Columbus McKinnon Corporation: Fiscal 2017 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2017. The filing is an annual 10-K rather than a 2016 fourth-quarter filing; quarterly data for the three months ended March 31, 2017 are included. Columbus McKinnon designs, manufactures, and markets hoists, cranes, rigging tools, actuators, digital power-control systems, and related material-handling products. The company reports one operating segment and sells globally through distributors, OEMs, crane builders, EPC firms, and directly to selected end users.
Financial Performance and Position
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $637.1 million | $597.1 million | Up 6.7% |
| Gross profit | $192.9 million | $187.3 million | Up 3.0% |
| Gross margin | 30.3% | 31.4% | Down 110 basis points |
| Operating income | $26.0 million | $40.6 million | Down 36.0% |
| Operating margin | 4.1% | 6.8% | Down approximately 270 basis points |
| Net income | $9.0 million | $19.6 million | Down 54.1% |
| Diluted EPS | $0.43 | $0.96 | Down 55.2% |
| Operating cash flow | $60.5 million | $52.6 million | Up 14.8% |
| Capital expenditures | $14.4 million | $22.3 million | Down 35.7% |
| Free cash flow | Approximately $46.1 million | Approximately $30.3 million | Improved |
| Cash and cash equivalents | $77.6 million | $51.6 million | Up $26.0 million |
| Total debt | $421.3 million | $267.6 million | Up $153.7 million |
| Debt net of cash | $343.7 million | $216.0 million | Up $127.7 million |
Sales benefited from acquisitions of $65.0 million and price increases of $0.7 million, but were reduced by lower volume of $20.6 million and unfavorable foreign-currency translation of $5.1 million. Non-U.S. sales were $243.3 million, or 38% of total sales, compared with 37% in fiscal 2016.
- Product mix shifted toward digital power control and delivery systems, which represented 12% of sales versus 8% in fiscal 2016. Hoists declined to 56% from 59% of sales.
- Sales from recently introduced or customer-engineered products were $115.3 million, or 18.1% of fiscal 2017 sales.
- Backlog was approximately $154.5 million at March 31, 2017, compared with $98.6 million a year earlier, including $46.8 million attributable to STAHL.
- Quarterly results were volatile: fourth-quarter sales were $183.7 million, but the company recorded a fourth-quarter operating loss of $3.2 million and net loss of $4.7 million, primarily reflecting acquisition-related and other unusual costs.
Material Changes Versus the Prior Comparable Period
- STAHL acquisition: On January 31, 2017, the company acquired STAHL CraneSystems for $218.3 million net of cash. STAHL added $24.7 million of fiscal 2017 sales but produced a $6.0 million operating loss, including $8.9 million of purchase-accounting inventory amortization.
- Leverage increased materially: The acquisition was financed with a new $545 million facility consisting of a $445 million first-lien term loan and a $100 million revolver. The term loan balance was $432.5 million at year-end; the revolver was undrawn.
- Equity financing: The company issued 2.273 million common shares at $22.00 per share, generating gross proceeds of approximately $50 million.
- Profitability declined: Higher acquisition and integration costs, increased amortization, product-liability costs, CEO retirement and search costs, legal expenses, purchase-accounting adjustments, and higher interest expense more than offset acquisition-driven revenue growth and productivity benefits.
- Balance sheet expanded: Total assets increased to $1.114 billion from $773 million, with goodwill increasing to $319.3 million from $170.7 million and other intangible assets increasing to $256.2 million from $122.1 million.
- Pension obligations increased: The company assumed STAHL’s unfunded pension obligation valued at $72.6 million. Total pension underfunding increased to $150.4 million from $103.3 million.
Liquidity, Debt, Outlook, and Risks
Management stated that cash on hand, operating cash flow, and available borrowing capacity under the new revolver should fund operations and planned capital expenditures for at least the next twelve months, subject to execution of the business plan and effective working-capital management. The company expects fiscal 2018 capital expenditures of approximately $20 million to $24 million, excluding acquisitions and strategic alliances, and plans to repay approximately $49.5 million of debt during fiscal 2018 versus required principal payments of approximately $4.5 million.
- The new term loan matures in 2024 and the revolver matures in 2022. The debt facilities are secured by substantially all U.S. inventory, receivables, equipment, real property, specified subsidiary stock, and intellectual property.
- The leverage covenant applies when borrowings are outstanding under the revolver, excluding letters of credit. The revolver was undrawn at March 31, 2017, and management stated that the company would have been in compliance if the covenant had applied at year-end.
- Contractual obligations totaled approximately $809.3 million, including $435.7 million of long-term debt obligations, $116.9 million of estimated interest obligations, $36.0 million of operating leases, and $209.4 million of other long-term liabilities.
- Fiscal 2018 pension contributions are expected to be approximately $8.4 million. Pension expense is expected to increase because fiscal 2018 will include a full year of STAHL pension expense.
- The company faces cyclical demand, industrial and end-market weakness, competition, steel-price volatility, foreign-currency exposure, acquisition-integration risk, debt-covenant and refinancing risk, and dependence on independent distributors.
- Asbestos-related liability was estimated at approximately $6.2 million, with aggregate potential liability estimated at $4.7 million to $7.4 million. Product-related liability reserves were approximately $5.8 million, and general and product-liability reserves totaled $13.3 million.
- The company recorded a $1.1 million impairment of the STB trademark. No goodwill impairment was recorded, but future impairment charges remain possible if forecast cash flows or valuation assumptions deteriorate.
- STAHL was excluded from management’s fiscal 2017 internal-control assessment because it was acquired during the year. Management and the auditor concluded that the company’s controls were effective, but STAHL must be included in future assessments.
Investor Verification Checklist
- Verify STAHL’s post-acquisition revenue, profitability, integration costs, synergies, and final purchase-price allocation.
- Monitor debt reduction, interest expense, leverage ratios, revolver availability, covenant compliance, and the company’s planned fiscal 2018 debt repayment.
- Assess whether gross-margin pressure from lower volume, purchase accounting, product-liability costs, and material inflation is reversing.
- Review the sustainability of operating cash flow and free cash flow after pension contributions, working-capital needs, capital expenditures, and debt service.
- Evaluate the substantial increase in goodwill, intangible assets, and pension liabilities, including sensitivity to impairment and discount-rate assumptions.
- Track asbestos, product-liability, environmental, and insurance-recovery matters, including the pending action against former product-liability insurers.
- Review the expected fiscal 2018 impact of the new revenue-recognition standard; the filing states that certain EMEA custom projects may move from point-in-time to over-time recognition, but the impact was not quantifiable.