Business Context and Reporting Period
Columbus McKinnon Corporation designs, manufactures and markets material-handling products and services, including hoists, rigging tools, cranes, digital power-control systems and actuators. The unaudited Form 10-Q covers the three and nine months ended December 31, 2016, within fiscal 2017. Approximately 64% of sales were to U.S. customers; 36% of nine-month sales were generated outside the United States.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31, 2016 | Three Months Ended Dec. 31, 2015 | Nine Months Ended Dec. 31, 2016 | Nine Months Ended Dec. 31, 2015 |
|---|---|---|---|---|
| Net sales | $152.5 million | $159.7 million | $453.4 million | $442.0 million |
| Gross profit | $44.8 million | $48.3 million | $142.6 million | $138.9 million |
| Gross margin | 29.4% | 30.3% | 31.4% | 31.4% |
| Income from operations | $5.3 million | $11.0 million | $29.1 million | $28.8 million |
| Net income | $0.5 million | $7.2 million | $13.7 million | $13.7 million |
| Diluted EPS | $0.02 | $0.36 | $0.67 | $0.67 |
- Operating cash flow for the first nine months was $48.5 million, compared with $32.9 million in the prior-year period.
- Capital expenditures were $11.3 million, compared with $15.5 million in the prior-year period; fiscal 2017 capital spending was expected to be approximately $16.0 million.
- Cash and cash equivalents were $51.5 million at December 31, 2016, essentially unchanged from March 31, 2016.
- Total assets were $725.6 million and shareholders’ equity was $292.3 million at December 31, 2016.
- Term loan and revolving-facility debt totaled $234.0 million on the balance sheet, including $103.1 million outstanding under the term loan and $131.5 million under the revolver. Unused revolver capacity was $89.5 million, producing reported total liquidity of $141.0 million including cash.
- The company paid $2.4 million of dividends during the first nine months and declared a further $0.04-per-share dividend payable in February 2017.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 4.5%, primarily from a $6.1 million volume reduction and $1.4 million unfavorable foreign-currency translation, partly offset by $0.2 million of price increases.
- Third-quarter gross margin fell 90 basis points. Management attributed the decline principally to lower volume, weaker productivity and manufacturing costs, higher product-liability costs, and currency effects.
- Third-quarter general and administrative expense increased $3.4 million, including $3.1 million of STAHL acquisition costs. The resulting tax treatment also raised the quarterly effective tax rate to 67%, compared with 14% in the prior-year quarter.
- Nine-month sales increased 2.6%, reflecting $40.3 million from the Magnetek acquisition and $0.8 million of pricing, partially offset by lower volume and currency translation.
- Nine-month gross margin was unchanged at 31.4%, while operating income increased modestly. Interest expense increased $2.2 million year over year because of debt incurred to finance Magnetek.
- Comprehensive income declined to $3.8 million for the nine-month period from $11.7 million, primarily due to greater foreign-currency translation losses.
Guidance, Outlook, Risks and Unusual Items
- The company agreed to acquire STAHL CraneSystems for approximately €224 million, or approximately $240 million, on a cash-free, debt-free basis, with potential additional earn-out consideration of approximately €6 million. Closing was expected on or about January 31, 2017.
- To fund STAHL, refinance existing debt and pay transaction costs, the company expected to issue approximately $545 million of new secured debt and complete a private placement of 2.273 million shares expected to generate $47.2 million of net proceeds.
- Management expected fiscal 2017’s effective tax rate to be approximately 31% to 36%.
- Management stated that cash, operating cash flow and available borrowing capacity were expected to 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 pending STAHL transaction is expected to materially increase leverage. The company warned that higher debt service could reduce funds available for operations and dividends and adversely affect financial condition and results.
- The third quarter included a $1.8 million loss on revaluation of a foreign-currency option related to STAHL and $3.1 million of acquisition-related costs.
- Asbestos-related liability was estimated at $6.2 million, with total potential aggregate exposure estimated at $4.7 million to $7.4 million; approximately $2.0 million of asbestos-related payments were expected over the following twelve months. Product-liability reserves were approximately $6.2 million, and environmental liabilities were $0.6 million.
- No material changes were reported in market risks, legal proceedings, disclosure controls or internal control over financial reporting. Goodwill impairment indicators were not identified during the quarter.
Important Facts for Investors to Verify
- Completion, financing terms and final purchase accounting for the STAHL acquisition.
- Post-acquisition debt levels, leverage ratios, interest costs, covenant capacity and available liquidity.
- Whether volume trends and third-quarter margin pressure reverse, particularly productivity, manufacturing costs and product-liability costs.
- Realization of expected Magnetek-related synergies and the integration and performance of STAHL.
- Foreign-currency exposure, including the STAHL currency option and the effect of translation on sales, margins and comprehensive income.
- Future asbestos, product-liability and environmental cash payments, as well as the outcome of related insurance recovery actions.
- The effect of pending revenue-recognition, lease, credit-loss and stock-compensation accounting standards.