Columbus McKinnon Corporation — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended June 30, 2017, the first quarter of fiscal 2018. Columbus McKinnon designs, manufactures, and markets material-handling products, including hoists, cranes, rigging tools, actuators, and digital power-control systems. Approximately 54% of quarterly sales were to U.S. customers and 46% were generated outside the United States.
The results include the January 31, 2017 acquisition of STAHL CraneSystems, a manufacturer of explosion-protected hoists and crane components. The STAHL purchase-price allocation remained preliminary at June 30, 2017.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 |
|---|---|---|
| Net sales | $203.7 million | $149.0 million |
| Gross profit | $69.3 million | $48.0 million |
| Gross margin | 34.0% | 32.2% |
| Income from operations | $20.0 million | $11.2 million |
| Income before taxes | $14.8 million | $9.5 million |
| Net income | $11.7 million | $6.4 million |
| Diluted earnings per share | $0.51 | $0.32 |
| Cash provided by operating activities | $14.4 million | $7.2 million |
Operating margin was approximately 9.8% versus 7.5% in the prior-year quarter. The effective tax rate was 21%, compared with 33% in the prior-year period. Management estimates a fiscal 2018 effective tax rate of approximately 20% to 24%.
At June 30, 2017, cash and cash equivalents were $64.6 million, down from $77.6 million at March 31, 2017. Total assets were $1.126 billion and shareholders’ equity was $364.0 million. Trade receivables were $119.7 million and inventories were $135.3 million.
The New Term Loan had an outstanding balance of $421.4 million. The Company made $11.1 million of term-loan principal repayments during the quarter, including $10.0 million of additional repayments. No borrowings were outstanding under the $100.0 million revolving facility, although letters of credit totaled $5.0 million. The balance sheet also reported $49.8 million of current long-term debt and $33 million of senior debt excluding the current portion.
Operating cash flow was partly offset by $16.6 million of investing cash uses, including $14.8 million paid to the former STAHL owner under a profit-distribution agreement and $1.9 million of capital expenditures. Financing cash uses were $15.0 million, including debt repayments and $0.9 million of dividends. Fiscal 2018 capital expenditures are expected to be approximately $20 million, excluding acquisitions and strategic alliances.
Material Changes Versus the Prior Comparable Period
- Sales increased 36.7% to $203.7 million. STAHL contributed $42.7 million, higher volume contributed $12.3 million, and price increases contributed $0.6 million; foreign-currency translation reduced sales by $0.9 million.
- Gross profit increased 44.3% to $69.3 million, with margin expanding 180 basis points to 34.0%. Improvements reflected STAHL, higher volume, productivity gains, pricing, and lower product-liability costs, partially offset by STAHL integration costs and currency effects.
- Income from operations increased 78.7% to $20.0 million. Selling expenses declined as a percentage of sales, while general and administrative expenses remained broadly stable as a percentage of sales.
- Interest and debt expense increased to $5.1 million from $2.6 million because of borrowings used to finance the STAHL acquisition.
- Amortization expense increased to $3.7 million from $1.8 million due primarily to STAHL-acquired intangible assets. Estimated annual amortization for fiscal 2018 through fiscal 2022 is approximately $15 million.
- Comprehensive income was $21.8 million versus $3.0 million, primarily reflecting favorable foreign-currency translation and derivative-related changes.
- Goodwill increased to $331.7 million from $319.3 million, mainly from currency translation. No goodwill impairment indicators or charges were identified during the quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects cash on hand, operating cash flow, and borrowing capacity under the New Facilities to fund operations and capital expenditures for at least the next twelve months, subject to execution of the business plan and effective working-capital management. Management is pursuing global market expansion, new products, Lean productivity initiatives, cost containment, and potential strategic acquisitions or joint ventures.
The Company expects to pay down $49.5 million of debt over the next twelve months, compared with contractual principal payments of $4.5 million. Steel costs, pricing recovery, industrial demand, interest rates, foreign exchange, economic conditions, customer and supplier conditions, and acquisition integration remain important operating variables.
- Asbestos-related liability was estimated at $6.2 million, within an actuarial range of $4.7 million to $7.4 million. Approximately $2.0 million of payments are expected over the next twelve months.
- Product-related liabilities totaled approximately $5.9 million, Magnetek-related asbestos liabilities approximately $1.2 million, and environmental liabilities approximately $0.7 million.
- The Company received a $1.7 million net insurance settlement in July 2017 related to asbestos expenses; the accounting impact was still being evaluated.
- The STAHL purchase-price allocation remained incomplete, including evaluation of contingent liabilities and intangible assets.
- Revenue standard ASC 606 becomes effective April 1, 2018. Management expects earlier, over-time recognition for certain custom EMEA projects but could not quantify the impact and plans modified-retrospective adoption.
- The Company’s marketable securities of $7.7 million are held in its captive insurance subsidiary and are not available for general working capital purposes.
- Management reported no material changes to previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls as of June 30, 2017.
Investor Verification Priorities
- Verify the sustainability of sales and margin growth excluding STAHL acquisition contribution and currency effects.
- Assess STAHL integration progress, final purchase-price allocation, and the resulting amortization, goodwill, and debt burden.
- Monitor debt repayment, interest expense, covenant capacity, and available liquidity under the New Facilities.
- Evaluate working-capital trends, particularly receivables and inventories, and the conversion of earnings into operating cash flow.
- Confirm the eventual quantified impact and adoption effects of ASC 606 on custom-project revenue recognition.
- Track asbestos, product-liability, environmental, and insurance-recovery developments, including potential future earnings impacts.
- Assess exposure to steel prices, foreign exchange, industrial demand, and other cyclical end-market conditions.