Business Context and Reporting Period
Columbus McKinnon Corporation designs, manufactures, and markets hoists, actuators, rigging tools, crane components, digital power control systems, and other material-handling products. This unaudited Form 10-Q covers the three and nine months ended December 31, 2018, the third quarter and first nine months of fiscal 2019. Approximately 54% of nine-month sales were generated in the United States.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2018 | Three Months Ended Dec. 31, 2017 | Nine Months Ended Dec. 31, 2018 | Nine Months Ended Dec. 31, 2017 |
|---|---|---|---|---|
| Net sales | $217.4 million | $208.7 million | $659.5 million | $625.3 million |
| Gross profit | $73.4 million | $68.7 million | $229.0 million | $209.0 million |
| Gross margin | 33.8% | 32.9% | 34.7% | 33.4% |
| Income from operations | $6.6 million | $13.7 million | $45.0 million | $52.5 million |
| Net income (loss) | $(0.8) million | $(10.6) million | $22.8 million | $13.6 million |
| Diluted EPS | $(0.03) | $(0.46) | $0.97 | $0.59 |
| Operating cash flow | Not separately provided | Not separately provided | $53.8 million | $51.2 million |
Third-quarter operating margin declined to approximately 3.1% from 6.6%, principally because of a $16.7 million impairment charge on remaining held-for-sale businesses. Nine-month operating margin was approximately 6.8%, compared with 8.4% in the prior-year period.
- Cash, cash equivalents, and restricted cash were $58.3 million at December 31, 2018, down $5.2 million from March 31, 2018.
- Term Loan principal outstanding was $325.5 million; the balance-sheet carrying amount of term loan and revolving credit facilities was $254.8 million after deferred financing costs and other adjustments.
- The $100 million revolving facility had no outstanding borrowings and $17.6 million of letters of credit outstanding.
- The Company repaid $50.1 million of debt during the first nine months and expects to pay down $60 million in total during the next 12 months.
- Capital expenditures were $7.2 million year to date; fiscal 2019 capital expenditures are expected to be approximately $10 million to $12 million.
- Shareholders’ equity was $420.4 million at December 31, 2018, versus $408.2 million at March 31, 2018.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 4.2%, driven by $9.8 million of volume growth and $2.8 million of price increases, partly offset by a $4.0 million unfavorable foreign-currency translation effect. Nine-month sales increased 5.5%.
- Gross margin improved by 90 basis points in the quarter and 130 basis points year to date, reflecting volume, pricing net of material inflation, productivity improvements, and lower certain prior-period costs.
- Income from operations decreased in the quarter because the held-for-sale impairment more than offset improved gross profit and lower selling and general and administrative expenses.
- The Company recorded $26.7 million of net losses on held-for-sale businesses in the first nine months, including $27.8 million of impairment charges and a $1.1 million gain on the sale of the Tire Shredder business.
- The remaining held-for-sale businesses include the crane builder business and Stahlhammer Bommern GmbH. Management expects each sale to occur in fiscal 2019, but proceeds and timing remain uncertain.
- Debt reduction and lower average borrowings reduced interest and debt expense to $4.3 million in the quarter and $13.2 million year to date, versus $4.9 million and $15.1 million, respectively.
- Cash flow from operations increased to $53.8 million from $51.2 million despite higher inventory investment of $13.0 million.
Guidance, Outlook, Commentary, and Risks
- Management expects a fiscal 2019 effective tax rate of approximately 27% to 29% for continuing operations.
- Management believes cash on hand, operating cash flow, and available borrowing capacity will fund operations and capital expenditures for at least the next 12 months, subject to execution of the business plan and effective working-capital management.
- The Blueprint for Growth strategy focuses on business simplification, the 80/20 process, operational excellence, new product development, digital investment, higher EBITDA margins, and improved return on invested capital.
- The Company plans to consolidate its Salem, Ohio hoist facility into facilities in Lisbon, Ohio and Wadesboro, North Carolina in early fiscal 2020. The quarter included $0.2 million of related costs.
- Management estimates approximately $2.0 million of fiscal 2019 cost exposure from China-related trade tariffs under current regulations and is pursuing pricing and productivity actions to mitigate the impact.
- Material risks include steel, aluminum, and other raw-material price volatility; tariffs and the ability to pass costs to customers; foreign-currency movements; cyclical industrial demand; acquisition integration; facility consolidation; goodwill and held-for-sale asset valuations; and asbestos, product-liability, environmental, and other litigation exposures.
- The Company recorded $5.9 million of probable and estimable asbestos-related liabilities, with approximately $2.0 million expected to be paid over the next 12 months. It also recorded $6.3 million of product-related liabilities and $0.9 million of environmental reserves.
- The Company completed adoption of ASC 606 revenue recognition without a material effect on reported revenue or costs. Adoption of ASU 2016-01 resulted in an $0.9 million opening retained-earnings adjustment, and the Company expects to adopt the new lease standard in fiscal 2020.
- Management reported no material changes in market risk, no material pending legal proceeding, and effective disclosure controls as of December 31, 2018.
Important Facts for Investors to Verify
- Verify the timing, sale proceeds, and any further impairment charges related to the two remaining held-for-sale businesses.
- Assess whether operating cash flow can support the planned $60 million debt paydown, dividends, capital expenditures, pension contributions, and working-capital needs.
- Monitor tariff and raw-material inflation exposure, pricing recovery, and the effect on gross margins.
- Review the Company’s debt covenants, interest-rate exposure, maturity schedule, and remaining revolving-facility capacity.
- Evaluate sensitivity of goodwill and other intangible assets to changes in forecasts, discount rates, foreign exchange, and operating performance.
- Track execution and costs associated with the Salem facility consolidation and the broader Blueprint for Growth program.
- Review asbestos, product-liability, environmental, and Monsanto-related contingencies, including potential liabilities not currently estimable.