Columbus McKinnon Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2019; fiscal 2020 second quarter. The unaudited statements are prepared under U.S. GAAP. Columbus McKinnon designs, manufactures, and markets motion-control and material-handling products, including hoists, actuators, rigging tools, crane solutions, and digital power and motion-control systems. Approximately 55% of sales were to U.S. customers during the quarter and six-month period.
Financial performance and position
| Metric | Three months ended Sept. 30, 2019 | Prior-year period | Six months ended Sept. 30, 2019 | Prior-year period |
|---|---|---|---|---|
| Net sales | $207.6 million | $217.1 million | $420.3 million | $442.1 million |
| Gross profit | $73.5 million | $75.9 million | $149.1 million | $155.5 million |
| Gross margin | 35.4% | 35.0% | 35.5% | 35.2% |
| Income from operations | $25.2 million | $24.8 million | $52.3 million | $38.3 million |
| Net income | $16.6 million | $15.9 million | $35.2 million | $23.6 million |
| Diluted EPS | $0.69 | $0.67 | $1.48 | $1.00 |
- Cash flow: Operating cash flow was $37.9 million for the six months, compared with $27.6 million in the prior-year period. Capital expenditures were $4.8 million, and management expects approximately $15.0 million for fiscal 2020.
- Liquidity: Cash, cash equivalents, and restricted cash totaled $72.2 million at September 30, 2019, up $0.9 million from March 31, 2019. Management stated that cash, operating cash flow, and borrowing capacity should fund operations, debt obligations, and capital expenditures for at least the next twelve months.
- Debt: Term Loan principal was $280.5 million. The Company repaid $30.0 million during the first six months and expects to repay $65.0 million over the next twelve months. The $100.0 million revolver had no borrowings and $15.8 million of letters of credit outstanding.
- Balance sheet: Total assets were $1.071 billion and shareholders’ equity was $463.8 million at September 30, 2019. The Company recognized $31.8 million of operating lease right-of-use assets and $31.9 million of related lease liabilities upon adopting ASC 842.
- Tax rate: The effective tax rate was 24% in the quarter and 23% year-to-date. Management estimates a fiscal 2020 effective tax rate of approximately 22% to 23%.
Material changes versus the prior comparable period
- Quarterly sales declined 4.4%, and six-month sales declined 4.9%. Divested businesses reduced sales by $9.2 million in the quarter and $20.3 million year-to-date; unfavorable foreign-currency translation reduced sales by $4.0 million and $9.1 million, respectively.
- Price increases contributed $3.3 million to quarterly sales and $7.1 million to six-month sales, while volume contributed $0.4 million and $0.6 million, respectively.
- Gross margin improved despite lower gross profit. Pricing actions and productivity more than offset tariffs, unfavorable product mix, facility-closure costs, product-liability costs, severance, and foreign-currency effects.
- Operating income increased substantially year-to-date, partly because the prior-year period included an $11.1 million impairment loss related to businesses held for sale. The current year included a $0.2 million final working-capital adjustment related to divestitures.
- Interest and debt expense decreased to $3.8 million in the quarter and $7.6 million year-to-date, primarily because of lower average term-loan borrowings.
- Operating cash flow improved by $10.3 million year-to-date, supported by higher net income and improved inventory working capital, partially offset by lower accrued liabilities and non-current liabilities, including pension contributions.
- Industrial Products sales decreased, while Crane Solutions and Engineered Products sales increased. The filing reports quarterly product-group sales of $89.9 million, $96.6 million, and $21.1 million, respectively.
Guidance, outlook, risks, and unusual items
- Management is executing its “Blueprint for Growth” strategy, emphasizing business simplification, operational excellence, product development, digital capabilities, margin expansion, and improved return on invested capital.
- Fiscal 2020 tariff exposure is estimated at approximately $3.0 million, with mitigation expected through productivity actions and pricing. The Company purchases approximately $25 million to $30 million of steel annually.
- The Company announced plans to consolidate its Lisbon, Ohio hoist facility into facilities in Wadesboro, North Carolina and Damascus, Virginia during fiscal 2021. The accounting impact was not yet determined and was expected to be assessed in the third quarter of fiscal 2020.
- Goodwill totaled $317.6 million at September 30, 2019. Management reported no goodwill impairment indicators during the quarter but identified sensitivity to lower revenue growth, margins, or terminal growth rates and higher discount rates.
- The Company plans approximately $11.0 million of fiscal 2020 pension contributions. Six-month U.S. pension contributions were $6.7 million.
- Asbestos-related liability was estimated at $4.9 million, within an actuarial range of $4.1 million to $8.0 million; approximately $2.0 million of payments were expected over the next twelve months. Product-related liability reserves totaled approximately $6.8 million.
- Known environmental liabilities included $1.2 million for current environmental matters and $0.5 million related to Magnetek matters. The Company also disclosed unresolved Monsanto-related indemnification litigation for which a potential loss range could not reasonably be estimated.
- There were no material changes to previously disclosed risk factors, no material legal proceedings reported in Part II, and no material changes in market risk. Management concluded disclosure controls were effective as of September 30, 2019.
Important facts for investors to verify
- Reconcile the sales decline with the impact of divestitures, foreign-currency translation, pricing, and volume, and assess the sustainability of margin improvement.
- Confirm the Company’s planned $65.0 million debt repayment, term-loan maturity profile, revolver availability, and compliance with applicable debt covenants.
- Evaluate tariff exposure, steel-cost trends, pricing recovery, and the financial impact of the planned Lisbon facility consolidation.
- Review goodwill and intangible-asset impairment sensitivity, particularly in light of industrial demand, foreign exchange, and projected cash flows.
- Assess pension funding requirements, asbestos and product-liability reserves, environmental obligations, and the unresolved Monsanto-related matter.
- Verify fiscal 2020 capital expenditures of approximately $15.0 million and the projected effective tax rate of 22% to 23%.