Business Context and Reporting Period
Columbus McKinnon Corporation designs, manufactures, and markets material-handling products, including hoists, cranes, rigging tools, actuators, and digital power-control systems. This Form 10-Q covers the three months ended June 30, 2018, the first quarter of fiscal 2019, compared with the three months ended June 30, 2017. Approximately 53% of quarterly sales were to U.S. customers and 47% were generated outside the United States.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $225.0 million | $203.7 million | +10.4% |
| Gross profit | $79.6 million | $69.0 million | +15.4% |
| Gross margin | 35.4% | 33.9% | +150 basis points |
| Income from operations | $13.5 million | $19.6 million | -31.1% |
| Operating margin | 6.0% | 9.6% | Decreased |
| Net income | $7.7 million | $11.7 million | -33.9% |
| Diluted earnings per share | $0.33 | $0.51 | Decreased |
| Cash flow from operations | $8.1 million | $14.4 million | -43.8% |
Sales growth reflected $14.0 million of higher volume, $2.0 million of price increases, and $5.3 million of favorable foreign-currency translation. Gross profit benefited from volume, pricing net of material inflation, productivity, and favorable currency effects, partially offset by higher STAHL integration and product-liability costs.
The quarter included an $11.1 million impairment charge related to businesses classified as held for sale. Excluding the charge, operating income would have been higher than reported; the filing does not provide a complete non-GAAP reconciliation of adjusted operating income or adjusted earnings.
At June 30, 2018, cash and cash equivalents were $57.1 million, or $57.7 million including restricted cash, compared with $63.6 million of cash, cash equivalents, and restricted cash at March 31, 2018. Current assets were $359.4 million and current liabilities were $195.8 million.
The Term Loan principal balance was $365.5 million. The balance-sheet carrying amount of the term loan and revolving facility was $293.7 million, net of applicable discounts and financing costs. The Company had no revolving borrowings, $4.5 million of outstanding letters of credit, and approximately $4.9 million of unused unsecured foreign credit lines. Management stated that liquidity and borrowing capacity should fund operations and capital expenditures for at least the next twelve months, subject to execution of its business plan and effective working-capital management.
Material Changes Versus the Prior Comparable Period
- Revenue increased 10.4%, driven by volume, pricing, and favorable foreign-currency translation.
- Gross margin improved to 35.4% from 33.9%, reflecting productivity and pricing actions despite material-cost inflation.
- Operating income and net income declined because of the $11.1 million held-for-sale impairment and higher selling, general and administrative, research and development, and integration expenses.
- Operating cash flow declined by $6.3 million, primarily due to higher receivables and inventory and lower accrued liabilities.
- The Company repaid $10.0 million of term-loan principal during the quarter and stated that it planned to repay $60.0 million over the following twelve months, although only $4.45 million was contractually required.
- Foreign-currency translation reduced comprehensive income by $11.2 million, resulting in a comprehensive loss of $3.1 million despite net income of $7.7 million.
- The Company adopted ASC 606 revenue recognition without a material impact and adopted ASU 2016-01, recording an $888,000 cumulative adjustment to beginning retained earnings related to marketable securities.
Outlook, Commentary, Risks, and Unusual Items
- Management is implementing its Blueprint 2021 strategy, focused on simplifying the business, improving operating performance, increasing productivity, expanding EBITDA margins and improving return on invested capital.
- Fiscal 2019 capital expenditures are expected to be approximately $15 million to $20 million, excluding acquisitions and strategic alliances.
- Management estimates a fiscal 2019 effective tax rate of approximately 21% to 23%.
- The Company is pursuing the sale of its tire shredder business, crane builder business, Crane Equipment and Service Inc., and Stahlhammer Bommern GmbH. The businesses were classified as held for sale and are expected to be sold during fiscal 2019. They were not considered significant discontinued operations.
- The held-for-sale impairment included a $6.2 million reduction to goodwill. An interim goodwill impairment test for the remaining Products reporting unit did not indicate impairment.
- STAHL integration activities resulted in $1.6 million of severance and employee-termination costs during the quarter, with $2.1 million of previously accrued severance remaining unpaid at June 30, 2018.
- Steel, aluminum, tariffs, import duties, currency movements, and other raw-material costs may pressure margins. The Company generally seeks to offset cost increases through price increases and surcharges, but may not be able to do so fully.
- Recorded liabilities included approximately $6.1 million for asbestos-related claims, $6.6 million for product-related liabilities, $1.1 million for environmental matters, and $0.7 million for Magnetek-related environmental matters. The filing states that pending ordinary litigation is not expected to have a material effect, but future claims could materially affect earnings.
- Management reported no material changes in market risk and concluded that disclosure controls and procedures were effective as of June 30, 2018.
Important Facts for Investors to Verify
- Whether the planned fiscal 2019 divestitures close on schedule and whether additional changes to fair value generate further impairment charges.
- Progress on the planned $60 million term-loan paydown and the effect on interest expense and liquidity.
- Whether productivity and pricing actions continue to offset steel, aluminum, tariff, freight, and other input-cost inflation.
- Working-capital trends, particularly inventory and receivables, given the decline in operating cash flow.
- The final accounting effects of the Tax Cuts and Jobs Act and the resulting fiscal 2019 effective tax rate.
- Potential changes in asbestos, product-liability, environmental, and other contingent liabilities.
- Foreign-currency exposure and the effect of translation on revenue, earnings, comprehensive income, and debt-related hedges.