Columbus McKinnon(CMCO) - 2020 Q1 - Quarterly Report

Part I. Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the quarter ended June 30, 2019 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (June 30, 2019 vs. March 31, 2019) | Metric | June 30, 2019 (in thousands) | March 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,090,472 | $1,061,571 | | Total Liabilities | $638,179 | $630,412 | | Total Shareholders' Equity | $452,293 | $431,159 | | Cash and Cash Equivalents | $55,716 | $71,093 | | Trade Accounts Receivable | $135,488 | $129,157 | | Inventories | $150,968 | $146,263 | | Current Portion of Long Term Debt | $65,000 | $65,000 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (Three Months Ended June 30, 2019 vs. 2018) | Metric | June 30, 2019 (in thousands) | June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Net Sales | $212,712 | $224,992 | | Gross Profit | $75,612 | $79,647 | | Income from Operations | $27,043 | $13,503 | | Net Income | $18,579 | $7,706 | | Basic Income Per Share | $0.79 | $0.33 | | Diluted Income Per Share | $0.78 | $0.33 | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (Three Months Ended June 30, 2019 vs. 2018) | Metric | June 30, 2019 (in thousands) | June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Net Income (Loss) | $18,579 | $7,706 | | Foreign Currency Translation Adjustments| $1,395 | $(11,246) | | Change in Derivatives Qualifying as Hedges | $(758) | $(164) | | Change in Pension Liability and Postretirement Obligation | $(99) | $608 | | Total Other Comprehensive Income (Loss) | $538 | $(10,802) | | Comprehensive Income (Loss) | $19,117 | $(3,096) | Condensed Consolidated Statements of Shareholders' Equity Changes in Shareholders' Equity (Three Months Ended June 30, 2019) | Item | Amount (in thousands) | | :--- | :--- | | Balance at March 31, 2019 | $431,159 | | Net Income | $18,579 | | Change in foreign currency translation adjustment | $1,395 | | Change in derivatives qualifying as hedges | $(758) | | Change in pension liability and postretirement obligations | $(99) | | Stock options exercised | $980 | | Stock compensation expense | $1,556 | | Restricted stock units released | $(519) | | Balance at June 30, 2019 | $452,293 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Three Months Ended June 30, 2019 vs. 2018) | Activity | June 30, 2019 (in thousands) | June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities| $(2,160) | $8,118 | | Net Cash from Investing Activities| $(2,420) | $(2,052) | | Net Cash from Financing Activities| $(10,942) | $(8,062) | | Net Change in Cash and Cash Equivalents | $(15,377) | $(5,890) | | Cash, Cash Equivalents, and Restricted Cash at End of Period | $55,966 | $57,675 | Notes to Condensed Consolidated Financial Statements 1. Description of Business - Columbus McKinnon Corporation is a global designer, manufacturer, and marketer of material handling products, systems, and services, including hoists, rigging tools, actuators, and digital power control systems, primarily serving commercial and industrial applications[24] - Approximately 55% of sales for the three months ended June 30, 2019, were to customers in the United States, with products sold globally through third-party distributors, crane builders, and directly to end-users[25] 2. Acquisitions and Disposals - As part of its 'Blueprint for Growth' strategy, the Company initiated the sale of its Tire Shredder business, Crane Equipment and Service Inc, and Stahlhammer Bommern GmbH in fiscal 2019, completing the sales by February 28, 2019, as these were no longer considered core businesses[26] Financial Impact of Disposals | Item | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Net Loss on Sales of Businesses, including impairment | $169 | $11,100 | | Net Sales for Sold Businesses (2018) | N/A | $11,104 | | Pre-tax Income for Sold Businesses (2018) | N/A | $660 | 3. Revenue Recognition - Revenue from standard products is recognized at the time of shipment when control transfers to the customer, with variable consideration reducing revenue based on the most likely amount expected[30][31] - Revenue for custom engineered products and services is generally recognized at a point in time upon project completion, as performance obligations are highly interrelated and do not meet over-time recognition criteria[32] Disaggregated Revenue by Product Grouping (Three Months Ended June 30, 2019 vs. 2018) | Product Grouping | June 30, 2019 (in thousands) | June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Industrial Products | $92,019 | $98,535 | | Crane Solutions | $100,113 | $97,502 | | Engineered Products | $20,561 | $17,683 | | All Other | $19 | $11,272 | | Total Net Sales | $212,712 | $224,992 | 4. Fair Value Measurements - The Company uses a fair value hierarchy (Level 1, 2, 3) to categorize inputs for measuring fair value, prioritizing observable inputs[45][46] - Derivative portfolios and annuity contracts are primarily valued using Level 2 inputs, while marketable securities are valued using Level 1 inputs[50][52] Fair Value Measurements (June 30, 2019) | Description (Assets/(Liabilities)) | Fair Value (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Marketable securities | $7,575 | $7,575 | — | — | | Annuity contract | $2,340 | — | $2,340 | — | | Foreign exchange contracts | $(32) | — | $(32) | — | | Interest rate swap liability | $(972) | — | $(972) | — | | Cross currency swap liability | $(17,049) | — | $(17,049) | — | | Cross currency swap asset | $2,005 | — | $2,005 | — | | Term loan (disclosed) | $(300,463) | — | $(300,463) | — | 5. Inventories - Interim LIFO calculations are based on management's estimates of year-end inventory levels and costs, which are subject to change[57] Inventories (June 30, 2019 vs. March 31, 2019) | Inventory Component | June 30, 2019 (in thousands) | March 31, 2019 (in thousands) | | :--- | :--- | :--- | | Raw Materials | $97,546 | $88,786 | | Work-in-Process | $30,978 | $32,547 | | Finished Goods | $39,961 | $40,523 | | Total at Cost - FIFO Basis | $168,485 | $161,856 | | LIFO Cost Less Than FIFO Cost | $(17,517) | $(15,593) | | Net Inventories | $150,968 | $146,263 | 6. Marketable Securities and Other Investments - Marketable securities are recorded at fair value through earnings, with a gain of $137,000 from unrealized changes in market value for the three months ended June 30, 2019[59] - These securities are held as long-term assets to settle liability insurance claims through CM Insurance Company, Inc and are not available for general working capital[61] - The Company holds a 49% equity interest in Eastern Morris Cranes Company Limited, valued at $3,776,000 as of June 30, 2019, with investment income of $110,000 recognized for the quarter[62] 7. Goodwill and Intangible Assets - Goodwill and indefinite-lived trademarks are not amortized but are tested for impairment at least annually across two reporting units: Duff-Norton and Rest of Products[63] - Total amortization expense for identifiable intangible assets was $3,253,000 for the three months ended June 30, 2019, with an estimated annual expense of approximately $13,000,000 for fiscal years 2020-2024[69] Goodwill Balance (June 30, 2019) | Reporting Unit | Goodwill (in thousands) | | :--- | :--- | | Duff-Norton | $9,626 | | Rest of Products | $315,675 | | Total Goodwill | $325,301 | Identifiable Intangible Assets (June 30, 2019) | Asset Type | Gross Carrying Amount (in thousands) | Accumulated Amortization (in thousands) | Net (in thousands) | | :--- | :--- | :--- | :--- | | Trademark | $6,289 | $(4,254) | $2,035 | | Indefinite Lived Trademark | $47,239 | — | $47,239 | | Customer Relationships | $184,208 | $(38,307) | $145,901 | | Acquired Technology | $46,753 | $(11,144) | $35,609 | | Other | $3,470 | $(2,744) | $726 | | Total | $287,959 | $(56,449) | $231,510 | 8. Derivative Instruments - The Company uses derivative instruments to manage foreign currency and interest rate exposures, not for speculative trading[70] - Cross currency swap agreements, designated as cash flow hedges, hedge intercompany loans related to the STAHL acquisition, with a notional amount of $194,043,000 maturing by January 31, 2022[73] - Interest rate swap agreements, also cash flow hedges, manage variable interest rate exposure on the senior secured term loan, with a total notional amount of $189,293,000 maturing by December 31, 2023[77] Effect of Derivative Instruments on Statements of Operations (Three Months Ended June 30, 2019) | Type of Instrument | Location of Gain or (Loss) Recognized in Income | Amount of Gain or (Loss) Reclassified from AOCL into Income (in thousands) | | :--- | :--- | :--- | | Foreign exchange contracts | Cost of products sold | $0 | | Interest rate swaps | Interest expense | $(1,413) | | Cross currency swaps | Foreign currency exchange loss (gain) | $(1,001) | 9. Debt - The Company's debt facilities include a $100,000,000 Revolving Facility (maturing 2022) and a $445,000,000 1st Lien Term Loan (maturing 2024)[82] - The outstanding principal balance of the Term Loan was $300,463,000 as of June 30, 2019, after repaying $10,000,000 during the quarter[83] - As of June 30, 2019, there were no outstanding borrowings on the Revolver, but $16,325,000 in outstanding letters of credit were issued against it[84] - Unsecured and uncommitted lines of credit totaling approximately $2,501,000 were available to non-U.S subsidiaries, with no amounts drawn as of June 30, 2019[87] 10. Net Periodic Benefit Cost - The Company plans to contribute approximately $11,142,000 to its pension plans in fiscal 2020[91] Net Periodic Pension Cost (Three Months Ended June 30, 2019 vs. 2018) | Component | June 30, 2019 (in thousands) | June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Service Costs | $267 | $269 | | Interest Cost | $3,699 | $3,884 | | Expected Return on Plan Assets | $(3,973) | $(4,637) | | Net Amortization | $569 | $589 | | Net Periodic Pension (Benefit) Cost | $562 | $105 | Net Periodic Postretirement Benefit Cost (Three Months Ended June 30, 2019 vs. 2018) | Component | June 30, 2019 (in thousands) | June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Interest Cost | $20 | $29 | | Amortization of Plan Net Losses | $(40) | $(12) | | Net Periodic Postretirement (Benefit) Cost | $(20) | $17 | 11. Earnings Per Share - Stock options, restricted stock units, and performance shares totaling 292,000 common shares were excluded from diluted EPS computation for the three months ended June 30, 2019, as they were antidilutive[93] - On July 22, 2019, the Board declared a dividend of $0.06 per common share, expected to be approximately $1,425,000[97] Earnings Per Share Computation (Three Months Ended June 30, 2019 vs. 2018) | Metric | June 30, 2019 (in thousands) | June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Net Income | $18,579 | $7,706 | | Weighted-Average Common Stock Outstanding (Basic) | 23,431 | 23,115 | | Effect of Dilutive Employee Stock Options and Other Share-Based Awards | 346 | 495 | | Adjusted Weighted-Average Common Stock Outstanding (Diluted) | 23,777 | 23,610 | | Basic EPS | $0.79 | $0.33 | | Diluted EPS | $0.78 | $0.33 | 12. Loss Contingencies - Accrued general and product liability costs totaled $12,660,000 as of June 30, 2019[99] - The Company has accrued $881,000 for environmental matters as of June 30, 2019, and does not anticipate a material adverse effect from environmental expenditures in fiscal 2020[102] - The estimated asbestos-related aggregate liability ranges between $4,100,000 and $8,000,000, with a recorded liability of approximately $5,417,000 as of June 30, 2019[104][106] - Magnetek, a subsidiary, faces asbestos-related lawsuits with an estimated liability of $864,000 and an Italian tax matter with a potential liability of approximately $10,800,000[109][110][112][113] - Magnetek is also involved in a dispute with Monsanto regarding PCB-related liabilities, which it is vigorously defending[120][121][122] 13. Income Taxes - The Company estimates the effective tax rate for continuing operations to be approximately 22% to 23% for fiscal 2020, varying from the U.S statutory rate due to foreign subsidiary tax rates and jurisdictional mix of taxable income[123][124] Income Tax Expense as Percentage of Income from Continuing Operations | Period | Percentage | | :--- | :--- | | Three Months Ended June 30, 2019 | 22% | | Three Months Ended June 30, 2018 | 19% | 14. Changes in Accumulated Other Comprehensive Loss Changes in AOCL by Component (Three Months Ended June 30, 2019) | Component | Beginning Balance (in thousands) | Other Comprehensive Income (Loss) before Reclassification (in thousands) | Amounts Reclassified from AOCL (in thousands) | Ending Balance (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Retirement Obligations | $(55,145) | $(494) | $395 | $(55,244) | | Foreign Currency | $(25,355) | $1,395 | — | $(23,960) | | Change in Derivatives Qualifying Hedges | $(2,552) | $(2,414) | $1,656 | $(3,310) | | Total | $(83,052) | $(1,513) | $2,051 | $(82,514) | Details of Amounts Reclassified out of AOCL (Three Months Ended June 30, 2019) | AOCL Component | Amount Reclassified from AOCL (before tax, in thousands) | Affected Line Item on Condensed Consolidated Statement of Operations | | :--- | :--- | :--- | | Net amortization of prior service cost and pension settlement | $529 | Included in net periodic pension cost | | Change in derivatives qualifying as hedges | $(1) | Cost of products sold | | Change in derivatives qualifying as hedges | $(329) | Interest expense | | Change in derivatives qualifying as hedges | $2,537 | Foreign currency | 15. Leases - The Company adopted ASU No 2016-02, 'Leases (Topic 842),' effective April 1, 2019, resulting in an initial recognition of operating lease Right-of-Use (ROU) assets and lease liabilities of $35,553,000[129][132] - Leases are classified as operating leases for facilities, vehicles, and equipment, with terms ranging from 1 to 15 years; leases of twelve months or less are not recorded on the balance sheet[133][134] Lease-Related Financial Information (June 30, 2019) | Metric | Amount (in thousands) | | :--- | :--- | | Operating Lease ROU Assets | $34,311 | | Current Lease Liabilities | $7,542 | | Non-Current Lease Liabilities | $26,835 | | Total Lease Liabilities | $34,377 | | Operating Lease Expense (3 months ended) | $2,313 | | Weighted-Average Remaining Lease Term | 6.14 years | | Weighted-Average Discount Rate | 4.22% | 16. Effects of New Accounting Pronouncements - The Company has not yet adopted ASU 2016-13, 'Financial Instruments - Credit Losses (Topic 326),' which changes the methodology for measuring credit losses[145] - ASU 2016-02, 'Leases (Topic 842),' and related amendments were adopted effective April 1, 2019, requiring recognition of ROU assets and lease liabilities for operating leases[151] - Other standards adopted in fiscal 2020 did not have a material impact on the financial statements for the three months ended June 30, 2019[152][154] Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition This section provides management's perspective on financial performance, condition, liquidity, and capital resources Executive Overview - Columbus McKinnon is a global leader in motion control products, systems, and services for material handling, focusing on safety and productivity[156] - The Company's 'Blueprint for Growth Strategy' aims to simplify the business, improve operational excellence, and drive profitable growth through new product development and a digital platform[157] - Revenue is geographically diverse, with approximately 45% from outside the U.S. for the quarter, and the Company monitors global economic trends[158] - The Company anticipates a fiscal 2020 exposure of approximately $3,000,000 from trade tariffs with China, which it is actively mitigating through productivity and pricing strategies[161] Results of Operations - Net sales decreased by $12,280,000 (5.5%) due to sold businesses and unfavorable foreign currency translation, partially offset by price increases and increased sales volume[164] - Gross profit decreased by $4,035,000 (5.1%), but gross profit margin slightly increased to 35.5%, driven by price increases net of material inflation and insurance settlements[165] - Selling, General and Administrative (G&A), and Research and Development (R&D) expenses all decreased, primarily due to lower incentive compensation and reductions from sold businesses[166][167][168] Key Financial Performance (Three Months Ended June 30, 2019 vs. 2018) | Metric | June 30, 2019 (in thousands) | June 30, 2018 (in thousands) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net Sales | $212,712 | $224,992 | -5.5% | | Gross Profit | $75,612 | $79,647 | -5.1% | | Gross Profit Margin | 35.5% | 35.4% | +0.1 pp | | Selling Expenses | $22,755 | $25,567 | -11.0% | | General & Administrative Expenses | $19,600 | $21,826 | -10.2% | | Research & Development Expenses | $2,792 | $3,748 | -25.4% | | Net Loss on Sales of Businesses, including impairment | $169 | $11,100 | -98.5% | | Amortization of Intangibles | $3,253 | $3,903 | -16.7% | | Interest and Debt Expense | $3,852 | $4,607 | -16.4% | | Investment Income | $302 | $268 | +12.7% | | Income Tax Expense % | 22% | 19% | +3 pp | Liquidity and Capital Resources - Net cash used by operating activities was $2,160,000, a significant decrease from $8,118,000 provided in the prior year, primarily due to changes in working capital[177] - Net cash used for financing activities increased to $10,942,000, mainly driven by $10,000,000 in Term Loan repayments and $1,404,000 in dividend payments[180] - The outstanding principal balance of the Term Loan was $300,463,000 as of June 30, 2019, with the Company planning to pay down $65,000,000 in total over the next 12 months[184][185] - Capital expenditures for the quarter were $1,854,000, and are projected to be approximately $20,000,000 for fiscal 2020[189] Cash Flow Summary (Three Months Ended June 30, 2019 vs. 2018) | Activity | June 30, 2019 (in thousands) | June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Cash, Cash Equivalents, and Restricted Cash (End of Period) | $55,966 | $57,675 | | Net Cash Used by Operating Activities | $(2,160) | $8,118 | | Net Cash Used for Investing Activities | $(2,420) | $(2,052) | | Net Cash Used for Financing Activities | $(10,942) | $(8,062) | Goodwill Impairment Testing - Goodwill is tested for impairment at least annually at the reporting unit level (Duff Norton and Rest of Products)[191][192] - As of June 30, 2019, the Company does not believe it is more likely than not that the fair value of its reporting units is less than their carrying value[193] Seasonality and Quarterly Results - Quarterly results can be materially affected by factors such as the timing of large customer orders, vacation concentrations, legal settlements, and foreign currency translation[197] Effects of New Accounting Pronouncements - Information regarding the effects of new accounting pronouncements is detailed in Note 16 to the condensed consolidated financial statements[198] Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 - This report contains forward-looking statements subject to known and unknown risks that could cause actual results to differ materially from those expressed or implied[199] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in the Company's market risks since the end of fiscal 2019 - There have been no material changes in the Company's market risks since the end of fiscal 2019[201] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of June 30, 2019 - The Company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2019[202] - There have been no material changes in the Company's internal control over financial reporting during the most recent quarter[203] Part II. Other Information Item 1. Legal Proceedings This section states that there are no material legal proceedings - No material legal proceedings are reported[205] Item 1A. Risk Factors This section indicates no material changes to previously disclosed risk factors - No material changes from the risk factors previously disclosed in the Company's 2019 10-K[206] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds - No unregistered sales of equity securities and use of proceeds[207] Item 3. Defaults upon Senior Securities This section confirms there were no defaults upon senior securities - No defaults upon senior securities[208] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable - Mine Safety Disclosures are not applicable[209] Item 5. Other Information This section indicates there is no other information to report - No other information to report[209] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q - Exhibits include certifications of the Chief Executive Officer and Chief Financial Officer pursuant to the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002[211] - The financial statements from the Quarterly Report on Form 10-Q for the three months ended June 30, 2019, are provided in iXBRL format as an exhibit[211]