Executive Overview
The Company is a leading worldwide designer, manufacturer and marketer of
intelligent motion solutions, including motion control products, technologies,
automated systems and services, that efficiently and ergonomically move, lift,
position and secure materials. Our key products include hoists, crane
components, precision conveyors, actuators, rigging tools, light rail
workstations, and digital power and motion control systems. These are highly
relevant, professional-grade solutions that solve customers' critical material
handling requirements.
Founded in 1875, we have grown to our current size and leadership position
through organic growth and acquisitions. We developed our leading market
position over our 147-year history by emphasizing technological innovation,
manufacturing excellence and superior customer service. In accordance with our
strategic framework, we are building out our business system (CMBS) and growth
framework to be market-led, customer-centric, and operationally excellent with
our people and values at the core. We believe this will transform Columbus
McKinnon into a top-tier Intelligent Motion Solutions company. We expect our
strategy will enhance shareholder value by expanding EBITDA margins and return
on invested capital ("ROIC").
Our revenue base is geographically diverse with approximately 37% derived from
customers outside the U.S. for the three months ended June 30, 2022. We believe
this diversity balances the impact of changes that occur in local economies, as
well as benefits the Company by providing access to growing emerging markets. We
monitor both U.S. and Eurozone Industrial Capacity Utilization statistics as
well as the ISM Production Index as indicators of anticipated demand for our
products. In addition, we continue to monitor the potential impact of other
global and U.S. trends including, industrial production, trade tariffs, raw
material cost inflation, interest rates, foreign currency exchange rates, and
activity of end-user markets around the globe.
From a strategic perspective, we are investing in new products as we focus on
our greatest opportunities for growth. We maintain a strong North American
market share with significant leading market positions in hoists, lifting and
sling chain, forged attachments, actuators, and digital power and motion control
systems for the material handling industry. We seek to maintain and enhance our
market share by focusing our sales and marketing activities toward select North
American and global market sectors including general industrial, energy,
automotive, heavy OEM, entertainment, and construction and infrastructure.
In March 2021, the Company announced that it had entered into a definitive
agreement to acquire Dorner. The acquisition of Dorner closed on April 7, 2021.
Dorner, headquartered in Hartland, Wisconsin, is a leading automation solutions
company providing unique, patented technologies in the design, application,
manufacturing and integration of high-precision conveying systems. Dorner is a
leading supplier to the stable life sciences, food processing, and consumer
packaged goods markets as well as the high growth industrial automation and
e-commerce sectors. The addition of Dorner provides attractive complementary
adjacencies including sortation and asynchronous conveyance systems.
Further, on December 1, 2021, the Company completed its acquisition of Garvey.
Garvey is a leading accumulation systems solutions company providing unique,
patented systems for the automation of production processes whose products
complement those of Dorner. The acquisitions of Dorner and Garvey accelerate the
Company's shift to intelligent motion and serve as a platform to expand
capabilities in advanced, higher technology automation solutions.
Regardless of the economic climate and point in the economic cycle, we
constantly explore ways to increase operating margins as well as further improve
our productivity and competitiveness. We have specific initiatives to reduce
quote lead-times, improve on-time deliveries, reduce warranty costs, and improve
material and factory productivity. The initiatives are being driven by the
implementation of our business operating system, CMBS. We are working to achieve
these strategic initiatives through business simplification, operational
excellence, and profitable growth initiatives. We believe these initiatives will
enhance future operating margins.
Our principal raw materials and components purchases were approximately $368
million in fiscal 2022 (or 62% of Cost of product sold) and include steel,
consisting of rod, wire, bar, structural, and other forms of steel; electric
motors; bearings; gear reducers; castings; steel and aluminum enclosures and
wire harnesses; electro-mechanical components; and standard variable drives and
controls. These commodities are all available from multiple sources. We purchase
most of these raw materials and components from a limited number of strategic
and preferred suppliers under agreements which are negotiated on a company-wide
basis through our Global Sourcing group. Currently, as a result of global supply
chain challenges, we are experiencing
29
--------------------------------------------------------------------------------
higher raw material costs and availability issues for select raw materials and
components. To date, we have raised prices to our customers to cover these
increased raw material costs and are working with our supply base to prioritize
shipments and improve availability of key components.
We operate in a highly competitive and global business environment. We face a
variety of opportunities in our markets and geographies, including trends toward
increasing productivity of the global labor force and the expansion of market
opportunities in Asia and other emerging markets. While we execute our long-term
growth strategy, we are supported by our strong free cash flow as well as our
liquidity position and flexible debt structure.
Results of Operations
Three months ended June 30, 2022 and June 30, 2021
Net sales in the fiscal 2023 quarter ended June 30, 2022 were $220,287,000, up
$6,823,000 or 3.2% from the fiscal 2022 quarter ended June 30, 2021 net sales of
$213,464,000. Net sales were positively impacted by $9,610,000 due to price
increases and $8,533,000 of acquired revenue from the Garvey acquisition, offset
by sales volume decreases of $4,302,000. Foreign currency translation
unfavorably impacted sales by $7,018,000 for the three months ended June 30,
2022.
Gross profit in the fiscal 2023 quarter ended June 30, 2022 was $82,519,000, an
increase of $8,456,000 or 11.4% from the fiscal 2022 quarter ended June 30, 2021
gross profit of $74,063,000. Gross profit margin was 37.5% in the fiscal 2023
first quarter compared to 34.7% in the fiscal 2022 first quarter. The increase
in gross profit was due to $3,502,000 of prior year acquisition amortization for
inventory step up and integration costs that did not reoccur, $3,134,000 of
price increases net of material inflation, $3,109,000 in gross profit as a
result of the acquisition of Garvey, $952,000 from higher margins on the mix of
products sold, $256,000 in increased productivity net of other cost changes and
$51,000 in decreased tariffs. The translation of foreign currencies had a
$2,548,000 unfavorable impact on gross profit in the three months ended June 30,
2022.
Selling expenses were $26,156,000 and $23,482,000, or 11.9% and 11.0% of net
sales, in fiscal 2023 and 2022 first quarters, respectively. Selling expense
increased by $1,092,000 due to the Garvey acquisition and $627,000 in increased
business realignment and integration costs during the three months ended
June 30, 2022. The remaining increase relates to higher salaries and travel
costs. Foreign currency translation had a $1,039,000 favorable impact on selling
expenses in the three months ended June 30, 2022.
General and administrative expenses were $21,881,000 and $30,143,000, or 9.9%
and 14.1% of net sales, in the fiscal 2023 and 2022 first quarters,
respectively. The decrease in general and administrative expenses was due to a
net decrease of $8,260,000 in acquisition and deal integration costs, a decrease
of $1,679,000 in stock-based compensation expense, and a net decrease in
business realignment costs of $149,000. The decrease in stock-based compensation
was the result of the Company no longer expecting the performance condition to
be fully met on the its fiscal 2021 performance shares, as well as a decrease in
the Company's stock price. Partially offsetting these decreases were higher
variable compensation expense of $573,000 and higher salaries and travel costs
as well as increased costs from the Garvey acquisition. Foreign currency
translation had a $575,000 favorable impact on general and administrative
expenses in the three months ended June 30, 2022.
Research and development expenses were $5,130,000 and $3,583,000, or 2.3% and
1.7% of net sales, in fiscal 2023 and 2022 first quarters, respectively. The
increase in research and development expenses was due to additional spending to
achieve strategic goals related to new product development.
Amortization of intangibles was $6,535,000 and $6,109,000 in the fiscal 2023 and
2022 first quarters, respectively, with the increase related to new intangible
assets recorded from Garvey acquisition.
Interest and debt expense was $6,203,000 in the first quarter ended June 30,
2022 compared to $5,812,000 in the first quarter ended June 30, 2021. The
increase is related to higher variable interest rates, as well as related
borrowings to finance the Garvey acquisition.
Investment loss of $430,000 in the quarter ended June 30, 2022 compared to
investment income of $433,000 in the quarter June 30, 2021, respectively,
related to mark-to-market adjustments on the marketable securities held in the
Company's wholly owned captive insurance subsidiary and the Company's equity
method investment in EMC, described in Note 6 of the financial statements.
Other income was $2,303,000 in the first quarter ended June 30, 2022 compared to
other expense of $250,000 in the first quarter ended June 30, 2021. As described
in Note 13, the increase in Other income is primarily related to a tax
indemnification reimbursement received from STAHL's former owners in accordance
with the share purchase agreement.
30
--------------------------------------------------------------------------------
Income tax expense as a percentage of income from continuing operations before
income tax expense was 51% and 26% in the first quarters ended June 30, 2022 and
June 30, 2021, respectively. Typically these percentages vary from the U.S.
statutory rate of 21% primarily due to varying effective tax rates at the
Company's foreign subsidiaries, and the jurisdictional mix of taxable income for
these subsidiaries.
During the three months ended June 30, 2022, the rate was unfavorably impacted
15 percentage points due to settlement of income tax assessments related to tax
periods prior to the Company's acquisition of Stahl Cranesystems GmbH ("STAHL").
In accordance with the tax indemnification clause of the share purchase
agreement, the Company received full reimbursement from STAHL's prior owner
which was recorded as a gain in Other (income) expense, net on the Condensed
Consolidated Statements of Operations during the period. The tax rate for the
three months ended June 30, 2022 also reflects an unfavorable impact of 12
percentage points due to the recording of a U.S. state tax valuation allowance.
The valuation allowance primarily relates to changes in the Company's
expectations regarding its ability to more likely than not utilize certain state
net operating losses prior to their expiration.
The Company estimates that the effective tax rate related to continuing
operations will be approximately 29% to 30% for fiscal 2023.
Liquidity and Capital Resources
Cash, cash equivalents, and restricted cash totaled $85,910,000 at June 30,
2022, a decrease of $29,730,000 from the March 31, 2022 balance of $115,640,000.
Cash flow from operating activities
Net cash used by operating activities was $11,177,000 for the three months ended
June 30, 2022 compared to $7,396,000 for the three months ended June 30, 2021.
An increase of $21,467,000 in inventories due to current supply chain
constraints, a decrease of $15,720,000 in trade payables, and a decrease of
$9,389,000 in accrued expenses and non-current liabilities contributed to cash
used by operations. The decrease in accrued expenses and non-current liabilities
primarily consists of the fiscal 2022 annual incentive plan payments, which were
paid in the quarter ended June 30, 2022. These decreases in cash were offset by
non-cash adjustments to net income of $15,527,000, of which $10,469,000 is from
depreciation and amortization, a decrease of $11,265,000 in trade receivables,
and net income of $8,391,000.
Cash flow from investing activities
Net cash used by investing activities was $4,832,000 for the three months ended
June 30, 2022 compared to $480,433,000 for the three months ended June 30, 2021.
The most significant use of cash in the quarter was $2,953,000 in capital
expenditures as well as a final working capital adjustment of $1,616,000 paid to
Garvey's previous owners in accordance with the share purchase agreement.
Cash flow from financing activities
Net cash used by financing activities was $12,881,000 for the three months ended
June 30, 2022 and net cash provided by financing activities was $373,755,000 for
the three months ended June 30, 2022. The Company paid down $10,128,000 of debt
during the quarter and paid dividends in the amount of $1,996,000. As noted in
Note 8 of the financial statements, during the second quarter of fiscal 2022,
the Company modified its cross currency swap and interest rate swap. As such,
the associated cash flows from hedging activities are classified as financing
activities in the Statement of Cash Flows which resulted in a net cash inflow of
$141,000 during the three months ended June 30, 2022.
We believe that our cash on hand, cash flows, and borrowing capacity under our
Amended and Restated Credit Agreement will be sufficient to fund our ongoing
operations and debt obligations, and capital expenditures for at least the next
twelve months. This belief is dependent upon successful execution of our current
business plan and effective working capital utilization. No material
restrictions exist in accessing cash held by our non-U.S. subsidiaries.
Additionally we expect to meet our U.S. funding needs without repatriating
non-U.S. cash and incurring incremental U.S. taxes. As of June 30, 2022,
$63,236,000 of cash and cash equivalents were held by foreign subsidiaries.
As discussed in Note 2, the Company completed its acquisition of Dorner on April
7, 2021 and entered into a $750,000,000 First Lien Facility with JPMorgan Chase
Bank, PNC Capital Markets LLC, and Wells Fargo Securities LLC. The First Lien
Facility consists of a New Revolving Credit Facility in an aggregate amount of
$100,000,000 and a $650,000,000 Bridge
31
--------------------------------------------------------------------------------
Facility. Proceeds from the Bridge Facility were used, among other things, to
finance the purchase price for the Dorner acquisition, pay related fees,
expenses and transaction costs, and refinance the Company's outstanding
borrowings under its prior Term Loan and Revolver.
In addition to the debt borrowing described above, the Company commenced and
completed an underwritten public offering of 4,312,500 shares of its common
stock at a price of $48.00 per share for total gross proceeds of $207,000,000.
The Company used all of the net proceeds from the equity offering to repay in
part outstanding borrowings under its Bridge Facility. The equity offering
closed on May 4, 2021. Following the repayment of outstanding borrowings under
the Bridge Facility, the Bridge Facility was refinanced with a syndicated Term
Loan B facility on May 14, 2021. Refer to the 2022 10-K for further details on
the Company's Term Loan B facility.
Also discussed in Note 2, the Company completed its acquisition of Garvey on
November 30, 2021 and borrowed additional funds in accordance with the Accordion
feature under its existing Term Loan B facility to increase the principal amount
of the Term Loan B facility by $75,000,000. Proceeds from the Accordion were
used, among other things, to finance the purchase price for the Garvey
acquisition, pay related fees, expenses, and transaction costs. No material
amendment to the terms of the Term Loan B facility or the First Lien Facility
was necessary for the Company to exercise this Accordion feature.
The outstanding principal balance of the Term Loan B facility was $492,560,000
as of June 30, 2022, which includes $75,000,000 in principal balance from the
Accordion exercised in the third quarter of fiscal 2022. The Company made
$10,000,000 in principal payments on the Term Loan B facility during the three
months ended June 30, 2022 of which $1,315,000 was required. The Company is
obligated to make $5,260,000 of principal payments on the Term Loan B facility
over the next 12 months plus applicable ECF payments, if required, however,
plans to pay down approximately $40,000,000 in principal payments in total
during such 12 month period. This amount has been recorded within the current
portion of long term debt on the Company's Condensed Consolidated Balance Sheet
with the remaining balance recorded as long term debt.
There were no outstanding borrowings and $17,210,000 in outstanding letters of
credit issued against the New Revolving Credit Facility as of June 30, 2022.
The outstanding letters of credit as of June 30, 2022 consisted of $1,550,000 in
commercial letters of credit and $15,660,000 of standby letters of credit.
The gross balance of deferred financing costs on the Term Loan B facility was
$6,323,000, which includes $892,000 from the Accordion exercise, as of June 30,
2022 and March 31, 2022. The accumulated amortization balances were $1,127,000
and $898,000 as of June 30, 2022 and March 31, 2022, respectively.
The gross balance of deferred financing costs associated with the New Revolving
Credit Facility is $4,027,000 as of June 30, 2022 and March 31, 2022,
respectively, which are included in Other assets on the Condensed Consolidated
Balance Sheet. The accumulated amortization balances were $1,007,000 and
$805,000 as of June 30, 2022 and March 31, 2022, respectively.
In connection with Dorner acquisition, the Company recorded a finance lease for
a manufacturing facility in Hartland, WI under a 23 year lease agreement which
terminates in 2035. The outstanding balance on the finance lease obligation is
$13,957,000 as of June 30, 2022 of which $559,000 has been recorded within the
Current portion of long term debt and the remaining balance recorded within Term
loan and revolving credit facility on the Company's Condensed Consolidated
Balance Sheet. See Note 15, Leases, for further details.
Unsecured and uncommitted lines of credit are available to meet short-term
working capital needs for certain of our subsidiaries operating outside of the
U.S. The lines of credit are available on an offering basis, meaning that
transactions under the line of credit will be on such terms and conditions,
including interest rate, maturity, representations, covenants and events of
default, as mutually agreed between our subsidiaries and the local bank at the
time of each specific transaction. As of June 30, 2022, unsecured credit lines
totaled approximately $2,306,000, of which $0 was drawn. In addition, unsecured
lines of $11,457,000 were available for bank guarantees issued in the normal
course of business of which $10,136,000 was utilized.
Capital Expenditures
In addition to keeping our current equipment and plants properly maintained, we
are committed to replacing, enhancing and upgrading our property, plant and
equipment to support new product development, improve productivity and customer
responsiveness, reduce production costs, increase flexibility to respond
effectively to market fluctuations and changes, meet environmental requirements,
enhance safety and promote ergonomically correct work stations. Consolidated
capital expenditures for the three months ended June 30, 2022 and June 30, 2021
were $2,953,000 and $3,648,000, respectively. We expect capital expenditure
spending in fiscal 2023 to range from $25,000,000 to $30,000,000.
32
--------------------------------------------------------------------------------
Inflation and Other Market Conditions
Our costs are affected by inflation in the U.S. economy and, to a lesser extent,
in non-U.S. economies including those of Europe, Canada, Mexico, South America,
and Asia-Pacific. We do not believe that general inflation has had a material
effect on our results of operations over the periods presented despite rising
inflation due to our ability to pass on rising costs through price increases. We
are currently experiencing higher raw material, freight, and logistics costs
than we have seen in recent years, which we have been able to recover with
pricing actions. In the future, we may not be able to pass on these cost
increases to our customers.
Goodwill Impairment Testing
We test goodwill for impairment at least annually and more frequently whenever
events occur or circumstances change that indicate there may be impairment.
These events or circumstances could include a significant long-term adverse
change in the business climate, poor indicators of operating performance, or a
sale or disposition of a significant portion of a reporting unit.
We test goodwill at the reporting unit level, which is one level below our
operating segment. We identify our reporting units by assessing whether the
components of our operating segment constitute businesses for which discrete
financial information is available and segment management regularly reviews the
operating results of those components. We also aggregate components that have
similar economic characteristics into single reporting units (for example,
similar products and / or services, similar long-term financial results, product
processes, classes of customers, etc.). We have three reporting units: the Duff
Norton reporting unit, the Rest of Products reporting unit, and the Precision
Conveyance reporting unit, which have goodwill totaling $9,699,000,
$301,298,000, and $329,973,000, respectively, as of June 30, 2022.
We currently do not believe that it is more likely than not that the fair value
of each of our reporting units is less than its applicable carrying value.
Additionally, we currently do not believe that we have any significant
impairment indicators or that any of our reporting units with goodwill are at
risk of failing Step One of the goodwill impairment test. However, if the
projected long-term revenue growth rates, profit margins, or terminal growth
rates are significantly lower, and/or the estimated weighted-average cost of
capital is considerably higher, future testing may indicate impairment of one or
more of the Company's reporting units and, as a result, the related goodwill may
be impaired.
Refer to our 2022 10-K for additional information regarding our annual goodwill
impairment process.
Seasonality and Quarterly Results
Quarterly results may be materially affected by the timing of large customer
orders, periods of high vacation and holiday concentrations, legal settlements,
gains or losses in our portfolio of marketable securities, restructuring
charges, favorable or unfavorable foreign currency translation, divestitures and
acquisitions. 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
Information regarding the effects of new accounting pronouncements is included
in Note 16 to the accompanying consolidated financial statements included in
this Quarterly Report on Form 10-Q.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Forward-looking statements include statements relating to:
•future development and expected growth of our business and industry;
•our ability to execute our business model, our Columbus McKinnon Business
System operating system and our strategy;
•plans to repay additional principal on the Term Loan B facility during future
periods;
•having available sufficient cash and borrowing capacity to fund ongoing
operations, debt obligations and capital expenditures for the next twelve
months;
•projected capital expenditures; and
33
--------------------------------------------------------------------------------
•projected effective tax rate for fiscal 2023.
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, including 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 risks and
uncertainties that arise from time to time are described in Item 1A "Risk
Factors" of our Annual Report on Form 10-K and in other periodic filings with
the SEC. All forward-looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by these cautionary factors
and to others contained throughout this Quarterly Report on Form 10-Q. We use
words like "will," "may," "should," "plan," "believe," "expect," "anticipate,"
"intend," "future" and other similar expressions to identify forward looking
statements. These forward looking statements speak only as of their respective
dates and are based on our current expectations. Except as required by
applicable law, we do not undertake and specifically decline any obligation to
publicly release 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 changes.
Actual events or our actual operating results could differ materially from those
predicted in these forward-looking statements, and any other events anticipated
in the forward-looking statements may not actually occur.
34
--------------------------------------------------------------------------------
© Edgar Online, source Glimpses
COLUMBUS MCKINNON CORPORATION 
