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| CMCO > SEC Filings for CMCO > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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 initiatives 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 an expiration of February 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. The closures will result in a reduction of approximately 500,000 square feet of manufacturing space and generation of annual savings estimated at approximately $9 - $11 million with 80% of the total $9 - $11 million of restructuring charges occurring in fiscal 2010. These costs are being recognized beginning in the second quarter of fiscal 2010 and will continue into early 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 now is more geographically diverse than in our Company's history, with over 40% derived outside the U.S., 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 June 2009, but has since consistently improved for each of the three months ended September 2009 by over 250 basis points. 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 $25,000 to $30,000 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 effectively managing through a global economic slowdown. We face a variety of 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, including a solid cash position and flexible cost base, aggressively addressing costs and implementing cost control measures and restructuring to buffer the impact on current margins.
Results of Operations
Three Months and Six Months Ended September 30, 2009 and September 28, 2008
Net sales in the fiscal 2010 quarter ended September 30, 2009 were $115,234, down $39,446 or 25.5% from the fiscal 2009 quarter ended September 28, 2008 net sales of $154,680. Net sales for the six month period ended September 30, 2009 were $234,242, down $71,602 or 23.4% from the six months ended September 28, 2008 net sales of $305,844. The fiscal 2010 results include sales of Pfaff-silberblau, which was acquired October 1, 2008, of $17,861 and $35,482 in the quarter and six months ended September 30, 2009, respectively. Excluding the sales of Pfaff-silberblau, sales decreased $57,307 or 37% and $107,084 or 35% in the quarter and six month periods, respectively. For the quarterly period, net sales were positively impacted $1,300 by price increases, $2,400 for an additional shipping day and negatively impacted $59,600 by decreased volume due to continued weakness in the global economy. For the six months period sales were positively impacted by $3,575 of price increases, $2,400 for an additional shipping day and negatively impacted by $107,525 of decreased volume due to continued weakness in the global economy. Translation of foreign currencies contributed $1,400 and $5,600 toward the decrease in sales for the quarter and six month period, respectively.
Gross profit in the fiscal 2010 quarter ended September 30, 2009 was $28,051, down $17,521 or 38.4% from the fiscal 2009 quarter ended September 28, 2008 gross profit of $45,572. Gross profit margin decreased to 24.3% in the fiscal 2010 second quarter from 29.5% compared to the same period in fiscal 2009. Gross profit in the six month period ended September 30, 2009 was $57,481, down $36,616 or 38.9% from the six month period ended September 28, 2008 gross profit of $94,097. Gross profit margin decreased to 24.5% in the six month period ended September 30, 2009 from 30.8% in the six month period ended September 28, 2008. The decline in gross profit margin was due mostly to lower volume in all markets as well as $500 related to the consolidation of our North American hoist and rigging operations and $2,900 for an atypical product liability reserve. The translation of foreign currencies had a $500 and $1,300 negative impact on gross profit for the quarter and six month period, respectively.
Selling expenses were $15,605 and $17,164 in the fiscal year second quarter 2010 and 2009, respectively. Selling expenses for the six-months ended Fiscal 2010 and 2009 were $32,082 and $35,366 respectively. Decreases in the current quarter and the first half of the current fiscal year reflect aggressive efforts to reduce or eliminate costs, as well as $700 lower salaries and commissions on lower sales volume, despite the addition of $2,700 of expenses associated with the Pfaff business and continued investments in emerging markets. Additionally, foreign currency translation had a $300 favorable impact on selling expenses for the quarter. As a percentage of consolidated net sales, selling expenses were 13.5% and 11.1% for the fiscal year second quarter 2010 and 2009, respectively. Selling expenses were 13.7% and 11.6% for the six months ended fiscal year 2010 and 2009 respectively.
General and administrative expenses were $8,731, $9,446, $17,192 and $19,347 in the fiscal 2010 and 2009 quarters and the six-month periods then ended, respectively. An additional $1,100 and $1,700 of expenses for the current quarter and the six months ended, respectively; associated with the Pfaff business and continuation of investments in new product development were more than offset by benefits from aggressive cost reduction activities. During the current quarter general and administrative expenses were favorably impacted by a $600 reduction in bad debt expenses. Additionally, foreign currency translation had a $100 favorable impact on general and administrative expense in the quarter and $400 favorable impact on the six months ended September 30, 2009. As a percentage of consolidated net sales, general and administrative expenses were 7.6%, 6.1%, 7.3% and 6.3% in the fiscal 2010 and 2009 quarters and the six-month periods, respectively.
Restructuring charges were $2,694, $155, $8,532, and $155 in the fiscal 2010 and 2009 quarters and the six-month periods then ended, respectively. The fiscal 2010 restructuring costs for the three-month period include $950 of non-cash fixed asset impairment charges, $1,181 in expense for severance costs related to salaried and union workforce reductions, $418 of pension plan curtailment charges and $145 of other costs related to our reorganization plan. Costs for the six-month period of fiscal 2010 include the above items, as well as 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. The fiscal 2009 restructuring costs were related to the consolidation of a U.S. crane manufacturing facility into another existing crane manufacturing facility.
Amortization of intangibles was $478, $29, $918, and $56 in the fiscal 2010 and 2009 quarters and the six-month periods then ended, respectively. The increase was the result of amortization of intangibles acquired in the Pfaff-silberblau acquisition.
Interest and debt expense was $3,407, $3,132, $6,744, and $6,325 in the fiscal 2010 and 2009 quarters and the six-month periods then ended, respectively. The increase was the result of higher debt levels in fiscal 2010 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 (benefit) expense was -13.5%, 35.9%, 22.2% and 35.8% in the fiscal 2010 and 2009 quarters and the six-month periods then ended, respectively. The percentages vary from the U.S. statutory rate due to varying effective tax rates at the Company's foreign subsidiaries, the jurisdictional mix of taxable income forecasted for these subsidiaries, and the impact of U.S. state franchise taxes unrelated to income.
Income (loss) from discontinued operations, net of tax, was $0, $130, $133 and ($1,966) in the fiscal 2010 and 2009 quarters and the six-month periods then ended, respectively. The fiscal 2009 six-month period loss was related primarily to the Univeyor business that was divested in July 2008.
Liquidity and Capital Resources
Cash and cash equivalents totaled $54,337 at September 30, 2009, an increase of $15,101 from the March 31, 2009 balance of $39,236.
Net cash provided by operating activities was $23,941 for the six months ended September 30, 2009 compared with $29,029 for the six months ended September 28, 2008. The net cash provided by operating activities for the six months ended September 30, 2009 was primarily the result of $22,784 of cash provided by changes in operating assets and liabilities driven by a $13,111 decrease in accounts receivable, a $10,675 decrease in inventory and a $7,508 increase in accrued and non-current liabilities, which were partially offset by an $9,715 decrease in accounts payable. The changes in accounts receivable, inventory and accounts payable were the result of the decline in net sales due to the continued weakness in the global economy. The increase in accrued and non-current liabilities was primarily the result of increased restructuring, product liability and pension accruals. The positive effect on cash from non-cash charges of $6,142 for depreciation and amortization, $1,209 for stock-based compensation, and $950 for restructuring, were largely offset by a net loss of $5,129 and a $2,098 negative effect on cash from a non-cash benefit from deferred income taxes. The net cash provided by operating activities for the six months ended September 28, 2008 is primarily the result of $22,273 of income from continuing operations plus non-cash charges for depreciation and amortization of $4,512, deferred income taxes of $8,016, and $591 of other non-cash charges. These amounts were partially offset by $4,149 of cash used for changes in operating assets and liabilities, primarily the result of a $5,301 increase in inventory. The increase in inventory resulted from support for penetration of new European 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 $2,214 for the six months ended September 28, 2008.
Net cash used by investing activities was $6,387 for the six months ended September 30, 2009 compared with $4,166 for the six months ended September 28, 2008. The net cash used by investing activities from continuing operations for the six months ended September 30, 2009 consisted of $4,028 for capital expenditures and $2,492 for the net purchases of marketable securities. The net cash used by investing activities from continuing operations for the six ended September 28, 2008 consisted of $5,014 used for capital expenditures and $686 for the net purchases of marketable securities, partially offset by $1,269 of proceeds from the sale of facilities and surplus real estate. 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 $265 for the six months ended September 30, 2009 and September 28, 2008, respectively.
Net cash used by financing activities was $3,004 for the six months ended September 30, 2009 compared with $13,924 for the six months ended September 28, 2008. The net cash used by financing activities for the six months ended September 30, 2009 consisted primarily of $3,224 of net debt payments and $188 of deferred financing fees, partially offset by $177 of proceeds from stock options exercised and $231 from the change in ESOP debt guarantee. The net cash provided by financing activities from continuing operations for six months ended September 28, 2008 consisted primarily of $391 of proceeds from stock options exercised, $187 of tax benefit from exercise of stock options and $254 from the change in ESOP debt guarantee, partially offset by $144 of net debt repayments. Net cash used by financing activities from discontinued operations, primarily attributable to the repayment of amounts outstanding on lines of credit and fixed term bank debt of our former Univeyor A/S business, was $14,612 for the six months ended September 28, 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 $68,214, net of outstanding borrowings of zero and outstanding letters of credit of $6,786 as of September 30, 2009. Interest is payable at a Eurodollar Rate or a prime rate plus an applicable margin determined by our senior leverage ratio. At our current senior 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. We amended our Revolving Credit Facility on May 19, 2009 and September 30, 2009. The credit facility was amended on May 19, 2009 to increase the amount of restructuring charges to be excluded from the fixed charge coverage ratio covenant calculation. On September 30, 2009 the credit facility was amended to allow "PILOT leases" as part of a tax abatement program which provides future local property tax savings in the state of Tennessee. The financial covenants are limited to a senior leverage ratio and a fixed charge coverage ratio with which we are in compliance as of September 30, 2009.
While we have begun to see improvement in incoming order trends over the past few months, we have no assurance that this will continue. As we execute investment in our ongoing facility consolidation activities at the planned pace and if order trends fail to continue at the current pace or other unexpected events occur, there is an increased likelihood that the Company could fail the fixed charges coverage ratio contained in the Revolving Credit Facility for our third quarter ended December 31, 2009. The fixed charges coverage ratio is defined as consolidated cash flow to consolidated fixed charges, as defined within the Revolving Credit Facility. We are required to maintain a minimum fixed charges coverage ratio of 1.25 to 1.00. Accordingly, while a variety of alternatives are available to us, our preferred path is to build flexibility within our bank agreement given the current strength of our balance sheet, liquidity and cash flows. To accomplish that we have initiated discussions to renew or amendment of our credit facilities by the end of the third quarter and, while no absolute assurance can be given, management believes that this is an achievable objective.
The Senior Subordinated 8 7/8% Notes (8 7/8% Notes) issued on September 2, 2005 amounted to $124,855 at September 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.
Our capital lease obligations related to property and equipment leases amounted to $8,283 at September 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 September 30, 2009, significant unsecured credit lines totaled approximately $7,758, of which $1,176 was drawn.
In addition to the above facilities, our foreign subsidiaries have certain secured credit lines. As of September 30, 2009, significant secured credit lines totaled $3,220, of which $293 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 six months ended September 30, 2009 and September 28, 2008 were $4,028 and $5,014, respectively. We expect capital spending for fiscal 2010 to be approximately $8,000 to $9,000 compared with $12,245 in fiscal 2009. Capital expenditures for fiscal 2010 primarily consist of investments required to accommodate facility consolidation and new product development activities.
Goodwill impairment testing
We test goodwill for impairment at least annually or more frequently whenever events or circumstances indicate that there is potential for impairment. We currently have four reporting units of which two carry goodwill as of September 30, 2009. One of the reporting units, which has $9,954 of goodwill and represented less than 10% of consolidated revenue for the quarter ended, was more negatively impacted by the current global economic slow down. Key performance indicators for the unit such as: revenue, operating and net income, and cash flows were below budget and prior year levels for the six months ended September 30, 2009 and are not expected to recover to previous levels in the near term. Accordingly, we performed Step I impairment testing as of the end of the second quarter. Step 1 testing was not considered necessary for the other reporting unit because, based on testing performed for prior year end, fair value of the reporting unit sufficiently exceeded book value and no risk of impairment existed at September 30, 2009.
The goodwill impairment test consists of comparing the fair value of a reporting unit, determined using discounted cash flows, with its carrying amount including goodwill. If the carrying amount of the reporting unit is less than the reporting unit's fair value no impairment is recognized and Step two of the goodwill impairment testing is not necessary.
Testing goodwill for impairment requires us to estimate fair values of reporting units using significant estimates and judgmental factors. The key estimates and factors used in our discounted cash flow valuation include revenue growth rates and profit margins based on internal forecasts, terminal value, and the weighted-average cost of capital used to discount future cash flows. The annual growth rate for revenue of this reporting unit during the first five years of our projections ranged from 6.5% to 8.0%, reaching historical levels by FY 2015. The terminal value was calculated assuming projected growth rates of 2.0% after five years which reflects our estimate of long-term gross domestic product growth. Operating profit margins were projected to return to historical levels by between fiscal 2013 and fiscal 2014, driven by volume increases. No significant changes were noted to the estimated weighted-average cost of capital rate used at year-end for the consolidated Company which was 13.5% calculated based upon an analysis of similar companies and their debt to equity mix, their related volatility and the size of their market capitalization. We also considered additional risks for the reporting unit achieving its forecasts, and adjusted the weighted-average cost of capital applied when determining its estimated fair value. The weighted-average cost of capital used for this particular reporting unit as of the September 30, 2009 was 15%. Based on our current assessment, fair value of the reporting unit exceeded book value by 6%. Future changes in these estimates and assumptions could materially affect the results of our goodwill impairment tests. For example, a decline in the terminal growth rate greater than 50 basis points or an increase in the weighted-average cost of capital greater than 50 basis points would indicate impairment for this reporting unit as of September 30, 2009.
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 . . .
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