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 1, 2006
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): [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 January 30, 2006 was:
18,300,397 shares.
FORM 10-Q INDEX
COLUMBUS MCKINNON CORPORATION
JANUARY 1, 2006
PAGE #
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets -
January 1, 2006 and March 31, 2005 2
Condensed consolidated statements of operations
and retained earnings - Three months and nine months
ended January 1, 2006 and January 2, 2005 3
Condensed consolidated statements of cash flows -
Nine months ended January 1, 2006 and January 2, 2005 4
Condensed consolidated statements of comprehensive income -
Three months and nine months ended January 1, 2006
and January 2, 2005 5
Notes to condensed consolidated financial statements -
January 1, 2006 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 - none 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
JANUARY 1, MARCH 31,
2006 2005
---------- ----------
(UNAUDITED)
ASSETS: (IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 41,788 $ 9,479
Trade accounts receivable 82,059 88,974
Unbilled revenues 11,407 8,848
Inventories 75,078 77,626
Prepaid expenses 13,883 14,198
---------- ----------
Total current assets 224,215 199,125
Property, plant, and equipment, net 53,198 57,237
Goodwill and other intangibles, net 186,569 187,285
Marketable securities 25,809 24,615
Deferred taxes on income 4,353 6,122
Other assets 6,164 6,487
---------- ----------
Total assets $ 500,308 $ 480,871
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable to banks $ 2,951 $ 4,839
Trade accounts payable 35,137 33,688
Accrued liabilities 54,434 51,962
Restructuring reserve 107 144
Current portion of long-term debt 192 5,819
---------- ----------
Total current liabilities 92,821 96,452
Senior debt, less current portion 75,289 115,735
Subordinated debt 136,000 144,548
Other non-current liabilities 44,730 42,369
---------- ----------
Total liabilities 348,840 399,104
---------- ----------
Shareholders' equity
Common stock 182 149
Additional paid-in capital 164,016 104,078
Retained earnings (accumulated deficit) 3,354 (8,644)
ESOP debt guarantee (4,108) (4,554)
Unearned restricted stock (29) (6)
Accumulated other comprehensive loss (11,947) (9,256)
---------- ----------
Total shareholders' equity 151,468 81,767
---------- ----------
Total liabilities and shareholders' equity $ 500,308 $ 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 NINE MONTHS ENDED
------------------ -----------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2006 2005 2006 2005
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 133,322 $ 125,913 $ 408,911 $ 370,282
Cost of products sold 98,391 95,914 302,279 278,889
--------- --------- --------- ---------
Gross profit 34,931 29,999 106,632 91,393
--------- --------- --------- ---------
Selling expenses 13,281 13,356 40,019 38,326
General and administrative expenses 8,392 6,918 25,106 21,920
Restructuring charges 83 191 320 408
Amortization of intangibles 61 78 184 231
--------- --------- --------- ---------
21,817 20,543 65,629 60,885
--------- --------- --------- ---------
Income from operations 13,114 9,456 41,003 30,508
Interest and debt expense 6,268 6,837 19,617 21,026
Other (income) and expense, net 4,177 (755) 5,252 (1,344)
--------- --------- --------- ---------
Income from continuing operations before
income tax expense 2,669 3,374 16,134 10,826
Income tax expense 1,471 1,183 4,779 2,893
--------- --------- --------- ---------
Income from continuing operations 1,198 2,191 11,355 7,933
Income from discontinued operations 215 214 643 428
--------- --------- --------- ---------
Net income 1,413 2,405 11,998 8,361
Retained earnings
(accumulated deficit) - beginning of period 1,941 (19,398) (8,644) (25,354)
--------- --------- --------- ---------
Retained earnings
(accumulated deficit) - end of period $ 3,354 $ (16,993) $ 3,354 $ (16,993)
========= ========= ========= =========
Basic income per share:
Income from continuing operations $ 0.08 $ 0.15 $ 0.74 $ 0.54
Income from discontinued operations 0.01 0.01 0.04 0.03
--------- --------- --------- ---------
Net income $ 0.09 $ 0.16 $ 0.78 $ 0.57
========= ========= ========= =========
Diluted income per share:
Income from continuing operations $ 0.07 $ 0.15 $ 0.71 $ 0.54
Income from discontinued operations 0.01 0.01 0.04 0.03
--------- --------- --------- ---------
Net income $ 0.08 $ 0.16 $ 0.75 $ 0.57
========= ========= ========= =========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
-----------------
JANUARY 1, JANUARY 2,
2006 2005
---------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Income from continuing operations $ 11,355 $ 7,933
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Depreciation and amortization 6,809 7,201
Deferred income taxes 1,769 1,823
Gain on sale of real estate/investments (1,794) -
Loss (gain) on early retirement of bonds 6,432 (93)
Amortization/write-off of deferred financing costs 2,786 1,029
Changes in operating assets and liabilities:
Trade accounts receivable and unbilled revenues 2,658 (172)
Inventories 2,139 (9,937)
Prepaid expenses 321 1,990
Other assets (197) (220)
Trade accounts payable 2,141 (447)
Accrued and non-current liabilities 4,090 (694)
---------- ----------
Net cash provided by operating activities 38,509 8,413
---------- ----------
INVESTING ACTIVITIES:
Sale of marketable securities, net 90 957
Capital expenditures (4,738) (3,169)
Proceeds from sale of facilities and surplus real estate 2,091 -
Net assets held for sale - 375
---------- ----------
Net cash used in investing activities (2,557) (1,837)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock/options exercised 59,944 -
Net (payments) borrowings under revolving
line-of-credit agreements (1,417) 2,906
Repayment of debt (196,881) (13,244)
Proceeds from issuance of long-term debt 136,000 -
Deferred financing costs incurred (2,357) (24)
Other 446 427
---------- ----------
Net cash used in financing activities (4,265) (9,935)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (21) 454
---------- ----------
Net cash provided by (used in) continuing operations 31,666 (2,905)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 643 428
---------- ----------
Net change in cash and cash equivalents 32,309 (2,477)
Cash and cash equivalents at beginning of period 9,479 11,101
---------- ----------
Cash and cash equivalents at end of period $ 41,788 $ 8,624
========== ==========
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 1, JANUARY 2, JANUARY 1, JANUARY 2,
2006 2005 2006 2005
---- ---- ---- ----
(IN THOUSANDS)
Net income $ 1,413 $ 2,405 $ 11,998 $ 8,361
-------- -------- -------- --------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (818) 4,136 (2,792) 5,074
Unrealized gain on investments:
Unrealized holding gains arising
during the period 260 971 1,284 580
Reclassification adjustment for
gains included in net income (192) (262) (1,183) (253)
-------- -------- -------- --------
68 709 101 327
-------- -------- -------- --------
Total other comprehensive (loss) income (750) 4,845 (2,691) 5,401
-------- -------- -------- --------
Comprehensive income $ 663 $ 7,250 $ 9,307 $ 13,762
======== ======== ======== ========
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 1, 2006
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 January 1, 2006, and the results of its operations and its cash
flows for the three and nine-month periods ended January 1, 2006 and January 2,
2005, have been included. Results for the period ended January 1, 2006 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 NINE MONTHS ENDED
----------------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2006 2005 2006 2005
----------------------------------------------------------
Net income, as reported.................... $ 1,413 $ 2,405 $ 11,998 $ 8,361
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (186) (495) (765) (864)
----------------------------------------------------------
Net income, pro forma...................... $ 1,227 $ 1,910 $ 11,233 $ 7,497
==========================================================
Basic income per share:
As reported................................ $ 0.09 $ 0.16 $ 0.78 $ 0.57
==========================================================
Pro forma.................................. $ 0.07 $ 0.13 $ 0.73 $ 0.51
==========================================================
Diluted income per share:
As reported................................ $ 0.08 $ 0.16 $ 0.75 $ 0.57
==========================================================
Pro forma.................................. $ 0.07 $ 0.13 $ 0.71 $ 0.51
==========================================================
During the first nine months of fiscal 2006, stock options for 323,600 shares
were exercised resulting in proceeds to the Company of $3,072.
3. INVENTORIES
Inventories consisted of the following:
JANUARY 1, MARCH 31,
2006 2005
---------- ----------
At cost - FIFO basis:
Raw materials................................... $ 40,768 $ 42,283
Work-in-process................................. 11,872 10,238
Finished goods.................................. 34,181 35,800
---------- ----------
86,821 88,321
LIFO cost less than FIFO cost................... (11,743) (10,695)
---------- ----------
Net inventories................................. $ 75,078 $ 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 nine-months of fiscal 2006, the Company recorded restructuring
costs of $320 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." $194 and $126 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 January 1,
2006 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
Fiscal 2006 third quarter restructuring charges.......... 81 2 83
Cash payments............................................ (70) (20) (90)
------------------------------------
Reserve at January 1, 2006 $ 20 $ 87 $ 107
====================================
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 NINE MONTHS ENDED
------------------ -----------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2006 2005 2006 2005
---- ---- ---- ----
Service costs................... $ 1,088 $ 1,190 $ 3,264 $ 3,570
Interest cost................... 1,737 1,755 5,211 5,265
Expected return on plan assets.. (1,654) (1,645) (4,962) (4,935)
Net amortization................ 508 495 1,524 1,485
-------- -------- -------- --------
Net periodic pension cost....... $ 1,679 $ 1,795 $ 5,037 $ 5,385
======== ======== ======== ========
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 NINE MONTHS ENDED
------------------ -----------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2006 2005 2006 2005
---- ---- ---- ----
Service costs................... $ 4 $ 4 $ 12 $ 12
Interest cost .................. 188 200 564 634
Amortization of plan net losses. 101 105 303 356
-------- -------- -------- --------
Net periodic postretirement cost $ 293 $ 309 $ 879 $ 1,002
======== ======== ======== ========
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
During the second quarter of fiscal 2006, 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, the
Company 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 and cash on hand were used to repurchase all
$142,375 of the outstanding 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. The net effect of these items, a $3,330 pre-tax loss
in the second quarter of fiscal 2006, is shown as part of other (income) and
expense, net.
During the third quarter of fiscal 2006, the Company used a portion of the
proceeds from its stock offering (see Note 8) to repurchase $40,250 of the
outstanding 10% Senior Secured Notes. The repurchase of the 10% Notes occurred
at a premium resulting in a pre-tax loss on early extinguishment of debt of
$4,025. As a result of the repurchase of the 10% Notes, $925 of pre-tax deferred
financing costs was written-off. The net effect of these items, a $4,950 pre-tax
loss in the third quarter of fiscal 2006, is shown as part of other (income) and
expense, net.
7. INCOME TAXES
Income tax expense as a percentage of income from continuing operations before
income tax expense was 55.1%, 35.1%, 29.6%, and 26.7% in the fiscal 2006 and
2005 quarters and the nine-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 loss on early
extinguishment of debt which reduced U.S. taxable income by $4,950 and $8,280 in
the quarter and nine-month period respectively, 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 NINE MONTHS ENDED
------------------ -----------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2006 2005 2006 2005
---- ---- ---- ----
Numerator for basic and diluted earnings per share:
Net income $ 1,413 $ 2,405 $11,998 $ 8,361
======= ======= ======= =======
Denominators:
Weighted-average common stock outstanding -
denominator for basic EPS 16,611 14,594 15,368 14,585
Effect of dilutive employee stock options 676 209 538 148
------- ------- ------- -------
Adjusted weighted-average common stock
outstanding and assumed conversions -
denominator for diluted EPS 17,287 14,803 15,906 14,733
======= ======= ======= =======
- 9 -
During the third quarter of fiscal 2006, the Company registered an additional
3,350,000 shares of its common stock which were sold at $20.00 per share. The
number of shares offered by the Company was 3,000,000 and 350,000 were offered
by a selling shareholder. The Company did not receive any proceeds from the sale
of shares by the selling shareholder. This stock offering increased our weighted
average common stock outstanding by 1,615,000 and 533,000 shares for the quarter
and nine-month period ended January 1, 2006, respectively. A portion of the
proceeds received by the Company were used to redeem $40,250 principal amount of
the Company's outstanding Senior Secured 10% Notes. The balance of the proceeds
is available for other general corporate purposes to advance its strategy of
global growth, including additional debt repayment, investments and
acquisitions.
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 nine months ended January 1, 2006 and
January 2, 2005, is as follows:
NINE MONTHS ENDED JANUARY 1, 2006
---------------------------------
PRODUCTS SOLUTIONS TOTAL
-------- --------- -----
Sales to external customers...................... $ 362,405 $ 46,506 $ 408,911
Income from operations........................... 39,089 1,914 41,003
Depreciation and amortization.................... 5,893 916 6,809
Total assets..................................... 470,108 30,200 500,308
NINE MONTHS ENDED JANUARY 2, 2005
---------------------------------
PRODUCTS SOLUTIONS TOTAL
-------- --------- -----
Sales to external customers...................... $ 326,847 $ 43,435 $ 370,282
Income from operations........................... 29,195 1,313 30,508
Depreciation and amortization.................... 6,461 740 7,201
Total assets..................................... 445,487 32,174 477,661
- 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 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 JANUARY 1, 2006
Current assets:
Cash and cash equivalents $ 22,405 $ (272) $ 19,655 $ - $ 41,788
Trade accounts receivable and unbilled revenues 53,931 237 39,298 - 93,466
Inventories 31,841 20,206 25,538 (2,507) 75,078
Other current assets 3,599 867 9,417 - 13,883
---------------------------------------------------------------------
Total current assets 111,776 21,038 93,908 (2,507) 224,215
Property, plant, and equipment, net 23,741 11,776 17,681 - 53,198
Goodwill and other intangibles, net 89,996 57,285 39,288 - 186,569
Intercompany 99,735 (99,688) (74,198) 74,151 -
Other assets 53,315 197,864 25,267 (240,120) 36,326
---------------------------------------------------------------------
Total assets $ 378,563 $ 188,275 $ 101,946 $(168,476) $ 500,308
=====================================================================
Current liabilities $ 43,908 $ 16,105 $ 33,572 $ (764) $ 92,821
Long-term debt, less current portion 210,750 - 539 - 211,289
Other non-current liabilities 7,285 8,168 29,277 - 44,730
---------------------------------------------------------------------
Total liabilities 261,943 24,273 63,388 (764) 348,840
Shareholders' equity 116,620 164,002 38,558 (167,712) 151,468
---------------------------------------------------------------------
Total liabilities and shareholders' equity $ 378,563 $ 188,275 $ 101,946 $ (168,476) $ 500,308
=====================================================================
FOR THE NINE MONTHS ENDED JANUARY 1, 2006
Net sales $ 195,700 $ 109,735 $ 121,098 $ (17,622) $ 408,911
Cost of products sold 146,411 83,126 88,829 (16,087) 302,279
---------------------------------------------------------------------
Gross profit 49,289 26,609 32,269 (1,535) 106,632
---------------------------------------------------------------------
Selling, general and administrative expenses 29,767 11,710 23,648 - 65,125
Restructuring charges 236 - 84 - 320
Amortization of intangibles 132 2 50 - 184
---------------------------------------------------------------------
30,135 11,712 23,782 - 65,629
---------------------------------------------------------------------
Income (loss) from operations 19,154 14,897 8,487 (1,535) 41,003
Interest and debt expense 15,867 3,537 213 - 19,617
Other (income) and expense, net 7,549 24 (2,321) - 5,252
---------------------------------------------------------------------
(Loss) income before income tax expense (4,262) 11,336 10,595 (1,535) 16,134
Income tax expense 590 1,044 3,145 - 4,779
---------------------------------------------------------------------
(Loss) income from continuing operations (4,852) 10,292 7,450 (1,535) 11,355
Income from discontinued operations 643 - - - 643
---------------------------------------------------------------------
Net (loss) income $ (4,209) $ 10,292 $ 7,450 $ (1,535) $ 11,998
=====================================================================
- 11 -
Parent Guarantors Nonguarantors Eliminations Consolidated
---------------------------------------------------------------------
FOR THE NINE MONTHS ENDED JANUARY 1, 2006
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 16,996 $ 9,296 $ 12,217 $ - $ 38,509
---------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale of marketable securities, net - - 90 - 90
Capital expenditures (2,641) (497) (1,600) - (4,738)
Proceeds from sale of facilities and surplus real estate - 468 1,623 - 2,091
---------------------------------------------------------------------
Net cash (used in) provided by investing activities (2,641) (29) 113 - (2,557)
---------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from stock offering/options exercised 59,944 - - - 59,944
Net borrowings (payments) under revolving
line-of-credit agreements 240 - (1,657) - (1,417)
Repayment of debt (196,706) - (175) - (196,881)
Proceeds from issuance of long-term debt 136,000 - - - 136,000
Deferred financing costs incurred (2,357) - - - (2,357)
Dividends paid 9,067 (8,854) (213) - -
Other 446 - - - 446
---------------------------------------------------------------------
Net cash provided by (used in) financing
activities 6,634 (8,854) (2,045) - (4,265)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (230) 12 197 - (21)
---------------------------------------------------------------------
Cash provided by (used in) continuing operations 20,759 425 10,482 - 31,666
CASH PROVIDED BY DISCONTINUED OPERATIONS 643 - - - 643
---------------------------------------------------------------------
Net change in cash and cash equivalents 21,402 425 10,482 - 32,309
Cash and cash equivalents at beginning of period 1,019 (697) 9,157 - 9,479
---------------------------------------------------------------------
Cash and cash equivalents at end of period $ 22,421 $ (272) $ 19,639 $ - $ 41,788
=====================================================================
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 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)
---------------------------------------------------------------------
(Loss) income before income tax expense (2,255) 5,101 7,980 - 10,826
Income tax expense 38 665 2,190 - 2,893
---------------------------------------------------------------------
(Loss) income from continuing operations (2,293) 4,436 5,790 - 7,933
Income from discontinued operations 428 - - - 428
---------------------------------------------------------------------
Net (loss) income $ (1,865) $ 4,436 $ 5,790 $ - $ 8,361
=====================================================================
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, net (2,102) (552) (515) - (3,169)
Other - 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 (used in) 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
=====================================================================
- 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, 2031 and March 31, 2082 to range between
$5,450 and $19,000 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 $5,450
to $6,300 as of January 1, 2006. 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 $5,700 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.
- 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, market expansion and renewed customer focus.
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 13% from approximately $97,000 to $110,000 during
the first nine months of fiscal 2006 and overall sales increased 10% 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 rising energy costs, steel price fluctuations, 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 nine
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 NINE MONTHS ENDED JANUARY 1, 2006 AND JANUARY 2, 2005
Net sales in the fiscal 2006 quarter ended January 1, 2006 were $133,322, up
$7,409 or 5.9% from the fiscal 2005 quarter ended January 2, 2005. Net sales for
the nine months ended January 1, 2006 were $408,911, an increase of $38,629 or
10.4% from the nine months ended January 2, 2005. Sales in the Products segment
increased by $8,541 or 7.8% from the previous year's quarter and $35,558 or
10.9% from the previous year's nine-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 $3,300 and $16,000 in the quarter and
nine months ended January 1, 2006, respectively. Translation of foreign
currencies, particularly the Euro and Canadian dollar, into U.S. dollars reduced
sales in the Products segment by $1,100 for the quarter ended January 1, 2006
and contributed $900 toward the Products segment increase in sales for the
nine-month period ended January 1, 2006. Sales in the Solutions segment
decreased 6.8% or $1,132 for the quarter and increased 7.1% or $3,071 for the
nine months ended January 1, 2006 when compared to the same period in the prior
year. The decrease in this segment for quarter ended January 1, 2006 is
primarily due to the translation of foreign currencies into U.S. dollars which
reduced sales by $900. The increase in this segment for the nine-month period
ended January 1, 2006 is primarily due to improvement in our European conveyor
business. Translation of foreign currencies into U.S. dollars reduced sales in
the Solutions segment by $100 for the nine-months ended January 1, 2006. Sales
in the segments are summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JAN. 1, JAN. 2, CHANGE JAN. 1, JAN. 2, CHANGE
2006 2005 AMOUNT % 2006 2005 AMOUNT %
---------- ---------- -------- ----- ---------- --------- --------- ----
Products $ 117,850 $ 109,309 $ 8,541 7.8 $ 362,405 $ 326,847 $ 35,558 10.9
Solutions 15,472 16,604 (1,132) (6.8) 46,506 43,435 3,071 7.1
---------- ---------- -------- ---------- --------- ---------
Net sales $ 133,322 $ 125,913 $ 7,409 5.9 $ 408,911 $ 370,282 $ 38,629 10.4
========== ========== ======== ========== ========= =========
Gross profits and gross profit margins by operating segment are summarized as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JAN. 1, 2006 JAN. 2, 2005 JAN. 1, 2006 JAN. 2, 2005
------------ ------------ ------------ ------------
$ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- -----
Products $ 32,142 27.3 $ 27,533 25.2 $ 99,027 27.3 $ 84,583 25.9
Solutions 2,789 18.0 2,466 14.9 7,605 16.4 6,810 15.7
--------- --------- --------- ---------
Total Gross Profit $ 34,931 26.2 $ 29,999 23.8 $ 106,632 26.1 $ 91,393 24.7
========= ========= ========= =========
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.
- 17 -
Selling expenses were $13,281, $13,356, $40,019, and $38,326 in the fiscal 2006
and 2005 quarters and the nine-month periods then ended, respectively. The
changes in expense dollars were impacted by increased investment in new markets
($200 and $925 for the quarter and nine-month period ended January 1, 2006,
respectively), translation from changes in foreign exchange rates ($225 decrease
in selling expense for the quarter ended January 1, 2006, and $50 increase for
the nine-month period ended January 1, 2006) and increased variable selling
costs as a result of higher sales volume. As a percentage of consolidated net
sales, selling expenses were 10.0%, 10.6%, 9.8%, and 10.4% in the fiscal 2006
and 2005 quarters and the nine-month periods then ended, respectively.
General and administrative expenses were $8,392, $6,918, $25,106, and $21,920 in
the fiscal 2006 and 2005 quarters and the nine-month periods then ended,
respectively. The quarterly increase is primarily the result of increased
variable compensation expense ($900), increased salaries and fringe benefits
($150), increased bad debt reserves ($200), increased Employee Stock Option Plan
expense ($125), increased support costs for our Mexican chain business ($75),
and increased board of directors expense ($75). The fiscal 2006 nine-month data
is higher than the prior year due to increased variable compensation expense
($700), increased salaries and fringe benefits ($600), increased bad debt
reserves ($450), severance expenses ($300), increased support costs for our
foreign operations ($200), and currency translation impact ($100). As a
percentage of consolidated net sales, general and administrative expenses were
6.3%, 5.5%, 6.1% and 5.9% in the fiscal 2006 and 2005 quarters and the
nine-month periods then ended, respectively.
Restructuring charges were $83, $191, $320, and $408 in the fiscal 2006 and 2005
quarters and the nine-month periods then ended, respectively.
Amortization of intangibles was $61, $78, $184, and $231 in the fiscal 2006 and
2005 quarters and the nine-month periods then ended, respectively.
Interest and debt expense was $6,268, $6,837, $19,617, and $21,026 in the fiscal
2006 and 2005 quarters and the nine-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 4.7%, 5.4%, 4.8% and 5.7%
in the fiscal 2006 and 2005 quarters and the nine-month periods then ended,
respectively.
Other (income) and expense, net was $4,177, $(755), $5,252 and $(1,344) in the
fiscal 2006 and 2005 quarters and the nine-month periods then ended,
respectively. The 2006 quarter expense consisted primarily of a $4,950 loss on
early extinguishment of debt, offset by $350 of realized gains and investment
income on investments within our captive insurance company portfolio and $375 of
interest income. The fiscal 2006 nine month expense consisted primarily of an
$8,300 loss on early extinguishment of debt, offset by $1,650 of realized gains
and investment income on investments within our captive insurance company
portfolio, $500 of gains on sales of real estate, and $750 of interest income.
The fiscal 2005 income for both the quarter and nine-month period consisted
primarily of realized gains and investment income on investments within our
captive insurance portfolio and of interest income.
Income tax expense as a percentage of income from continuing operations before
income tax expense was 55.1%, 35.1%, 29.6%, and 26.7% in the fiscal 2006 and
2005 quarters and the nine-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 loss on early
extinguishment of debt which reduced U.S. taxable income by $4,950 and $8,280 in
the quarter and nine month period respectively, 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
During the third quarter of fiscal 2006, the Company registered an additional
3,350,000 shares of its common stock which were sold at $20.00 per share. The
number of shares offered by the Company was 3,000,000 and 350,000 were offered
- 18 -
by a selling shareholder. The Company did not receive any proceeds from the sale
of shares by the selling shareholder. This stock offering increased our weighted
average common stock outstanding by 1,615,000 and 533,000 shares for the quarter
and nine-month period ended January 1, 2006, respectively. A portion of the
proceeds received by the Company were used to redeem $40,250 principal amount of
the Company's outstanding Senior Secured 10% Notes. The balance of the proceeds
is available for other general corporate purposes to advance its strategy of
global growth, including additional debt repayment, investments and
acquisitions.
The Company's Revolving Credit Facility provides availability up to a maximum of
$65,000. Underlying collateral at January 1, 2006 amounted to $65,000. The
unused portion totaled $54,800, net of outstanding borrowings of $0 and
outstanding letters of credit of $10,200. Interest is payable at varying
Eurodollar rates based on LIBOR or prime plus spreads determined by our leverage
ratio, amounting to 150 or 25 basis points applied to each, respectively. 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.
During the second quarter of fiscal 2006, 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 and cash on hand were used to repurchase all of
the outstanding 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.
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. During the third quarter of
fiscal 2006, the Company used a portion of the proceeds from its stock offering
to repurchase $40,250 of the outstanding 10% Notes. The repurchase of the 10%
Notes occurred at a premium resulting in a pre-tax loss on early extinguishment
of debt of $4,025. As a result of the repurchase of the 10% Notes, $925 of
pre-tax deferred financing costs was written-off. The net effect of these items,
a $4,950 pre-tax loss in the third quarter of fiscal 2006, is shown as part of
other (income) and expense, net. The remaining 10% Notes are not entitled to
redemption at our option, prior to August 1, 2007. 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.
- 19 -
Net cash provided by operating activities was $38,509 for the nine months ended
January 1, 2006 compared to $8,413 for the nine months ended January 2, 2005.
The $30,096 increase is the result of a $3,422 increase in income from
continuing operations, an $8,280 loss on early extinguishment of debt, and
$20,632 of changes in net working capital components, primarily decreased
accounts receivable and inventories, and increased accounts payable and accrued
liabilities, offset by $1,794 of gains on the sale of real estate and
investments.
Net cash used in investing activities was $2,557 for the nine months ended
January 1, 2006 compared to $1,837 for the nine months ended January 2, 2005.
The $720 increase in cash used was the result of an increase in capital
expenditures to $4,738 in fiscal 2006 compared to $3,169 in fiscal 2005, and by
a decrease in sales of marketable equity securities to $90 in fiscal 2006
compared to $957 in fiscal 2005. This increase in cash used in investing
activities was offset by $2,091 of proceeds from sale of property in fiscal
2006.
Net cash used in financing activities was $4,265 for the nine months ended
January 1, 2006 compared to $9,935 for the nine months ended January 2, 2005.
The net cash used in financing activities for the nine months ended January 1,
2006 consisted primarily of $196,881 repayment of debt, $2,357 of deferred
financing costs incurred, and $1,417 of net payments under revolving line of
credit agreements, offset by $136,000 of proceeds from the issuance of long-term
debt and $59,944 of proceeds from the issuance of common stock and stock options
exercised. The net cash used in financing activities for the nine months ended
January 2, 2005 consisted primarily of $13,244 repayment of debt, offset by
$2,906 net borrowings under revolving line of credit agreements.
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 nine months ended
January 1, 2006 and January 2, 2005 were $4,738 and $3,169, respectively. We
expect capital spending for fiscal 2006 to in the range of $6.0 to $7.0 million
compared with $5.2 million in fiscal 2005. Higher capital expenditures for
fiscal 2006 have been primarily directed toward new product development and
productivity improvement.
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.
- 20 -
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,
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.
- 21 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the market risks since the end of Fiscal
2005.
Item 4. Disclosure Controls and Procedures
As of January 1, 2006, 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 1, 2006. There were no
changes in the Company's internal controls or in other factors during our third
quarter ended January 1, 2006.
- 22 -
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 November 8, 2005, the Company filed a Current Report on Form 8-K
with respect to the pricing of its previously announced offering of
3,350,000 shares of common stock at $20.00 per share.
On November 15, 2005, the Company filed a Current Report on Form 8-K
with respect to the completion of its previously disclosed offering of
3,350,000 shares of common stock at $20.00 per share.
On November 18, 2005, the Company filed a Current Report on Form 8-K
with respect to the call for redemption of approximately $40.25
million of its outstanding Senior Subordinated 10% Notes due 2010.
On January 24, 2006, the Company filed a Current Report on Form 8-K
with respect to its financial results for the third quarter of fiscal
2006.
On January 26, 2006, the Company filed a Current Report on Form 8-K
with respect to the appointment of its Chief Financial Officer.
- 23 -
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 1, 2006 /S/ KAREN L. HOWARD
---------------- --------------------------------------
Karen L. Howard
Vice President and Treasurer and Chief
Financial Officer (Principal
Financial Officer)
- 24 -