UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT 1934 For the quarterly period ended October 2, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to ------------------- -------------------- Commission File Number: 0-27618 ------- 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 October 31, 2005 was: 15,250,272 shares.
FORM 10-Q INDEX COLUMBUS MCKINNON CORPORATION OCTOBER 2, 2005 PAGE # ------ PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed consolidated balance sheets - October 2, 2005 and March 31, 2005 2 Condensed consolidated statements of operations and retained earnings - Three months and six and October 3, 2004 3 Condensed consolidated statements of cash flows - Six months ended October 2, 2005 and October 3, 2004 4 Condensed consolidated statements of comprehensive income - Three months and six months ended October 2, 2005 and October 3, 2004 5 Notes to condensed consolidated financial statements - October 2, 2005 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Disclosure Controls and Procedures 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings - none. 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - none. 23 Item 3. Defaults upon Senior Securities - none. 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information - none. 23 Item 6. Exhibits and Reports on Form 8-K 23 - 1 -
PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) COLUMBUS MCKINNON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS OCTOBER 2, MARCH 31, 2005 2005 ---------- ---------- (UNAUDITED) (AUDITED) ASSETS: (IN THOUSANDS) Current assets: Cash and cash equivalents $ 42,535 $ 9,479 Trade accounts receivable 86,026 88,974 Unbilled revenues 10,862 8,848 Inventories 77,637 77,626 Prepaid expenses 14,317 14,198 ---------- ---------- Total current assets 231,377 199,125 Property, plant, and equipment, net 54,532 57,237 Goodwill and other intangibles, net 186,732 187,285 Marketable securities 25,165 24,615 Deferred taxes on income 4,327 6,122 Other assets 6,635 6,487 ---------- ---------- Total assets $ 508,768 $ 480,871 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Notes payable to banks $ 3,318 $ 4,839 Trade accounts payable 37,833 33,688 Accrued liabilities 51,955 51,962 Restructuring reserve 114 144 Current portion of long-term debt 195 5,819 ---------- ---------- Total current liabilities 93,415 96,452 Senior debt, less current portion 115,600 115,735 Subordinated debt 161,600 144,548 Other non-current liabilities 44,751 42,369 ---------- ---------- Total liabilities 415,366 399,104 ---------- ---------- Shareholders' equity Common stock 152 149 Additional paid-in capital 106,795 104,078 Retained earnings (accumulated deficit) 1,941 (8,644) ESOP debt guarantee (4,260) (4,554) Unearned restricted stock (29) (6) Accumulated other comprehensive loss (11,197) (9,256) ---------- ---------- Total shareholders' equity 93,402 81,767 ---------- ---------- Total liabilities and shareholders' equity $ 508,768 $ 480,871 ========== ========== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. - 2 -
<TABLE> <CAPTION> COLUMBUS MCKINNON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3, 2005 2004 2005 2004 ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Net sales $ 134,712 $ 122,711 $ 275,589 $ 244,369 Cost of products sold 99,554 92,768 203,888 182,975 --------- --------- --------- --------- Gross profit 35,158 29,943 71,701 61,394 --------- --------- --------- --------- Selling expenses 13,080 12,270 26,738 24,970 General and administrative expenses 8,539 7,517 16,714 15,002 Restructuring charges 211 184 237 217 Amortization of intangibles 61 76 123 153 --------- --------- --------- --------- 21,891 20,047 43,812 40,342 --------- --------- --------- --------- Income from operations 13,267 9,896 27,889 21,052 Interest and debt expense 6,633 7,141 13,349 14,189 Other (income) and expense, net 1,864 (607) 1,075 (589) --------- --------- --------- --------- Income from continuing operations before income tax expense 4,770 3,362 13,465 7,452 Income tax expense 1,721 982 3,308 1,710 --------- --------- --------- --------- Income from continuing operations 3,049 2,380 10,157 5,742 Income from discontinued operations 214 214 428 214 --------- --------- --------- --------- Net income 3,263 2,594 10,585 5,956 Accumulated deficit - beginning of period (1,322) (21,992) (8,644) (25,354) --------- --------- --------- --------- Retained earnings (accumulated deficit) - end of period $ 1,941 $ (19,398) $ 1,941 $ (19,398) ========= ========= ========= ========= Basic income per share: Income from continuing operations $ 0.21 $ 0.17 $ 0.69 $ 0.40 Income from discontinued operations 0.01 0.01 0.03 0.01 --------- --------- --------- --------- Net income $ 0.22 $ 0.18 $ 0.72 $ 0.41 ========= ========= ========= ========= Diluted income per share: Income from continuing operations $ 0.20 $ 0.17 $ 0.67 $ 0.40 Income from discontinued operations 0.01 0.01 0.03 0.01 --------- --------- --------- --------- Net income $ 0.21 $ 0.18 $ 0.70 $ 0.41 ========= ========= ========= ========= </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. - 3 -
<TABLE> <CAPTION> COLUMBUS MCKINNON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED ---------------- OCTOBER 2, OCTOBER 3, 2005 2004 ---------- ---------- (IN THOUSANDS) OPERATING ACTIVITIES: <S> <C> <C> Income from continuing operations $ 10,157 $ 5,742 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 4,651 4,652 Deferred income taxes 1,795 1,275 Gain on sale of real estate/investments (1,547) - Loss on early retirement of 2008 bonds 2,407 - Amortization/write-off of deferred financing costs 1,563 655 Changes in operating assets and liabilities: Trade accounts receivable and unbilled revenues (417) (1,597) Inventories (301) (5,257) Prepaid expenses (97) 1,342 Other assets (202) (135) Trade accounts payable 4,666 (4,718) Accrued and non-current liabilities 1,487 (4,781) --------- --------- Net cash provided by (used in) operating activities 24,162 (2,822) --------- --------- INVESTING ACTIVITIES: Sale of marketable securities, net 475 1,991 Capital expenditures (3,761) (1,948) Proceeds from sale of facilities and surplus real estate 2,091 - Net assets held for sale - 300 --------- --------- Net cash (used in) provided by investing activities (1,195) 343 --------- --------- FINANCING ACTIVITIES: Proceeds from stock options exercised 2,729 - Net (payments) borrowings under revolving line-of-credit agreements (1,110) 8,036 Repayment of debt (126,953) (7,173) Proceeds from issuance of long-term debt 136,000 - Deferred financing costs incurred (1,566) (11) Other 294 286 --------- --------- Net cash provided by financing activities 9,394 1,138 EFFECT OF EXCHANGE RATE CHANGES ON CASH 267 (91) --------- --------- Net cash provided by (used in) continuing operations 32,628 (1,432) NET CASH PROVIDED BY DISCONTINUED OPERATIONS 428 214 --------- --------- Net change in cash and cash equivalents 33,056 (1,218) Cash and cash equivalents at beginning of period 9,479 11,101 --------- --------- Cash and cash equivalents at end of period $ 42,535 $ 9,883 ========= ========= </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. - 4 -
<TABLE> <CAPTION> COLUMBUS MCKINNON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3, 2005 2004 2005 2004 ---- ---- ---- ---- (IN THOUSANDS) <S> <C> <C> <C> <C> Net income $ 3,263 $ 2,594 $ 10,585 $ 5,956 -------- -------- -------- -------- Other comprehensive income, net of tax: Foreign currency translation adjustments 1,171 945 (1,974) 938 Unrealized gain (loss) on investments: Unrealized holding gains (losses) arising during the period 653 (294) 1,024 (391) Reclassification adjustment for (gains) losses included in net income (541) (7) (991) 9 -------- -------- -------- -------- 112 (301) 33 (382) -------- -------- -------- -------- Total other comprehensive income (loss) 1,283 644 (1,941) 556 -------- -------- -------- -------- Comprehensive income $ 4,546 $ 3,238 $ 8,644 $ 6,512 ======== ======== ======== ======== </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. - 5 -
COLUMBUS MCKINNON CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) OCTOBER 2, 2005 1. DESCRIPTION OF BUSINESS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of Columbus McKinnon Corporation (the Company) at October 2, 2005, and the results of its operations and its cash flows for the three and six-month periods ended October 2, 2005 and October 3, 2004, have been included. Results for the period ended October 2, 2005 are not necessarily indicative of the results that may be expected for the year ended March 31, 2006. The balance sheet at March 31, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Columbus McKinnon Corporation annual report on Form 10-K for the year ended March 31, 2005. The Company is a leading manufacturer and marketer of material handling products, systems and services which lift, secure, position and move material ergonomically, safely, precisely and efficiently. Key products include hoists, cranes, chain and forged attachments. The Company's material handling products are sold, domestically and internationally, principally to third party distributors through diverse distribution channels, and to a lesser extent directly to manufacturers and other end-users. The Company's integrated material handling solutions businesses deal primarily with end users and sales are concentrated, domestically and internationally (primarily Europe), in the consumer products, manufacturing, warehousing and, to a lesser extent, the steel, construction, automotive and other industrial markets. 2. STOCK BASED COMPENSATION The Company has two stock-based employee compensation plans in effect. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant and the number of options granted was fixed. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition of SFAS No. 123 "Accounting for Stock-Based Compensation", to stock-based employee compensation: - 6 -
<TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED --------------------------------------------------- OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3, 2005 2004 2005 2004 --------------------------------------------------- <S> <C> <C> <C> <C> Net income, as reported..................... $ 3,263 $ 2,594 $ 10,585 $ 5,956 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (233) (183) (579) (369) --------------------------------------------------- Net income, pro forma....................... $ 3,030 $ 2,411 $ 10,006 $ 5,587 =================================================== Basic income per share: As reported................................. $ 0.22 $ 0.18 $ 0.72 $ 0.41 =================================================== Pro forma................................... $ 0.20 $ 0.17 $ 0.68 $ 0.38 =================================================== Diluted income per share: As reported................................. $ 0.21 $ 0.18 $ 0.70 $ 0.41 =================================================== Pro forma................................... $ 0.20 $ 0.16 $ 0.66 $ 0.38 =================================================== </TABLE> During the first six months of fiscal 2006, stock options for 298,400 shares were exercised resulting in proceeds to the Company of $2,729. 3. INVENTORIES Inventories consisted of the following: OCTOBER 2, MARCH 31, 2005 2005 ---------- ---------- At cost - FIFO basis: Raw materials................................... $ 39,716 $ 42,283 Work-in-process................................. 12,482 10,238 Finished goods.................................. 36,392 35,800 ---------- ---------- 88,590 88,321 LIFO cost less than FIFO cost................... (10,953) (10,695) ---------- ---------- Net inventories................................. $ 77,637 $ 77,626 ========== ========== An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many forces beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. 4. RESTRUCTURING CHARGES During the first six-months of fiscal 2006, the Company recorded restructuring costs of $237 for severance and the maintenance of non-operating facilities being held for sale which are expensed on an as incurred basis in accordance with SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." $186 and $51 of these costs are related to the Solutions and Products segments, respectively. The fiscal 2006 second quarter employee restructuring charges are related to the termination of several employees within our industrial crane and conveyor businesses. The liability as of October 2, 2005 consists primarily of costs associated with the preparation and maintenance of non-operating facilities prior to disposal which were accrued prior to the adoption of SFAS No. 146. - 7 -
The following table provides a reconciliation of the activity related to restructuring reserves: <TABLE> <CAPTION> EMPLOYEE FACILITY TOTAL --------------------------------------- <S> <C> <C> <C> 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 ======================================= </TABLE> 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: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3, 2005 2004 2005 2004 ---- ---- ---- ---- <S> <C> <C> <C> <C> Service costs.................... $ 1,088 $ 1,190 $ 2,176 $ 2,380 Interest cost.................... 1,737 1,755 3,474 3,510 Expected return on plan assets... (1,654) (1,645) (3,308) (3,290) Net amortization................. 508 495 1,016 990 -------- -------- -------- -------- Net periodic pension cost........ $ 1,679 $ 1,795 $ 3,358 $ 3,590 ======== ======== ======== ======== </TABLE> 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: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3, 2005 2004 2005 2004 ---- ---- ---- ---- <S> <C> <C> <C> <C> Service costs..................... $ 4 $ 4 $ 8 $ 8 Interest cost .................... 188 200 376 434 Amortization of plan net losses... 101 105 202 251 -------- -------- -------- ---- Net periodic postretirement cost.. $ 293 $ 309 $ 586 $ 693 ======== ======== ======== ======== </TABLE> On December 8, 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ("Medicare Act"). In March 2004, the FASB issued Staff Position No FAS 106-2 "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003 ("FSP No 106-2")," which provides accounting guidance on how to account for the effects of the Medicare Act on postretirement plans that provide prescription drug benefits. The Medicare Act also requires certain disclosures regarding the effect of the subsidy provided by the Medicare Act. Additionally, FSP 106-2 provides two transition methods - retroactive to the date of enactment or prospective from the date of adoption. The Company elected to adopt FAS 106-2 and apply the prospective transition method in the second quarter of fiscal 2005. The accumulated post retirement benefit obligation decreased approximately $2,200. For additional information on the Company's defined benefit postretirement benefit plans, refer to Note 13 in the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended March 31, 2005. - 8 -
6. DEBT On September 2, 2005, the Company issued $136,000 of 8 7/8% Senior Subordinated Notes (8 7/8% Notes) due November 1, 2013. Provisions of the 8 7/8% Notes include, without limitation, restrictions on indebtedness, asset sales, and dividends and other restricted payments. Until November 1, 2008, we may redeem up to 35% of the outstanding notes at a redemption price of 108.875% with the proceeds of equity offerings, subject to certain restrictions. The 8 7/8% Notes are redeemable at the option of the Company, in whole or in part, at prices declining annually from the Make-Whole Price (as defined in the 8 7/8% Notes agreement) to 100% on and after November 1, 2011. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 8 7/8% Notes may require us to repurchase all or a portion of such holder's 8 7/8% Notes at a purchase price equal to 101% of the principal amount thereof. The 8 7/8% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. Proceeds from the 8 7/8% Notes were used for the repurchase of $116,775 million of the 8 1/2% Senior Subordinated Notes. The repurchase of the 8 1/2% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $2,298. As a result of the repurchase of the 8 1/2% Notes, $922 of pre-tax deferred financing costs and $110 of the original issue discount were written-off in the second quarter of fiscal 2006. The net effect of these items, a $3,330 pre-tax loss, is shown as part of other (income) and expense, net. As of October 2, 2005, the Senior Subordinated 8 1/2% Notes issued on March 31, 1998 amounted to $25,600. On October 14, 2005, all of the outstanding 8 1/2% Notes were repurchased with proceeds from the 8 7/8% Notes and cash on hand. 7. INCOME TAXES Income tax expense as a percentage of income from continuing operations before income tax expense was 36.1%, 29.2%, 24.6%, and 22.9% in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. The fiscal 2006 and 2005 percentages vary from the U.S. statutory rate due to the utilization of domestic net operating loss carry-forwards that had been fully reserved and jurisdictional mix. Therefore, income tax expense primarily results from non-U.S. taxable income and state taxes on U.S. taxable income. The higher effective income tax rate in fiscal 2006 reflects the $3,330 loss on early extinguishment of debt which reduced U.S. taxable income, but did not affect our tax expense due to the existence of fully reserved U.S. Federal net operating loss carry-forwards. 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3, 2005 2004 2005 2004 ---- ---- ---- ---- Numerator for basic and diluted earnings per share: <S> <C> <C> <C> <C> Net income $ 3,263 $ 2,594 $ 10,585 $ 5,956 ======== ======== ======== ======== Denominators: Weighted-average common stock outstanding - denominator for basic EPS 14,845 14,585 14,757 14,581 Effect of dilutive employee stock options 586 215 470 117 -------- -------- -------- -------- Adjusted weighted-average common stock outstanding and assumed conversions - denominator for diluted EPS 15,431 14,800 15,227 14,698 ======== ======== ======== ======== </TABLE> - 9 -
9. BUSINESS SEGMENT INFORMATION As a result of the way the Company manages the business, its reportable segments are strategic business units that offer products with different characteristics. The most defining characteristic is the extent of customized engineering required on a per-order basis. In addition, the segments serve different customer bases through differing methods of distribution. The Company has two reportable segments: Products and Solutions. The Company's Products segment sells hoists, industrial cranes, chain, attachments, and other material handling products principally to third party distributors through diverse distribution channels, and to a lesser extent directly to end-users. The Solutions segment sells engineered material handling systems such as conveyors and lift tables primarily to end-users in the consumer products, manufacturing, warehousing, and, to a lesser extent, the steel, construction, automotive, and other industrial markets. Intersegment sales are not significant. The Company evaluates performance based on operating income of the respective business units. Segment information as of and for the six months ended October 2, 2005 and October 3, 2004, is as follows: SIX MONTHS ENDED OCTOBER 2, 2005 -------------------------------- PRODUCTS SOLUTIONS TOTAL -------- --------- ----- Sales to external customers........ $ 244,555 $ 31,034 $ 275,589 Income from operations............. 26,820 1,069 27,889 Depreciation and amortization...... 4,059 592 4,651 Total assets....................... 477,646 31,122 508,768 SIX MONTHS ENDED OCTOBER 3, 2004 -------------------------------- PRODUCTS SOLUTIONS TOTAL -------- --------- ----- Sales to external customers........ $ 217,538 $ 26,831 $ 244,369 Income from operations............. 20,259 793 21,052 Depreciation and amortization...... 4,176 476 4,652 Total assets....................... 442,152 29,967 472,119 - 10 -
10. SUMMARY FINANCIAL INFORMATION The following information sets forth the condensed consolidating summary financial information of the parent and guarantors, which guarantee the 10% Senior Secured Notes, the 8 1/2% Senior Subordinated Notes and the 8 7/8% Senior Subordinated Notes, and the nonguarantors. The guarantors are wholly owned and the guarantees are full, unconditional, joint and several. <TABLE> <CAPTION> Parent Guarantors Nonguarantors Eliminations Consolidated ------------------------------------------------------------------- AS OF OCTOBER 2, 2005 Current assets: <S> <C> <C> <C> <C> <C> Cash and cash equivalents $ 26,423 $ (1,209) $ 17,321 $ - $ 42,535 Trade accounts receivable and unbilled revenues 57,632 245 39,011 - 96,888 Inventories 33,979 19,880 26,155 (2,377) 77,637 Other current assets 3,589 893 9,835 - 14,317 --------------------------------------------------------------------- Total current assets 121,623 19,809 92,322 (2,377) 231,377 Property, plant, and equipment, net 24,567 12,102 17,863 - 54,532 Goodwill and other intangibles, net 90,006 57,286 39,440 - 186,732 Intercompany 98,943 (102,682) (71,472) 75,211 - Other assets 53,769 197,864 24,689 (240,195) 36,127 --------------------------------------------------------------------- Total assets $ 388,908 $ 184,379 $ 102,842 $(167,361) $ 508,768 ===================================================================== Current liabilities $ 42,154 $ 15,329 $ 35,636 $ 296 $ 93,415 Long-term debt, less current portion 276,600 - 600 - 277,200 Other non-current liabilities 7,244 8,183 29,324 - 44,751 --------------------------------------------------------------------- Total liabilities 325,998 23,512 65,560 296 415,366 Shareholders' equity 62,910 160,867 37,282 (167,657) 93,402 --------------------------------------------------------------------- Total liabilities and shareholders' equity $ 388,908 $ 184,379 $ 102,842 $(167,361) $ 508,768 ===================================================================== FOR THE SIX MONTHS ENDED OCTOBER 2, 2005 Net sales $ 133,203 $ 74,059 $ 80,228 $ (11,901) $ 275,589 Cost of products sold 99,422 55,921 59,041 (10,496) 203,888 --------------------------------------------------------------------- Gross profit 33,781 18,138 21,187 (1,405) 71,701 --------------------------------------------------------------------- Selling, general and administrative expenses 20,193 8,014 15,245 - 43,452 Restructuring charges 159 - 78 - 237 Amortization of intangibles 88 1 34 - 123 --------------------------------------------------------------------- 20,440 8,015 15,357 - 43,812 --------------------------------------------------------------------- Income from operations 13,341 10,123 5,830 (1,405) 27,889 Interest and debt expense 10,929 2,254 166 - 13,349 Other (income) and expense, net 2,904 28 (1,857) - 1,075 --------------------------------------------------------------------- (Loss) income before income tax expense (492) 7,841 7,521 (1,405) 13,465 Income tax expense 349 683 2,276 - 3,308 --------------------------------------------------------------------- (Loss) income from continuing operations (841) 7,158 5,245 (1,405) 10,157 Income from discontinued operations 428 - - - 428 --------------------------------------------------------------------- Net (loss) income $ (413) $ 7,158 $ 5,245 $ (1,405) $ 10,585 ===================================================================== - 11 -
Parent Guarantors Nonguarantors Eliminations Consolidated --------------------------------------------------------------------- FOR THE SIX MONTHS ENDED OCTOBER 2, 2005 OPERATING ACTIVITIES: Net cash provided by operating activities $ 7,543 $ 8,507 $ 8,112 $ - $ 24,162 --------------------------------------------------------------------- INVESTING ACTIVITIES: Sale of marketable securities, net - - 475 - 475 Capital expenditures (2,030) (644) (1,087) - (3,761) Proceeds from sale of facilities and surplus real estate - 468 1,623 - 2,091 --------------------------------------------------------------------- Net cash (used in) provided by investing activities (2,030) (176) 1,011 - (1,195) --------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from stock options exercised 2,729 - - - 2,729 Net borrowings (payments) under revolving line-of-credit agreements 240 - (1,350) - (1,110) Repayment of debt (126,831) - (122) - (126,953) Proceeds from issuance of long-term debt 136,000 - - - 136,000 Deferred financing costs incurred (1,566) - - - (1,566) Dividends paid 8,854 (8,854) - - - Other 294 - - - 294 --------------------------------------------------------------------- Net cash provided by (used in) financing activities 19,720 (8,854) (1,472) - 9,394 EFFECT OF EXCHANGE RATE CHANGES ON CASH (257) 11 513 - 267 --------------------------------------------------------------------- Cash provided by (used in) continuing operations 24,976 (512) 8,164 - 32,628 CASH PROVIDED BY DISCONTINUED OPERATIONS 428 - - - 428 --------------------------------------------------------------------- Net change in cash and cash equivalents 25,404 (512) 8,164 - 33,056 Cash and cash equivalents at beginning of period 1,019 (697) 9,157 - 9,479 --------------------------------------------------------------------- Cash and cash equivalents at end of period $ 26,423 $ (1,209) $ 17,321 $ - $ 42,535 ===================================================================== AS OF MARCH 31, 2005 Current assets: Cash and cash equivalents $ 1,019 $ (697) $ 9,157 $ - $ 9,479 Trade accounts receivable and unbilled revenues 57,707 197 39,918 - 97,822 Inventories 33,651 18,919 26,028 (972) 77,626 Other current assets 7,297 973 5,928 - 14,198 --------------------------------------------------------------------- Total current assets 99,674 19,392 81,031 (972) 199,125 Property, plant, and equipment, net 25,107 12,847 19,283 - 57,237 Goodwill and other intangibles, net 90,027 57,287 39,971 - 187,285 Intercompany 98,964 (102,189) (70,216) 73,441 - Other assets 55,396 197,864 24,159 (240,195) 37,224 --------------------------------------------------------------------- Total assets $ 369,168 $ 185,201 $ 94,228 $(167,726) $ 480,871 ===================================================================== Current liabilities $ 50,323 $ 14,450 $ 33,153 $ (1,474) $ 96,452 Long-term debt, less current portion 259,520 - 763 - 260,283 Other non-current liabilities 7,898 8,199 26,272 - 42,369 --------------------------------------------------------------------- Total liabilities 317,741 22,649 60,188 (1,474) 399,104 Shareholders' equity 51,427 162,552 34,040 (166,252) 81,767 --------------------------------------------------------------------- Total liabilities and shareholders' equity $ 369,168 $ 185,201 $ 94,228 $(167,726) $ 480,871 ===================================================================== - 12 -
Parent Guarantors Nonguarantors Eliminations Consolidated --------------------------------------------------------------------- FOR THE SIX MONTHS ENDED OCTOBER 3, 2004 Net sales $ 119,552 $ 68,243 $ 68,656 $ (12,082) $ 244,369 Cost of products sold 91,845 53,413 49,799 (12,082) 182,975 --------------------------------------------------------------------- Gross profit 27,707 14,830 18,857 - 61,394 Selling, general and administrative expenses 15,833 10,326 13,813 - 39,972 Restructuring charges 217 - - - 217 Amortization of intangibles 118 1 34 - 153 --------------------------------------------------------------------- 16,168 10,327 13,847 - 40,342 --------------------------------------------------------------------- Income from operations 11,539 4,503 5,010 - 21,052 Interest and debt expense 12,174 1,830 185 - 14,189 Other (income) and expense, net (726) 237 (100) - (589) --------------------------------------------------------------------- Income before income tax expense 91 2,436 4,925 - 7,452 Income tax expense 103 275 1,332 - 1,710 --------------------------------------------------------------------- (Loss) income from continuing operations (12) 2,161 3,593 - 5,742 Income from discontinued operations 214 - - - 214 --------------------------------------------------------------------- Net income $ 202 $ 2,161 $ 3,593 $ - $ 5,956 ===================================================================== FOR THE SIX MONTHS ENDED OCTOBER 3, 2004 OPERATING ACTIVITIES: Net cash (used in) provided by operating activities $ (72,018) $ 67,369 $ 1,827 $ - $ (2,822) --------------------------------------------------------------------- INVESTING ACTIVITIES: Sale of marketable securities, net - - 1,991 - 1,991 Capital expenditures, net (1,580) (385) 17 - (1,948) Other - 300 - - 300 --------------------------------------------------------------------- Net cash (used in) provided by investing activities (1,580) (85) 2,008 - 343 --------------------------------------------------------------------- FINANCING ACTIVITIES: Net borrowings (payments) under revolving line-of-credit agreements 8,468 - (432) - 8,036 Repayment of debt (7,052) - (121) - (7,173) Deferred financing costs incurred (11) - - - (11) Dividends paid 68,000 (68,000) - - - Other 286 - - - 286 --------------------------------------------------------------------- Net cash provided by (used in) financing activities 69,691 (68,000) (553) - 1,138 EFFECT OF EXCHANGE RATE CHANGES ON CASH (34) 92 (149) - (91) --------------------------------------------------------------------- Cash (used in) provided by continuing operations (3,941) (624) 3,133 - (1,432) CASH PROVIDED BY DISCONTINUED OPERATIONS 214 - - - 214 --------------------------------------------------------------------- Net change in cash and cash equivalents (3,727) (624) 3,133 - (1,218) Cash and cash equivalents at beginning of period 6,981 (329) 4,449 - 11,101 --------------------------------------------------------------------- Cash and cash equivalents at end of period $ 3,254 $ (953) $ 7,582 $ - $ 9,883 ===================================================================== </TABLE> - 13 -
11. LOSS CONTINGENCIES Like many industrial manufacturers, the Company is involved in asbestos-related litigation. In continually evaluating costs relating to its estimated asbestos-related liability, the Company reviews, among other things, the incidence of past and recent claims, the historical case dismissal rate, the mix of the claimed illnesses and occupations of the plaintiffs, its recent and historical resolution of the cases, the number of cases pending against it, the status and results of broad-based settlement discussions, and the number of years such activity might continue. Based on this review, the Company has estimated its share of liability to defend and resolve probable asbestos-related personal injury claims. This estimate is highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that can affect the range of the liability. The Company will continue to study the variables in light of additional information in order to identify trends that may become evident and to assess their impact on the range of liability that is probable and estimable. Based on actuarial information, the Company has estimated its asbestos-related aggregate liability through March 31, 2030 and March 31, 2081 to range between $4,200 and $16,700 using actuarial parameters of continued claims for a period of 25 to 76 years. The Company's estimation of its asbestos-related aggregate liability that is probable and estimable, in accordance with U.S. generally accepted accounting principles, is through March 31, 2031 and ranges from $4,200 to $5,500 as of October 2, 2005. The range of probable and estimable liability reflects uncertainty in the number of future claims that will be filed and the cost to resolve those claims, which may be influenced by a number of factors, including the outcome of the ongoing broad-based settlement negotiations, defensive strategies, and the cost to resolve claims outside the broad-based settlement program. Based on the underlying actuarial information, the Company has reflected $5,000 as a liability in the consolidated financial statements in accordance with U.S. generally accepted accounting principles. The recorded liability does not consider the impact of any potential favorable federal legislation such as the "FAIR Act". Of this amount, management expects to incur asbestos liability payments of approximately $250 over the next 12 months. Because payment of the liability is likely to extend over many years, management believes that the potential additional costs for claims will not have a material after-tax effect on the financial condition of the Company or its liquidity, although the net after-tax effect of any future liabilities recorded could be material to earnings in a future period. 12. NEW ACCOUNTING STANDARDS In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, as an amendment to ARB No. 43, Chapter 4, INVENTORY PRICING, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage). This Statement requires that these items be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This Statement becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS No. 151 to have a material impact on the Company's consolidated financial statements. In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), SHARE-BASED PAYMENT, which is a revision of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement 123(R) supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEEs, and amends FASB Statement No. 95, STATEMENT OF CASH FLOWS. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) was to be adopted for interim or annual periods beginning after June 15, 2005. On April 14th, 2005, the SEC announced that it would provide for a phased-in implementation process for FASB statement No. 123(R). The SEC is requiring that registrants adopt statement 123(R)'s fair value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after June 15, 2005. We expect to adopt 123(R) in the first quarter of Fiscal 2007. Statement 123(R) permits public companies to adopt its requirements using one of two methods: - 14 -
1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123(R) for all share-based payments granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company is still evaluating the method it plans to use when it adopts statement 123(R). As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, recognizes no compensation cost for employee stock options. Accordingly, adoption of Statement 123(R)'s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of 123(R) cannot be predicted at this time because it will depend on levels of share based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to our condensed consolidated financial statements. 13. SUBSEQUENT EVENT On October 20, 2005, the Company filed a Form S-3 registration statement with the Securities Exchange Commission to potentially sell an additional 3,350,000 shares of its common stock. The number of shares being offered by the Company is 3,000,000 and 350,000 are being offered by a selling shareholder. The Company will not receive any proceeds from the sale of shares by the selling shareholder. A portion of the proceeds received by the Company would be used to redeem approximately $40.3 million principal amount of the Company's outstanding Senior Secured 10% Notes. The balance of the proceeds would be available for other general corporate purposes to advance its strategy of global growth, including additional debt repayment, investments and acquisitions. - 15 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (DOLLAR AMOUNTS IN THOUSANDS) EXECUTIVE OVERVIEW We are a leading manufacturer and marketer of hoists, cranes, chain, conveyors, material handling systems, lift tables and component parts serving a wide variety of commercial and industrial end-user markets. Our products are used to efficiently and ergonomically move, lift, position or secure objects and loads. Our Products segment sells a wide variety of powered and manually operated wire rope and chain hoists, industrial crane systems, chain, hooks and attachments, actuators and rotary unions. Our Solutions segment designs, manufactures, and installs application-specific material handling systems and solutions for end-users to improve work station and facility-wide work flow. Founded in 1875, we have grown to our current leadership position through organic growth and the acquisition of 14 businesses between February 1994 and April 1999. We have developed our leading market position over our 130-year history by emphasizing technological innovation, manufacturing excellence and superior after-sale service. In addition, the acquisitions significantly broadened our product lines and services and expanded our geographic reach, end-user markets and customer base. Integration of the operations of the acquired businesses with our previously existing businesses is substantially complete. Ongoing integration of these businesses includes improving our productivity, further reducing our excess manufacturing capacity and extending our sales activities to the European and Asian marketplaces. We are executing those initiatives through our Lean Manufacturing efforts, facility rationalization program, new product development and expanded sales activities. Shareholder value will be enhanced through continued emphasis on the improvement of the fundamentals including manufacturing efficiency, cost containment, efficient capital investment, and our markets and customers. We maintain a strong domestic market share with significant leading North American market positions in hoists, lifting and sling chain, and forged attachments. To broaden our product offering in markets where we have a strong competitive position as well as to facilitate penetration into new geographic markets, we have heightened our new product development activities. This includes development of hoist lines in accordance with international standards, to complement our current offering of hoist products designed in accordance with U.S. standards. To further expand our global sales, we are introducing certain of our products that historically have been distributed only in North America and also introducing new products through our existing European distribution network. Furthermore, we are working to build a distribution network in China to capture an anticipated growing demand for material handling products as that economy continues to industrialize. These investments in international markets and new products are part of our focus on our greatest opportunities for growth. International sales increased 20% from approximately $82,000 to $98,000 during the first six months of fiscal 2006 and overall sales increased 13% over the same period last year. Management believes that the growth rate of total sales may moderate in future periods due to more difficult comparisons with our fiscal 2005 periods. In addition, bookings have tapered to the mid-single digit growth range. We monitor such indicators as U.S. Industrial Capacity Utilization, which had been increasing since July 2003 but have more recently begun to stabilize. In addition, we continue to monitor the potential impact of global and domestic trends, including steel price fluctuations, possibly rising interest rates and uncertainty in some end-user markets around the globe. Our Lean Manufacturing efforts continue to fundamentally change our manufacturing processes to be more responsive to customer demand and improve on-time delivery and productivity. From 2001 to 2004 under our facility rationalization program, we closed 13 facilities and consolidated several product lines, with potential opportunity for further rationalization. We have been undergoing assessments for possible divestiture of several less-strategic businesses. Our manipulator and specialty marine chain businesses were sold in fiscal 2004 and two others remain as possible divestiture candidates, our conveyor business which comprises a majority of our Solutions segment and a specialty crane business within our Products segment. In furtherance of our facility rationalization projects, we completed the sale of several excess properties at a gain of $3,700 and $556 during fiscal 2005 and the first six months of fiscal 2006, respectively. We will continue to sell surplus real estate resulting from our facility rationalization projects and those sales may result in gains or losses. - 16 -
We keep a close watch on the costs for fringe benefits such as health insurance, workers compensation insurance and pension. Combined, those benefits cost us over $33,000 in fiscal 2005 and we work diligently to balance cost control with the need to provide competitive employee benefits packages for our associates. Another cost area of focus is steel. We utilize approximately $30,000 to $35,000 of steel annually in a variety of forms including rod, wire, bar, structural and others. Increases in our costs have been reflected as price increases and surcharges to our customers and we continue to monitor them. The costs of implementing Sarbanes-Oxley internal control documentation and compliance had a substantial impact on fiscal 2005 profitability and we are focused on minimizing the future added costs of compliance. We continue to operate in a highly competitive business environment in the markets and geographies served. Our performance will be impacted by our ability to address a variety of challenges and opportunities in those markets and geographies, including trends towards increased utilization of the global labor force and the expansion of market opportunities in Asia and other emerging markets. Based on current trends, we look forward to slowed growth over the remainder of fiscal 2006. RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED OCTOBER 2, 2005 AND OCTOBER 3, 2004 Net sales in the fiscal 2006 quarter ended October 2, 2005 were $134,712, up $12,001 or 9.8% from the fiscal 2005 quarter ended October 3, 2004. Net sales for the six months ended October 2, 2005 were $275,589, an increase of $31,220 or 12.8% from the six months ended October 3, 2004. Sales in the Products segment increased by $11,693 or 10.7% from the previous year's quarter and $27,017 or 12.4% from the previous year's six-month period then ended. These increases are due to the continued strength of the U.S. and European industrial markets, as well as the impact of price increases of $4,800 and $12,700 in the quarter and six months ended October 2, 2005, respectively. Translation of foreign currencies, particularly the Euro and Canadian dollar, into U.S. dollars contributed $700 and $2,000 toward the Products segment increase in sales for the quarter and six-month period ended October 2, 2005. Sales in the Solutions segment increased 2.2% or $308 for the quarter and 15.7% or $4,203 for the six months ended October 2, 2005 when compared to the same period in the prior year. The increase in this segment is primarily due to improvement in our European conveyor business. Translation of foreign currencies into U.S. dollars contributed $200 and $800 toward the Solutions segment increase in sales for the quarter and six-months ended October 2, 2005. Sales in the segments are summarized as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- OCT. 2, OCT. 3, CHANGE OCT. 2, OCT. 3, CHANGE 2005 2004 AMOUNT % 2005 2004 AMOUNT % ---------- ---------- -------- ---- ---------- --------- -------- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> Products $ 120,674 $ 108,981 $ 11,693 10.7 $ 244,555 $ 217,538 $ 27,017 12.4 Solutions 14,038 13,730 308 2.2 31,034 26,831 4,203 15.7 ---------- ---------- -------- ---------- --------- -------- Net sales $ 134,712 $ 122,711 $ 12,001 9.8 $ 275,589 $ 244,369 $ 31,220 12.8 ========== ========== ======== ========== ========= ======== </TABLE> Gross profits and gross profit margins by operating segment are summarized as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- OCT. 2, 2005 OCT. 3, 2004 OCT. 2, 2005 OCT. 3, 2004 ------------ ------------ ------------ ------------ $ % $ % $ % $ % ----- ----- ----- ----- ----- ----- ----- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> Products $ 32,665 27.1 $ 27,805 25.5 $ 66,885 27.3 $ 57,050 26.2 Solutions 2,493 17.8 2,138 15.6 4,816 15.5 4,344 16.2 --------- --------- --------- --------- Total Gross Profit $ 35,158 26.1 $ 29,943 24.4 $ 71,701 26.0 $ 61,394 25.1 ========= ========= ========= ========= </TABLE> The increase in the gross profit margin for the Products segment is the result of product mix, the realization of operational leverage at increased sales volumes and previous cost containment activities. The Solutions segment gross profit margin was impacted by product mix. Selling expenses were $13,080, $12,270, $26,738, and $24,970 in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. The changes in expense dollars were impacted by increased investment in new markets - 17 -
($250 and $750 for the quarter and six-month period ended October 2, 2005, respectively), translation from changes in foreign exchange rates ($100 and $300 for the quarter and six-month period ended October 2, 2005, respectively) and increased variable selling costs as a result of higher sales volume. As a percentage of consolidated net sales, selling expenses were 9.7%, 10.0%, 9.7%, and 10.2% in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. General and administrative expenses were $8,539, $7,517, $16,714, and $15,002 in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. The quarterly increase is primarily the result of increased salaries and fringe benefits ($200), increased bad debt reserves ($150), severance expenses ($300), increased support costs for our European conveyor business ($125), and currency translation impact ($100). The fiscal 2006 six-month data is higher than the prior year due to increased salaries and fringe benefits ($400), increased bad debt reserves ($250), severance expenses ($300), increased support costs for our European conveyor business ($125), and currency translation impact ($100). As a percentage of consolidated net sales, general and administrative expenses were 6.3%, 6.1%, 6.1% and 6.1% in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. Restructuring charges were $211, $184, $237, and $217 in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. Amortization of intangibles was $61, $76, $123, and $153 in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. Interest and debt expense was $6,633, $7,141, $13,349, and $14,189 in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. These decreases are the result of lower debt levels. As a percentage of consolidated net sales, interest and debt expense was 4.9%, 5.8%, 4.8% and 5.8% in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. Other (income) and expense, net was $1,864, $(607), $1,075 and $(589) in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. The 2006 quarter expense consisted primarily of a $3,330 loss on early extinguishment of debt, offset by $691 of realized gains and investment income on investments within our captive insurance company portfolio, $556 of gains on sales of real estate, and $120 of interest income. The fiscal 2006 six month expense consisted primarily of a $3,330 loss on early extinguishment of debt, offset by $1,226 of realized gains and investment income on investments within our captive insurance company portfolio, $554 of gains on sales of real estate, and $240 of interest income. The fiscal 2005 income for both the quarter and six-month period consisted primarily of $580 of interest income. Income tax expense as a percentage of income from continuing operations before income tax expense was 36.1%, 29.2%, 24.6%, and 22.9% in the fiscal 2006 and 2005 quarters and the six-month periods then ended, respectively. The fiscal 2006 and 2005 percentages vary from the U.S. statutory rate due to the utilization of domestic net operating loss carry-forwards that had been fully reserved and jurisdictional mix. Income tax expense primarily results from non-U.S. taxable income and state taxes on U.S. taxable income. The higher effective income tax rate in fiscal 2006 reflects the $3,330 loss on early extinguishment of debt which reduced U.S. taxable income, but did not affect our tax expense due to the existence of fully reserved U.S. Federal net operating loss carry-forwards. We evaluate our estimated annual effective tax rate each quarter. In light of the our continuing improvement in the results of our U.S. operations during fiscal 2005 and 2006, we plan to review the previously established valuation reserves for our net deferred tax assets in more detail as information becomes available. LIQUIDITY AND CAPITAL RESOURCES The Company's Revolving Credit Facility provides availability up to a maximum of $65,000. Underlying collateral at October 2, 2005 amounted to $65,000. The unused portion totaled $54,100, net of outstanding borrowings of $0 and outstanding letters of credit of $10,900. Interest is payable at varying Eurodollar rates based on LIBOR or prime plus spreads determined by our leverage ratio, amounting to 175 or 50 basis points applied to each, respectively. The Revolving Credit Facility is secured by all domestic inventory, receivables, - 18 -
equipment, real property, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual property. On September 2, 2005, the Company issued $136,000 of 8 7/8% Senior Subordinated Notes (8 7/8% Notes) due November 1, 2013. Provisions of the 8 7/8% Notes include, without limitation, restrictions on indebtedness, asset sales, and dividends and other restricted payments. Until November 1, 2008, we may redeem up to 35% of the outstanding notes at a redemption price of 108.875% with the proceeds of equity offerings, subject to certain restrictions. The 8 7/8% Notes are redeemable at the option of the Company, in whole or in part, at prices declining annually from the Make-Whole Price (as defined in the 8 7/8% Notes agreement) to 100% on and after November 1, 2011. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 8 7/8% Notes may require us to repurchase all or a portion of such holder's 8 7/8% Notes at a purchase price equal to 101% of the principal amount thereof. The 8 7/8% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. Proceeds from the 8 7/8% Notes were used for the repurchase of $116,775 million of the 8 1/2% Senior Subordinated Notes. The repurchase of the 8 1/2% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $2,298. As a result of the repurchase of the 8 1/2% Notes, $922 of pre-tax deferred financing costs and $110 of the original issue discount were written-off in the second quarter of fiscal 2006. The net effect of these items, a $3,330 pre-tax loss, is shown as part of other (income) and expense, net. As of October 2, 2005, the Senior Subordinated 8 1/2% Notes issued on March 31, 1998 amounted to $25,600. On October 14, 2005, all of the outstanding 8 1/2% Notes were repurchased with proceeds from the 8 7/8% Notes and cash on hand. The Senior Secured 10% Notes issued on July 22, 2003 amounted to $115,000 and are due August 1, 2010. Provisions of the 10% Notes include, without limitation, restrictions on indebtedness, restricted payments, asset and subsidiary stock sales, liens, and other restricted transactions. The 10% Notes are not entitled to redemption at our option, prior to August 1, 2007 in the absence of an equity offering. Until August 1, 2006, we may redeem up to 35% of the outstanding notes at a redemption price of 110.0% with the proceeds of equity offerings, subject to certain restrictions. On and after August 1, 2007, they are redeemable at prices declining annually to 100% on and after August 1, 2009. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 10% Notes may require us to repurchase all or a portion of such holder's 10% Notes at a purchase price equal to 101% of the principal amount thereof. The 10% Notes are secured by a second-priority interest in all domestic inventory, receivables, equipment, real property, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual property. The 10% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. The corresponding credit agreements associated with the Revolving Credit Facility place certain debt covenant restrictions on us including certain financial requirements and a restriction on dividend payments. We believe that our cash on hand, cash flows, and borrowing capacity under our Revolving Credit Facility will be sufficient to fund our ongoing operations and budgeted capital expenditures for at least the next twelve months. This belief is dependent upon a steady economy and successful execution of our current business plan which is focused on cash generation for debt repayment. The business plan includes continued implementation of Lean Manufacturing, facility rationalization projects, divestiture of excess facilities and certain non-strategic operations, improving working capital utilization, and new market and new product development. Net cash provided by operating activities was $24,162 for the six months ended October 2, 2005 compared to $2,822 used in operating activities for the six months ended October 3, 2004. The $26,984 increase is the result of a $4,415 increase in income from continuing operations, a $3,330 loss on early extinguishment of debt, and $20,282 of changes in net working capital components, primarily increased accounts payable and accrued liabilities, offset by $1,547 of gains on the sale of real estate and investments. Net cash used in investing activities was $1,195 for the six months ended October 2, 2005 compared to $343 provided by investing activities for the six months ended October 3, 2004. The $1,538 decrease was the result of an increase - 19 -
in capital expenditures to $3,761 in fiscal 2006 compared to $1,948 in fiscal 2005, and a decrease in sales of marketable equity securities to $475 in fiscal 2006 compared to $1,991 in fiscal 2005. This decrease was offset by $2,091 of proceeds from sale of property in fiscal 2006. Net cash provided by financing activities was $9,394 for the six months ended October 2, 2005 compared to $1,138 for the six months ended October 3, 2004. The $8,256 change is the result of an increase in debt of $7,937 in fiscal 2006 compared to $863 in fiscal 2005, and $2,729 of proceeds from the exercise of stock options in fiscal 2006. The increase was partially offset by $1,566 of deferred financing costs incurred in association with our issuance of the 8 7/8% Notes in fiscal 2006. CAPITAL EXPENDITURES In addition to keeping our current equipment and plants properly maintained, we are committed to replacing, enhancing, and upgrading our property, plant, and equipment to support new product development, reduce production costs, increase flexibility to respond effectively to market fluctuations and changes, meet environmental requirements, enhance safety, and promote ergonomically correct work stations. Consolidated capital expenditures for the six months ended October 2, 2005 and October 3, 2004 were $3,761 and $1,948, respectively. Higher capital expenditures in the first half of fiscal 2006 included a concentration of new product development and productivity improvement spending. INFLATION AND OTHER MARKET CONDITIONS Our costs are affected by inflation in the U.S. economy and, to a lesser extent, in foreign economies including those of Europe, Canada, Mexico, and the Pacific Rim. We do not believe that general inflation has had a material effect on results of operations over the periods presented primarily due to overall low inflation levels over such periods and the ability to generally pass on rising costs through price increases. However, we have been impacted by fluctuations in steel costs, which vary by type of steel and we continue to monitor them. In addition, employee benefits costs such as health insurance, workers compensation insurance, pensions as well as energy and business insurance have exceeded general inflation levels. We generally incorporate those cost increases into our sales price increases as well as surcharges on certain products. In the future, we may be further affected by inflation that we may not be able to pass on as price increases. SEASONALITY AND QUARTERLY RESULTS Quarterly results may be materially affected by the timing of large customer orders, periods of high vacation and holiday concentrations, restructuring charges and other costs attributable to our facility rationalization program, divestitures, acquisitions and the magnitude of rationalization integration costs. Therefore, the operating results for any particular fiscal quarter are not necessarily indicative of results for any subsequent fiscal quarter or for the full fiscal year. EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," as an amendment to ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage). This Statement requires that these items be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This Statement becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS No. 151 to have a material impact on our consolidated financial statements. In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), SHARE-BASED PAYMENT, which is a revision of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement 123(R) supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEEs, and amends FASB Statement No. 95, STATEMENT OF CASH FLOWS. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, - 20 -
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 reported market risks since the end of Fiscal 2005. Item 4. Disclosure Controls and Procedures As of October 2, 2005, an evaluation was performed under the supervision and with the participation of the Company's management, including the chief executive officer and interim chief financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the chief executive officer and interim chief financial officer, concluded that the Company's disclosure controls and procedures were effective as of October 2, 2005. There were no changes in the Company's internal controls or in other factors during our second quarter ended October 2, 2005. - 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 On August 15, 2005, the Annual Meeting of Shareholders was held and the following directors were elected: 13,554,290 votes cast for: Herbert P. Ladds, Jr.; 13,629,700 votes cast for: Timothy T. Tevens; 12,954,223 votes cast for: Carlos Pasqual; 12,843,039 votes cast for: Richard H. Fleming; 12,900,667 votes cast for: Ernest R. Verebelyi; 12,957,171 votes cast for: Wallace W. Creek; 13,594,758 votes cast for: Linda A. Goodspeed; 13,595,579 votes cast for: Stephen Rabinowitz. Item 5. Other Information - none. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 4.1 Seventh Supplemental Indenture among Columbus McKinnon Corporation, Crane Equipment & Service, Inc., Yale Industrial Products, Inc., Audubon Europe S.a.r.l.and U.S. Bank National Trust Association, as trustee, dated as of August 30, 2005. Exhibit 10.1 Second amendment, dated as of August 5, 2005, to that certain Second Amended and Restated Credit and Security Agreement, dated as of November 21, 2002 and amended and restated as of January 2, 2004 (as amended by that certain First Amendment to that certain Second Amended and Restated Credit and Security Agreement, dated as of April 29, 2005, and as further modified and supplemented and in effect from time to time, the "Credit Agreement"), among Columbus McKinnon Corporation, a corporation organized under the laws of New York (the "Borrower"), Larco Industrial Services Ltd., a business corporation organized under the laws of the Province of Ontario, Columbus McKinnon Limited, a business corporation organized under the laws of Canada, the Guarantors from time to time party thereto, the Lenders from time to time party thereto (collectively, the "Lenders"), Bank of America, N.A., as Administrative Agent for such Lenders (the "Agent") and as Issuing Lender. Exhibit 10.2 Third amendment, dated as of August 22, 2005, to that certain Second Amended and Restated Credit and Security Agreement, dated as of November 21, 2002 and amended and restated as of January 2, 2004 (as amended by that certain First Amendment to that certain Second Amended and Restated Credit and Security Agreement, dated as of April 29, 2005, by that certain Second Amendment to that certain Second Amended and Restated Credit and Security Agreement, dated as of August 5, 2005, and as further modified and supplemented and in effect from time to time, the "Credit Agreement"), among Columbus McKinnon Corporation, a corporation organized under the laws of New York (the "Borrower"), Larco Industrial Services Ltd., a business corporation organized under the laws of the Province of Ontario, Columbus - 23 -
McKinnon Limited, a business corporation organized under the laws of Canada, the Guarantors from time to time party thereto, the Lenders from time to time party thereto (collectively, the "Lenders"), Bank of America, N.A., as Administrative Agent for such Lenders (the "Agent") and as Issuing Lender. Exhibit 10.3 Fourth amendment, dated as of October 17, 2005, to that certain Second Amended and Restated Credit and Security Agreement, dated as of November 21, 2002 and amended and restated as of January 2, 2004, and amended by that certain First Amendment to the Credit Agreement, dated as of April 29, 2005, and by that certain Second Amendment to the Credit Agreement, dated as of August 5, 2005, and by that certain Third Amendment to the Credit Agreement, dated as of August 22, 2005 (as further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Columbus McKinnon Corporation (the "Borrower"), Larco Industrial Services Ltd., Columbus McKinnon Limited, the Guarantors named therein, the lending institutions party thereto, and Bank of America, N.A., as Administrative Agent and Issuing Lender. Capitalized terms used herein and not defined herein shall have the meanings ascribed thereto in the Credit Agreement. Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934; as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934; as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: On August 5, 2005, the Company filed a Current Report on Form 8-K with respect to its intention to raise proceeds through a private offering of Senior Subordinated Notes, pursuant to Rule 144A under the Securities Act of 1933. On August 5, 2005, the Company filed a Current Report on Form 8-K with respect to the resignation of its Vice President - Finance and Chief Financial Officer, who also served as the registrant's Principal Financial Officer, and the designation of an Interim Chief Financial Officer and Principal Financial Officer. On August 9, 2005, the Company filed a Current Report on Form 8-K with respect to its Regulation FD Disclosure in connection with the Company's previously announced sale of senior subordinated notes pursuant to Rule 144A under the Securities Act of 1933. On August 17, 2005, the Company filed a Current Report on Form 8-K with respect to its Regulation FD Disclosure in connection with the Company's annual shareholders meeting. On August 17, 2005, the Company filed a Current Report on Form 8-K with respect to its receipt of tenders and consents for approximately 82% of the principal amount outstanding of its 8 1/2% Senior Subordinated Notes Due 2008 as of August 15, 2005. On August 18, 2005, the Company filed a Current Report on Form 8-K with respect to its pricing of its offering of $136 million in aggregate principal amount of Senior Subordinated 8 7/8% Notes due 2013. On September 2, 2005, the Company filed a Current Report on Form 8-K with respect to the completion of its previously announced sale of - 24 -
$136 million in aggregate principal amount of Senior Subordinated 8 7/8% Notes due 2013. On September 12, 2005, the Company filed a Current Report on Form 8-K with respect to the call for redemption of approximately $26 million of its outstanding Senior Subordinated 8 1/2% Notes due 2008. On October 20, 2005, the Company filed a Current Report on Form 8-K with respect to its filing of a registration statement with the Securities and Exchange Commission relating to the public offering of 3,350,000 shares of its common stock. On October 25, 2005, the Company filed a Current Report on Form 8-K with respect to its financial results for the second quarter of fiscal 2006. - 25 -
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COLUMBUS MCKINNON CORPORATION ----------------------------- (Registrant) Date: NOVEMBER 2, 2005 /S/ KAREN L. HOWARD ---------------- -------------------------------- Karen L. Howard Vice President and Treasurer and Interim Chief Financial Officer (Principal Financial Officer) - 26 -