UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT 1934 For the quarterly period ended January 1, 2006 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to ------------------- -------------------- Commission File Number: 0-27618 ------- COLUMBUS MCKINNON CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NEW YORK 16-0547600 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 140 JOHN JAMES AUDUBON PARKWAY, AMHERST, NY 14228-1197 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (716) 689-5400 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. : [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934): [X] Yes [ ] No Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No The number of shares of common stock outstanding as of January 30, 2006 was: 18,300,397 shares.
FORM 10-Q INDEX COLUMBUS MCKINNON CORPORATION JANUARY 1, 2006 PAGE # PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed consolidated balance sheets - January 1, 2006 and March 31, 2005 2 Condensed consolidated statements of operations and retained earnings - Three months and nine months ended January 1, 2006 and January 2, 2005 3 Condensed consolidated statements of cash flows - Nine months ended January 1, 2006 and January 2, 2005 4 Condensed consolidated statements of comprehensive income - Three months and nine months ended January 1, 2006 and January 2, 2005 5 Notes to condensed consolidated financial statements - January 1, 2006 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Disclosure Controls and Procedures 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings - none. 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - none. 23 Item 3. Defaults upon Senior Securities - none. 23 Item 4. Submission of Matters to a Vote of Security Holders - none 23 Item 5. Other Information - none. 23 Item 6. Exhibits and Reports on Form 8-K 23 - 1 -
PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) COLUMBUS MCKINNON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS JANUARY 1, MARCH 31, 2006 2005 ---------- ---------- (UNAUDITED) ASSETS: (IN THOUSANDS) Current assets: Cash and cash equivalents $ 41,788 $ 9,479 Trade accounts receivable 82,059 88,974 Unbilled revenues 11,407 8,848 Inventories 75,078 77,626 Prepaid expenses 13,883 14,198 ---------- ---------- Total current assets 224,215 199,125 Property, plant, and equipment, net 53,198 57,237 Goodwill and other intangibles, net 186,569 187,285 Marketable securities 25,809 24,615 Deferred taxes on income 4,353 6,122 Other assets 6,164 6,487 ---------- ---------- Total assets $ 500,308 $ 480,871 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Notes payable to banks $ 2,951 $ 4,839 Trade accounts payable 35,137 33,688 Accrued liabilities 54,434 51,962 Restructuring reserve 107 144 Current portion of long-term debt 192 5,819 ---------- ---------- Total current liabilities 92,821 96,452 Senior debt, less current portion 75,289 115,735 Subordinated debt 136,000 144,548 Other non-current liabilities 44,730 42,369 ---------- ---------- Total liabilities 348,840 399,104 ---------- ---------- Shareholders' equity Common stock 182 149 Additional paid-in capital 164,016 104,078 Retained earnings (accumulated deficit) 3,354 (8,644) ESOP debt guarantee (4,108) (4,554) Unearned restricted stock (29) (6) Accumulated other comprehensive loss (11,947) (9,256) ---------- ---------- Total shareholders' equity 151,468 81,767 ---------- ---------- Total liabilities and shareholders' equity $ 500,308 $ 480,871 ========== ========== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. - 2 -
<TABLE> <CAPTION> COLUMBUS MCKINNON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2, 2006 2005 2006 2005 ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Net sales $ 133,322 $ 125,913 $ 408,911 $ 370,282 Cost of products sold 98,391 95,914 302,279 278,889 --------- --------- --------- --------- Gross profit 34,931 29,999 106,632 91,393 --------- --------- --------- --------- Selling expenses 13,281 13,356 40,019 38,326 General and administrative expenses 8,392 6,918 25,106 21,920 Restructuring charges 83 191 320 408 Amortization of intangibles 61 78 184 231 --------- --------- --------- --------- 21,817 20,543 65,629 60,885 --------- --------- --------- --------- Income from operations 13,114 9,456 41,003 30,508 Interest and debt expense 6,268 6,837 19,617 21,026 Other (income) and expense, net 4,177 (755) 5,252 (1,344) --------- --------- --------- --------- Income from continuing operations before income tax expense 2,669 3,374 16,134 10,826 Income tax expense 1,471 1,183 4,779 2,893 --------- --------- --------- --------- Income from continuing operations 1,198 2,191 11,355 7,933 Income from discontinued operations 215 214 643 428 --------- --------- --------- --------- Net income 1,413 2,405 11,998 8,361 Retained earnings (accumulated deficit) - beginning of period 1,941 (19,398) (8,644) (25,354) --------- --------- --------- --------- Retained earnings (accumulated deficit) - end of period $ 3,354 $ (16,993) $ 3,354 $ (16,993) ========= ========= ========= ========= Basic income per share: Income from continuing operations $ 0.08 $ 0.15 $ 0.74 $ 0.54 Income from discontinued operations 0.01 0.01 0.04 0.03 --------- --------- --------- --------- Net income $ 0.09 $ 0.16 $ 0.78 $ 0.57 ========= ========= ========= ========= Diluted income per share: Income from continuing operations $ 0.07 $ 0.15 $ 0.71 $ 0.54 Income from discontinued operations 0.01 0.01 0.04 0.03 --------- --------- --------- --------- Net income $ 0.08 $ 0.16 $ 0.75 $ 0.57 ========= ========= ========= ========= </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. - 3 -
<TABLE> <CAPTION> COLUMBUS MCKINNON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED ----------------- JANUARY 1, JANUARY 2, 2006 2005 ---------- ---------- (IN THOUSANDS) OPERATING ACTIVITIES: <S> <C> <C> Income from continuing operations $ 11,355 $ 7,933 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 6,809 7,201 Deferred income taxes 1,769 1,823 Gain on sale of real estate/investments (1,794) - Loss (gain) on early retirement of bonds 6,432 (93) Amortization/write-off of deferred financing costs 2,786 1,029 Changes in operating assets and liabilities: Trade accounts receivable and unbilled revenues 2,658 (172) Inventories 2,139 (9,937) Prepaid expenses 321 1,990 Other assets (197) (220) Trade accounts payable 2,141 (447) Accrued and non-current liabilities 4,090 (694) ---------- ---------- Net cash provided by operating activities 38,509 8,413 ---------- ---------- INVESTING ACTIVITIES: Sale of marketable securities, net 90 957 Capital expenditures (4,738) (3,169) Proceeds from sale of facilities and surplus real estate 2,091 - Net assets held for sale - 375 ---------- ---------- Net cash used in investing activities (2,557) (1,837) ---------- ---------- FINANCING ACTIVITIES: Proceeds from issuance of common stock/options exercised 59,944 - Net (payments) borrowings under revolving line-of-credit agreements (1,417) 2,906 Repayment of debt (196,881) (13,244) Proceeds from issuance of long-term debt 136,000 - Deferred financing costs incurred (2,357) (24) Other 446 427 ---------- ---------- Net cash used in financing activities (4,265) (9,935) EFFECT OF EXCHANGE RATE CHANGES ON CASH (21) 454 ---------- ---------- Net cash provided by (used in) continuing operations 31,666 (2,905) NET CASH PROVIDED BY DISCONTINUED OPERATIONS 643 428 ---------- ---------- Net change in cash and cash equivalents 32,309 (2,477) Cash and cash equivalents at beginning of period 9,479 11,101 ---------- ---------- Cash and cash equivalents at end of period $ 41,788 $ 8,624 ========== ========== </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 NINE MONTHS ENDED ------------------ ----------------- JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2, 2006 2005 2006 2005 ---- ---- ---- ---- (IN THOUSANDS) <S> <C> <C> <C> <C> Net income $ 1,413 $ 2,405 $ 11,998 $ 8,361 -------- -------- -------- -------- Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments (818) 4,136 (2,792) 5,074 Unrealized gain on investments: Unrealized holding gains arising during the period 260 971 1,284 580 Reclassification adjustment for gains included in net income (192) (262) (1,183) (253) -------- -------- -------- -------- 68 709 101 327 -------- -------- -------- -------- Total other comprehensive (loss) income (750) 4,845 (2,691) 5,401 -------- -------- -------- -------- Comprehensive income $ 663 $ 7,250 $ 9,307 $ 13,762 ======== ======== ======== ======== </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) JANUARY 1, 2006 1. DESCRIPTION OF BUSINESS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of Columbus McKinnon Corporation (the Company) at January 1, 2006, and the results of its operations and its cash flows for the three and nine-month periods ended January 1, 2006 and January 2, 2005, have been included. Results for the period ended January 1, 2006 are not necessarily indicative of the results that may be expected for the year ended March 31, 2006. The balance sheet at March 31, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Columbus McKinnon Corporation annual report on Form 10-K for the year ended March 31, 2005. The Company is a leading manufacturer and marketer of material handling products, systems and services which lift, secure, position and move material ergonomically, safely, precisely and efficiently. Key products include hoists, cranes, chain and forged attachments. The Company's material handling products are sold, domestically and internationally, principally to third party distributors through diverse distribution channels, and to a lesser extent directly to manufacturers and other end-users. The Company's integrated material handling solutions businesses deal primarily with end users and sales are concentrated, domestically and internationally (primarily Europe), in the consumer products, manufacturing, warehousing and, to a lesser extent, the steel, construction, automotive and other industrial markets. 2. STOCK BASED COMPENSATION The Company has two stock-based employee compensation plans in effect. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant and the number of options granted was fixed. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition of SFAS No. 123 "Accounting for Stock-Based Compensation", to stock-based employee compensation: - 6 -
<TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------------------------------- JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2, 2006 2005 2006 2005 ---------------------------------------------------------- <S> <C> <C> <C> <C> Net income, as reported.................... $ 1,413 $ 2,405 $ 11,998 $ 8,361 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (186) (495) (765) (864) ---------------------------------------------------------- Net income, pro forma...................... $ 1,227 $ 1,910 $ 11,233 $ 7,497 ========================================================== Basic income per share: As reported................................ $ 0.09 $ 0.16 $ 0.78 $ 0.57 ========================================================== Pro forma.................................. $ 0.07 $ 0.13 $ 0.73 $ 0.51 ========================================================== Diluted income per share: As reported................................ $ 0.08 $ 0.16 $ 0.75 $ 0.57 ========================================================== Pro forma.................................. $ 0.07 $ 0.13 $ 0.71 $ 0.51 ========================================================== </TABLE> During the first nine months of fiscal 2006, stock options for 323,600 shares were exercised resulting in proceeds to the Company of $3,072. 3. INVENTORIES Inventories consisted of the following: JANUARY 1, MARCH 31, 2006 2005 ---------- ---------- At cost - FIFO basis: Raw materials................................... $ 40,768 $ 42,283 Work-in-process................................. 11,872 10,238 Finished goods.................................. 34,181 35,800 ---------- ---------- 86,821 88,321 LIFO cost less than FIFO cost................... (11,743) (10,695) ---------- ---------- Net inventories................................. $ 75,078 $ 77,626 ========== ========== An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many forces beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. 4. RESTRUCTURING CHARGES During the first nine-months of fiscal 2006, the Company recorded restructuring costs of $320 for severance and the maintenance of non-operating facilities being held for sale which are expensed on an as incurred basis in accordance with SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." $194 and $126 of these costs are related to the Solutions and Products segments, respectively. The fiscal 2006 second quarter employee restructuring charges are related to the termination of several employees within our industrial crane and conveyor businesses. The liability as of January 1, 2006 consists primarily of costs associated with the preparation and maintenance of non-operating facilities prior to disposal which were accrued prior to the adoption of SFAS No. 146. - 7 -
The following table provides a reconciliation of the activity related to restructuring reserves: <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 Fiscal 2006 third quarter restructuring charges.......... 81 2 83 Cash payments............................................ (70) (20) (90) ------------------------------------ Reserve at January 1, 2006 $ 20 $ 87 $ 107 ==================================== </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 NINE MONTHS ENDED ------------------ ----------------- JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2, 2006 2005 2006 2005 ---- ---- ---- ---- <S> <C> <C> <C> <C> Service costs................... $ 1,088 $ 1,190 $ 3,264 $ 3,570 Interest cost................... 1,737 1,755 5,211 5,265 Expected return on plan assets.. (1,654) (1,645) (4,962) (4,935) Net amortization................ 508 495 1,524 1,485 -------- -------- -------- -------- Net periodic pension cost....... $ 1,679 $ 1,795 $ 5,037 $ 5,385 ======== ======== ======== ======== </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 NINE MONTHS ENDED ------------------ ----------------- JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2, 2006 2005 2006 2005 ---- ---- ---- ---- <S> <C> <C> <C> <C> Service costs................... $ 4 $ 4 $ 12 $ 12 Interest cost .................. 188 200 564 634 Amortization of plan net losses. 101 105 303 356 -------- -------- -------- -------- Net periodic postretirement cost $ 293 $ 309 $ 879 $ 1,002 ======== ======== ======== ======== </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 During the second quarter of fiscal 2006, the Company issued $136,000 of 8 7/8% Senior Subordinated Notes (8 7/8% Notes) due November 1, 2013. Provisions of the 8 7/8% Notes include, without limitation, restrictions on indebtedness, asset sales, and dividends and other restricted payments. Until November 1, 2008, the Company may redeem up to 35% of the outstanding notes at a redemption price of 108.875% with the proceeds of equity offerings, subject to certain restrictions. The 8 7/8% Notes are redeemable at the option of the Company, in whole or in part, at prices declining annually from the Make-Whole Price (as defined in the 8 7/8% Notes agreement) to 100% on and after November 1, 2011. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 8 7/8% Notes may require us to repurchase all or a portion of such holder's 8 7/8% Notes at a purchase price equal to 101% of the principal amount thereof. The 8 7/8% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. Proceeds from the 8 7/8% Notes and cash on hand were used to repurchase all $142,375 of the outstanding 8 1/2% Senior Subordinated Notes. The repurchase of the 8 1/2% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $2,298. As a result of the repurchase of the 8 1/2% Notes, $922 of pre-tax deferred financing costs and $110 of the original issue discount were written-off. The net effect of these items, a $3,330 pre-tax loss in the second quarter of fiscal 2006, is shown as part of other (income) and expense, net. During the third quarter of fiscal 2006, the Company used a portion of the proceeds from its stock offering (see Note 8) to repurchase $40,250 of the outstanding 10% Senior Secured Notes. The repurchase of the 10% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $4,025. As a result of the repurchase of the 10% Notes, $925 of pre-tax deferred financing costs was written-off. The net effect of these items, a $4,950 pre-tax loss in the third quarter of fiscal 2006, is shown as part of other (income) and expense, net. 7. INCOME TAXES Income tax expense as a percentage of income from continuing operations before income tax expense was 55.1%, 35.1%, 29.6%, and 26.7% in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. The fiscal 2006 and 2005 percentages vary from the U.S. statutory rate due to the utilization of domestic net operating loss carry-forwards that had been fully reserved and jurisdictional mix. Therefore, income tax expense primarily results from non-U.S. taxable income and state taxes on U.S. taxable income. The higher effective income tax rate in fiscal 2006 reflects the loss on early extinguishment of debt which reduced U.S. taxable income by $4,950 and $8,280 in the quarter and nine-month period respectively, but did not affect our tax expense due to the existence of fully reserved U.S. Federal net operating loss carry-forwards. 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2, 2006 2005 2006 2005 ---- ---- ---- ---- Numerator for basic and diluted earnings per share: <S> <C> <C> <C> <C> Net income $ 1,413 $ 2,405 $11,998 $ 8,361 ======= ======= ======= ======= Denominators: Weighted-average common stock outstanding - denominator for basic EPS 16,611 14,594 15,368 14,585 Effect of dilutive employee stock options 676 209 538 148 ------- ------- ------- ------- Adjusted weighted-average common stock outstanding and assumed conversions - denominator for diluted EPS 17,287 14,803 15,906 14,733 ======= ======= ======= ======= </TABLE> - 9 -
During the third quarter of fiscal 2006, the Company registered an additional 3,350,000 shares of its common stock which were sold at $20.00 per share. The number of shares offered by the Company was 3,000,000 and 350,000 were offered by a selling shareholder. The Company did not receive any proceeds from the sale of shares by the selling shareholder. This stock offering increased our weighted average common stock outstanding by 1,615,000 and 533,000 shares for the quarter and nine-month period ended January 1, 2006, respectively. A portion of the proceeds received by the Company were used to redeem $40,250 principal amount of the Company's outstanding Senior Secured 10% Notes. The balance of the proceeds is available for other general corporate purposes to advance its strategy of global growth, including additional debt repayment, investments and acquisitions. 9. BUSINESS SEGMENT INFORMATION As a result of the way the Company manages the business, its reportable segments are strategic business units that offer products with different characteristics. The most defining characteristic is the extent of customized engineering required on a per-order basis. In addition, the segments serve different customer bases through differing methods of distribution. The Company has two reportable segments: Products and Solutions. The Company's Products segment sells hoists, industrial cranes, chain, attachments, and other material handling products principally to third party distributors through diverse distribution channels, and to a lesser extent directly to end-users. The Solutions segment sells engineered material handling systems such as conveyors and lift tables primarily to end-users in the consumer products, manufacturing, warehousing, and, to a lesser extent, the steel, construction, automotive, and other industrial markets. Intersegment sales are not significant. The Company evaluates performance based on operating income of the respective business units. Segment information as of and for the nine months ended January 1, 2006 and January 2, 2005, is as follows: <TABLE> <CAPTION> NINE MONTHS ENDED JANUARY 1, 2006 --------------------------------- PRODUCTS SOLUTIONS TOTAL -------- --------- ----- <S> <C> <C> <C> Sales to external customers...................... $ 362,405 $ 46,506 $ 408,911 Income from operations........................... 39,089 1,914 41,003 Depreciation and amortization.................... 5,893 916 6,809 Total assets..................................... 470,108 30,200 500,308 NINE MONTHS ENDED JANUARY 2, 2005 --------------------------------- PRODUCTS SOLUTIONS TOTAL -------- --------- ----- Sales to external customers...................... $ 326,847 $ 43,435 $ 370,282 Income from operations........................... 29,195 1,313 30,508 Depreciation and amortization.................... 6,461 740 7,201 Total assets..................................... 445,487 32,174 477,661 </TABLE> - 10 -
10. SUMMARY FINANCIAL INFORMATION The following information sets forth the condensed consolidating summary financial information of the parent and guarantors, which guarantee the 10% Senior Secured Notes and the 8 7/8% Senior Subordinated Notes, and the nonguarantors. The guarantors are wholly owned and the guarantees are full, unconditional, joint and several. <TABLE> <CAPTION> Parent Guarantors Nonguarantors Eliminations Consolidated --------------------------------------------------------------------- AS OF JANUARY 1, 2006 Current assets: <S> <C> <C> <C> <C> <C> Cash and cash equivalents $ 22,405 $ (272) $ 19,655 $ - $ 41,788 Trade accounts receivable and unbilled revenues 53,931 237 39,298 - 93,466 Inventories 31,841 20,206 25,538 (2,507) 75,078 Other current assets 3,599 867 9,417 - 13,883 --------------------------------------------------------------------- Total current assets 111,776 21,038 93,908 (2,507) 224,215 Property, plant, and equipment, net 23,741 11,776 17,681 - 53,198 Goodwill and other intangibles, net 89,996 57,285 39,288 - 186,569 Intercompany 99,735 (99,688) (74,198) 74,151 - Other assets 53,315 197,864 25,267 (240,120) 36,326 --------------------------------------------------------------------- Total assets $ 378,563 $ 188,275 $ 101,946 $(168,476) $ 500,308 ===================================================================== Current liabilities $ 43,908 $ 16,105 $ 33,572 $ (764) $ 92,821 Long-term debt, less current portion 210,750 - 539 - 211,289 Other non-current liabilities 7,285 8,168 29,277 - 44,730 --------------------------------------------------------------------- Total liabilities 261,943 24,273 63,388 (764) 348,840 Shareholders' equity 116,620 164,002 38,558 (167,712) 151,468 --------------------------------------------------------------------- Total liabilities and shareholders' equity $ 378,563 $ 188,275 $ 101,946 $ (168,476) $ 500,308 ===================================================================== FOR THE NINE MONTHS ENDED JANUARY 1, 2006 Net sales $ 195,700 $ 109,735 $ 121,098 $ (17,622) $ 408,911 Cost of products sold 146,411 83,126 88,829 (16,087) 302,279 --------------------------------------------------------------------- Gross profit 49,289 26,609 32,269 (1,535) 106,632 --------------------------------------------------------------------- Selling, general and administrative expenses 29,767 11,710 23,648 - 65,125 Restructuring charges 236 - 84 - 320 Amortization of intangibles 132 2 50 - 184 --------------------------------------------------------------------- 30,135 11,712 23,782 - 65,629 --------------------------------------------------------------------- Income (loss) from operations 19,154 14,897 8,487 (1,535) 41,003 Interest and debt expense 15,867 3,537 213 - 19,617 Other (income) and expense, net 7,549 24 (2,321) - 5,252 --------------------------------------------------------------------- (Loss) income before income tax expense (4,262) 11,336 10,595 (1,535) 16,134 Income tax expense 590 1,044 3,145 - 4,779 --------------------------------------------------------------------- (Loss) income from continuing operations (4,852) 10,292 7,450 (1,535) 11,355 Income from discontinued operations 643 - - - 643 --------------------------------------------------------------------- Net (loss) income $ (4,209) $ 10,292 $ 7,450 $ (1,535) $ 11,998 ===================================================================== - 11 -
Parent Guarantors Nonguarantors Eliminations Consolidated --------------------------------------------------------------------- FOR THE NINE MONTHS ENDED JANUARY 1, 2006 OPERATING ACTIVITIES: Net cash provided by operating activities $ 16,996 $ 9,296 $ 12,217 $ - $ 38,509 --------------------------------------------------------------------- INVESTING ACTIVITIES: Sale of marketable securities, net - - 90 - 90 Capital expenditures (2,641) (497) (1,600) - (4,738) Proceeds from sale of facilities and surplus real estate - 468 1,623 - 2,091 --------------------------------------------------------------------- Net cash (used in) provided by investing activities (2,641) (29) 113 - (2,557) --------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from stock offering/options exercised 59,944 - - - 59,944 Net borrowings (payments) under revolving line-of-credit agreements 240 - (1,657) - (1,417) Repayment of debt (196,706) - (175) - (196,881) Proceeds from issuance of long-term debt 136,000 - - - 136,000 Deferred financing costs incurred (2,357) - - - (2,357) Dividends paid 9,067 (8,854) (213) - - Other 446 - - - 446 --------------------------------------------------------------------- Net cash provided by (used in) financing activities 6,634 (8,854) (2,045) - (4,265) EFFECT OF EXCHANGE RATE CHANGES ON CASH (230) 12 197 - (21) --------------------------------------------------------------------- Cash provided by (used in) continuing operations 20,759 425 10,482 - 31,666 CASH PROVIDED BY DISCONTINUED OPERATIONS 643 - - - 643 --------------------------------------------------------------------- Net change in cash and cash equivalents 21,402 425 10,482 - 32,309 Cash and cash equivalents at beginning of period 1,019 (697) 9,157 - 9,479 --------------------------------------------------------------------- Cash and cash equivalents at end of period $ 22,421 $ (272) $ 19,639 $ - $ 41,788 ===================================================================== AS OF MARCH 31, 2005 Current assets: Cash and cash equivalents $ 1,019 $ (697) $ 9,157 $ - $ 9,479 Trade accounts receivable and unbilled revenues 57,707 197 39,918 - 97,822 Inventories 33,651 18,919 26,028 (972) 77,626 Other current assets 7,297 973 5,928 - 14,198 --------------------------------------------------------------------- Total current assets 99,674 19,392 81,031 (972) 199,125 Property, plant, and equipment, net 25,107 12,847 19,283 - 57,237 Goodwill and other intangibles, net 90,027 57,287 39,971 - 187,285 Intercompany 98,964 (102,189) (70,216) 73,441 - Other assets 55,396 197,864 24,159 (240,195) 37,224 --------------------------------------------------------------------- Total assets $ 369,168 $ 185,201 $ 94,228 $(167,726) $ 480,871 ===================================================================== Current liabilities $ 50,323 $ 14,450 $ 33,153 $ (1,474) $ 96,452 Long-term debt, less current portion 259,520 - 763 - 260,283 Other non-current liabilities 7,898 8,199 26,272 - 42,369 --------------------------------------------------------------------- Total liabilities 317,741 22,649 60,188 (1,474) 399,104 Shareholders' equity 51,427 162,552 34,040 (166,252) 81,767 --------------------------------------------------------------------- Total liabilities and shareholders' equity $ 369,168 $ 185,201 $ 94,228 $(167,726) $ 480,871 ===================================================================== - 12 -
Parent Guarantors Nonguarantors Eliminations Consolidated --------------------------------------------------------------------- FOR THE NINE MONTHS ENDED JANUARY 2, 2005 Net sales $ 177,905 $ 102,039 $ 108,385 $ (18,047) $ 370,282 Cost of products sold 138,004 80,131 78,801 (18,047) 278,889 --------------------------------------------------------------------- Gross profit 39,901 21,908 29,584 - 91,393 --------------------------------------------------------------------- Selling, general and administrative expenses 24,594 14,310 21,342 - 60,246 Restructuring charges 357 - 51 - 408 Amortization of intangibles 178 2 51 - 231 --------------------------------------------------------------------- 25,129 14,312 21,444 - 60,885 --------------------------------------------------------------------- Income from operations 14,772 7,596 8,140 - 30,508 Interest and debt expense 18,496 2,260 270 - 21,026 Other (income) and expense, net (1,469) 235 (110) - (1,344) --------------------------------------------------------------------- (Loss) income before income tax expense (2,255) 5,101 7,980 - 10,826 Income tax expense 38 665 2,190 - 2,893 --------------------------------------------------------------------- (Loss) income from continuing operations (2,293) 4,436 5,790 - 7,933 Income from discontinued operations 428 - - - 428 --------------------------------------------------------------------- Net (loss) income $ (1,865) $ 4,436 $ 5,790 $ - $ 8,361 ===================================================================== FOR THE NINE MONTHS ENDED JANUARY 2, 2005 OPERATING ACTIVITIES: Net cash (used in) provided by operating activities $ (65,597) $ 68,173 $ 5,837 $ - $ 8,413 --------------------------------------------------------------------- INVESTING ACTIVITIES: Sale of marketable securities, net - - 957 - 957 Capital expenditures, net (2,102) (552) (515) - (3,169) Other - 375 - - 375 --------------------------------------------------------------------- Net cash (used in) provided by investing activities (2,102) (177) 442 - (1,837) --------------------------------------------------------------------- FINANCING ACTIVITIES: Net borrowings (payments) under revolving line-of-credit agreements 5,022 - (2,116) - 2,906 Repayment of debt (13,062) - (182) - (13,244) Deferred financing costs incurred (24) - - - (24) Dividends paid 68,168 (68,000) (168) - - Other 427 - - - 427 --------------------------------------------------------------------- Net cash provided by (used in) financing activities 60,531 (68,000) (2,466) - (9,935) EFFECT OF EXCHANGE RATE CHANGES ON CASH (120) 85 489 - 454 --------------------------------------------------------------------- Cash (used in) provided by continuing operations (7,288) 81 4,302 - (2,905) CASH PROVIDED BY DISCONTINUED OPERATIONS 428 - - - 428 --------------------------------------------------------------------- Net change in cash and cash equivalents (6,860) 81 4,302 - (2,477) Cash and cash equivalents at beginning of period 6,981 (329) 4,449 - 11,101 --------------------------------------------------------------------- Cash and cash equivalents at end of period $ 121 $ (248) $ 8,751 $ - $ 8,624 ===================================================================== </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, 2031 and March 31, 2082 to range between $5,450 and $19,000 using actuarial parameters of continued claims for a period of 25 to 76 years. The Company's estimation of its asbestos-related aggregate liability that is probable and estimable, in accordance with U.S. generally accepted accounting principles, is through March 31, 2031 and ranges from $5,450 to $6,300 as of January 1, 2006. The range of probable and estimable liability reflects uncertainty in the number of future claims that will be filed and the cost to resolve those claims, which may be influenced by a number of factors, including the outcome of the ongoing broad-based settlement negotiations, defensive strategies, and the cost to resolve claims outside the broad-based settlement program. Based on the underlying actuarial information, the Company has reflected $5,700 as a liability in the consolidated financial statements in accordance with U.S. generally accepted accounting principles. The recorded liability does not consider the impact of any potential favorable federal legislation such as the "FAIR Act". Of this amount, management expects to incur asbestos liability payments of approximately $250 over the next 12 months. Because payment of the liability is likely to extend over many years, management believes that the potential additional costs for claims will not have a material after-tax effect on the financial condition of the Company or its liquidity, although the net after-tax effect of any future liabilities recorded could be material to earnings in a future period. 12. NEW ACCOUNTING STANDARDS In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, as an amendment to ARB No. 43, Chapter 4, INVENTORY PRICING, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage). This Statement requires that these items be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This Statement becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS No. 151 to have a material impact on the Company's consolidated financial statements. In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), SHARE-BASED PAYMENT, which is a revision of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement 123(R) supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEEs, and amends FASB Statement No. 95, STATEMENT OF CASH FLOWS. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) was to be adopted for interim or annual periods beginning after June 15, 2005. On April 14th, 2005, the SEC announced that it would provide for a phased-in implementation process for FASB statement No. 123(R). The SEC is requiring that registrants adopt statement 123(R)'s fair value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after June 15, 2005. We expect to adopt 123(R) in the first quarter of Fiscal 2007. Statement 123(R) permits public companies to adopt its requirements using one of two methods: - 14 -
1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123(R) for all share-based payments granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company is still evaluating the method it plans to use when it adopts statement 123(R). As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, recognizes no compensation cost for employee stock options. Accordingly, adoption of Statement 123(R)'s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of 123(R) cannot be predicted at this time because it will depend on levels of share based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to our condensed consolidated financial statements. - 15 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (DOLLAR AMOUNTS IN THOUSANDS) EXECUTIVE OVERVIEW We are a leading manufacturer and marketer of hoists, cranes, chain, conveyors, material handling systems, lift tables and component parts serving a wide variety of commercial and industrial end-user markets. Our products are used to efficiently and ergonomically move, lift, position or secure objects and loads. Our Products segment sells a wide variety of powered and manually operated wire rope and chain hoists, industrial crane systems, chain, hooks and attachments, actuators and rotary unions. Our Solutions segment designs, manufactures, and installs application-specific material handling systems and solutions for end-users to improve work station and facility-wide work flow. Founded in 1875, we have grown to our current leadership position through organic growth and the acquisition of 14 businesses between February 1994 and April 1999. We have developed our leading market position over our 130-year history by emphasizing technological innovation, manufacturing excellence and superior after-sale service. In addition, the acquisitions significantly broadened our product lines and services and expanded our geographic reach, end-user markets and customer base. Integration of the operations of the acquired businesses with our previously existing businesses is substantially complete. Ongoing integration of these businesses includes improving our productivity, further reducing our excess manufacturing capacity and extending our sales activities to the European and Asian marketplaces. We are executing those initiatives through our Lean Manufacturing efforts, facility rationalization program, new product development and expanded sales activities. Shareholder value will be enhanced through continued emphasis on the improvement of the fundamentals including manufacturing efficiency, cost containment, efficient capital investment, market expansion and renewed customer focus. We maintain a strong domestic market share with significant leading North American market positions in hoists, lifting and sling chain, and forged attachments. To broaden our product offering in markets where we have a strong competitive position as well as to facilitate penetration into new geographic markets, we have heightened our new product development activities. This includes development of hoist lines in accordance with international standards, to complement our current offering of hoist products designed in accordance with U.S. standards. To further expand our global sales, we are introducing certain of our products that historically have been distributed only in North America and also introducing new products through our existing European distribution network. Furthermore, we are working to build a distribution network in China to capture an anticipated growing demand for material handling products as that economy continues to industrialize. These investments in international markets and new products are part of our focus on our greatest opportunities for growth. International sales increased 13% from approximately $97,000 to $110,000 during the first nine months of fiscal 2006 and overall sales increased 10% over the same period last year. Management believes that the growth rate of total sales may moderate in future periods due to more difficult comparisons with our fiscal 2005 periods. In addition, bookings have tapered to the mid-single digit growth range. We monitor such indicators as U.S. Industrial Capacity Utilization, which had been increasing since July 2003 but have more recently begun to stabilize. In addition, we continue to monitor the potential impact of global and domestic trends, including rising energy costs, steel price fluctuations, rising interest rates and uncertainty in some end-user markets around the globe. Our Lean Manufacturing efforts continue to fundamentally change our manufacturing processes to be more responsive to customer demand and improve on-time delivery and productivity. From 2001 to 2004 under our facility rationalization program, we closed 13 facilities and consolidated several product lines, with potential opportunity for further rationalization. We have been undergoing assessments for possible divestiture of several less-strategic businesses. Our manipulator and specialty marine chain businesses were sold in fiscal 2004 and two others remain as possible divestiture candidates, our conveyor business which comprises a majority of our Solutions segment and a specialty crane business within our Products segment. In furtherance of our facility rationalization projects, we completed the sale of several excess properties at a gain of $3,700 and $556 during fiscal 2005 and the first nine months of fiscal 2006, respectively. We will continue to sell surplus real estate resulting from our facility rationalization projects and those sales may result in gains or losses. - 16 -
We keep a close watch on the costs for fringe benefits such as health insurance, workers compensation insurance and pension. Combined, those benefits cost us over $33,000 in fiscal 2005 and we work diligently to balance cost control with the need to provide competitive employee benefits packages for our associates. Another cost area of focus is steel. We utilize approximately $30,000 to $35,000 of steel annually in a variety of forms including rod, wire, bar, structural and others. Increases in our costs have been reflected as price increases and surcharges to our customers and we continue to monitor them. The costs of implementing Sarbanes-Oxley internal control documentation and compliance had a substantial impact on fiscal 2005 profitability and we are focused on minimizing the future added costs of compliance. We continue to operate in a highly competitive business environment in the markets and geographies served. Our performance will be impacted by our ability to address a variety of challenges and opportunities in those markets and geographies, including trends towards increased utilization of the global labor force and the expansion of market opportunities in Asia and other emerging markets. Based on current trends, we look forward to slowed growth over the remainder of fiscal 2006. RESULTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED JANUARY 1, 2006 AND JANUARY 2, 2005 Net sales in the fiscal 2006 quarter ended January 1, 2006 were $133,322, up $7,409 or 5.9% from the fiscal 2005 quarter ended January 2, 2005. Net sales for the nine months ended January 1, 2006 were $408,911, an increase of $38,629 or 10.4% from the nine months ended January 2, 2005. Sales in the Products segment increased by $8,541 or 7.8% from the previous year's quarter and $35,558 or 10.9% from the previous year's nine-month period then ended. These increases are due to the continued strength of the U.S. and European industrial markets, as well as the impact of price increases of $3,300 and $16,000 in the quarter and nine months ended January 1, 2006, respectively. Translation of foreign currencies, particularly the Euro and Canadian dollar, into U.S. dollars reduced sales in the Products segment by $1,100 for the quarter ended January 1, 2006 and contributed $900 toward the Products segment increase in sales for the nine-month period ended January 1, 2006. Sales in the Solutions segment decreased 6.8% or $1,132 for the quarter and increased 7.1% or $3,071 for the nine months ended January 1, 2006 when compared to the same period in the prior year. The decrease in this segment for quarter ended January 1, 2006 is primarily due to the translation of foreign currencies into U.S. dollars which reduced sales by $900. The increase in this segment for the nine-month period ended January 1, 2006 is primarily due to improvement in our European conveyor business. Translation of foreign currencies into U.S. dollars reduced sales in the Solutions segment by $100 for the nine-months ended January 1, 2006. Sales in the segments are summarized as follows: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- JAN. 1, JAN. 2, CHANGE JAN. 1, JAN. 2, CHANGE 2006 2005 AMOUNT % 2006 2005 AMOUNT % ---------- ---------- -------- ----- ---------- --------- --------- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> Products $ 117,850 $ 109,309 $ 8,541 7.8 $ 362,405 $ 326,847 $ 35,558 10.9 Solutions 15,472 16,604 (1,132) (6.8) 46,506 43,435 3,071 7.1 ---------- ---------- -------- ---------- --------- --------- Net sales $ 133,322 $ 125,913 $ 7,409 5.9 $ 408,911 $ 370,282 $ 38,629 10.4 ========== ========== ======== ========== ========= ========= </TABLE> Gross profits and gross profit margins by operating segment are summarized as follows: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- JAN. 1, 2006 JAN. 2, 2005 JAN. 1, 2006 JAN. 2, 2005 ------------ ------------ ------------ ------------ $ % $ % $ % $ % ----- ----- ----- ----- ----- ----- ----- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> Products $ 32,142 27.3 $ 27,533 25.2 $ 99,027 27.3 $ 84,583 25.9 Solutions 2,789 18.0 2,466 14.9 7,605 16.4 6,810 15.7 --------- --------- --------- --------- Total Gross Profit $ 34,931 26.2 $ 29,999 23.8 $ 106,632 26.1 $ 91,393 24.7 ========= ========= ========= ========= </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. - 17 -
Selling expenses were $13,281, $13,356, $40,019, and $38,326 in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. The changes in expense dollars were impacted by increased investment in new markets ($200 and $925 for the quarter and nine-month period ended January 1, 2006, respectively), translation from changes in foreign exchange rates ($225 decrease in selling expense for the quarter ended January 1, 2006, and $50 increase for the nine-month period ended January 1, 2006) and increased variable selling costs as a result of higher sales volume. As a percentage of consolidated net sales, selling expenses were 10.0%, 10.6%, 9.8%, and 10.4% in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. General and administrative expenses were $8,392, $6,918, $25,106, and $21,920 in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. The quarterly increase is primarily the result of increased variable compensation expense ($900), increased salaries and fringe benefits ($150), increased bad debt reserves ($200), increased Employee Stock Option Plan expense ($125), increased support costs for our Mexican chain business ($75), and increased board of directors expense ($75). The fiscal 2006 nine-month data is higher than the prior year due to increased variable compensation expense ($700), increased salaries and fringe benefits ($600), increased bad debt reserves ($450), severance expenses ($300), increased support costs for our foreign operations ($200), and currency translation impact ($100). As a percentage of consolidated net sales, general and administrative expenses were 6.3%, 5.5%, 6.1% and 5.9% in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. Restructuring charges were $83, $191, $320, and $408 in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. Amortization of intangibles was $61, $78, $184, and $231 in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. Interest and debt expense was $6,268, $6,837, $19,617, and $21,026 in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. These decreases are the result of lower debt levels. As a percentage of consolidated net sales, interest and debt expense was 4.7%, 5.4%, 4.8% and 5.7% in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. Other (income) and expense, net was $4,177, $(755), $5,252 and $(1,344) in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. The 2006 quarter expense consisted primarily of a $4,950 loss on early extinguishment of debt, offset by $350 of realized gains and investment income on investments within our captive insurance company portfolio and $375 of interest income. The fiscal 2006 nine month expense consisted primarily of an $8,300 loss on early extinguishment of debt, offset by $1,650 of realized gains and investment income on investments within our captive insurance company portfolio, $500 of gains on sales of real estate, and $750 of interest income. The fiscal 2005 income for both the quarter and nine-month period consisted primarily of realized gains and investment income on investments within our captive insurance portfolio and of interest income. Income tax expense as a percentage of income from continuing operations before income tax expense was 55.1%, 35.1%, 29.6%, and 26.7% in the fiscal 2006 and 2005 quarters and the nine-month periods then ended, respectively. The fiscal 2006 and 2005 percentages vary from the U.S. statutory rate due to the utilization of domestic net operating loss carry-forwards that had been fully reserved and jurisdictional mix. Therefore, income tax expense primarily results from non-U.S. taxable income and state taxes on U.S. taxable income. The higher effective income tax rate in fiscal 2006 reflects the loss on early extinguishment of debt which reduced U.S. taxable income by $4,950 and $8,280 in the quarter and nine month period respectively, but did not affect our tax expense due to the existence of fully reserved U.S. Federal net operating loss carry-forwards. We evaluate our estimated annual effective tax rate each quarter. In light of the our continuing improvement in the results of our U.S. operations during fiscal 2005 and 2006, we plan to review the previously established valuation reserves for our net deferred tax assets in more detail as information becomes available. LIQUIDITY AND CAPITAL RESOURCES During the third quarter of fiscal 2006, the Company registered an additional 3,350,000 shares of its common stock which were sold at $20.00 per share. The number of shares offered by the Company was 3,000,000 and 350,000 were offered - 18 -
by a selling shareholder. The Company did not receive any proceeds from the sale of shares by the selling shareholder. This stock offering increased our weighted average common stock outstanding by 1,615,000 and 533,000 shares for the quarter and nine-month period ended January 1, 2006, respectively. A portion of the proceeds received by the Company were used to redeem $40,250 principal amount of the Company's outstanding Senior Secured 10% Notes. The balance of the proceeds is available for other general corporate purposes to advance its strategy of global growth, including additional debt repayment, investments and acquisitions. The Company's Revolving Credit Facility provides availability up to a maximum of $65,000. Underlying collateral at January 1, 2006 amounted to $65,000. The unused portion totaled $54,800, net of outstanding borrowings of $0 and outstanding letters of credit of $10,200. Interest is payable at varying Eurodollar rates based on LIBOR or prime plus spreads determined by our leverage ratio, amounting to 150 or 25 basis points applied to each, respectively. The Revolving Credit Facility is secured by all domestic inventory, receivables, equipment, real property, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual property. During the second quarter of fiscal 2006, the Company issued $136,000 of 8 7/8% Senior Subordinated Notes (8 7/8% Notes) due November 1, 2013. Provisions of the 8 7/8% Notes include, without limitation, restrictions on indebtedness, asset sales, and dividends and other restricted payments. Until November 1, 2008, we may redeem up to 35% of the outstanding notes at a redemption price of 108.875% with the proceeds of equity offerings, subject to certain restrictions. The 8 7/8% Notes are redeemable at the option of the Company, in whole or in part, at prices declining annually from the Make-Whole Price (as defined in the 8 7/8% Notes agreement) to 100% on and after November 1, 2011. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 8 7/8% Notes may require us to repurchase all or a portion of such holder's 8 7/8% Notes at a purchase price equal to 101% of the principal amount thereof. The 8 7/8% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. Proceeds from the 8 7/8% Notes and cash on hand were used to repurchase all of the outstanding 8 1/2% Senior Subordinated Notes. The repurchase of the 8 1/2% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $2,298. As a result of the repurchase of the 8 1/2% Notes, $922 of pre-tax deferred financing costs and $110 of the original issue discount were written-off in the second quarter of fiscal 2006. The net effect of these items, a $3,330 pre-tax loss, is shown as part of other (income) and expense, net. The Senior Secured 10% Notes issued on July 22, 2003 amounted to $115,000 and are due August 1, 2010. Provisions of the 10% Notes include, without limitation, restrictions on indebtedness, restricted payments, asset and subsidiary stock sales, liens, and other restricted transactions. During the third quarter of fiscal 2006, the Company used a portion of the proceeds from its stock offering to repurchase $40,250 of the outstanding 10% Notes. The repurchase of the 10% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $4,025. As a result of the repurchase of the 10% Notes, $925 of pre-tax deferred financing costs was written-off. The net effect of these items, a $4,950 pre-tax loss in the third quarter of fiscal 2006, is shown as part of other (income) and expense, net. The remaining 10% Notes are not entitled to redemption at our option, prior to August 1, 2007. On and after August 1, 2007, they are redeemable at prices declining annually to 100% on and after August 1, 2009. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 10% Notes may require us to repurchase all or a portion of such holder's 10% Notes at a purchase price equal to 101% of the principal amount thereof. The 10% Notes are secured by a second-priority interest in all domestic inventory, receivables, equipment, real property, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual property. The 10% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. The corresponding credit agreements associated with the Revolving Credit Facility place certain debt covenant restrictions on us including certain financial requirements and a restriction on dividend payments. We believe that our cash on hand, cash flows, and borrowing capacity under our Revolving Credit Facility will be sufficient to fund our ongoing operations and budgeted capital expenditures for at least the next twelve months. This belief is dependent upon a steady economy and successful execution of our current business plan which is focused on cash generation for debt repayment. The business plan includes continued implementation of Lean Manufacturing, facility rationalization projects, divestiture of excess facilities and certain non-strategic operations, improving working capital utilization, and new market and new product development. - 19 -
Net cash provided by operating activities was $38,509 for the nine months ended January 1, 2006 compared to $8,413 for the nine months ended January 2, 2005. The $30,096 increase is the result of a $3,422 increase in income from continuing operations, an $8,280 loss on early extinguishment of debt, and $20,632 of changes in net working capital components, primarily decreased accounts receivable and inventories, and increased accounts payable and accrued liabilities, offset by $1,794 of gains on the sale of real estate and investments. Net cash used in investing activities was $2,557 for the nine months ended January 1, 2006 compared to $1,837 for the nine months ended January 2, 2005. The $720 increase in cash used was the result of an increase in capital expenditures to $4,738 in fiscal 2006 compared to $3,169 in fiscal 2005, and by a decrease in sales of marketable equity securities to $90 in fiscal 2006 compared to $957 in fiscal 2005. This increase in cash used in investing activities was offset by $2,091 of proceeds from sale of property in fiscal 2006. Net cash used in financing activities was $4,265 for the nine months ended January 1, 2006 compared to $9,935 for the nine months ended January 2, 2005. The net cash used in financing activities for the nine months ended January 1, 2006 consisted primarily of $196,881 repayment of debt, $2,357 of deferred financing costs incurred, and $1,417 of net payments under revolving line of credit agreements, offset by $136,000 of proceeds from the issuance of long-term debt and $59,944 of proceeds from the issuance of common stock and stock options exercised. The net cash used in financing activities for the nine months ended January 2, 2005 consisted primarily of $13,244 repayment of debt, offset by $2,906 net borrowings under revolving line of credit agreements. CAPITAL EXPENDITURES In addition to keeping our current equipment and plants properly maintained, we are committed to replacing, enhancing, and upgrading our property, plant, and equipment to support new product development, reduce production costs, increase flexibility to respond effectively to market fluctuations and changes, meet environmental requirements, enhance safety, and promote ergonomically correct work stations. Consolidated capital expenditures for the nine months ended January 1, 2006 and January 2, 2005 were $4,738 and $3,169, respectively. We expect capital spending for fiscal 2006 to in the range of $6.0 to $7.0 million compared with $5.2 million in fiscal 2005. Higher capital expenditures for fiscal 2006 have been primarily directed toward new product development and productivity improvement. INFLATION AND OTHER MARKET CONDITIONS Our costs are affected by inflation in the U.S. economy and, to a lesser extent, in foreign economies including those of Europe, Canada, Mexico, and the Pacific Rim. We do not believe that general inflation has had a material effect on results of operations over the periods presented primarily due to overall low inflation levels over such periods and the ability to generally pass on rising costs through price increases. However, we have been impacted by fluctuations in steel costs, which vary by type of steel and we continue to monitor them. In addition, employee benefits costs such as health insurance, workers compensation insurance, pensions as well as energy and business insurance have exceeded general inflation levels. We generally incorporate those cost increases into our sales price increases as well as surcharges on certain products. In the future, we may be further affected by inflation that we may not be able to pass on as price increases. SEASONALITY AND QUARTERLY RESULTS Quarterly results may be materially affected by the timing of large customer orders, periods of high vacation and holiday concentrations, restructuring charges and other costs attributable to our facility rationalization program, divestitures, acquisitions and the magnitude of rationalization integration costs. Therefore, the operating results for any particular fiscal quarter are not necessarily indicative of results for any subsequent fiscal quarter or for the full fiscal year. - 20 -
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," as an amendment to ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage). This Statement requires that these items be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This Statement becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS No. 151 to have a material impact on our consolidated financial statements. In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), SHARE-BASED PAYMENT, which is a revision of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement 123(R) supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEEs, and amends FASB Statement No. 95, STATEMENT OF CASH FLOWS. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) was to be adopted for interim or annual periods beginning after June 15, 2005. On April 14th, 2005, the SEC announced that it would provide for a phased-in implementation process for FASB statement No. 123(R). The SEC is requiring that registrants adopt statement 123(R)'s fair value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after June 15, 2005. We expect to adopt 123(R) in the first quarter of Fiscal 2007. Statement 123(R) permits public companies to adopt its requirements using one of two methods: 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123(R) for all share-based payments granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We are still evaluating the method we plans to use when we adopt statement 123(R). As permitted by Statement 123, we currently account for share-based payments to employees using Opinion 25's intrinsic value method and, as such, recognize no compensation cost for employee stock options. Accordingly, adoption of Statement 123(R)'s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of 123(R) cannot be predicted at this time because it will depend on levels of share based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to our condensed consolidated financial statements. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report may include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed or implied by such statements, including general economic and business conditions, conditions affecting the industries served by us and our subsidiaries, conditions affecting our customers and suppliers, competitor responses to our products and services, the overall market acceptance of such products and services, the integration of acquisitions and other factors disclosed in our periodic reports filed with the Commission. Consequently such forward-looking statements should be regarded as our current plans, estimates and beliefs. We do not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. - 21 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the market risks since the end of Fiscal 2005. Item 4. Disclosure Controls and Procedures As of January 1, 2006, an evaluation was performed under the supervision and with the participation of the Company's management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the chief executive officer and chief financial officer, concluded that the Company's disclosure controls and procedures were effective as of January 1, 2006. There were no changes in the Company's internal controls or in other factors during our third quarter ended January 1, 2006. - 22 -
PART II. OTHER INFORMATION Item 1. Legal Proceedings - none. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - none. Item 3. Defaults upon Senior Securities - none. Item 4. Submission of Matters to a Vote of Security Holders - none. Item 5. Other Information - none. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934; as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934; as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: On November 8, 2005, the Company filed a Current Report on Form 8-K with respect to the pricing of its previously announced offering of 3,350,000 shares of common stock at $20.00 per share. On November 15, 2005, the Company filed a Current Report on Form 8-K with respect to the completion of its previously disclosed offering of 3,350,000 shares of common stock at $20.00 per share. On November 18, 2005, the Company filed a Current Report on Form 8-K with respect to the call for redemption of approximately $40.25 million of its outstanding Senior Subordinated 10% Notes due 2010. On January 24, 2006, the Company filed a Current Report on Form 8-K with respect to its financial results for the third quarter of fiscal 2006. On January 26, 2006, the Company filed a Current Report on Form 8-K with respect to the appointment of its Chief Financial Officer. - 23 -
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COLUMBUS MCKINNON CORPORATION ----------------------------- (Registrant) Date: FEBRUARY 1, 2006 /S/ KAREN L. HOWARD ---------------- -------------------------------------- Karen L. Howard Vice President and Treasurer and Chief Financial Officer (Principal Financial Officer) - 24 -