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 October 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
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COLUMBUS MCKINNON CORPORATION
- --------------------------------------------------------------------------------
(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): [X] Yes [ ] No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The number of shares of common stock outstanding as of October 31, 2005 was:
15,250,272 shares.
FORM 10-Q INDEX
COLUMBUS MCKINNON CORPORATION
OCTOBER 2, 2005
PAGE #
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets -
October 2, 2005 and March 31, 2005 2
Condensed consolidated statements of operations
and retained earnings - Three months and six
and October 3, 2004 3
Condensed consolidated statements of cash flows -
Six months ended October 2, 2005 and October 3, 2004 4
Condensed consolidated statements of comprehensive income -
Three months and six months ended October 2, 2005
and October 3, 2004 5
Notes to condensed consolidated financial statements -
October 2, 2005 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Disclosure Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - none. 23
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds - none. 23
Item 3. Defaults upon Senior Securities - none. 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information - none. 23
Item 6. Exhibits and Reports on Form 8-K 23
- 1 -
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 2, MARCH 31,
2005 2005
---------- ----------
(UNAUDITED) (AUDITED)
ASSETS: (IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 42,535 $ 9,479
Trade accounts receivable 86,026 88,974
Unbilled revenues 10,862 8,848
Inventories 77,637 77,626
Prepaid expenses 14,317 14,198
---------- ----------
Total current assets 231,377 199,125
Property, plant, and equipment, net 54,532 57,237
Goodwill and other intangibles, net 186,732 187,285
Marketable securities 25,165 24,615
Deferred taxes on income 4,327 6,122
Other assets 6,635 6,487
---------- ----------
Total assets $ 508,768 $ 480,871
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable to banks $ 3,318 $ 4,839
Trade accounts payable 37,833 33,688
Accrued liabilities 51,955 51,962
Restructuring reserve 114 144
Current portion of long-term debt 195 5,819
---------- ----------
Total current liabilities 93,415 96,452
Senior debt, less current portion 115,600 115,735
Subordinated debt 161,600 144,548
Other non-current liabilities 44,751 42,369
---------- ----------
Total liabilities 415,366 399,104
---------- ----------
Shareholders' equity
Common stock 152 149
Additional paid-in capital 106,795 104,078
Retained earnings (accumulated deficit) 1,941 (8,644)
ESOP debt guarantee (4,260) (4,554)
Unearned restricted stock (29) (6)
Accumulated other comprehensive loss (11,197) (9,256)
---------- ----------
Total shareholders' equity 93,402 81,767
---------- ----------
Total liabilities and shareholders' equity $ 508,768 $ 480,871
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
2005 2004 2005 2004
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 134,712 $ 122,711 $ 275,589 $ 244,369
Cost of products sold 99,554 92,768 203,888 182,975
--------- --------- --------- ---------
Gross profit 35,158 29,943 71,701 61,394
--------- --------- --------- ---------
Selling expenses 13,080 12,270 26,738 24,970
General and administrative expenses 8,539 7,517 16,714 15,002
Restructuring charges 211 184 237 217
Amortization of intangibles 61 76 123 153
--------- --------- --------- ---------
21,891 20,047 43,812 40,342
--------- --------- --------- ---------
Income from operations 13,267 9,896 27,889 21,052
Interest and debt expense 6,633 7,141 13,349 14,189
Other (income) and expense, net 1,864 (607) 1,075 (589)
--------- --------- --------- ---------
Income from continuing operations before
income tax expense 4,770 3,362 13,465 7,452
Income tax expense 1,721 982 3,308 1,710
--------- --------- --------- ---------
Income from continuing operations 3,049 2,380 10,157 5,742
Income from discontinued operations 214 214 428 214
--------- --------- --------- ---------
Net income 3,263 2,594 10,585 5,956
Accumulated deficit - beginning of period (1,322) (21,992) (8,644) (25,354)
--------- --------- --------- ---------
Retained earnings
(accumulated deficit) - end of period $ 1,941 $ (19,398) $ 1,941 $ (19,398)
========= ========= ========= =========
Basic income per share:
Income from continuing operations $ 0.21 $ 0.17 $ 0.69 $ 0.40
Income from discontinued operations 0.01 0.01 0.03 0.01
--------- --------- --------- ---------
Net income $ 0.22 $ 0.18 $ 0.72 $ 0.41
========= ========= ========= =========
Diluted income per share:
Income from continuing operations $ 0.20 $ 0.17 $ 0.67 $ 0.40
Income from discontinued operations 0.01 0.01 0.03 0.01
--------- --------- --------- ---------
Net income $ 0.21 $ 0.18 $ 0.70 $ 0.41
========= ========= ========= =========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
----------------
OCTOBER 2, OCTOBER 3,
2005 2004
---------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Income from continuing operations $ 10,157 $ 5,742
Adjustments to reconcile income from
continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,651 4,652
Deferred income taxes 1,795 1,275
Gain on sale of real estate/investments (1,547) -
Loss on early retirement of 2008 bonds 2,407 -
Amortization/write-off of deferred financing costs 1,563 655
Changes in operating assets and liabilities:
Trade accounts receivable and unbilled revenues (417) (1,597)
Inventories (301) (5,257)
Prepaid expenses (97) 1,342
Other assets (202) (135)
Trade accounts payable 4,666 (4,718)
Accrued and non-current liabilities 1,487 (4,781)
--------- ---------
Net cash provided by (used in) operating activities 24,162 (2,822)
--------- ---------
INVESTING ACTIVITIES:
Sale of marketable securities, net 475 1,991
Capital expenditures (3,761) (1,948)
Proceeds from sale of facilities and surplus real estate 2,091 -
Net assets held for sale - 300
--------- ---------
Net cash (used in) provided by investing activities (1,195) 343
--------- ---------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 2,729 -
Net (payments) borrowings under revolving
line-of-credit agreements (1,110) 8,036
Repayment of debt (126,953) (7,173)
Proceeds from issuance of long-term debt 136,000 -
Deferred financing costs incurred (1,566) (11)
Other 294 286
--------- ---------
Net cash provided by financing activities 9,394 1,138
EFFECT OF EXCHANGE RATE CHANGES ON CASH 267 (91)
--------- ---------
Net cash provided by (used in) continuing operations 32,628 (1,432)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 428 214
--------- ---------
Net change in cash and cash equivalents 33,056 (1,218)
Cash and cash equivalents at beginning of period 9,479 11,101
--------- ---------
Cash and cash equivalents at end of period $ 42,535 $ 9,883
========= =========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
2005 2004 2005 2004
---- ---- ---- ----
(IN THOUSANDS)
Net income $ 3,263 $ 2,594 $ 10,585 $ 5,956
-------- -------- -------- --------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 1,171 945 (1,974) 938
Unrealized gain (loss) on investments:
Unrealized holding gains (losses) arising
during the period 653 (294) 1,024 (391)
Reclassification adjustment for
(gains) losses included in net income (541) (7) (991) 9
-------- -------- -------- --------
112 (301) 33 (382)
-------- -------- -------- --------
Total other comprehensive income (loss) 1,283 644 (1,941) 556
-------- -------- -------- --------
Comprehensive income $ 4,546 $ 3,238 $ 8,644 $ 6,512
======== ======== ======== ========
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)
OCTOBER 2, 2005
1. DESCRIPTION OF BUSINESS
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 October 2, 2005, and the results of its operations and its cash
flows for the three and six-month periods ended October 2, 2005 and October 3,
2004, have been included. Results for the period ended October 2, 2005 are not
necessarily indicative of the results that may be expected for the year ended
March 31, 2006. The balance sheet at March 31, 2005 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, 2005.
The Company is a leading manufacturer and marketer 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. STOCK BASED COMPENSATION
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:
- 6 -
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
2005 2004 2005 2004
---------------------------------------------------
Net income, as reported..................... $ 3,263 $ 2,594 $ 10,585 $ 5,956
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (233) (183) (579) (369)
---------------------------------------------------
Net income, pro forma....................... $ 3,030 $ 2,411 $ 10,006 $ 5,587
===================================================
Basic income per share:
As reported................................. $ 0.22 $ 0.18 $ 0.72 $ 0.41
===================================================
Pro forma................................... $ 0.20 $ 0.17 $ 0.68 $ 0.38
===================================================
Diluted income per share:
As reported................................. $ 0.21 $ 0.18 $ 0.70 $ 0.41
===================================================
Pro forma................................... $ 0.20 $ 0.16 $ 0.66 $ 0.38
===================================================
During the first six months of fiscal 2006, stock options for 298,400 shares
were exercised resulting in proceeds to the Company of $2,729.
3. INVENTORIES
Inventories consisted of the following:
OCTOBER 2, MARCH 31,
2005 2005
---------- ----------
At cost - FIFO basis:
Raw materials................................... $ 39,716 $ 42,283
Work-in-process................................. 12,482 10,238
Finished goods.................................. 36,392 35,800
---------- ----------
88,590 88,321
LIFO cost less than FIFO cost................... (10,953) (10,695)
---------- ----------
Net inventories................................. $ 77,637 $ 77,626
========== ==========
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. RESTRUCTURING CHARGES
During the first six-months of fiscal 2006, the Company recorded restructuring
costs of $237 for severance and 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." $186 and $51 of these costs are related to the Solutions and
Products segments, respectively. The fiscal 2006 second quarter employee
restructuring charges are related to the termination of several employees within
our industrial crane and conveyor businesses. The liability as of October 2,
2005 consists primarily of 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.
- 7 -
The following table provides a reconciliation of the activity related to
restructuring reserves:
EMPLOYEE FACILITY TOTAL
---------------------------------------
Reserve at March 31, 2005................................ $ 16 $ 128 $ 144
Fiscal 2006 first quarter restructuring charges.......... - 26 26
Cash payments............................................ (13) (35) (48)
---------------------------------------
Reserve at July 3, 2005.................................. $ 3 $ 119 $ 122
Fiscal 2006 second quarter restructuring charges......... 178 33 211
Cash payments............................................ (172) (47) (219)
---------------------------------------
Reserve at October 2, 2005............................... $ 9 $ 105 $ 114
=======================================
5. NET PERIODIC BENEFIT COST
The following table sets forth the components of net periodic pension cost for
the Company's defined benefit pension plans:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
2005 2004 2005 2004
---- ---- ---- ----
Service costs.................... $ 1,088 $ 1,190 $ 2,176 $ 2,380
Interest cost.................... 1,737 1,755 3,474 3,510
Expected return on plan assets... (1,654) (1,645) (3,308) (3,290)
Net amortization................. 508 495 1,016 990
-------- -------- -------- --------
Net periodic pension cost........ $ 1,679 $ 1,795 $ 3,358 $ 3,590
======== ======== ======== ========
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, 2005.
The following table sets forth the components of net periodic postretirement
benefit cost for the Company's defined benefit postretirement plans:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
2005 2004 2005 2004
---- ---- ---- ----
Service costs..................... $ 4 $ 4 $ 8 $ 8
Interest cost .................... 188 200 376 434
Amortization of plan net losses... 101 105 202 251
-------- -------- -------- ----
Net periodic postretirement cost.. $ 293 $ 309 $ 586 $ 693
======== ======== ======== ========
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, 2005.
- 8 -
6. DEBT
On September 2, 2005, the Company issued $136,000 of 8 7/8% Senior Subordinated
Notes (8 7/8% Notes) due November 1, 2013. Provisions of the 8 7/8% Notes
include, without limitation, restrictions on indebtedness, asset sales, and
dividends and other restricted payments. Until November 1, 2008, we may redeem
up to 35% of the outstanding notes at a redemption price of 108.875% with the
proceeds of equity offerings, subject to certain restrictions. The 8 7/8% 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 7/8% Notes
agreement) to 100% on and after November 1, 2011. In the event of a Change of
Control (as defined in the indenture for such notes), each holder of the 8 7/8%
Notes may require us to repurchase all or a portion of such holder's 8 7/8%
Notes at a purchase price equal to 101% of the principal amount thereof. The 8
7/8% Notes are guaranteed by certain existing and future domestic subsidiaries
and are not subject to any sinking fund requirements.
Proceeds from the 8 7/8% Notes were used for the repurchase of $116,775 million
of the 8 1/2% Senior Subordinated Notes. The repurchase of the 8 1/2% Notes
occurred at a premium resulting in a pre-tax loss on early extinguishment of
debt of $2,298. As a result of the repurchase of the 8 1/2% Notes, $922 of
pre-tax deferred financing costs and $110 of the original issue discount were
written-off in the second quarter of fiscal 2006. The net effect of these items,
a $3,330 pre-tax loss, is shown as part of other (income) and expense, net.
As of October 2, 2005, the Senior Subordinated 8 1/2% Notes issued on March 31,
1998 amounted to $25,600. On October 14, 2005, all of the outstanding 8 1/2%
Notes were repurchased with proceeds from the 8 7/8% Notes and cash on hand.
7. INCOME TAXES
Income tax expense as a percentage of income from continuing operations before
income tax expense was 36.1%, 29.2%, 24.6%, and 22.9% in the fiscal 2006 and
2005 quarters and the six-month periods then ended, respectively. The fiscal
2006 and 2005 percentages vary from the U.S. statutory rate due to 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 higher
effective income tax rate in fiscal 2006 reflects the $3,330 loss on early
extinguishment of debt which reduced U.S. taxable income, but did not affect our
tax expense due to the existence of fully reserved U.S. Federal net operating
loss carry-forwards.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
2005 2004 2005 2004
---- ---- ---- ----
Numerator for basic and diluted earnings per share:
Net income $ 3,263 $ 2,594 $ 10,585 $ 5,956
======== ======== ======== ========
Denominators:
Weighted-average common stock outstanding -
denominator for basic EPS 14,845 14,585 14,757 14,581
Effect of dilutive employee stock options 586 215 470 117
-------- -------- -------- --------
Adjusted weighted-average common stock
outstanding and assumed conversions -
denominator for diluted EPS 15,431 14,800 15,227 14,698
======== ======== ======== ========
- 9 -
9. BUSINESS SEGMENT INFORMATION
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.
Segment information as of and for the six months ended October 2, 2005 and
October 3, 2004, is as follows:
SIX MONTHS ENDED OCTOBER 2, 2005
--------------------------------
PRODUCTS SOLUTIONS TOTAL
-------- --------- -----
Sales to external customers........ $ 244,555 $ 31,034 $ 275,589
Income from operations............. 26,820 1,069 27,889
Depreciation and amortization...... 4,059 592 4,651
Total assets....................... 477,646 31,122 508,768
SIX MONTHS ENDED OCTOBER 3, 2004
--------------------------------
PRODUCTS SOLUTIONS TOTAL
-------- --------- -----
Sales to external customers........ $ 217,538 $ 26,831 $ 244,369
Income from operations............. 20,259 793 21,052
Depreciation and amortization...... 4,176 476 4,652
Total assets....................... 442,152 29,967 472,119
- 10 -
10. SUMMARY FINANCIAL INFORMATION
The following information sets forth the condensed consolidating summary
financial information of the parent and guarantors, which guarantee the 10%
Senior Secured Notes, the 8 1/2% Senior Subordinated Notes and the 8 7/8% 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 OCTOBER 2, 2005
Current assets:
Cash and cash equivalents $ 26,423 $ (1,209) $ 17,321 $ - $ 42,535
Trade accounts receivable and unbilled revenues 57,632 245 39,011 - 96,888
Inventories 33,979 19,880 26,155 (2,377) 77,637
Other current assets 3,589 893 9,835 - 14,317
---------------------------------------------------------------------
Total current assets 121,623 19,809 92,322 (2,377) 231,377
Property, plant, and equipment, net 24,567 12,102 17,863 - 54,532
Goodwill and other intangibles, net 90,006 57,286 39,440 - 186,732
Intercompany 98,943 (102,682) (71,472) 75,211 -
Other assets 53,769 197,864 24,689 (240,195) 36,127
---------------------------------------------------------------------
Total assets $ 388,908 $ 184,379 $ 102,842 $(167,361) $ 508,768
=====================================================================
Current liabilities $ 42,154 $ 15,329 $ 35,636 $ 296 $ 93,415
Long-term debt, less current portion 276,600 - 600 - 277,200
Other non-current liabilities 7,244 8,183 29,324 - 44,751
---------------------------------------------------------------------
Total liabilities 325,998 23,512 65,560 296 415,366
Shareholders' equity 62,910 160,867 37,282 (167,657) 93,402
---------------------------------------------------------------------
Total liabilities and shareholders' equity $ 388,908 $ 184,379 $ 102,842 $(167,361) $ 508,768
=====================================================================
FOR THE SIX MONTHS ENDED OCTOBER 2, 2005
Net sales $ 133,203 $ 74,059 $ 80,228 $ (11,901) $ 275,589
Cost of products sold 99,422 55,921 59,041 (10,496) 203,888
---------------------------------------------------------------------
Gross profit 33,781 18,138 21,187 (1,405) 71,701
---------------------------------------------------------------------
Selling, general and administrative expenses 20,193 8,014 15,245 - 43,452
Restructuring charges 159 - 78 - 237
Amortization of intangibles 88 1 34 - 123
---------------------------------------------------------------------
20,440 8,015 15,357 - 43,812
---------------------------------------------------------------------
Income from operations 13,341 10,123 5,830 (1,405) 27,889
Interest and debt expense 10,929 2,254 166 - 13,349
Other (income) and expense, net 2,904 28 (1,857) - 1,075
---------------------------------------------------------------------
(Loss) income before income tax expense (492) 7,841 7,521 (1,405) 13,465
Income tax expense 349 683 2,276 - 3,308
---------------------------------------------------------------------
(Loss) income from continuing operations (841) 7,158 5,245 (1,405) 10,157
Income from discontinued operations 428 - - - 428
---------------------------------------------------------------------
Net (loss) income $ (413) $ 7,158 $ 5,245 $ (1,405) $ 10,585
=====================================================================
- 11 -
Parent Guarantors Nonguarantors Eliminations Consolidated
---------------------------------------------------------------------
FOR THE SIX MONTHS ENDED OCTOBER 2, 2005
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 7,543 $ 8,507 $ 8,112 $ - $ 24,162
---------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale of marketable securities, net - - 475 - 475
Capital expenditures (2,030) (644) (1,087) - (3,761)
Proceeds from sale of facilities and surplus real
estate - 468 1,623 - 2,091
---------------------------------------------------------------------
Net cash (used in) provided by investing
activities (2,030) (176) 1,011 - (1,195)
---------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 2,729 - - - 2,729
Net borrowings (payments) under revolving
line-of-credit agreements 240 - (1,350) - (1,110)
Repayment of debt (126,831) - (122) - (126,953)
Proceeds from issuance of long-term debt 136,000 - - - 136,000
Deferred financing costs incurred (1,566) - - - (1,566)
Dividends paid 8,854 (8,854) - - -
Other 294 - - - 294
---------------------------------------------------------------------
Net cash provided by (used in) financing
activities 19,720 (8,854) (1,472) - 9,394
EFFECT OF EXCHANGE RATE CHANGES ON CASH (257) 11 513 - 267
---------------------------------------------------------------------
Cash provided by (used in) continuing operations 24,976 (512) 8,164 - 32,628
CASH PROVIDED BY DISCONTINUED OPERATIONS 428 - - - 428
---------------------------------------------------------------------
Net change in cash and cash equivalents 25,404 (512) 8,164 - 33,056
Cash and cash equivalents at beginning of period 1,019 (697) 9,157 - 9,479
---------------------------------------------------------------------
Cash and cash equivalents at end of period $ 26,423 $ (1,209) $ 17,321 $ - $ 42,535
=====================================================================
AS OF MARCH 31, 2005
Current assets:
Cash and cash equivalents $ 1,019 $ (697) $ 9,157 $ - $ 9,479
Trade accounts receivable and unbilled revenues 57,707 197 39,918 - 97,822
Inventories 33,651 18,919 26,028 (972) 77,626
Other current assets 7,297 973 5,928 - 14,198
---------------------------------------------------------------------
Total current assets 99,674 19,392 81,031 (972) 199,125
Property, plant, and equipment, net 25,107 12,847 19,283 - 57,237
Goodwill and other intangibles, net 90,027 57,287 39,971 - 187,285
Intercompany 98,964 (102,189) (70,216) 73,441 -
Other assets 55,396 197,864 24,159 (240,195) 37,224
---------------------------------------------------------------------
Total assets $ 369,168 $ 185,201 $ 94,228 $(167,726) $ 480,871
=====================================================================
Current liabilities $ 50,323 $ 14,450 $ 33,153 $ (1,474) $ 96,452
Long-term debt, less current portion 259,520 - 763 - 260,283
Other non-current liabilities 7,898 8,199 26,272 - 42,369
---------------------------------------------------------------------
Total liabilities 317,741 22,649 60,188 (1,474) 399,104
Shareholders' equity 51,427 162,552 34,040 (166,252) 81,767
---------------------------------------------------------------------
Total liabilities and shareholders' equity $ 369,168 $ 185,201 $ 94,228 $(167,726) $ 480,871
=====================================================================
- 12 -
Parent Guarantors Nonguarantors Eliminations Consolidated
---------------------------------------------------------------------
FOR THE SIX MONTHS ENDED OCTOBER 3, 2004
Net sales $ 119,552 $ 68,243 $ 68,656 $ (12,082) $ 244,369
Cost of products sold 91,845 53,413 49,799 (12,082) 182,975
---------------------------------------------------------------------
Gross profit 27,707 14,830 18,857 - 61,394
Selling, general and administrative expenses 15,833 10,326 13,813 - 39,972
Restructuring charges 217 - - - 217
Amortization of intangibles 118 1 34 - 153
---------------------------------------------------------------------
16,168 10,327 13,847 - 40,342
---------------------------------------------------------------------
Income from operations 11,539 4,503 5,010 - 21,052
Interest and debt expense 12,174 1,830 185 - 14,189
Other (income) and expense, net (726) 237 (100) - (589)
---------------------------------------------------------------------
Income before income tax expense 91 2,436 4,925 - 7,452
Income tax expense 103 275 1,332 - 1,710
---------------------------------------------------------------------
(Loss) income from continuing operations (12) 2,161 3,593 - 5,742
Income from discontinued operations 214 - - - 214
---------------------------------------------------------------------
Net income $ 202 $ 2,161 $ 3,593 $ - $ 5,956
=====================================================================
FOR THE SIX MONTHS ENDED OCTOBER 3, 2004
OPERATING ACTIVITIES:
Net cash (used in) provided by operating
activities $ (72,018) $ 67,369 $ 1,827 $ - $ (2,822)
---------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale of marketable securities, net - - 1,991 - 1,991
Capital expenditures, net (1,580) (385) 17 - (1,948)
Other - 300 - - 300
---------------------------------------------------------------------
Net cash (used in) provided by investing
activities (1,580) (85) 2,008 - 343
---------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
line-of-credit agreements 8,468 - (432) - 8,036
Repayment of debt (7,052) - (121) - (7,173)
Deferred financing costs incurred (11) - - - (11)
Dividends paid 68,000 (68,000) - - -
Other 286 - - - 286
---------------------------------------------------------------------
Net cash provided by (used in) financing
activities 69,691 (68,000) (553) - 1,138
EFFECT OF EXCHANGE RATE CHANGES ON CASH (34) 92 (149) - (91)
---------------------------------------------------------------------
Cash (used in) provided by continuing operations (3,941) (624) 3,133 - (1,432)
CASH PROVIDED BY DISCONTINUED OPERATIONS 214 - - - 214
---------------------------------------------------------------------
Net change in cash and cash equivalents (3,727) (624) 3,133 - (1,218)
Cash and cash equivalents at beginning of period 6,981 (329) 4,449 - 11,101
---------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,254 $ (953) $ 7,582 $ - $ 9,883
=====================================================================
- 13 -
11. LOSS CONTINGENCIES
Like many industrial manufacturers, the Company is involved in asbestos-related
litigation. In continually evaluating costs relating to 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.
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 using actuarial parameters of continued claims for a period
of 25 to 76 years. The Company's estimation of its asbestos-related aggregate
liability that is probable and estimable, in accordance with U.S. generally
accepted accounting principles, is through March 31, 2031 and ranges from $4,200
to $5,500 as of October 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 $5,000 as a liability in the consolidated financial statements in
accordance with U.S. 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 $250 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.
12. NEW ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, as an amendment
to ARB No. 43, Chapter 4, INVENTORY PRICING, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
materials (spoilage). This Statement requires that these items be recognized as
current-period charges and requires the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. This
Statement becomes effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not expect the adoption of SFAS
No. 151 to have a material impact on the Company's consolidated financial
statements.
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) was to be adopted for interim or annual periods beginning after
June 15, 2005. On April 14th, 2005, the SEC announced that it would provide for
a phased-in implementation process for FASB statement No. 123(R). The SEC is
requiring that registrants adopt statement 123(R)'s fair value method of
accounting for share-based payments to employees no later than the beginning of
the first fiscal year beginning after June 15, 2005. We expect to adopt 123(R)
in the first quarter of Fiscal 2007. Statement 123(R) permits public companies
to adopt its requirements using one of two methods:
- 14 -
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 share 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
condensed consolidated financial statements.
13. SUBSEQUENT EVENT
On October 20, 2005, the Company filed a Form S-3 registration statement with
the Securities Exchange Commission to potentially sell an additional 3,350,000
shares of its common stock. The number of shares being offered by the Company is
3,000,000 and 350,000 are being offered by a selling shareholder. The Company
will not receive any proceeds from the sale of shares by the selling
shareholder. A portion of the proceeds received by the Company would be used to
redeem approximately $40.3 million principal amount of the Company's outstanding
Senior Secured 10% Notes. The balance of the proceeds would be available for
other general corporate purposes to advance its strategy of global growth,
including additional debt repayment, investments and acquisitions.
- 15 -
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-user 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. 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.
Founded in 1875, we have grown to our current leadership position through
organic growth and the acquisition of 14 businesses between February 1994 and
April 1999. We have 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. Integration of the operations of the
acquired businesses with our previously existing businesses is substantially
complete. Ongoing integration of these businesses includes improving our
productivity, further reducing our excess manufacturing capacity and extending
our sales activities to the European and Asian marketplaces. We are executing
those initiatives through our Lean Manufacturing efforts, facility
rationalization program, new product development and expanded sales activities.
Shareholder value will be enhanced through continued emphasis on the improvement
of the fundamentals including manufacturing efficiency, cost containment,
efficient capital investment, and our markets and customers.
We maintain a strong domestic market share with significant leading North
American market positions in hoists, lifting and sling chain, and forged
attachments. To broaden our product offering in markets where we have a strong
competitive position as well as to facilitate penetration into new geographic
markets, we have heightened our new product development activities. This
includes development of hoist lines in accordance with international standards,
to complement our current offering of hoist products designed in accordance with
U.S. standards. To further expand our global sales, we are introducing certain
of our products that historically have been distributed only in North America
and also introducing new products through our existing European distribution
network. Furthermore, we are working to build a distribution network in China to
capture an anticipated growing demand for material handling products as that
economy continues to industrialize. These investments in international markets
and new products are part of our focus on our greatest opportunities for growth.
International sales increased 20% from approximately $82,000 to $98,000 during
the first six months of fiscal 2006 and overall sales increased 13% over the
same period last year. Management believes that the growth rate of total sales
may moderate in future periods due to more difficult comparisons with our fiscal
2005 periods. In addition, bookings have tapered to the mid-single digit growth
range. We monitor such indicators as U.S. Industrial Capacity Utilization, which
had been increasing since July 2003 but have more recently begun to stabilize.
In addition, we continue to monitor the potential impact of global and domestic
trends, including steel price fluctuations, possibly rising interest rates and
uncertainty in some end-user markets around the globe.
Our Lean Manufacturing efforts continue to fundamentally change our
manufacturing processes to be more responsive to customer demand and improve
on-time delivery and productivity. From 2001 to 2004 under our facility
rationalization program, we closed 13 facilities and consolidated several
product lines, with potential opportunity for further rationalization. We have
been undergoing assessments for possible divestiture of several less-strategic
businesses. Our manipulator and specialty marine chain businesses were sold in
fiscal 2004 and two others remain as possible divestiture candidates, our
conveyor business which comprises a majority of our Solutions segment and a
specialty crane business within our Products segment. In furtherance of our
facility rationalization projects, we completed the sale of several excess
properties at a gain of $3,700 and $556 during fiscal 2005 and the first six
months of fiscal 2006, respectively. We will continue to sell surplus real
estate resulting from our facility rationalization projects and those sales may
result in gains or losses.
- 16 -
We keep a close watch on the costs for fringe benefits such as health insurance,
workers compensation insurance and pension. Combined, those benefits cost us
over $33,000 in fiscal 2005 and we work diligently to balance cost control with
the need to provide competitive employee benefits packages for our associates.
Another cost area of focus is steel. We utilize approximately $30,000 to $35,000
of steel annually in a variety of forms including rod, wire, bar, structural and
others. Increases in our costs have been reflected as price increases and
surcharges to our customers and we continue to monitor them. The costs of
implementing Sarbanes-Oxley internal control documentation and compliance had a
substantial impact on fiscal 2005 profitability and we are focused on minimizing
the future added costs of compliance. We continue to operate in a highly
competitive business environment in the markets and geographies served. Our
performance will be impacted by our ability to address a variety of challenges
and opportunities in those markets and geographies, including trends towards
increased utilization of the global labor force and the expansion of market
opportunities in Asia and other emerging markets. Based on current trends, we
look forward to slowed growth over the remainder of fiscal 2006.
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED OCTOBER 2, 2005 AND OCTOBER 3, 2004
Net sales in the fiscal 2006 quarter ended October 2, 2005 were $134,712, up
$12,001 or 9.8% from the fiscal 2005 quarter ended October 3, 2004. Net sales
for the six months ended October 2, 2005 were $275,589, an increase of $31,220
or 12.8% from the six months ended October 3, 2004. Sales in the Products
segment increased by $11,693 or 10.7% from the previous year's quarter and
$27,017 or 12.4% from the previous year's six-month period then ended. These
increases are due to the continued strength of the U.S. and European industrial
markets, as well as the impact of price increases of $4,800 and $12,700 in the
quarter and six months ended October 2, 2005, respectively. Translation of
foreign currencies, particularly the Euro and Canadian dollar, into U.S. dollars
contributed $700 and $2,000 toward the Products segment increase in sales for
the quarter and six-month period ended October 2, 2005. Sales in the Solutions
segment increased 2.2% or $308 for the quarter and 15.7% or $4,203 for the six
months ended October 2, 2005 when compared to the same period in the prior year.
The increase in this segment is primarily due to improvement in our European
conveyor business. Translation of foreign currencies into U.S. dollars
contributed $200 and $800 toward the Solutions segment increase in sales for the
quarter and six-months ended October 2, 2005. Sales in the segments are
summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCT. 2, OCT. 3, CHANGE OCT. 2, OCT. 3, CHANGE
2005 2004 AMOUNT % 2005 2004 AMOUNT %
---------- ---------- -------- ---- ---------- --------- -------- ----
Products $ 120,674 $ 108,981 $ 11,693 10.7 $ 244,555 $ 217,538 $ 27,017 12.4
Solutions 14,038 13,730 308 2.2 31,034 26,831 4,203 15.7
---------- ---------- -------- ---------- --------- --------
Net sales $ 134,712 $ 122,711 $ 12,001 9.8 $ 275,589 $ 244,369 $ 31,220 12.8
========== ========== ======== ========== ========= ========
Gross profits and gross profit margins by operating segment are summarized as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCT. 2, 2005 OCT. 3, 2004 OCT. 2, 2005 OCT. 3, 2004
------------ ------------ ------------ ------------
$ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- -----
Products $ 32,665 27.1 $ 27,805 25.5 $ 66,885 27.3 $ 57,050 26.2
Solutions 2,493 17.8 2,138 15.6 4,816 15.5 4,344 16.2
--------- --------- --------- ---------
Total Gross Profit $ 35,158 26.1 $ 29,943 24.4 $ 71,701 26.0 $ 61,394 25.1
========= ========= ========= =========
The increase in the gross profit margin for the Products segment is the result
of product mix, the realization of operational leverage at increased sales
volumes and previous cost containment activities. The Solutions segment gross
profit margin was impacted by product mix.
Selling expenses were $13,080, $12,270, $26,738, and $24,970 in the fiscal 2006
and 2005 quarters and the six-month periods then ended, respectively. The
changes in expense dollars were impacted by increased investment in new markets
- 17 -
($250 and $750 for the quarter and six-month period ended October 2, 2005,
respectively), translation from changes in foreign exchange rates ($100 and $300
for the quarter and six-month period ended October 2, 2005, respectively) and
increased variable selling costs as a result of higher sales volume. As a
percentage of consolidated net sales, selling expenses were 9.7%, 10.0%, 9.7%,
and 10.2% in the fiscal 2006 and 2005 quarters and the six-month periods then
ended, respectively.
General and administrative expenses were $8,539, $7,517, $16,714, and $15,002 in
the fiscal 2006 and 2005 quarters and the six-month periods then ended,
respectively. The quarterly increase is primarily the result of increased
salaries and fringe benefits ($200), increased bad debt reserves ($150),
severance expenses ($300), increased support costs for our European conveyor
business ($125), and currency translation impact ($100). The fiscal 2006
six-month data is higher than the prior year due to increased salaries and
fringe benefits ($400), increased bad debt reserves ($250), severance expenses
($300), increased support costs for our European conveyor business ($125), and
currency translation impact ($100). As a percentage of consolidated net sales,
general and administrative expenses were 6.3%, 6.1%, 6.1% and 6.1% in the fiscal
2006 and 2005 quarters and the six-month periods then ended, respectively.
Restructuring charges were $211, $184, $237, and $217 in the fiscal 2006 and
2005 quarters and the six-month periods then ended, respectively.
Amortization of intangibles was $61, $76, $123, and $153 in the fiscal 2006 and
2005 quarters and the six-month periods then ended, respectively.
Interest and debt expense was $6,633, $7,141, $13,349, and $14,189 in the fiscal
2006 and 2005 quarters and the six-month periods then ended, respectively. These
decreases are the result of lower debt levels. As a percentage of consolidated
net sales, interest and debt expense was 4.9%, 5.8%, 4.8% and 5.8% in the fiscal
2006 and 2005 quarters and the six-month periods then ended, respectively.
Other (income) and expense, net was $1,864, $(607), $1,075 and $(589) in the
fiscal 2006 and 2005 quarters and the six-month periods then ended,
respectively. The 2006 quarter expense consisted primarily of a $3,330 loss on
early extinguishment of debt, offset by $691 of realized gains and investment
income on investments within our captive insurance company portfolio, $556 of
gains on sales of real estate, and $120 of interest income. The fiscal 2006 six
month expense consisted primarily of a $3,330 loss on early extinguishment of
debt, offset by $1,226 of realized gains and investment income on investments
within our captive insurance company portfolio, $554 of gains on sales of real
estate, and $240 of interest income. The fiscal 2005 income for both the quarter
and six-month period consisted primarily of $580 of interest income.
Income tax expense as a percentage of income from continuing operations before
income tax expense was 36.1%, 29.2%, 24.6%, and 22.9% in the fiscal 2006 and
2005 quarters and the six-month periods then ended, respectively. The fiscal
2006 and 2005 percentages vary from the U.S. statutory rate due to the
utilization of domestic net operating loss carry-forwards that had been fully
reserved and jurisdictional mix. Income tax expense primarily results from
non-U.S. taxable income and state taxes on U.S. taxable income. The higher
effective income tax rate in fiscal 2006 reflects the $3,330 loss on early
extinguishment of debt which reduced U.S. taxable income, but did not affect our
tax expense due to the existence of fully reserved U.S. Federal net operating
loss carry-forwards. We evaluate our estimated annual effective tax rate each
quarter. In light of the our continuing improvement in the results of our U.S.
operations during fiscal 2005 and 2006, we plan to review the previously
established valuation reserves for our 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
$65,000. Underlying collateral at October 2, 2005 amounted to $65,000. The
unused portion totaled $54,100, net of outstanding borrowings of $0 and
outstanding letters of credit of $10,900. Interest is payable at varying
Eurodollar rates based on LIBOR or prime plus spreads determined by our leverage
ratio, amounting to 175 or 50 basis points applied to each, respectively. The
Revolving Credit Facility is secured by all domestic inventory, receivables,
- 18 -
equipment, real property, subsidiary stock (limited to 65% for foreign
subsidiaries) and intellectual property.
On September 2, 2005, the Company issued $136,000 of 8 7/8% Senior Subordinated
Notes (8 7/8% Notes) due November 1, 2013. Provisions of the 8 7/8% Notes
include, without limitation, restrictions on indebtedness, asset sales, and
dividends and other restricted payments. Until November 1, 2008, we may redeem
up to 35% of the outstanding notes at a redemption price of 108.875% with the
proceeds of equity offerings, subject to certain restrictions. The 8 7/8% 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 7/8% Notes
agreement) to 100% on and after November 1, 2011. In the event of a Change of
Control (as defined in the indenture for such notes), each holder of the 8 7/8%
Notes may require us to repurchase all or a portion of such holder's 8 7/8%
Notes at a purchase price equal to 101% of the principal amount thereof. The 8
7/8% Notes are guaranteed by certain existing and future domestic subsidiaries
and are not subject to any sinking fund requirements.
Proceeds from the 8 7/8% Notes were used for the repurchase of $116,775 million
of the 8 1/2% Senior Subordinated Notes. The repurchase of the 8 1/2% Notes
occurred at a premium resulting in a pre-tax loss on early extinguishment of
debt of $2,298. As a result of the repurchase of the 8 1/2% Notes, $922 of
pre-tax deferred financing costs and $110 of the original issue discount were
written-off in the second quarter of fiscal 2006. The net effect of these items,
a $3,330 pre-tax loss, is shown as part of other (income) and expense, net.
As of October 2, 2005, the Senior Subordinated 8 1/2% Notes issued on March 31,
1998 amounted to $25,600. On October 14, 2005, all of the outstanding 8 1/2%
Notes were repurchased with proceeds from the 8 7/8% Notes and cash on hand.
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 our option, prior to August 1, 2007 in the absence of an equity
offering. Until August 1, 2006, we 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 us 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.
The corresponding credit agreements associated with the Revolving Credit
Facility place certain debt covenant restrictions on us including certain
financial requirements and a restriction on dividend payments.
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, divestiture of excess facilities and certain
non-strategic operations, improving working capital utilization, and new market
and new product development.
Net cash provided by operating activities was $24,162 for the six months ended
October 2, 2005 compared to $2,822 used in operating activities for the six
months ended October 3, 2004. The $26,984 increase is the result of a $4,415
increase in income from continuing operations, a $3,330 loss on early
extinguishment of debt, and $20,282 of changes in net working capital
components, primarily increased accounts payable and accrued liabilities, offset
by $1,547 of gains on the sale of real estate and investments.
Net cash used in investing activities was $1,195 for the six months ended
October 2, 2005 compared to $343 provided by investing activities for the six
months ended October 3, 2004. The $1,538 decrease was the result of an increase
- 19 -
in capital expenditures to $3,761 in fiscal 2006 compared to $1,948 in fiscal
2005, and a decrease in sales of marketable equity securities to $475 in fiscal
2006 compared to $1,991 in fiscal 2005. This decrease was offset by $2,091 of
proceeds from sale of property in fiscal 2006.
Net cash provided by financing activities was $9,394 for the six months ended
October 2, 2005 compared to $1,138 for the six months ended October 3, 2004. The
$8,256 change is the result of an increase in debt of $7,937 in fiscal 2006
compared to $863 in fiscal 2005, and $2,729 of proceeds from the exercise of
stock options in fiscal 2006. The increase was partially offset by $1,566 of
deferred financing costs incurred in association with our issuance of the 8 7/8%
Notes in fiscal 2006.
CAPITAL EXPENDITURES
In addition to keeping our current equipment and plants properly maintained, we
are committed to replacing, enhancing, and upgrading our property, plant, and
equipment to support new product development, reduce production costs, increase
flexibility to respond effectively to market fluctuations and changes, meet
environmental requirements, enhance safety, and promote ergonomically correct
work stations. Consolidated capital expenditures for the six months ended
October 2, 2005 and October 3, 2004 were $3,761 and $1,948, respectively. Higher
capital expenditures in the first half of fiscal 2006 included a concentration
of new product development and productivity improvement spending.
INFLATION AND OTHER MARKET CONDITIONS
Our costs are affected by inflation in the U.S. economy and, to a lesser extent,
in foreign economies including those of Europe, Canada, Mexico, and the Pacific
Rim. We do not believe that general inflation has had a material effect on
results of operations over the periods presented primarily due to overall low
inflation levels over such periods and the ability to generally pass on rising
costs through price increases. However, we have been impacted by fluctuations in
steel costs, which vary by type of steel and we continue to monitor them. In
addition, employee benefits costs such as health insurance, workers compensation
insurance, pensions as well as energy and business insurance have exceeded
general inflation levels. We generally incorporate those cost increases into our
sales price increases as well as surcharges on certain products. 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, 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 November 2004, the FASB issued SFAS No. 151, "Inventory Costs," as an
amendment to ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted materials (spoilage). This Statement requires that these items
be recognized as current-period charges and requires the allocation of fixed
production overheads to inventory based on the normal capacity of the production
facilities. This Statement becomes effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We do not expect the adoption of
SFAS No. 151 to have a material impact on our consolidated financial statements.
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,
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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) was to be adopted for interim or annual periods beginning after
June 15, 2005. On April 14th, 2005, the SEC announced that it would provide for
a phased-in implementation process for FASB statement No. 123(R). The SEC is
requiring that registrants adopt statement 123(R)'s fair value method of
accounting for share-based payments to employees no later than the beginning of
the first fiscal year beginning after June 15, 2005. We expect to adopt 123(R)
in the first quarter of Fiscal 2007. 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.
We are still evaluating the method we plans to use when we adopt statement
123(R).
As permitted by Statement 123, we currently account for share-based payments to
employees using Opinion 25's intrinsic value method and, as such, recognize 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 share 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 condensed consolidated
financial statements.
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 our actual
results to differ materially from the results expressed or implied by such
statements, including general economic and business conditions, conditions
affecting the industries served by us and our subsidiaries, conditions affecting
our customers and suppliers, competitor responses to our products and services,
the overall market acceptance of such products and services, the integration of
acquisitions and other factors disclosed in our periodic reports filed with the
Commission. Consequently such forward-looking statements should be regarded as
our current plans, estimates and beliefs. We do 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.
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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 2005.
Item 4. Disclosure Controls and Procedures
As of October 2, 2005, an evaluation was performed under the supervision and
with the participation of the Company's management, including the chief
executive officer and interim 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 interim chief financial officer, concluded that the
Company's disclosure controls and procedures were effective as of October 2,
2005. There were no changes in the Company's internal controls or in other
factors during our second quarter ended October 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
On August 15, 2005, the Annual Meeting of Shareholders was held and
the following directors were elected:
13,554,290 votes cast for: Herbert P. Ladds, Jr.;
13,629,700 votes cast for: Timothy T. Tevens;
12,954,223 votes cast for: Carlos Pasqual;
12,843,039 votes cast for: Richard H. Fleming;
12,900,667 votes cast for: Ernest R. Verebelyi;
12,957,171 votes cast for: Wallace W. Creek;
13,594,758 votes cast for: Linda A. Goodspeed;
13,595,579 votes cast for: Stephen Rabinowitz.
Item 5. Other Information - none.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 4.1 Seventh Supplemental Indenture among Columbus
McKinnon Corporation, Crane Equipment & Service,
Inc., Yale Industrial Products, Inc., Audubon Europe
S.a.r.l.and U.S. Bank National Trust Association, as
trustee, dated as of August 30, 2005.
Exhibit 10.1 Second amendment, dated as of August 5, 2005, to
that certain Second Amended and Restated Credit and
Security Agreement, dated as of November 21, 2002
and amended and restated as of January 2, 2004 (as
amended by that certain First Amendment to that
certain Second Amended and Restated Credit and
Security Agreement, dated as of April 29, 2005, and
as further modified and supplemented and in effect
from time to time, the "Credit Agreement"), among
Columbus McKinnon Corporation, a corporation
organized under the laws of New York (the
"Borrower"), Larco Industrial Services Ltd., a
business corporation organized under the laws of the
Province of Ontario, Columbus McKinnon Limited, a
business corporation organized under the laws of
Canada, the Guarantors from time to time party
thereto, the Lenders from time to time party thereto
(collectively, the "Lenders"), Bank of America,
N.A., as Administrative Agent for such Lenders (the
"Agent") and as Issuing Lender.
Exhibit 10.2 Third amendment, dated as of August 22, 2005, to
that certain Second Amended and Restated Credit and
Security Agreement, dated as of November 21, 2002
and amended and restated as of January 2, 2004 (as
amended by that certain First Amendment to that
certain Second Amended and Restated Credit and
Security Agreement, dated as of April 29, 2005, by
that certain Second Amendment to that certain Second
Amended and Restated Credit and Security Agreement,
dated as of August 5, 2005, and as further modified
and supplemented and in effect from time to time,
the "Credit Agreement"), among Columbus McKinnon
Corporation, a corporation organized under the laws
of New York (the "Borrower"), Larco Industrial
Services Ltd., a business corporation organized
under the laws of the Province of Ontario, Columbus
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McKinnon Limited, a business corporation organized
under the laws of Canada, the Guarantors from time
to time party thereto, the Lenders from time to time
party thereto (collectively, the "Lenders"), Bank of
America, N.A., as Administrative Agent for such
Lenders (the "Agent") and as Issuing Lender.
Exhibit 10.3 Fourth amendment, dated as of October 17, 2005, to
that certain Second Amended and Restated Credit and
Security Agreement, dated as of November 21, 2002
and amended and restated as of January 2, 2004, and
amended by that certain First Amendment to the
Credit Agreement, dated as of April 29, 2005, and by
that certain Second Amendment to the Credit
Agreement, dated as of August 5, 2005, and by that
certain Third Amendment to the Credit Agreement,
dated as of August 22, 2005 (as further amended,
supplemented or otherwise modified from time to
time, the "Credit Agreement"), among Columbus
McKinnon Corporation (the "Borrower"), Larco
Industrial Services Ltd., Columbus McKinnon Limited,
the Guarantors named therein, the lending
institutions party thereto, and Bank of America,
N.A., as Administrative Agent and Issuing Lender.
Capitalized terms used herein and not defined herein
shall have the meanings ascribed thereto in the
Credit Agreement.
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 August 5, 2005, the Company filed a Current Report on Form 8-K with
respect to its intention to raise proceeds through a private offering
of Senior Subordinated Notes, pursuant to Rule 144A under the
Securities Act of 1933.
On August 5, 2005, the Company filed a Current Report on Form 8-K with
respect to the resignation of its Vice President - Finance and Chief
Financial Officer, who also served as the registrant's Principal
Financial Officer, and the designation of an Interim Chief Financial
Officer and Principal Financial Officer.
On August 9, 2005, the Company filed a Current Report on Form 8-K with
respect to its Regulation FD Disclosure in connection with the
Company's previously announced sale of senior subordinated notes
pursuant to Rule 144A under the Securities Act of 1933.
On August 17, 2005, the Company filed a Current Report on Form 8-K
with respect to its Regulation FD Disclosure in connection with the
Company's annual shareholders meeting.
On August 17, 2005, the Company filed a Current Report on Form 8-K
with respect to its receipt of tenders and consents for approximately
82% of the principal amount outstanding of its 8 1/2% Senior
Subordinated Notes Due 2008 as of August 15, 2005.
On August 18, 2005, the Company filed a Current Report on Form 8-K
with respect to its pricing of its offering of $136 million in
aggregate principal amount of Senior Subordinated 8 7/8% Notes due
2013.
On September 2, 2005, the Company filed a Current Report on Form 8-K
with respect to the completion of its previously announced sale of
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$136 million in aggregate principal amount of Senior Subordinated 8
7/8% Notes due 2013.
On September 12, 2005, the Company filed a Current Report on Form 8-K
with respect to the call for redemption of approximately $26 million
of its outstanding Senior Subordinated 8 1/2% Notes due 2008.
On October 20, 2005, the Company filed a Current Report on Form 8-K
with respect to its filing of a registration statement with the
Securities and Exchange Commission relating to the public offering of
3,350,000 shares of its common stock.
On October 25, 2005, the Company filed a Current Report on Form 8-K
with respect to its financial results for the second quarter of fiscal
2006.
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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: NOVEMBER 2, 2005 /S/ KAREN L. HOWARD
---------------- --------------------------------
Karen L. Howard
Vice President and Treasurer and
Interim Chief Financial Officer
(Principal Financial Officer)
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