Columbus McKinnon Corporation — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three and six months ended September 30, 2017, representing fiscal 2018 second-quarter and year-to-date results. Columbus McKinnon designs, manufactures, and markets hoists, cranes, actuators, rigging tools, digital power-control systems, and related material-handling products globally. Approximately 53% of second-quarter sales and 54% of six-month sales were generated in the United States.
Results include the January 31, 2017 acquisition of STAHL CraneSystems, a manufacturer of explosion-protected hoists and crane components. The acquisition materially affects comparability with the prior year.
Financial Performance and Position
| Metric | Three months ended Sept. 30, 2017 | Three months ended Sept. 30, 2016 | Six months ended Sept. 30, 2017 | Six months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Net sales | $212.8 million | $151.9 million | $416.6 million | $300.9 million |
| Gross profit | $71.6 million | $49.7 million | $140.9 million | $97.8 million |
| Gross margin | 33.7% | 32.7% | 33.8% | 32.5% |
| Operating income | $19.6 million | $12.6 million | $39.6 million | $23.8 million |
| Net income | $12.5 million | $6.8 million | $24.2 million | $13.2 million |
| Diluted EPS | $0.54 | $0.33 | $1.05 | $0.65 |
| Operating cash flow | Not separately provided | Not separately provided | $34.8 million | $25.6 million |
Second-quarter sales increased 40.1%, primarily from $45.8 million attributable to STAHL, $12.1 million from higher volume, $0.7 million from pricing, and $2.2 million from favorable currency translation. Six-month sales increased 38.4%, including $88.5 million from STAHL and $24.4 million from volume.
Second-quarter operating margin was approximately 9.2%, compared with approximately 8.3% in the prior-year quarter. Six-month operating margin was approximately 9.5%, compared with approximately 7.9% in the prior-year period. Net margins were approximately 5.9% and 5.8% for the quarter and six months, respectively, versus approximately 4.5% and 4.4% in the comparable periods.
- Cash and cash equivalents were $69.5 million at September 30, 2017, versus $77.6 million at March 31, 2017.
- Operating cash flow was $34.8 million for the first six months; capital expenditures were $6.1 million.
- Investing cash outflow was $20.9 million, including $14.8 million paid to the former STAHL owner under a profit-sharing arrangement.
- Financing cash outflow was $27.6 million, including $30.1 million of debt repayment and $1.8 million of dividends.
- The reported balance sheet included $49.7 million of current debt, $342.5 million of term loan and revolving-facility debt, and $0.02 million of senior debt. The New Term Loan had an outstanding balance of $405.3 million; the revolver had no borrowings and $6.1 million of letters of credit outstanding.
- Total assets were $1.15 billion and shareholders’ equity was $386.8 million at September 30, 2017.
Material Changes Versus the Prior Comparable Period
- STAHL substantially increased sales, gross profit, selling costs, administrative costs, research and development expense, amortization, and interest expense.
- Gross margin improved by 100 basis points in the quarter and 130 basis points year to date, aided by STAHL, volume, pricing net of material inflation, lower product-liability costs, and a $1.7 million insurance recovery.
- Amortization increased to $3.9 million in the quarter and $7.6 million year to date, primarily because of STAHL-acquired intangible assets. Estimated annual amortization is approximately $15 million for fiscal 2018 through fiscal 2022.
- Interest and debt expense rose to $5.1 million in the quarter and $10.2 million year to date, compared with $2.5 million and $5.1 million, respectively, due to acquisition-related borrowings.
- The effective tax rate declined to 14% in the quarter and 18% year to date, versus 35% and 34%, respectively. Adoption of ASU 2016-09 reduced the reported tax rate through tax effects of stock-based compensation.
- Goodwill increased to $338.2 million, primarily from $19.4 million of favorable currency translation, partly offset by a $0.5 million STAHL purchase-accounting adjustment. No goodwill impairment indicators were identified.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2018 capital expenditures of approximately $15 million to $20 million, excluding acquisitions and strategic alliances.
- Management estimates an effective tax rate of approximately 18% to 22% for fiscal 2018.
- Management believes cash on hand, operating cash flow, and available borrowing capacity will fund operations and capital expenditures for at least the next twelve months, subject to execution of the business plan and effective working-capital management.
- The company expects some custom EMEA projects to transition from point-in-time to over-time revenue recognition when ASC 606 becomes effective April 1, 2018. The financial impact had not been quantified, and the company planned modified-retrospective adoption.
- Management is pursuing global market expansion, new products, Lean productivity initiatives, cost reduction, pricing actions, and targeted acquisitions. Steel costs, foreign exchange, interest rates, industrial demand, and end-market conditions remain significant variables.
- Asbestos-related liability was estimated at $6.0 million, with an actuarial range of $4.7 million to $7.4 million; approximately $2.0 million of payments were expected over the following twelve months. Product-related liabilities were approximately $6.3 million, and Magnetek asbestos-related liabilities were approximately $1.1 million.
- The company recorded a $1.7 million net insurance settlement in July 2017 related to asbestos expenses. It also incurred acquisition-integration costs, legal costs related to insurance recovery, and $0.4 million of expected litigation costs involving a former Magnetek subsidiary.
- The company faces unresolved asbestos, product-liability, environmental, and indemnification matters, including a Monsanto PCB-related dispute for which a potential loss range could not be estimated. Management did not expect these matters to materially affect liquidity or financial condition, although future charges could materially affect earnings.
- No material changes to previously disclosed risk factors or market risks were reported. Disclosure controls were deemed effective.
Important Facts for Investors to Verify
- Determine the portion of reported growth and margin expansion attributable to STAHL versus organic volume, pricing, productivity, and currency effects.
- Assess leverage, required and discretionary term-loan repayments, interest-rate exposure, and the company’s plan to repay approximately $49.5 million over the following twelve months.
- Monitor working-capital trends, particularly the $10.1 million increase in accounts receivable and the $2.2 million increase in inventories during the six months.
- Evaluate the sustainability of the unusually low tax rates in fiscal 2018 and the expected 18% to 22% full-year range.
- Track the final purchase-price allocation for STAHL, potential goodwill impairment, and the effect of increased amortization.
- Review the eventual ASC 606 adoption impact on timing of revenue recognition for custom EMEA projects.
- Follow asbestos, product-liability, environmental, Monsanto, and insurance-recovery proceedings and related changes in recorded liabilities or cash payments.