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 January 2, 2005
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
-------
COLUMBUS MCKINNON CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 16-0547600
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
140 JOHN JAMES AUDUBON PARKWAY, AMHERST, NY 14228-1197
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(716) 689-5400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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, 2005 was:
14,896,172 shares.
FORM 10-Q INDEX
COLUMBUS MCKINNON CORPORATION
JANUARY 2, 2005
PAGE #
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets -
January 2, 2005 and March 31, 2004 2
Condensed consolidated statements of operations and
accumulated deficit - Three months and nine months
ended January 2, 2005 and December 28, 2003 3
Condensed consolidated statements of cash flows -
nine months ended January 2, 2005 and December 28, 2003 4
Condensed consolidated statements of comprehensive income
- Three months and nine months ended January 2, 2005
and December 28, 2003 5
Notes to condensed consolidated financial statements -
January 2, 2005 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 21
Item 4. Disclosure Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - none. 22
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds - none. 22
Item 3. Defaults upon Senior Securities - none. 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information - none. 22
Item 6. Exhibits and Reports on Form 8-K 22
- 1 -
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 2, MARCH 31,
2005 2004
---------- ----------
(UNAUDITED) (AUDITED)
ASSETS: (IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 8,624 $ 11,101
Trade accounts receivable 83,551 84,374
Unbilled revenues 8,699 5,160
Inventories 81,246 69,119
Net assets held for sale 2,415 2,790
Prepaid expenses 12,741 15,486
---------- ----------
Total current assets 197,276 188,030
Property, plant, and equipment, net 56,350 58,773
Goodwill and other intangibles, net 192,790 192,963
Marketable securities 24,725 25,355
Deferred taxes on income 4,565 6,388
Other assets 1,955 1,854
---------- ----------
Total assets $ 477,661 $ 473,363
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable to banks $ 3,732 $ 5,471
Trade accounts payable 30,537 30,076
Accrued liabilities 49,260 48,416
Restructuring reserve 358 561
Current portion of long-term debt 5,608 2,205
---------- ----------
Total current liabilities 89,495 86,729
Senior debt, less current portion 119,568 121,603
Subordinated debt 154,563 164,131
Other non-current liabilities 37,068 37,922
---------- ----------
Total liabilities 400,694 410,385
---------- ----------
Shareholders' equity
Common stock 149 149
Additional paid-in capital 103,690 103,914
Accumulated deficit (16,993) (25,354)
ESOP debt guarantee (4,689) (5,116)
Unearned restricted stock (15) (39)
Accumulated other comprehensive loss (5,175) (10,576)
---------- ----------
Total shareholders' equity 76,967 62,978
---------- ----------
Total liabilities and shareholders' equity $ 477,661 $ 473,363
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMLATED DEFICIT
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 2, DECEMBER 28, JANUARY 2, DECEMBER 28,
2005 2003 2005 2003
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 125,913 $ 110,253 $ 370,282 $ 323,412
Cost of products sold 95,914 85,695 278,889 247,889
----------- ----------- ----------- -----------
Gross profit 29,999 24,558 91,393 75,523
----------- ----------- ----------- -----------
Selling expenses 13,356 11,942 38,326 35,400
General and administrative expenses 6,918 6,610 21,920 18,089
Restructuring charges 191 275 408 1,650
Amortization of intangibles 78 80 231 300
----------- ----------- ----------- -----------
20,543 18,907 60,885 55,439
----------- ----------- ----------- -----------
Income from operations 9,456 5,651 30,508 20,084
Interest and debt expense 6,837 6,538 21,026 21,940
Other income (755) (2,212) (1,344) (6,659)
----------- ----------- ----------- -----------
Income from continuing operations before
income tax expense 3,374 1,325 10,826 4,803
Income tax expense 1,183 620 2,893 2,099
----------- ----------- ----------- -----------
Income from continuing operations 2,191 705 7,933 2,704
Income from discontinued operations 214 - 428 -
----------- ----------- ----------- -----------
Net income 2,405 705 8,361 2,704
Accumulated deficit - beginning of period (19,398) (24,548) (25,354) (26,547)
----------- ------------ ----------- -----------
Accumulated deficit - end of period $ (16,993) $ (23,843) $ (16,993) $ (23,843)
=========== =========== =========== ===========
Earnings per share data, basic and diluted:
Income from continuing operations $ 0.15 $ 0.05 $ 0.54 $ 0.19
Income from discontinued operations 0.01 - 0.03 -
----------- ---------- ----------- -----------
Net income $ 0.16 $ 0.05 $ 0.57 $ 0.19
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
-----------------
JANUARY 2, DECEMBER 28,
2005 2003
---------- -----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Income from continuing operations $ 7,933 $ 2,704
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Depreciation and amortization 7,201 7,979
Deferred income taxes 1,823 1,251
Gain on sale of real estate/investments - (4,505)
Deferred financing costs 1,029 1,359
Other (93) (598)
Changes in operating assets and liabilities:
Trade accounts receivable and unbilled revenues (172) 4,060
Inventories (9,937) 5,184
Prepaid expenses 1,990 (1,340)
Other assets (220) (1,354)
Trade accounts payable (447) (4,012)
Accrued and non-current liabilities (694) 6,921
---------- ----------
Net cash provided by operating activities 8,413 17,649
---------- ----------
INVESTING ACTIVITIES:
Sale (purchase) of marketable securities, net 957 (530)
Capital expenditures (3,169) (3,096)
Proceeds from sale of property, plant, and equipment - 387
Net assets held for sale 375 3,380
---------- ----------
Net cash (used in) provided by investing activities (1,837) 141
---------- ----------
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
line-of-credit agreements 2,906 (3,103)
Repayment of debt (13,244) (125,264)
Proceeds from issuance of long-term debt - 115,000
Deferred financing costs incurred (24) (4,361)
Other 427 441
---------- ----------
Net cash used in financing activities (9,935) (17,287)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 454 616
---------- ----------
Net cash (used in) provided by continuing operations (2,905) 1,119
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 428 -
---------- ----------
Net change in cash and cash equivalents (2,477) 1,119
Cash and cash equivalents at beginning of period 11,101 1,943
---------- ----------
Cash and cash equivalents at end of period $ 8,624 $ 3,062
========== ==========
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
------------------ -----------------
JANUARY 2, DECEMBER 28, JANUARY, DECEMBER 28,
2005 2003 2005 2003
---- ---- ---- ----
(IN THOUSANDS)
Net income $ 2,405 $ 705 $ 8,361 $ 2,704
---------- ---------- ---------- ----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 4,136 3,342 5,074 7,058
Unrealized gain on derivatives
qualifying as hedges - - - 191
Unrealized gain on investments:
Unrealized holding gains arising
during the period 971 1,192 580 2,628
Reclassification adjustment for
(gains) included in net income (262) (685) (253) (795)
---------- ---------- ----------- ----------
709 507 327 1,833
---------- ---------- ---------- ----------
Total other comprehensive income 4,845 3,849 5,401 9,082
---------- ---------- ---------- ----------
Comprehensive income $ 7,250 $ 4,554 $ 13,762 $ 11,786
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
COLUMBUS MCKINNON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 2, 2005
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. 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 January 2, 2005, and the results of
its operations and its cash flows for the three and nine-month periods
ended January 2, 2005 and December 28, 2003, have been included. Results
for the period ended January 2, 2005 are not necessarily indicative of the
results that may be expected for the year ended March 31, 2005. The balance
sheet at March 31, 2004 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by U.S. 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, 2004.
The Company is a leading U.S. designer and manufacturer of material
handling products, systems and services which lift, secure, position and
move material ergonomically, safely, precisely and efficiently. 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-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-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
------------------------------------------------------------
JANUARY 2, DECEMBER 28, JANUARY 2, DECEMBER 28,
2005 2003 2005 2003
------------------------------------------------------------
Net income, as reported...................... $ 2,405 $ 705 $ 8,361 $ 2,704
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (495) (104) (864) (386)
------------------------------------------------------------
Net income, pro forma...................... $ 1,910 $ 601 $ 7,497 $ 2,318
============================================================
Basic and diluted income per share:
As reported................................ $ 0.16 $ 0.05 $ 0.57 $ 0.19
============================================================
Pro forma.................................. $ 0.13 $ 0.04 $ 0.51 $ 0.16
============================================================
- 6 -
3. Inventories consisted of the following:
JANUARY 2, MARCH 31,
2005 2004
---------- ----------
At cost - FIFO basis:
Raw materials........................ $ 44,323 $ 34,657
Work-in-process...................... 11,445 10,169
Finished goods....................... 35,682 31,205
---------- ----------
91,450 76,031
LIFO cost less than FIFO cost............. (10,204) (6,912)
---------- ----------
Net inventories ........................ $ 81,246 $ 69,119
========== ==========
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. During the first nine-months of fiscal 2005, the Company recorded
restructuring costs of $408 related mostly to the maintenance of
non-operating facilities being held for sale which are expensed on an as
incurred basis in accordance with SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." All of these costs are
related to the Products segment. The liability as of January 2, 2005
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.
The following table provides a reconciliation of the activity related to
restructuring reserves:
EMPLOYEE FACILITY TOTAL
-----------------------------------------
Reserve at March 31, 2004 $ 161 $ 400 $ 561
Fiscal 2005 first quarter restructuring charges...... - 33 33
Cash payments........................................ (143) (81) (224)
-----------------------------------------
Reserve at July 4, 2004.............................. $ 18 $ 352 $ 370
Fiscal 2005 second quarter restructuring charges..... 14 170 184
Cash payments........................................ (16) (177) (193)
-----------------------------------------
Reserve at October 3, 2004........................... $ 16 $ 345 $ 361
Fiscal 2005 third quarter restructuring charges...... 63 128 191
Cash payments........................................ (55) (139) (194)
-----------------------------------------
Reserve at January 2, 2005........................... $ 24 $ 334 $ 358
=========================================
5. The following table sets forth the components of net periodic pension cost
for the Company's defined benefit pension plans:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ----------------
JANUARY 2, DECEMBER 28, JANUARY 2, DECEMBER 28,
2005 2003 2005 2003
---- ---- ---- ----
Service costs.................. $ 1,190 $ 980 $ 3,570 $ 2,940
Interest cost.................. 1,755 1,678 5,265 5,034
Expected return on plan assets. (1,645) (1,351) (4,935) (4,053)
Net amortization............... 495 494 1,485 1,482
---------- ---------- ---------- ----------
Net periodic pension cost...... $ 1,795 $ 1,801 $ 5,385 $ 5,403
========== ========== ========== ==========
For additional information on the Company's defined benefit pension plans,
refer to Note 11 in the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended March 31, 2004.
- 7 -
The following table sets forth the components of net periodic
postretirement benefit cost for the Company's defined benefit
postretirement plans:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JANUARY 2, DECEMBER 28, JANUARY 2, DECEMBER 28,
2005 2003 2005 2003
---- ---- ---- ----
Service costs........................ $ 4 $ 3 $ 12 $ 9
Interest cost ....................... 200 217 634 651
Amortization of prior service cost... - (38) - (114)
Amortization of plan net losses...... 105 161 356 483
---------- ---------- ---------- ----------
Net periodic postretirement cost..... $ 309 $ 343 $ 1,002 $ 1,029
========== ========== ========== ==========
On December 8, 2003, Congress passed the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 ("Medicare Act"). In March 2004,
the FASB issued Staff Position No FAS 106-2 "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003 ("FSP No 106-2")," which provides accounting
guidance on how to account for the effects of the Medicare Act on
postretirement plans that provide prescription drug benefits. The Medicare
Act also requires certain disclosures regarding the effect of the subsidy
provided by the Medicare Act. Additionally, FSP 106-2 provides two
transition methods - retroactive to the date of enactment or prospective
from the date of adoption. The Company elected to adopt FAS 106-2 and apply
the prospective transition method in the second quarter of fiscal 2005. The
accumulated post retirement benefit obligation decreased approximately
$2,200.
For additional information on the Company's defined benefit postretirement
benefit plans, refer to Note 13 in the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K
for the year ended March 31, 2004.
6. Income tax expense as a percentage of income from continuing operations
before income tax expense was 35.1%, 46.8%, 26.7%, and 43.7% in the fiscal
2005 and 2004 quarters and the nine-month periods then ended, respectively.
The fiscal 2005 percentages vary from the U.S. statutory rate due to the
benefit from the utilization of domestic net operating loss carry-forwards
that had been fully reserved and jurisdictional mix. Therefore, income tax
expense primarily results from non-U.S. taxable income and state taxes on
U.S. taxable income. The fiscal 2004 percentages vary from the U.S.
statutory rate due to jurisdictional mix and the existence of losses at
certain subsidiaries for which no benefit was recorded.
7. The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JANUARY 2, DECEMBER 28, JANUARY 2, DECEMBER 28,
2005 2003 2005 2003
---- ---- ---- ----
Numerator for basic and diluted earnings per share:
Net income $ 2,405 $ 705 $ 8,361 $ 2,704
========= ========= ========= =========
Denominators:
Weighted-average common stock outstanding -
denominator for basic EPS 14,594 14,558 14,585 14,549
Effect of dilutive employee stock options 209 - 148 -
--------- --------- --------- ---------
Adjusted weighted-average common stock
outstanding and assumed conversions -
denominator for diluted EPS 14,803 14,558 14,733 14,549
========= ========= ========= =========
- 8 -
8. 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, industrial cranes,
chain, attachments, and other material handling products principally to
third party distributors through diverse distribution channels, and to a
lesser extent directly to end-users. The Solutions segment sells engineered
material handling systems such as conveyors 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 because
management believes this to be the most appropriate measure of operating
performance.
Segment information as of and for the nine months ended January 2, 2005 and
December 28, 2003, is as follows:
NINE MONTHS ENDED JANUARY 2, 2005
---------------------------------
PRODUCTS SOLUTIONS TOTAL
----------- ----------- -----------
Sales to external customers...................... $ 326,847 $ 43,435 $ 370,282
Operating income before restructuring
charges and amortization...................... 29,746 1,401 31,147
Depreciation and amortization.................... 6,461 740 7,201
Total assets..................................... 445,487 32,174 477,661
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
The following schedule provides a reconciliation of operating income before
restructuring charges and amortization with income from continuing
operations before income tax expense:
NINE MONTHS ENDED
-----------------
JANUARY 2, DECEMBER 28,
2005 2003
---- ----
Operating income before restructuring
charges and amortization................................... $ 31,147 $ 22,034
Restructuring charges......................................... (408) (1,650)
Amortization of intangibles................................... (231) (300)
Interest and debt expense..................................... (21,026) (21,940)
Other income.................................................. 1,344 6,659
---------- ----------
Income before income tax expense.............................. $ 10,826 $ 4,803
========== ==========
- 9 -
9. The following information sets forth the condensed consolidating summary
financial information of the parent and guarantors, which guarantee the 10%
Senior Secured Notes and the 8 1/2% Senior Subordinated Notes, and the
nonguarantors. The guarantors are wholly owned and the guarantees are full,
unconditional, joint and several.
Parent Guarantors Nonguarantors Eliminations Consolidated
-------------------------------------------------------------------
AS OF JANUARY 2, 2005
Current assets:
Cash and cash equivalents $ 121 $ (248) $ 8,751 $ - $ 8,624
Trade accounts receivable and unbilled revenues 52,596 264 39,390 - 92,250
Inventories 36,396 19,364 26,458 (972) 81,246
Net assets held for sale 1,800 615 - - 2,415
Other current assets 6,613 681 5,447 - 12,741
-------------------------------------------------------------------
Total current assets 97,526 20,676 80,046 (972) 197,276
Property, plant, and equipment, net 23,854 13,049 19,447 - 56,350
Goodwill and other intangibles, net 95,094 57,323 40,373 - 192,790
Intercompany 103,449 (107,127) (68,829) 72,507 -
Other assets 49,382 198,751 23,307 (240,195) 31,245
-------------------------------------------------------------------
Total assets $ 369,305 $ 182,672 $ 94,344 $ (168,660) $ 477,661
===================================================================
Current liabilities $ 44,541 $ 14,818 $ 32,544 $ (2,408) $ 89,495
Long-term debt, less current portion 273,384 - 747 - 274,131
Other non-current liabilities 2,343 10,522 24,203 - 37,068
-------------------------------------------------------------------
Total liabilities 320,268 25,340 57,494 (2,408) 400,694
Shareholders' equity 49,037 157,332 36,850 (166,252) 76,967
-------------------------------------------------------------------
Total liabilities and shareholders' equity $ 369,305 $ 182,672 $ 94,344 $ (168,660) $ 477,661
===================================================================
FOR THE NINE MONTHS ENDED JANUARY 2, 2005
Net sales $ 177,905 $ 102,039 $ 108,385 $ (18,047) $ 370,282
Cost of products sold 138,004 80,131 78,801 (18,047) 278,889
-------------------------------------------------------------------
Gross profit 39,901 21,908 29,584 - 91,393
-------------------------------------------------------------------
Selling, general and administrative expenses 24,594 14,310 21,342 - 60,246
Restructuring charges 357 - 51 - 408
Amortization of intangibles 178 2 51 - 231
-------------------------------------------------------------------
25,129 14,312 21,444 - 60,885
-------------------------------------------------------------------
Income from operations 14,772 7,596 8,140 - 30,508
Interest and debt expense 18,496 2,260 270 - 21,026
Other income and (expense), net 1,469 (235) 110 - 1,344
-------------------------------------------------------------------
Income before income taxes (2,255) 5,101 7,980 - 10,826
Income tax expense 38 665 2,190 - 2,893
-------------------------------------------------------------------
Income from continuing operations (2,293) 4,436 5,790 - 7,933
Income from discontinued operations 428 - - - 428
-------------------------------------------------------------------
Net income $ (1,865) $ 4,436 $ 5,790 $ - $ 8,361
===================================================================
- 10 -
Parent Guarantors Nonguarantors Eliminations Consolidated
-------------------------------------------------------------------
FOR THE NINE MONTHS ENDED JANUARY 2, 2005
OPERATING ACTIVITIES:
Net cash (used in) provided by operating
activities $ (65,597) $ 68,173 $ 5,837 $ - $ 8,413
-------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale of marketable securities, net - - 957 - 957
Capital expenditures (2,102) (552) (515) - (3,169)
Net assets held for sale - 375 - - 375
-------------------------------------------------------------------
Net cash (used in) provided by investing
activities (2,102) (177) 442 - (1,837)
-------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
line-of-credit agreements 5,022 - (2,116) - 2,906
Repayment of debt (13,062) - (182) - (13,244)
Deferred financing costs incurred (24) - - - (24)
Dividends paid 68,168 (68,000) (168) - -
Other 427 - - - 427
-------------------------------------------------------------------
Net cash provided by (used in) financing
activities 60,531 (68,000) (2,466) - (9,935)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (120) 85 489 - 454
-------------------------------------------------------------------
Cash provided by continuing operations (7,288) (81) 4,302 - (2,905)
CASH PROVIDED BY DISCONTINUED OPERATIONS 428 - - - 428
-------------------------------------------------------------------
Net change in cash and cash equivalents (6,860) (81) 4,302 - (2,477)
Cash and cash equivalents at beginning of period 6,981 (329) 4,449 - 11,101
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 121 $ (248) $ 8,751 $ - $ 8,624
===================================================================
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
===================================================================
- 11 -
Parent Guarantors Nonguarantors Eliminations Consolidated
-------------------------------------------------------------------
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
===================================================================
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
===================================================================
10. Like many 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.
- 12 -
Based on actuarial information, the Company has estimated its
asbestos-related aggregate liability through March 31, 2030 and March 31,
2081 to range between $4,200 and $16,700. The Company's estimation of its
asbestos-related aggregate liability that is probable and estimable is
through March 31, 2030 and ranges from $4,200 to $5,500 as of January 2,
2005. 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. Based on the underlying actuarial information, the
Company has reflected $4,800 as a liability in the consolidated financial
statements in accordance with U.S. generally accepted accounting
principles. The increase in the recorded liability from the amount of
$3,300 disclosed in the fiscal 2005 second quarter 10Q is due to a change
in actuarial parameters used to calculate required asbestos liability
reserve levels. 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 $220 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.
11. In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), SHARE-BASED PAYMENT, which is a
revision of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. Statement 123(R) supersedes APB Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEEs, and amends FASB Statement No. 95, STATEMENT
OF CASH FLOWS. Generally, the approach in Statement 123(R) is similar to
the approach described in Statement 123. However, Statement 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted for interim or annual periods beginning
after June 15, 2005. We expect to adopt 123(R) in the second quarter of
Fiscal 2006. Statement 123(R) permits public companies to adopt its
requirements using one of two methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of Statement 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements of
Statement 123(R) for all share-based payments granted to employees
prior to the effective date of Statement 123(R) that remain unvested
on the effective date.
2. A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on amounts previously recognized under
Statement 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
The Company is still evaluating the method it plans to use when it adopts
statement 123(R).
As permitted by Statement 123, the Company currently accounts for
share-based payments to employees using Opinion 25's intrinsic value method
and, as such, recognizes no compensation cost for employee stock options.
Accordingly, adoption of Statement 123(R)'s fair value method will have an
impact on our results of operations, although it will have no impact on our
overall financial position. The impact of adoption of 123(R) cannot be
predicted at this time because it will depend on levels of shared based
payments granted in the future. However, had we adopted Statement 123(R) in
prior periods, the impact of that standard would have approximated the
impact of statement 123 as described in the disclosure of pro forma net
income and earnings per share in Note 2 to our consolidated financial
statements.
- 13 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS)
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.
Founded in 1875, we have grown to our current leadership position through
organic growth and also as the result of the 14 businesses we acquired between
February 1994 and April 1999. We developed our leading market position over our
130-year history by emphasizing technological innovation, manufacturing
excellence and superior after-sale service. In addition, the acquisitions
significantly broadened our product lines and services and expanded our
geographic reach, end-user markets and customer base. We continue to further
integrate the operations of the acquired businesses with our previously existing
businesses. The current phase of the ongoing integration of these businesses
includes improving our productivity, further reducing our excess manufacturing
capacity and extending our cross-selling activities to the European marketplace.
This phase is in process through our Lean Manufacturing efforts, facility
rationalization program and European sales initiatives. Our Lean Manufacturing
efforts are fundamentally changing our manufacturing processes to be more
responsive to customer demand, improving on-time delivery and productivity. Over
the past three years, under our facility rationalization program, we closed 13
facilities and consolidated several product lines, with potential opportunity
for further rationalization. Also, as previously reported, we have been
undergoing assessments for possible divestiture of several less-strategic
businesses, including most of our Solutions segment and certain businesses
within our Products segment. Two businesses were sold in fiscal 2004 and two
others remain as possible divestiture candidates. In January of 2005, the
Company completed the sale of a Chicago area property in accordance with its
facility rationalization projects at a $2.6 million gain, which will be recorded
in the fourth quarter of fiscal 2005. On February 1, 2005, the Company announced
the sale and partial leaseback of its corporate headquarters building in
Amherst, New York at a $2.7 million gain, which will also be recorded in the
fourth quarter of fiscal 2005. The Company will continue to sell surplus real
estate resulting from our facility rationalization projects and these
divestitures may result in gains or losses. To further expand our global sales,
we continue to introduce certain of our products through our existing European
distribution network that historically have been distributed only in North
America.
Following several years of negative economic conditions we saw some definitive
economic improvement in the first nine months of fiscal 2005. Net sales
rebounded in the first nine months of fiscal 2005, reflecting a 14.5% increase
over the comparable fiscal 2004 period. We monitor such indicators as U.S.
Industrial Capacity Utilization and Industrial Production which have been
increasing since July 2003. Further, we continue to monitor the potential impact
of negative global and domestic trends, including continued steel price
increases, possibly rising interest rates and uncertainty in some end-user
markets around the globe. In addition, to enhance future revenue opportunities,
we are increasing our sales and marketing efforts in international markets and
investing in the development of new products and services.
- 14 -
Consistent with most companies, we 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
cost us almost $30,000 in fiscal 2004 and we work diligently to balance cost
control with the need to provide competitive benefits packages for our
associates. Another cost area of focus is steel pricing and availability. We
utilize approximately $37,000-$39,000 of steel annually in a variety of forms
including rod, wire, bar, structural and others. With increases in worldwide
demand for steel and significant increases in scrap steel prices, we experienced
increases in our costs that we have reflected as price increases and surcharges
to our customers. Our surcharges for certain products went into effect beginning
March 18, 2004 and currently affect most of our chain and forged attachment
products. We continue to monitor steel costs and potential surcharge
requirements on a monthly basis. Another challenging cost area results from
Sarbanes-Oxley internal control documentation and testing compliance. We are
well underway with this initiative and work to control our added internal costs
as well as those of third parties assisting with our efforts and the audit
costs. On the whole, we are encouraged, remaining reservedly optimistic for the
future.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED JANUARY 2, 2005 AND DECEMBER 28, 2003
Net sales in the fiscal 2005 quarter ended January 2, 2005 were $125,913, up
$15,660 or 14.2% from the fiscal 2004 quarter ended December 28, 2003. Net sales
for the nine months ended January 2, 2005 were $370,282, an increase of $46,870
or 14.5% from the nine months ended December 28, 2003. Sales in the Products
segment increased by $12,785 or 13.2% from the previous year's quarter and
$43,795 or 15.5% from the previous year's nine-month period then ended. These
increases are due primarily to the recovery of US industrial markets, as well as
the impact of price increases and surcharges due to steel cost increases.
Translation of foreign currencies, particularly the Euro and Canadian dollar,
into U.S. dollars contributed $2,000 and $4,700 toward the Products segment
increase in sales for the quarter and nine-month period ended January 2, 2005,
respectively. Sales in the Solutions segment increased 20.9% or $2,875 for the
quarter and 7.6% or $3,075 for the nine months ended January 2, 2005 when
compared to the same periods in the prior year. The increase in this segment for
the quarter is primarily due to improvement in our European conveyor business.
For the nine-month period ended January 2, 2005, the improvement in our European
conveyor business is being offset by the divestiture of a subsidiary ($4,034) in
February of 2004. Translation of foreign currencies into U.S. dollars
contributed $1,100 and $2,300 toward the Solutions segment increase in sales for
the quarter and nine-month period ended January 2, 2005, respectively. Sales in
the segments are summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JAN. 2, DEC. 28, CHANGE JAN. 2, DEC. 28, CHANGE
2005 2003 AMOUNT % 2005 2003 AMOUNT %
---- ---- ------ ----- ---- ---- ------ -----
Products $ 109,309 $ 96,524 $ 12,785 13.2 $ 326,847 $ 283,052 $ 43,795 15.5
Solutions 16,604 13,729 2,875 20.9 43,435 40,360 3,075 7.6
--------- --------- -------- --------- --------- --------
Net sales $ 125,913 $ 110,253 $ 15,660 14.2 $ 370,282 $ 323,412 $ 46,870 14.5
========= ========= ======== ========= ========= ========
Gross profit and gross profit margins by operating segment are summarized as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JAN. 2, 2005 DEC. 28, 2003 JAN. 2, 2005 DEC. 28, 2003
------------ ------------- ------------ -------------
$ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- -----
Products $ 27,533 25.2 $ 22,791 23.6 $ 84,583 25.9 $ 70,164 24.8
Solutions 2,466 14.9 1,767 12.9 6,810 15.7 5,359 13.3
--------- --------- --------- ---------
Total Gross Profit $ 29,999 23.8 $ 24,558 22.3 $ 91,393 24.7 $ 75,523 23.4
========= ========= ========= =========
The increase in the gross profit margin for the Products segment is the result
of realization of operational leverage at increased sales volumes and previous
cost containment activities. The improvement in the Solutions segment gross
profit margin was the result of the divestiture of a poor performing,
non-strategic division in February 2004 as well as improved operating
performance in the remaining businesses.
- 15 -
Selling expenses were $13,356, $11,942, $38,326, and $35,400 in the fiscal 2005
and 2004 quarters and the nine-month periods then ended, respectively. The
changes in expense dollars were impacted by increased variable costs, mainly
commissions, as a result of improved sales volume as well as translation from
changes in foreign exchange rates ($400 and $1,000 for the quarter and
nine-month period ended January 2, 2005, respectively). As a percentage of
consolidated net sales, selling expenses were 10.6%, 10.8%, 10.4%, and 10.9% in
the fiscal 2005 and 2004 quarters and the nine-month periods then ended,
respectively.
General and administrative expenses were $6,918, $6,610, $21,920, and $18,089 in
the fiscal 2005 and 2004 quarters and the nine-month periods then ended,
respectively. The quarterly increase is primarily the result of increased
professional costs associated with regulatory compliance with the Sarbanes-Oxley
Act ($400) and currency translation impact ($200), offset by decreased variable
compensation expense ($150). The fiscal 2005 nine-month data is higher than the
prior year due to increased variable compensation expense ($1,050), increased
professional costs associated with regulatory compliance with the Sarbanes-Oxley
Act and environmental matters ($900), increased research and development costs
related to new product development ($450), increased health insurance expense
($400), and currency translation impact ($500). As a percentage of consolidated
net sales, general and administrative expenses were 5.5%, 6.0%, 5.9% and 5.6% in
the fiscal 2005 and 2004 quarters and the nine-month periods then ended,
respectively.
During the first nine-months of fiscal 2005, the Company recorded restructuring
costs of $408 related mostly to the maintenance of non-operating facilities
being held for sale which are expensed on an as incurred basis in accordance
with SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities." All of these costs are related to the Products segment. We
anticipate that our total restructuring charges for fiscal 2005 in connection
with our ongoing facility rationalization and reorganization initiatives will be
between $400 and $600. The majority of these costs relate to projects initiated
subsequent to the adoption of SFAS No. 146 and are therefore expensed as
incurred. The Company recorded restructuring charges of $1,650 in the first
nine-months of fiscal 2004 related to this Corporate-wide reorganization plan
for various employee termination benefits. There were $1,263 of costs related to
the Products segment and $387 in the Solutions Segment.
Amortization of intangibles was $78, $80, $231, and $300 in the fiscal 2005 and
2004 quarters and nine-month periods, respectively.
Interest and debt expense was $6,837, $6,538, $21,026, and $21,940 in the fiscal
2005 and 2004 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 had a $70,000 Senior Second Secured Term Loan facility in place from
November 22, 2002 through July 22, 2003 with an effective interest rate of
approximately 13.8%. The Company secured $115,000 Senior Secured notes on July
22, 2003 with an interest rate of 10.0%, the proceeds from which were used to
retire the $70,000 Term Loan Facility. 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 which was terminated in January 2004. The fiscal 2005
quarter has lower average debt balances than fiscal 2004, but the increased
expense stems from fiscal 2004's benefit from the favorable impact of the swap
($700). The decrease in the nine-month period ended January 2, 2005 is the
result of the lower debt levels. As a percentage of consolidated net sales,
interest and debt expense was 5.4%, 5.9%, 5.7%, and 6.8% in the fiscal 2005 and
2004 quarters and the nine-month periods then ended, respectively.
Other income was $755, $2,212, $1,344, and $6,659 in the fiscal 2005 and 2004
quarters and the nine-month periods then ended, respectively. The 2005 quarter
consisted primarily of $600 of realized gains on investments within the
Company's captive insurance company portfolio. The 2004 quarter consisted
primarily of $1,100 of realized gains on investments within the Company's
captive insurance company portfolio and $1,000 from the change in the fair value
of the interest rate swap. For the nine-month period ended January 2, 2005,
other income is mainly comprised of a $800 of investment income from the
Company's captive insurance company portfolio and $700 in interest income on a
note from the sale of a discontinued operation. For the nine-month period ended
December 28, 2003, other income is mainly comprised of a $3,300 gain on the sale
of real estate, $1,700 of investment income from the Company's captive insurance
- 16 -
company portfolio, $1,000 from the change in the fair value of the interest rate
swap, and a net $700 gain consisting of a $5,600 gain from the early
extinguishment of debt offset by the $4,900 deferred financing cost write-off
associated with the extinguished debt.
Income tax expense as a percentage of income from continuing operations before
income tax expense was 35.1%, 46.8%, 26.7%, and 43.7% in the fiscal 2005 and
2004 quarters and the nine-month periods then ended, respectively. The fiscal
2005 percentages vary from the U.S. statutory rate due to the benefit from the
utilization of domestic net operating loss carry-forwards that had been fully
reserved and jurisdictional mix. Therefore, income tax expense primarily results
from non-U.S. taxable income and state taxes on U.S. taxable income. The fiscal
2004 percentages vary from the U.S. statutory rate due to jurisdictional mix and
the existence of losses at certain subsidiaries for which no benefit was
recorded. The Company evaluates their estimated annual effective tax rate each
quarter. In light of the Company's continuing improvement in the results of its
U.S. operations during fiscal 2005, management plans to review the previously
established valuation reserves for its net deferred tax assets in more detail as
information becomes available.
LIQUIDITY AND CAPITAL RESOURCES
The Company's Revolving Credit Facility provides availability up to a maximum of
$50,000 through March 31, 2007. Underlying collateral at January 2, 2005
amounted to $49,334. The unused portion totaled $34,958, net of outstanding
borrowings of $3,554 and outstanding letters of credit of $10,822. Interest is
payable at varying Eurodollar rates based on LIBOR or prime plus spreads
determined by the Company's leverage ratio, amounting to 250 or 125 basis points
applied to each, respectively, at January 2, 2005 (4.91%). 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 January 2, 2005, the Company has a Term Loan with a balance of $5,821, which
requires quarterly payments of $500. Interest is payable at varying Eurodollar
rates based on LIBOR plus a spread determined by the Company's leverage ratio
amounting to 300 basis points at January 2, 2005 (5.07%). The Term Loan is
secured by all domestic inventory, receivables, equipment, real property,
subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual
property.
The senior subordinated 8 1/2% Notes issued on March 31, 1998 amounted to
$154,563, net of original issue discount and are due March 31, 2008. Provisions
of the 8 1/2% Senior Subordinated Notes (8 1/2% Notes) include, without
limitation, restrictions on liens, indebtedness, asset sales, and dividends and
other restricted payments. The 8 1/2% Notes are redeemable at the option of the
Company, in whole or in part, at prices declining annually from the Make-Whole
Price (as defined in the 8 1/2% Notes agreement) to 100% on and after April 1,
2006. In the event of a Change of Control (as defined in the indenture for such
notes), each holder of the 8 1/2% Notes may require the Company to repurchase
all or a portion of such holder's 8 1/2% Notes at a purchase price equal to 101%
of the principal amount thereof. The 8 1/2% Notes are guaranteed by certain
existing and future domestic subsidiaries and are not subject to any sinking
fund requirements.
The senior secured 10% Notes issued on July 22, 2003 amounted to $115,000 and
are due August 1, 2010. Provisions of the 10% Notes include, without limitation,
restrictions on indebtedness, restricted payments, asset and subsidiary stock
sales, liens, and other restricted transactions. The 10% Notes are not entitled
to redemption at the option of the Company, prior to August 1, 2007 in the
absence of an equity offering. The Company may redeem up to 35% of the
outstanding notes at a redemption price of 110.0% with the proceeds of equity
offerings, subject to certain restrictions. On and after August 1, 2007, they
are redeemable at prices declining annually to 100% on and after August 1, 2009.
In the event of a Change of Control (as defined in the indenture for such
notes), each holder of the 10% Notes may require the Company to repurchase all
or a portion of such holder's 10% Notes at a purchase price equal to 101% of the
principal amount thereof. The 10% Notes are secured by a second-priority
interest in all domestic inventory, receivables, equipment, real property,
subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual
property. The 10% Notes are guaranteed by certain existing and future domestic
subsidiaries and are not subject to any sinking fund requirements.
- 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. The
Company entered into an interest rate swap agreement, which matured in June
2003. The cash flow hedge was considered effective and the gain or loss on the
change in fair value was reported in other comprehensive loss, net of tax and
amounted to a gain of $191 for the fiscal 2004 nine-month period.
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 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, and improving working capital components, and new
market and new product development.
Net cash provided by operating activities was $8,413 for the nine months ended
January 2, 2005 compared to $17,649 for the nine months ended December 28, 2003.
The $9,236 decrease is due to changes in net working capital components,
primarily increased accounts receivable, increased inventories, and decreased
accrued liabilities (including a fiscal 2004 $10,600 tax refund), offset by
increased accounts payable, increased income from continuing operations of
$5,229 in fiscal 2005 and the impact of the fiscal 2004 $3,282 gain from the
sale of real estate.
Net cash used in investing activities was $1,837 for the nine months ended
January 2, 2005 compared to net cash provided by investing activities of $141
for the nine months ended December 28, 2003. In 2005, the Company sold $957 of
marketable equity securities to fund product liability payments compared to the
purchase of $530 of marketable equity securities in fiscal 2004. The Company
received $375 in proceeds from assets held for sale in fiscal 2005 compared to
$3,380 in fiscal 2004. Capital expenditures were consistent at approximately
$3,100 for both periods.
Net cash used in financing activities was $9,935 for the nine months ended
January 2, 2005 compared to net cash used in financing activities of $17,287 for
the nine months ended December 28, 2003. The $7,352 change is primarily the
result of repayment of debt from the receipt of the $10,600 tax refund in the
first quarter of fiscal 2004 and the impact of working capital changes between
the two periods, offset by the increase in net income for the current period.
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 support new product development, reduce production costs,
increase flexibility to respond effectively to market fluctuations and changes,
meet environmental requirements, enhance safety, and promote ergonomically
correct work stations. Consolidated capital expenditures for the nine months
ended January 2, 2005 and December 28, 2003 were $3,169 and $3,096,
respectively.
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 such periods and the ability to
generally pass on rising costs through price increases. However, in the fourth
quarter of fiscal 2004, we were impacted by high inflation in steel costs which
varied by type of steel. We continue to monitor steel costs and potential
surcharge requirements on a monthly basis. In addition, employee benefit costs
such as health insurance, workers compensation insurance, pensions as well as
energy and business insurance have exceeded general inflation levels. We
generally incorporated those cost increases into our sales price increases
effective in early fiscal 2005 as well as surcharges on certain products that
began in March 2004. In the future, we may be further affected by inflation that
we may not be able to pass on as price increases.
- 18 -
SEASONALITY AND QUARTERLY RESULTS
Quarterly results may be materially affected by the timing of large customer
orders, periods of high vacation and holiday concentrations, restructuring
charges and other costs attributable to our facility rationalization program,
divestitures, acquisitions and the magnitude of rationalization integration
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.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004), SHARE-BASED PAYMENT, which is a revision of
FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement
123(R) supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEEs,
and amends FASB Statement No. 95, STATEMENT OF CASH FLOWS. Generally, the
approach in Statement 123(R) is similar to the approach described in Statement
123. However, Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative.
Statement 123(R) must be adopted for interim or annual periods beginning after
June 15, 2005. We expect to adopt 123(R) in the second quarter of Fiscal 2006.
Statement 123(R) permits public companies to adopt its requirements using one of
two methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of Statement 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements of
Statement 123(R) for all share-based payments granted to employees
prior to the effective date of Statement 123(R) that remain unvested
on the effective date.
2. A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on amounts previously recognized under
Statement 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
The Company is still evaluating the method it plans to use when it adopts
statement 123(R).
As permitted by Statement 123, the Company currently accounts for share-based
payments to employees using Opinion 25's intrinsic value method and, as such,
recognizes no compensation cost for employee stock options. Accordingly,
adoption of Statement 123(R)'s fair value method will have an impact on our
results of operations, although it will have no impact on our overall financial
position. The impact of adoption of 123(R) cannot be predicted at this time
because it will depend on levels of shared based payments granted in the future.
However, had we adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of statement 123 as described in the
disclosure of pro forma net income and earnings per share in Note 2 to our
consolidated financial statements.
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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.
New requirements adopted by the Securities and Exchange Commission in response
to the passage of the Sarbanes-Oxley Act of 2002 will require an annual review
and evaluation of our internal control systems and attestation of these systems
by our independent auditors. We are currently reviewing our internal control
procedures. Any improvements in our internal control systems or in documentation
of such control systems could be costly to prepare or implement, divert
attention of management or finance staff, and may cause our operating expenses
to increase over the balance of our fiscal year.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the reported market risks since the end
of Fiscal 2004.
Item 4. Disclosure Controls and Procedures
As of January 2, 2005, 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 January 2, 2005. There were no
significant changes in the Company's internal controls or in other factors
during our third quarter ended January 2, 2005.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings - none.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - 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 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 January 18, 2005, the Company filed a Current Report on Form 8-K
with respect to the sale of property.
On January 26, 2005, the Company filed a Current Report on Form 8-K
with respect to its financial results for the third quarter of fiscal
2005.
On February 1, 2005, the Company filed a Current Report on Form 8-K
with respect to the sale and partial leaseback of property.
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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 2, 2005 /S/ ROBERT R. FRIEDL
---------------- --------------------------------------
Robert R. Friedl
Vice President and Chief Financial
Officer (Principal Financial Officer)
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