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| CMCO > SEC Filings for CMCO > Form 10-Q on 25-Jul-2012 | All Recent SEC Filings |
25-Jul-2012
Quarterly Report
Executive Overview
We are a leading worldwide designer, manufacturer and marketer of material handling products, systems and services which efficiently and safely move, lift, position and secure material. Key products include hoists, actuators, cranes and rigging tools. The Company is focused on serving commercial and industrial applications that require the safety and quality provided by the Company's superior design and engineering know-how.
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 137-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 Asian, Latin American and European marketplaces. In accordance with our strategy, we have been investing in our directed sales and marketing activities, new product development and "Lean" efforts across the Company. Shareholder value will be enhanced through continued emphasis on improvement of the fundamentals including market expansion, a high degree of customer satisfaction, new product development, manufacturing efficiency, cost containment, and efficient capital investment.
Over the course of our history, we have managed through many business cycles and our solid cash flow profile has helped us grow and expand globally. We stand with a capital structure which includes sufficient cash reserves, significant revolver availability with an expiration of December 2013, fixed-rate long-term debt which expires in 2019 and a solid cash flow business profile.
Additionally our revenue base is now more geographically diverse than at any time in our Company's history, with approximately 42% derived from customers outside the U.S. for the quarter ended June 30, 2012. We believe this will help balance the impact of changes that will occur in local economies as well as benefit the Company from growth in emerging markets. As in the past, we monitor both U.S. and Eurozone Industrial Capacity Utilization statistics as indicators of anticipated demand for our product. Since their June 2009 trough, these statistics have improved through June 2012. In addition, we continue to monitor the potential impact of other global and U.S. trends including industrial production, energy costs, steel price fluctuations, interest rates, foreign currency exchange rates and activity of end-user markets around the globe.
From a strategic perspective, we are investing in global 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 focusing our sales and marketing activities toward select North American and global market sectors including energy, construction, entertainment, mining and food processing.
Regardless of the economic climate and point in the economic cycle, we constantly explore ways to increase our operating margins as well as further improve our productivity and competitiveness. 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 purchase approximately $30,000,000 to $40,000,000 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. Some of our steel costs have increased during this year as a result of higher scrap and alloy surcharges.
We are also looking for opportunities for growth via strategic acquisitions or joint ventures. The focus of our acquisition strategy centers on opportunities for non-U.S. market penetration and product line expansion in alignment with our existing core product offering.
We operate in a highly competitive and global business environment. 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 supported by our solid capital structure, including our cash position and flexible cost base. We are also aggressively addressing costs and restructuring opportunities to enhance future margin opportunities.
Results of Operations
Three Months Ended June 30, 2012 and June 30, 2011
Net sales in the fiscal 2013 quarter ended June 30, 2012 were $153,013,000, up $13,253,000 or 9.5% from the fiscal 2012 quarter ended June 30, 2011 net sales of $139,760,000. Net sales were positively impacted $15,644,000 by volume and mix of products sold and $4,716,000 by price increases. Foreign currency translation negatively impacted sales by $7,107,000 in the fiscal 2013 quarter ended June 30, 2012.
Gross profit in the fiscal 2013 quarter ended June 30, 2012 was $43,824,000, an increase of $8,182,000 or 23.0% from the fiscal 2012 quarter ended June 30, 2011 gross profit of $35,642,000. Gross profit margin increased to 28.6% in the fiscal 2013 quarter from 25.5% in the fiscal 2012 quarter. The increase in gross profit margin was due to $4,716,000 in price increases, $3,910,000 in increased volume and the impact of product sales mix, $3,181,000 in increased productivity, and $839,000 from the acquisition of a South African subsidiary in December 2011 offset by material inflation of 2,056,000. The translation of foreign currencies had a $2,408,000 negative impact on gross profit in the fiscal 2012 quarter.
Selling expenses were $16,366,000 and $16,026,000 in the fiscal 2013 and 2012 first quarters, respectively. The increase was consistent with the overall increase in sales volume offset by aggressive efforts to reduce or eliminate costs. Additionally, foreign currency translation had a $1,010,000 positive impact on selling expenses. As a percentage of consolidated net sales, selling expenses were 10.7% and 11.5% in the fiscal 2013 and 2012 quarters, respectively.
General and administrative expenses were $14,177,000 and $11,452,000 in the fiscal 2013 and 2012 first quarters, respectively. The increase in fiscal 2013 general and administrative expenses was primarily the result of investments in the Company's ERP system implementation, an acquisition in South Africa, severance costs and higher incentive compensation and group health costs. Foreign currency translation had a $519,000 positive impact on general and administrative expense. As a percentage of consolidated net sales, general and administrative expenses were 9.3% and 8.2% for the fiscal 2013 and 2012 first quarters respectively.
The Company did not incur any restructuring costs during the quarter ended June 30, 2012. The Company incurred $430,000 in restructuring costs for the quarter ended June 30, 2011 primarily related to workforce reductions at one of its European facilities.
There were no significant changes in amortization of intangibles of $499,000 and $521,000 in the fiscal 2013 and 2012 first quarters, respectively with the decrease in 2012 related primarily to the foreign currency impact.
Interest and debt expense was $3,499,000 in the quarter ended June 30, 2012 and was consistent with $3,504,000 in the quarter ended June 30, 2011.
Income tax expense as a percentage of income from continuing operations before income tax expense was 17% and 33% for the first quarters ended June 30, 2012 and 2011, respectively. These percentages vary from the U.S. statutory rate primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income for these subsidiaries. We estimate that the effective tax rate related to continuing operations will be approximately 17% to 22% for fiscal 2013 based on the forecasted jurisdictional mix of taxable income.
Liquidity and Capital Resources
Cash and cash equivalents totaled $82,166,000 at June 30, 2011, a decrease of $7,307,000 from the March 31, 2012 balance of $89,473,000.
Cash flow provided by operating activities
Net cash used by operating activities was $3,889,000 for the three months ended June 30, 2012 compared with net cash provided by operating activities of $907,000 for the three months ended June 30, 2011. The net cash provided by operating activities for the three months ended June 30, 2012 consisted of $8,436,000 in net income, which was largely due to higher gross profit offset by higher selling, general, and administrative expenses, reduced by an increase in trade accounts receivable, inventories and prepaid expenses of $2,090,000, $4,204,000 and $2,336,000 respectively and a decrease in trade accounts payable and accrued and non-current liabilities of $2,964,000 and $4,947,000, respectively. The increase in inventory levels and accounts receivable was due to continued growth in sales volume on a year over year basis. The reduction in accrued and non-current liabilities was due to payment of the annual incentive compensation as well as sales rebates earned in fiscal year 2012 and paid in fiscal 2013. The increase in prepaid expenses was due to the timing of insurance renewals.
Net cash provided by operating activities was $907,000 for the three months ended June 30, 2011. The net cash provided by operating activities for the three months ended June 30, 2011 was primarily the result of net income of $2,779,000 and an increase in accounts payable and accrued and non-current liabilities of $1,523,000 and $2,324,000 respectively, offset by an increase in accounts receivable and inventories of $2,976,000 and $6,124,000 respectively. The increase in inventory was primarily to meet increasing sales volume and expected future customer demand.
Cash flow provided by investing activities
Net cash used by investing activities was $1,482,000 for the three months ended June 30, 2012 compared with net cash used by investing activities of $3,623,000 for the three months ended June 30, 2011. The net cash used by investing activities for the three months ended June 30, 2012 primarily consisted of $1,716,000 in capital expenditures (of which $306,000 relates to implementation of our global ERP system).
Net cash used by investing activities was $3,623,000 for the three months ended June 30, 2011. The net cash used by investing activities for the three months ended June 30, 2011 was primarily the result of $3,161,000 for capital expenditures (of which $1,266,000 relates to implementation of our global ERP system).
Cash flow provided by financing activities
Net cash used by financing activities was $117,000 for the three months ended June 30, 2012 compared with net cash used by financing activities of $208,000 for the three months ended June 30, 2011.
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 and effective working capital utilization. No material restrictions exist in accessing cash held by our non-U.S. subsidiaries. Additionally we expect to meet our U.S. funding needs without repatriating non-U.S. cash and incurring the incremental U.S. taxes. As of March 31, 2012, $27,907,000 of cash and cash equivalents were held by foreign subsidiaries.
We have an amended, restated and expanded revolving credit facility dated December 31, 2009. The Revolving Credit Facility provides availability up to a maximum of $85,000,000 and expires December 31, 2013.
Provided there is no default, we may, on a one-time basis, request an increase in the availability of the Revolving Credit Facility by an amount not exceeding $65,000,000, subject to lender approval. The unused portion of the Revolving Credit Facility totalled $73,577,000, net of outstanding borrowings of $0 and outstanding letters of credit of $11,423,000, as of June 30, 2012. The outstanding letters of credit at June 30, 2012 consisted of $2,634,000 in commercial letters of credit and $8,789,000 of standby letters of credit.
Interest on the revolver is payable at varying Eurodollar rates based on LIBOR or prime plus a spread determined by our total leverage ratio amounting to 150 or 50 basis points, respectively, at June 30, 2012. The Revolving Credit Facility is secured by all domestic inventory, receivables, equipment, real property, subsidiary stock (limited to 65% of non-U.S. 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 restrictions on dividend payments, with which we are in compliance as of June 30, 2012. Key financial covenants include a minimum fixed charge coverage ratio of 1.25x, a maximum total leverage ratio, net of cash, of 3.50x, and maximum annual capital expenditures of $18,000,000 excluding capital expenditures for a global ERP system.
During the fourth quarter of fiscal year 2011, the Company refinanced its 8 7/8% Notes through the issuance of $150,000,000 principal amount of 7 7/8% Senior Subordinated Notes due 2019 in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended ("Unregistered 7 7/8% Notes"). The proceeds from the sale of the Unregistered 7 7/8% Notes were used to repurchase or redeem all of the outstanding 8 7/8% Notes amounting to $124,855,000 and to fund working capital and other corporate activities. The offering price of the Unregistered 7 7/8% Notes was 98.545% after adjustment for the original issue discount. Provisions of the Unregistered 7 7/8% Notes include, without limitation, restrictions on indebtedness, asset sales, and dividends and other restrictive payments. Until February 1, 2014, the Company may redeem up to 35% of the outstanding Unregistered 7 7/8% Notes at a redemption price of 107.875% with the proceeds of equity offerings, subject to certain restrictions. On or after February 1, 2015, the Unregistered 7 7/8% Notes are redeemable at the option of the Company, in whole or in part, at a redemption price of 103.938%, reducing to 100% on February 1, 2017. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the Unregistered 7 7/8% Notes may require us to repurchase all or a portion of such holder's Unregistered 7 7/8% Notes at a purchase price equal to 101% of the principal amount thereof. The Unregistered 7 7/8% Notes are guaranteed by certain existing and future U.S. subsidiaries and are not subject to any sinking fund requirements.
During the first quarter of fiscal year 2012, the Company exchanged its $150,000,000 outstanding Unregistered 7 7/8% Notes for a like principal amount of 7 7/8% Senior Subordinated Notes due 2019 registered under the Securities Act of 1933, as amended ("7 7/8% Notes"). All of the Unregistered 7 7/8% Notes were exchanged in the transaction. The 7 7/8% Notes contain identical terms and provisions as the Unregistered 7 7/8% Notes.
Our capital lease obligations related to property and equipment leases amounted to $4,432,000 at June 30, 2012. 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, 2012, significant unsecured credit lines totalled approximately $9,062,000, of which $41,000 was drawn. In addition to the above facilities, our foreign subsidiaries have certain secured credit lines as of June 30, 2012. Significant secured credit lines totaled $944,000, of which $0 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, improve productivity and customer responsiveness, 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, 2012 and June 30, 2011 were $1,716,000 and $3,161,000, respectively. We expect capital spending for fiscal 2013 to be approximately $14,000,000 to $17,000,000 compared with $13,765,000 in fiscal 2012.
Inflation and Other Market Conditions
Our costs are affected by inflation in the U.S. economy and, to a lesser extent, in non-U.S. economies including those of Europe, Canada, Mexico, South America, and Asia Pacific. 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 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.
Goodwill Impairment Testing
We test goodwill for impairment at least annually and more frequently whenever events occur or circumstances change that indicate there may be impairment. These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of operating performance, or a sale or disposition of a significant portion of a reporting unit.
We test goodwill at the reporting unit level, which is one level below our operating segment. We identify our reporting units by assessing whether the components of our operating segment constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. We also aggregate components that have similar economic characteristics into single reporting units (for example, similar products and / or services, similar long-term financial results, product processes, classes of customers, etc.). We have four reporting units, only two of which have goodwill. Our Duff Norton reporting unit and Rest of Products reporting unit had goodwill totalling $9,754,000 and $95,519,000 at June 30, 2012, respectively.
When we evaluate the potential for goodwill impairment, we assess a range of qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a two-step impairment test.
In order to perform the two-step impairment test, we use the discounted cash flow method to estimate the fair value of each of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating profit margins and cash flows, the terminal growth rate and the discount rate. Management projects revenue growth rates, operating margins and cash flows based on each reporting unit's current business, expected developments and operational strategies over a five-year period. In estimating the terminal growth rate, we consider our historical and projected results, as well as the economic environment in which our reporting units operate. The discount rates utilized for each reporting unit reflect management's assumptions of marketplace participants' cost of capital and risk assumptions, both specific to the reporting unit and overall in the economy.
We currently do not believe that it is more likely than not that the fair value of each of our reporting units is less than that its applicable carrying value. Additionally, we currently do not believe that we have any significant impairment indicators or that any of our reporting units with goodwill are at risk of failing Step One of the goodwill impairment test. However if the projected long-term revenue growth rates, profit margins, or terminal rates are significantly lower, and/or the estimated weighted-average cost of capital is considerably higher, future testing may indicate impairment of one or more of the Company's reporting units and, as a result, the related goodwill may be impaired.
Deferred Tax Asset Valuation Allowance
During the fiscal year ended March 31, 2011, the Company recorded a non-cash charge of $42,983,000 included within its provision for income taxes. The balance of the valuation allowance at March 31, 2012 was $53,325,000. This charge relates to the Company's determination that a full valuation allowance against its deferred tax assets generated in the U.S. was necessary. The deferred tax assets relate principally to liabilities related to employee benefit plans, insurance reserves, U.S. tax credits, and U.S. net operating loss carryforwards. The U.S. net operating loss carryforwards have been generated primarily as a result of restructuring costs in fiscal years 2010 and 2011. Accounting rules require a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available and objectively verifiable evidence, it is more likely than not that such assets will not be realized. The existence of cumulative losses for a certain threshold period is a significant form of negative evidence used in the assessment. During the third quarter ended December 31, 2010, the Company determined that it would be in a three-year cumulative pretax loss position in the U.S. at March 31, 2011 primarily due to restructuring-related charges incurred in the U.S. to-date in fiscal 2011, despite our expectations of future profitability. If a cumulative loss threshold is met, the accounting rules indicate that forecasts of future profitability are generally not sufficient positive evidence to overcome the presumption that a valuation allowance is necessary.
The recording of this non-cash charge does not impact the Company's ability to realize the economic benefit of its deferred tax assets (including those related to net operating loss carryforwards) amounting to $58,226,000 on a gross basis at March 31, 2012 on future tax returns. In future periods, the allowance could be reduced or reversed based on sufficient objectively verifiable evidence indicating that it is more likely than not that a portion or all of the Company's deferred tax assets will be realized.
The Internal Revenue Code imposes limitations on a corporation's ability to utilize NOLs if it experiences an "ownership change." In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three year period. If we were to experience an ownership change, utilization of our NOLs would be subject to an annual limitation determined by multiplying the market value of our outstanding shares of stock at the time of the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years within the allowed NOL carryforward period. The amount of the limitation may, under certain circumstances, be increased or decreased by built-in gains or losses held by us at the time of the change that are recognized in the five-year period after the change.
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
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income ("ASU 2011-05"), effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The issuance of ASU 2011-5 is intended to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance in ASU 2011-5 supersedes the presentation options in ASC Topic 220 and facilitates convergence of U.S. generally accepted accounting principles and International Financial Reporting Standards by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity and requiring that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The adoption of ASU 2011-05 in fiscal 2013 did not have a significant impact on the Company's condensed consolidated financial statements.
In May 2011 the FASB issued ASU No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards ("IFRS") ("ASU 2011-04"). ASU 2011-04 represents the converged guidance of the FASB and the International Accounting Standards Board (the "Boards") on fair value measurements. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a . . .
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