Columbus McKinnon Corporation: Fiscal 2016 Third-Quarter Form 10-Q Summary
Reporting period: Unaudited results for the three and nine months ended December 31, 2015, compared with the corresponding periods ended December 31, 2014. The company designs, manufactures, and markets material-handling products, including hoists, cranes, rigging tools, actuators, and digital power and motion-control systems.
Financial Results and Liquidity
| Metric | Three months ended December 31, 2015 | Prior-year period | Nine months ended December 31, 2015 | Prior-year period |
|---|---|---|---|---|
| Net sales | $159.7 million | $140.8 million | $442.0 million | $430.7 million |
| Gross profit | $48.3 million | $43.4 million | $138.9 million | $136.1 million |
| Gross margin | 30.3% | 30.8% | 31.4% | 31.6% |
| Income from operations | $11.0 million | $12.6 million | $28.8 million | $41.8 million |
| Operating margin | 6.9% | 9.0% | 6.5% | 9.7% |
| Net income | $7.2 million | $7.9 million | $13.7 million | $25.2 million |
| Diluted EPS | $0.36 | $0.39 | $0.67 | $1.25 |
- Operating cash flow for the first nine months was $32.9 million, compared with $29.9 million in the prior-year period.
- Capital expenditures were $15.5 million, compared with $11.3 million; fiscal 2016 capital spending is expected to be approximately $18 million to $22 million.
- Cash and cash equivalents were $51.9 million at December 31, 2015, down from $63.1 million at March 31, 2015. Foreign subsidiaries held $35.5 million of cash.
- Investing cash outflow was $196.5 million, including $182.5 million for the Magnetek acquisition.
- Financing cash inflow was $151.1 million, primarily from net revolving-credit borrowings of $164.1 million.
- Reported debt included $45.8 million of current debt, $1.0 million of senior debt excluding the current portion, and $234.3 million of term-loan and revolving-credit borrowings.
- The term loan balance was $115.6 million and revolving borrowings were $165.0 million at December 31, 2015. Revolving availability was $54.9 million after borrowings and letters of credit, producing total stated liquidity of $106.8 million including cash.
- The company expects to repay an additional $32.5 million of revolving borrowings during the following 12 months.
Material Changes Versus the Prior Comparable Period
- Magnetek was acquired on September 2, 2015 for $182.5 million net of cash acquired. It contributed $29.5 million of sales and $3.8 million of operating income in the third quarter, and $39.6 million of sales and $3.3 million of operating income for the post-acquisition nine-month period.
- STB and Magnetek acquisitions increased third-quarter sales by $31.7 million and nine-month sales by $48.6 million. Price increases added $1.5 million and $4.3 million, respectively, while lower volume and foreign-currency translation reduced sales.
- Third-quarter sales increased 13.5%, but nine-month sales increased only 2.6% because of a $25.6 million unfavorable foreign-currency translation impact and lower volume.
- Gross margin declined modestly, while operating margin contracted materially because of higher general and administrative expense, acquisition-related costs, amortization, lower volume, reduced fixed-cost absorption, and productivity pressures.
- General and administrative expense increased to $53.5 million for the first nine months from $40.2 million, including $5.7 million of Magnetek acquisition costs and $2.3 million of Magnetek acquisition-related severance.
- Interest and debt expense declined to $5.2 million from $10.0 million for the first nine months, reflecting the refinancing and redemption of the prior 7 7/8% senior subordinated notes, partly offset by acquisition-related borrowings.
- Goodwill increased to $182.0 million from $121.5 million at March 31, 2015, and identifiable intangible assets increased to $123.3 million from $19.1 million, primarily because of Magnetek.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2016 cash taxes to benefit from approximately $62 million of Magnetek-related deferred tax assets and estimates a fiscal 2016 effective tax rate of approximately 37% to 41%.
- Management believes cash on hand, operating cash flow, and revolver availability will fund operations and planned capital expenditures for at least the next 12 months, subject to execution of the business plan and effective working-capital management.
- Management is pursuing growth through global market expansion, new products, acquisitions, Lean manufacturing, productivity improvements, cost reduction, and supply-chain initiatives.
- Demand is exposed to industrial production, Eurozone and global economic conditions, energy costs, steel prices, interest rates, foreign-exchange movements, and end-user markets including energy, automotive, construction, and infrastructure.
- The company expects foreign-currency translation to remain relevant; approximately 38% of nine-month sales came from outside the United States, although this percentage is expected to decline as Magnetek is predominantly U.S.-based.
- Goodwill and acquisition-related intangible assets are subject to impairment risk. Management reported no current significant impairment indicators, but lower revenue growth, margins, or terminal growth rates, or higher discount rates, could result in future impairment charges.
- Asbestos-related liabilities were estimated at $6.9 million, within an actuarial range of $5.4 million to $8.3 million; approximately $2.0 million of payments are expected over the next 12 months. Product-related liabilities were approximately $5.0 million.
- Assumed Magnetek contingencies included approximately $1.5 million of asbestos-related liability and $1.3 million of environmental liabilities. Italian tax assessments related to a former Magnetek business remain subject to appeal; management does not expect a liability from those assessments.
- The Magnetek purchase-price allocation remained preliminary at December 31, 2015, and could change as additional information is obtained regarding contingent liabilities and intangible assets.
- The company disclosed no legal proceedings under Item 1, no defaults under senior securities, and no material changes to previously disclosed risk factors other than intellectual-property infringement risk associated with acquired technology.
Investor Verification Priorities
- Verify the pace and profitability of Magnetek integration, including whether acquisition-related costs and severance decline as expected.
- Monitor leverage, revolver repayments, covenant compliance, and the $54.9 million of remaining revolver availability.
- Assess whether lower volume, foreign-exchange pressure, reduced fixed-cost absorption, and productivity issues continue to compress margins.
- Review the final Magnetek purchase-price allocation and test the carrying value of goodwill and acquired intangible assets.
- Evaluate cash conversion, inventory growth, capital expenditures, pension contributions, asbestos claims, product liabilities, and environmental contingencies.
- Compare actual fiscal 2016 tax rates and capital spending with management’s stated 37% to 41% tax-rate and $18 million to $22 million capital-expenditure expectations.