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| CMCO > SEC Filings for CMCO > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
Executive Overview
We are a leading designer, marketer and manufacturer of a wide variety of powered and manually operated wire rope and chain hoists, industrial crane systems, chain, hooks and other attachments, actuators, rotary unions, lift tables and tire shredders serving a wide variety of commercial and industrial end-user markets. Our products are used to efficiently and ergonomically move, lift, position or secure objects and loads.
Founded in 1875, we have grown to our current size and leadership position through organic growth and acquisitions. We developed our leading market position over our 134-year history by emphasizing technological innovation, manufacturing excellence and superior after-sale service. In addition, acquisitions significantly broadened our product lines and services and expanded our geographic reach, end-user markets and customer base. Ongoing operations include improving our productivity and increasing penetration of the European, Latin American, and Asian marketplaces. In accordance with our strategy, we have been investing in our Lean efforts across the Company, new product development and directed sales and marketing activities. Shareholder value will be enhanced through continued emphasis on improvement of the fundamentals including new product development, market expansion, manufacturing efficiency, cost containment, efficient capital investment and a high degree of customer satisfaction.
Over the course of its history, the Company has resiliently withstood many business cycles and its strong cash flow profile has helped it endure. Reflecting on the current global economic recession and recent credit crisis, we stand with a strong capital structure which includes excess cash reserves, significant revolver availability with expiration dating to 2011, fixed-rate long-term debt which doesn't expire until 2013 and a strong free cash flow business profile. We believe our liquidity strength will enable us to withstand this downturn as well. Further, we are managing our business through this cycle with a lower fixed cost footprint than prior cycles and are aggressively reducing our fixed cost base further as we strategically reorganize our North American hoist and rigging operations. The process includes the closure of two manufacturing facilities and the significant downsizing of a third facility. We are currently engaged with the labor unions at each facility in bargaining unit negotiations. The closures will result in a reduction of 500,000 square feet of manufacturing space and generation of annual savings estimated at approximately $9 - $11 million with 80% of the total $8-$10 million of charges occurring in fiscal 2010. These costs will be recorded beginning in the second quarter of fiscal 2010 and continue into fiscal 2011. During the first quarter of fiscal 2010, also in accordance with our strategy, we consolidated our North American sales force and offered certain employees an incentive to voluntarily retire early. The early retirement program consisted of two benefits: a paid leave of absence and an enhanced pension benefit.
Additionally, our revenue base is more geographically diverse than in our Company's history, with over 40% derived outside the U.S., pro forma for the effects of our October 1, 2008 Pfaff acquisition, which we believe will help to balance the impact of changes that will occur in different global economies at different times. As in the past, we monitor U.S. Industrial Capacity Utilization as an indicator of anticipated U.S. demand for our product. This statistic weakened significantly between September 2008 and March 2009, but has since moderated over recent months. In addition, we continue to monitor the potential impact of other global and U.S. trends, including European industrial production, energy costs, steel price fluctuations, interest rates, currency exchange and activity in a variety of end-user markets around the globe.
Regardless of the economic climate, we constantly explore ways to manage our operating margins as well as further improve our productivity and competitiveness, regardless of the point in the economic cycle. We have specific initiatives related to improved customer satisfaction, reduction of defects, shortened lead times, improved inventory turns and on-time deliveries, reduction of warranty costs, and improved working capital utilization. The initiatives are being driven by the continued implementation of our Lean efforts which are fundamentally changing our manufacturing and business processes to be more responsive to customer demand and improving on-time delivery and productivity. In addition to Lean, we are working to achieve these strategic initiatives through product simplification, the creation of centers of excellence, and improved supply chain management.
We continuously monitor market prices of steel. We utilize approximately $35,000 to $40,000 of steel annually in a variety of forms including rod, wire, bar, structural and others. Generally, as we experience fluctuations in our costs, we reflect them as price increases or surcharges to our customers with the goal of being margin neutral. Our steel costs have been relatively stable during this quarter.
From a strategic perspective, we are investing in international markets and new products as we focus on our greatest opportunities for growth. We maintain a strong North American market share with significant leading market positions in hoists, lifting and sling chain, forged attachments and actuators. We seek to maintain and enhance our market share by continuing and focusing our sales and marketing activities directed toward select North American and global sectors including entertainment, energy, construction, mining and food processing. Our fiscal 2009 acquisition of Pfaff is enhancing our European market penetration as well as strengthening our global actuator offering. Further, we continue to invest in emerging market penetration, including the geographic regions of Eastern Europe, Latin America and Asia. We complement these activities with continued investments in new product development, particularly products with global reach.
We are also looking for opportunities for growth via acquisitions or joint ventures, although given the current economic uncertainty we intend to continue to monitor and assess deployment of capital prudently. The focus of our acquisition strategy centers on opportunities for international revenue growth and product line expansion in alignment with our existing core offering.
We continue to operate in a highly competitive and global business environment faced with significant uncertainty at the present time. We face a variety of challenges and opportunities in those markets and geographies, including trends toward increased utilization of the global labor force and the expansion of market opportunities in Asia and other emerging markets. While we continue to execute our long-term growth strategy, we are weathering this downturn with our strong capital structure, solid cash position and flexible cost base, aggressively addressing costs and implementing changes to buffer the impact on current margins.
Results of Operations
Three Months Ended June 30, 2009 and June 29, 2008 Net sales in the fiscal 2010 quarter ended June 30, 2009 were $119,008, down $32,156 or 21.3% from the fiscal 2009 quarter ended June 29, 2008 net sales of $151,164. The fiscal 2010 quarter includes $17,600 of sales from Pfaff-silberblau, which was acquired October 1, 2008. Excluding the sales from Pfaff-silberblau, sales decreased $49,800 or 32.9%. Net sales was positively impacted $2,200 by price increases and negatively impacted $47,900 by decreased volume due to continued weakness in the global economy. Foreign currency translation also negatively impacted sales by $4,100 in the fiscal 2010 quarter.
Gross profit in the fiscal 2010 quarter ended June 30, 2009 was $29,430, down $19,095 or 39.4% from the fiscal 2009 quarter ended June 29, 2008 gross profit of $48,525. Gross profit margin decreased to 24.7% in the fiscal 2010 quarter from 32.1% in the fiscal 2009 quarter. The decline in gross profit margin was due mostly to lower volume in all markets and currently lower margins at Pfaff. The translation of foreign currencies had a $1,300 negative impact on gross profit in the fiscal 2010 quarter.
Selling expenses were $16,477 and $18,202 in the fiscal 2010 and 2009 quarters, respectively. This decrease reflects aggressive efforts to reduce or eliminate costs, as well as $500 lower commissions on lower sales volume, despite the addition of $3,000 of expenses associated with the Pfaff business and continued investments in emerging markets. Additionally, foreign currency translation had an $800 favorable impact on selling expenses. As a percentage of consolidated net sales, selling expenses were 13.8% and 12.0% in the fiscal 2010 and 2009 quarters, respectively.
General and administrative expenses were $8,461 and $9,901 in the fiscal 2010 and 2009 quarters, respectively, as additional $600 of expenses associated with the Pfaff business and continuation of investments in new product development were more than offset by benefits from aggressive cost reduction activities. Additionally, foreign currency translation had a $300 favorable impact on general and administrative expense. As a percentage of consolidated net sales, general and administrative expenses were 7.1% and 6.5% in the fiscal 2010 and 2009 quarters, respectively.
Restructuring charges were $5,838 in the fiscal 2010 quarter ended June 30, 2009. These restructuring costs were for both voluntary ($5,404) and involuntary ($434) termination benefits related to workforce reductions in our North American sales force reorganization and other salaried workforce reductions. There were no restructuring charges recorded during the quarter ended June 29, 2008.
Amortization of intangibles was $440 and $27 in the fiscal 2010 and 2009 quarters, respectively. The increase was the result of amortization of intangibles acquired in the Pfaff-silberblau acquisition.
Interest and debt expense was $3,337 and $3,193 in the fiscal 2010 and 2009 quarters, respectively. The increase was the result of higher debt levels in the fiscal 2010 quarter from debt assumed upon the acquisition of Pfaff-silberblau.
Income tax (benefit) expense as a percentage of (loss) income from continuing operations before income tax expense was 41.9% and 35.6% in the fiscal 2010 and 2009 quarters, respectively. The percentages vary from the U.S. statutory rate due to varying effective tax rates at our foreign subsidiaries, and the jurisdictional mix of taxable income forecasted for these subsidiaries.
Income (loss) from discontinued operations, net of tax, was $133 and ($2,096) in the fiscal 2010 and 2009 quarters, respectively. The fiscal 2009 first quarter loss was related primarily to the Univeyor business that was divested in July 2008.
Liquidity and Capital Resources
Cash and cash equivalents totaled $44,198 at June 30, 2009, an increase of $4,962 from the March 31, 2009 balance of $39,236.
Net cash provided by operating activities was $4,871 for the quarter ended June 30, 2009 compared with $9,831 for the quarter ended June 29, 2008. The net cash provided by operating activities for the quarter ended June 30, 2009 was primarily the result of $5,277 of cash provided by changes in operating assets and liabilities driven by a $7,163 decrease in accounts receivable and a $6,434 decrease in inventory, which were partially offset by an $8,069 decrease in accounts payable. The changes in operating assets and liabilities were the result of the decline in net sales due to the continued weakness in the global economy. A net loss of $2,398 and a $1,534 negative effect on cash from deferred income taxes were offset by non-cash charges for depreciation and amortization of $3,059 and stock-based compensation of $501. The net cash provided by operating activities for the quarter ended June 29, 2008 was primarily the result of $11,766 of income from continuing operations plus non-cash charges of depreciation and amortization of $2,172 and deferred income taxes of $1,180, which were partially offset by $3,562 of cash used for changes in operating assets and liabilities, primarily driven by a $4,613 increase in inventory to support penetration of new markets, upcoming new product launches, longer-duration projects and timing of offshore purchases. Net cash used by operating activities from discontinued operations, attributable to our former Univeyor A/S business, was $2,218 for the quarter ended June 29, 2008.
Net cash used by investing activities was $2,104 for the quarter ended June 30, 2009 compared with $2,476 for the quarter ended June 29, 2008. The net cash used by investing activities for the quarter ended June 30, 2009 was primarily the result of $1,250 for capital expenditures and $987 for the net purchases of marketable securities. The net cash used by investing activities for the quarter ended June 29, 2008 was primarily the result of $2,118 for capital expenditures and $497 for the net purchases of marketable securities. Net cash provided by investing activities from discontinued operations, primarily attributable to payments received on our note receivable related to our 2002 sale of Automatic Systems, Inc, was $133 and $139 for the quarters ended June 30, 2009 and June 29, 2008, respectively.
Net cash provided by financing activities was $1,656 for the quarter ended June 30, 2009 compared with $1,035 for the quarter ended June 29, 2008. The net cash used by financing activities for the quarter ended June 30, 2009 consisted primarily of $1,552 of net debt borrowings and $176 of proceeds from stock options exercised. The net cash provided by financing activities for quarter ended June 29, 2008 consisted primarily of $221 of proceeds from stock options exercised, $187 of tax benefit from exercise of stock options and $130 from the change in ESOP debt guarantee, partially offset by $82 of net debt repayments. Net cash provided by financing activities from discontinued operations, attributable to our former Univeyor A/S business, was $579 for the quarter ended June 29, 2008.
We believe that our cash on hand, cash flows, and borrowing capacity under our Revolving Credit Facility will be sufficient to fund our ongoing operations and budgeted capital expenditures for at least the next twelve months. This belief is dependent upon successful execution of our current business plan which includes aggressive cost management, facility consolidations and effective working capital utilization. This is complemented by the fact that throughout the last economic recession spanning 2000 - 2004, we generated positive cash flows from operating activities.
Our Revolving Credit Facility provides availability up to $75,000. Provided there is no default, the Company may request an increase in the availability of the Revolving Credit Facility by an amount not exceeding $50,000 subject to lender approval and possible renegotiation of the terms of the credit agreement. The Revolving Credit Facility matures February 2011.
The unused portion of the Revolving Credit Facility totaled $66,087, net of outstanding borrowings of zero and outstanding letters of credit of $8,913 as of June 30, 2009. Interest is payable at a Eurodollar Rate or a prime rate plus an applicable margin determined by our leverage ratio. At our current leverage ratio, we qualify for the lowest applicable margin level, which amounts to 87.5 basis points for Eurodollar borrowings and zero basis points for prime rate based borrowings. The Revolving Credit Facility is secured by all domestic inventory, receivables, equipment, real property, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual property. The corresponding credit agreement associated with the Revolving Credit Facility places certain debt covenant restrictions on us, including certain financial requirements and a limitation on dividend payments. The Company amended its Revolving Credit Facility on May 19, 2009. The credit facility was amended to increase the amount of restructuring charges to be excluded from the fixed charge coverage ratio covenant calculation as a result of the amendment. The financial covenants are limited to a senior leverage ratio and a fixed charge coverage ratio with which the Company is in compliance as of June 30, 2009. These covenants were set at levels which allow the Company flexibility relative to deteriorating market conditions given the Company's low level of outstanding senior debt and its favorable cash flow profile.
The Senior Subordinated 8 7/8% Notes (8 7/8% Notes) issued on September 2, 2005 amounted to $124,855 at June 30, 2009 and are due November 1, 2013. Provisions of the 8 7/8% Notes include limitations on indebtedness, asset sales, and dividends and other restricted payments. On or after November 1, 2009, the 8 7/8% Notes are redeemable at the option of the Company, in whole or in part, at prices declining annually from 104.438% to 100% on and after November 1, 2011. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 8 7/8% Notes may require us to repurchase all or a portion of such holder's 8 7/8% Notes at a purchase price equal to 101% of the principal amount thereof. The 8 7/8% Notes are guaranteed by certain existing and future U.S. subsidiaries and are not subject to any sinking fund requirements.
The Company's capital lease obligations related to property and equipment leases amounted to $8,100 at June 30, 2009. Capital lease obligations are included in senior debt in the consolidated balance sheets.
Unsecured and uncommitted lines of credit are available to meet short-term working capital needs for certain of our subsidiaries operating outside of the U.S. The lines of credit are available on an offering basis, meaning that transactions under the line of credit will be on such terms and conditions, including interest rate, maturity, representations, covenants and events of default, as mutually agreed between our subsidiaries and the local bank at the time of each specific transaction. As of June 30, 2009, significant unsecured credit lines totaled approximately $7,400, of which $5,200 was drawn.
In addition to the above facilities, our foreign subsidiaries have certain secured credit lines. As of June 30, 2009, significant secured credit lines totaled $3,100, of which $300 was drawn.
Capital Expenditures
In addition to keeping our current equipment and plants properly maintained, we are committed to replacing, enhancing, and upgrading our property, plant, and equipment to support new product development, reduce production costs, increase flexibility to respond effectively to market fluctuations and changes, meet environmental requirements, enhance safety, and promote ergonomically correct work stations. Consolidated capital expenditures for the three months ended June 30, 2009 and June 29, 2008 were $1,250 and $2,118, respectively. We expect capital spending for fiscal 2010 to be approximately $10,000 to $12,000 compared with $12,245 in fiscal 2009. Capital expenditures for fiscal 2010 include investments required to accommodate facility consolidation activities as well as new product development and productivity improvement.
Inflation and Other Market Conditions
Our costs are affected by inflation in the U.S. economy and, to a lesser extent, in foreign economies including those of Europe, Canada, Mexico, South America, and the Asia Pacific region. We have been impacted by fluctuations in steel costs, which vary by type of steel and we continue to monitor them and address our pricing policies accordingly. In addition, U.S. employee benefits costs such as health insurance and pension, as well as energy costs have exceeded general inflation levels. Otherwise, we do not believe that general inflation has had a material effect on results of operations over the periods presented primarily due to overall low inflation levels of most costs over such periods and our ability to generally pass on rising costs through price increases or surcharges. In the future, we may be further affected by inflation that we may not be able to offset with price increases or surcharges. Additionally, we are impacted by fluctuations in currency exchange rates which are primarily translational, but transactional fluctuations could also impact our financial results.
Seasonality and Quarterly Results
Quarterly results may be materially affected by the timing of large customer orders, periods of high vacation and holiday concentrations, gains or losses on early retirement of bonds, gains or losses in our portfolio of marketable securities, restructuring charges, favorable or unfavorable foreign currency translation, divestitures and acquisitions. Therefore, the operating results for any particular fiscal quarter are not necessarily indicative of results for any subsequent fiscal quarter or for the full fiscal year.
Effects of New Accounting Pronouncements
On April 1, 2009 the Company adopted the provisions of SFAS No. 165, "Subsequent Events" ("SFAS 165"), which establishes principles and requirements for subsequent events. SFAS 165 sets forth the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date, as well as the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. The adoption of SFAS 165 did not have a material impact on the Company's consolidated financial position or results of operations. We have evaluated subsequent events through August 5, 2009, the date this quarterly report on Form 10-Q was filed with the U.S. Securities and Exchange Commission. We made no significant changes to our condensed consolidated financial statements as a result of our subsequent events evaluation.
On April 1, 2009, the Company adopted the provisions of FSP SFAS No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP SFAS 157-4"). FSP SFAS 157-4 amends SFAS No. 157, "Fair Value Measurements" to provide additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. The FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly, and requires additional disclosures about fair value measurements in annual and interim reporting periods. FSP SFAS No. 157-4 also supersedes FSP SFAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active." Disclosures required by FSP SFAS 157-4 are included in Notes 4, 8 and 9.
On April 1, 2009, the Company adopted the provisions of FSP SFAS No. 115-2 and SFAS No. 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments" ("FSP SFAS 115-2 / 124-2"). This FSP extends existing disclosure requirements about debt and equity securities to interim reporting periods as well as provides new disclosure requirements. FSP SFAS 115-2 / 124-2 also provides new guidance on the recognition and presentation of an other-than-temporary impairment for debt securities classified as available for sale or held to maturity. Equity securities are excluded from the scope the FSP's recognition and measurement provisions. Refer to Note 6 for disclosures required as a result of the adoption of this standard.
On April 1, 2009, the Company adopted the provisions of FSP SFAS No. 107-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP SFAS 107-1"), which amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," and APB Opinion No. 28, "Interim Financial Reporting." FSP SFAS No. 107-1 requires disclosures about fair value of financial instruments in financial statements for interim reporting periods and in annual financial statements of publicly-traded companies. This FSP also requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods. The adoption of FSP SFAS 107-1 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Disclosures required by SFAS 107 are included in Notes 4, 8 and 9.
On April 1, 2009, the Company adopted the provisions of SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"), which requires additional disclosures about the objectives of derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on the Company's financial position, financial performance, and cash flows. The adoption of SFAS 161 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements--an amendment of ARB No. 51" ("SFAS 160"). This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The adoption of SFAS 160 did not have an impact on the Company's consolidated financial position, results of operations or cash flows.
On April 1, 2008, the Company adopted the provisions of FASB Emerging Issues Task Force ("EITF") Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements" ("EITF 06-10"). In accordance with EITF 06-10, an employer should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, or APB Opinion 12, Omnibus Opinion-1967. The provisions of EITF 6-10 were applied as a change in accounting principle through a cumulative-effect adjustment to retained earnings. The adoption of EITF 6-10 resulted in a $774 reduction to the opening balance of retained earnings, recorded on April 1, 2008, the date of adoption. The adoption of this EITF did not have a significant impact on our financial position, results of operations or cash flows, basic or diluted per share amounts.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose all of the information required to evaluate and understand the nature and financial effect of the business combination. This . . .
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