax expense decreased for reasons discussed in the Income Tax Expense section below.

Fiscal 2019 compared to Fiscal 2018

Consolidated sales from continuing operations in fiscal 2019 were $655 million, 2% higher than the prior year sales of $641 million.

Core sales increased 4% due to solid core sales growth in the IT&S segment ( 5% ).

Core sales were up $26 million (4%), as a result of a 5% core sales increase in the IT&S segment.

Changes in foreign currency exchange rates unfavorably impacted sales comparisons by 2%.

Gross profit margins remained relatively consistent year-over-year.

We benefited from our strategic exit of highly customized heavy lifting projects which provided lower gross profit margins, offset from higher service & rental sales which provide lower gross profit margins.

We benefited from our strategic exit of highly customized heavy lifting projects which historically provided lower gross profit margins, offset by higher service & rental sales which provide lower gross profit margins.

Operating profit was lower in fiscal 2019 as compared to fiscal 2018 as a result of increased impairment and divestiture charges.

In fiscal 2019, we incurred $14 million of goodwill impairment charges associated with triggering events impacting Cortland U.S., $6 million of impairment & divestiture charges associated with the impairment of a customer relationship intangible in connection with the strategic exit of certain North America service offerings and $3 million of trade name impairment & divestiture charges associated with a re-branding strategy which will ultimately eliminate the use of certain secondary brands within the IT&S segment that were previously determined to be indefinite lived.

In fiscal 2019 , we incurred $14 million of goodwill impairment charges associated with triggering events impacting Cortland U.S., $6 million of impairment & divestiture charges associated with the impairment of a customer relationship intangible asset in connection with the strategic exit of certain North America service offerings and $3 million of trade name impairment & divestiture charges associated with a re-branding strategy which will ultimately eliminate the use of certain secondary brands within the IT&S segment that were previously determined to be indefinite-lived.

In fiscal 2018, we incurred $3 million of impairment & divestiture charges associated with the divestiture of our Viking business.

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Our income tax expense also decreased in fiscal 2019 as discussed in further detail within the Income Tax Expense section below.

Fiscal 2018 compared to Fiscal 2017

Consolidated sales from continuing operations in fiscal 2018 were $641 million , 4% higher than the prior year sales of $617 million .

Core sales were up $18 million ( 3% ), as a result of a 3% core sales increase in the IT&S segment.

Changes in foreign currency exchange rates also favorably impacted sales comparisons by $14 million , while the net impact from the Mirage and Equalizer acquisitions, net of the Viking divestiture, reduced core sales by $7 million .

Gross profit margins increased from 42% in fiscal 2017 to 44% in fiscal 2018 as a result of a higher net sales and the realization of benefits from restructuring activities which were offset by project overruns and production inefficiencies.

Additionally, fiscal 2018 results included $3 million of impairment & divestiture charges related to the sale of our Viking business, while fiscal 2017 results included $8 million of director and officer transition charges as well as $117 million of impairment and divestiture charges related to the then pending sale of Viking.

Fiscal 2018 included an increase in our effective income tax rate compared to the prior year due to provisional tax charges for U.S.

tax reform act enacted in December 2017, the non-recurrence of fiscal 2017 income tax planning benefits and the deductibility and timing related to impairment and divestiture charges in both comparable years.

Segment Results

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The IT&S segment is a global supplier of branded hydraulic and mechanical tools and services to a broad array of end markets, including industrial, energy, mining and production automation markets.

Its primary products include branded tools, highly engineered heavy lifting technology solutions, connectors for oil & gas, as well as hydraulic torque wrenches (Product product line).

Its primary products include branded tools, cylinders, hydraulic torque wrenches and highly engineered heavy lifting technology solutions (Product product line).

On the services side, we provide energy maintenance and manpower services to meet customer-specific needs and rental capabilities for certain of our products (Service & Rental product line).

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Year Ended August 31,

2020 2019 2018

Net Sales $ 455 $ 610 $ 591

Operating Profit 66 101 99

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Fiscal 2020 compared to Fiscal 2019

Fiscal 2020 IT&S segment net sales decreased by $155 million (25%) from fiscal 2019 to $455 million.

Core sales decreased $110 million (20%) year-over-year while strat egic exits and divestitures of non-core product lines, net of current-year acquisitions, accounted for $38 million (6%) of the decrease.

Changes in foreign currency exchange rates favorably impacted sales comparisons by 1%.

The 20% decrease in core sales predominantly was a result of the significant declines in volume in the third and fourth quarter due to impacts of the COVID-19 pandemic and volatile oil prices.

Fiscal 2020 operating profit decreased $35 million (35%) from the prior year.

The operating profit decrease was a result of the $72 million decrease in gross profit as a result of the sales volume decline, partially offset by a $23 million decrease in selling, administrative, and engineering costs and a $12 million decrease in impairment and divestiture charges.

The $23 million decrease in SAE was predominantly due to the benefit from restructuring actions and a decrease in commissions expense as a result of the reduction in sales volumes, in addition to cost-reduction measures in response to the COVID-19 pandemic including the termination of our fiscal 2020 bonus plan, furloughs and other temporary wage reduction programs, and other discretionary spending initiatives.

We also received approximately $1.1 million of COVID-19 relief governmental support in certain foreign jurisdictions.

With respect to impairment and divestiture charges, in fiscal 2020 , we incurred a net benefit of $3 million due to the benefit from the divestitures of our Connectors and UNI-LIFT product lines, partially offset by the impairment and divestiture charges associated with the divestiture of our Milwaukee Cylinder business.

In fiscal 2019 , we incurred $6 million of impairment & divestiture charges associated with the impairment of a customer relationship intangible in connection with the strategic exit of certain North America service offerings and $3 million of trade name impairment & divestiture charges associated with a re-branding strategy which will ultimately eliminate the use of certain secondary brands within the IT&S segment that were previously determined to be indefinite lived.

Fiscal 2019 compared to Fiscal 2018

Fiscal 2019 IT&S segment net sales increased by $19 million (3%) from fiscal 2018 to $610 million.

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The core sales increase of 19% in the Service & Rental product line was the result of higher global maintenance activity levels as compared to the prior year, predominantly in our Middle East operations.

Operating profit margins decreased from 16.8% in fiscal 2018 to 16.6% in fiscal 2019 primarily due to additional impairment & divestiture charges in fiscal 2019 as compared to 2018 (impairment & divestiture charges of $9 million related to tradename and customer relationship intangible impairments in 2019 with no impairment & divestiture charges in fiscal 2018) and sales mix, specifically the increased revenues from Middle East service & rental which have lower gross profit margins than our product sales, partially offset by increased margins in our product sales as a result of our strategic focus to exit heavy lifting technology projects which historically were at low margins.

Operating profit margins decreased from 16.8% in fiscal 2018 to 16.6% in fiscal 2019 primarily due to additional impairment & divestiture charges in fiscal 2019 as compared to fiscal 2018 (impairment & divestiture charges of $9 million related to tradename and customer relationship intangible impairments in fiscal 2019 with no impairment & divestiture charges in fiscal 2018 ) and sales mix, specifically the increased revenues from Middle East service & rental which have lower gross profit margins than our product sales, partially offset by increased margins in our product sales as a result of our strategic focus to exit heavy lifting technology projects which historically were at low margins.

Restructuring charges were $4 million in both fiscal 2019 and 2018 .

Fiscal 2018 compared to Fiscal 2017

Fiscal 2018 IT&S segment net sales increased by $39 million ( 7% ) from fiscal 2017 to $591 million .

Changes in foreign currency exchange rates favorably impacted sales comparisons by 2% , while the Mirage and Equalizer acquisitions increased net sales by 2% .

The IT&S segment core sales increased 3% on a year-over-year basis.

The core sales increase of 6% for the Product product line reflected broad based industrial tool demand across all major geographies and end markets and contributions from our commercial effectiveness and new product development efforts.

This increase was offset by a core sales decrease of 4% in the Service & Rental product line as global maintenance activity levels declined from prior year.

Operating profit margins decreased from 17.3% in fiscal 2017 to 16.8% in fiscal 2018, due to production inefficiencies and ongoing investments in commercial and engineering activities which were partially offset by the margin expansion impact of incremental volume.

Restructuring charges were $4 million and $3 million in fiscal 2018 and 2017, respectively.

Corporate consists of selling and administrative costs and expenses, including executive, legal, finance, and technology, that are not allocated to the segments based on their nature, as well as corporate costs previously allocated to the EC&S segment that must be excluded from discontinued operations based on their nature.

Corporate expenses were $38 million in fiscal 2020 compared to $42 million in fiscal 2019.

A decrease in annual incentive amounts and restructuring charges of $5 million in fiscal 2018 (no restructuring costs in fiscal 2019) partially offset by increased outsourced consulting fees resulted in a $2 million year-over-year cost reduction.

Non-recurring director and officer transition charges of $8 million in fiscal 2017 were the primary reason for the $7 million decrease in fiscal 2018 from $50 million in fiscal 2017 .

Financing Costs, Net

The decrease of $4 million is a result of the benefit of restructuring actions, positive experience in medical claims, and temporary cost-reduction actions in response to COVID-19 including the termination of our fiscal 2020 bonus plan, furloughs and other temporary wage reduction programs, and restrictions on travel and other discretionary spend.

These were partially offset by $2 million of restructuring expenses associated with our strategic efforts to drive efficiency in the overall corporate structure (there were no restructuring charges in fiscal 2019) and an increase in business development costs, specifically costs associated with the acquisition of HTL Group.

Corporate expenses were $42 million in fiscal 2019 as compared to $44 million in fiscal 2018.

A decrease in annual incentive amounts, as well as restructuring charges of $5 million in fiscal 2018 (no restructuring costs in fiscal 2019), partially offset by increased outsourced consulting fees resulted in a $2 million year-over-year cost reduction.

Net financing costs were $19 million, $28 million and $31 million in fiscal 2020, 2019 and 2018, respectively.

Fiscal 2019 net financing costs decreased primarily from fiscal 2018 as a result of the $73 million of term loan principal payments made throughout fiscal 2019 and lower interest rates resulting from our March 2019 Senior Credit Facility refinancing.

Fiscal 2018 net financing costs increased from fiscal 2017 resulting from increases in interest rates on our variable rate debt.

Fiscal 2020 financing costs decreased as a result of the repayment in the first quarter of the remaining $175 million principal balance on our term loan with the proceeds from the EC&S divestiture, as well as the redemption of our 5.625% senior notes in the fourth quarter, funded by drawing on the revolving credit facility, which reduced interest rate expense due to the difference in interest rates.

These actions were partially offset due to $2 million of additional interest expense recorded due to the accelerated write off of the remaining capitalized debt issuance costs associated with the early payoff of the term loan and redemption of the senior notes.

Fiscal 2019 net financing costs decreased from fiscal 2018 primarily as a result of the $73 million of term loan principal payments made throughout fiscal 2019 and lower interest rates resulting from our March 2019 Senior Credit Facility refinancing.

Income Tax Expense

The Company's income tax expense or benefit is impacted by a number of factors, including the amount of taxable earnings generated in foreign jurisdictions with tax rates that are different than the U.S.

The Company's income tax expense or benefit is impacted by a number of factors, including, among others, the amount of taxable earnings generated in foreign jurisdictions with tax rates that are different than the U.S.

federal statutory rate, permanent items, state tax rates, changes in tax laws, acquisitions and divestitures and the ability to utilize various tax credits and net operating loss carryforwards.

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Income tax expense also includes the impact of provision to tax return adjustments, changes in valuation allowances and reserve requirements for unrecognized tax benefits.

Pre-tax earnings (loss), income tax expense (benefit) and effective income tax rate from continuing operations for the past three years were as follows (in thousands):

Pre-tax earnings, income tax expense and effective income tax rate from continuing operations for the past three years were as follows (in thousands):

Year Ended August 31,

Earnings (loss) from continuing operations before income tax expense (benefit)

Income tax expense (benefit)

2020 2019 2018

Earnings before income tax expense $ 7,849 $ 18,724 $ 19,196

Income tax expense 2,292 10,657 14,450

Effective income tax rate 29.2 % 56.9 % 75.3 %

The comparability of pre-tax earnings (loss), income tax expense (benefit) and the related effective income tax rates are impacted by impairment and other divestiture charges as well as the Tax Cuts and Jobs Act (the “Act”), which was enacted on December 22, 2017.

Fiscal 2019 results included $23 million of impairment and divestiture charges, while fiscal 2018 and 2017 results included $3 million and $117 million, respectively.

A substantial portion of these charges do not result in tax benefits.

The fiscal 2019 tax provision included tax benefits of $2 million related to legislative changes and additional guidance related to the Act.

The fiscal 2018 tax provision included net tax expense of approximately $6 million related to the revaluation of U.S.

deferred taxes as a result of the Act and the establishment of valuation allowances against foreign tax credit carryforwards and net deferred tax assets of various jurisdictions.

Both the current and prior year income tax provisions were impacted by the mix of earnings in foreign jurisdictions with income tax rates different than the U.S.

The comparability of pre-tax earnings, income tax expense and the related effective income tax rates are impacted by impairment and other divestiture charges (benefits) as well as the Tax Cuts and Jobs Act (the “Act”), which was enacted on December 22, 2017.

Fiscal 2020 results included $3 million of impairment and divestiture benefits, while fiscal 2019 and 2018 results included $23 million and $3 million of charges, respectively.

A substantial portion of these charges (benefits) do not result in tax benefits.

The fiscal 2020 tax provision included a tax benefit of $3 million related to legislative changes and additional guidance related to the Act as compared to a tax benefit of $2 million in fiscal 2019 and a tax charge of $6 million in fiscal 2018 .

Both the fiscal 2020 and prior-year income tax provisions were impacted by the mix of earnings in foreign jurisdictions with income tax rates different than the U.S.

federal income tax rate and income tax benefits from global tax planning initiatives.

The Company’s earnings (loss) before income taxes from continuing operations, excluding impairment and other divestiture charges, included approximately 80% of earnings from foreign jurisdictions for fiscal 2019 compared to 76% in fiscal 2018

which results in an effective tax rate that is higher than the current U.S.

The Company’s earnings before income taxes from continuing operations, excluding impairment and other divestiture charges, had over 75% of earnings from foreign jurisdictions for fiscal 2020, 2019 and 2018, which results in an effective tax rate that is higher than the current U.S.

statutory tax rate of 21%.

Excluding the impairment and divestiture charges, the fiscal 2019 effective tax rate was 30.2%, which increased from the fiscal 2018 effective tax rate of 22.8% due to one-time tax benefits related to the Act in fiscal 2018 that will not repeat in future periods.

Excluding the impairment and divestiture charges (benefits), the fiscal 2020 effective tax rate was 32.5%, which is comparable to the fiscal 2019 effective tax rate of 30.2%.

In general, the increase in the fiscal 2020 effective tax rate from the statutory 21% is largely driven by taxable earnings in jurisdictions with higher tax rates and non-creditable withholding tax.

Items Impacting Comparability

On December 1, 2017 , the Company completed the sale of the Viking business which had net sales from continuing operations of $3 million and $19 million million for the years ended August 31, 2018 and 2017, respectively.

On December 1, 2017, the Company completed the sale of the Viking business, which had net sales from continuing operations of $3 million for the year ended August 31, 2018.

In fiscal 2018, the Company acquired the stock and certain assets of Mirage Machines, Ltd.

("Mirage") and the stock of Equalizer International, Limited ("Equalizer").

The acquired businesses generated combined net sales of $14 million and $9 million for the years ended August 31, 2019 and 2018 , respectively.

The acquired businesses generated combined net sales of $5 million, $14 million and $9 million for the years ended August 31, 2020, 2019 and 2018, respectively.

On January 7, 2020, the Company acquired the stock of HTL Group ("HTL"), a provider of controlled bolting products, calibration and repair services, and tool rental services, which contributed net sales of $6 million in fiscal 2020.

During fiscal 2020, the Company completed the sale of the UNI-LIFT and Connectors product lines, as well as the Milwaukee Cylinder business, which contributed combined net sales of $3 million, $18 million and $11 million for the years ended August 31, 2020, 2019 and 2018, respectively.

Liquidity and Capital Resources

At August 31, 2020, cash and cash equivalents were $152 million, comprised of $130 million of cash held by foreign subsidiaries and $22 million held domestically.

We periodically utilize income tax safe harbor provisions to make temporary short-term intercompany advances from our foreign subsidiaries to our U.S.

There were no temporary intercompany advances outstanding at August 31, 2019 and 2018.

We had $5 million in temporary intercompany advances outstanding at August 31, 2017.

The following table summarizes the cash flow attributable to operating, investing and financing activities (in millions):

Year Ended August 31,

Net cash provided by operating activities

2020 2019 2018

Net cash (used in) provided by operating activities $ (3) $ 54 $ 106

Net cash provided by (used in) investing activities 176 11 (63)

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Net (decrease) increase in cash and cash equivalents $ (59) $ (40) $ 21

Cash flow provided by operations was $54 million in fiscal 2019, a decrease of $52 million from the prior year due primarily to higher cash taxes paid, higher incentive compensation payouts in fiscal 2019 from 2018 results, a change in the timing of our 401(k) plan Company match funding and additional cash usage associated with divestiture costs.

We utilized the cash flow from operations, along with $36 million of cash from the sale of our PHI and Cortland Fibron businesses and excess cash on hand, for $73 million of principal payments on our outstanding term term loan ( $43 million more than our required commitment as of August 31, 2018), $27 million of capital expenditures and to repurchase approximately 1 million shares of our outstanding common stock for approximately $22 million .

Cash flow from operations in fiscal 2018 was $106 million, an increase of $18 million from the prior year due to higher cash earnings and reduced net cash tax payments.

We utilized the cash flow from operations to fund $23 million of business acquisitions, $21 million of capital expenditures, and $30 million of principal repayments on our term loan.

In addition, in order to facilitate the sale of our Viking business, we used cash of approximately $27 million to buy out leases of rental assets.

On March 29, 2019, the Company refinanced its Senior Credit Facility, which is comprised of a $400 million revolving line of credit and a $200 million term loan (see Note 7, "Debt" in the notes to the consolidated financial statements for further details of the new Senior Credit Facility).

The unused credit line and amount available for borrowing under the revolver was $399 million at August 31, 2019 .

The $200 million term loan is required to be repaid in principal installments of $1.25 million per quarter beginning on August 31, 2019, increasing to $2.5 million per quarter beginning on May 31, 2020, increasing to $3.75 million per quarter beginning on May 31, 2021, and increasing to $5 million per quarter beginning on May 31, 2022, with the remaining balance due at maturity (March 29, 2024).

Borrowings under the Senior Credit Facility bear interest based on LIBOR or a base rate, with interest rate spreads above LIBOR or the base rate being subject to adjustments based on the Company’s net leverage ratio, ranging from 1.125% to 2.00% in the case of loans bearing interest at LIBOR and from 0.125% to 1.00% in the case of loans bearing interest at the base rate.

In addition, a non-use fee is payable quarterly on the average unused revolving credit facility ranging from 0.15% to 0.30% per annum, based on the Company’s net leverage ratio.

The agreement governing the Senior Credit Facility contains customary limits and restrictions concerning investments, sales of assets, liens on assets and dividends and includes two financial covenants-a maximum net leverage ratio of 3.75:1.00

and a minimum interest coverage ratio of 3.50:1.00, in each case subject to adjustment in connection with certain transactions, including reduction of the minimum interest coverage ratio to 3.00:1.00 for any fiscal quarter ending within 12 months after the sale of the principal businesses comprising the EC&S segment and an increase to the leverage ratio from 3.75:1.00 to 4.25:

1.00 during the four fiscal quarters after a significant acquisition.

Subsequent to the refinancing of the Senior Credit Facility, in addition to the required term loan principal payment of $1 million , the Company utilized excess cash to prepay a total of $24 million , reducing the remaining principal due to $175 million at August 31, 2019 .

Cash flow provided by operations was a use of $3 million in fiscal 2020 , a decrease of $57 million from the prior year due to a $34 million decrease in cash flows from discontinued operations driven by the timing of the divestiture of the EC&S segment in the first quarter and a decrease in net earnings from continuing operations, exclusive of the impacts of impairment & divestiture (benefit) charges, of $26 million year-over-year.

W e generated $176 million of cash from investing activities in the current year from the divestiture of the EC&S business ($211 million, net, comprised of the sales price of $216 million, less closing costs of $3 million and $2 million of capital expenditures in fiscal 2020 prior to the divestiture date) and the divestiture of other non-core product lines ($10 million), offset by the HTL Group acquisition ($33 million) and capital expenditures ($12 million).

We utilized the funds from the sale of EC&S to repay the remaining $175 million of outstanding principal on our term loan and utilized free cash flow and excess cash on hand to reduce the outstanding principal on our remaining debt by a net $33 million, in addition to repurchasing approximately 1 million shares of our outstanding common stock for $28 million.

Cash flow provided by operations was $54 million in fiscal 2019, a decrease of $52 million from the prior year due primarily to higher cash taxes paid, higher incentive compensation payouts in fiscal 2019, a change in the timing of our 401(k) plan Company match funding and additional cash usage associated with divestiture costs.

We utilized the cash flow from operations, along with $36 million of cash from the sale of our PHI and Cortland Fibron businesses and excess cash on hand, for $73 million of principal payments on our then outstanding term loan ($43 million more than our required commitment as of August 31, 2018), $27 million of capital expenditures and to repurchase approximately 1 million shares of our outstanding common stock for approximately $22 million.

The Company's Senior Credit Facility is comprised of a $400 million revolving line of credit and provided for a $200 million term loan both scheduled to mature in March 2024 (see Note 7 , "Debt" in the notes to the consolidated financial statements for further details of the Senior Credit Facility).

As previously noted, the Company paid off the outstanding principal balance on the term loan in November 2019.

Further, as noted in Note 7 , "Debt", on June 15, 2020, the Company borrowed $295 million under the Senior Credit Facility revolving line of credit to fund the redemption of all of the outstanding Senior Notes at par, plus the remaining accrued and unpaid interest, in order to reduce interest costs in the current interest rate environment.

The unused credit line and amount available for borrowing under the revolving line of credit was $140 million at August 31, 2020 .

We believe that the revolver, 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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The following table shows the components of our primary working capital (in millions):

August 31, 2019

August 31, 2018

August 31, 2020 August 31, 2019

$ PWC % $ PWC %

Accounts receivable, net $ 84 19 % $ 126 20 %

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Net primary working capital $ 108 25 % $ 126 20 %

Total primary working capital was $126 million at August 31, 2019 which stayed relatively consistent with the $125 million at August 31, 2018.

Primary working capital increased slightly due to increased accounts receivable as a result of significant sales growth in the Middle East which has longer payment terms, increased inventory levels resulting from lower fourth quarter fiscal 2019 sales due to recent decelerating demand, offset by an increase in accounts payable as we continue to work with our supply chain to extend payment terms to be commensurate with those of our customers.

Total primary working capital was $108 million at August 31, 2020, which decreased from $126 million at August 31, 2019.

The primary working capital decrease related to decreased accounts receivable as a result of the substantial decrease in net sales in the third and fourth quarter of fiscal 2020 as a result of the COVID-19 pandemic, decreased inventory levels as part of the Company-wide initiative to reduce inventory levels to meet demand levels in the current COVID-19 environment, and a

decrease in accounts payable as a result of the decrease in volume of inventory purchases and other expenditures in the fourth quarter of fiscal 2020 in response to the economic environment created by the COVID-19 pandemic.

Our accounts receivable are derived from a diverse customer base spread across a number of industries, with our largest single customer generating approximately 3% of fiscal 2020 net sales from continuing operations.

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Capital expenditures associated with continuing operations were $12 million, $15 million and $11 million in fiscal 2020, 2019 and 2018, respectively.

Capital expenditures for fiscal 2020 are expected to be $10-$12 million, but could vary depending on business performance, changes in foreign currency exchange rates, growth opportunities and the amount of assets leased instead of purchased.

Capital expenditures for fiscal 2021 are expected to be $10-$15 million, but could vary depending on business performance, changes in foreign currency exchange rates, the timing and extent of the impact from the COVID-19 pandemic and the amount of assets leased instead of purchased.

Commitments and Contingencies

Given our desire to allocate cash flow and revolver availability to fund growth initiatives, we have historically leased most of our operating equipment and facilities.

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 based upon fair value rental rates on the date of expiration of the initial leases.

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 are contingently liable for certain lease payments under leases within businesses we previously divested or spun-off.

If any of these businesses do not fulfill their future lease payment obligations under a lease, we could be liable for such obligations.

As of August 31, 2019 , the present value of future minimum lease payments, using a weighted average discount rate of 1.89% , on previously divested or spun-off businesses was as follows:

$2 million in each fiscal year for fiscal 2020 through 2024 and less than $1 million in aggregate thereafter.

If any of these businesses do not fulfill their future lease payment obligations under a lease, we could be liable for such obligations, however, the Company does not believe it is probable that it will be required to satisfy these obligations.

Future minimum lease payments for these leases at August 31, 2020 were $7 million with monthly payments extending to fiscal 2025.

We had outstanding letters of credit totaling $12 million and $18 million at August 31, 2020 and 2019, respectively, the majority of which relate to commercial contracts and self-insured workers' compensation programs.

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The timing of payments due under our contractual commitments is as follows (in millions):

2021 2022 2023 2024 2025 Thereafter Total

Debt (short-term and long-term) $ — $ — $ — $ 255 $ — $ — $ 255

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Operating leases* 12 8 7 5 4 14 50

*Table includes contractual obligations associated with leases of the EC&S segment held for sale as of August 31, 2019.

Certain leases are currently in the name of Actuant Corporation or operating subsidiaries that will not be divested, and we are working proactively with the buyer to transfer leases into the name of a subsidiary to be divested or to buy out the lease with reimbursement of the cost from the buyer.

Interest on long-term debt assumes the current interest rate environment and revolver borrowings consistent with August 31, 2019 debt levels.

$ 16 $ 12 $ 11 $ 262 $ 4 $ 14 $ 319

*Operating lease contractual obligations amounts do not include $1.6 million in minimum lease payments for a real estate lease signed, but not yet commenced as of August 31, 2020.

Interest on long-term debt assumes the current interest rate environment and revolving credit facility borrowings consistent with the August 31, 2020 debt level.

Our contractual obligations generally relate to amounts due under contracts with third-party service providers.

These contracts are primarily for real estate leases, information technology services and telecommunications services.

Only those obligations that are not cancelable are included in the table.

These contracts are primarily for real estate leases, vehicle leases, IT and manufacturing leases, information technology services and telecommunications services.

Only those obligations that are not cancellable are included in the table.

As part of our 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.

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We have long-term obligations related to our deferred compensation, pension and postretirement plans that are excluded from this table and summarized in Note 11, “Employee Benefit Plans” in the notes to the consolidated financial statements.

Our liability for unrecognized tax benefits was $24 million at August 31, 2019 , but is not included in the table of contractual obligations because the timing of the potential settlements of these uncertain tax positions cannot be reasonably estimated.

Our liability for unrecognized tax benefit s was $23 million at August 31, 2020, but is not included in the table of contractual obligations because the timing of the potential settlements of these uncertain tax positions cannot be reasonably estimated.

Critical Accounting Estimates

We prepare our consolidated financial statements in conformity with U.S.

generally accepted accounting principles (“GAAP”).

We prepare our consolidated financial statements in conformity with GAAP.

This requires management to make estimates and assumptions that affect reported amounts and related disclosures.

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owned inventory (approximately 44% and 48% of total inventories at August 31, 2020 and 2019, respectively).

If the LIFO method were not used, inventory balances would be higher than amounts presented in the consolidated balance sheet by $10 million and $5 million at August 31, 2019 and 2018 , respectively.

If the LIFO method were not used, inventory balances would be higher than amounts presented in the consolidated balance sheet by $10 million at both August 31, 2020 and 2019.

We perform an analysis on historical sales usage of individual inventory items on hand and record a reserve to adjust inventory cost to market value.

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The estimated fair value represents the amount we believe a reporting unit could be bought or sold for in a current transaction between willing parties on an arms-length basis.

The fiscal 2020 annual review of the reporting units performed in the fourth quarter did not result in any reporting units having an estimated fair value that exceeded the carrying value (expressed as a percentage of the carrying value) by less than 30%.

Fiscal 2019 Impairment Charges :

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In addition, as a result of the EC&S reporting unit being held for sale as of August 31, 2019, we recorded a $210 million impairment charge representing the excess of the net book value of the net assets of the reporting unit as compared to the anticipated proceeds less costs to sell which is recorded within "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations.

The annual review of the reporting units representing continuing operations did not result in any reporting units having an estimated fair value that exceeded the carrying value (expressed as a percentage of the carrying value) by less than 30%.

Fiscal 2018 Impairment Charges:

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The impairment charge is recorded within "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations.

See Note 5, “Divestiture Activities” in the notes to the consolidated financial statements for further discussion.

See Note 5, “Discontinued Operations and Other Divestiture Activities” in the notes to the consolidated financial statements for further discussion.

PHI Reporting Unit:

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The impairment charge is recorded within "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations.

See Note 5, “Divestiture Activities” in the notes to the consolidated financial statements for further discussion.

Fiscal 2017 Year-End Impairment Test:

Our annual fiscal 2017 impairment review resulted in one reporting unit (Cortland) having an estimated fair value that exceeded the carrying value (expressed as a percentage of the carrying value) by less than 30%, however the test did not result in the need to record an impairment charge.

See Note 5, “Discontinued Operations and Other Divestiture Activities” in the notes to the consolidated financial statements for further discussion.

Indefinite-lived intangibles (tradenames):

Indefinite-lived intangible assets are also subject to annual impairment testing.

On an annual basis or more frequently if a triggering event occurs, the fair value of indefinite lived assets, based on a relief of royalty valuation approach, are evaluated to determine if an impairment charge is required.

On an annual basis or more frequently if a triggering event occurs, the fair value of indefinite-lived intangible assets, based on a relief of royalty valuation approach, are evaluated to determine if an impairment charge is required.

The fiscal 2020 annual impairment review of indefinite-lived intangible assets resulted in one impairment charge associated with an indefinite-lived intangible asset for less than $0.1 million.

For the remaining indefinite-lived intangibles, the annual assessment did not result in any indefinite-lived asset having an estimated fair value that exceeded the carrying value (expressed as a percentage of the carrying value) by less than 10%.

We recognized an impairment charge of $3 million in the fourth quarter of fiscal 2019 as a result of our determination that two secondary tradenames which were previously assumed to have an indefinite life would be phased out over the next 12-15 months and be re-branded with the Enerpac tradename.

The fiscal 2019 annual impairment review of the remaining indefinite-lived intangible assets (that represented components of continuing operations) did not result in any indefinite-lived assets having an estimated fair value that exceeded the carrying value (expressed as a percentage of the carrying value) by less than 30%.

We recognized impairment charges during the fourth quarter of fiscal 2018 to write-down the value of tradenames by $7 million in relation to the Cortland Fibron held-for-sale treatment (impairment charge recorded as a component of "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations).

A considerable amount of management judgment is required in performing impairment tests, principally in determining the fair value of each reporting unit and the indefinite-lived intangible assets.

While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore, future additional impairment charges could be required.

Weakening industry or economic trends, disruptions to our business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in the use of the assets or in entity structure and divestitures may adversely impact the assumptions used in the valuations and ultimately result in future impairment charges.

While we believe our judgments and assumptions are reasonable, different assumptions, including the duration and severity of the impacts from the COVID-19 pandemic, could change the estimated fair values and, therefore, future additional impairment charges could be required.

Prolonged weakening industry or economic trends, disruptions to our business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in the use of the assets or in entity structure and divestitures may adversely impact the assumptions used in the valuations and ultimately result in future impairment charges.

Long-lived assets (fixed assets and amortizable intangible assets):

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If impairment is determined to exist, any related impairment loss is calculated based on fair value.

In the fourth quarter of fiscal 2019, in connection with our North America service restructuring within the IT&S segment, we identified one customer relationship intangible asset associated with the component of the service business we intend to exit.

In the first quarter of fiscal 2020, in connection with the held-for sale-treatment of the Milwaukee Cylinder business, we recognized a $3 million impairment charge, representing the excess of the net book value of assets held for sale over anticipated proceeds.

See Note 5, "Discontinued Operations and Other Divestiture Activities" in the notes to the consolidated financial statements for further discussion.

As a result of our assessment, for which the primary assumption is the anticipated revenues associated with those customers, we determined that the fair value of the intangible asset was less than its carrying value, and therefore, recorded a $6 million impairment charge.

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Also in the fourth quarter of fiscal 2019, in connection with the held-for-sale treatment of the remaining businesses within the EC&S segment, we recognized a $54 million impairment charge related to the recognition in earnings of the cumulative effect of foreign currency rate changes since acquisition of those businesses which is recorded in "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations.

See Note 5, "Divestiture Activities" in the notes to the consolidated financial statements for further discussion.

See Note 5, "Discontinued Operations and Other Divestiture Activities" in the notes to the consolidated financial statements for further discussion.

In the fourth quarter of fiscal 2018, related to the held-for-sale treatment of our Cortland Fibron business, we recognized a $46 million long-lived asset impairment, representing the excess of net book value of assets held for sale over anticipated proceeds which consisted of i) $35 million related to the recognition in earnings of the cumulative effect of foreign currency rate changes since acquisition;

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These charges are recorded as a component of "(Loss) earnings from discontinued operations" within the Consolidated Statements of Operations.

See Note 5, "Divestiture Activities" in the notes to the consolidated financial ftatements for further discussion.

See Note 5, "Discontinued Operations and Divestiture Activities" in the notes to the consolidated financial statements for further discussion.

During the fourth quarter of fiscal 2018, the undiscounted operating cash flows of our PHI business did not exceed the carrying value of the net assets of the business, resulting in a long-lived asset impairment charge of $6 million (recorded as a component of "(Loss) earnings from discontinued operations" on the Consolidated Statements of Operations), consisting of charges of $5 million and $1 million on amortizable intangible assets and fixed assets (primarily machinery and equipment), respectively.

See Note 5, "Divestiture Activities" in the notes to the consolidated financial statements for further discussion.

In the fourth quarter of fiscal 2017, related to the pending sale of our Viking business, we recognized an $85 million long-lived asset impairment, representing the excess of the net book value of assets held for sale over the anticipated proceeds which included $69 million related to the recognition in earnings of the cumulative effect of foreign currency rate changes since acquisition.

See Note 5, "Divestiture Activities" in the notes to the consolidated financial statements for further discussion.

See Note 5, "Discontinued Operations and Divestiture Activities" in the notes to the consolidated financial statements for further discussion.

Significant management judgment is required in performing impairment tests, principally in determining the fair value of long-lived assets.

While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore, future additional impairment charges could be required.

Business Combinations and Purchase Accounting:

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In estimating the expected return on plan assets, we consider historical returns, forward-looking considerations, inflation assumptions and the asset-allocation strategy in investing such assets.

Domestic benefit plan assets consist primarily of participating units in mutual funds, index funds and bond funds.

Domestic benefit plan assets consist primarily of participating units in mutual funds with equity based strategies, mutual funds with fixed income based strategies, and U.S treasury securities.

The expected return on domestic benefit plan assets was 4.60% and 5.75% for the fiscal years ended August 31, 2020 and 2019, respectively.

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Our annual effective income tax rate includes the impact of discrete income tax matters including adjustments to reserves for uncertain tax positions and the benefits of various income tax planning activities.

Tax regulations require items to be included in our tax returns at different times than these same items reflected in our consolidated financial statements.

Tax regulations require items to be included in our tax returns at different times than these same items are reflected in our consolidated financial statements.

As a result, the effective income tax rate in our consolidated financial statements differs from that reported in our tax returns.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis