Temporary working capital

ENERPAC TOOL: Discussion and analysis by management of the financial position and operating results (Form 10-K)

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 that
are included in   Item 8    .     "    Financial Statements and Supplementary
Data  ".
Background
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. Financial information related to the Company's reportable segment
is included in   Note 15, "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
operates within thirteen vertical markets. We continue to execute our strategy
to drive best in class returns for our shareholders, 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 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. 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/alternative energy, aerospace, infrastructure and industrial
maintenance, repair and operation.
COVID-19 Update
During largely the second half of fiscal 2020 and through the first two quarters
of fiscal 2021, our business, like many others around the world, experienced
significant negative financial impacts from the COVID-19 pandemic. In the third
and fourth quarters of fiscal 2021, we returned to year-over-year core growth in
all regions. We saw strong growth in the Americas and Europe, however, there are
still portions of our business, particularly in our Middle East and Asia Pacific
regions, that remain challenged by reduced demand conditions, pandemic-related
lockdowns or the lingering economic effects of the pandemic. Our key
manufacturing facilities continue to operate with additional precautions in
place to ensure the safety of our employees and prevent production disruptions.
Though lead times have been difficult to predict due to the current supply chain
and logistics environment, we generally have been able to meet our customers'
demand for the products and services they require, although our product backlogs
and lead times have grown in recent quarters. The Company is well-positioned to
execute our strategic growth initiatives as the markets we serve continue to
recover across the globe. With our strong balance sheet, we remain focused on
new product development, driving organic growth and pursuing disciplined
acquisition opportunities.
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), with approximately $3 million which was due in four equal
quarterly installments, the last of which was received in the first quarter of
2021.
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
operations (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 $2 million and $7 million for the year ended
August 31, 2021 and 2020, respectively, related 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
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plan. The annual benefit of these gross cost savings can be affected by a number of factors, including annual incentive pay differentials. Historical financial data (in millions)

Year ended August 31,

                                                           2021                     2020                  2019
Statements of Earnings Data: (1)
Net sales                                         $   529          100  %    $ 493       100  %    $ 655       100  %
Cost of products sold                                 286           54  %      276        56  %      362        55  %
Gross profit                                          243           46  %      217        44  %      293        45  %
Selling, general and administrative expenses          175           33  %      181        37  %      209        32  %
Amortization of intangible assets                       8            2  %        8         2  %        9         1  %
Restructuring charges                                   3            1  %        7         1  %        4         1  %
Impairment & divestiture charges (benefit)              6            1  %       (3)       (1) %       23         4  %
Operating profit                                       51           10  %       24         5  %       48         7  %
Financing costs, net                                    5            1  %       19         4  %       28         4  %
Other expense (income), net                             2            0  %       (3)       (1) %        1         0  %
Earnings before income tax expense                     44            8  %        8         2  %       19         3  %
Income tax expense                                      4            1  %        2         0  %       11         2  %
Net earnings                                      $    40            8  %    $   6         1  %    $   8         1  %

Other Financial Data: (1)
Depreciation                                      $    13                    $  12                 $  11
Capital expenditures                                   12                       12                    15

(1) The results come from continuing operations and exclude the financial results of previously sold operations presented as discontinued operations.

Fiscal 2021 compared to Fiscal 2020
Consolidated net sales from continuing operations in fiscal 2021 were $529
million, 7% higher than the prior-year sales of $493 million. Core sales
increased $27 million (5%) and divested product lines and the strategic exits of
certain service offerings, net of sales from acquisitions, decreased net sales
$2 million (1%), while the impact from foreign currency rates favorably impacted
sales by 2%. The COVID-19 pandemic had a detrimental impact on our core sales in
the third and fourth quarter of fiscal 2020. Sales in the first and second
quarter of fiscal 2021 still were COVID-19 impacted, however, not to the same
extent as we saw in the third and fourth quarters of fiscal 2020. The third and
fourth quarter of fiscal 2021 saw more of a return to normalcy in our core
product sales, driving the overall increase in core sales from fiscal 2020 to
fiscal 2021. Gross profit margins increased 2% year over year as a result of the
increase in volumes, leading to greater absorption of overhead, and a strong mix
of product and service sales. Operating profit was $27 million higher in fiscal
2021 as compared to fiscal 2020 predominantly as a result of the $26 million
increase in gross profit. Selling, general and administrative expenses ("SG&A")
also decreased approximately $6 million on leading to the increase in operating
profit as a result of the recognition of a gain on the sale of a manufacturing
facility in China. Restructuring savings realized in fiscal 2021 were able to
offset the short term cost reduction actions taken in the third and fourth
quarter of fiscal 2020 in response to the COVID-10 pandemic (termination of our
fiscal 2020 bonus program and furloughs and other temporary wage reduction
programs. The savings in SG&A were nearly offset by an increase in impairment
and divestiture charges recorded in fiscal 2021, specifically the $6 million
Goodwill impairment charge recorded associated with the Cortland Industrial
reporting unit (Other Segment). Financing costs also decreased in fiscal 2021
due to continued benefit from the cash pay off of our outstanding term loan in
fiscal 2020, the rate benefit from the retirement of our Senior Notes in the
fourth quarter of fiscal 2020 through drawing on our revolving credit facility,
and the paydown of $80 million of principal on our outstanding credit facility
in fiscal 2021 through utilization of cash from operations.
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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 sales 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 the COVID-19 pandemic to our service
revenue stream, which generally has lower gross profit margins than our product
sales. Operating 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
SG&A, and impairment & divestiture benefits in the current year as opposed to
charges in the prior year. SG&A 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. 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 to 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. 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.
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 infrastructure,
industrial maintenance, repair, and operations, oil & gas, mining, alternative
and renewable energy and construction markets. Its primary products include
branded tools, cylinders, hydraulic torque wrenches, highly engineered heavy
lifting technology solutions and other tools (Product product line). On the
service and rental side, 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 (in millions):
                                                   Year Ended August 31,
                                               2021          2020        2019
                    Net Sales               $   493        $ 455       $ 610
                    Operating Profit             82           66         101
                    Operating Profit %         16.6   %     14.4  %     16.6  %


Fiscal 2021 compared to Fiscal 2020
Fiscal 2021 IT&S segment net sales increased by $38 million (8%) from fiscal
2020 to $493 million. Core sales increased $29 million (7%) year-over-year. The
net sales increase included a $2 million (1%) decrease from strategic exits and
divestitures of non-core product lines, net of current-year acquisitions, and a
2% favorable impact on sales due to changes in foreign currency exchange rates.
The 7% increase in core sales was predominantly a result of broad-based market
recovery, as our largest regions of the world returned to more normalized levels
of activity in the second half of fiscal 2021.
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Fiscal 2021 operating profit increased $16 million (25%) from the prior year.
The operating profit increase was a result of a $24 million increase in gross
profit as a result of the increased sales volumes, offset by the $8 million
increase in selling, general, and administrative expenses ("SG&A"). The increase
in SG&A expenses resulted from increased sales commissions, the cost of our
fiscal 2021 bonus plan (the fiscal 2020 bonus plan was eliminated in response to
the COVID-19 pandemic) and other discretionary spending cuts and government
subsidy programs that provided a benefit in fiscal 2020, partially offset by the
benefit of the restructuring plan first announced in March 2019 and expanded in
fiscal 2020.
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 strategic 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. 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.
Fiscal 2020 operating profit decreased $36 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 SG&A and a $12 million decrease in impairment and
divestiture charges. The $23 million decrease in SG&A 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 to eliminate the use of certain
secondary brands within the IT&S segment that were previously determined to be
indefinite lived.
Corporate
Corporate consists of selling, general and administrative costs and expenses,
including executive, legal, finance, human resources, and technology, that are
not allocated to the segments based on their nature. Corporate expenses were $20
million in fiscal 2021 compared to $38 million in fiscal 2020. The decrease of
$18 million is a result of the realization of savings from restructuring
actions, the elimination of costs retained after the EC&S divestiture that were
required to support the transition services agreement entered into as part of
that sale, the reduction in business development costs and the gain, net of
transaction costs and value-added taxes, resulting from the sale of our facility
in China.
Corporate expenses were $38 million in fiscal 2020 as compared to $42 million in
fiscal 2019. The decrease of $4 million is a result of the benefit from
restructuring actions, positive experience in medical claims, and temporary
cost-reduction actions in response to the COVID-19 pandemic, 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.
Net financing costs were $5 million, $19 million and $28 million in fiscal 2021,
2020 and 2019, respectively. Fiscal 2021 financing costs decreased as a result
of the cash pay off of our outstanding term loan in November 2019 and, in the
fourth quarter of fiscal 2020, the retirement of the 5.625% Senior Notes through
drawing on our revolving line of credit, which maintains a lower interest rate
in the current interest rate environment. We have also reduced the principal on
our outstanding credit facility by $80 million in fiscal 2021 through
utilization of cash from operations. Fiscal 2020 net financing costs decreased
from fiscal 2019 primarily as a result of the repayment of the term loan and
retirement of 5.625% Senior Notes. 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.
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Income Tax Expense
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. 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, income tax expense and
effective income tax rate from continuing operations for the past three fiscal
years were as follows (in thousands):
                                                           Year Ended 

August 31,

                                                     2021           2020          2019
          Earnings before income tax expense      $ 43,975       $ 7,849       $ 18,724
          Income tax expense                         3,763         2,292         10,657
          Effective income tax rate                    8.6  %       29.2  %        56.9  %


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 ("TCJA"), which was
enacted on December 22, 2017, and the Coronavirus Aid, Relief and Economic
Security Act ("CARES Act"), which was enacted on March 27, 2020. Fiscal 2021,
2020 and fiscal 2019 results included $6 million (expense), $3 million (benefit)
and $23 million (expense) of impairment and divestiture charges, respectively. A
substantial portion of these charges (benefits) do not result in a tax expense
or benefit. The fiscal 2021 tax provision included a tax benefit of $8 million
related to the lapse of statute of limitations on uncertain tax positions and a
tax benefit $ 4 million related to the net operating loss carryback provision of
the CARES Act. The fiscal 2020 tax provision included a tax benefit of $3
million related to legislative changes and additional guidance related to the
TCJA compared to a tax benefit of $2 million from fiscal 2019.
Both the fiscal 2021 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 fiscal 2021 effective tax rate was 8.6%, which is
significantly lower than the fiscal 2020 effective tax rate of 29.2%. The
decrease in the fiscal 2021 effective tax rate from the statutory 21% is largely
driven by the lapse of the statute of limitations on uncertain tax positions and
the one-time tax benefits related to the CARES Act in fiscal 2021 that will not
repeat in future periods.
Items Impacting Comparability
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 $14 million and $6 million
in fiscal 2021 and 2020, respectively. 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 and $18
million for the years ended August 31, 2020 and 2019, respectively.
Liquidity and Capital Resources
At August 31, 2021, cash and cash equivalents were $140 million, comprised of
$128 million of cash held by foreign subsidiaries and $12 million held
domestically. The following table summarizes the cash flow attributable to
operating, investing and financing activities (in millions):
                                                                 Year Ended 

August 31,

                                                               2021           2020       2019
Net cash provided by (used in) operating activities      $     54            $  (3)     $  54
Net cash provided by investing activities                      13              176         11
Net cash used in financing activities                         (82)            (239)      (100)
Effect of exchange rate changes on cash                         3                7         (5)
Net decrease in cash and cash equivalents                $    (12)          

$ (59) $ (40)


Cash flow provided by operations was $54 million in fiscal 2021, an increase of
$57 million from the prior year due to a $20 million increase in cash flows from
discontinued operations driven by the timing of the divestiture of the EC&S
segment in fiscal 2020 and an increase in net earnings from continuing
operations of $35 million year over year. We generated $13 million of cash from
investing activities in the current year as compared to $176 million in the
prior-year period. The cash provided in fiscal 2020 was primarily generated from
the sale of our EC&S segment as well as our Connectors and UNI-LIFT product
lines, slightly offset by cash used for capital expenditures. In fiscal 2021, we
sold our manufacturing facility in China for approximately $22 million and
received approximately $3 million in proceeds associated with the death benefit
for life
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insurance on legacy officers of the Company, which was offset by approximately
$12 million of capital expenditures in the fiscal year. In fiscal 2021, our cash
used in financing activities was primarily from the paydown of $80 million of
principal on our outstanding credit facility with cash from operations and
excess cash on hand.
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. We generated $176 million of
cash from investing activities in the fiscal 2020 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). In fiscal 2020, we utilized the proceeds
of the sale of our EC&S segment to repay the remaining $175 million of
outstanding principal on our term loan, utilized free cash flow and excess cash
on hand to reduce the outstanding principal on our remaining debt by $33 million
and also repurchased approximately 1 million shares of our outstanding common
stock for $28 million.
The Company's senior credit facility is comprised of a $400 million revolving
line of credit and 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, to reduce interest costs.
Outstanding borrowings under the senior credit facility revolving line of credit
were $175 million as of August 31, 2021. The unused credit line and amount
available for borrowing under the revolving line of credit was $220 million at
August 31, 2021.
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.
Primary Working Capital Management
We use primary working capital as a percentage of sales as a key metric for
working capital efficiency. 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 the components of our
primary working capital (in millions):
                                                      August 31, 2021                                August 31, 2020
                                                 $                     PWC %                    $                     PWC %
Accounts receivable, net                  $         103                      18  %       $          84                      19  %
Inventory, net                                       75                      13  %                  69                      16  %
Accounts payable                                    (62)                    (11) %                 (45)                    (10) %
Net primary working capital               $         116                      20  %       $         108                      25  %


Total primary working capital was $116 million at August 31, 2021, which
increased from $108 million at August 31, 2020. The primary working capital
increase related to increased accounts receivable as a result of the substantial
increase in net sales in the fourth quarter of fiscal 2021 as a result of the
return towards normalcy, as compared to fiscal 2020 where the fourth quarter was
severely impacted by the COVID-19 pandemic. In response to the increased volume,
we have increased inventory levels and purchases of inventory (Accounts Payable)
which partially offset the increase in net primary working capital from the
increase in accounts receivable.
Capital Expenditures
The majority of our manufacturing activities consist of assembly operations. We
believe that our capital expenditure requirements are not as extensive as other
industrial companies given the nature of our operations. Capital expenditures
associated with continuing operations were $12 million for both fiscal 2021 and
2020, respectively, and $15 million in fiscal 2019. Capital expenditures for
fiscal 2022 are expected to be $12 to $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 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
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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, 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, 2021 were $5 million with monthly payments
extending to fiscal 2025.
We had outstanding letters of credit totaling $12 million at both August 31,
2021 and 2020, the majority of which relate to commercial contracts and
self-insured workers' compensation programs.
Contractual Obligations
Our predominant sources of contractual obligations include the payment of
interest and principal on our outstanding line of credit, our operating lease
portfolio, certain employee-related benefit plans and agreements with certain
suppliers related to the procurement of inventory.
The timing of principal payments associated with our revolving line of credit
are disclosed in   N    ote 7    ,     "    Debt    .    "   We pay interest
monthly based on prevailing interest rates at the time and the balance
outstanding on our revolving line of credit.
Our lease contracts are primarily for real estate leases, vehicle leases, IT and
manufacturing leases, information technology services and telecommunications
services. See   Note 10    ,     "    Leases    "   for future minimum lease
payments associated with our lease portfolio.
We have long-term obligations related to our deferred compensation, pension and
postretirement plans that are summarized in   Note 11, "Employee Benefit
Plans"   in the notes to the consolidated financial statements.
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. We have the ability to notify the supplier that they no
longer need to maintain the minimum level of inventory should we discontinue
manufacturing 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. These contracts allow for us to terminate with
appropriate notice so long as we utilize the remaining inventory on hand at the
supplier and there are no overall minimum volumes in these contracts other than
what the supplier is required to maintain on hand at any given point in time.
Critical Accounting Estimates
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. Actual results could differ from those
estimates. The following estimates are considered by management to be the most
critical in understanding judgments involved in the preparation of our
consolidated financial statements and uncertainties that could impact our
results of operations, financial position and cash flow.
Accounts receivable, net: Accounts receivable, net is recorded based on the
contractual value of our accounts receivable, net of an estimated allowance for
doubtful accounts representing management's best estimate of the amount of
receivables that are not probable of collection. Accounts receivable, net was
$103 million as of August 31, 2021, which is net of a $4 million allowance for
doubtful accounts. Our customer base generally consists of financially reputable
distributors, agents, OEMs, and other customers with whom we have long standing
relationships, and we have not experienced significant write off of accounts
receivables as a percentage of our annual net sales (accounts receivable written
off as a percentage of net sales was 0.1% for each the years ended August 31,
2021, 2020, and 2019, respectively). Recently, however, an agent through which
we conduct a significant amount of business in an international jurisdiction,
and which has historically been a slow but consistent payer, has delayed its
payments to us beyond its customary practices and, in fact, failed to make any
payment to us in the three month periods ended May 31, 2021 and August 31, 2021.
At August 31, 2021, the agent, for whom we have outstanding receivables of $11
million as of August 31, 2021, has indicated it is temporarily unable to remit
required payments to us because of disputes with tax authorities in its
jurisdiction but intends to honor its payment obligations when it is able.
Management's estimate of the allowance for doubtful accounts as of August 31,
2021 considered various factors associated with this agent, including, but not
limited to (i) the lack of payment received in the six-month period ended August
31, 2021, (ii) our due diligence on balances due to the agent from their end
customers related to sales of our product and the known markup on those sales
from agent to end customer and (iii) the status of ongoing negotiations with the
agent to secure payments. Actual collections from the agent may differ from our
estimate, which could impact our financial position and results of operations.
Inventories: Inventory cost is determined using the last-in, first-out ("LIFO")
method for a portion of U.S. owned inventory (approximately 48% and 44% of total
inventories at August 31, 2021 and 2020, respectively). If the LIFO method were
not used, inventory balances would be higher than amounts presented in the
consolidated balance sheet by $16 million and
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$10 million at August 31, 2021 and 2020, respectively. We perform an analysis on
historical sales usage of individual inventory items on hand and record a
reserve to adjust inventory cost to net realizable value. The inventory
valuation assumptions used are based on historical experience. We believe that
such estimates are made based on consistent and appropriate methods; however,
actual results may differ from these estimates under different assumptions or
conditions.
Goodwill and Long-lived Assets:
Goodwill Impairment Review and Estimates: A considerable amount of management
judgment is required in performing the 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, impairment charges could be required. Significant negative industry
or economic trends, disruptions to the Company's business, loss of significant
customers, inability to effectively integrate acquired businesses, unexpected
significant changes or planned changes in 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.
In estimating the fair value of a reporting unit, we generally use a discounted
cash flow model, which calculates fair value as the sum of the projected
discounted cash flows over a discrete seven-year period plus an estimated
terminal value. Significant assumptions include forecasted revenues, operating
profit margins, and discount rates applied to the future cash flows based on the
respective reporting unit's estimated weighted average cost of capital. In
certain circumstances, we also review a market approach in which a trading
multiple is applied to either forecasted EBITDA (earnings before interest,
income taxes, depreciation and amortization) or anticipated proceeds of the
reporting unit to arrive at the estimated fair value. If the fair value of a
reporting unit is less than its carrying value, an impairment loss is recorded.
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.
Fiscal 2021 Impairment Charges: In the fourth quarter of fiscal 2021, the
Cortland Industrial business lagged behind our IT&S segment with respect to
recovery in demand from the COVID-19 pandemic. Further, though volumes did
increase from previous quarters, it became clear that we were not on track to
realize the annual savings from our footprint optimization actions at the pace
initially projected. Therefore, in conjunction with our annual goodwill
impairment assessment, we recorded a $6 million goodwill impairment charge
associated with the Cortland Industrial reporting unit. See   Note 6, "Goodwill,
Intangible Assets, and Long-Lived Assets"   in the notes to the consolidated
financial statements for further discussion. The fiscal 2021 annual review of
other 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 100%.
The fiscal 2020 annual review of the reporting units performed in the fourth
quarter resulted in all reporting units having an estimated fair value that
exceeded the carrying value.
Fiscal 2019 Impairment Charges: As a result of a triggering event in fiscal
2019, we recorded a $14 million goodwill impairment charge associated with the
Cortland U.S. reporting unit. See   Note 6, "Goodwill, Intangible Assets, and
Long-Lived Assets"   in the notes to the consolidated financial statements for
further discussion.
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
from discontinued operations, net of Income Taxes" within the Consolidated
Statements of Operations.
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
intangible assets, based on a relief of royalty valuation approach, are
evaluated to determine if an impairment charge is required.
No material impairments were recorded in fiscal 2021 or fiscal 2020 as a result
of triggering events or the annual impairment review of indefinite-lived
intangible assets.
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.
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, 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.
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Long-lived assets (fixed assets and amortizable intangible assets): We also
review long-lived assets for impairment when events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. If such indicators are present, we perform undiscounted operating
cash flow analyses to determine if impairment exists. If impairment is
determined to exist, any related impairment loss is calculated based on fair
value.
No long-lived asset impairment charges were recorded in fiscal 2021. The fact
that the fair value of the Cortland Industrial reporting unit was less than its
net book value was considered a triggering event, however, no impairments were
recorded on the long-lived assets based on the results of the undiscounted cash
flow analyses performed.
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.
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 intended to exit. 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. See
  Note 6, "Goodwill, Intangible Assets, and Long-Lived Assets"   in the notes to
the consolidated financial statements for further discussion.
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 from discontinued operations" within the
Consolidated Statements of Operations. See   Note 5, "Discontinued Operations
and Other 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. 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.
Business Combinations and Purchase Accounting: Business combinations are
accounted for using the acquisition method of accounting, and accordingly, the
assets and liabilities of the acquired business are recorded at their respective
fair values. The excess of the purchase price over the estimated fair value is
recorded as goodwill. Assigning fair market values to the assets acquired and
liabilities assumed at the date of an acquisition requires knowledge of current
market values and the values of assets in use, and often requires the
application of judgment regarding estimates and assumptions. While the ultimate
responsibility resides with management, for certain acquisitions we retain the
services of certified valuation specialists to assist with assigning estimated
values to certain acquired assets and assumed liabilities, including intangible
assets and tangible long-lived assets. Acquired intangible assets, excluding
goodwill, are valued using discounted cash flow methodology based on future cash
flows specific to the type of intangible asset purchased. This methodology
incorporates various estimates and assumptions, the most significant being
projected revenue growth rates, profit margins and forecasted cash flows based
on discount rates and terminal growth rates.
Employee Benefit Plans: We provide a variety of benefits to employees and former
employees including, in some cases, pensions and postretirement health care.
Plan assets and obligations are recorded based on an August 31 measurement date
utilizing various actuarial assumptions such as discount rates, assumed rates of
return on plan assets and health care cost trend rates. We determine the
discount rate assumptions by referencing high-quality, long-term bond rates that
are matched to the duration of our benefit obligations, with appropriate
consideration of local market factors, participant demographics and benefit
payment forecasts. At August 31, 2021 and 2020, the discount rates on domestic
benefit plans were 2.55% and 2.40%, respectively. 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 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 4.2% and 4.6% for the fiscal years
ended August 31, 2021 and 2020, respectively. A 25 basis point change in the
assumptions for the discount rate or expected return on plan assets would not
have materially changed the fiscal 2021 domestic benefit plan expense.
We review actuarial assumptions on an annual basis and make modifications based
on current rates and trends, when appropriate. As required by GAAP, the effects
of any modifications are recorded currently or amortized over future periods.
Based on information provided by independent actuaries and other relevant
sources, we believe that the assumptions used are
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reasonable; however, changes in these assumptions could impact our financial
position, results of operations or cash flow. See   Note 11, "Employee Benefit
Plans"   in the notes to the consolidated financial statements for further
discussion.
Income Taxes: Judgment is required to determine the annual effective income tax
rate, deferred tax assets and liabilities, reserves for unrecognized tax
benefits and any valuation allowances recorded against net deferred tax assets.
Our effective income tax rate is based on annual income, statutory tax rates,
tax planning opportunities available in the various jurisdictions in which we
operate and other adjustments. 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 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.
Some of these differences are permanent, such as expenses that are not tax
deductible, while others are temporary differences, such as amortization and
depreciation expenses.
Temporary differences create deferred tax assets and liabilities, which are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. We establish valuation allowances for our deferred tax assets when the
amount of expected future taxable income is not large enough to utilize the
entire deduction or credit. Relevant factors in determining the realizability of
deferred tax assets include future taxable income, the expected timing of the
reversal of temporary differences, tax planning strategies and the expiration
dates of the various tax attributes.
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates
and interest rates and, to a lesser extent, commodities. To reduce such risks,
we selectively use financial instruments and other proactive management
techniques. All hedging transactions are authorized and executed pursuant to
clearly defined policies and procedures, which strictly prohibit the use of
financial instruments for trading or speculative purposes. A discussion of our
accounting policies for derivative financial instruments is included within
  Note 9, "Derivatives"   in the notes to the consolidated financial statements.
Foreign Currency Risk-We maintain operations in the U.S. and various foreign
countries. Our non-U.S. operations, the largest of which are located in the
Netherlands (and other countries whose functional currency is the Euro), the
United Kingdom, Australia, the United Arab Emirates and China, 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 forward foreign
currency swaps, 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.
The strengthening of the U.S. dollar 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, annual sales and operating profit were remeasured assuming a ten
percent reduction in foreign exchange rates compared to the U.S. dollar. Under
this assumption, annual sales would have been $25 million lower and operating
profit would have been $3 million lower for the twelve months ended August 31,
2021. 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 actual sales
or price levels. Similarly, a ten percent decline in foreign currency exchange
rates relative to the U.S. dollar on our August 31, 2021 financial position
would result in a $44 million reduction to equity (accumulated other
comprehensive loss), as a result of non-U.S. dollar denominated assets and
liabilities being translated into U.S. dollars, our reporting currency.
Interest Rate Risk-In the current economic environment, we manage interest
expense using a mixture of variable rate debt and fixed-interest-rate swaps. As
of August 31, 2021, long term debt consisted of $175 million of borrowings under
the revolving line of credit (variable rate debt). We were the fixed-rate payor
on an interest rate swap that effectively fixed the LIBOR-based index on $100
million of borrowings under our revolving line of credit through August 31,
2021.
Commodity 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, aluminum, plastic
resin, brass, steel wire and rubber are subject to price fluctuations which
could have a negative impact on our results. We strive to timely pass along such
commodity price increases to customers to avoid profit margin erosion.
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