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CMCO > SEC Filings for CMCO > Form 10-K on 29-May-2014All Recent SEC Filings

Show all filings for COLUMBUS MCKINNON CORP

Form 10-K for COLUMBUS MCKINNON CORP


29-May-2014

Annual Report


Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition

This section should be read in conjunction with our consolidated financial statements included elsewhere in this annual report. Comments on the results of operations and financial condition below refer to our continuing operations, except in the section entitled "Discontinued Operations."

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 139-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 sales and marketing activities, new product development and "Lean" efforts across the Company. Shareholder value will be enhanced through continued emphasis on market expansion, 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 October 31, 2017, fixed-rate long-term debt which expires in 2019 and a solid cash flow business profile. Additionally, our revenue base is geographically diverse with approximately 43% derived from customers outside the U.S. for the year ended March 31, 2014. 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 products. Since their June 2009 trough, these statistics have generally improved over the last several years. 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, load chain, forged fittings 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, general industrial, entertainment, and mining.
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 workplace safety, customer satisfaction, reduced defects, shortened lead times, improved inventory turns and on-time deliveries, reduced 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 to our customers with the goal of being margin neutral.
We are also looking for opportunities for growth via strategic acquisitions or joint ventures. The focus of our acquisition strategy centers on product line expansion in alignment with our existing core product offering and opportunities for non-U.S. market penetration.
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 pursuing cost reduction opportunities to enhance future margins.


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RESULTS OF OPERATIONS

Fiscal 2014 Compared to 2013

Fiscal 2014 sales were $583,290,000, down 2.3%, or $13,973,000 compared with fiscal 2013 sales of $597,263,000. Sales for the year were positively impacted by $10,218,000 by price increases, $4,983,000 by additional shipping days, and $470,000 due to net acquisition activity. Sales for the year were negatively impacted $30,203,000 due to a decrease in sales volume. The decline in sales volume was due to weakness in our European business resulting from the impact of the recession and declines in our crane business servicing the heavy OEM vertical market. Favorable foreign currency translation impacted sales by $558,000.

Our gross profit was $181,048,000 and $174,231,000 or 31.0% and 29.2% of net sales in fiscal 2014 and 2013, respectively. The fiscal 2014 increase in gross profit of $6,817,000 or 3.9% is the result of $10,218,000 in price increases, $3,198,000 in increased productivity, and $2,554,000 due to net acquisition and divestiture activity, partially offset by $6,561,000 in decreased volume, $1,536,000 in material inflation, and $1,067,000 in increased product liability costs. Foreign currency translation had an favorable impact on gross profit of $11,000.

Selling expenses were $68,963,000 and $65,608,000 or 11.8% and 11.0% of net sales in fiscal years 2014 and 2013, respectively. The incremental increase in selling expenses relates to our recent acquisitions of Hebetechnik and Unified resulting in $1,464,000 of additional selling expenses as well as additional investments to grow our business in Europe and Latin America. Additionally, foreign currency translation had a $378,000 favorable impact on selling expenses.

General and administrative expenses were $55,754,000 and $52,271,000 or 9.6% and 8.8% of net sales in fiscal 2014 and 2013, respectively. The increase in fiscal 2014 general and administrative expenses was primarily the result of $1,657,000 of atypical professional services associated with a large acquisition that was not consummated. Additional increases were primarily the result of investments in emerging markets, the implementation of the Company's new enterprise management system, as well as general inflationary increases. Foreign currency translation had a $439,000 unfavorable impact on general and administrative expenses.

Amortization of intangibles was $1,981,000 and $1,981,000 fiscal 2014 and 2013, respectively and primarily relate to amortization of intangible assets acquired in connection with our fiscal 2009 acquisition of Pfaff.

Interest and debt expense was $13,492,000 and $13,757,000 or 2.3% of net sales in both the 2014 and 2013 fiscal years.

Investment income of $1,595,000 and $1,546,000, in fiscal 2014 and 2013, respectively, related to earnings on marketable securities held in the Company's wholly owned captive insurance subsidiary.

Foreign currency exchange loss (gain) was $1,124,000 and $(45,000) in fiscal 2014 and 2013, respectively, as a result of foreign currency volatility related to foreign currency denominated purchases and intercompany debt.

Other income, net was $1,393,000 and $417,000 in fiscal 2014 and 2013, respectively. The increase in fiscal 2014 primarily relates to the sale of equity securities received in an insurance company demutualization.

Income tax expense (benefit) as a percentage of income from continuing operations before income tax expense was 28.8% and (83.7%) in fiscal 2014 and 2013, respectively. The unusual percentage experienced during the year ended March 31, 2013 is related to the reversal of a U.S. deferred tax asset valuation allowance of $49,161,000.

Fiscal 2013 Compared to 2012
Fiscal 2013 sales were $597,263,000, up 0.9%, or $5,318,000 compared with fiscal 2012 sales of $591,945,000. Sales for the year were positively impacted by $20,755,000 in volume and mix of products sold and $16,057,000 in price increases. Sales for the year were negatively impacted $9,644,000 due to net acquisition and divestiture activity and $4,784,000 by two fewer shipping days. Unfavorable foreign currency translation impacted sales by $17,066,000.

Our gross profit was $174,231,000 and $157,718,000 in fiscal 2013 and 2012 respectively. The fiscal 2013 increase in gross profit of $16,513,000 or 10.5% is the result of $16,057,000 in price increases, $5,355,000 in increased productivity, $3,812,000 in increased volume, $1,666,000 from lower product liability expenses, and $1,971,000 from net acquisition and divestiture activity partially offset by $6,821,000 in material inflation. Foreign currency translation had an unfavorable impact on gross profit of $5,527,000.


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Selling expenses were $65,608,000 and $64,860,000 or 11.0% of net sales in in both fiscal years 2013 and 2012. The increase in fiscal 2013 selling expense was consistent with the overall increase in sales volume. Additionally, foreign currency translation had a $2,760,000 favorable impact on selling expenses.

General and administrative expenses were $52,271,000 and $46,677,000 or 8.8% and 7.9% of net sales in fiscal 2013 and 2012, respectively. The increase in fiscal 2013 general and administrative expenses was primarily the result of investments in emerging markets and new product development costs, higher variable compensation costs, higher employee benefit costs, including pension and group medical costs, the implementation of the Company's new enterprise management system, as well as general inflationary increases.

Restructuring charges of $0 and ($1,037,000), or 0% and (0.2%) of net sales were recorded in fiscal 2013 and 2012, respectively. Fiscal 2012 restructuring gains were the result of a gain recognized on the sale of a previously closed manufacturing facility of ($1,462,000) offset by an employee workforce reduction effort initiated and completed at one of our European facilities.

Amortization of intangibles was $1,981,000 and $2,074,000 fiscal 2013 and 2012, respectively and primarily relate to amortization of intangible assets acquired in connection with our fiscal 2009 acquisition of Pfaff.

Interest and debt expense was $13,757,000 and $14,214,000 or 2.3% and 2.4% of net sales in fiscal 2013 and 2012, respectively.

Investment income of $1,546,000 and $1,018,000, in fiscal 2013 and 2012, respectively, related to marketable securities held in the Company's wholly owned captive insurance subsidiary.

Foreign currency exchange (gain) loss was ($45,000) and $316,000 in fiscal 2013 and 2012, respectively, as a result of foreign currency volatility related to foreign currency denominated purchases and intercompany debt.

Other income, net was $417,000 and $1,179,000 in fiscal 2013 and 2012, respectively. Other income in fiscal 2012 includes a gain of $850,000 calculated on the acquisition of the remaining ownership interest of an investment which the Company previously had a 20% ownership interest.

Income tax expense (benefit) as a percentage of income from continuing operations before income tax expense was (83.7%) and 21.0% in fiscal 2013 and 2012, respectively. The unusual percentage experienced during the year ended March 31, 2013 is related to the reversal of a U.S. deferred tax asset valuation allowance of $49,161,000.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $112,309,000, $121,660,000, and $89,473,000 at March 31, 2014, 2013 and 2012, respectively.

Cash flow provided by operating activities

Net cash provided by operating activities was $29,507,000, $42,378,000 and $23,587,000 in fiscal 2014, 2013 and 2012, respectively. The net cash provided by operating activities in fiscal 2014 consisted of $30,421,000 in net income. The slight improvement in net income over the prior year (before a $49,161,000 reversal of a U.S. non-cash charge originally booked in fiscal 2011) despite decreased sales is primarily due to higher gross profit. Net cash provided by operating activities in fiscal 2014 decreased as a result of a decrease in non-current liabilities of $7,727,000 and an increase in trade accounts receivable of $9,318,000 offset by a decrease in inventories of $1,312,000. The reduction in non-current liabilities was primarily due to a net decrease in accrued pension costs as a result of an $11,041,000 pension contribution and a decrease in accrued product liability costs. The increase in trade accounts receivable is primarily due to a significant increase in sales volume during the last month of our 2014 fiscal year.


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Net cash provided by operating activities was $42,378,000 and $23,587,000 in fiscal 2013 and 2012 respectively. The net cash provided by operating activities in fiscal 2013 consisted of $29,135,000 in net income, before a $49,161,000 reversal of a U.S. non-cash charge (originally booked in fiscal 2011) related to the recording of valuation allowances against deferred tax assets. The improvement in net income was largely due to higher gross profit. In addition, net cash provided by operating activities in fiscal 2013 increased as a result of a decrease in inventories and trade accounts receivable of $10,106,000 and $6,712,000 respectively, offset by an increase in prepaid expenses of $1,283,000 and a decrease in trade accounts payable and accrued and non-current liabilities of $5,465,000 and $18,801,000 respectively. The reduction in accrued and non-current liabilities was due to a net decrease in customer deposits due to large projects in process at the end of the prior fiscal year and sales rebates earned in fiscal year 2012 and paid in fiscal 2013, a decrease in accrued product liability costs and a decrease in accrued pension costs.

Cash flow used by investing activities

Net cash used by investing activities was $40,425,000, $10,087,000 and $13,541,000 in fiscal 2014, 2013 and 2012, respectively. The net cash used by investing activities in fiscal 2014 consisted primarily of business acquisitions, net of cash acquired, of $22,169,000 and capital expenditures of $20,846,000 (of which $4,365,000 relates to the expansion of our China operations and $2,749,000 relates to implementation of our global ERP system) partially offset by $2,590,000 in net proceeds from the sale of marketable securities.

Net cash used by investing activities was $10,087,000 and $13,541,000 in fiscal 2013 and 2012, respectively. The net cash used by investing activities in fiscal 2013 consisted of $14,879,000 in capital expenditures (of which $3,953,000 relates to implementation of our global ERP system) partially offset by $2,357,000 in proceeds from the sale of assets and $2,435,000 in net proceeds from the sale of marketable securities.

Cash flow provided (used) by financing activities

Net cash provided (used) by financing activities was $1,739,000, $(1,086,000) and $474,000 in fiscal 2014, 2013 and 2012, respectively. The net cash provided by financing activities in fiscal 2014 primarily consisted of $2,194,000 from the issuance of stock options and offset by $858,000 in the repayment of debt.

Net cash (used) provided by financing activities was ($1,086,000) and $474,000 in fiscal 2013 and 2012, respectively. The net cash used by financing activities in fiscal 2013 primarily consisted of $1,066,000 repayment of debt and $684,000 payment in deferred financing costs related to the renewal of the Revolving Credit Facility.

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, 2014, $39,960,000 of cash and cash equivalents were held by foreign subsidiaries.

We entered into a fifth amended, restated and expanded revolving credit facility dated October 19, 2012 (New Revolving Credit Facility). The New Revolving Credit Facility provides availability up to a maximum of $100,000,000 and has an initial term ending October 31, 2017.

Provided there is no default, we may request an increase in the availability of the New Revolving Credit Facility by an amount not exceeding $75,000,000, subject to lender approval. The unused portion of the New Revolving Credit Facility totaled $94,197,000 net of outstanding borrowings of $0 and outstanding letters of credit of $5,803,000 as of March 31, 2014. The outstanding letters of credit at March 31, 2014 consisted of $1,174,000 in commercial letters of credit and $4,629,000 of standby letters of credit. The unused portion of the New Revolving Credit Facility combined with our cash balance yields total liquidity of $206,506,000 at March 31, 2014.

Commitment fees are payable against the unused portion of the revolver based on the applicable rate. Interest on an outstanding borrowing used against the revolver is payable at varying rates depending on the type of outstanding borrowing and its associated interest rate plus its associated applicable rate. The two potential interest rates used are either a Base Rate (equivalent to a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its "prime rate.", or (c) LIBOR plus 100 basis points) or a Eurocurrency Rate (equivalent to LIBOR plus a Mandatory Cost).


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The applicable rate is determined based on the pricing grid in the New Revolving Credit Facility which varies based on the Company's total leverage ratio and borrowing type at March 31, 2014. The mandatory cost is intended to compensate the lenders for the cost of European banking requirements.

The corresponding credit agreement associated with the New Revolving Credit Facility places certain debt covenant restrictions on the Company, including certain financial requirements and restrictions on dividend payments, with which the Company was in compliance as of March 31, 2014. Key financial covenants include a minimum fixed charge coverage ratio of 1.25x, a maximum total leverage ratio of 3.50x and maximum annual capital expenditures of $30,000,000. Our actual fixed charges coverage ratio and total leverage ratio, as calculated per the terms of our New Revolving Credit Facility, were 3.99x and 0.64x, respectively, at March 31, 2014.

In connection with the execution of the New Revolving Credit Facility, it was determined that the borrowing capacity of each lender participating in this new agreement exceeded their borrowing capacities prior to the amendment. As a result, unamortized deferred financing costs associated with the agreement prior to its amendment remain deferred and are being amortized over the term of the New Revolving Credit Facility. Fees and other costs paid to execute the New Revolving Credit Facility totaling $684,000 were recorded as additional deferred financing costs and are being amortized over the term of the New Revolving Credit Facility.

At March 31, 2012, the Company had entered into an amended, restated and expanded revolving credit facility dated December 31, 2009. The Revolving Credit Facility provided availability up to a maximum of $85,000,000 and had an initial term ending December 31, 2013. The Revolving Credit Facility was replaced by the New Revolving Credit Facility on October 19, 2012.

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. 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.

The gross balances of deferred financing costs were $4,133,000 and $4,133,000 as of March 31, 2014 and 2013, respectively. The accumulated amortization balances were $1,531,000 and $934,000 as of March 31, 2014 and 2013, respectively.

Our capital lease obligations related to property and equipment leases amounted to $3,608,000 at March 31, 2014. 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 March 31, 2014, significant unsecured credit lines totaled approximately $7,160,000, of which $0 was drawn. In addition, unsecured lines of $13,150,000 were available for bank guarantees issued in the normal course of business of which $5,007,000 was utilized.


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CONTRACTUAL OBLIGATIONS

The following table reflects a summary of our contractual obligations in
millions of dollars as of March 31, 2014, by period of estimated payments due:

                                                                   Fiscal            Fiscal            More
                                                   Fiscal           2016-             2018-             Than
                                     Total          2015         Fiscal 2017       Fiscal 2019      Five Years
Long-term debt obligations (a)    $   153.6     $      1.6     $         1.4     $       150.6     $         -
Operating lease obligations (b)        32.7            6.3               8.6               5.8            12.0
Purchase obligations (c)                  -              -                 -                 -               -
Interest obligations (d)               57.5           12.0              23.8              21.7               -
Letter of credit obligations            5.8            5.8                 -                 -               -
Bank guarantees                         5.0            5.0
Uncertain tax positions                 2.4              -               2.4                 -               -
Other long-term liabilities
reflected on the Company's
balance sheet under GAAP (e)           65.0              -              15.3               8.2            41.5
Total                             $   322.0     $     30.7     $        51.5     $       186.3     $      53.5

(a) As described in Note 12 to consolidated financial statements.

(b) As described in Note 19 to consolidated financial statements.

(c) We have no purchase obligations specifying fixed or minimum quantities to be purchased. We estimate that, at any given point in time, our open purchase orders to be executed in the normal course of business approximate $40 million.

(d) Estimated for our Senior Subordinated Notes due 2/1/19 and other senior debt.

(e) As described in Note 11 to our consolidated financial statements. Excludes uncertain tax positions of $2.4 million shown separately above.

We have no additional off-balance sheet obligations that are not reflected above.

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 and enhance safety. Our capital expenditures for fiscal 2014, 2013 and 2012 were $20,846,000, $14,879,000 and $13,765,000, respectively. Excluded from fiscal 2014 capital expenditures is $2,624,000 in property, plant and equipment purchases included in accounts payable at March 31, 2014. We expect capital expenditure spending in fiscal 2015 to be in the range of $20,000,000 to $25,000,000, excluding acquisitions and strategic alliances.

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 do not believe that general inflation has had a material effect on our 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 annual price increases and surcharges. However, increases in U.S. employee benefits costs such as health insurance, workers compensation insurance, pensions as well as energy and business insurance have . . .

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