UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT 1934
For the quarterly period ended December 28, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
------------------- --------------------
Commission File Number: 0-27618
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COLUMBUS MCKINNON CORPORATION
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(Exact name of registrant as specified in its charter)
NEW YORK 16-0547600
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
140 JOHN JAMES AUDUBON PARKWAY, AMHERST, NY 14228-1197
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(Address of principal executive offices) (Zip code)
(716) 689-5400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. : [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934): [ ] Yes [ X ] No
The number of shares of common stock outstanding as of January 31, 2004 was:
14,896,172 shares.
FORM 10-Q INDEX
COLUMBUS MCKINNON CORPORATION
DECEMBER 28, 2003
PAGE #
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets -
December 28, 2003 and March 31, 2003 2
Condensed consolidated statements of operations and
accumulated deficit - Three months and nine months
ended December 28, 2003 and December 29, 2002 3
Condensed consolidated statements of cash flows -
Nine months ended December 28, 2003 and December 29, 2002 4
Condensed consolidated statements of comprehensive
income - Three months and nine months ended
December 28, 2003 and December 29, 2002 5
Notes to condensed consolidated financial statements -
December 28, 2003 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Disclosure Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - none. 21
Item 2. Changes in Securities - none. 21
Item 3. Defaults upon Senior Securities - none. 21
Item 4. Submission of Matters to a Vote of Security Holders - none. 21
Item 5. Other Information - none. 21
Item 6. Exhibits and Reports on Form 8-K 21
- 1 -
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 28, MARCH 31,
2003 2003
----------- -----------
ASSETS: (IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 3,062 $ 1,943
Trade accounts receivable 80,428 79,335
Unbilled revenues 7,453 8,861
Inventories 76,130 78,613
Net assets held for sale 2,786 1,800
Prepaid expenses 13,616 10,819
----------- -----------
Total current assets 183,475 181,371
Property, plant, and equipment, net 62,364 67,295
Goodwill and other intangibles, net 194,206 195,129
Marketable securities 25,484 21,898
Deferred taxes on income 13,994 15,245
Other assets 3,116 1,668
----------- -----------
Total assets $ 482,639 $ 482,606
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable to banks $ 3,841 $ 2,245
Trade accounts payable 26,646 28,654
Accrued liabilities 48,351 36,540
Restructuring reserve 1,224 2,331
Current portion of long-term debt 7,614 15,209
----------- -----------
Total current liabilities 87,676 84,979
Senior bank debt, less current portion 7,227 99,127
Senior secured debt 115,000 -
Subordinated debt 164,120 199,734
Other non-current liabilities 43,996 46,059
----------- -----------
Total liabilities 418,019 429,899
----------- -----------
Shareholders' equity
Common stock 149 149
Additional paid-in capital 104,080 104,412
Accumulated deficit (23,843) (26,547)
ESOP debt guarantee (5,268) (5,709)
Unearned restricted stock (190) (208)
Accumulated other comprehensive loss (10,308) (19,390)
----------- -----------
Total shareholders' equity 64,620 52,707
----------- -----------
Total liabilities and shareholders' equity $ 482,639 $ 482,606
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29,
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 110,253 $ 107,384 $ 323,412 $ 334,513
Cost of products sold 85,695 81,085 247,889 254,011
----------- ----------- ----------- -----------
Gross profit 24,558 26,299 75,523 80,502
----------- ----------- ----------- -----------
Selling expenses 11,942 12,033 35,400 35,018
General and administrative expenses 6,610 5,281 18,089 18,223
Restructuring charges 275 840 1,650 840
Amortization of intangibles 80 137 300 400
----------- ----------- ----------- -----------
18,907 18,291 55,439 54,481
----------- ----------- ----------- -----------
Income from operations 5,651 8,008 20,084 26,021
Interest and debt expense 6,538 8,887 21,940 23,371
Other (income) and expense, net (2,212) 2,399 (6,659) (1,319)
------------ ----------- ----------- -----------
Income (loss) from operations before income
tax expense (benefit) and cumulative
effect of accounting change 1,325 (3,278) 4,803 3,969
Income tax expense (benefit) 620 (805) 2,099 1,928
----------- ----------- ----------- -----------
Income (loss) from operations before
cumulative effect of accounting change 705 (2,473) 2,704 2,041
Cumulative effect of accounting change - - - (8,000)
----------- ----------- ----------- -----------
Net income (loss) 705 (2,473) 2,704 (5,959)
Accumulated deficit - beginning of period (24,548) (16,022) (26,547) (12,536)
----------- ----------- ----------- -----------
Accumulated deficit - end of period $ (23,843) $ (18,495) $ (23,843) $ (18,495)
=========== =========== =========== ===========
Earnings per share data, basic and diluted:
Income (loss) from operations before
cumulative effect of accounting change $ 0.05 $ (0.17) $ 0.19 $ 0.14
Cumulative effect of accounting change - - - (0.55)
----------- ---------- ---------- ----------
Net income (loss) $ 0.05 $ (0.17) $ 0.19 $ (0.41)
============ =========== =========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
-----------------
DECEMBER 28, DECEMBER 29,
2003 2002
----------- -----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Income from operations before cumulative effect
of accounting change $ 2,704 $ 2,041
Adjustments to reconcile income from operations to net
cash provided by (used in) operating activities:
Depreciation and amortization 7,979 8,470
Deferred income taxes 1,251 (499)
Gain on sale of real estate/investments (4,505) (1,025)
Deferred financing costs 1,359 3,008
Other (598) -
Changes in operating assets and liabilities:
Trade accounts receivable and unbilled revenues 4,060 3,966
Inventories 5,184 1,727
Prepaid expenses (1,340) 34
Other assets (1,354) 3,912
Trade accounts payable (4,012) (11,433)
Accrued and non-current liabilities 6,921 (12,683)
----------- -----------
Net cash provided by (used in) operating activities 17,649 (2,482)
----------- -----------
INVESTING ACTIVITIES:
Purchase of marketable securities, net (530) 1,221
Capital expenditures (3,096) (3,623)
Proceeds from sale of businesses - 15,950
Other 3,767 1,990
----------- -----------
Net cash provided by investing activities 141 15,538
----------- -----------
FINANCING ACTIVITIES:
Net payments under revolving line-of-credit agreements (252,048) (188,150)
Net borrowings under revolving line-of-credit agreements 248,945 176,196
Repayment of debt (125,264) (1,675)
Proceeds from issuance of long-term debt 115,000 -
Deferred financing costs incurred (4,361) (7,565)
Other 441 444
----------- -----------
Net cash used in financing activities (17,287) (20,750)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 616 (9)
----------- -----------
Net cash provided by (used in) continuing operations 1,119 (7,703)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 504
----------- -----------
Net change in cash and cash equivalents 1,119 (7,199)
Cash and cash equivalents at beginning of period 1,943 13,068
----------- -----------
Cash and cash equivalents at end of period $ 3,062 $ 5,869
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29,
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS)
Net income $ 705 $ (2,473) $ 2,704 $ (5,959)
---------- ---------- ---------- ----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 3,342 2,452 7,058 6,559
Unrealized gain on derivatives
qualifying as hedges - 145 191 48
Unrealized gain (loss) on investments:
Unrealized holding gains (losses) arising
during the period 1,192 191 2,628 (2,244)
Reclassification adjustment for
(gains) losses included in net income (685) 1,888 (795) (67)
---------- ---------- ---------- ----------
507 2,079 1,833 (2,311)
---------- ---------- ---------- ----------
Total other comprehensive income 3,849 4,676 9,082 4,296
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 4,554 $ 2,203 $ 11,786 $ (1,663)
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
COLUMBUS MCKINNON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(TABULAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 28, 2003
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation of the financial position of Columbus McKinnon
Corporation (the Company) at December 28, 2003, and the results of its
operations and its cash flows for the three and nine-month periods ended
December 28, 2003 and December 29, 2002, have been included. Results for
the period ended December 28, 2003 are not necessarily indicative of the
results that may be expected for the year ended March 31, 2004. The balance
sheet at March 31, 2003 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Columbus
McKinnon Corporation annual report on Form 10-K for the year ended March
31, 2003.
The Company is a leading U.S. designer and manufacturer of material
handling products, systems and services which efficiently and ergonomically
move, lift, position and secure material. Key products include hoists,
cranes, chain and forged attachments. The Company's material handling
products are sold, domestically and internationally, principally to third
party distributors through diverse distribution channels, and to a lesser
extent directly to manufacturers and other end-users. The Company's
integrated material handling solutions businesses deal primarily with end
users and sales are concentrated, domestically and internationally
(primarily Europe), in the consumer products, manufacturing, warehousing
and, to a lesser extent, the steel, construction, automotive and other
industrial markets.
2. The Company has two stock option-based employee compensation plans in
effect. The Company accounts for these plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations. No stock option-based employee compensation cost is
reflected in net income, as all options granted under these plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant and the number of options granted was fixed. The
following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition of SFAS No. 123
"Accounting for Stock-Based Compensation", to stock-based employee
compensation:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29,
2003 2002 2003 2002
---------------------------------------------------------------
Net income (loss), as reported...............$ 705 $ (2,473) $ 2,704 $ (5,959)
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects................ (104) (254) (386) (764)
---------------------------------------------------------------
Net income (loss), pro forma...............$ 601 $ (2,727) $ 2,318 $ (6,723)
===============================================================
Basic and diluted income (loss) per share:
As reported................................$ 0.05 $ (0.17) $ 0.19 $ (0.41)
===============================================================
Pro forma..................................$ 0.04 $ (0.19) $ 0.16 $ (0.46)
===============================================================
- 6 -
3. Inventories consisted of the following:
DECEMBER 28, MARCH 31,
2003 2003
---------- ----------
At cost - FIFO basis:
Raw materials......................... $ 38,237 $ 42,707
Work-in-process....................... 12,254 10,361
Finished goods........................ 33,391 33,072
---------- ----------
83,882 86,140
LIFO cost less than FIFO cost............ (7,752) (7,527)
---------- ----------
Net inventories ....................... $ 76,130 $ 78,613
========== ==========
An actual valuation of inventory under the LIFO method can be made only at
the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on
management's estimates of expected year-end inventory levels and costs.
Because these are subject to many forces beyond management's control,
interim results are subject to the final year-end LIFO inventory valuation.
4. On November 21, 2002, the Company refinanced its credit facilities. The new
arrangement consisted of a Revolving Credit Facility, a Term Loan, and a
Senior Second Secured Term Loan. The Revolving Credit Facility currently
provides availability up to a maximum of $50 million. At December 28, 2003,
$5.5 million was outstanding for borrowings and the unused portion totaled
$23.2 million. Interest is payable at varying Eurodollar rates based on
LIBOR or prime plus a spread determined by the Company's leverage ratio
amounting to 275 (LIBOR) or 150 (prime) basis points, respectively, at
December 28, 2003. 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.
At December 28, 2003, the Term Loan has a balance of $8,321,000 and
requires quarterly payments of $500,000. Interest is payable at varying
Eurodollar rates based on LIBOR or prime plus a spread determined by the
Company's leverage ratio amounting to 325 (LIBOR) or 200 (prime) basis
points at December 28, 2003. The Term Loan is secured by all domestic
inventory, receivables, equipment, real property, subsidiary stock (limited
to 65% for foreign subsidiaries) and intellectual property.
On July 22, 2003, the Company issued $115 million of 10% Senior Secured
Notes due August 1, 2010. Proceeds from this offering were used for the
repayment in full of the Senior Second Secured Term Loan ($66.8 million),
the repurchase of $35.7 million of Senior Subordinated Notes at a discount
($30.1 million), the repayment of a portion of the outstanding Revolving
Credit Facility ($10.0 million), the repayment of a portion of the Term
Loan ($3.9 million), the payment of financing costs ($2.8 million), and the
payment of accrued interest ($1.4 million).
As noted above, the Senior Second Secured Term loan was repaid in its
entirety on July 22, 2003. As a result of the repayment occurring prior to
the first anniversary of the loan, $1.1 million of accrued interest expense
was reversed in the second quarter of fiscal 2004 and is reflected as a
reduction of interest expense.
The redemption of the 8 1/2% Senior Subordinated Notes occurred at a
discount resulting in a $5.6 million pre-tax gain on early extinguishment
of debt. As a result of the repayment of the Senior Second Secured Term
Loan and a portion of the Term Loan and 8 1/2% Senior Subordinated Notes,
$4.9 million of pre-tax deferred financing costs were written-off in the
second quarter of fiscal 2004. The net effect of these two items, a $0.7
million pre-tax gain, is shown as part of other (income) and expense, net.
The corresponding credit agreements associated with the Revolving Credit
Facility and the Term Loan place certain debt covenant restrictions on the
Company including certain financial requirements and a restriction on
dividend payments.
- 7 -
From time to time, the Company manages its debt portfolio by using interest
rate swaps to achieve an overall desired position of fixed and floating
rates. In June 2001, the Company entered into an interest rate swap
agreement to effectively convert $40 million of variable-rate debt to
fixed-rate debt, which matured in June 2003. This cash flow hedge was
considered effective and the gain or loss on the change in fair value was
reported in other comprehensive income, net of tax.
Effective August 4, 2003, the Company entered into an interest rate swap
agreement to convert $93.5 million of fixed-rate debt (10%) to
variable-rate debt (LIBOR plus 578.2 basis points) through August 2008 and
$57.5 million from August 2008 through August 2010. This interest rate swap
was considered an ineffective hedge and therefore the change in fair value
was recognized in income as a gain or loss. For the quarter ended December
28, 2003, approximately $1.0 million was recognized as other income as a
result of changes in the fair value of the swap. The swap was terminated on
January 22, 2004 at an additional pre-tax gain of $0.7 million.
5. Upon the adoption of SFAS No. 142, the Company recorded a one-time,
non-cash charge of $8,000,000 to reduce the carrying value of its goodwill
as of April 1, 2002. Such charge is reflected as a cumulative effect of a
change in accounting principle in the accompanying consolidated statement
of operations. The impairment charge was related to the Cranebuilder
reporting unit in the Products segment and the Univeyor reporting unit in
the Solutions segment. In relation to the initial adoption of SFAS No. 142,
goodwill was allocated among the reporting units so that goodwill was
allocated to the units that benefited from the acquisitions. The Company
will record any future impairment charges as a component of operating
income.
6. During the third quarter of fiscal 2004, the Company continued the
implementation of its Corporate-wide reorganization plan. During the
quarter ended December 28, 2003, the Company recorded restructuring costs
of $0.3 million related to these initiatives that included $0.2 million and
$0.1 million related to the Products and Solutions segments, respectively,
and stemmed from facility costs and a minor amount from employee
terminations. As of December 28, 2003, all of the terminations had occurred
and the liability consists of severance payments and costs associated with
the preparation and maintenance of non-operating facilities prior to
disposal which were accrued prior to the adoption of SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities."
Currently, we anticipate that our restructuring charges for the remainder
of fiscal 2004 related to these plans to be between $0.2 and $0.5 million.
The Company has several facilities being completely closed and prepared for
disposal; one of which is expected to be completed in the fourth quarter of
fiscal 2004; one, which is currently being used, in the first quarter of
fiscal 2005; and another in the second half of Fiscal 2005.
The following table provides a reconciliation of the activity related to
restructuring reserves, segregated by year and between employee costs
("employee") and facility closure related costs ("facility"):
FISCAL 2002 FISCAL 2003 FISCAL 2004
----------- ----------- -----------
FACILITY EMPLOYEE FACILITY EMPLOYEE TOTAL
------------------------------------------------------------------------
Reserve at March 31, 2003 $ 360 $ 922 $ 1,049 $ - $ 2,331
Fiscal 2004 first quarter
restructuring charges........ - 41 97 663 801
Cash payments................... (33) (416) (345) (277) (1,071)
------------------------------------------------------------------------
Reserve at June 29, 2003........ 327 547 801 386 2,061
------------------------------------------------------------------------
Fiscal 2004 second quarter
restructuring charges........ - 43 8 523 574
Cash payments................... (44) (293) (109) (699) (1,145)
------------------------------------------------------------------------
Reserve at September 28, 2003... 283 297 700 210 1,490
------------------------------------------------------------------------
Fiscal 2004 third quarter
restructuring charges........ - 12 245 18 275
Cash payments................... (40) (216) (134) (151) (541)
------------------------------------------------------------------------
Reserve at December 28, 2003 $ 243 $ 93 $ 811 $ 77 $ 1,224
========================================================================
- 8 -
7. Income tax expense as a percentage of income before income tax expense was
46.8%, 24.6%, 43.7% and 48.6% in the fiscal 2004 and 2003 quarters and
nine-month periods ended December 28, 2003 and December 29, 2002,
respectively. The percentages vary from the U.S. statutory rate due to
jurisdictional mix and the existence of losses at certain subsidiaries for
which no benefit has been recorded.
8. The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29,
2003 2002 2003 2002
---- ---- ---- ----
Numerator for basic and diluted earnings per share:
Net income (loss) $ 705 $ (2,473) $ 2,704 $ (5.959)
======== ======== ======== ========
Denominators:
Weighted-average common stock outstanding -
denominator for basic EPS 14,558 14,502 14,549 14,489
Effect of dilutive employee stock options - - - -
-------- -------- -------- --------
Adjusted weighted-average common stock
outstanding and assumed conversions -
denominator for diluted EPS 14,558 14,502 14,549 14,489
======== ======== ======== =======
9. As a result of the way the Company manages the business, its reportable
segments are strategic business units that offer products with different
characteristics. The most defining characteristic is the extent of
customized engineering required on a per-order basis. In addition, the
segments serve different customer bases through differing methods of
distribution. The Company has two reportable segments: Products and
Solutions. The Company's Products segment sells hoists, cranes, chain,
forged attachments, and other material handling products principally to
third party distributors through diverse distribution channels, and to a
lesser extent directly to manufacturers and other end-users. The Solutions
segment sells engineered material handling systems such as conveyors,
manipulators, and lift tables primarily to end-users in the consumer
products, manufacturing, warehousing, and, to a lesser extent, the steel,
construction, automotive, and other industrial markets. Intersegment sales
are not significant. The Company evaluates performance based on operating
income of the respective business units prior to the effects of
restructuring charges and amortization.
- 9 -
Segment information as of and for the nine months ended December 28, 2003
and December 29, 2002, is as follows:
NINE MONTHS ENDED DECEMBER 28, 2003
-----------------------------------
PRODUCTS SOLUTIONS TOTAL
----------- ----------- -----------
Sales to external customers...................... $ 283,052 $ 40,360 $ 323,412
Operating income before restructuring
charges and amortization...................... 22,280 (246) 22,034
Depreciation and amortization.................... 7,122 857 7,979
Total assets..................................... 449,883 32,756 482,639
NINE MONTHS ENDED DECEMBER 29, 2002
-----------------------------------
PRODUCTS SOLUTIONS TOTAL
----------- ----------- -----------
Sales to external customers...................... $ 286,295 $ 48,218 $ 334,513
Operating income before restructuring
charges and amortization...................... 26,531 730 27,261
Depreciation and amortization.................... 7,701 769 8,470
Total assets..................................... 449,348 37,196 486,544
The following schedule provides a reconciliation of operating income before
restructuring charges and amortization with income from operations before
income tax expense and cumulative effect of accounting change:
NINE MONTHS ENDED
-----------------
DECEMBER 28, DECEMBER 29,
2003 2002
---- ----
Operating income before restructuring
charges and amortization..................................... $ 22,034 $ 27,261
Restructuring charges........................................... (1,650) (840)
Amortization of intangibles..................................... (300) (400)
Interest and debt expense....................................... (21,940) (23,371)
Other income and (expense), net................................. 6,659 1,319
----------- -----------
Income from operations before income tax expense
and cumulative effect of accounting change................... $ 4,803 $ 3,969
=========== ===========
- 10 -
10. The summary financial information of the parent, guarantors and
nonguarantors of the 8.5% senior subordinated notes and 10% senior secured
notes is as follows:
Parent Guarantors Nonguarantors Eliminations Consolidated
-------------------------------------------------------------------
AS OF DECEMBER 28, 2003
Current assets:
Cash and cash equivalents $ (1,324) $ 1,356 $ 3,030 $ - $ 3,062
Trade accounts receivable and unbilled revenues 51,734 69 36,078 - 87,881
Inventories 35,463 18,944 22,695 (972) 76,130
Other current assets 9,561 911 5,930 - 16,402
-------------------------------------------------------------------
Total current assets 95,434 21,280 67,733 (972) 183,475
Property, plant, and equipment, net 29,301 13,588 19,475 - 62,364
Goodwill and other intangibles, net 97,076 57,362 39,768 - 194,206
Intercompany 48,262 (64,033) (56,223) 71,994 -
Other assets 57,772 208,064 23,462 (246,704) 42,594
-------------------------------------------------------------------
Total assets $ 327,845 $ 236,261 $ 94,215 $ (175,682) $ 482,639
===================================================================
Current liabilities $ 48,456 $ 11,874 $ 30,267 $ (2,921) $ 87,676
Long-term debt, less current portion 285,441 - 906 - 286,347
Other non-current liabilities 6,987 12,579 24,430 - 43,996
-------------------------------------------------------------------
Total liabilities 340,884 24,453 55,603 (2,921) 418,019
Shareholders' equity (13,039) 211,808 38,612 (172,761) 64,620
-------------------------------------------------------------------
Total liabilities and shareholders' equity $ 327,845 $ 236,261 $ 94,215 $ (175,682) $ 482,639
===================================================================
FOR THE NINE MONTHS ENDED DECEMBER 28, 2003
Net sales $ 163,616 $ 82,464 $ 92,257 $ (14,925) $ 323,412
Cost of products sold 125,659 67,764 69,391 (14,925) 247,889
-------------------------------------------------------------------
Gross profit 37,957 14,700 22,866 - 75,523
-------------------------------------------------------------------
Selling, general and administrative expenses 25,334 9,278 18,877 - 53,489
Restructuring charges 1,184 - 466 - 1,650
Amortization of intangibles 180 2 118 - 300
-------------------------------------------------------------------
26,698 9,280 19,461 - 55,439
-------------------------------------------------------------------
Income from operations 11,259 5,420 3,405 - 20,084
Interest and debt expense 21,343 7 590 - 21,940
Other (income) and expense, net (2,077) (5,626) (1,337) 2,381 (6,659)
-------------------------------------------------------------------
(Loss) income before income tax
(benefit) expense (8,007) 11,039 4,152 (2,381) 4,803
Income tax (benefit) expense (2,962) 3,570 1,491 - 2,099
-------------------------------------------------------------------
Net (loss) income $ (5,045) $ 7,469 $ 2,661 $ (2,381) $ 2,704
===================================================================
- 11 -
Parent Guarantors Nonguarantors Eliminations Consolidated
-------------------------------------------------------------------
FOR THE NINE MONTHS ENDED DECEMBER 28, 2003
OPERATING ACTIVITIES:
Net cash provided by (used in) operating
activities $ 8,717 $ (1,499) $ 12,812 $ (2,381) $ 17,649
-------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of marketable securities, net - - (530) - (530)
Capital expenditures, net (2,214) (403) (479) - (3,096)
Other - 3,767 - - 3,767
-------------------------------------------------------------------
Net cash (used in) provided by investing
activities (2,214) 3,364 (1,009) - 141
-------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (payments) borrowings under revolving
line-of-credit agreements (4,407) - 1,304 - (3,103)
Repayment of debt (114,647) - (10,617) - (125,264)
Proceeds from issuance of long-term debt 115,000 - - - 115,000
Other (3,746) - (2,555) 2,381 (3,920)
-------------------------------------------------------------------
Net cash used in financing activities (7,800) - (11,868) 2,381 (17,287)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (84) 311 389 - 616
-------------------------------------------------------------------
Net change in cash and cash equivalents (1,381) 2,176 324 - 1,119
Cash and cash equivalents at beginning of period 57 (820) 2,706 - 1,943
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ (1,324) $ 1,356 $ 3,030 $ - $ 3,062
===================================================================
AS OF DECEMBER 29, 2002
Current assets:
Cash and cash equivalents $ 2,159 $ (935) $ 4,645 $ - $ 5,869
Trade accounts receivable and unbilled revenues 54,254 2,916 25,339 - 82,509
Inventories 43,674 20,854 27,820 (972) 91,376
Net assets held for sale 2,300 - - - 2,300
Other current assets 6,594 (1,411) 5,094 - 10,277
-------------------------------------------------------------------
Total current assets 108,981 21,424 62,898 (972) 192,331
Property, plant, and equipment, net 32,768 16,648 18,021 - 67,437
Goodwill and other intangibles, net 32,312 121,047 45,944 - 199,303
Intercompany 105,582 (130,273) (44,521) 69,212 -
Other assets 180,071 156,992 20,797 (330,387) 27,473
-------------------------------------------------------------------
Total assets $ 459,714 $ 185,838 $ 103,139 $ (262,147) $ 486,544
===================================================================
Current liabilities $ 27,130 $ 9,192 $ 25,025 $ (5,703) $ 55,644
Long-term debt, less current portion 314,100 - 16,860 - 330,960
Other non-current liabilities (4,222) 11,252 22,520 - 29,550
-------------------------------------------------------------------
Total liabilities 337,008 20,444 64,405 (5,703) 416,154
Shareholders' equity 122,706 165,394 38,734 (256,444) 70,390
-------------------------------------------------------------------
Total liabilities and shareholders' equity $ 459,714 $ 185,838 $ 103,139 $ (262,147) $ 486,544
===================================================================
- 12 -
Parent Guarantors Nonguarantors Eliminations Consolidated
-------------------------------------------------------------------
FOR THE NINE MONTHS ENDED DECEMBER 29, 2002
Net sales $ 171,014 $ 92,329 $ 84,995 $ (13,825) $ 334,513
Cost of products sold 126,770 76,306 64,737 (13,802) 254,011
-------------------------------------------------------------------
Gross profit 44,244 16,023 20,258 (23) 80,502
-------------------------------------------------------------------
Selling, general and administrative expenses 27,534 9,788 15,919 - 53,241
Restructuring charges - - 840 - 840
Amortization of intangibles 178 2 220 - 400
-------------------------------------------------------------------
27,712 9,790 16,979 - 54,481
-------------------------------------------------------------------
Income from operations 16,532 6,233 3,279 (23) 26,021
Interest and debt expense 22,839 122 410 - 23,371
Other (income) and expense, net (443) (246) (630) - (1,319)
-------------------------------------------------------------------
(Loss) income before income tax
(benefit) expense (5,864) 6,357 3,499 (23) 3,969
Income tax (benefit) expense (1,638) 2,557 1,018 (9) 1,928
-------------------------------------------------------------------
Net (loss) income before cumulative effect of
accounting change (4,226) 3,800 2,481 (14) 2,041
Income (loss) from discontinued operations 1,278 (1,278) - - -
Cumulative effect of change in
accounting principle - (1,930) (6,070) - (8,000)
-------------------------------------------------------------------
Net (loss) income $ (2,948) $ 592 $ (3,589) $ (14) $ (5,959)
===================================================================
FOR THE NINE MONTHS ENDED DECEMBER 29, 2002
OPERATING ACTIVITIES:
Net cash provided by (used in) operating
activities $ 19,194 $ (5,721) $ (15,955) $ - $ (2,482)
-------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of marketable securities, net - - 1,221 - 1,221
Capital expenditures (1,427) (411) (1,785) - (3,623)
Proceeds from sale of business - 15,950 - - 15,950
Other - 1,990 - - 1,990
-------------------------------------------------------------------
Net cash (used in) provided by investing
activities (1,427) 17,529 (564) - 15,538
-------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (payments) borrowings under revolving
line-of-credit agreements (16,334) (11,551) 15,931 - (11,954)
Repayment of debt (535) - (1,140) - (1,675)
Other (6,756) - (365) - (7,121)
-------------------------------------------------------------------
Net cash used in financing activities (23,625) (11,551) 14,426 - (20,750)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (7) 5 (7) - (9)
-------------------------------------------------------------------
Net cash used in continuing operations (5,865) 262 (2,100) - (7,703)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 504 - - 504
-------------------------------------------------------------------
Net change in cash and cash equivalents (5,865) 766 (2,100) - (7,199)
Cash and cash equivalents at beginning of period 8,024 (1,701) 6,745 - 13,068
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,159 $ (935) $ 4,645 $ - $ 5,869
===================================================================
- 13 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE SPECIFIED)
EXECUTIVE OVERVIEW
We are a leading manufacturer and marketer of hoists, cranes, chain, conveyors,
material handling systems, lift tables and component parts serving a wide
variety of commercial and industrial end markets. Our products are used to
efficiently and ergonomically move, lift, position or secure objects and loads.
Our Products segment sells a wide variety of powered and manually operated wire
rope and chain hoists, industrial crane systems, chain, hooks and attachments,
actuators and rotary unions. They are sold, domestically and internationally,
principally to third party distributors through diverse distribution channels,
and to a lesser extent directly to manufacturers and other end-users.
Distribution channels include general distributors, specialty distributors,
crane end users, service-after-sale distributors, original equipment
manufacturers (OEMs), government, consumer and international general line
distributors. Our Solutions segment designs, manufactures, and installs
application-specific material handling systems and solutions for end-users to
improve work station and facility-wide work flow. Sales from that segment are
concentrated, domestically and internationally (primarily Europe), in the
consumer products, manufacturing, warehousing and, to a lesser extent, the
steel, construction, automotive and other industrial markets.
Many of the U.S. industrial sectors that we serve have been impacted by soft
economic conditions since mid-1998. These conditions deteriorated significantly
in our fiscal 2001 fourth quarter and continued to decline throughout fiscal
2002 and most of fiscal 2003, impacting our net sales and financial performance.
After reaching a historical high of $609.2 million in fiscal 2000, our net sales
declined 3.8% to $586.2 million in fiscal 2001, and further by 18.1% to $480.0
million in fiscal 2002 and by an additional 5.6% to $453.3 million in fiscal
2003, primarily due to this downturn in the business cycle. Despite these
economic conditions and their impact on our operating results, we maintained our
leading market share, generated positive cash flow from operations and repaid
$6.4 million, $59.7 million and $34.5 million of debt in fiscal 2001, 2002 and
2003, respectively. Our positive cash flow was favorably impacted by our lean
manufacturing efforts, which began in fiscal 2002. These efforts are
fundamentally changing our manufacturing processes, resulting in significant
inventory reductions and improving on-time delivery and productivity.
We are cautiously optimistic that the economic environment as it impacts our
Company may be stabilizing. We monitor such indicators as U.S. Industrial
Capacity Utilization and Industrial Production which have been steadily
increasing, albeit modestly, since July 2003 or so, following a "double dip"
recession. We sell our products to a cross-section of business sectors, spanning
the breadth of primarily the industrial contributors to the U.S. gross domestic
product, which are impacted by these indicators in varying degrees and at
various points in a business cycle. We will continue to monitor these indicators
to assess the impact on our future business. In addition, to enhance future
revenue opportunities, we are increasing our sales and marketing efforts in
international markets and investing in new products and services.
We have also been continuing the integration activities of our acquisition
strategy, which over the last three years have been focused on facility and
product rationalization. This has resulted in thirteen facility closures and
consolidation of numerous product lines. We continue to focus efforts on cash
generation to repay debt. As previously reported, we have been undergoing
possible divestiture of several less-strategic businesses, including many of
those within our Solutions segment as well as some within our Products segment.
Furthermore, we are selling real properties that resulted from our facility
rationalization projects. These divestitures may result in gains or losses.
- 14 -
On the cost side we, like many companies have been challenged over the past
several years with significantly increased costs for fringe benefits such as
health insurance, workers compensation insurance and pension. Combined, those
benefits will cost us almost $30 million this year and we work diligently with
our advisors to balance cost control with the need to provide competitive
benefits packages for our associates. Another cost area of focus is steel
pricing. We utilize approximately $15-$20 million of steel annually in a variety
of forms including rod, wire, bar, structural and others. With increases in
worldwide demand for steel, we most likely will experience increases in our
costs in the near term that we will continue to monitor.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 28, 2003 AND DECEMBER 29, 2002
Net sales in the fiscal 2004-quarter ended December 28, 2003 were $110,253, up
$2,869 or 2.7% from the fiscal 2003 quarter ended December 29, 2002. Net sales
for the nine months ended December 28, 2003 were $323,412, a decrease of $11,101
or 3.3% from the nine months ended December 29, 2002. Sales in the Products
segment increased by $5,047 or 5.5% from the previous year's quarter and
decreased $3,243 or 1.1% from the previous year's nine-month period then ended.
While translation of foreign currencies, particularly the Euro and Canadian
dollar, into U.S. dollars contributed $3.3 million toward the Products segment
increase in sales for the quarter, local currency sales also increased $1.7
million perhaps evidencing some economic stability. Products segment sales for
the fiscal 2004 nine-months were impacted by the prior quarters' softness in all
industrial markets (particularly domestically), offset by $8.5 million
attributable to translation of foreign currencies, particularly the Euro and
Canadian dollar, into U.S. dollars. Sales in the Solutions segment decreased
13.7% or $2,178 for the quarter and 16.3% or $7,858 for the nine months ended
December 28, 2003 when compared to the same periods in the prior year. The
decreases in this segment are primarily due to continued softness in both
domestic (nine-month period) and international (quarter and nine-month period)
industrial markets and the divestiture of a subsidiary on March 31, 2003 ($2.0
million for the quarter and $5.5 million for the nine-month period ended
December 29, 2002, respectively), offset by an increase of $1.2 million and $3.6
million attributable to translation of the Euro into U.S. dollars for the
quarter and nine-month period ended December 28, 2003, respectively. Sales in
the segments are summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DEC. 28, DEC. 29, CHANGE DEC. 28, DEC. 29, CHANGE
2003 2002 AMOUNT % 2003 2002 AMOUNT %
---- ---- ------ - ---- ---- ------ -
Products $ 96,524 $ 91,477 $ 5,047 5.5 $ 283,052 $ 286,295 $ (3,243) (1.1)
Solutions 13,729 15,907 (2,178) (13.7) 40,360 48,218 (7,858) (16.3)
--------- --------- -------- --------- --------- --------
Net sales $ 110,253 $ 107,384 $ 2,869 2.7 $ 323,412 $ 334,513 $(11,101) (3.3)
========= ========= ======== ========= ========= ========
Gross profits and gross profit margins by operating segment are summarized as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DEC. 28, 2003 DEC. 29, 2002 DEC. 28, 2003 DEC. 29, 2002
------------- ------------- ------------- -------------
$ % $ % $ % $ %
--- --- --- --- --- --- --- ---
Products $ 22,791 23.6 $ 24,285 26.5 $ 70,164 24.8 $ 73,383 25.6
Solutions 1,767 12.9 2,014 12.7 5,359 13.3 7,119 14.8
--------- --------- --------- ---------
Total Gross Profit $ 24,558 22.3 $ 26,299 24.5 $ 75,523 23.4 $ 80,502 24.1
========= ========= ========= =========
- 15 -
The decline of gross profit margins in the Products segment is the result of an
adjustment to increase product liability reserves as actuarially determined
during the third quarter of FY04 ($2.4 million) offset partially by cost
containment activities. The decrease in the gross profit margin for the
Solutions segment for the nine-month period ended December 28, 2003 is primarily
the result of a shift in sales mix to larger integrated solutions projects which
typically carry lower gross profit margins and the impact of a divestiture of a
relatively small subsidiary on March 31, 2003.
Selling expenses were $11,942, $12,033, $35,400, and $35,018 in the fiscal 2004
and 2003 quarters and the nine-month periods then ended, respectively. The
changes in expense dollars were impacted by translation from changes in foreign
exchange rates ($0.7 million and $1.7 million for the quarter and nine-month
period ended December 28, 2003, respectively), offset partially by cost
containment activities. As a percentage of consolidated net sales, selling
expenses were 10.8%, 11.2%, 10.9%, and 10.5% in the fiscal 2004 and 2003
quarters and the nine-month periods then ended, respectively.
General and administrative expenses were $6,610, $5,281, $18,089, and $18,223 in
the fiscal 2004 and 2003 quarters and the nine-month periods then ended,
respectively. The comparable quarterly increase in expense is primarily the
result of a reduction in product liability expense ($1.1 million) recorded in
the third quarter of fiscal 2003 by the Company's captive insurance company as a
result of realized losses in its investment portfolio. The fiscal 2004
nine-month data is higher than the prior year by $0.5 million for the same
reason, but offset by cost containment. Foreign currency translation into U.S.
dollars resulted in a $0.3 million and $0.9 million increase for the quarter and
nine-month periods, respectively. As a percentage of consolidated net sales,
general and administrative expenses were 6.0%, 4.9%, 5.6% and 5.4% in the fiscal
2004 and 2003 quarters and the nine-month periods then ended, respectively. The
percentages for the quarter were impacted by the reasons outlined above.
During the third quarter of fiscal 2004, the Company continued the
implementation of its Corporate-wide reorganization plan. During the quarter,
the Company recorded restructuring costs of $0.3 million related to these
initiatives that included $0.2 million and $0.1 million related to the Products
and Solutions segments, respectively, and stemmed from facility costs and a
minor amount from employee terminations. As of December 28, 2003, all of the
terminations had occurred and the liability consists of severance payments and
costs associated with the preparation and maintenance of non-operating
facilities prior to disposal which were accrued prior to the adoption of SFAS
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities".
Currently, we anticipate that our restructuring charges for the remainder of
fiscal 2004 related to these plans to be between $0.2 and $0.5 million. The
Company has several facilities being completely closed and prepared for
disposal; one of which is expected to be completed in the fourth quarter of
fiscal 2004; one, which is currently being used, in the first quarter of fiscal
2005; and another in the second half of Fiscal 2005.
Interest and debt expense was $6,538, $8,887, $21,940, and $23,371 in the fiscal
2004 and 2003 quarters and the nine-month periods then ended, respectively. The
fluctuations in interest expense are significantly impacted by changes in the
various credit facilities in place during the periods, described as follows. The
Company renegotiated its senior credit facility in November of 2002, a portion
of which was subsequently replaced by the July 2003 10% Senior Secured Note
offering. The Company's pre-November 2002 senior credit facility had an
approximate effective interest rate of 5.5%. The $70 million Senior Second
Secured Term Loan facility in place from November 22, 2002 through July 22, 2003
had an effective interest rate of approximately 13.8%. The $115 million Senior
Secured notes placed on July 22, 2003 have an interest rate of 10.0%. Effective
August 4, 2003, the Company entered into an interest rate swap agreement to
convert $93.5 million of fixed-rate debt (10%) to variable-rate debt (LIBOR plus
578.2 basis points) through August 2008 and $57.5 million from August 2008
through August 2010. The fiscal 2004 quarterly decrease is the result of the
lower average effective interest rate (7.2% versus 11.0%), lower debt levels,
and the write-off of deferred financing costs of $1.2 million relating to the
prior senior credit facility in the quarter ended December 29, 2002. The
decrease in the nine-month period ended December 28, 2003 is the result of the
reversal of previously accrued deferred interest expense ($1.1 million) under
the $70 million Senior Second Secured Term Loan facility and the decreasing debt
levels offset by a slightly higher average interest rate. As a percentage of
consolidated net sales, interest and debt expense was 5.9%, 8.3%, 6.8%, and 7.0%
in the fiscal 2004 and 2003 quarters and the nine-month periods then ended,
respectively.
- 16 -
Other (income) and expense, net was ($2,212), $2,399, ($6,659), and ($1,319) in
the fiscal 2004 and 2003 quarters and the nine-month periods then ended,
respectively. The current quarter income consists primarily of $1.1 million of
realized gains on investments within the Company's captive insurance company
portfolio and $1.0 million from the change in the fair value of the interest
rate swap. This compares to the same quarter of the prior year which consisted
primarily of $1.7 million in write-downs of investments for other than temporary
losses and $1.2 million of realized losses on investments within the Company's
captive insurance company portfolio. The current year nine-month period is
mainly comprised of a $3.3 million gain on the sale of real estate, $1.5 million
of investment income from the Company's captive insurance company portfolio,
$1.0 million from the change in the fair value of the interest rate swap, and a
net $0.7 million consisting of a $5.6 million gain from the early extinguishment
of debt offset by the $4.9 million deferred financing cost write-off associated
with extinguished debt. This compares primarily to income of $0.5 million of
investment income from the Company's captive insurance company portfolio for the
nine-month period ended December 29, 2002.
Income tax expense as a percentage of income before income tax expense was
46.8%, 24.6%, 43.7%, and 48.6% in the fiscal 2004 and 2003 quarters and the
nine-month periods then ended, respectively. The percentages for fiscal 2004
vary from the U.S. statutory rate due to jurisdictional mix and the existence of
losses at certain subsidiaries for which no benefit has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
On November 21, 2002, the Company refinanced its credit facilities. The new
arrangement consisted of a Revolving Credit Facility, a Term Loan, and a Senior
Second Secured Term Loan. The Revolving Credit Facility currently provides
availability up to a maximum of $50 million. At December 28, 2003, $5.5 million
was outstanding for borrowings and the unused portion totaled $23.2 million.
Interest is payable at varying Eurodollar rates based on LIBOR or prime plus a
spread determined by the Company's leverage ratio amounting to 275 (LIBOR) or
150 (prime) basis points, respectively, at December 28, 2003. 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.
At December 28, 2003, the Term Loan has a balance of $8,321,000 and requires
quarterly payments of $500,000. Interest is payable at varying Eurodollar rates
based on LIBOR or prime plus a spread determined by the Company's leverage ratio
amounting to 325 (LIBOR) or 200 (prime) basis points at December 28, 2003. The
Term Loan is secured by all domestic inventory, receivables, equipment, real
property, subsidiary stock (limited to 65% for foreign subsidiaries) and
intellectual property.
On July 22, 2003, the Company issued $115 million of 10% Senior Secured Notes
due August 1, 2010. Proceeds from this offering were used for the repayment in
full of the Senior Second Secured Term Loan ($66.8 million), the repurchase of
$35.7 million of Senior Subordinated Notes at a discount ($30.1 million), the
repayment of a portion of the outstanding Revolving Credit Facility ($10.0
million), the repayment of a portion of the Term Loan ($3.9 million), the
payment of financing costs ($2.8 million), and the payment of accrued interest
($1.4 million).
As noted above, the Senior Second Secured Term loan was repaid in its entirety
on July 22, 2003. As a result of the repayment occurring prior to the first
anniversary of the loan, $1.1 million of accrued interest expense was reversed
in the second quarter of fiscal 2004 and is reflected as a reduction of interest
expense.
The redemption of the 8 1/2% Senior Subordinated Notes occurred at a discount
resulting in a $5.6 million pre-tax gain on early extinguishment of debt. As a
result of the repayment of the Senior Second Secured Term Loan and a portion of
the Term Loan and 8 1/2% Senior Subordinated Notes, $4.9 million of pre-tax
deferred financing costs were written-off in the second quarter of fiscal 2004.
The net effect of these two items, a $0.7 million pre-tax gain, is shown as part
of other (income) and expense, net.
- 17 -
The corresponding credit agreements associated with the Revolving Credit
Facility and the Term Loan place certain debt covenant restrictions on the
Company including certain financial requirements and a restriction on dividend
payments.
From time to time, the Company manages its debt portfolio by using interest rate
swaps to achieve an overall desired position of fixed and floating rates. In
June 2001, the Company entered into an interest rate swap agreement to
effectively convert $40 million of variable-rate debt to fixed-rate debt, which
matured in June 2003. This cash flow hedge was considered effective and the gain
or loss on the change in fair value was reported in other comprehensive income,
net of tax.
Effective August 4, 2003, the Company entered into an interest rate swap
agreement to convert $93.5 million of fixed-rate debt (10%) to variable-rate
debt (LIBOR plus 578.2 basis points) through August 2008 and $57.5 million from
August 2008 through August 2010. This interest rate swap was considered an
ineffective hedge and therefore the change in fair value was recognized in
income as a gain or loss. For the quarter ended December 28, 2003, approximately
$1.0 million was recognized as other income as a result of changes in the fair
value of the swap. The swap was terminated on January 22, 2004 at an additional
pre-tax gain of $0.7 million.
We believe that our cash on hand, cash flows from operations, 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 a steady economy and successful
execution of our current business plan which is focused on cash generation for
debt repayment. The business plan includes continued implementation of lean
manufacturing, facility rationalization projects, possible divestiture of excess
facilities and certain non-strategic operations, new product development,
international market expansion, and improving working capital components,
including inventory reductions.
Net cash provided by operating activities was $17,649 for the nine months ended
December 28, 2003 compared to net cash used in operating activities of $2,482
for the nine months ended December 29, 2002. The difference of $20,131 is due
primarily to favorable changes in net working capital components particularly
inventories ($3.5 million), accounts payable ($7.4 million) and accrued and
non-current liabilities ($19.6 million), offset by an unfavorable change in
other assets ($5.3 million).
Net cash provided by investing activities was $141 for the nine months ended
December 28, 2003 compared to $15,538 for the nine months ended December 29,
2002 as a result of the $16.0 million of proceeds from the sale of ASI, a former
subsidiary, in fiscal 2003.
Net cash used in financing activities was $17,287 for the nine months ended
December 28, 2003 compared to $20,750 for the nine months ended December 29,
2002. The cash generated from operations in fiscal 2004 was used to pay debt and
deferred financing costs. Debt repayment and the payment of deferred financing
costs in fiscal 2003 was accomplished via proceeds from the sale of ASI and the
use of cash on hand.
CAPITAL EXPENDITURES
In addition to keeping its current equipment and plants properly maintained, the
Company is committed to replacing, enhancing, and upgrading its property, plant,
and equipment to 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 nine months ended December 28, 2003 and December
29, 2002 were $3,096 and $3,623, respectively.
- 18 -
INFLATION AND OTHER MARKET CONDITIONS
The Company's costs are affected by inflation in the U.S. economy and, to a
lesser extent, in foreign economies including those of Europe, Canada, Mexico,
and the Pacific Rim. The Company does 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 the periods and because the Company has
generally been able to pass on rising costs through price increases. However,
employee benefit costs such as health insurance, workers compensation insurance,
pensions as well as energy and business insurance have exceeded general
inflation levels in recent years. In the future, we may be further affected by
inflation that we may not be able to pass on as price increases.
SEASONALITY AND QUARTERLY RESULTS
Quarterly results may be materially affected by the timing of large customer
orders, by periods of high vacation and holiday concentrations, by the timing
and extent of restructuring projects, and by acquisitions and the magnitude of
acquisition costs. 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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report may include "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements involve known
and unknown risks, uncertainties and other factors that could cause the actual
results of the Company to differ materially from the results expressed or
implied by such statements, including general economic and business conditions,
conditions affecting the industries served by the Company and its subsidiaries,
conditions affecting the Company's customers and suppliers, competitor responses
to the Company's products and services, the overall market acceptance of such
products and services, the integration of acquisitions and other factors
disclosed in the Company's periodic reports filed with the Commission.
Consequently such forward-looking statements should be regarded as the Company's
current plans, estimates and beliefs. The Company does not undertake and
specifically declines any obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
From time to time, the Company manages its debt portfolio by using interest rate
swaps to achieve an overall desired position of fixed and floating rates.
Effective August 4, 2003, the Company entered into an interest rate swap
agreement to convert $93.5 million of fixed-rate debt (10%) to variable-rate
debt (LIBOR plus 578.2 basis points) through August 2008 and $57.5 million from
August 2008 through August 2010. The interest rate swap was terminated on
January 22, 2004.
Like most industrial manufacturers, the Company is involved in asbestos-related
litigation. In continually evaluating its estimated asbestos-related liability,
the Company reviews, among other things, the incidence of past and recent
claims, the historical case dismissal rate, the mix of the claimed illnesses and
occupations of the plaintiffs, its recent and historical resolution of the
cases, the number of cases pending against it, the status and results of
broad-based settlement discussions, and the number of years such activity might
continue. Based on this review, the Company has estimated its share of liability
to defend and resolve probable asbestos-related personal injury claims. This
estimate is highly uncertain due to the limitations of the available data and
the difficulty of forecasting with any certainty the numerous variables that can
affect the range of the liability. The Company will continue to study the
variables in light of additional information in order to identify trends that
may become evident and to assess their impact on the range of liability that is
probable and estimable.
- 19 -
The Company's estimation of its asbestos-related liability that is probable and
estimable through 2012 ranges from $2.8 million to $4.0 million as of December
28, 2003. The range of probable and estimable liability reflects uncertainty in
the number of future claims that will be filed and the cost to resolve those
claims, which may be influenced by a number of factors, including the outcome of
the ongoing broad-based settlement negotiations, defensive strategies, and the
cost to resolve claims outside the broad-based settlement program. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $3.0 million as a liability in the consolidated
financial statements in accordance with generally accepted accounting
principles. The recorded liability does not consider the impact of any potential
favorable federal legislation such as the "FAIR Act". Of this amount, management
expects to incur asbestos liability payments of approximately $0.2 million over
the next 12 months. Because payment of the liability is likely to extend over
many years, management believes that the potential additional costs for claims
will not have a material after-tax effect on the financial condition of the
Company or its liquidity, although the net after-tax effect of any future
liabilities recorded could be material to earnings in a future period.
There have been no other material changes in the reported market risks since the
end of Fiscal 2003.
Item 4. Disclosure Controls and Procedures
As of December 28, 2003, an evaluation was performed under the supervision and
with the participation of the Company's management, including the chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the chief executive
officer and chief financial officer, concluded that the Company's disclosure
controls and procedures were effective as of December 28, 2003. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to December 28,
2003.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings - none.
Item 2. Changes in Securities - none.
Item 3. Defaults upon Senior Securities - none.
Item 4. Submission of Matters to a Vote of Security Holders - none.
Item 5. Other Information - none.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1 Second Amended and Restated Credit and Security
Agreement dated as of November 21, 2002 and amended
and restated as of January 2, 2004 among Columbus
McKinnon Corporation, as Borrower, Larco Industrial
Services Ltd., Columbus McKinnon Limited, the
Guarantors Named Herein, the Lenders Party Hereto
From Time to Time, Fleet Capital Corporation, as
Administrative Agent, Fleet National Bank, as
Issuing Lender, Congress Financial Corporation
(Central), Syndication Agent, Merrill Lynch Capital,
a Division of Merrill Lynch Business Financial
Services Inc., as Documentation Agent, and Fleet
Securities, Inc., as Arranger dated January 2, 2004.
Exhibit 10.2 Amendment No. 11 to the Columbus McKinnon
Corporation Employee Stock Ownership Plan as Amended
and Restated as of April 1, 1989, dated December 19,
2003.
Exhibit 10.3 Amendment No. 8 to the 1998 Plan Restatement of the
Columbus McKinnon Corporation Thrift 401(k) Plan,
dated December 19, 2003.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934; as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934; as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On December 12, 2003, the Company filed a Current Report on Form 8-K
with respect to its completion of the exchange offer of its 10%
Senior Secured Notes due 2010.
On January 21, 2004, the Company filed a Current Report on Form 8-K
with respect to its financial results for the third quarter of fiscal
2004.
On February 3, 2004, the Company filed a Current Report on Form 8-K
with respect to the sale of its Positech division.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLUMBUS MCKINNON CORPORATION
-----------------------------------
(Registrant)
Date: FEBRUARY 11, 2004 /S/ ROBERT L. MONTGOMERY, JR.
------------------ -----------------------------------
Robert L. Montgomery, Jr.
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer)
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