Columbus McKinnon Corporation — Fiscal 2018 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended December 31, 2017, compared with the corresponding periods ended December 31, 2016. The company designs, manufactures and markets material-handling products, including hoists, cranes, rigging tools, actuators and digital power-control systems. Results include the January 31, 2017 acquisition of STAHL CraneSystems.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Net sales | $208.7 million | $152.5 million | $625.3 million | $453.4 million |
| Gross profit | $69.0 million | $44.8 million | $210.0 million | $142.6 million |
| Gross margin | 33.1% | 29.4% | 33.6% | 31.4% |
| Income from operations | $14.2 million | $5.3 million | $53.8 million | $29.1 million |
| Net income (loss) | $(10.6) million | $0.5 million | $13.6 million | $13.7 million |
| Diluted EPS | $(0.46) | $0.02 | $0.59 | $0.67 |
- Third-quarter sales increased 36.9%; management attributed the increase principally to $42.6 million from STAHL, $9.4 million of higher volume, $0.6 million of pricing and $3.7 million of favorable currency translation.
- Nine-month sales increased 37.9%, including $131.1 million from STAHL, $33.8 million from higher volume, $1.9 million from pricing and $5.0 million of favorable currency translation.
- Operating income improved despite higher selling, administrative, research and development, amortization and interest costs. Gross-margin improvement reflected STAHL, volume, productivity, lower product-liability costs, pricing and a partial insurance settlement.
- Third-quarter net loss resulted primarily from a $19.9 million income-tax expense, including a provisional $18.6 million charge related to the Tax Cuts and Jobs Act. The company reported $9.3 million of pretax income for the quarter.
- Nine-month income taxes were $25.0 million, producing a 65% effective tax rate versus 36% in the prior-year period. Management estimated a fiscal 2018 effective tax rate of approximately 51% to 55%.
Cash flow, balance sheet and liquidity
- Cash provided by operating activities was $51.2 million for the first nine months, compared with $48.5 million in the prior-year period.
- Capital expenditures were $9.4 million, and management expected fiscal 2018 capital expenditures of approximately $13 million to $15 million, excluding acquisitions and strategic alliances.
- Investing cash uses totaled $27.0 million, including $14.8 million paid to the former STAHL owner and $3.4 million for a 49% equity investment in Eastern Morris Cranes Company Limited.
- Financing cash uses totaled $43.1 million, including $45.1 million of debt repayments and $2.7 million of dividends, partially offset by stock-option exercise proceeds.
- Cash and cash equivalents were $64.6 million at December 31, 2017, down from $77.6 million at March 31, 2017. Approximately $58.8 million was held by foreign subsidiaries.
- The new term loan had outstanding principal of $390.5 million. The company reported no revolver borrowings, with $5.6 million of letters of credit outstanding against the $100 million revolver. Management planned to repay $60 million of term debt over the following 12 months.
- Management stated that cash on hand, operating cash flow and borrowing capacity should fund operations and capital expenditures for at least the next 12 months, subject to execution of the business plan and effective working-capital management.
Material changes, outlook and unusual items
- STAHL materially expanded sales and gross profit but also increased amortization, interest expense, operating costs and integration activity. STAHL purchase accounting remained preliminary at December 31, 2017.
- STAHL integration generated $1.9 million of severance and employee-termination costs during the quarter and nine months; $1.4 million remained unpaid at quarter-end. Total integration costs were also recorded in cost of products sold, selling expense and general and administrative expense.
- The company received a $1.7 million net asbestos-insurance settlement during the nine months and received an additional $0.6 million settlement in February 2018. Further insurance recovery efforts remain ongoing.
- Management continued to emphasize global expansion, new products, lean manufacturing, productivity, cost containment and working-capital improvement. Steel costs are monitored and generally addressed through price increases or surcharges.
- The company expects certain custom projects in Europe, the Middle East and Africa to transition from point-in-time to over-time revenue recognition when ASC 606 becomes effective on April 1, 2018. The financial impact had not been quantified.
- Goodwill totaled $341.6 million and intangible assets totaled $263.4 million at December 31, 2017. No impairment indicators or impairment charges were identified during the quarter.
Risks and contingencies
- Asbestos-related liability was estimated at $6.3 million, with an actuarial aggregate range of $4.0 million to $7.7 million; approximately $2.0 million of payments were expected over the next 12 months.
- Product-related liabilities totaled approximately $5.7 million. Magnetek-related asbestos liabilities were approximately $1.1 million, and total environmental liabilities were approximately $0.8 million.
- Magnetek is contesting defense and indemnification demands from Monsanto relating to PCB litigation. The company recorded $0.4 million for legal costs but could not reasonably estimate a potential loss range.
- The company remains exposed to foreign-currency, interest-rate, steel-cost, pension, acquisition-integration, product-liability and goodwill-impairment risks. Management reported no material changes in market risks or risk factors from the prior Form 10-K.
Investor verification points
- Verify the final accounting for the STAHL acquisition, including contingent liabilities, intangible assets and goodwill.
- Assess the sustainability of gross-margin improvement after integration costs, amortization and potential steel-cost increases.
- Reconcile the third-quarter tax-driven loss with underlying pretax operating performance and monitor final Tax Cuts and Jobs Act accounting.
- Track the planned $60 million term-loan repayment, cash generation and remaining revolver availability.
- Evaluate the timing and magnitude of ASC 606 revenue-recognition changes for EMEA custom projects.
- Monitor asbestos, product-liability, environmental and Monsanto-related contingencies, as future charges could materially affect earnings despite management’s assessment of limited liquidity impact.