Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

For the quarterly period ended December 31, 2017 
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                   to

Commission File Number:       0-27618

Columbus McKinnon Corporation
 
(Exact name of registrant as specified in its charter)
 
New York
16-0547600
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
205 Crosspoint Parkway, Getzville, NY
14068
(Address of principal executive offices)
(Zip code)
(716) 689-5400
 
(Registrant's telephone number, including area code)
 
 
 
(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.  : ý Yes   o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act. 
Large accelerated filer  o
Accelerated filer x
Non-accelerated filer  o  (Do not check if a smaller reporting company)
Smaller Reporting Company o
Emerging Growth Company o
 
If an Emerging Growth Company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes    ý No
 
The number of shares of common stock outstanding as of February 1, 2018 was: 23,021,510 shares.




FORM 10-Q INDEX
COLUMBUS McKINNON CORPORATION
December 31, 2017

 
 
Page #
Part I. Financial Information
 
 
 
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
 
 
 
Condensed consolidated balance sheets - December 31, 2017 and March 31, 2017
 
 
 
 
Condensed consolidated statements of operations and retained earnings  - Three and nine months ended December 31, 2017 and December 31, 2016
 
 
 
 
Condensed consolidated statements of comprehensive (loss) income - Three and nine months ended December 31, 2017 and December 31, 2016
 
 
 
 
Condensed consolidated statements of cash flows - Nine months ended December 31, 2017 and December 31, 2016
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II. Other Information
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2



Part I.    Financial Information
Item 1.    Condensed Consolidated Financial Statements (Unaudited)

COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
December 31,
2017
 
March 31,
2017
 
 
(unaudited)
 
 
ASSETS:
 
(In thousands)
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
64,598

 
$
77,591

Trade accounts receivable
 
123,466

 
111,569

Inventories
 
144,697

 
130,643

Prepaid expenses and other
 
17,773

 
21,147

Total current assets
 
350,534

 
340,950

Property, plant, and equipment, net
 
111,815

 
113,028

Goodwill
 
341,619

 
319,299

Other intangibles, net
 
263,353

 
256,183

Marketable securities
 
7,558

 
7,686

Deferred taxes on income
 
39,889

 
61,857

Other assets
 
16,319

 
14,840

Total assets
 
$
1,131,087

 
$
1,113,843

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY:
 
 

 
 

Current liabilities:
 
 

 
 

Trade accounts payable
 
$
42,945

 
$
40,994

Accrued liabilities
 
90,869

 
97,397

Current portion of long term debt
 
60,134

 
52,568

Total current liabilities
 
193,948

 
190,959

Senior debt, less current portion
 
60

 
41

Term loan and revolving credit facility
 
317,696

 
368,710

Other non current liabilities
 
235,420

 
212,783

Total liabilities
 
747,124

 
772,493

Shareholders' equity:
 
 

 
 

Voting common stock; 50,000,000 shares authorized; 23,015,303
and 22,565,613 shares issued and outstanding
 
230

 
226

Additional paid in capital
 
267,813

 
258,853

Retained earnings
 
191,504

 
179,735

Accumulated other comprehensive loss
 
(75,584
)
 
(97,464
)
Total shareholders' equity
 
383,963

 
341,350

Total liabilities and shareholders' equity
 
$
1,131,087

 
$
1,113,843


See accompanying notes.

3



COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)

 
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
2017
 
December 31,
2016
 
December 31,
2017
 
December 31,
2016
 
 
(In thousands, except per share data)
Net sales
 
$
208,725

 
$
152,497

 
$
625,279

 
$
453,435

Cost of products sold
 
139,680

 
107,676

 
415,307

 
310,838

Gross profit
 
69,045

 
44,821

 
209,972

 
142,597

 
 
 
 
 
 
 
 
 
Selling expenses
 
25,467

 
17,988

 
74,309

 
55,834

General and administrative expenses
 
22,204

 
17,206

 
60,403

 
44,820

Research and development expenses
 
3,293

 
2,545

 
9,938

 
7,526

Amortization of intangibles
 
3,908

 
1,765

 
11,547

 
5,280

 
 
54,872

 
39,504

 
156,197

 
113,460

 
 
 
 
 
 


 


Income from operations
 
14,173

 
5,317

 
53,775

 
29,137

Interest and debt expense
 
4,864

 
2,299

 
15,072

 
7,398

Investment (income) loss
 
(53
)
 
(61
)
 
(161
)
 
(366
)
Foreign currency exchange (gain) loss
 
312

 
1,673

 
705

 
890

Other (income) expense, net
 
(262
)
 
(110
)
 
(462
)
 
(238
)
Income before income tax expense
 
9,312

 
1,516

 
38,621

 
21,453

Income tax expense
 
19,877

 
1,011

 
25,022

 
7,731

Net (loss) income
 
(10,565
)
 
505

 
13,599

 
13,722

Dividends declared
 
(920
)
 
(810
)
 
(1,830
)
 
(1,618
)
Retained earnings - beginning of period
 
202,989

 
186,582

 
179,735

 
174,173

Retained earnings -  end of period
 
$
191,504

 
$
186,277

 
$
191,504

 
$
186,277

 
 
 
 
 
 


 


Average basic shares outstanding
 
23,007

 
20,239

 
22,778

 
20,192

Average diluted shares outstanding
 
23,007

 
20,490

 
23,203

 
20,400


 
 
 
 
 
 
 
 
Basic (loss) income per share:
 
$
(0.46
)
 
$
0.02

 
$
0.60

 
$
0.68


 
 
 
 
 
 
 
 
Diluted (loss) income per share:
 
$
(0.46
)
 
$
0.02

 
$
0.59

 
$
0.67

 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.04

 
$
0.04

 
$
0.08

 
$
0.08

 
See accompanying notes.

4



COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)

 
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
2017
 
December 31,
2016
 
December 31,
2017
 
December 31,
2016
 
 
(In thousands)
 
 
 
 
Net (loss) income
 
$
(10,565
)
 
$
505

 
$
13,599

 
$
13,722

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
2,124

 
(8,805
)
 
16,154

 
(11,822
)
Change in derivatives qualifying as hedges, net of taxes of $(108), $(638), $(734) and $(870)
 
323

 
1,184

 
2,201

 
1,616

Change in pension liability and postretirement obligation, net of taxes of $(2,713), $69, $(1,995) and $(180)
 
4,427

 
128

 
3,255

 
335

Adjustments for unrealized gain (loss) on investments:
 
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during the period, net of taxes of $(44), $79, $(145) and $(19)
 
81

 
(147
)
 
270

 
35

Reclassification adjustment for gain (loss) included in net income, net of taxes of $0, $0, $0, and $41
 

 
(1
)
 

 
(75
)
Net change in unrealized gain (loss) on investments
 
81

 
(148
)
 
270

 
(40
)
Total other comprehensive income (loss)
 
6,955

 
(7,641
)
 
21,880

 
(9,911
)
Comprehensive (loss) income
 
$
(3,610
)
 
$
(7,136
)
 
$
35,479

 
$
3,811




See accompanying notes.

5



COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Nine Months Ended
 
 
December 31,
2017
 
December 31,
2016
 
 
(In thousands)
OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
13,599

 
$
13,722

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
26,873

 
17,695

Deferred income taxes and related valuation allowance
 
20,141

 
2,627

Net gain on sale of real estate, investments and other
 
(10
)
 
(116
)
Stock based compensation
 
4,267

 
4,027

Amortization of deferred financing costs and discount on debt
 
2,009

 
515

Loss on revaluation of foreign exchange option
 

 
1,826

Changes in operating assets and liabilities, net of effects of business acquisitions:
 
 

 
 
Trade accounts receivable
 
(6,516
)
 
6,909

Inventories
 
(6,456
)
 
5,267

Prepaid expenses and other
 
(130
)
 
8,153

Other assets
 
2,803

 
(483
)
Trade accounts payable
 
389

 
(5,465
)
Accrued liabilities
 
5,388

 
2,082

Non-current liabilities
 
(11,114
)
 
(8,239
)
Net cash provided by (used for) operating activities
 
51,243

 
48,520

 
 
 
 
 
INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of marketable securities
 
653

 
10,336

Purchases of marketable securities
 
(110
)
 
(242
)
Capital expenditures
 
(9,384
)
 
(11,274
)
Purchase of business, net of cash acquired
 

 
(588
)
Purchase of foreign exchange option
 

 
(6,370
)
Net payments to former STAHL owner
 
(14,750
)
 

Cash paid for purchase of equity investment
 
(3,359
)
 

Net cash provided by (used for) investing activities
 
(26,950
)
 
(8,138
)
 
 
 
 
 
FINANCING ACTIVITIES:
 
 

 
 

Proceeds from exercises of stock options
 
5,961

 
353

Net borrowings (repayments) under lines of credit
 

 
(23,500
)
Repayment of debt
 
(45,050
)
 
(9,792
)
Restricted cash related to purchase of business
 

 
(588
)
Payment of dividends
 
(2,737
)
 
(2,421
)
Other
 
(1,255
)
 
(558
)
Net cash provided by (used for) financing activities
 
(43,081
)
 
(36,506
)
Effect of exchange rate changes on cash
 
5,795

 
(3,941
)
Net change in cash and cash equivalents
 
(12,993
)
 
(65
)
Cash and cash equivalents at beginning of year
 
77,591

 
51,603

Cash and cash equivalents at end of period
 
$
64,598

 
$
51,538

 
 
 
 
 
Supplementary cash flow data:
 
 

 
 

Interest paid
 
$
14,317

 
$
7,080

Income taxes paid (refunded), net
 
$
531

 
$
910

See accompanying notes.

6



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2017

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, 2017, the results of its operations for the three and nine month periods ended December 31, 2017 and December 31, 2016, and cash flows for the nine months ended December 31, 2017 and December 31, 2016, have been included. Results for the period ended December 31, 2017 are not necessarily indicative of the results that may be expected for the year ending March 31, 2018. The balance sheet at March 31, 2017 has been derived from the audited consolidated 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, 2017.

For its fiscal 2018 financial statements, the Company has reclassified research and development expenses previously recorded in general and administrative expense into a separate line item on the condensed consolidated statements of operations and retained earnings. All periods presented have been revised to reflect this presentation. With the acquisitions of Magnetek in September 2015 and STAHL CraneSystems (“STAHL”) in January 2017, the Company expects research and development costs to factor more prominently in our cost structure. Therefore, the new presentation of research and development costs provides transparency into these costs. Consistent with prior periods, the Company continues to account for research and development expenses in accordance with the provisions of ASC 730. Costs that qualify as research and development costs are expensed as incurred.

The Company is a leading global designer, manufacturer and marketer of hoists, actuators, cranes, rigging tools, digital power control systems, and other material handling products, which efficiently and safely move, lift, position, and secure materials. Key products include hoists, rigging tools, cranes, actuators, digital power control and delivery systems, and elevator application drive systems. On January 31, 2017, the Company acquired STAHL. STAHL is a leading manufacturer of explosion-protected hoists and crane components specializing in custom engineering of lifting solutions and hoisting technology. STAHL serves independent crane builders and Engineering Procurement and Construction (EPC) firms, providing products to a variety of end markets including oil & gas, automotive, general manufacturing, steel & concrete, power generation as well as process industries such as chemical and pharmaceuticals.

The Company’s material handling products are sold globally, principally to third party distributors through diverse distribution channels, and to a lesser extent directly to end-users. During the three and nine month periods ended December 31, 2017, approximately 52% and 53% of sales were to customers in the United States, respectively.
 
2.    Acquisitions
 
On July 15, 2016, the Company purchased 100% of the assets of Ergomatic Products LLC ("Ergomatic"), a designer and manufacturer of ergonomic lift assists, articulating arms, torque tubes, and pneumatic control systems for material handling and tool suspension applications. The purchase price of the transaction was $1,175,000, of which $588,000 was paid to the seller on the day of closing with the remainder due to the seller over a two year period.

In connection with the acquisition of Ergomatic, the Company withheld $588,000 to be paid to the seller upon satisfaction of certain conditions. Of this amount, $294,000 was paid to the seller in July 2017 and the remaining $294,000 is expected to be paid in July 2018. The Company has recorded short term restricted cash on its consolidated balance sheets of $294,000 within prepaid expenses and a short term liability of $294,000 within accrued liabilities at December 31, 2017.

The allocation of the purchase price to the assets and liabilities of Ergomatic is now complete as the measurement period has closed. Please refer to the Company's annual report on form 10-K for the fiscal year ended March 31, 2017 ("2017 10-K") for further details on the assets acquired and liabilities assumed related to the Ergomatic transaction.






7



On January 31, 2017, the Company completed its acquisition of STAHL for $217,773,000, net of cash acquired. STAHL is a leading manufacturer of explosion-protected hoists and crane components as well as provides custom engineered lifting solutions and hoisting technology with annual sales of approximately $165,000,000. STAHL serves independent crane builders and Engineering Procurement and Construction (EPC) firms, providing products to a variety of end markets including oil & gas, automotive, general manufacturing, steel & concrete, power generation, as well as process industries such as chemical and pharmaceuticals.

The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed as of the date of acquisition. The excess consideration of $150,078,000 recorded as goodwill reflects a decrease of $244,000 from March 31, 2017. The decrease is due to a payment received in the first quarter from the prior owner of STAHL as a result of a working capital true up offset by an increase in goodwill in the current quarter due to an adjustment to the amount allocated to STAHL's other assets. The identifiable intangible assets acquired include customer relationships of $120,220,000, trademark and trade names of $18,191,000, patents and technology of $2,660,000, and other intangibles totaling $1,968,000. The weighted average life of the acquired identifiable intangible assets subject to amortization was estimated at 16 years at the time of acquisition. Goodwill recorded in connection with the acquisition is not deductible for income tax purposes. The allocation of the purchase price to the assets acquired and liabilities assumed of STAHL is not complete as of December 31, 2017 as the Company is continuing to gather information regarding STAHL's contingent liabilities and intangible assets.

The preliminary assignment of purchase consideration to the assets acquired and liabilities assumed is as follows:
Cash
$
30,473

Working capital
18,593

Property, plant, and equipment
14,234

Intangible assets
143,039

Other assets
141

Other liabilities
(74,762
)
Deferred taxes, net
(33,550
)
Goodwill
150,078

Total
$
248,246


Please refer to the Company's 2017 10-K for further details on the assets acquired and liabilities assumed related to the STAHL transaction.

The following unaudited pro forma financial information presents the combined results of operations as if the STAHL acquisition had occurred as of April 1, 2016. The pro forma information includes certain adjustments, including depreciation and amortization expense, interest expense, and certain other adjustments, together with related income tax effects. The pro forma amounts may not be indicative of the results that actually would have been achieved had the acquisitions occurred as of April 1, 2016 and are not necessarily indicative of future results of the combined companies (in thousands, except per share data):
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
2017
December 31,
2016
 
December 31,
2017
December 31,
2016
 
Net sales
$
208,725

$
196,080


$
625,279

$
582,996

 
Net (loss) income
$
(10,565
)
$
(769
)

$
13,599

$
15,129

 
Net (loss) income per share - Basic
$
(0.46
)
$
(0.03
)

$
0.60

$
0.67

 
Net (loss) income per share - Diluted
$
(0.46
)
$
(0.03
)

$
0.59

$
0.67

 

On December 21, 2017, the Company purchased a 49% ownership of Eastern Morris Cranes Company Limited (EMC), a limited liability company organized and existing under the laws and regulations of the Kingdom of Saudi Arabia, for $3,359,000. This represents an equity investment in a strategic customer of STAHL serving the Kingdom of Saudi Arabia. The purchase price approximates the carrying value of the investment as of December 31, 2017. The investment has been preliminarily accounted for as an equity method investment and is presented in other assets in the condensed consolidated balance sheet. The December 31, 2017 trade accounts receivable balance due from EMC is $4,900,000 and is comprised of amounts due for the sale of goods and services in the ordinary course of business. In trade accounts payable there is $196,000 due to EMC as of December 31, 2017 for services performed.

8



3.    Fair Value Measurements

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurements and Disclosures” establishes the standards for reporting financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value on a recurring basis (at least annually). Under these standards, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the "exit price") in an orderly transaction between market participants at the measurement date.

ASC Topic 820-10-35-37 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the valuation techniques that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is separated into three levels based on the reliability of inputs as follows:

Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly, involving some degree of judgment.

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

The availability of observable inputs can vary and is affected by a wide variety of factors, including the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that market participants would use in pricing the asset or liability at the measurement date.

The Company primarily uses readily observable market data in conjunction with internally developed discounted cash flow valuation models when valuing its derivative portfolio and, consequently, the fair value of the Company’s derivatives is based on Level 2 inputs. The carrying amount of the Company's annuity contract acquired in connection with the acquisition of Magnetek is recorded at net asset value of the contract and, consequently, its fair value is based on Level 2 inputs and is included in other assets on the Company's condensed consolidated balance sheet. The carrying value of the Company’s Term Loan and senior debt approximate fair value based on current market interest rates for debt instruments of similar credit standing and, consequently, their fair values are based on Level 2 inputs.


9




The following table provides information regarding financial assets and liabilities measured or disclosed at fair value (in thousands):

 
 
Fair value measurements at reporting date using
 
 
December 31,
 
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
Description
 
2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets/(Liabilities) measured at fair value:
 
 
 
 
 
 
 
 
Marketable securities
 
$
7,558

 
$
7,558

 
$

 
$

Annuity contract
 
2,598

 

 
2,598

 

Derivative Assets (Liabilities):
 


 


 


 


 Foreign exchange contracts
 
(249
)
 

 
(249
)
 

 Interest rate swap liability
 
(554
)
 

 
(554
)
 

 Interest rate swap asset
 
1,234

 

 
1,234

 

 Cross currency swap liability
 
(32,289
)
 

 
(32,289
)
 

 Cross currency swap asset
 
2,304

 

 
2,304

 

 
 
 
 
 
 
 
 
 
Disclosed at fair value:
 
 

 
 

 
 

 
 

Term loan
 
$
(394,123
)
 
$

 
$
(394,123
)
 
$

Senior debt
 
(193
)
 

 
(193
)
 

 
 
Fair value measurements at reporting date using
 
 
March 31,
 
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
Description
 
2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets/(Liabilities) measured at fair value:
 
 
 
 
 
 
 
 
Marketable securities
 
$
7,686

 
$
7,686

 
$

 
$

Annuity contract
 
2,898

 

 
2,898

 

Derivative assets (liabilities):
 
 
 


 


 


 Foreign exchange contracts
 
18

 

 
18

 

 Interest rate swap liability
 
(1,808
)
 

 
(1,808
)
 

 Interest rate swap asset
 
1,394

 

 
1,394

 

 Cross currency swap liability
 
(7,580
)
 

 
(7,580
)
 

 Cross currency swap asset
 
3,237

 

 
3,237

 

 
 
 
 
 
 
 
 
 
Disclosed at fair value:
 
 

 
 

 
 

 
 

Term loan
 
$
(436,555
)
 
$

 
$
(436,555
)
 
$

Senior debt
 
(3,159
)
 

 
(3,159
)
 


The Company does not have any non-financial assets and liabilities that are recognized at fair value on a recurring basis. At December 31, 2017, the term loan and senior debt have been recorded at carrying value which approximates fair value.
 
Interest and dividend income on marketable securities are recorded in investment (income) loss.  Changes in the fair value of derivatives are recorded in foreign currency exchange (gain) loss or other comprehensive loss, to the extent that the derivative

10



qualifies as a hedge under the provisions of ASC Topic 815. Interest and dividend income on marketable securities are measured based upon amounts earned on their respective declaration dates.

During fiscal 2018, the Company terminated certain employees in connection with its overall STAHL integration plan. For the quarter and nine months ended December 31, 2017 the Company incurred $1,867,000 in severance and other employee termination costs. The costs incurred were calculated at fair value on a non-recurring basis using Level 3 inputs which included expected payments. Of this, $1,358,000 is unpaid and included within accrued liabilities on the Company's Condensed Consolidated Balance Sheet.

Please refer to the 2017 10-K for a full description of the assets and liabilities measured on a non-recurring basis that are included in the Company's March 31, 2017 balance sheet.

4.    Inventories

Inventories consisted of the following (in thousands):

 
 
December 31,
2017
 
March 31,
2017
At cost - FIFO basis:
 
 
 
 
Raw materials
 
$
81,312

 
$
74,716

Work-in-process
 
40,220

 
39,117

Finished goods
 
38,420

 
33,666

Total at cost FIFO basis
 
159,952

 
147,499

LIFO cost less than FIFO cost
 
(15,255
)
 
(16,856
)
Net inventories
 
$
144,697

 
$
130,643


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 factors beyond management's control, estimated interim results are subject to change in the final year-end LIFO inventory valuation.

5.    Marketable Securities

All of the Company’s marketable securities, which consist of equity securities and fixed income securities, have been classified as available-for-sale securities and are therefore recorded at their fair values with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive loss in the shareholders’ equity section of the condensed consolidated balance sheet unless unrealized losses are deemed to be other-than-temporary. In such instances, the unrealized losses are reported in the condensed consolidated statements of operations and retained earnings within investment income. Estimated fair value is based on quoted market prices at the balance sheet dates. The cost of securities sold is based on the specific identification method. Interest and dividend income are included in investment income in the condensed consolidated statements of operations and retained earnings.

Marketable securities are carried as long-term assets since they are held for the settlement of the Company’s general and product liability insurance claims filed through CM Insurance Company, Inc. ("CMIC"), a wholly owned captive insurance subsidiary. The marketable securities are not available for general working capital purposes.

In accordance with ASC Topic 320-10-35-30 “Investments – Debt & Equity Securities – Subsequent Measurement,” the Company reviews its marketable securities for declines in market value that may be considered other-than-temporary. The Company generally considers market value declines to be other-than-temporary if there are declines for a period longer than six months and in excess of 20% of original cost, or when other evidence indicates impairment.  We also consider the nature of the underlying investments, our intent and ability to hold the investments until their market values recover, and other market conditions in making this assessment. There were no other-than-temporary impairments for the three and nine months ended December 31, 2017 or December 31, 2016.

During the quarter ended September 30, 2016, CMIC obtained approval from the New York State Department of Finance Services to loan up to $10,000,000 to the Company based on arms-length terms and conditions.  CMIC initially loaned $6,000,000 to the Company during fiscal 2017. To fund this intercompany loan, CMIC sold a portion of its marketable security portfolio with a

11



cost of $5,938,000 and a fair value of $6,000,000 resulting in a realized gain of $62,000. During fiscal 2018 the loan was increased to $10,000,000 to settle intercompany payables due to CMIC.

The following is a summary of available-for-sale securities at December 31, 2017 (in thousands):
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Marketable securities
 
$
6,932

 
$
644

17

$
18

 
$
7,558




The aggregate fair value of investments and unrealized losses on available-for-sale securities in an unrealized loss position at December 31, 2017 are as follows (in thousands):
 
 
Aggregate Fair Value
 
Unrealized Losses
Securities in a continuous loss position for less than 12 months
 
$
459

 
$
2

Securities in a continuous loss position for more than 12 months
 
1,308

 
16

 
 
$
1,767

 
$
18


The Company considered the nature of the investments, causes of previous impairments, the severity and duration of unrealized losses and other factors and determined that the unrealized losses at December 31, 2017 were temporary in nature.

Net realized gains (losses) related to sales of marketable securities were $(400) and $1,000, in the three month periods ended December 31, 2017 and December 31, 2016, respectively and $(200) and $116,000 for the nine months period ended, respectively.

The following is a summary of available-for-sale securities at March 31, 2017 (in thousands):
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Marketable securities
 
$
7,475

 
$
248

 
$
37

 
$
7,686


6.    Goodwill and Intangible Assets

Goodwill and indefinite lived trademarks are not amortized but are tested for impairment at least annually, in accordance with the provisions of ASC Topic 350-20-35-1.  Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value.  The fair value of a reporting unit is determined using a discounted cash flow methodology.  The Company’s reporting units are determined based upon whether discrete financial information is available and reviewed regularly, whether those units constitute a business, and the extent of economic similarities between those reporting units for purposes of aggregation.  The Company’s reporting units identified under ASC Topic 350-20-35-33 are at the component level, or one level below the operating segment level as defined under ASC Topic 280-10-50-10 “Segment Reporting - Disclosure.” The Company has four reporting units as of December 31, 2017 and March 31, 2017.   Only two of the four reporting units carried goodwill at December 31, 2017 and March 31, 2017. The Duff-Norton reporting unit (which designs, manufactures and sources mechanical and electromechanical actuators and rotary unions) had goodwill of $9,689,000 and $9,555,000 at December 31, 2017 and March 31, 2017, respectively, and the Rest of Products reporting unit (representing the hoist, chain, forgings design, digital power, motion control, manufacturing, and distribution businesses) had goodwill of $331,930,000 and $309,744,000 at December 31, 2017 and March 31, 2017, respectively. STAHL has been determined to be a part of the Rest of Products reporting unit.

Refer to the 2017 10-K for information regarding our annual goodwill and indefinite lived trademark impairment evaluation. Future impairment indicators, such as declines in forecasted cash flows, may cause impairment charges. Impairment charges could be based on such factors as the Company’s stock price, forecasted cash flows, assumptions used, control premiums or other variables. There were no such indicators during the quarter ended December 31, 2017.

Identifiable intangible assets acquired in a business combination are amortized over their estimated useful lives. A summary of changes in goodwill during the three months ended December 31, 2017 is as follows (in thousands):

12



Balance at April 1, 2017
$
319,299

STAHL purchase accounting adjustment - See Note 2
(244
)
Currency translation
$
22,564

Balance at December 31, 2017
$
341,619


Goodwill is recognized net of accumulated impairment losses of $107,000,000 as of December 31, 2017 and March 31, 2017, respectively. There were no goodwill or indefinite lived trademark impairment losses recorded in the three and nine month periods ended December 31, 2017 and 2016.
 
Identifiable intangible assets are summarized as follows (in thousands):

 
 
December 31, 2017
 
March 31, 2017
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Trademark
 
$
5,733

 
$
(3,140
)
 
$
2,593

 
$
5,151

 
$
(2,616
)
 
$
2,535

Indefinite lived trademark
 
48,313

 

 
48,313

 
46,018

 

 
46,018

Customer relationships
 
194,895

 
(24,526
)
 
170,369

 
177,983

 
(14,873
)
 
163,110

Acquired technology
 
46,910

 
(6,794
)
 
40,116

 
46,574

 
(4,603
)
 
41,971

Other
 
3,987

 
(2,025
)
 
1,962

 
3,471

 
(922
)
 
2,549

Total
 
$
299,838

 
$
(36,485
)
 
$
263,353

 
$
279,197

 
$
(23,014
)
 
$
256,183


The Company’s intangible assets that are considered to have finite lives are amortized. The weighted-average amortization periods are 17 years for trademarks, 18 years for customer relationships, 18 years for acquired technology, 6 years for other, and 18 years in total. Trademarks with a carrying value of $48,313,000 as of December 31, 2017 have an indefinite useful life and are therefore not being amortized.

Total amortization expense was $3,908,000 and $1,765,000 for the three month periods ended December 31, 2017 and 2016, respectively. Total amortization expense was $11,547,000 and $5,280,000 for the nine month periods ended December 31, 2017 and 2016, respectively. The increase relates to amortization of intangible assets acquired in the STAHL acquisition. Based on the current amount of identifiable intangible assets and current exchange rates, the estimated annual amortization expense is approximately $15,000,000 for fiscal years 2018 through 2022.

7.    Derivative Instruments

The Company uses derivative instruments to manage selected foreign currency and interest rate exposures. The Company does not use derivative instruments for speculative trading purposes. All derivative instruments must be recorded on the balance sheet at fair value. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded as accumulated other comprehensive loss, or “AOCL,” and is reclassified to earnings when the underlying transaction has an impact on earnings. The ineffective portion of changes in the fair value of the foreign currency forward agreements is reported in foreign currency exchange loss (gain) in the Company’s consolidated statement of operations. The ineffective portion of changes in the fair value of the interest rate swap agreements is reported in interest expense. For foreign currency derivatives not designated as cash flow hedges, all changes in market value are recorded as a foreign currency exchange (gain) loss in the Company’s consolidated statements of operations. The cash flow effects of derivatives are reported within net cash provided by operating activities.

The Company is exposed to credit losses in the event of non-performance by the counterparties on its financial instruments. The counterparties have investment grade credit ratings. The Company anticipates that these counterparties will be able to fully satisfy their obligations under the contracts. The Company has derivative contracts with three counterparties as of December 31, 2017.

The Company's agreements with its counterparties contain provisions pursuant to which the Company could be declared in default of its derivative obligations. As of December 31, 2017, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of December 31, 2017, it could have been required to settle its obligations under these agreements at amounts which approximate the December 31, 2017 fair values reflected in the table below. During the nine months ended December 31, 2017, the Company was not in default of any of its derivative obligations.

13




As of December 31, 2017, the Company had no derivatives designated as net investments or fair value hedges in accordance with ASC Topic 815, “Derivatives and Hedging.”

The Company has cross currency swap agreements that are designated as cash flow hedges to hedge changes in the value of intercompany loans to a foreign subsidiary due to changes in foreign exchange rates. These intercompany loans are related to the acquisition of STAHL. The notional amount of these derivatives is $219,348,000, and all of the contracts mature by January 31, 2022. From its December 31, 2017 balance of AOCL, the Company expects to reclassify approximately $598,000 out of AOCL, and into foreign currency exchange loss (gain), during the next 12 months based on the contractual payments due under these intercompany loans.

The Company has foreign currency forward agreements in place to offset changes in the value of other intercompany loans to foreign subsidiaries due to changes in foreign exchange rates. The notional amount of these derivatives is $3,805,000, and all of the contracts mature by March 31, 2018. These contracts are marked to market each balance sheet date and are not designated as hedges.

The Company has foreign currency forward agreements that are designated as cash flow hedges to hedge a portion of forecasted inventory purchases denominated in foreign currencies. The notional amount of those derivatives is $10,521,000 and all contracts mature by September 30, 2018. From its December 31, 2017 balance of AOCL, the Company expects to reclassify approximately $289,000 out of AOCL during the next 12 months based on the expected sales of the goods purchased.

The Company's policy is to maintain a capital structure that is comprised of 50-70% of fixed rate long term debt and 30-50% of variable rate long term debt. The Company has two interest rate swap agreements in which the Company receives interest at a variable rate and pays interest at a fixed rate. These interest rate swap agreements are designated as cash flow hedges to hedge changes in interest expense due to changes in the variable interest rate of the senior secured term loan. The amortizing interest rate swaps mature by December 31, 2023 and have a total notional amount of $242,498,000 as of December 31, 2017. The effective portion of the changes in fair values of the interest rate swaps is reported in AOCL and will be reclassified to interest expense over the life of the swap agreements. The ineffective portion was not material and was recognized in current period interest expense. From its December 31, 2017 balance of AOCL, the Company expects to reclassify approximately $343,000 out of AOCL, and into interest expense, during the next 12 months.

The following is the effect of derivative instruments on the condensed consolidated statements of operations for the three months ended December 31, 2017 and 2016 (in thousands):


Derivatives Designated as Cash Flow Hedges
Type of Instrument
Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives (Effective Portion)
Location of Gain or (Loss) Recognized in Income on Derivatives
Amount of Gain or (Loss) Reclassified from AOCL into Income (Effective Portion)
December 31, 2017
Foreign exchange contracts
$
16

Cost of products sold
$
(120
)
December 31, 2017
Interest rate swaps
(85
)
Interest expense
(1,111
)
December 31, 2017
Cross currency swaps
(3,310
)
Foreign currency exchange loss (gain)
(2,471
)
 
 
 
 
 
December 31, 2016
Foreign exchange contracts
130

Cost of products sold
(6
)
December 31, 2016
Interest rate swap
810

Interest expense
(238
)


14



Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income on Derivatives
Amount of Gain (Loss) Recognized in Income on Derivatives
December 31, 2017
Foreign currency exchange gain/loss
$
(12
)
December 31, 2016
Foreign currency exchange gain/loss
(1,847
)

The following is the effect of derivative instruments on the condensed consolidated statements of operations and retained earnings for the nine months ended December 31, 2017 and 2016 (in thousands):
Derivatives Designated as Cash Flow Hedges
Type of Instrument
Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives (Effective Portion)
Location of Gain or (Loss) Recognized in Income on Derivatives
Amount of Gain or (Loss) Reclassified from AOCL into Income (Effective Portion)
December 31, 2017
Foreign exchange contracts
$
(402
)
Cost of products sold
$
(81
)
December 31, 2017
Interest rate swaps
(949
)
Interest expense
(1,627
)
December 31, 2017
Cross currency swaps
(18,803
)
Foreign currency exchange loss (gain)
(20,647
)
 
 
 
 
 
December 31, 2016
Foreign exchange contracts
227

Cost of products sold
101

December 31, 2016
Interest rate swap
577

Interest expense
(913
)

Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income on Derivatives
Amount of Gain (Loss) Recognized in Income on Derivatives
December 31, 2017
Foreign currency exchange gain/loss
$

December 31, 2016
Foreign currency exchange gain/loss
(1,951
)


The following is information relative to the Company’s derivative instruments in the condensed consolidated balance sheet as of December 31, 2017 (in thousands):


15



 
 
 
Fair Value of Asset (Liability)
Derivatives Designated as Hedging Instruments
Balance Sheet Location
 
December 31, 2017
 
March 31,
2017
Foreign exchange contracts
Prepaid expenses and other
 
$
14

 
$
161

Foreign exchange contracts
Accrued Liabilities
 
(243
)
 
(123
)
Interest rate swap
Other Assets
 
1,234

 
1,394

Interest rate swap
Accrued Liabilities
 
(554
)
 
(1,808
)
Cross currency swap
Prepaid expenses and other
 
2,304

 
3,237

Cross currency swap
Accrued liabilities
 
(1,507
)
 
(121
)
Cross currency swap
Other non current liabilities
 
(30,782
)
 
(7,459
)
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
Balance Sheet Location
 
December 31, 2017
 
March 31,
2017
Foreign exchange contracts
Prepaid expenses and other
 
$
7

 
$
2

Foreign exchange contracts
Accrued Liabilities
 
(27
)
 
(22
)

8.    Debt

On January 31, 2017 the Company entered into a New Credit Agreement ("New Credit Agreement") and $545,000,000 of new debt facilities ("New Facilities") in connection with the STAHL acquisition. The New Facilities consist of a New Revolving Facility ("Revolver") in the amount of $100,000,000 and a $445,000,000 1st Lien Term Loan ("New Term Loan"). Proceeds from the New Facilities were used to fund the STAHL acquisition, pay fees and expenses associated with the acquisition, and refinance the Company's previous revolving credit facility ("Replaced Revolving Credit Facility") and senior secured Term Loan ("Replaced Term Loan"). The New Term Loan has a seven-year term maturing in 2024 and the Revolver has a five-year term maturing in 2022.

The outstanding principal balance of the New Term Loan was $390,463,000 as of December 31, 2017. The Company made $1,113,000 of required principal payments and $13,700,000 of additional principal payments on the New Term Loan during the quarter ended December 31, 2017 and $3,338,000 of required principal payments and $38,700,000 of additional principal payments on the New Term Loan during the nine months ended December 31, 2017. The Company is obligated to make $4,450,000 of principal payments over the next 12 months, however, plans to pay down $60,000,000 in total. This amount has been recorded within the current portion of long term debt on the Company's consolidated balance sheet with the remaining balance recorded as long term debt.

There were no outstanding borrowings and $5,590,000 in outstanding letters of credit issued against the New Revolving Credit Facility as of December 31, 2017. The outstanding letters of credit as of December 31, 2017 consisted of $1,024,000 in commercial letters of credit and $4,566,000 of standby letters of credit.

The gross balance of deferred financing costs on the New Term Loan was $14,690,000 as of December 31, 2017 and March 31, 2017. The accumulated amortization balances were $1,924,000 and $350,000 as of December 31, 2017 and March 31, 2017, respectively.

The gross balance of deferred financing costs associated with the New Revolving Credit Facility and Replaced Revolving Credit Facility is $2,789,000 as of December 31, 2017 and March 31, 2017, which is included in other assets. The accumulated amortization balances were $511,000 and $93,000 as of December 31, 2017 and March 31, 2017, respectively. The net balance at December 31, 2017 includes $645,000 related to the Replaced Revolving Credit Facility as certain lenders in the Replaced Revolving Credit Facility participate in the New Revolving Credit Facility.

The Company has a capital lease resulting from the sale and partial leaseback of its facility in Charlotte, NC. The Company also has capital leases on certain production machinery and equipment. The outstanding balance on the capital lease obligations of $193,000 and $551,000 as of December 31, 2017 and March 31, 2017 respectively, are included in senior debt in the consolidated balance sheets. $134,000 of the capital lease liability has been recorded within the current portion of long term debt on the Company's condensed consolidated balance sheet with the remaining balance recorded as long term debt.

Unsecured and uncommitted lines of credit are available to meet short-term working capital needs for certain of our subsidiaries operating outside of the U.S. The lines of credit are available on an offering basis, meaning that transactions under the line of

16



credit will be on such terms and conditions, including interest rate, maturity, representations, covenants and events of default, as mutually agreed between our subsidiaries and the local bank at the time of each specific transaction. As of December 31, 2017, unsecured credit lines totaled approximately $5,038,000, of which $0 was drawn. In addition, unsecured lines of $16,751,000 were available for bank guarantees issued in the normal course of business of which $10,238,000 was utilized.

Refer to the Company’s consolidated financial statements included in its 2017 10-K for further information on its debt arrangements.


9.    Net Periodic Benefit Cost

The following table sets forth the components of net periodic pension (benefit) cost for the Company’s defined benefit pension plans (in thousands):
 
 
Three months ended
 
Nine Months Ended
 
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
Service costs
 
$
235

 
$
308

 
$
1,491

 
$
1,209

Interest cost
 
3,982

 
4,111

 
12,438

 
12,343

Expected return on plan assets
 
(5,181
)
 
(5,604
)
 
(16,124
)
 
(16,841
)
Net amortization
 
696

 
735

 
2,325

 
2,325

Settlement
 

 

 

 
247

Curtailment
 
5

 

 
5

 

Net periodic pension (benefit) cost
 
$
(263
)
 
$
(450
)
 
$
135

 
$
(717
)

As part of the acquisition of STAHL, the Company became the sponsor of STAHL's pension plan ("STAHL's Plan"), a single-employer defined benefit plan. STAHL's Plan provides benefits to certain current and former employees of STAHL and has been closed to new members since January 1, 1997. The net periodic pension (benefit) cost, shown above, for the three and nine months ended December 31, 2017 includes a cost related to the STAHL Plan of $616,000 and $1,807,000, respectively.

During the nine months ended December 31, 2017, the Company completed negotiations with one of its labor unions which resulted in an amendment to one of its pension plans. Further, the Company decided to amend one of its other domestic pension plans during the quarter. As a result of these amendments, the Company remeasured the pension obligation and net periodic pension cost and recognized a $5,000 curtailment loss. The weighted average expected long-term rate of return on plan assets decreased due to the remeasurement and is expected to be 6.56% for fiscal 2018. These amendments had an immaterial impact on the condensed consolidated statement of operations and retained earnings and reduced the pension obligation by $7,099,000 (offset in accumulated other comprehensive loss before income tax effects) during the current quarter.

The Company currently plans to contribute approximately $11,370,000 to its pension plans in fiscal 2018.
 
The following table sets forth the components of net periodic postretirement benefit cost for the Company’s defined benefit postretirement plans (in thousands):
 
 
Three months ended
 
Nine months ended
 
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
Interest cost
 
$
35

 
$
31

 
$
105

 
$
114

Amortization of plan net losses
 

 
(19
)
 

 

Net periodic postretirement cost
 
$
35


$
12

 
$
105

 
$
114


For additional information on the Company’s defined benefit pension and postretirement benefit plans, refer to the consolidated financial statements included in the 2017 10-K.

10.    Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands):

17



 
 
Three Months Ended
Nine Months Ended
 
 
December 31, 2017
 
December 31, 2016
 
December 31,
2017
 
December 31,
2016
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
 
Net income
 
$
(10,565
)
 
$
505

 
$
13,599

 
$
13,722

 
 
 
 
 
 
 
 
 
Denominators:
 
 

 
 

 
 
 
 
Weighted-average common stock outstanding – denominator for basic EPS
 
23,007

 
20,239

 
22,778

 
20,192

Effect of dilutive employee stock options and other share-based awards
 

 
251

 
425

 
208

Adjusted weighted-average common stock outstanding and assumed conversions – denominator for diluted EPS
 
23,007

 
20,490

 
23,203

 
20,400


During fiscal 2018, the Company adopted ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." Among other modifications to accounting for stock based compensation, this ASU requires that assumed proceeds from excess tax benefits and deficiencies are no longer included in the calculation of weighted-average diluted common stock outstanding and are recorded as income tax expense or benefit in the statement of operations. The adoption of this ASU did not have a material impact on the calculation of weighted-average diluted common stock outstanding.

Stock options, restricted stock units, and performance shares with respect to 1,393,000 common shares for the three months ended December 31, 2017 were not included in the computation of diluted loss per share because they were antidilutive as a result of the Company's net loss attributed to the enactment of the Tax Cuts and Jobs Act (the Act).

Stock options and performance shares with respect to 68,000 common shares for the nine months ended December 31, 2017, and 274,000 and 554,000 common shares for the three and nine months ended December 31, 2016, respectively, were not included in the computation of diluted earnings per share because they were antidilutive. For the three and nine months ended December 31, 2017 an additional 127,000 in contingently issuable shares were not included in the computation of diluted earnings per share because a performance condition had not yet been met.

On July 18, 2016, the shareholders of the Company approved the 2016 Long Term Incentive Plan (“2016 LTIP”).  The Company grants share based compensation to eligible participants under the 2016 LTIP.  The total number of shares of common stock with respect to which awards may be granted under the plan is 2,000,000 including shares not previously authorized for issuance under any of the prior stock plans and any shares not issued or subject to outstanding awards under the prior stock plans.

During the first nine months of fiscal 2018 and 2017, there were 343,000 and 23,000 shares of stock, respectively, issued upon the exercising of stock options related to the Company’s stock option plans. During the fiscal year ended March 31, 2017, 162,502 shares of restricted stock units vested and were issued.

On January 29, 2018 the Company's Board of Directors declared a dividend of $0.04 per common share. The dividend will be paid on February 20, 2018 to shareholders of record on February 9, 2018. The dividend payment is expected to be approximately $921,000.

Refer to the Company’s consolidated financial statements included in its 2017 10-K for further information on its earnings per share and stock plans.

11.    Loss Contingencies

From time to time, the Company is named a defendant in legal actions arising out of the normal course of business. The Company is not a party to any pending legal proceeding other than ordinary, routine litigation incidental to our business. The Company does not believe that any of our pending litigation will have a material impact on its business.

Accrued general and product liability costs are the actuarially estimated reserves based on amounts determined from loss reports, individual cases filed with the Company, and an amount for losses incurred but not reported. The aggregate amounts of reserves

18



were $13,130,000 as of December 31, 2017, of which $9,630,000 is included in Other non current liabilities and $3,500,000 included in Accrued liabilities.  The liability for accrued general and product liability costs are funded in part by investments in marketable securities (see Note 5).

The per occurrence limits on the self-insurance for general and product liability coverage to the Company through its wholly-owned captive insurance company were $2,000,000 from inception through fiscal 2003 and $3,000,000 for fiscal 2004 and thereafter. In addition to the per occurrence limits, the Company’s coverage is also subject to an annual aggregate limit, applicable to losses only. These limits range from $2,000,000 to $6,000,000 for each policy year from inception through fiscal 2018.

Along with other manufacturing companies, the Company is subject to various federal, state and local laws relating to the protection of the environment. To address the requirements of such laws, the Company has adopted a corporate environmental protection policy which provides that all of its owned or leased facilities shall, and all of its employees have the duty to, comply with all applicable environmental regulatory standards, and the Company has initiated an environmental auditing program for its facilities to ensure compliance with such regulatory standards.  The Company has also established managerial responsibilities and internal communication channels for dealing with environmental compliance issues that may arise in the course of its business. Because of the complexity and changing nature of environmental regulatory standards, it is possible that situations will arise from time to time requiring the Company to incur expenditures in order to ensure environmental regulatory compliance. However, the Company is not aware of any environmental condition or any operation at any of its facilities, either individually or in the aggregate, which would cause expenditures to have a material adverse effect on its results of operations, financial condition or cash flows and, accordingly, has not budgeted any material capital expenditures for environmental compliance for fiscal 2018.

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 including related legal costs to range between $4,000,000 and $7,700,000 using actuarial parameters of continued claims for a period of 37 years from December 31, 2017.  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 $6,284,000, which has been reflected as a liability in the consolidated financial statements as of December 31, 2017. The recorded liability does not consider the impact of any potential favorable federal legislation. This liability will 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 $2,000,000 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 effect on the financial condition of the Company or its liquidity, although the effect of any future liabilities recorded could be material to earnings in a future period.

The Company believes that a share of its previously incurred asbestos-related expenses and future asbestos-related expenses are covered by pre-existing insurance policies. The Company has engaged in a legal action against the insurance carriers for those policies to recover these expenses and future costs incurred. When the Company resolves this legal action, it is expected that a gain will be recorded for previously expensed cost that is recovered. In July 2017, the Company received a $1,741,000 settlement payment, net of legal fees, from one of its insurance carriers as partial reimbursement for asbestos-related expenses.  This partial payment has been recorded as a gain in cost of products sold. In February 2018, an additional settlement payment of $621,000 was received from another insurance carrier as partial reimbursement for asbestos-related expenses. The Company is continuing its actions to recover further past costs and to cover future costs.

The Company is also involved in other unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability. The Company's estimation of its product-related aggregate liability that is probable and estimable, in accordance with U.S. generally accepted accounting principles approximates $5,731,000, which has been reflected as a liability in the consolidated financial statements as of December 31, 2017. In some cases, we cannot reasonably estimate a range of loss because there is insufficient information regarding the matter.  Management believes that the potential additional costs for claims will not have a material effect on the

19



financial condition of the Company or its liquidity, although the effect of any future liabilities recorded could be material to earnings in a future period.

The following contingencies relate to the Company’s Magnetek subsidiary:

Product Liability
Magnetek has been named, along with multiple other defendants, in asbestos-related lawsuits associated with business operations previously acquired but which are no longer owned. During Magnetek's ownership, none of the businesses produced or sold asbestos-containing products. For such claims, Magnetek is uninsured and either contractually indemnified against liability, or contractually obligated to defend and indemnify the purchaser of these former business operations.  The Company aggressively seeks dismissal from these proceedings. Based on actuarial information, the asbestos related liability including legal costs is estimated to be approximately $1,115,000 which has been reflected as a liability in the consolidated financial statements at December 31, 2017.

Litigation-Other
In October 2010, Magnetek received a request for indemnification from Power-One, Inc. ("Power-One") for an Italian tax matter arising out of the sale of Magnetek's power electronics business to Power-One in October 2006. With a reservation of rights, Magnetek affirmed its obligation to indemnify Power-One for certain pre-closing taxes.  The sale included an Italian company, Magnetek, S.p.A., and its wholly owned subsidiary, Magnetek Electronics (Shenzhen) Co. Ltd. (the “Power-One China Subsidiary”). The tax authority in Arezzo, Italy, issued a notice of audit report in September 2010 wherein it asserted that the Power-One China Subsidiary had its administrative headquarters in Italy with fiscal residence in Italy and, therefore, is subject to taxation in Italy.  In November 2010, the tax authority issued a notice of tax assessment for the period of July 2003 to June 2004, alleging that taxes of approximately $2,300,000 (Euro 1,900,000) were due in Italy on taxable income earned by the Power-One China Subsidiary during this period.  In addition, the assessment alleges potential penalties together with interest in the amount of approximately $3,100,000 (Euro 2,600,000) for the alleged failure of the Power-One China Subsidiary to file its Italian tax return.  The Power-One China Subsidiary filed its response with the provincial tax commission of Arezzo, Italy in January 2011. The tax authority in Arezzo, Italy issued a tax inspection report in January 2011 for the periods July 2002 to June 2003 and July 2004 to December 2006 claiming that the Power-One China Subsidiary failed to file Italian tax returns for the reported periods. A hearing before the Tax Court was held in July 2012 on the tax assessment for the period of July 2003 to June 2004. In September 2012, the Tax Court ruled in favor of the Power-One China Subsidiary dismissing the tax assessment for the period of July 2003 to June 2004. In February 2013, the tax authority filed an appeal of the Tax Court's September 2012 ruling. The Regional Tax Commission of Florence heard the appeal of the tax assessment dismissal for the period of July 2003 to June 2004 and thereafter issued its ruling finding in favor of the tax authority. Magnetek believes the court’s decision was based upon erroneous interpretations of the applicable law and appealed the ruling to the Italian Supreme Court in April 2015.

In August 2012, the tax authority in Arezzo, Italy issued notices of tax assessment for the periods July 2002 to June 2003 and July 2004 to December 2006, alleging that taxes of approximately $8,000,000 (Euro 6,700,000) were due in Italy on taxable income earned by the Power-One China Subsidiary together with an allegation of potential penalties in the amount of approximately $3,400,000 (Euro 2,800,000) for the alleged failure of the Power-One China Subsidiary to file its Italian tax returns. On June 3, 2015, the Tax Court ruled in favor of the Power-One China Subsidiary dismissing the tax assessments for the periods of July 2002 to June 2003 and July 2004 to December 2006. On July 27, 2015, the tax authority filed an appeal of the Tax Court's ruling of June 3, 2015. In May 2016, the Regional Tax Court of Florence rejected the appeal of the tax authority and at the same time canceled the notices of assessment for the fiscal years of 2004/2005 and 2005/2006. The tax authority had up to six months to appeal the decision. In December 2016, Magnetek was served by the Italian Revenue Service with two appeals to the Italian Supreme Court regarding the two positive judgments on the tax assessments for the fiscal periods 2004/2005 and 2005/2006. In March 2017, the tax authority rejected the appeal of the assessment for 2005/2006 fiscal year. The tax authority had until October 2017 to appeal this decision. In October 2017, Magnetek was served by the Italian Revenue Service with an appeal to the Italian Supreme Court against the positive judgment on the tax assessment for fiscal year 2005/2006. In November 2017 Magnetek filed a memorandum with the Italian Revenue Service and the Italian Supreme Court in response to the appeal made by the tax authority. The Company believes it will be successful and does not expect to incur a liability related to these assessments.

Environmental Matters
From time to time, Magnetek has taken action to bring certain facilities associated with previously owned businesses into compliance with applicable environmental laws and regulations. Upon the subsequent sale of certain businesses, Magnetek agreed to indemnify the buyers against environmental claims associated with the divested operations, subject to certain conditions and limitations. Remediation activities, including those related to indemnification obligations, did not involve material expenditures during the first nine months of fiscal year 2018.


20



Magnetek has also been identified by the United States Environmental Protection Agency and certain state agencies as a potentially responsible party for cleanup costs associated with alleged past waste disposal practices at several previously utilized, owned or leased facilities and off-site locations. Its remediation activities as a potentially responsible party were not material in the first nine months of fiscal year 2018. Although the materiality of future expenditures for environmental activities may be affected by the level and type of contamination, the extent and nature of cleanup activities required by governmental authorities, the nature of Magnetek's alleged connection to the contaminated sites, the number and financial resources of other potentially responsible parties, the availability of indemnification rights against third parties and the identification of additional contaminated sites, Magnetek's estimated share of liability, if any, for environmental remediation, including its indemnification obligations, is not expected to be material.

In 1986, Magnetek acquired the stock of Universal Manufacturing Corporation (“Universal”) from a predecessor of Fruit of the Loom (“FOL”), and the predecessor agreed to indemnify Magnetek against certain environmental liabilities arising from pre-acquisition activities at a facility in Bridgeport, Connecticut. Environmental liabilities covered by the indemnification agreement included completion of additional cleanup activities, if any, at the Bridgeport facility and defense and indemnification against liability for potential response costs related to offsite disposal locations. Magnetek's leasehold interest in the Bridgeport facility was assigned to the buyer in connection with the sale of Magnetek's transformer business in June 2001. FOL, the successor to the indemnification obligation, filed a petition for Reorganization under Chapter 11 of the Bankruptcy Code in 1999 and Magnetek filed a proof of claim in the proceeding for obligations related to the environmental indemnification agreement. Magnetek believes that FOL had substantially completed the clean-up obligations required by the indemnification agreement prior to the bankruptcy filing. In November 2001, Magnetek and FOL entered into an agreement involving the allocation of certain potential tax benefits and Magnetek withdrew its claims in the bankruptcy proceeding. Magnetek further believes that FOL's obligation to the state of Connecticut was not discharged in the reorganization proceeding. 
 
In January 2007, the Connecticut Department of Environmental Protection (“DEP”) requested parties, including Magnetek, to submit reports summarizing the investigations and remediation performed to date at the site and the proposed additional investigations and remediation necessary to complete those actions at the site. DEP requested additional information relating to site investigations and remediation. Magnetek and the DEP agreed to the scope of the work plan in November 2010.  The Company has recorded a liability of $447,000, included in the amount specified above, related to the Bridgeport facility, representing the best estimate of future site investigation costs and remediation costs which are expected to be incurred in the future.
FOL's inability to satisfy its remaining obligations to the state of Connecticut related to the Bridgeport facility and any offsite disposal locations, or the discovery of additional environmental contamination at the Bridgeport facility is not expected to have a material adverse effect on the Company's financial position, cash flows or results of operations.

In September of 2017, Magnetek received a request for defense and indemnification from Monsanto Company, Pharmacia, LLC, and Solutia, Inc. (collectively, “Monsanto”) with respect to: (1) lawsuits brought by plaintiffs claiming that Monsanto manufactured polychlorinated biphenyls ("PCBs"), exposure to which allegedly caused injury to plaintiffs; (2) lawsuits brought by municipalities and municipal entities claiming that Monsanto should be responsible for a variety of damages due to the presence of PCBs in bodies of water in those municipalities and/or in water treated by those municipal entities.  Monsanto claims to be entitled to defense and indemnification from Magnetek under a so-called “Special Undertaking” apparently executed by Universal in January of 1972, which purportedly required Universal to defend and indemnify Monsanto from liabilities “arising out of or in connection with the receipt, purchase, possession, handling, use, sale or disposition of” PCBs by Universal.
 
Magnetek has declined Monsanto’s tender, and believes that it has meritorious legal and factual defenses to the demands made by Monsanto.  Magnetek is vigorously defending against those demands and has commenced litigation to, among other things, declare the Special Undertaking void and unenforceable.  Monsanto has, in turn, commenced an action to enforce the Special Undertaking.  Magnetek intends to continue to vigorously prosecute its declaratory judgment action and to defend against Monsanto’s action against it.  As of December 31, 2017 the Company has recorded $400,000 for legal costs incurred to date and expected to be incurred related to this matter. We cannot reasonably estimate a potential range of loss with respect to Monsanto’s tender because there is insufficient information regarding the underlying matters.  Management believes, however, that the potential additional costs related to such matters, if any, will not have a material effect on the financial condition of the Company or its liquidity, although the effect of any future liabilities recorded could be material to earnings in a future period.

The Company has recorded total liabilities of $833,000 for all environmental matters in the consolidated financial statements as of December 31, 2017 on an undiscounted basis.


12.    Income Taxes


21



Income tax expense as a percentage of income from continuing operations before income tax expense was 213% and 67% in the quarters ended December 31, 2017 and December 31, 2016, respectively and 65% and 36% for the nine-month periods then ended, respectively. Typically these percentages vary from the U.S. statutory rate primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income for these subsidiaries. Income tax expense as a percentage of income from continuing operations for the three and nine months ended December 31, 2017 were increased by 200 and 48 percentage points, respectively, as a result of accounting for the enactment of the Act on December 22, 2017, as discussed further below.

Income tax expense for the three and nine months ended December 31, 2016 was impacted by certain non-deductible STAHL related acquisition costs of $3,140,000 increasing the effective tax rate for the quarter and nine-months period by 29 and 2 percentage points, respectively.

The Company estimates that the effective tax rate related to continuing operations will be approximately 51% to 55% for fiscal 2018 which has been increased by approximately 36% due to the Act.

In the third quarter, the Company revised its estimated annual effective rate to reflect a change in the federal statutory rate from 35% to 21%, resulting from the enactment of the Act on December 22, 2017. The rate change is administratively effective at the beginning of the Company’s fiscal year, resulting in a blended rate for the annual period. As a result, the blended statutory tax rate for fiscal 2018 is 31.5%.

The Act requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Act at this time; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In other cases, the Company has not been able to make a reasonable estimate and continue to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which it was able to determine a reasonable estimate, the Company recognized a provisional amount of $18,628,000, which is included as a component of income tax expense on the Company's condensed consolidated statement of operations and retained earnings for the fiscal 2018.

Provisional amounts

Deferred tax assets and liabilities: The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the Company's deferred tax balance was $16,128,000.

Foreign tax effects: The one-time transition tax is based on the Company's total post-1986 earnings and profits (E&P) that it previously deferred from US income taxes. The Company recorded a provisional amount for its one-time transition tax liability for its foreign subsidiaries, resulting in an increase in income tax expense of $2,500,000. The Company has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from US federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable.

22



13.    Changes in Accumulated Other Comprehensive Loss

Changes in AOCL by component for the three and nine-month period ended December 31, 2017 are as follows (in thousands):
 
 

Three months ended December 31, 2017
 

Unrealized Investment Gain

Retirement Obligations

Foreign Currency

Change in Derivatives Qualifying as Hedges

Total
Beginning balance net of tax

$
883


$
(63,888
)

$
(16,334
)

$
(3,200
)

$
(82,539
)
Other comprehensive income (loss) before reclassification

81


3,992


2,124


(3,379
)

2,818

Amounts reclassified from other comprehensive loss



435




3,702


4,137

Net current period other comprehensive income (loss)

81


4,427

 
2,124

 
323

 
6,955

Ending balance net of tax

$
964


$
(59,461
)
 
$
(14,210
)
 
$
(2,877
)
 
$
(75,584
)

 
 
Nine months ended December 31, 2017
 
 
Unrealized Investment Gain
 
Retirement Obligations
 
Foreign Currency
 
Change in Derivatives Qualifying as Hedges
 
Total
Beginning balance net of tax
 
$
694

 
$
(62,716
)
 
$
(30,364
)
 
$
(5,078
)
 
$
(97,464
)
Other comprehensive income (loss) before reclassification
 
270

 
1,810

 
16,154

 
(20,154
)
 
(1,920
)
Amounts reclassified from other comprehensive loss
 

 
1,445

 

 
22,355

 
23,800

Net current period other comprehensive income (loss)
 
270

 
3,255

 
16,154

 
2,201

 
21,880

Ending balance net of tax
 
$
964

 
$
(59,461
)
 
$
(14,210
)
 
$
(2,877
)
 
$
(75,584
)


Details of amounts reclassified out of AOCL for the three-month period ended December 31, 2017 are as follows (in thousands):
Details of AOCL Components

Amount reclassified from AOCL

Affected line item on condensed consolidated statement of operations and retained earnings
Net amortization of prior service cost and pension settlement

 



 

$
701


(1)
 

701


Total before tax
 

(266
)

Tax benefit
 

$
435


Net of tax






Change in derivatives qualifying as hedges

 


 
 

$
160


Cost of products sold
 
 
1,481

 
Interest expense
 
 
3,295

 
Foreign currency
 

4,936


Total before tax
 

(1,234
)

Tax benefit
 

$
3,702


Net of tax




23





Details of amounts reclassified out of AOCL for the nine-month period ended December 31, 2017 are as follows (in thousands):
Details of AOCL Components
 
Amount reclassified from AOCL
 
Affected line item on condensed consolidated statement of operations and retained earnings
Net amortization of prior service cost and pension settlement
 
 

 
 
 
 
$
2,330

 
(1)
 
 
2,330

 
Total before tax
 
 
(885
)
 
Tax benefit
 
 
$
1,445

 
Net of tax
 
 
 
 
 
Change in derivatives qualifying as hedges
 
 

 
 
 
 
$
108

 
Cost of products sold
 
 
2,169

 
Interest expense
 
 
27,529

 
Foreign currency
 
 
29,806

 
Total before tax
 
 
(7,451
)
 
Tax benefit
 
 
$
22,355

 
Net of tax



(1)
These AOCL components are included in the computation of net periodic pension cost. (See Note 9 — Net Periodic Benefit Cost for additional details.)

24



14.    Effects of New Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which delays the effective date of ASU 2014-09 by one year. This ASU is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.

In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." This ASU amends the principal-versus-agent implementation guidance and illustrations in the FASB’s new revenue standard (ASC 606). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.

In May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients." ASU 2016-12 provides for amendments to ASU No. 2014-09, Revenue from Contracts with Customers, amending the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. Specifically, ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria.

In November 2017, the FASB issued ASU No. 2017-14, "Income Statement - Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue From Contracts With Customers (Topic 606)." The standard amends various paragraphs in ASC 220, ASC 605, and ASC 606 that contains SEC guidance, specifically Staff Accounting Bulletin No. 116 (SAB 116). The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact the standard will have on our consolidated financial statements.

The new revenue standard is effective for the Company on April 1, 2018. We have made progress in evaluating the effect the new standard will have on the financial statements and expect a change in the timing of revenue recognition for some custom projects in the EMEA region. Currently, certain rail and road and other custom projects are recognized at a point-in-time basis at or near the completion of the project, however, we expect these projects will be recognized earlier on an over time basis under the new revenue standard. We have assessed our internal control framework and will be implementing additional controls to facilitate accounting for the projects under the new standard. We cannot quantify the impact of this change at this time. Based on the anticipated impact to the financial statements we plan to adopt the new standard using the modified retrospective method.

In August 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities (Topic 815)." The standard better aligns an entity’s financial reporting for hedging relationships with risk management activities and reduces the complexity for the application of hedge accounting. Changes include the ability to elect to perform subsequent effectiveness assessments qualitatively and the elimination of the concept of recognizing periodic hedge ineffectiveness for cash flow hedges. The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact the standard will have on our consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-10, "Service Concession Arrangements (Topic 853)." The standard clarifies how an operating entity determines the customer of the operation services for transactions within the scope of ASC 853 by clarifying that the grantor is the customer of the operation services in all cases for those arrangements. The effective date is aligned with that of ASC 606, "Revenue from Contracts with Customers," which is April 1, 2018 for the Company. We do not anticipate that this standard will have a material effect on the consolidated financial statements.






25



In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718)." The standard provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within the fiscal year, with early adoption permitted. The Company does not expect that the adoption of this standard will have a material effect on the consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." This ASU makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The Company adopted this standard effective April 1, 2017. Refer to Note 12 for further information regarding the impact of the standard in the three and nine months ended December 31, 2017.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This standard will require all leases with durations greater than twelve months to be recognized on the balance sheet. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018, although early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements and have started gathering lease agreements in order to compile a complete list. Information about our undiscounted future lease payments and the timing of those payments is included in Note 17 of our 2017 10-K.


26




Item 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
Executive Overview

We are a leading worldwide designer, manufacturer, and marketer of material handling products, systems and services which efficiently and safely move, lift, position, and secure materials. Key products include hoists, rigging tools, cranes, digital power control systems, and actuators. We are focused on serving commercial and industrial applications that require the safety and quality in moving material provided by our superior design and engineering know-how.

Founded in 1875, we have grown to our current size and leadership position through organic growth and acquisitions. We developed our leading market position over our 142-year history by emphasizing technological innovation, manufacturing excellence and superior after-sale service. In addition, acquisitions significantly broadened our product lines and services and expanded our geographic reach, end-user markets and customer base. Ongoing initiatives include growing revenue by increasing our penetration of the Asian, Latin American and European marketplaces, pursuing new products and targeted vertical markets, and by improving our productivity. In accordance with our strategy, we have been investing in our sales and marketing activities, new product development, and “Lean” efforts across the Company. Shareholder value will be enhanced through continued emphasis on market expansion, customer satisfaction, new product development, manufacturing efficiency, cost containment, and efficient capital investment.

On January 31, 2017 we completed our acquisition of STAHL. STAHL is a leading manufacturer of explosion-protected hoists and crane components and is well known for providing lifting solutions utilizing its custom engineering and hoisting technology. STAHL serves independent crane builders and Engineering Procurement and Construction (EPC) firms, providing products to a variety of end markets including oil and gas, automotive, general manufacturing, steel & concrete, power generation as well as process industries such as chemical and pharmaceuticals. We believe STAHL is an excellent expansion of our global product offering. STAHL's strong position with wire rope and electric chain hoists in Europe immediately complements our leadership position in handheld hoists in that region, and their broad portfolio of ATEX certified explosion-protected products serving the oil and gas, mining, and chemical processing industries significantly extends our global offerings in capability and capacities.

Our revenue base is geographically diverse with approximately 47% derived from customers outside the U.S. for the nine months ended December 31, 2017. Our expansion within the European market with the acquisition of STAHL further expands our geographic diversity. We believe this will help balance the impact of changes that will occur in local economies, as well as benefit the Company from growth in emerging markets. As in the past, we monitor both U.S. and Eurozone Industrial Capacity Utilization statistics as indicators of anticipated demand for our products. In addition, we continue to monitor the potential impact of other global and U.S. trends including industrial production, energy costs, steel price fluctuations, interest rates, foreign currency exchange rates, and activity of end-user markets around the globe.

From a strategic perspective, we are leveraging our recent acquisitions and investing in new products as we focus on our greatest opportunities for growth. We maintain a strong North American market share with significant leading market positions in hoists, lifting, and sling chain, forged attachments, actuators, and digital power and motion control systems for the material handling industry. We seek to maintain and enhance our market share by focusing our sales and marketing activities toward select North American and global market sectors including energy, automotive, heavy OEM, entertainment, and construction and infrastructure.

Regardless of the economic climate and point in the economic cycle, we constantly explore ways to increase operating margins as well as further improve our productivity and competitiveness. We have specific initiatives related to improved customer satisfaction, reduced defects, shortened lead times, improved inventory turns and on-time deliveries, reduced warranty costs, and improved working capital utilization. The initiatives are being driven by the continued implementation of our “Lean” efforts which are fundamentally changing our manufacturing and business processes to be more responsive to customer demand and improving on-time delivery and productivity. In addition to “Lean,” we are working to achieve these strategic initiatives through product simplification, the creation of centers of excellence, and improved supply chain management. We are also pursuing cost reduction opportunities to enhance future margins.

We continuously monitor market prices of steel. We purchase approximately $30,000,000 to $40,000,000 of steel annually in a variety of forms including rod, wire, bar, structural, and others. Generally, as we experience fluctuations in our costs, we reflect them as price increases or surcharges to our customers with the goal of being margin neutral.



27



We operate in a highly competitive and global business environment. We face a variety of opportunities in those markets and geographies, including trends toward increasing productivity of the global labor force and the expansion of market opportunities in Asia and other emerging markets. While we continue to execute our long-term growth strategy, we are supported by our solid free cash flow as well as our liquidity position and flexible debt structure.

 
Results of Operations

Three Months Ended December 31, 2017 and December 31, 2016

Net sales in the fiscal 2018 quarter ended December 31, 2017 were $208,725,000, up $56,228,000 or 36.9% from the fiscal 2017 quarter ended December 31, 2016 net sales of $152,497,000. Net sales were positively impacted $42,576,000 by the STAHL acquisition, $9,440,000 due to increased sales volume, and $553,000 by price increases. Foreign currency translation favorably impacted sales by $3,659,000 for the three months ended December 31, 2017.

Gross profit in the fiscal 2018 quarter ended December 31, 2017 was $69,045,000, an increase of $24,224,000 or 54.0% from the fiscal 2017 quarter ended December 31, 2016 gross profit of $44,821,000. Gross profit margin increased to 33.1% in the fiscal 2018 three months ended from 29.4% in fiscal 2017. The increase in gross profit was due to $15,070,000 from our STAHL acquisition, $3,079,000 in increased volume, $286,000 of price increases net of material inflation, $2,175,000 in decreased product liability costs, and $2,708,000 in increased productivity net of other cost changes, offset by $50,000 in STAHL integration costs that are classified as cost of products sold. The translation of foreign currencies had a $956,000 favorable impact on gross profit in the three months ended December 31, 2017.

Selling expenses were $25,467,000 and $17,988,000 in the fiscal 2018 and 2017 third quarters ended December 31, 2017 and 2016, respectively. As a percentage of consolidated net sales, selling expenses were 12.2% and 11.8% in the fiscal 2018 and 2017 three months ended December 31, 2017 and 2016. STAHL contributed an additional $5,269,000 in selling expense and $81,000 of integration costs were incurred related to the acquisition of STAHL that are classified as selling expense for the three months ended December 31, 2017. The remainder of the increase is largely due to the transition to a new warehouse in North America. Foreign currency translation had a $508,000 unfavorable impact on selling expenses.

General and administrative expenses were $22,204,000 and $17,206,000 in the fiscal 2018 and 2017 third quarters ended December 31, 2017 and 2016, respectively. As a percentage of consolidated net sales, general and administrative expenses were 10.6% and 11.3% in the fiscal 2018 and 2017 three months ended December 31, 2017 and 2016. STAHL contributed an additional $2,733,000 in general and administrative expense and $2,875,000 of integration costs were incurred related to the acquisition of STAHL that are classified as general and administrative expense, offset by $3,140,000 in of STAHL related acquisition costs incurred in the three months ended fiscal 2017. Additionally, $1,040,000 in legal costs were incurred related to an insurance recovery legal action in the three months ended December 31, 2017. The remainder of the increase is largely due to higher annual incentive plan costs expected in fiscal 2018 compared to fiscal 2017. Foreign currency translation had a $230,000 unfavorable impact on general and administrative expenses.

Research and development expenses were $3,293,000 and $2,545,000 in the fiscal 2018 and 2017 third quarters ended December 31, 2017 and 2016, respectively. As a percentage of consolidated net sales, research and development expenses were 1.6% and 1.7% in the fiscal 2018 and 2017 three months ended December 31, 2017 and 2016. STAHL contributed an additional $472,000 to research and development expenses for the three months ended December 31, 2017. The remainder of the increase relates to global initiatives to develop new products.

Amortization of intangibles was $3,908,000 and $1,765,000 in the fiscal 2018 and 2017 third quarters ended December 31, 2017 and 2016, respectively. The increase relates to amortization of intangibles acquired in the STAHL acquisition.

Interest and debt expense was $4,864,000 in the third quarters ended December 31, 2017 compared to $2,299,000 in the quarter ended December 31, 2016. The increase in interest and debt expense relates to increased borrowings used to fund the purchase of STAHL.
 
Investment income of $53,000 and $61,000 in the fiscal 2018 and 2017 third quarters ended December 31, 2017 and 2016, respectively, related to earnings on marketable securities held in the Company’s wholly owned captive insurance subsidiary.

Income tax expense as a percentage of income from continuing operations before income tax expense was 213% and 67% in the quarter ended December 31, 2017 and December 31, 2016, respectively. Typically these percentages vary from the U.S. statutory rate primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income

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for these subsidiaries. Income tax expense as a percentage of income from continuing operations for the three months ended December 31, 2017 increased by 200 percentage points as a result of accounting for the enactment of the Tax Cuts and Jobs Act (the Act).

In the third quarter, the Company revised its estimated annual effective rate to reflect a change in the federal statutory rate from 35% to 21%, resulting from the enactment of the Act on December 22, 2017. The rate change is administratively effective at the beginning of the Company’s fiscal year, resulting in a blended rate for the annual period. As a result, the blended statutory tax rate for fiscal 2018 is 31.5%.

The Act requires companies to remeasure certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. The Company recognized a provisional amount of $18,628,000, which is included as a component of income tax expense on the Company's condensed consolidated statement of operations and retained earnings for the fiscal 2018. See Note 12 for additional information regarding how the provisional amount was calculated.

Included within the estimated provisional amount described above is a one-time transition tax on the Company's total foreign post-1986 earnings and profits (E&P) that it previously deferred from US income taxes of $2,500,000. The transition tax on the Company's foreign E&P is payable over an 8-year period (8% in each of the first five years, 15% in year six, 20% in year seven, and 25% in year 8). The balance of the provisional amount recorded is a result of remeasuring the Company's deferred tax assets and liabilities at the new U.S. Federal statutory tax rate.

We estimate that the effective tax rate related to continuing operations will be approximately 51% to 55% for fiscal 2018 which has been increased by approximately 36% due to the Act.

Nine Months Ended December 31, 2017 and December 31, 2016

Net sales in the fiscal 2018 nine months ended December 31, 2017 were $625,279,000, up $171,844,000 or 37.9% from the fiscal 2017 nine months ended December 31, 2016 net sales of $453,435,000. Net sales were positively impacted $131,104,000 by the STAHL acquisition, $33,849,000 due to increased sales volume, and $1,867,000 by price increases. Foreign currency translation favorably impacted sales by $5,024,000 for the nine months ended December 31, 2017.

Gross profit in the fiscal 2018 nine months ended December 31, 2017 was $209,972,000, an increase of $67,375,000 or 47.2% from the fiscal 2017 nine months ended December 31, 2016 gross profit of $142,597,000. Gross profit margin increased to 33.6% in the fiscal 2018 nine months ended from 31.4% in fiscal 2017. The increase in gross profit was due to $48,175,000 from our STAHL acquisition, $10,535,000 in increased volume, $1,146,000 of price increases net of material inflation, $3,049,000 in decreased product liability costs, $1,741,000 due to a partial insurance settlement, and $1,645,000 in increased productivity net of other manufacturing cost changes, offset by $271,000 in STAHL integration costs that are classified as cost of products sold. The translation of foreign currencies had a $1,355,000 favorable impact on gross profit in the nine months ended December 31, 2017.

Selling expenses were $74,309,000 and $55,834,000 in the fiscal 2018 and 2017 nine months ended December 31, 2017 and 2016, respectively. As a percentage of consolidated net sales, selling expenses were 11.9% and 12.3% in the fiscal 2018 and 2017 nine months ended December 31, 2017 and 2016. STAHL contributed an additional $16,179,000 in selling expense and $437,000 of integration costs were incurred related to the acquisition of STAHL that are classified as selling expense, offset by $247,000 in expenses that did not reoccur related to the Canadian lump sum pension settlement for the nine months ended December 31, 2017. The remainder of the increase is largely due to the transition to a new warehouse in North America. Foreign currency translation had a $713,000 unfavorable impact on selling expenses.

General and administrative expenses were $60,403,000 and $44,820,000 in the fiscal 2018 and 2017 nine months ended December 31, 2017 and 2016, respectively. As a percentage of consolidated net sales, general and administrative expenses were 9.7% and 9.9% in the fiscal 2018 and 2017 nine months ended December 31, 2017 and 2016. STAHL contributed an additional $8,553,000 in general and administrative expense and $4,138,000 of integration costs were incurred related to the acquisition of STAHL that are classified as general and administrative expense, offset by $3,140,000 in STAHL related acquisition costs incurred in the nine months ended fiscal 2017. Additionally, $2,592,000 in legal costs were incurred related to an insurance recovery legal action and $400,000 in expected litigation costs for a former subsidiary of Magnetek in the nine months ended December 31, 2017. The remainder of the increase is largely due to higher annual incentive plan costs expected in fiscal 2018 compared to fiscal 2017. Foreign currency translation had a $299,000 unfavorable impact on general and administrative expenses.


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Research and development expenses were $9,938,000 and $7,526,000 in the fiscal 2018 and 2017 nine months ended December 31, 2017 and 2016, respectively. As a percentage of consolidated net sales, research and development expenses were 1.6% and 1.7% in the fiscal 2018 and 2017 nine months ended December 31, 2017 and 2016. STAHL contributed an additional $1,494,000 to research and development expenses and Magnetek increased its research and development costs by $146,000 for the nine months ended December 31, 2017 compared to the nine months ended December 31, 2016. The remainder of the increase relates to global initiatives to develop new products.

Amortization of intangibles was $11,547,000 and $5,280,000 in the fiscal 2018 and 2017 nine months ended December 31, 2017 and 2016, respectively. The increase relates to amortization of intangibles acquired in the STAHL acquisition.

Interest and debt expense was $15,072,000 in the nine months ended December 31, 2017 compared to $7,398,000 in the nine months ended December 31, 2016. The increase in interest and debt expense relates to increased borrowings used to fund the purchase of STAHL.
 
Investment income of $161,000 and $366,000 in the fiscal 2018 and 2017 nine months ended December 31, 2017 and 2016, respectively, related to earnings on marketable securities held in the Company’s wholly owned captive insurance subsidiary.

Income tax expense as a percentage of income from continuing operations before income tax expense was 65% and 36% in the nine months ended December 31, 2017 and December 31, 2016, respectively. Typically these percentages vary from the U.S. statutory rate primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income for these subsidiaries. Income tax expense as a percentage of income from continuing operations for the nine months ended December 31, 2017 increased by 48 percentage points as a result of accounting for the enactment of the Act. Refer to Note 12 for additional information regarding the Company's accounting for the Act.

We estimate that the effective tax rate related to continuing operations will be approximately 51% to 55% for fiscal 2018.

Liquidity and Capital Resources

Cash and cash equivalents totaled $64,598,000 at December 31, 2017, a decrease of $12,993,000 from the March 31, 2017 balance of $77,591,000.

Cash flow from operating activities

Net cash provided by operating activities was $51,243,000 for the nine months ended December 31, 2017 compared with net cash provided by operating activities of $48,520,000 for the nine months ended December 31, 2016. Net income of $13,599,000, non-cash adjustments to net income of $53,290,000, and an increase in trade accounts payable of $389,000 contributed the most to cash provided by operating activities for the the nine months ended December 31, 2017. This was offset by an increase in trade accounts receivable of $6,516,000, an increase in inventory of $6,456,000, and a net decrease in accrued expenses and non-current liabilities of $5,726,000. The net decrease in accrued expenses and non-current liabilities primarily consists of $4,347,000 in contributions to the Magnetek pension plan and a $2,000,000 contribution to one of the Company's domestic pension plans.

The net cash provided by operating activities for the nine months ended December 31, 2016 consisted of net income of $13,722,000, non-cash adjustments to net income of $24,864,000, net collections on trade accounts receivable of $6,909,000, and a reduction in inventory of $5,267,000. This increase in cash was offset by a decrease in trade accounts payable and non-current liabilities of $5,465,000 and $8,239,000, respectively. The reduction in non-current liabilities was primarily due to contributions made to the Magnetek pension plan as well as certain legal settlements paid.

Cash flow from investing activities

Net cash used by investing activities was $26,950,000 for the nine months ended December 31, 2017 compared with net cash used by investing activities of $8,138,000 for the nine months ended December 31, 2016. The most significant use of cash used by investing activities was $14,750,000 in net cash paid to the former owner of STAHL related to a profit sharing agreement, net of a purchase price working capital refund. Capital expenditures for the nine months ended December 31, 2017 totaled $9,384,000. Further, the Company paid cash for an investment accounted for under the equity method in the amount of $3,359,000.

The net cash used by investing activities for the nine months ended December 31, 2016 is primarily from capital expenditures of $11,274,000 and the acquisition of Ergomatic of which $588,000 was paid during the nine months ended December 31, 2016. Additionally, the Company paid $6,370,000 for a foreign currency option agreement to offset the change in value of the

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purchase price of STAHL due to a change in foreign exchange rates. Offsetting this use of cash are proceeds from the sale of marketable equity securities of $10,336,000.

Cash flow from financing activities

Net cash used for financing activities was $43,081,000 for the nine months ended December 31, 2017 compared with net cash used for financing activities of $36,506,000 for the nine months ended December 31, 2016. The most significant uses of cash were repayments on debt of $45,050,000 of which $42,038,000 is principal payments on our Term Loan. The remaining net cash used for financing activities for the nine months ended December 31, 2017 primarily relates to dividends paid of $2,737,000 offset by $4,706,000 in net inflows from stock related transactions, which includes $5,961,000 in stock options exercised.

The most significant uses of cash for the nine months ended December 31, 2016 were repayments on our revolving credit facility of $23,500,000 and repayments on our other long term debt totaling $9,792,000, of which $9,375,000 is a scheduled principal payment on our Replaced Term Loan. In connection with the acquisition of Ergomatic, the Company withheld $588,000 to be paid to the seller upon satisfaction of certain conditions. This cash was classified as other assets on the Company's balance sheet and was classified as a use of cash for financing activities. The remaining net cash used for financing activities for the nine months ended December 31, 2016 primarily relates to dividends paid of $2,421,000 and $205,000 in net outflows from stock related transactions.

We believe that our cash on hand, cash flows, and borrowing capacity under our New Facilities will be sufficient to fund our ongoing operations and capital expenditures for at least the next twelve months. This belief is dependent upon successful execution of our current business plan and effective working capital utilization. No material restrictions exist in accessing cash held by our non-U.S. subsidiaries.  Additionally we expect to meet our U.S. funding needs without repatriating non-U.S. cash and incurring incremental U.S. taxes. As of December 31, 2017, $58,761,000 of cash and cash equivalents were held by foreign subsidiaries. The Company is evaluating the possibility of repatriating foreign cash as a result of the Act.

On January 31, 2017 the Company entered into a New Credit Agreement ("New Credit Agreement") and $545,000,000 of new debt facilities ("New Facilities") in connection with the STAHL acquisition. The New Facilities consist of a New Revolving Facility ("Revolver") in the amount of $100,000,000 and a $445,000,000 1st Lien Term Loan ("New Term Loan"). Proceeds from the New Facilities were used to fund the STAHL acquisition, pay fees and expenses associated with the acquisition, and refinance the Company's Replaced Revolving Credit Facility and Replaced Term Loan. The New Term Loan has a seven-year term maturing in 2024 and the Revolver has a five-year term maturing in 2022.

The outstanding principal balance of the New Term Loan was $390,463,000 as of December 31, 2017. The Company made $1,113,000 of required principal payments and $13,700,000 of additional principal payments on the New Term Loan during the quarter ended December 31, 2017 and $3,338,000 of required principal payments and $38,700,000 of additional principal payments on the New Term Loan during the nine months ended December 31, 2017. The Company is obligated to make $4,450,000 of principal payments over the next 12 months, however, plans to pay down $60,000,000 in total. This amount has been recorded within the current portion of long term debt on the Company's consolidated balance sheet with the remaining balance recorded as long term debt.

There were no outstanding borrowings and $5,590,000 in outstanding letters of credit issued against the New Revolving Credit Facility as of December 31, 2017. The outstanding letters of credit as of December 31, 2017 consisted of $1,024,000 in commercial letters of credit and $4,566,000 of standby letters of credit.

The gross balance of deferred financing costs on the New Term Loan was $14,690,000 as of December 31, 2017 and March 31, 2017. The accumulated amortization balances were $1,924,000 and $350,000 as of December 31, 2017 and March 31, 2017, respectively.

The gross balance of deferred financing costs associated with the New Revolving Credit Facility and Replaced Revolving Credit Facility is $2,789,000 as of December 31, 2017 and March 31, 2017, which is included in other assets. The accumulated amortization balances were $511,000 and $93,000 as of December 31, 2017 and March 31, 2017, respectively. The net balance at December 31, 2017 includes $645,000 related to the Replaced Revolving Credit Facility as certain lenders in the Replaced Revolving Credit Facility participate in the New Revolving Credit Facility.

The Company has a capital lease resulting from the sale and partial leaseback of its facility in Charlotte, NC. The Company also has capital leases on certain production machinery and equipment. The outstanding balance on the capital lease obligations of $193,000 and $551,000 as of December 31, 2017 and March 31, 2017 respectively, are included in senior debt in the consolidated

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balance sheets. $134,000 of the capital lease liability has been recorded within the current portion of long term debt on the Company's condensed consolidated balance sheet with the remaining balance recorded as long term debt.

Unsecured and uncommitted lines of credit are available to meet short-term working capital needs for certain of our subsidiaries operating outside of the U.S. The lines of credit are available on an offering basis, meaning that transactions under the line of credit will be on such terms and conditions, including interest rate, maturity, representations, covenants and events of default, as mutually agreed between our subsidiaries and the local bank at the time of each specific transaction. As of December 31, 2017, unsecured credit lines totaled approximately $5,038,000, of which $0 was drawn. In addition, unsecured lines of $16,751,000 were available for bank guarantees issued in the normal course of business of which $10,238,000 was utilized.

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, improve productivity and customer responsiveness, 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, 2017 and December 31, 2016 were $9,384,000 and $11,274,000, respectively. We expect capital expenditures for fiscal 2018 to range from approximately $13,000,000 to $15,000,000, excluding acquisitions and strategic alliances.

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Inflation and Other Market Conditions

Our costs are affected by inflation in the U.S. economy and, to a lesser extent, in non-U.S. economies including those of Europe, Canada, Mexico, South America and Asia-Pacific. We do not believe that general inflation has had a material effect on our results of operations over the periods presented primarily due to overall low inflation levels over such periods and our ability to generally pass on rising costs through annual price increases and surcharges. However, increases in U.S. employee benefits costs such as health insurance and workers compensation insurance may exceed general inflation levels. In the future, we may be further affected by inflation that we may not be able to pass on as price increases. With changes in worldwide demand for steel and fluctuating scrap steel prices over the past several years, we experienced fluctuations in our costs that we have reflected as price increases and surcharges to our customers. We believe we have been successful in instituting surcharges and price increases to pass on these material cost increases. We will continue to monitor our costs and reevaluate our pricing policies.

Goodwill Impairment Testing

We test goodwill for impairment at least annually and more frequently whenever events occur or circumstances change that indicate there may be impairment.  These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of operating performance, or a sale or disposition of a significant portion of a reporting unit.

We test goodwill at the reporting unit level, which is one level below our operating segment.  We identify our reporting units by assessing whether the components of our operating segment constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components.  We also aggregate components that have similar economic characteristics into single reporting units (for example, similar products and / or services, similar long-term financial results, product processes, classes of customers, etc.). We have four reporting units, only two of which have goodwill. Our Duff Norton reporting unit and Rest of Products reporting unit had goodwill totaling $9,689,000 and $331,930,000, respectively, at December 31, 2017. STAHL has been determined to be part of the Rest of Products reporting unit.

Refer to our 2017 10-K for additional information regarding our annual goodwill impairment process. We currently do not believe that it is more likely than not that the fair value of each of our reporting units is less than that its applicable carrying value. Additionally, we currently do not believe that we have any significant impairment indicators or that any of our reporting units with goodwill are at risk of failing Step One of the goodwill impairment test. However, if the projected long-term revenue growth rates, profit margins, or terminal growth rates are significantly lower, and/or the estimated weighted-average cost of capital is considerably higher, future testing may indicate impairment of one or more of the Company’s reporting units and, as a result, the related goodwill may be impaired.

Seasonality and Quarterly Results

Quarterly results may be materially affected by the timing of large customer orders, periods of high vacation and holiday concentrations, legal settlements, gains or losses in our portfolio of marketable securities, restructuring charges, favorable or unfavorable foreign currency translation, 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.


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Effects of New Accounting Pronouncements

Information regarding the effects of new accounting pronouncements is included in Note 14 to the accompanying consolidated financial statements included in this quarterly report on form 10-Q.

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, facility consolidations and other restructurings, our asbestos-related liability, 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.


Item 3.    Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the market risks since the end of fiscal 2017.

Item 4.    Controls and Procedures

As of December 31, 2017, 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, 2017, to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is made known to them on a timely basis, and that these disclosure controls and procedures are effective to ensure such information is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
 
There have been no changes in the Company’s internal control over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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Part II.    Other Information


Item 1.    Legal Proceedings – none.

Item 1A.        Risk Factors

There have been no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10K for the year ended March 31, 2017.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds – none.

Item 3.    Defaults upon Senior Securities – none.

Item 4.    Mine Safety Disclosures – Not applicable

Item 5.    Other Information – none.


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Item 6.    Exhibits

 
 
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.
 
 
 
 
 
 
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.
 
 
 
 
 
 
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
Exhibit 101*
 
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended December 31, 2017, formatted in XBRL, as follows:
 
 
 
 
 
 
 
(i) Condensed Consolidated Balance Sheets December 31, 2017 and March 31, 2017;
 
 
 
 
 
 
 
(ii) Condensed Consolidated Statements of Operations and Retained Earnings for the three and nine months ended December 31, 2017 and 2016;
 
 
 
 
 
 
 
(iii) Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2017 and 2016;
 
 
 
 
 
 
 
(iv) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended December 31, 2017 and 2016
 
 
 
 
 
 
 
(v) Notes to Condensed Consolidated Financial Statements.
 
*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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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 6, 2018
/S/   GREGORY P. RUSTOWICZ
 
Gregory P. Rustowicz
 
Vice President Finance and Chief Financial Officer
 
(Principal Financial Officer)

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