Background

As Discussed in Item 1, "Business," we are a diversified global manufacturer of a broad range of industrial products and systems, organized into four reportable segments, Industrial, Energy, Electrical and Engineered Solutions. During the second quarter of fiscal 2009, our financial reporting segments were modified to reflect changes in the portfolio of businesses, due to acquisitions, as well as changes in business reporting lines. The Industrial segment is primarily involved in the design, manufacture and distribution of branded hydraulic and mechanical tools to the maintenance, industrial, infrastructure and production automation markets. The Energy segment provides joint integrity products and services, as well as umbilical, rope and cable solutions to the global oil & gas, power generation and energy markets. The Electrical segment is primarily involved in the design, manufacture and distribution of a broad range of electrical products to the retail DIY, wholesale, OEM, utility and harsh environment markets. The Engineered Solutions segment provides highly engineered position and motion control systems to OEMs in various vehicle markets, as well as a variety of other industrial products.

Business Update

During fiscal 2009, most of the end markets that we serve saw sales declines as the overall economic environment continued to worsen. As a result of global economic uncertainties, significant declines in OEM production in vehicle and marine markets, decreased demand for electrical products, inventory destocking by industrial customers and delays in maintenance and capital projects in energy markets, we implemented various cost reduction programs across all four segments. These restructuring actions were initiated to reduce the impact of lower customer demand on our profitability. We incurred approximately $24 million of restructuring charges in fiscal 2009, closed or exited over twenty facilities and reduced headcount by approximately 20%. The significant deterioration of end market demand in the RV and harsh environment electrical markets also resulted in $58 million of non-cash goodwill and long-lived asset impairment charges during fiscal 2009. A summary of fiscal 2009 results and trends by segment are as follows:

Industrial: After a relatively strong first quarter of fiscal 2009 (core sales growth of 9%), economic conditions deteriorated dramatically, adversely impacting operating results in the Industrial segment during the remainder of fiscal 2009. Core sales declines, especially in the last two quarters of fiscal 2009, were broad based across the diverse end markets and geographic regions served. These declines in sales volumes coupled with restructuring charges and under-absorption of manufacturing overhead resulted in reduced year-over-year operating margins for the Industrial Segment.

Energy: Our Energy segment experienced sales growth in fiscal 2009 due to acquisitions (primarily the Cortland Companies) and core sales growth in the first three fiscal quarters. However, fourth quarter fiscal 2009 core sales declined 11% from the prior year, due to reduced demand in energy exploration markets and certain oil & gas installations deferring maintenance and capital projects. Operating margins in this segment have declined during fiscal 2009 as a result of unfavorable acquisition mix, reduced sales volumes and restructuring charges.

Electrical: Our Electrical segment experienced significant year-over-year core sales declines in each quarter of fiscal 2009 reflecting weak demand in retail DIY (due to sharp declines in consumer confidence), harsh environment electrical, transformer and utility markets. The significant sales declines necessitated considerable restructuring efforts to consolidate facilities, reduce headcount and exit low margin business. During the fourth quarter of fiscal 2009, we saw slight improvement in sales trends for the DIY channel and marine aftermarket (core sales were (19%) in the fourth quarter compared to (30%) in the third quarter) and an improvement in operating margins as benefits from restructuring programs were realized. During fiscal 2010, we will continue to focus on execution of restructuring programs in this segment to improve its operating performance.

Engineered Solutions: Our Engineered Solutions segment was hit hardest by the unfavorable economic conditions that existed throughout fiscal 2009. Significant declines in vehicle markets (including auto, truck, off-highway and specialty vehicle) have impacted this segment's financial performance. The segment's reduced operating margins were primarily due to lower sales volume, under-absorbed fixed overhead costs, non-cash impairment charges and restructuring charges. Significant restructuring actions have occurred in this segment, which are expected to improve margins and operating performance prospectively.

Despite these challenging economic conditions, we continued to generate substantial cash flow from operations, including $147 million during fiscal 2009. This cash flow, coupled with $125 million of net proceeds from the June 2009 follow-on equity offering and $38 million of net proceeds from the divestiture of two businesses more than offset the $239 million of cash used to fund acquisitions. Our priorities in fiscal 2010 include the continued strong execution of restructuring activities, investments in growth initiatives and cash flow generation.

Results of Operations

Historical Financial Data (in millions)



                                                 2009                    2008                   2007
Statements of Earnings Data:
Net sales                                  $ 1,240       100 %     $ 1,613       100 %     $ 1,436    100 %
Cost of products sold                          825        67 %       1,052        65 %         959     67 %

Gross profit                                   415        33 %         561        35 %         477     33 %
Selling, administration and engineering
expenses                                       277        22 %         331        21 %         279     19 %
Restructuring charges                           22         2 %          10         1 %           5      0 %
Impairment charges                              31         3 %          -          0 %          -       0 %
Amortization of intangible assets               20         2 %          14         1 %          11      1 %

Operating profit                                65         5 %         206        13 %         182     13 %
Financing costs, net                            42         3 %          36         2 %          33      2 %
Other income, net                               -          0 %          (3 )       0 %          -       0 %

Earnings from continuing operations
before income tax expense (benefit)             23         2 %         173        11 %         149     10 %
Income tax (benefit) expense                    (1 )       0 %          53         3 %          46      3 %

Earnings from continuing operations             24         2 %         120         7 %         103      7 %
Earnings (loss) from discontinued
operations, net of income taxes                (10 )      -1 %           3         0 %           2      0 %

Net earnings                               $    14         1 %     $   123         8 %     $   105      7 %

Other Financial Data:
Depreciation                               $    31                 $    29                 $    25
Capital expenditures                            21                      44                      31

The comparability of the operating results for the fiscal years ended August 31, 2009, 2008, and 2007 has been significantly impacted by acquisitions. The results of operations for acquired businesses are included in our results of operations only since their respective acquisition dates. See Note 2, "Acquisitions" in Notes to Consolidated Financial Statements for further discussion. In addition to the impact of acquisitions on operating results, currency translation rates can influence our reported results given that approximately half of our sales are denominated in currencies other than the US dollar. The strengthening of the US dollar in fiscal 2009 has unfavorably impacted results of operations due to the translation of non-US dollar denominated subsidiary results.

Consolidated net sales decreased by approximately $373 million, or 23%, from $ 1,613 million in fiscal 2008 to $1,240 million in fiscal 2009. Excluding the $64 million of sales from acquired businesses and the $94 million unfavorable impact of foreign currency exchange rate changes, fiscal 2009 consolidated core sales decreased approximately 23%. Consolidated net sales increased by approximately $177 million, or 12%, from $1,436 million in fiscal 2007 to $1,613 million in fiscal 2008. Excluding the $88 million of sales from acquired businesses and the $77 million favorable impact of foreign currency exchange rate changes, fiscal 2008 consolidated core sales increased approximately 1%. Changes in net sales at the segment level are discussed in further detail below.

Consolidated operating profit for fiscal 2009 was $65 million, compared with $206 million and $182 million for fiscal 2008 and 2007, respectively. In addition to the impact of economic conditions, the comparability between periods is impacted by acquisitions, the $31 million impairment charge included in continuing operations in fiscal 2009 and pre-tax restructuring charges of $24 million, $10 million and $5 million recognized in fiscal 2009, 2008 and 2007, respectively (see Note 4, "Restructuring" and Note 6 "Impairment Charges" in

Notes to Consolidated Financial Statements for further discussion). The changes in consolidated operating profit at the segment level are discussed in further detail below.

Segment Results

Net Sales (in millions)



                                             Year Ended August 31,
                                            2009      2008      2007
                   Industrial             $    287   $   375   $   279
                   Energy                      260       212       160
                   Electrical                  364       496       521
                   Engineered Solutions        329       530       476

                                          $  1,240   $ 1,613   $ 1,436

Fiscal 2009 compared to Fiscal 2008

Industrial Segment

Industrial segment net sales decreased by $88 million, or 23%, from $375 million for fiscal 2008 to $287 million for fiscal 2009. Foreign currency rate changes negatively impacted sales comparisons for fiscal 2009 by $17 million. Excluding foreign currency rate changes and sales from the Templeton, Kenly & Co., Inc. (Simplex) acquisition, core sales declined 17%. The core sales decline reflects a significant weakening of end market demand across all geographic regions and customer inventory destocking.

Energy Segment

Energy segment net sales increased by $48 million, or 22%, from $212 million for fiscal 2008 to $260 for fiscal 2009, reflecting core sales growth and the acquisitions of Superior Plant Services, LLC ("SPS") in March 2008 and Cortland Cable Company ("Cortland") in September 2008. Foreign currency rate changes on translated results negatively impacted sales comparisons for fiscal 2009 by $26 million. Excluding foreign currency rate changes and acquisitions, core sales increased 4% for fiscal 2009, reflecting increased market share and geographic expansion, which was partially offset by declining market conditions.

Electrical Segment

Electrical segment net sales decreased by $132 million, or 27%, from $496 million for fiscal 2008 to $364 million for fiscal 2009. Foreign currency rate changes negatively impacted sales comparisons for fiscal 2009 by $21 million. Excluding foreign currency rate changes, core sales declined 23%, the result of substantially weaker demand in essentially all markets, driven by the global economic slowdown. Additionally, year-over-year comparisons are negatively affected by the loss of certain business with a major North American DIY customer during the second half of fiscal 2008.

Engineered Solutions Segment

Engineered Solutions segment net sales decreased by $201 million, or 38%, from $530 million for fiscal 2008 to $329 million for fiscal 2009. Foreign currency rate changes negatively impacted sales comparisons for fiscal 2009 by $30 million. Excluding foreign currency rate changes and sales from the Sanlo acquisition, core sales declined 37% for fiscal 2009. The core sales decline reflects sharply lower demand from vehicle OEMs serving the truck, automotive, RV, off-highway, construction and agricultural markets. Weak economic conditions globally and our customers' inventory destocking resulted in a substantial reduction in customer production levels and adversely impacted our sales.

Fiscal 2008 compared to Fiscal 2007

Industrial Segment

Industrial segment net sales in fiscal 2008 increased approximately $96 million, or 34%, to $375 million from $279 million in fiscal 2007. Excluding sales from the three acquisitions completed since the beginning of fiscal 2007 and the $17 million favorable impact of foreign currency rate changes, core sales grew 12% in 2008. The sales increase reflects a continuation of strong global demand for high force hydraulic and mechanical tools provided across all markets served, along with modest price increases.

Energy Segment

Energy segment net sales for 2008 increased approximately $52 million, or 32%, to $212 million from $160 million in fiscal 2007, reflecting core sales growth and sales added from the two acquisitions completed since the beginning of fiscal 2007. Excluding acquisitions and the $5 million favorable impact of foreign currency rate changes, core sales increased 18%, reflecting market share gains and continued strong demand for our joint integrity products, rental assets and manpower services across the global energy market.

Electrical Segment

Electrical segment net sales in fiscal 2008 decreased approximately $25 million, to $496 million from $521 million in fiscal 2007. Excluding the $24 million favorable impact of foreign currency rate changes, core sales declined 9% in 2008, the result of lower demand in the retail DIY, transformer and marine markets. Approximately 65% of the Electrical segment sales are generated in North America, where economic conditions started to weaken since August 31, 2007, partially reflecting a sharp decline in consumer confidence.
Year-over-year comparisons were also negatively affected by the loss of business with a major North American DIY customer and our strategic decision to exit low margin products in our European Electrical business.

Engineered Solutions Segment

Engineered Solutions segment net sales in fiscal 2008 increased approximately $54 million, or 11%, to $530 million from $476 million in fiscal 2007. Excluding the $32 million favorable impact of foreign currency rate changes and sales added from the Maxima Technologies acquisition, core sales were flat. This reflected the net impact of lower vehicle market sales volume, offset by strong demand in the container hardware and truck markets. Vehicle market sales volume declined as a result of lower sales to RV OEM's due to weak consumer demand, which was partially offset by strong truck demand in Europe.

Operating Profit (in millions)



                                             Year Ended August 31,
                                       2009           2008          2007
               Industrial             $    67       $    114      $     86
               Energy                      44             48            35
               Electrical                   1             24            37
               Engineered Solutions       (28 )           51            45
               General Corporate          (19 )          (31 )         (21 )

                                      $    65       $    206      $    182

Fiscal 2009 compared to Fiscal 2008

Industrial Segment

Industrial segment operating profit decreased by $47 million, or 41%, from $114 million for fiscal 2008 to $67 million for fiscal 2009. Excluding the Simplex acquisition and the unfavorable impact of foreign currency rate changes, operating profit declined by 35% for fiscal 2009. This decline was due to lower sales, $4 million of restructuring charges and reduced profit margins, the latter of which resulted from unfavorable product mix and lower absorption of manufacturing costs due to lower production levels.

Energy Segment

Energy segment operating profit decreased by $4 million, or 8%, from $48 million for fiscal 2008 to $44 million for fiscal 2009. Excluding the SPS and Cortland acquisitions and the unfavorable impact of foreign currency rate changes, operating profit for fiscal 2009 decreased 3%, which was primarily the result of $1 million of restructuring charges.

Electrical Segment

Electrical segment operating profit decreased by $23 million from $24 million for fiscal 2008 to $1 million for fiscal 2009. Fiscal 2009 operating profit was adversely impacted by $5 million of non-cash impairment charges related to the harsh environment electrical business and $10 million of restructuring charges. Similarly, fiscal 2008 operating profit included $10 million of European Electrical restructuring charges. Excluding these charges, the decline in operating profit for fiscal 2009 resulted from lower sales volumes and profit margins.

Engineered Solutions Segment

Engineered Solutions segment operating profit decreased by $79 million from $51 million for fiscal 2008 to an operating loss of $28 million for fiscal 2009. The operating results for fiscal 2009 was adversely impacted by $8 million of restructuring costs and a $27 million non-cash RV goodwill and intangible asset impairment charge. Fiscal 2009 operating results were also significantly impacted by lower sales and production levels (resulting in decreased absorption of fixed costs) and the unfavorable impact of foreign currency rate changes.

General Corporate

General Corporate expenses decreased by $12 million, or 39%, from $31 million for fiscal 2008 to $19 million for fiscal 2009 due to lower incentive compensation expense, headcount reductions and the benefit of other General Corporate cost reduction efforts.

Fiscal 2008 compared to Fiscal 2007

Industrial Segment

Industrial segment operating profit in fiscal 2008 increased approximately $28 million, or 32%, to $114 million from $86 million in fiscal 2007. Excluding the favorable impact of foreign currency rate changes, operating profit rose by 25%. Operating profit grew as a result of increased sales volumes from existing businesses, higher production levels resulting in increased absorption of fixed costs, customer price increases, acquisitions, operating efficiencies resulting from continuous improvement initiatives and the favorable impact of foreign exchange rates. Partially offsetting these improvements were unfavorable sales and acquisition mix, higher intangible asset amortization and incentive compensation expense, increased raw material costs and investments in sales and marketing initiatives.

Energy Segment

Energy segment operating profit in fiscal 2008 increased approximately $13 million, or 37%, to $48 million from $35 million in fiscal 2007. Excluding the favorable impact of foreign currency rate changes, operating profit rose by 32%. Operating profit grew as a result of acquisitions, increased sales volumes in existing businesses, favorable sales mix and operating efficiencies, which were partially offset by higher intangible amortization, incentive compensation and investments in growth initiatives.

Electrical Segment

Electrical segment operating profit was $24 million in fiscal 2008, a $13 million decline from fiscal 2007. Excluding the favorable impact of foreign currency rate changes on translated results, operating profit declined by 19%. The lower profit resulted from lower sales, decreased production levels, European Electrical restructuring costs and other downsizing costs and unfavorable sales mix.

Engineered Solutions Segment

Engineered Solutions operating profit increased by $6 million, or 13%, from $45 million in fiscal 2007 to $51 million for fiscal 2008. The operating profit growth was due to higher sales volumes, the Maxima acquisition, customer price increases, the favorable impact of foreign currency rate changes and increased low cost country sourcing. Partially offsetting these items were facility consolidation costs, material cost increases and higher incentive compensation expense.

General Corporate

General Corporate expenses increased by approximately $10 million, to $31 million in fiscal 2008, the result of business expansion, higher incentive compensation and training expenses, tax consulting fees and start-up costs related to our new facility in Taicang, China.

Restructuring Charges

During 2009, we committed to various restructuring initiatives including workforce reductions, plant consolidations, the continued movement of production and product sourcing to low cost countries and the centralization of certain support functions. The total restructuring charges for these activities were $24 million for fiscal 2009. We estimate we will incur an additional $10-$12 million of restructuring charges in fiscal 2010. We believe these restructuring actions will better align our resources with strategic growth opportunities, optimize existing manufacturing capabilities, improve our overall cost structure and deliver increased free cash flow and profitability. See Note 4, "Restructuring" in the Notes to the Consolidated Financial Statements for further discussion on restructuring charges.

During the second quarter of fiscal 2008, we completed a specific restructuring plan in our European Electrical business (Electrical segment), at a cumulative pre-tax cost of $21 million.

Impairment Charges

Significant adverse developments in the RV market during the first quarter of fiscal 2009, including sharply lower wholesale motorhome shipments by OEMs, decreased consumer confidence and the lack of financing available to RV dealers and retail customers negatively impacted the financial results of our RV business. As a result, during the first quarter of fiscal 2009, we recognized a $27 million non-cash impairment charge related to the goodwill and long-lived assets of the RV business. Poor economic conditions, low consumer confidence, increased unemployment and tight credit markets have negatively impacted consumer discretionary spending, resulting in a substantial reduction in recreational boating industry sales. OEM boat builders responded to the

sharp drop in demand and high levels of finished goods inventory by suspending operations as well as eliminating brands and permanently closing facilities. As a result, in the third quarter of fiscal 2009, we recognized a $32 million non-cash asset impairment charge ($5 million included in continuing operations and $27 million included in discontinued operations) related to the goodwill, indefinite lived intangibles and long-lived assets of the harsh environment electrical businesses (included in the Electrical Segment). See Note 6, "Impairment Charges" in the Notes to the Consolidated Financial Statements for further discussion.

Financing Costs, Net

All debt is considered to be for general corporate purposes and therefore financing costs have not been allocated to our segments. The $6 million year-over-year increase in financing costs in fiscal 2009 reflected higher debt levels resulting from acquisitions, higher borrowing spreads pursuant to the amended credit agreement, as well as the write-off of $2 million of deferred financing costs due to the early extinguishment of our credit agreement term loan in the fourth quarter of fiscal 2009.

Income Tax Expense

Our income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are higher or lower than the U.S. federal statutory rate, state tax rates in the jurisdictions where we do business, tax minimization planning and our ability to utilize various tax credits and net operating loss carryforwards. The effective income tax rate for fiscal 2009 was (2.0%), compared to 31.0% and 30.7% in fiscal 2008 and 2007, respectively. The decrease in the effective tax rate in fiscal 2009, relative to the prior years, reflects the tax benefit on the impairment charges (Note 6, "Impairment Charges") and restructuring charges (Note 4, "Restructuring") being recognized at the domestic tax rate which is higher than our consolidated global effective tax rate. In addition, the effective income tax rate for fiscal 2009 includes the benefit of income tax reserve adjustments resulting from settling tax audits for amounts less than previously accrued and the lapsing of various tax statutes of limitations.

Discontinued Operations

Discontinued operations reflect the results of the Acme Aerospace and BH Electronics, Inc. businesses, which were divested in the fourth quarter of fiscal 2009 for net cash proceeds of $38 million. See Note 3 "Discontinued Operations" in the Notes to the Consolidated Financial Statements for further information. The following table summarizes the results of discontinued operations for the divested businesses (in millions):

                                                                           Year Ended August 31,
                                                                       2009            2008       2007
Net sales                                                            $     24         $   51      $  23

Net gain on disposal                                                       18             -          -
Earnings (loss) from operations of divested businesses (1)                (31 )            5          3
Income tax expense (benefit)                                               (3 )            2          1

Earnings (loss) from discontinued operations, net of income tax      $    (10 )       $    3      $   2

(1) The loss from operations of divested businesses for the year ended August 31, 2009 includes $27 million of non-cash asset impairment charges related to BH Electronics.