UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT 1934
For the quarterly period ended December 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
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Commission File Number: 0-27618
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COLUMBUS MCKINNON CORPORATION
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(Exact name of registrant as specified in its charter)
NEW YORK 16-0547600
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
140 JOHN JAMES AUDUBON PARKWAY, AMHERST, NY 14228-1197
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(Address of principal executive offices) (Zip code)
(716) 689-5400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. : [X] Yes [ ] No
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The number of shares of common stock outstanding as of January 31, 2007 was:
18,818,437 shares.
FORM 10-Q INDEX
COLUMBUS MCKINNON CORPORATION
DECEMBER 31, 2006
PAGE #
PART I. FINANCIAL INFORMATION ------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets -
December 31, 2006 and March 31, 2006 2
Condensed consolidated statements of operations
and retained earnings - Three months and nine
months ended December 31, 2006 and January 1, 2006 3
Condensed consolidated statements of cash flows -
Nine months ended December 31, 2006 and January 1, 2006 4
Condensed consolidated statements of comprehensive income -
Three months and nine months ended December 31, 2006
and January 1, 2006 5
Notes to condensed consolidated financial statements -
December 31, 2006 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - none. 23
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds - none. 23
Item 3. Defaults upon Senior Securities - none. 23
Item 4. Submission of Matters to a Vote of Security Holders - none. 23
Item 5. Other Information - none. 23
Item 6. Exhibits 23
- 1 -
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
2006 2006
---------- ----------
(UNAUDITED)
ASSETS: (IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 32,125 $ 45,598
Trade accounts receivable 91,612 95,726
Unbilled revenues 14,363 12,061
Inventories 86,314 74,845
Prepaid expenses 17,270 15,676
---------- ----------
Total current assets 241,684 243,906
Property, plant, and equipment, net 55,210 55,132
Goodwill and other intangibles, net 188,000 187,327
Marketable securities 27,873 27,596
Deferred taxes on income 33,539 46,065
Other assets 5,283 6,018
---------- ----------
Total assets $ 551,589 $ 566,044
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable to banks $ 8,723 $ 5,798
Trade accounts payable 38,329 39,311
Accrued liabilities 57,151 61,264
Restructuring reserve 447 793
Current portion of long-term debt 194 127
---------- ----------
Total current liabilities 104,844 107,293
Senior debt, less current portion 28,330 67,841
Subordinated debt 136,000 136,000
Other non-current liabilities 49,609 50,489
---------- ----------
Total liabilities 318,783 361,623
---------- ----------
Shareholders' equity
Common stock 188 185
Additional paid-in capital 173,595 170,081
Retained earnings 74,164 51,152
ESOP debt guarantee (3,558) (3,996)
Unearned restricted stock - (22)
Accumulated other comprehensive loss (11,583) (12,979)
---------- ----------
Total shareholders' equity 232,806 204,421
---------- ----------
Total liabilities and shareholders' equity $ 551,589 $ 566,044
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 31, JANUARY 1, DECEMBER 31, JANUARY 1,
2006 2006 2006 2006
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 142,044 $ 133,322 $ 432,963 $ 408,911
Cost of products sold 103,421 98,391 313,040 302,279
----------- ----------- ----------- -----------
Gross profit 38,623 34,931 119,923 106,632
----------- ----------- ----------- -----------
Selling expenses 14,989 13,281 45,095 40,019
General and administrative expenses 8,566 8,392 26,195 25,106
Restructuring charges 128 83 (278) 320
Amortization of intangibles 44 61 131 184
----------- ----------- ----------- -----------
23,727 21,817 71,143 65,629
----------- ----------- ----------- -----------
Income from operations 14,896 13,114 48,780 41,003
Interest and debt expense 4,034 6,268 12,722 19,617
Cost of bond redemptions 359 4,950 4,942 8,279
Investment income (3,774) (364) (4,560) (1,629)
Other income (151) (409) (1,444) (1,398)
----------- ----------- ----------- -----------
Income before income tax expense 14,428 2,669 37,120 16,134
Income tax expense 5,510 1,471 14,673 4,779
----------- ----------- ----------- -----------
Income from continuing operations 8,918 1,198 22,447 11,355
Income from discontinued operations (net of tax) 208 215 565 643
----------- ----------- ----------- -----------
Net income 9,126 1,413 23,012 11,998
Retained earnings
(accumulated deficit) - beginning of period 65,038 1,941 51,152 (8,644)
----------- ----------- ----------- -----------
Retained earnings - end of period $ 74,164 $ 3,354 $ 74,164 $ 3,354
=========== =========== =========== ===========
Basic income per share:
Income from continuing operations $ 0.48 $ 0.08 $ 1.21 $ 0.74
Income from discontinued operations 0.01 0.01 0.03 0.04
----------- ----------- ----------- -----------
Net income $ 0.49 $ 0.09 $ 1.24 $ 0.78
=========== =========== =========== ===========
Diluted income per share:
Income from continuing operations $ 0.47 $ 0.07 $ 1.19 $ 0.71
Income from discontinued operations 0.01 0.01 0.03 0.04
----------- ----------- ----------- -----------
Net income $ 0.48 $ 0.08 $ 1.22 $ 0.75
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31, JANUARY 1,
2006 2006
----------- -----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Income from continuing operations $ 22,447 $ 11,355
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Depreciation and amortization 6,306 6,809
Deferred income taxes 12,526 1,769
Gain on sale of real estate/investments (4,745) (1,794)
Loss on early retirement of bonds 4,069 6,432
Stock compensation expense 1,040 -
Amortization/write-off of deferred financing costs 1,385 2,786
Changes in operating assets and liabilities:
Trade accounts receivable and unbilled revenues 4,178 2,658
Inventories (10,890) 2,139
Prepaid expenses (1,564) 321
Other assets (297) (197)
Trade accounts payable (2,033) 2,141
Accrued and non-current liabilities (5,192) 4,090
---------- ----------
Net cash provided by operating activities 27,230 38,509
---------- ----------
INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 22,077 13,295
Purchases of marketable securities (20,025) (13,205)
Capital expenditures (6,825) (4,738)
Proceeds from sale of facilities and surplus real estate 2,051 2,091
Proceeds from discontinued operations note receivable - revised 565 643
---------- ----------
Net cash used by investing activities (2,157) (1,914)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock/options exercised 2,334 59,944
Net borrowings (payments) under revolving
line-of-credit agreements 2,294 (1,417)
Repayment of debt (43,668) (196,881)
Proceeds from issuance of long-term debt - 136,000
Deferred financing costs incurred (456) (2,357)
Other 438 446
---------- ----------
Net cash used by financing activities (39,058) (4,265)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 512 (21)
---------- ----------
Net change in cash and cash equivalents (13,473) 32,309
Cash and cash equivalents at beginning of period 45,598 9,479
---------- ----------
Cash and cash equivalents at end of period $ 32,125 $ 41,788
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 31, JANUARY 1, DECEMBER 31, JANUARY 1,
2006 2006 2006 2006
---- ---- ---- ----
(IN THOUSANDS)
Net income $ 9,126 $ 1,413 $ 23,012 $ 11,998
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 425 (818) 3,081 (2,792)
Unrealized (loss) gain on investments:
Unrealized holding gains arising
during the period 1,999 260 2,328 1,284
Reclassification adjustment for
gains included in net income (3,544) (192) (4,013) (1,183)
---------- ---------- ---------- ----------
(1,545) 68 (1,685) 101
---------- ---------- ---------- ----------
Total other comprehensive income (loss) (1,120) (750) 1,396 (2,691)
---------- ---------- ---------- ----------
Comprehensive income $ 8,006 $ 663 $ 24,408 $ 9,307
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
COLUMBUS MCKINNON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 2006
1. DESCRIPTION OF BUSINESS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position of Columbus McKinnon Corporation (the
Company) at December 31, 2006, and the results of its operations and its cash
flows for the three and nine-month periods ended December 31, 2006 and January
1, 2006, have been included. Results for the period ended December 31, 2006 are
not necessarily indicative of the results that may be expected for the year
ended March 31, 2007. The balance sheet at March 31, 2006 has been derived from
the audited financial statements at that date, but does not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Columbus McKinnon Corporation annual report on Form 10-K for the year ended
March 31, 2006.
The Company is a leading manufacturer and marketer of material handling
products, systems and services which lift, secure, position and move material
ergonomically, safely, precisely and efficiently. Key products include hoists,
cranes, chain and forged attachments. The Company's material handling products
are sold, domestically and internationally, principally to third party
distributors through diverse distribution channels, and to a lesser extent
directly to manufacturers and other end-users. The Company's integrated material
handling solutions businesses deal primarily with end users and sales are
concentrated, domestically and internationally (primarily Europe), in the
consumer products, manufacturing, warehousing and, to a lesser extent, the
steel, construction, automotive and other industrial markets.
2. STOCK BASED COMPENSATION
Effective April 1, 2006, the Company adopted SFAS 123(R), "Share-Based Payment,"
applying the modified prospective method. This Statement requires all
equity-based payments to employees, including grants of employee stock options,
to be recognized in the statement of earnings based on the grant date fair value
of the award. Under the modified prospective method, the Company is required to
record equity-based compensation expense for all awards granted after the date
of adoption and for the unvested portion of previously granted awards
outstanding as of the date of adoption. The adoption of SFAS 123(R) resulted in
$174 and $1,040 of non-deductible incentive stock option expense in the quarter
and nine months ended December 31, 2006, respectively. Stock compensation
expense is included in cost of goods sold, selling, and general and
administrative expense. The Company uses a straight-line method of attributing
the value of stock-based compensation expense, subject to minimum levels of
expense, based on vesting.
In November 2005, the FASB issued FSP No. FAS 123(R)-3, Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards. This
FSP provides an elective alternative simplified method for calculating the pool
of excess tax benefits available to absorb tax deficiencies recognized
subsequent to the adoption of SFAS No. 123(R) and reported in the Condensed
Consolidated Statements of Cash Flows. Companies may take up to one year from
the effective date of the FSP to evaluate the available transition alternatives
and make a one-time election as to which method to adopt. The Company is
currently in the process of evaluating the alternative methods of calculating
the pool of excess tax benefits.
LONG TERM INCENTIVE PLAN
Effective July 31, 2006, the shareholders of the Company approved the adoption
of our Long Term Incentive Plan (LTIP). The total number of shares of common
stock with respect to which awards may be granted under the plan is 850,000. The
LTIP was designed as an omnibus plan and awards may consist of non-qualified
stock options, incentive stock options, stock appreciation rights, restricted
stock, restricted stock units, or stock bonuses. A maximum of 600,000 shares may
be awarded as restricted stock, restricted stock units, or stock bonuses.
- 6 -
During the first nine months of fiscal 2007, a total of 9,390 shares of stock
and 7,200 restricted stock units were granted under the LTIP to the Company's
non-executive directors as part of their annual compensation. The weighted
average fair value grant price of those shares and units was $19.17.
As of December 31, 2006, there were 833,410 shares available for future grants
under the Long Term Incentive Plan.
STOCK OPTION PLANS
Existing prior to the adoption of the LTIP, the Company maintains two stock
option plans, a Non-Qualified Stock Option Plan (Non-Qualified Plan) and an
Incentive Stock Option Plan (Incentive Plan). Under the Non-Qualified Plan,
options may be granted to officers and other key employees of the Company as
well as to non-employee directors and advisors. As of December 31, 2006, no
options have been granted to non-employees. Options granted under the
Non-Qualified and Incentive Plans become exercisable over a four-year period at
the rate of 25% per year commencing one year from the date of grant at an
exercise price of not less than 100% of the fair market value of the common
stock on the date of grant. Any option granted under the Non-Qualified Plan may
be exercised not earlier than one year from the date such option is granted. Any
option granted under the Incentive Plan may be exercised not earlier than one
year and not later than 10 years from the date such option is granted.
FAIR VALUE OF STOCK OPTIONS
The fair value of stock options granted was estimated on the date of grant using
a Black-Scholes option pricing model. The weighted-average fair value of the
options was $12.93 and $12.13 for options granted during the nine months ended
December 31, 2006 and January 1, 2006, respectively. The following table
provides the weighted-average assumptions used to value stock options granted
during the nine months ended December 31, 2006 and January 1, 2006:
NINE MONTHS ENDED
DECEMBER 31, 2006 JANUARY 1, 2006
-----------------------------------------------
Assumptions:
Risk-free interest rate.................... 4.9 % 4.5 %
Dividend yield--Incentive Plan.............. 0.0 % 0.0 %
Volatility factor.......................... 0.593 0.615
Expected life--Incentive Plan............... 5.5 years 5.0 years
To determine expected volatility, the Company uses historical volatility based
on daily closing prices of its Common Stock over periods that correlate with the
expected terms of the options granted. The risk-free rate is based on the United
States Treasury yield curve at the time of grant for the appropriate term of the
options granted. Expected dividends are based on the Company's history and
expectation of dividend payouts. The expected term of stock options is based on
vesting schedules, expected exercise patterns and contractual terms.
STOCK OPTION ACTIVITY
The following table summarizes stock option activity related to the Company's
previously existing stock option plans for the nine months ended December 31,
2006:
WEIGHTED-AVERAGE
REMAINING
WEIGHTED-AVERAGE CONTRACTUAL LIFE AGGREGATE
SHARES EXERCISE PRICE (IN YEARS) INTRINSIC VALUE
------------------------------------------------------------------------------
Outstanding at March 31, 2006.... 1,132,118 $ 11.28
Granted....................... 70,000 22.41
Exercised..................... (203,093) 10.60
Cancelled..................... (27,500) 7.76
------------------------------------------------------------------------------
Outstanding at December 31, 2006. 971,525 $ 12.32 6.0 $ 8,730
==============================================================================
Exercisable at December 31, 2006. 552,150 $ 13.58 4.5 $ 4,230
==============================================================================
- 7 -
We calculated intrinsic value for those options that had an exercise price lower
than the market price of our common shares as of December 31, 2006. The
aggregate intrinsic value of outstanding options as of December 31, 2006 is
calculated as the difference between the exercise price of the underlying
options and the market price of our common shares for the 866,425 options that
were in-the-money at that date. The aggregate intrinsic value of exercisable
options as of December 31, 2006 is calculated as the difference between the
exercise price of the underlying options and the market price of our common
shares for the 520,800 exercisable options that were in-the-money at that date.
The Company's closing stock price was $21.02 as of December 31, 2006. The total
intrinsic value of stock options exercised during the first nine months of
fiscal 2007 was $2,999 ($2,631 for fiscal 2006). As of December 31, 2006, there
are 129,600 options available for future grants under the two stock option
plans.
The fair value of shares that vested during the nine months ended December 31,
2006 and January 1, 2006 was $3.65 and $3.75, respectively.
Cash received from option exercises under all share-based payment arrangements
for the nine months ended December 31, 2006 was $2,153. Proceeds from the
exercise of stock options under stock option plans are credited to common stock
at par value and the excess is credited to additional paid-in capital.
As of December 31, 2006, $1,631 of unrecognized compensation cost related to
non-vested stock options is expected to be recognized over a weighted-average
period of approximately 3 years.
PRO FORMA INFORMATION UNDER SFAS N0. 123 FOR PERIODS PRIOR TO FISCAL 2007
Prior to April 1, 2006, the Company accounted for the stock option plans under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations. No stock-based employee compensation cost was reflected in net
income, as all options granted under these plans had an exercise price equal to
the market value of the underlying common stock on the date of grant and the
number of options granted was fixed.
The Company's net income and earnings per share as if the fair value based
method had been applied to all outstanding and unvested awards for the
comparable prior year periods is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 1, 2006 JANUARY 1, 2006
------------------------ ----------------------
Net income, as reported $ 1,413 $ 11,998
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (186) (765)
------------------------ ----------------------
Net income, pro forma $ 1,227 $ 11,233
======================== ======================
Basic income per share:
As reported $ 0.09 $ 0.78
======================== ======================
Pro forma $ 0.07 $ 0.73
======================== ======================
Diluted income per share:
As reported $ 0.08 $ 0.75
======================== ======================
Pro forma $ 0.07 $ 0.71
======================== ======================
RESTRICTED STOCK
Also existing prior to the adoption of the LTIP, the Company maintains a
Restricted Stock Plan. The Company charges compensation expense and
shareholders' equity for the market value of shares ratably over the restricted
period. Grantees that remain continuously employed with the Company become
vested in their shares five years after the date of the grant. As of December
31, 2006, there were 48,000 shares available for future grants under the
Restricted Stock Plan.
- 8 -
During the first nine months of Fiscal 2007, no shares of restricted stock were
granted. As of December 31, 2006, there are 2,000 shares of restricted stock
outstanding with a weighted average fair value grant price of $16.25.
3. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, MARCH 31,
2006 2006
------------- -----------
At cost - FIFO basis:
Raw materials....................... $ 50,878 $ 41,134
Work-in-process..................... 11,827 12,199
Finished goods...................... 37,116 33,424
---------- -----------
99,821 86,757
LIFO cost less than FIFO cost....... (13,507) (11,912)
---------- -----------
Net inventories..................... $ 86,314 $ 74,845
========== ===========
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
4. RESTRUCTURING CHARGES
During the first nine-months of fiscal 2007, the Company recorded restructuring
costs of $132 for severance and the maintenance of non-operating facilities
being held for sale which are expensed on an as incurred basis in accordance
with SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities." $128 and $4 of these costs are related to the Solutions and
Products segments, respectively. In the second quarter of fiscal 2007 we
completed the sale of a previously closed facility which resulted in the
reversal of $410 of restructuring charges within the Products segment, including
$216 of gain on the sale of a non-operating property that had been written down
in previous periods. The liability as of December 31, 2006 consists primarily of
environmental remediation costs which were accrued in accordance with SFAS No.
143.
The following table provides a reconciliation of the activity related to
restructuring reserves:
EMPLOYEE FACILITY TOTAL
-----------------------------------------------------
Reserve at March 31, 2006 $ 59 $ 734 $ 793
Restructuring charges 57 75 132
Cash payments (116) (168) (284)
Restructuring charge reversal - (410) (410)
Gain on sale of a non-operating facility - 216 216
-----------------------------------------------------
Reserve at December 31, 2006 $ - $ 447 $ 447
=====================================================
5. NET PERIODIC BENEFIT COST
The following table sets forth the components of net periodic pension cost for
the Company's defined benefit pension plans:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 31, JANUARY 1, DECEMBER 31, JANUARY 1,
2006 2006 2006 2006
---- ---- ---- ----
Service costs................... $ 1,049 $ 1,088 $ 3,147 $ 3,264
Interest cost................... 1,879 1,737 5,636 5,211
Expected return on plan assets.. (1,831) (1,654) (5,492) (4,962)
Net amortization................ 623 508 1,869 1,524
------- ------- ------- -------
Net periodic pension cost....... $ 1,720 $ 1,679 $ 5,160 $ 5,037
======= ======= ======= =======
- 9 -
For additional information on the Company's defined benefit pension plans, refer
to Note 11 in the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended March
31, 2006.
The following table sets forth the components of net periodic postretirement
benefit cost for the Company's defined benefit postretirement plans:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 31, JANUARY 1, DECEMBER 31, JANUARY 1,
2006 2006 2006 2006
---- ---- ---- ----
Service costs..................... $ 2 $ 4 $ 5 $ 12
Interest cost .................... 160 188 482 564
Amortization of plan net losses... 100 101 300 303
----- ----- ----- -----
Net periodic postretirement cost.. $ 262 $ 293 $ 787 $ 879
===== ===== ===== =====
For additional information on the Company's defined benefit postretirement
benefit plans, refer to Note 13 in the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended March 31, 2006.
6. INCOME TAXES
Income tax expense as a percentage of income from continuing operations before
income tax expense was 38.2%, 55.1%, 39.5%, and 29.6% in the fiscal 2007 and
2006 quarters and the nine-month periods then ended, respectively. The effective
income tax rate in the third quarter of fiscal 2006 reflects the $4,950 loss on
early extinguishment of debt which reduced U.S. taxable income, but did not
affect our tax expense due to the existence of fully reserved U.S. Federal net
operating loss carry-forwards. The nine month fiscal 2006 percentage varies from
the U.S. statutory rate due to the utilization of domestic net operating loss
carry-forwards that had been fully reserved. Therefore, income tax expense
primarily resulted from non-U.S. taxable income and state taxes on U.S. taxable
income. During the fourth quarter of fiscal 2006, as a result of our improved
operating performance over the past several years, we reevaluated the certainty
as to whether our remaining net operating loss carryforwards and other deferred
tax assets may ultimately be realized. As a result of the determination that it
is more likely than not that nearly all of the remaining deferred tax assets
will be realized, a significant portion of the remaining valuation allowance was
reversed as of March 31, 2006. As of December 31, 2006, we had U.S. federal net
operating loss carry-forwards of approximately $48,400, representing
approximately $16,900 of cash tax savings in future periods.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 31, JANUARY 1, DECEMBER 31, JANUARY 1,
2006 2006 2006 2006
---- ---- ---- ----
Numerator for basic and diluted earnings per share:
Net income $ 9,126 $ 1,413 $ 23,012 $ 11,998
======== ======== ======== ========
Denominators:
Weighted-average common stock outstanding -
denominator for basic EPS 18,544 16,611 18,491 15,368
Effect of dilutive employee stock options
and awards 410 676 438 538
-------- -------- -------- --------
Adjusted weighted-average common stock
outstanding and assumed conversions -
denominator for diluted EPS 18,954 17,287 18,929 15,906
======== ======== ======== ========
- 10 -
During the third quarter of fiscal 2006, the Company registered an additional
3,350,000 shares of its common stock which were sold at $20.00 per share. The
number of shares offered by the Company was 3,000,000 and 350,000 were offered
by a selling shareholder. The Company did not receive any proceeds from the sale
of shares by the selling shareholder.
8. BUSINESS SEGMENT INFORMATION
As a result of the way the Company manages the business, its reportable segments
are strategic business units that offer products with different characteristics.
The most defining characteristic is the extent of customized engineering
required on a per-order basis. In addition, the segments serve different
customer bases through differing methods of distribution. The Company has two
reportable segments: Products and Solutions. The Company's Products segment
sells hoists, industrial cranes, chain, attachments, and other material handling
products principally to third party distributors through diverse distribution
channels, and to a lesser extent directly to end-users. The Solutions segment
sells engineered material handling systems such as conveyors and lift tables
primarily to end-users in the consumer products, manufacturing, warehousing,
and, to a lesser extent, the steel, construction, automotive, and other
industrial markets. Intersegment sales are not significant. The Company
evaluates performance based on operating income of the respective business
units.
Segment information as of and for the nine months ended December 31, 2006 and
January 1, 2006, is as follows:
NINE MONTHS ENDED DECEMBER 31, 2006
-----------------------------------
PRODUCTS SOLUTIONS TOTAL
-------- --------- -----
Sales to external customers............. $ 384,039 $ 48,924 $ 432,963
Income from operations.................. 49,991 (1,211) 48,780
Depreciation and amortization........... 5,657 649 6,306
Total assets............................ 515,053 36,536 551,589
NINE MONTHS ENDED JANUARY 1, 2006
---------------------------------
PRODUCTS SOLUTIONS TOTAL
-------- --------- -----
Sales to external customers............. $ 362,405 $ 46,506 $ 408,911
Income from operations.................. 39,089 1,914 41,003
Depreciation and amortization........... 5,893 916 6,809
Total assets............................ 470,108 30,200 500,308
- 11 -
9. SUMMARY FINANCIAL INFORMATION
The following information sets forth the condensed consolidating summary
financial information of the parent and guarantors, which guarantee the 10%
Senior Secured Notes and the 8 7/8% Senior Subordinated Notes, and the
nonguarantors. The guarantors are wholly owned and the guarantees are full,
unconditional, joint and several.
Parent Guarantors Nonguarantors Eliminations Consolidated
--------------------------------------------------------------------
AS OF DECEMBER 31, 2006
Current assets:
Cash and cash equivalents $ 6,549 $ (486) $ 26,062 $ - $ 32,125
Trade accounts receivable and unbilled revenues 56,997 233 48,745 - 105,975
Inventories 40,277 20,627 28,185 (2,775) 86,314
Other current assets 5,591 1,411 10,268 - 17,270
--------------------------------------------------------------------
Total current assets 109,414 21,785 113,260 (2,775) 241,684
Property, plant, and equipment, net 23,719 11,440 20,051 - 55,210
Goodwill and other intangibles, net 89,835 58,034 40,131 - 188,000
Intercompany 85,316 (85,699) (74,004) 74,387 -
Other assets 82,595 197,328 26,908 (240,136) 66,695
--------------------------------------------------------------------
Total assets $ 390,879 $ 202,888 $ 126,346 $ (168,524) $ 551,589
====================================================================
Current liabilities $ 40,891 $ 16,987 $ 47,875 $ (909) $ 104,844
Long-term debt, less current portion 161,132 - 3,198 - 164,330
Other non-current liabilities 18,094 8,513 23,002 - 49,609
--------------------------------------------------------------------
Total liabilities 220,117 25,500 74,075 (909) 318,783
Shareholders' equity 170,762 177,388 52,271 (167,615) 232,806
--------------------------------------------------------------------
Total liabilities and shareholders' equity $ 390,879 $ 202,888 $ 126,346 $ (168,524) $ 551,589
====================================================================
FOR THE NINE MONTHS ENDED DECEMBER 31, 2006
Net sales $ 208,814 $ 125,574 $ 134,320 $ (35,745) $ 432,963
Cost of products sold 153,144 94,092 101,139 (35,335) 313,040
--------------------------------------------------------------------
Gross profit 55,670 31,482 33,181 (410) 119,923
--------------------------------------------------------------------
Selling, general and administrative expenses 31,715 12,650 26,925 - 71,290
Restructuring charges (331) - 53 - (278)
Amortization of intangibles 79 2 50 - 131
--------------------------------------------------------------------
31,463 12,652 27,028 - 71,143
--------------------------------------------------------------------
Income (loss) from operations 24,207 18,830 6,153 (410) 48,780
Interest and debt expense 9,453 2,975 294 - 12,722
Other (income) and expense, net 4,591 (407) (5,246) - (1,062)
--------------------------------------------------------------------
Income (loss) before income tax expense (benefit) 10,163 16,262 11,105 (410) 37,120
Income tax expense (benefit) 5,264 6,444 3,175 (210) 14,673
--------------------------------------------------------------------
Income (loss) from continuing operations 4,899 9,818 7,930 (200) 22,447
Income from discontinued operations 565 - - - 565
--------------------------------------------------------------------
Net income (loss) $ 5,464 $ 9,818 $ 7,930 $ (200) $ 23,012
====================================================================
- 12 -
Parent Guarantors Nonguarantors Eliminations Consolidated
--------------------------------------------------------------------
FOR THE NINE MONTHS ENDED DECEMBER 31, 2006
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 24,998 $ 1,424 $ 808 $ - $ 27,230
--------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale of marketable securities, net - - 2,052 - 2,052
Capital expenditures (4,195) (710) (1,920) - (6,825)
Proceeds from sale of facilities and surplus real
estate 1,655 396 - - 2,051
Proceeds from discontinued operations note
receivable 565 - - - 565
--------------------------------------------------------------------
Net cash (used) provided by investing activities (1,975) (314) 132 - (2,157)
--------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 2,334 - - - 2,334
Net borrowings under revolving line-of-credit
agreements - - 2,294 - 2,294
(Repayment) borrowings of debt (46,321) - 2,653 - (43,668)
Deferred financing costs incurred (456) - - - (456)
Other 438 - - - 438
--------------------------------------------------------------------
Net cash (used) provided by financing activities (44,005) - 4,947 - (39,058)
EFFECT OF EXCHANGE RATE CHANGES ON CASH - (135) 647 - 512
--------------------------------------------------------------------
Net change in cash and cash equivalents (20,982) 975 6,534 - (13,473)
Cash and cash equivalents at beginning of period 27,531 (1,461) 19,528 - 45,598
--------------------------------------------------------------------
Cash and cash equivalents at end of period $ 6,549 $ (486) $ 26,062 $ - $ 32,125
====================================================================
AS OF MARCH 31, 2006
Current assets:
Cash and cash equivalents $ 27,531 $ (1,461) $ 19,528 $ - $ 45,598
Trade accounts receivable and unbilled revenues 60,808 157 46,822 - 107,787
Inventories 32,708 18,177 26,325 (2,365) 74,845
Other current assets 4,777 1,446 8,903 550 15,676
--------------------------------------------------------------------
Total current assets 125,824 18,319 101,578 (1,815) 243,906
Property, plant, and equipment, net 24,651 11,703 18,778 - 55,132
Goodwill and other intangibles, net 89,808 58,036 39,483 - 187,327
Intercompany 92,325 (93,637) (73,697) 75,009 -
Other assets 96,548 197,328 25,939 (240,136) 79,679
--------------------------------------------------------------------
Total assets $ 429,156 $ 191,749 $ 112,081 $ (166,942) $ 566,044
====================================================================
Current liabilities $ 48,146 $ 15,368 $ 43,306 $ 473 $ 107,293
Long-term debt, less current portion 203,384 - 457 - 203,841
Other non-current liabilities 16,305 8,676 25,508 - 50,489
--------------------------------------------------------------------
Total liabilities 267,835 24,044 69,271 473 361,623
Shareholders' equity 161,321 167,705 42,810 (167,415) 204,421
--------------------------------------------------------------------
Total liabilities and shareholders' equity $ 429,156 $ 191,749 $ 112,081 $ (166,942) $ 566,044
====================================================================
- 13 -
Parent Guarantors Nonguarantors Eliminations Consolidated
--------------------------------------------------------------------
FOR THE NINE MONTHS ENDED JANUARY 1, 2006
Net sales $ 195,700 $ 109,735 $ 121,098 $ (17,622) $ 408,911
Cost of products sold 146,411 83,126 88,829 (16,087) 302,279
--------------------------------------------------------------------
Gross profit 49,289 26,609 32,269 (1,535) 106,632
Selling, general and administrative expenses 29,767 11,710 23,648 - 65,125
Restructuring charges 236 - 84 - 320
Amortization of intangibles 132 2 50 - 184
--------------------------------------------------------------------
30,135 11,712 23,782 - 65,629
--------------------------------------------------------------------
Income (loss) from operations 19,154 14,897 8,487 (1,535) 41,003
Interest and debt expense 15,867 3,537 213 - 19,617
Other (income) and expense, net 7,549 24 (2,321) - 5,252
--------------------------------------------------------------------
(Loss) income before income tax expense (4,262) 11,336 10,595 (1,535) 16,134
Income tax expense 590 1,044 3,145 - 4,779
--------------------------------------------------------------------
(Loss) income from continuing operations (4,852) 10,292 7,450 (1,535) 11,355
Income from discontinued operations 643 - - - 643
--------------------------------------------------------------------
Net (loss) income $ (4,209) $ 10,292 $ 7,450 $ (1,535) $ 11,998
====================================================================
FOR THE NINE MONTHS ENDED JANUARY 1, 2006
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 16,996 $ 9,296 $ 12,217 $ - $ 38,509
--------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale of marketable securities, net - - 90 - 90
Capital expenditures (2,641) (497) (1,600) - (4,738)
Proceeds from sale of facilities and surplus real
estate - 468 1,623 - 2,091
Proceeds from discontinued operations note
receivable - revised 643 - - - 643
--------------------------------------------------------------------
Net cash (used) provided by investing activities (1,998) (29) 113 - (1,914)
--------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from stock offering/options exercised 59,944 - - - 59,944
Net borrowings (payments) under revolving
line-of-credit agreements 240 - (1,657) - (1,417)
Repayment of debt (196,706) - (175) - (196,881)
Proceeds from issuance of long-term debt 136,000 - - - 136,000
Deferred financing costs incurred (2,357) - - - (2,357)
Dividends paid 9,067 (8,854) (213) - -
Other 446 - - - 446
--------------------------------------------------------------------
Net cash provided (used) by financing activities 6,634 (8,854) (2,045) - (4,265)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (230) 12 197 - (21)
--------------------------------------------------------------------
Net change in cash and cash equivalents 21,402 425 10,482 - 32,309
Cash and cash equivalents at beginning of period 1,019 (697) 9,157 - 9,479
--------------------------------------------------------------------
Cash and cash equivalents at end of period $ 22,421 $ (272) $ 19,639 $ - $ 41,788
====================================================================
- 14 -
10. LOSS CONTINGENCIES
Like many industrial manufacturers, the Company is involved in asbestos-related
litigation. In continually evaluating costs relating to its estimated
asbestos-related liability, the Company reviews, among other things, the
incidence of past and recent claims, the historical case dismissal rate, the mix
of the claimed illnesses and occupations of the plaintiffs, its recent and
historical resolution of the cases, the number of cases pending against it, the
status and results of broad-based settlement discussions, and the number of
years such activity might continue. Based on this review, the Company has
estimated its share of liability to defend and resolve probable asbestos-related
personal injury claims. This estimate is highly uncertain due to the limitations
of the available data and the difficulty of forecasting with any certainty the
numerous variables that can affect the range of the liability. The Company will
continue to study the variables in light of additional information in order to
identify trends that may become evident and to assess their impact on the range
of liability that is probable and estimable.
Based on actuarial information, the Company has estimated its asbestos-related
aggregate liability through March 31, 2025 and March 31, 2037 to range between
$5,000 and $14,000 using actuarial parameters of continued claims for a period
of 18 to 30 years. The Company's estimation of its asbestos-related aggregate
liability that is probable and estimable, in accordance with U.S. generally
accepted accounting principles approximates $8,400 which has been reflected as a
liability in the consolidated financial statements as of December 31, 2006. The
recorded liability does not consider the impact of any potential favorable
federal legislation such as the "FAIR Act". This liability may fluctuate based
on the uncertainty in the number of future claims that will be filed and the
cost to resolve those claims, which may be influenced by a number of factors,
including the outcome of the ongoing broad-based settlement negotiations,
defensive strategies, and the cost to resolve claims outside the broad-based
settlement program. Of this amount, management expects to incur asbestos
liability payments of approximately $325 over the next 12 months. Because
payment of the liability is likely to extend over many years, management
believes that the potential additional costs for claims will not have a material
after-tax effect on the financial condition of the Company or its liquidity,
although the net after-tax effect of any future liabilities recorded could be
material to earnings in a future period.
11. NEW ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes".
FIN 48 is an interpretation of FASB Statement No. 109 "Accounting for Income
Taxes" and must be adopted by the Company no later than April 1, 2007. FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting, and
disclosing in the financial statements uncertain tax positions that the company
has taken or expect to take in our tax returns. The Company is assessing the
impact the adoption of FIN 48 will have on the Company's consolidated financial
position and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements," to define fair value, establish a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expand disclosures about fair value measurements.
SFAS No. 157 will be effective for fiscal years beginning after November 15,
2007. The Company is assessing the impact the adoption of SFAS No. 157 will have
on the Company's consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" (SFAS 158). Among other items, SFAS 158
requires recognition of the overfunded or underfunded status of an entity's
defined benefit postretirement plan as an asset or liability in the financial
statements, requires the measurement of defined benefit postretirement plan
assets and obligations as of the end of the employer's fiscal year, and requires
recognition of the funded status of defined benefit postretirement plans in
other comprehensive income. SFAS 158 is effective as of the end of the fiscal
year ending after December 15, 2006. The Company is assessing the impact the
adoption of SFAS No. 158 will have on the Company's consolidated financial
position and results of operations.
- 15 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS)
EXECUTIVE OVERVIEW
We are a leading manufacturer and marketer of hoists, cranes, chain, conveyors,
material handling systems, lift tables and component parts serving a wide
variety of commercial and industrial end-user markets. Our products are used to
efficiently and ergonomically move, lift, position or secure objects and loads.
Our Products segment sells a wide variety of powered and manually operated wire
rope and chain hoists, industrial crane systems, chain, hooks and attachments,
actuators and rotary unions. Our Solutions segment designs, manufactures, and
installs application-specific or standard material handling systems and
solutions for end-users to improve work station and facility-wide work flow.
Founded in 1875, we have grown to our current size and leadership position
through organic growth and the acquisition of 14 businesses between February
1994 and April 1999. We have developed our leading market position over our
131-year history by emphasizing technological innovation, manufacturing
excellence and superior after-sale service. In addition, the acquisitions
significantly broadened our product lines and services and expanded our
geographic reach, end-user markets and customer base. Ongoing integration of
these businesses includes improving our productivity and extending our sales
activities to the European and Asian marketplaces. We are executing those
initiatives through our Lean Manufacturing efforts, new product development and
expanded sales activities. Shareholder value will be enhanced through continued
emphasis on improvement of the fundamentals including manufacturing efficiency,
cost containment, efficient capital investment, market expansion and renewed
customer focus.
We maintain a strong domestic market share with significant leading North
American market positions in hoists, lifting and sling chain, and forged
attachments. To broaden our product offering in markets where we have a strong
competitive position as well as to facilitate penetration into new geographic
markets, we have heightened our new product development activities. This
includes the recent introduction of powered hoist lines in accordance with
international standards, to complement our current offering of hoist products
designed in accordance with U.S. standards. To further expand our global sales,
we are introducing certain of our products that historically have been
distributed only in North America and also introducing new products through our
existing European distribution network. Furthermore, we are working to build a
distribution network in China to capture an anticipated growing demand for
material handling products as that economy continues to industrialize. We have
recently reorganized our management team to align with these strategic
initiatives. These investments in international markets and new products are
part of our focus on our greatest opportunities for growth. Our overall order
growth rate of approximately 9% for the first nine months of fiscal 2007
compared to fiscal 2006 was a combination of increasing domestic organic sales
growth and increasing global sales as a result of our expanding presence in
emerging and existing international markets. Management monitors U.S. Industrial
Capacity Utilization, which has been increasing since July 2003, as an indicator
of anticipated demand for our product. In addition, we continue to monitor the
potential impact of other global and domestic trends, including energy costs,
steel price fluctuations, interest rates and activity in a variety of end-user
markets around the globe.
Our Lean Manufacturing efforts continue to fundamentally change our
manufacturing processes to be more responsive to customer demand and improve
on-time delivery and productivity. From 2001 to 2004 under our facility
rationalization program, we closed 13 facilities and consolidated several
product lines, with potential opportunity for further rationalization. These
activities are driving our operating leverage. In furtherance of our facility
rationalization projects, we completed the sale of several excess properties
during fiscal 2006 and the first nine months of fiscal 2007, generating $4,100
from real estate sales which has been, and will continue to be used to repay our
outstanding debt.
We keep a close watch on the costs for fringe benefits such as health insurance,
workers compensation insurance and pension. Combined, those benefits cost us
over $35,000 in fiscal 2006 and we work diligently to balance cost control with
the need to provide competitive employee benefits packages for our associates.
Another cost area of focus is steel. We utilize approximately $40,000 to $45,000
of steel annually in a variety of forms including rod, wire, bar, structural and
others. With increases in worldwide demand for steel and fluctuating scrap steel
prices, we experienced fluctuations in our costs that we reflected as price
increases to our customers. We will continue to monitor our costs and reevaluate
- 16 -
our pricing policies. We continue to operate in a highly competitive business
environment in the markets and geographies served. Our performance will be
impacted by our ability to address a variety of challenges and opportunities in
those markets and geographies, including trends towards increased utilization of
the global labor force and the expansion of market opportunities in Asia and
other emerging markets.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 2006 AND JANUARY 1, 2006
Net sales in the fiscal 2007 quarter ended December 31, 2006 were $142,044, up
$8,722 or 6.5% from the fiscal 2006 quarter ended January 1, 2006. Net sales for
the nine months ended December 31, 2006 were $432,963, an increase of $24,052 or
5.9% from the nine months ended January 1, 2006. Sales in the Products segment
increased by $9,013 or 7.6% from the previous year's quarter and $21,634 or 6.0%
from the previous year's nine-month period then ended. These increases are due
to the continued strength of the U.S. and European industrial markets, as well
as the impact of price increases of $2,000 and $5,400 in the quarter and nine
months ended December 31, 2006, respectively. Translation of foreign currencies,
particularly the Euro and Canadian dollar, into U.S. dollars contributed $1,300
and $3,600 toward the Products segment increase in sales for the quarter and
nine-month period ended December 31, 2006, respectively. Sales in the Solutions
segment decreased 1.9% or $291 for the quarter and increased 5.2% or $2,418 for
the nine months ended December 31, 2006 when compared with the same periods in
the prior year. The quarter's decrease in this segment is due to lower volume in
our European conveyor business. Translation of foreign currencies into U.S.
dollars contributed $700 and $800 to the Solutions segment sales for the quarter
and nine-months ended December 31, 2006. Sales in the segments are summarized as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------ -------------------------------------------
DEC. 31, JAN. 1, CHANGE DEC. 31, JAN. 1, CHANGE
2006 2006 AMOUNT % 2006 2006 AMOUNT %
---- ---- ------ --- ---- ---- ------ ---
Products $ 126,863 $ 117,850 $ 9,013 7.6 $ 384,039 $ 362,405 $ 21,634 6.0
Solutions 15,181 15,472 (291) -1.9 48,924 46,506 2,418 5.2
---------- ---------- -------- ---------- --------- ---------
Net sales $ 142,044 $ 133,322 $ 8,722 6.5 $ 432,963 $ 408,911 $ 24,052 5.9
========== ========== ======== ========== ========= =========
Gross profits and gross profit margins by operating segment are summarized as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ ---------------------------------------
DEC. 31, 2006 JAN. 1, 2006 DEC. 31, 2006 JAN. 1, 2006
------------- ------------ ------------- ------------
$ % $ % $ % $ %
--- --- --- --- --- --- --- ---
Products $ 37,654 29.7 $ 32,142 27.3 $ 114,967 29.9 $ 99,027 27.3
Solutions 969 6.4 2,789 18.0 4,956 10.1 7,605 16.4
--------- --------- ---------- ----------
Total Gross Profit $ 38,623 27.2 $ 34,931 26.2 $ 119,923 27.7 $ 106,632 26.1
========= ========= ========== ==========
The increase in the gross profit margin for the Products segment is the result
of product mix, the realization of operational leverage at increased sales
volumes and ongoing cost containment activities. The Solutions segment gross
profit margin was impacted by weak performance at our European conveyor business
as a result of cost overruns on a few specific projects, a challenging pricing
environment, and unfavorable sales mix.
Selling expenses were $14,989, $13,281, $45,095, and $40,019 in the fiscal 2007
and 2006 quarters and the nine-month periods then ended, respectively. The
changes in expense dollars were impacted by increased investment to support our
strategic growth initiatives ($450 and $1,250 for the quarter and nine-month
period ended December 31, 2006, respectively), translation from changes in
foreign exchange rates ($100 and $600 for the quarter and nine-month period
ended December 31, 2006, respectively) and increased variable selling costs as a
result of higher sales volume. As a percentage of consolidated net sales,
selling expenses were 10.6%, 10.0%, 10.4%, and 9.8% in the fiscal 2007 and 2006
quarters and the nine-month periods then ended, respectively.
- 17 -
General and administrative expenses were $8,566, $8,392, $26,195, and $25,106 in
the fiscal 2007 and 2006 quarters and the nine-month periods then ended,
respectively. The fiscal 2007 nine-month data is higher than the prior year due
to the result of stock based compensation expense ($600), and increased research
and development ($460). As a percentage of consolidated net sales, general and
administrative expenses were 6.0%, 6.3%, 6.1% and 6.1% in the fiscal 2007 and
2006 quarters and the nine-month periods then ended, respectively.
Restructuring charges were $128, $83, ($278), and $320 in the fiscal 2007 and
2006 quarters and the nine-month periods then ended, respectively. The reversal
of restructuring charges in fiscal 2007 resulted from the sale of a previously
closed facility and included $216 of gain on the sale of the property that had
been written down in previous periods.
Amortization of intangibles was $44, $61, $131, and $184 in the fiscal 2007 and
2006 quarters and the nine-month periods then ended, respectively.
Interest and debt expense was $4,034, $6,268, $12,722, and $19,617 in the fiscal
2007 and 2006 quarters and the nine-month periods then ended, respectively.
These decreases are the result of lower debt levels. As a percentage of
consolidated net sales, interest and debt expense was 2.8%, 4.7%, 2.9% and 4.8%
in the fiscal 2007 and 2006 quarters and the nine-month periods then ended,
respectively.
Cost of bond redemptions was $359, $4,950, $4,942, and $8,279 in the fiscal 2007
and 2006 quarters and the nine-month periods then ended, respectively,
supporting our debt reduction initiatives.
Investment income was $3,744, $364, $4,560, and $1,629 in the fiscal 2007 and
2006 quarters and the nine-month periods then ended, respectively. The fiscal
2007 quarter and nine month period includes $3,300 of realized gains on sale of
investments resulting from the reallocation of our captive insurance company's
investment portfolio.
Other (income) and expense, net was ($151), ($409), ($1,444) and ($1,398) in the
fiscal 2007 and 2006 quarters and the nine-month periods then ended,
respectively.
Income tax expense as a percentage of income from continuing operations before
income tax expense was 38.2%, 55.1%, 39.5%, and 29.6% in the fiscal 2007 and
2006 quarters and the nine-month periods then ended, respectively. The effective
income tax rate in the third quarter of fiscal 2006 reflects the $4,950 loss on
early extinguishment of debt which reduced U.S. taxable income, but did not
affect our tax expense due to the existence of fully reserved U.S. Federal net
operating loss carry-forwards. The nine month fiscal 2006 percentage varies from
the U.S. statutory rate due to the utilization of domestic net operating loss
carry-forwards that had been fully reserved. Therefore, income tax expense
primarily resulted from non-U.S. taxable income and state taxes on U.S. taxable
income. During the fourth quarter of fiscal 2006, as a result of our improved
operating performance over the past several years, we reevaluated the certainty
as to whether our remaining net operating loss carryforwards and other deferred
tax assets may ultimately be realized. As a result of the determination that it
is more likely than not that nearly all of the remaining deferred tax assets
will be realized, a significant portion of the remaining valuation allowance was
reversed as of March 31, 2006. As of December 31, 2006, we had U.S. federal net
operating loss carry-forwards of approximately $48,400, representing
approximately $16,900 of cash tax savings in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $32,125 at December 31, 2006, an increase of
$7,984 from the October 1, 2006 balance of $24,177.
Net cash provided by operating activities was $27,230 for the nine months ended
December 31, 2006 compared to $38,509 for the nine months ended January 1, 2006.
The $11,279 decrease is the result of an $11,092 increase in income from
continuing operations which includes a $2,930 increase in investment income and
$3,329 of lower bond redemption costs relative to the prior period. This
increased income was offset by unfavorable changes in net working capital of
$26,950, including $13,029 of increased inventory (support for upcoming new
product launches, a surge in demand for larger capacity equipment, and timing of
offshore purchases) and a $13,456 decrease in accounts payable and accrued and
- 18 -
non-current liabilities (timing of disbursements, decreased product liability
reserves, and decreased variable compensation accruals).
Net cash used in investing activities was $2,157 for the nine months ended
December 31, 2006 compared to $1,914 for the nine months ended January 1, 2006.
The $243 increase in net cash used in investing activities was the result of a
$2,087 increase in capital expenditures, offset by a $1,962 increase in proceeds
from the sale of marketable securities.
Net cash used in financing activities was $39,058 for the nine months ended
December 31, 2006 compared to $4,265 for the nine months ended January 1, 2006.
The net cash used in financing activities for the nine months ended December 31,
2006 consisted of $41,374 of net debt repayments, partially offset by $2,334 of
proceeds from the issuance of common stock and stock options exercised. The net
cash used by financing activities for the nine months ended January 1, 2006
consisted of $198,298 of net debt repayments and $2,357 of deferred financing
costs incurred in association with our issuance of the 8 7/8% Notes, offset by
$136,000 of proceeds from the issuance of those notes, and $59,944 of proceeds
from the issuance of common stock and stock options exercised.
We believe that our cash on hand, cash flows, and borrowing capacity under our
Revolving Credit Facility will be sufficient to fund our ongoing operations and
budgeted capital expenditures for at least the next twelve months. This belief
is dependent upon a steady economy and successful execution of our current
business plan which includes focus on cash generation for debt repayment. The
business plan includes continued implementation of new market penetration, new
product development, lean manufacturing and improving working capital
utilization.
In March 2006, we entered into a Revolving Credit Facility which provides
availability up to $75,000. Provided there is no default, the Company may
request an increase in the availability of the Revolving Credit Facility by an
amount not exceeding $50,000 if all Senior Secured 10% Notes (10% Notes) have
been repaid in full or will be repaid in full contemporaneously with such
increase, or $25,000 in the event that any 10% Notes remain outstanding. The
Revolving Credit Facility matures February 2010, however the maturity date can
be extended to February 2011 based on certain conditions related to outstanding
balances and maturity dates of the 10% Notes.
The unused portion of the Revolving Credit Facility totaled $64,341 net of
outstanding borrowings of zero and outstanding letters of credit of $10,659 of
December 31, 2006. Interest is payable at a Eurodollar Rate or a prime rate plus
an applicable margin determined by our leverage ratio. At our current leverage
ratio, we qualify for the lowest applicable margin level, which amounts to 87.5
basis points for Eurodollar borrowings and zero basis points for prime rate
based borrowings. The Revolving Credit Facility is secured by all domestic
inventory, receivables, equipment, real property, subsidiary stock (limited to
65% for foreign subsidiaries) and intellectual property. The corresponding
credit agreement associated with the Revolving Credit Facility places certain
debt covenant restrictions on us, including certain financial requirements and a
restriction on dividend payments.
The Senior Subordinated 8 7/8% Notes (8 7/8% Notes) issued on September 2, 2005
amounted to $136,000 and are due November 1, 2013. Provisions of the 8 7/8%
Notes include, without limitation, restrictions on indebtedness, asset sales,
and dividends and other restricted payments. Until November 1, 2008, we may
redeem up to 35% of the outstanding notes at a redemption price of 108.875% with
the proceeds of equity offerings, subject to certain restrictions. On or after
November 1, 2009, the 8 7/8% Notes are redeemable at the option of the Company,
in whole or in part, at prices declining annually from 104.438% to 100% on and
after November 1, 2011. In the event of a Change of Control (as defined in the
indenture for such notes), each holder of the 8 7/8% Notes may require us to
repurchase all or a portion of such holder's 8 7/8% Notes at a purchase price
equal to 101% of the principal amount thereof. The 8 7/8% Notes are guaranteed
by certain existing and future domestic subsidiaries and are not subject to any
sinking fund requirements.
The Senior Secured 10% Notes (10% Notes) issued on July 22, 2003 amounted to
$25,132 as of December 31, 2006 and are due August 1, 2010. Provisions of the
10% Notes include, without limitation, restrictions on indebtedness, restricted
payments, asset and subsidiary stock sales, liens, and other restricted
transactions. The remaining 10% Notes are not entitled to redemption at our
option, prior to August 1, 2007. On and after August 1, 2007, they are
redeemable at a prices declining annually from 105% to 100% on and after August
1, 2009. In the event of a Change of Control (as defined in the indenture for
such notes), each holder of the 10% Notes may require us to repurchase all or a
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portion of such holder's 10% Notes at a purchase price equal to 101% of the
principal amount thereof. The 10% Notes are secured by a second-priority
interest in all domestic inventory, receivables, equipment, real property,
subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual
property. The 10% Notes are guaranteed by certain existing and future domestic
subsidiaries and are not subject to any sinking fund requirements.
CAPITAL EXPENDITURES
In addition to keeping our current equipment and plants properly maintained, we
are committed to replacing, enhancing, and upgrading our property, plant, and
equipment to support new product development, reduce production costs, increase
flexibility to respond effectively to market fluctuations and changes, meet
environmental requirements, enhance safety, and promote ergonomically correct
work stations. Consolidated capital expenditures for the nine months ended
December 31, 2006 and January 1, 2006 were $6,825 and $4,738, respectively. We
expect capital spending for fiscal 2007 to be approximately $10 million compared
with $8.4 million in fiscal 2006. Anticipated higher capital expenditures for
fiscal 2007 will be primarily directed toward new product development and
productivity improvement.
INFLATION AND OTHER MARKET CONDITIONS
Our costs are affected by inflation in the U.S. economy and, to a lesser extent,
in foreign economies including those of Europe, Canada, Mexico, and the Pacific
Rim. We do not believe that general inflation has had a material effect on
results of operations over the periods presented primarily due to overall low
inflation levels of most costs over such periods and the ability to generally
pass on rising costs through price increases. However, we have been impacted by
fluctuations in steel costs, which vary by type of steel and we continue to
monitor them. In addition, U.S. employee benefits costs such as health insurance
and workers compensation insurance as well as energy costs have exceeded general
inflation levels. We generally incorporate those cost increases into our sales
price increases and consider surcharges on certain products, as determined
necessary. In the future, we may be further affected by inflation that we may
not be able to pass on as price increases or surcharges.
SEASONALITY AND QUARTERLY RESULTS
Quarterly results may be materially affected by the timing of large customer
orders, periods of high vacation and holiday concentrations, gains or losses on
early retirement of bonds, restructuring charges, divestitures and acquisitions.
Therefore, the operating results for any particular fiscal quarter are not
necessarily indicative of results for any subsequent fiscal quarter or for the
full fiscal year.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes".
FIN 48 is an interpretation of FASB Statement No. 109 "Accounting for Income
Taxes" and must be adopted by us no later than April 1, 2007. FIN 48 prescribes
a comprehensive model for recognizing, measuring, presenting, and disclosing in
the financial statements uncertain tax positions that we have taken or expect to
take in our tax returns. We are assessing the impact the adoption of FIN 48 will
have on our consolidated financial position and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements," to define fair value, establish a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expand disclosures about fair value measurements.
SFAS No. 157 will be effective for fiscal years beginning after November 15,
2007. We are assessing the impact the adoption of SFAS No. 157 will have on our
consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" (SFAS 158). Among other items, SFAS 158
requires recognition of the overfunded or underfunded status of an entity's
defined benefit postretirement plan as an asset or liability in the financial
statements, requires the measurement of defined benefit postretirement plan
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assets and obligations as of the end of the employer's fiscal year, and requires
recognition of the funded status of defined benefit postretirement plans in
other comprehensive income. SFAS 158 is effective as of the end of the fiscal
year ending after December 15, 2006. We are assessing the impact the adoption of
SFAS No. 158 will have on our consolidated financial position and results of
operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report may include "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements involve known
and unknown risks, uncertainties and other factors that could cause our actual
results to differ materially from the results expressed or implied by such
statements, including general economic and business conditions, conditions
affecting the industries served by us and our subsidiaries, conditions affecting
our customers and suppliers, competitor responses to our products and services,
the overall market acceptance of such products and services, the integration of
acquisitions and other factors disclosed in our periodic reports filed with the
Commission. Consequently such forward-looking statements should be regarded as
our current plans, estimates and beliefs. We do not undertake and specifically
decline any obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the market risks since the end of Fiscal
2006.
Item 4. Controls and Procedures
As of December 31, 2006, an evaluation was performed under the supervision and
with the participation of the Company's management, including the chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the chief executive
officer and chief financial officer, concluded that the Company's disclosure
controls and procedures were effective as of December 31, 2006. There were no
changes in the Company's internal controls or other factors during our third
quarter ended December 31, 2006.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings - none.
Item 1A. Risk Factors
No material changes from risk factors as previously disclosed in the
Company's Form 10-K for the year ended March 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - none.
Item 3. Defaults upon Senior Securities - none.
Item 4. Submission of Matters to a Vote of Security Holders - none.
Item 5. Other Information - none.
Item 6. Exhibits
(a) Exhibits:
Exhibit 10.1 Amendment No. 8 to the 1998 Plan Restatement of the
Columbus McKinnon Corporation Monthly Retirement
Benefit Plan, dated December 22, 2006.
Exhibit 10.2 First Amendment, dated as of January 8, 2007, made in
connection with that certain Third Amended and
Restated Credit Agreement, dated as of March 16, 2006,
among Columbus McKinnon Corporation, the Guarantors
named therein, the lending institutions party thereto,
and Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934; as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934; as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLUMBUS MCKINNON CORPORATION
-----------------------------
(Registrant)
Date: FEBRUARY 9, 2007 /S/ KAREN L. HOWARD
---------------- ---------------------------------------
Karen L. Howard
Vice President and Chief Financial
Officer (Principal Financial Officer)
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