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 December 27, 1998 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 The number of shares of common stock outstanding as of January 31, 1999 was: 13,766,083 shares.
FORM 10-Q INDEX COLUMBUS McKINNON CORPORATION DECEMBER 27, 1998 Page # ------ PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed consolidated balance sheets - December 27, 1998 and March 31, 1998 2 Condensed consolidated statements of income and retained earnings - Three months and nine months ended December 27, 1998 and December 28, 1997 3 Condensed consolidated statements of cash flows - Nine months ended December 27, 1998 and December 28, 1997 4 Condensed consolidated statements of comprehensive income - Three months and nine months ended December 27, 1998 and December 28, 1997 5 Notes to condensed consolidated financial statements - December 27, 1998 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Part II. OTHER INFORMATION Item 1 Legal Proceedings 18 Item 2. Changes in Securities - none. 18 Item 3. Defaults upon Senior Securities - none. 18 Item 4. Submission of Matters to a Vote of Security Holders - none. 18 Item 5. Other Information - none. 18 Item 6. Exhibits and Reports on Form 8-K 18 -1-
Part I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) <TABLE> <CAPTION> COLUMBUS McKINNON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) DECEMBER 27, MARCH 31, 1998 1998 ----------- --------- (In thousands) <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents ......................... $ 11,102 $ 22,841 Trade accounts receivable ......................... 132,408 113,509 Unbilled revenues ................................. 17,986 19,634 Inventories ....................................... 107,621 107,673 Net assets held for sale .......................... 7,292 10,396 Prepaid expenses .................................. 7,126 9,969 --------- --------- Total current assets .................................... 283,535 284,022 Net property, plant, and equipment ...................... 82,325 81,927 Goodwill and other intangibles, net ..................... 352,132 368,137 Marketable securities ................................... 18,173 16,665 Deferred taxes on income ................................ 6,820 7,534 Other assets ............................................ 8,748 5,463 --------- --------- Total assets ............................................ $751,733 $763,748 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Notes payable to banks ............................ $ 2,890 $ 2,801 Trade accounts payable ............................ 45,371 53,901 Excess billings ................................... 2,871 3,290 Accrued liabilities ............................... 41,849 43,065 Current portion of long-term debt ................. 1,423 1,456 --------- --------- Total current liabilities ............................... 94,404 104,513 Senior debt, less current portion ....................... 243,877 247,388 Subordinated debt ....................................... 199,508 199,468 Other non-current liabilities ........................... 39,049 45,857 --------- --------- Total liabilities ....................................... 576,838 597,226 Shareholders' equity: Common stock ...................................... 137 137 Additional paid-in capital ........................ 97,409 96,544 Retained earnings ................................. 90,225 76,187 ESOP debt guarantee ............................... (10,235) (3,203) Unearned restricted stock ......................... (322) (538) Total accumulated other comprehensive income (loss) (2,319) (2,605) --------- --------- Total shareholders' equity .............................. 174,895 166,522 --------- --------- Total liabilities and shareholders' equity .............. $751,733 $763,748 ========= ========= See accompanying notes to condensed consolidated financial statements. </TABLE> -2-
<TABLE> <CAPTION> COLUMBUS McKINNON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28, 1998 1997 1998 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Net sales ........................... $171,727 $124,093 $510,865 $372,442 Cost of products sold ............... 128,741 88,680 382,024 265,990 -------- -------- -------- -------- Gross profit ........................ 42,986 35,413 128,841 106,452 -------- -------- -------- -------- Selling expenses .................... 12,480 11,565 37,421 33,358 General and administrative expenses . 6,886 5,751 20,996 18,087 Amortization of intangibles ......... 3,756 2,487 11,363 7,581 -------- -------- -------- -------- 23,122 19,803 69,780 59,026 -------- -------- -------- -------- Income from operations .............. 19,864 15,610 59,061 47,426 Interest and debt expense ........... 8,946 5,294 26,543 17,729 Interest and other income ........... 231 432 864 1,076 -------- -------- -------- -------- Income before income taxes .......... 11,149 10,748 33,382 30,773 Income tax expense .................. 5,451 5,263 16,517 15,227 -------- -------- -------- -------- Net income .......................... 5,698 5,485 16,865 15,546 Retained earnings - beginning of period ............ 85,473 69,194 76,187 60,999 Cash dividends of $0.07, $0.07, $0.21 and $0.21 per share ...... (946) (936) (2,827) (2,802) -------- -------- -------- -------- Retained earnings - end of period ... $ 90,225 $ 73,743 $ 90,225 $ 73,743 ======== ======== ======== ======== Earnings per share data, both basic and diluted: ......... $0.44 $0.41 $1.26 $1.16 ===== ===== ===== ===== See accompanying notes to condensed consolidated financial statements. </TABLE> -3-
<TABLE> <CAPTION> COLUMBUS McKINNON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED ----------------- DECEMBER 27, DECEMBER 28, 1998 1997 ---- ---- (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES: Net income ........................................... $ 16,865 $ 15,546 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................. 19,752 14,244 Other .......................................... 1,410 1,080 Changes in operating assets and liabilities net of effects from businesses purchased and sold: Trade accounts receivable ................. (20,115) (5,979) Unbilled revenues and excess billings ..... 1,229 - Inventories ............................... (2,080) (1,590) Prepaid expenses .......................... (482) 8,986 Other assets .............................. (434) (311) Trade accounts payable .................... (8,241) (6,038) Accrued and non-current liabilities ....... 1,373 (1,909) -------- -------- Net cash provided by operating activities ............ 9,277 24,029 -------- -------- INVESTING ACTIVITIES: Purchase of marketable securities, net of sales ...... (834) (2,295) Capital expenditures ................................. (9,705) (6,161) Proceeds from sale of businesses ..................... 9,301 - Purchases of businesses, net of cash ................. (7,323) - Net assets held for sale ............................. 3,104 4,669 Other ................................................ - (168) -------- -------- Net cash used in investing activities ................ (5,457) (3,955) -------- -------- FINANCING ACTIVITIES: Net payments under revolving line-of-credit agreements (2,511) (1,273) Repayment of debt .................................... (944) (17,610) Deferred financing costs ............................. (985) (558) Dividends paid ....................................... (2,827) (2,802) Reduction of ESOP debt guarantee, net of borrowings .. (7,032) 625 -------- -------- Net cash used in financing activities ................ (14,299) (21,618) Effect of exchange rate changes on cash .............. (1,260) (1,480) -------- -------- Net change in cash and cash equivalents .............. (11,739) (3,024) Cash and cash equivalents at beginning of period ..... 22,841 8,907 -------- -------- Cash and cash equivalents at end of period ........... $ 11,102 $ 5,883 ======== ======== See accompanying notes to condensed consolidated financial statements. </TABLE> -4-
<TABLE> <CAPTION> COLUMBUS McKINNON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28, 1998 1997 1998 1997 ---- ---- ---- ---- (IN THOUSANDS) <S> <C> <C> <C> <C> Net income ............................... $ 5,698 $ 5,485 $ 16,865 $ 15,546 -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (529) (563) (388) (1,520) Unrealized gains on investments: Unrealized holding gains arising during the period ................... 899 182 678 983 Less: reclassification adjustment for gains included in net income ....... 22 (182) (4) (429) -------- -------- -------- -------- 921 - 674 554 -------- -------- -------- -------- Total other comprehensive income (loss) .. 392 (563) 286 (966) -------- -------- -------- -------- Comprehensive income ..................... $ 6,090 $ 4,922 $ 17,151 $ 14,580 ======== ======== ======== ======== See accompanying notes to condensed consolidated financial statements. </TABLE> -5-
COLUMBUS McKINNON CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) DECEMBER 27, 1998 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with 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 the Company at December 27, 1998, and the results of its operations and its cash flows for the three and nine month periods ended December 27, 1998 and December 28, 1997, have been included. Results for the period ended December 27, 1998 are not necessarily indicative of the results that may be expected for the year ended March 31, 1999. 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, 1998. 2. Inventories consisted of the following: DECEMBER 27, MARCH 31, 1998 1998 ------------------------ (IN THOUSANDS) At cost - FIFO basis: Raw materials .......... $ 49,667 $ 52,158 Work-in-process ........ 17,504 22,188 Finished goods ......... 44,253 37,089 --------- --------- 111,424 111,435 LIFO cost less than FIFO cost (3,803) (3,762) --------- --------- $ 107,621 $ 107,673 ========= ========= 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. 3. Property, plant, and equipment is net of $38,485,000 and $30,876,000 of accumulated depreciation at December 27, 1998 and March 31, 1998, respectively. 4. Goodwill and other intangibles, net includes $25,750,000 and $14,979,000 of accumulated amortization at December 27, 1998 and March 31, 1998, respectively. 5. General and Product Liability - Accrued general and product liability costs which are included in other non-current liabilities are the actuarial present value of estimated expenditures based on amounts determined from loss reports and individual cases filed with the Company and an amount, based on past experience, for losses incurred but not reported. The accrual in these condensed consolidated financial statements was determined by applying a discount factor based on interest rates customarily used in the insurance industry. -6-
Yale was self-insured for product liability claims up to a maximum of $500,000 per occurrence and maintained product liability insurance with a $100 million cap per occurrence through July 31, 1997 when Yale was added to the Company's coverage as described above. The general and product liability accrual continues to include provisions related to that pre-acquisition time period. 6. To manage its exposure to interest rate fluctuations, the Company has an interest rate swap with a notional value $3.5 million from January 2, 1999 through July 2, 2002 based on LIBOR at 5.9025%. The Company also has a LIBOR-based interest rate cap on $49.5 million of debt through December 16, 1999 at 10%. Net payments or receipts under the swap and cap agreements are recorded as adjustments to interest expense. The carrying amount of the Company's senior debt instruments approximates the fair values. The Company's subordinated debt has an approximate fair value of $192,500,000, which is less than its carrying amount of $199,508,000. <TABLE> <CAPTION> 7. The following table sets forth the computation of basic and diluted earnings per share before extraordinary charge for debt extinguishment: THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28, 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Numerator for basic and diluted earnings per share: Income before extraordinary charge .............. $ 5,698,000 $ 5,485,000 $16,865,000 $15,546,000 =========== =========== =========== =========== Denominators: Weighted-average common stock outstanding - denominator for basic EPS .................... 13,079,000 13,374,000 13,313,000 13,352,000 Effect of dilutive employee stock options ...... 13,000 72,000 48,000 52,000 ----------- ----------- ----------- ----------- Adjusted weighted-average common stock outstanding and assumed conversions - denominator for diluted EPS .................. 13,092,000 13,446,000 13,361,000 13,404,000 =========== =========== =========== =========== </TABLE> 8. Income tax expense for the three month periods ended December 27, 1998 and December 28, 1997 and also for the nine month periods then ended exceeds the customary relationship between income tax expense and income before income taxes due to nondeductible amortization of goodwill of $3,605,000, $2,487,000, $11,212,000, and $7,581,000, respectively. 9. On December 4, 1998 the Company acquired all of the outstanding stock of Societe D'Exploitation des Raccords Gautier ("Gautier"), a French-based manufacturer of industrial components. The total cost of the acquisition, which was accounted for as a purchase, was approximately $3 million, consisting of cash of $2.4 million financed by proceeds from the Company's revolving debt facility and the assumption of certain debt. On August 21, 1998 the Company acquired the net assets of the Abell-Howe Crane division ("Abell-Howe") of Abell-Howe Company, a regional manufacturer of jib, gantry, and bridge cranes. The total cost of the acquisition, which was accounted for as a purchase, was approximately $7 million of cash and was financed by proceeds from the Company's revolving debt facility. On August 7, 1998 the Company sold its Mechanical Products division, a producer of circuit protection devices, for $12 million, consisting of $9.6 million of cash and a $2.4 million note receivable, to Mechanical Products' senior management team. -7-
On March 31, 1998 the Company acquired all of the outstanding stock of LICO, Inc. ("LICO"), a leading designer, manufacturer and installer of custom conveyor and automated material handling systems primarily for the automotive industry and, to a lesser extent, the steel and other industrial markets. The total cost of the acquisition, which was accounted for as a purchase, was approximately $155 million of cash, which was financed by proceeds from the Company's new revolving debt facility and a private placement of senior subordinated notes, both of which also closed effective March 31, 1998. On January 7, 1998 the Company acquired all of the outstanding stock of Univeyor A/S ("Univeyor"), a Denmark-based designer, manufacturer and distributor of automated material handling systems, and has accounted for the acquisition as a purchase. The cost of the acquisition was approximately $15 million of cash financed by the Company's revolving debt facility, plus the assumption of certain debt. The following table presents pro forma summary information for the nine month periods ended December 27, 1998 and December 28, 1997 as if the Mechanical Products sale, Abell-Howe, LICO and Univeyor acquisitions, and related borrowings had occurred as of April 1, 1997, which is the beginning of fiscal 1998. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined enterprise: NINE MONTHS ENDED ----------------- DECEMBER 27, 1998 DECEMBER 28, 1997 ------------------ ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma: Net sales .............. $507,563 $501,331 Income from operations . 58,682 56,239 Net income ............. 16,784 15,670 Earnings per share, both basic and diluted 1.26 1.17 <TABLE> <CAPTION> 10. The summary financial information of the parent, domestic subsidiaries (guarantors) and foreign subsidiaries (nonguarantors) of the 8.5% senior subordinated notes follows: Domestic Foreign Elimina- Consoli- (In thousands) Parent Subsidiaries Subsidiaries Tions Dated ------------------------------------------------------------ AS OF DECEMBER 27, 1998 Current assets: <S> <C> <C> <C> <C> <C> Cash and cash equivalents $ 6,627 $ (1,482) $ 5,957 $ - $ 11,102 Trade accounts receivable 55,583 60,058 16,767 - 132,408 Unbilled revenues - 17,986 - - 17,986 Inventories 46,218 37,386 24,356 (339) 107,621 Other current assets 1,696 8,453 4,269 - 14,418 ------------------------------------------------------------ Total current assets 110,124 122,401 51,349 (339) 283,535 Net property, plant, and equipment 36,257 29,817 16,251 - 82,325 Goodwill and other intangibles, net 42,967 261,236 47,929 - 352,132 Intercompany 208,358 (373,211) (65,684) 230,537 - Other assets 218,002 163,723 (1,851) (346,133) 33,741 ------------------------------------------------------------ Total assets $ 615,708 $ 203,966 $ 47,994 $ (115,935) $751,733 ============================================================ -8-
Current liabilities $ 18,230 $ 57,109 $ 18,052 $ 1,013 $ 94,404 Long-term debt, less current portion 440,843 103 2,439 - 443,385 Other non-current liabilities 11,909 24,061 3,079 - 39,049 ------------------------------------------------------------ Total liabilities 470,982 81,273 23,570 1,013 576,838 Shareholders' equity 144,726 122,693 24,424 (116,948) 174,895 ------------------------------------------------------------ Total liabilities and shareholders' equity $ 615,708 $ 203,966 $ 47,994 $ (115,935) $751,733 ============================================================ FOR THE NINE MONTHS ENDED DECEMBER 27, 1998 Net sales $196,972 $251,866 $72,555 $ (10,528) $510,865 Cost of products sold 139,571 201,455 51,371 (10,373) 382,024 ------------------------------------------------------------ Gross profit 57,401 50,411 21,184 (155) 124,841 ------------------------------------------------------------ Selling, general and administrative expenses 25,448 18,665 14,304 - 58,417 Amortization of intangibles 1,467 8,309 1,587 - 11,363 ------------------------------------------------------------ 26,915 26,974 15,891 - 69,780 ------------------------------------------------------------ Income from operations 30,486 23,437 5,293 (155) 59,061 Interest and debt expense 26,144 98 301 - 26,543 Interest and other income 934 141 (211) - 864 ------------------------------------------------------------ Income before income taxes 5,276 23,480 4,781 (155) 33,382 Income tax expense 2,625 11,560 2,394 (62) 16,517 ------------------------------------------------------------ Net income $ 2,651 $ 11,920 $ 2,387 $ (93) $ 16,865 ============================================================ FOR THE NINE MONTHS ENDED DECEMBER 27, 1998 OPERATING ACTIVITIES: Net cash (used in) provided by operating $ 8,100 $ (2,990) $ 4,135 $ 32 $ 9,277 activities ------------------------------------------------------------ INVESTING ACTIVITIES: Purchase of marketable securities, net (834) - - - (834) Capital expenditures (6,755) (1,572) (1,378) - (9,705) Proceeds from sale of businesses 9,390 (89) - - 9,301 Purchases of businesses, net of cash (7,000) (323) - - (7,323) Other - 3,104 - - 3,104 ------------------------------------------------------------ Net cash used in investing activities (5,199) 1,120 (1,378) - (5,547) ------------------------------------------------------------ FINANCING ACTIVITIES: Net payments under revolving line-of-credit agreements (2,600) - 89 - (2,511) Repayment of debt (822) (380) 258 - (944) Dividends paid (2,827) - - - (2,827) Other (8,017) - - - (8,017) ------------------------------------------------------------ Net cash used in financing activities (14,266) (380) 347 - (14,299) ------------------------------------------------------------ Effect of exchange rate changes on cash 1 - (1,229) (32) (1,260) ------------------------------------------------------------ Net change in cash and cash equivalents (11,364) (2,250) 1,875 - (11,739) Cash and cash equivalents at beginning of period 17,991 768 4,082 - 22,841 ------------------------------------------------------------ Cash and cash equivalents at end of period $ 6,627 $ (1,482) $ 5,597 $ - $ 11,102 ============================================================ </TABLE> 11. During October 1998, the Company repurchased 479,900 shares of its common stock for a total consideration of $7,682,000. These shares were deposited in the Employee Stock Ownership Plan and are owned by such plan. -9-
12. The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 130 "Reporting Comprehensive Income," which the Company adopted for the interim reporting period ending June 28, 1998. Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components. This includes unrealized gains and losses on the Company's available-for-sale securities, foreign currency translation adjustments, and minimum pension liability adjustments, which previously were reported in shareholders' equity and will now be included and disclosed in total comprehensive income. Compliance with this Statement does not impact financial position, net income or cash flows. The FASB also issued FAS Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information," which the Company will adopt for the year ended March 31, 1999. Statement No. 131 superseded FAS Statement No. 14 "Financial Reporting for Segments of a Business Enterprise." Statement No. 131 establishes new standards for determining segment criteria and annual and interim reporting of that data. It also establishes new disclosures about products, geographic areas and major customers. Currently, the company reports one operating segment under Statement No. 14 and, while the impact of compliance with Statement No. 131 has not yet been determined, the Company expects to report at least two segments upon its adoption. The FASB issued FAS Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is effective for years beginning after June 15, 1999. Statement No. 133 establishes standards for the recognition and measurement of derivatives and hedging activities. At this time, the Company's management does not believe that this statement will have a material effect on the financial statements. -10-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW The Company is a broad-line designer, manufacturer, and supplier of sophisticated material handling products and integrated material handling solutions that are widely distributed to industrial and consumer markets worldwide. The Company's material handling products are sold, domestically and internationally, principally to third party distributors in commercial and consumer distribution channels, and to a lesser extent directly to manufacturers and other end-users. Commercial distribution channels include general distributors, specialty distributors, service-after-sale distributors, original equipment manufacturers ("OEMs"), and the U.S. and Canadian governments. The general distributors are comprised of industrial distributors, rigging shops and crane builders. Specialty distributors include catalog houses, material handling specialists and entertainment equipment riggers. The service-after-sale network includes repair parts distribution centers, chain service centers, and hoist repair centers. Consumer distribution channels include mass merchandisers, hardware distributors, trucking and transportation distributors, farm hardware distributors and rental outlets. The Company's integrated material handling solutions businesses primarily deal with end-users. Material handling solution sales are concentrated, domestically and internationally (primarily Europe), in the automotive industry, consumer products manufacturing, warehousing and, to a lesser extent, the steel, construction and other industrial markets. RESULTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 Net sales in the fiscal 1999 quarter ended December 27, 1998 were $171,727,000, an increase of $47,634,000 or 38.4% over the fiscal 1998 quarter ended December 28, 1997. Net sales for the nine months ended December 27, 1998 were $510,865,000, an increase of $138,423,000 or 37.2% over the nine months ended December 28, 1997. Sales growth during the current quarter was due primarily to the March 1998 LICO acquisition and January 1998 Univeyor acquisition. The impact of the August 1998 sale of the Mechanical Products division resulted in a decrease of $4,360,000 for the quarter December 27, 1998 compared to the quarter ended December 28, 1997. Excluding the effects of the acquisitions and the divestiture, compared with the prior year quarter, the Company experienced a 3.9% net decrease in sales volume due to a soft industrial market, the continued effect of the General Motors strike, the impact of the Asian and South American economic situations and a shift in demand from small retail hardware stores to larger do-it-yourself superstores, to which the Company supplies only a small share. In addition, list price increases of approximately 4% were introduced in both December 1998 and 1997 affecting certain of the Company's hoist, chain and forged products sold in its domestic commercial markets. Sales in the Products and Solutions segments were as follows, in thousands of dollars and with percentage changes for each group: -11-
<TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- DEC. 27, DEC. 28, CHANGE DEC. 27 DEC. 28 CHANGE ------ ------ 1998 1997 AMOUNT % 1998 1997 AMOUNT % ---- ---- ------ - ---- ---- ------ - (IN THOUSANDS, EXCEPT PERCENTAGES) <S> <C> <C> <C> <C> <C> <C> <C> <C> Products $ 113,416 $ 113,014 $ 402 0.4 $ 339,757 $ 341,524 $ (1,767) (0.5) Solutions 62,452 9,996 52,456 524.8 174,054 26,940 147,114 546.1 Divested business - 4,360 (4,360) (100.0) 7,582 13,329 (5,747) (43.1) Intercompany Eliminations (4,141) (3,277) (864) (26.4) (10,528) (9,351) (1,177) (12.6) --------- --------- -------- ---------- --------- -------- Net sales $ 171,727 $ 124,093 $ 47,634 38.4 $ 510,865 $ 372,442 $138,423 37.2 ========= ========= ======== ========== ========= ======== </TABLE> The Company's gross profit margins were approximately 25.0%, 28.5%, 25.2% and 28.6% for the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. The decrease in gross profit margin in the current quarter and the nine month period resulted from the inclusion of the LICO and Univeyor operations. These design and engineer-to-order businesses typically experience gross profit margins of approximately 20%, which is lower than the Company's margins in its product-oriented businesses. Selling expenses were $12,480,000, $11,565,000, $37,421,000 and $33,358,000 in the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. The 1999 expenses were impacted by the addition of LICO and Univeyor activities. As a percentage of consolidated net sales, selling expenses were 7.3%, 9.3%, 7.3% and 9.0% in the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. The more favorable percentages in the fiscal 1999 quarter and the nine month period are primarily due to low selling expenses relative to sales for LICO and Univeyor, which is normal for these businesses. General and administrative expenses were $6,886,000, $5,751,000, $20,996,000 and $18,087,000 in the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. The 1999 expenses were impacted by the addition of LICO and Univeyor activities. As a percentage of consolidated net sales, general and administrative expenses were 4.0%, 4.6%, 4.1% and 4.9% in the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. The improved percentages result from continued integration of acquisitions and the fixed nature of costs in relation to the increased sales. Amortization of intangibles was $3,756,000, $2,487,000, $11,363,000 and $7,581,000 in the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. The fiscal 1999 increase is due to the amortization of goodwill resulting from the acquisitions of LICO and Univeyor. As a result of the above, income from operations increased $4,254,000 or 27.3% in the fiscal 1999 quarter and $11,635,000 or 24.5% in the fiscal 1999 nine month period compared to the respective periods in fiscal 1998. This is based on income from operations of $19,864,000, $15,610,000, $59,061,000 and $47,426,000 or 11.6%, 12.6%, 11.6% and 12.7% as a percentage of consolidated net sales in the fiscal 1999 and 1998 quarters and nine months then ended, respectively. Interest and debt expense was $8,946,000, $5,294,000, $26,543,000 and $17,729,000 in the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. The fiscal 1999 increase is primarily due to debt incurred to finance the LICO acquisition. As a percentage of consolidated net sales, interest and debt expense was 5.2%, 4.3%, 5.2% and 4.8% in the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. -12-
Interest and other income was $231,000, $432,000, $864,000 and $1,076,000 in the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. The fiscal 1999 decrease is due to decreases in the investment return on marketable securities held for settlement of a portion of the Company's general and products liability claims. Income taxes as a percentage of income before income taxes were 48.9%, 49.0%, 49.5% and 49.5% in the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. The percentages reflect the effect of nondeductible amortization of goodwill resulting from acquisitions. As a result of the above, net income increased $213,000 or 3.9% for the quarter and increased $1,319,000 or 8.5% for the nine months then ended. As a percentage of consolidated net sales, net income was 3.3%, 4.4%, 3.3% and 4.2% in the fiscal 1999 and 1998 quarters and the nine months then ended, respectively. LIQUIDITY AND CAPITAL RESOURCES On December 4, 1998 the Company acquired all of the outstanding stock of Societe D'Exploitation des Raccords Gautier ("Gautier"), a French-based manufacturer of industrial components. The total cost of the acquisition, which was accounted for as a purchase, was approximately $3 million, consisting of cash of $2.4 million financed by proceeds from the Company's revolving debt facility and the assumption of certain debt. During October, the Company repurchased 479,900 shares of its common stock of a total of $7,82,000. These shares were deposited in the Employee Stock Ownership Plan and are owned by such plan. On August 21, 1998 the Company acquired the net assets of the Abell-Howe Crane division of Abell-Howe Company, a regional manufacturer of jib, gantry, and bridge cranes. The total cost of the acquisition, which was accounted for as a purchase, was approximately $7 million of cash, and was financed by proceeds from the Company's revolving debt facility. On August 7, 1998 the Company sold its Mechanical Products division, a producer of circuit controls and protection devices, for $12 million, consisting of $9.6 million of cash and a $2.4 million note receivable, to Mechanical Products' senior management team. On March 31, 1998, the Company acquired all of the outstanding stock of LICO for approximately $155 million in cash, which was financed by proceeds from the Company's new revolving credit facility ("1998 Revolving Credit Facility") and a private placement of senior subordinated notes ("8.5% Notes"), both of which also closed effective March 31, 1998. The Company's previously existing Term Loan A, Term Loan B and revolving credit facility were repaid and retired on March 31, 1998. On January 7, 1998, the Company acquired all of the outstanding stock of Univeyor for approximately $15 million of cash financed by the Company's revolving credit facility, plus the assumption of certain debt. -13-
The new 1998 Revolving Credit Facility provides availability up to $300 million, due March 31, 2003, against which $237.4 million was outstanding at December 27, 1998. Interest is payable at varying Eurodollar rates based on LIBOR plus a spread determined by the Company's leverage ratio, revised to 112.5 basis points effective July 20, 1998. The 1998 Revolving Credit Facility is secured by all equipment, inventory, receivables and subsidiary stock (limited to 65% for foreign subsidiaries). To manage its exposure to interest rate fluctuations, the Company has an interest rate swap and cap. The 8.5% Notes issued on March 31, 1998 amounted to $199,468,000, net of original issue discount of $532,000 and are due March 31, 2008. Interest is payable semi-annually based on an effective rate of 8.45%, considering $1,902,000 of proceeds from rate hedging in advance of the placement. Provisions of the 8.5% Notes include, without limitation, restrictions on liens, indebtedness, asset sales, and dividends and other restricted payments. Prior to April 1, 2003, the 8.5% Notes are redeemable at the option of the Company, in whole or in part, at the Make-Whole Price (as defined). On or after April 1, 2003 they are redeemable at prices declining annually from 108.5% to 100% on and after April 1, 2006. In addition, on or prior to April 1, 2001, the Company may redeem up to 35% of the outstanding notes at a redemption price of 108.5% with the proceeds of equity offerings, subject to certain restrictions. In the event of a Change in Control (as defined), each holder of the 8.5% Notes may require the Company to repurchase all or a portion of such holder's 8.5% Notes at a purchase price equal to 101% of the principal amount thereof. The 8.5% Notes are not subject to any sinking fund requirements. The Company believes that its cash on hand, cash flows, and borrowing capacity under its 1998 Revolving Credit Facility will be sufficient to fund its ongoing operations, budgeted capital expenditures and business acquisitions for the next twelve months. Net cash provided by operating activities decreased to $9,277,000 for the nine months ended December 27, 1998 from $24,029,000 for the nine months ended December 28, 1997. The $14,752,000 decrease is primarily due to changes in working capital, reflecting fluctuations in the temporary working capital needs of LICO. Net cash used in investing activities increased to $5,457,000 for the nine months ended December 27, 1998 from $3,955,000 for the nine months ended December 28, 1997. The $1,502,000 increase in cash usage is due primarily to increased capital expenditures over the prior year's quarter, proceeds received from the sale of Mechanical Products offset by cash used for the acquisition of Abell-Howe. Net cash used in financing activities decreased to $14,299,000 for the nine months ended December 27, 1998 from $21,618,000 for the nine months ended December 28, 1997. The $7,319,000 decrease in cash usage is primarily due to the timing of debt repayments and the repurchase of common stock for the Company's Employee Stock Ownership Plan. -14-
CAPITAL EXPENDITURES In addition to keeping its current equipment and plants properly maintained, the Company is committed to replacing, enhancing, and upgrading its property, plant, and equipment to 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 December 27, 1998 and December 28, 1997 were $9,705,000 and $6,161,000, respectively. The increase reflects timing of the incurrence of maintenance capital expenditures. INFLATION AND OTHER MARKET CONDITIONS The Company's 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. The Company does not believe that inflation has had a material effect on results of operations over the periods presented because of low inflation levels over the periods and because the Company has generally been able to pass on rising costs through price increases. However, in the future there can be no assurance that the Company's business will not be affected by inflation or that it will be able to pass on cost increases. YEAR 2000 CONVERSIONS The Company's corporate-wide Year 2000 initiative is being managed by a team of internal staff and administered by the Director of Information Services. The Company has completed the assessment phase of its Year 2000 compliance project and is currently working on remediation of affected components. The Company has determined that it needs to modify significant portions of its corporate business information software so that its computer system will function properly with respect to dates in the year 2000 and beyond. Both internal and external resources have been dedicated to identifying, implementing, and testing corrective action in order to make such programs Year 2000 compliant; all such work is planned to be completed by July 1999 and is currently on schedule. To date the corporate business information software has been 100% assessed, approximately 84% has been remedially reprogrammed, approximately 46% has been successfully tested, and approximately 41% is now implemented as totally Year 2000 compliant. The Company believes that, with modifications to existing software, the Year 2000 issue will not pose significant operational problems for its computer systems. The Company has completed a corporate-wide assessment of the Year 2000 readiness of microprocessor controlled equipment such as robotics, CNC machines, and security and environmental systems. This assessment has revealed that at least 85% of all microprocessor controlled equipment, including over 98% of all security and environmental systems, is currently compliant. Any necessary upgrades to ensure Year 2000 readiness are expected to be in place by the end of March 1999. In addition, the Company has determined that all of its manufactured products are 100% Year 2000 compliant. -15-
The Company has initiated communications with its suppliers and customers to determine the extent to which systems, products or services are vulnerable to failure should those third parties fail to remediate their own Year 2000 issues. To date the Company has received responses to over 70% of its inquiries and no Year 2000 compliance problem has been identified from these responses. While we believe that our Year 2000 compliance plan adequately addresses potential Year 2000 concerns and to date no significant Year 2000 issues have been identified with our suppliers and customers, there can be no guarantee that the systems of other companies on which our operations rely will be compliant on a timely basis and will not have an effect on our operations. The Company has conducted preliminary contingency planning and identified the critical need areas. A high level approach incorporating manual workarounds, increasing critical inventories, identifying alternate suppliers, and adjusting staffing levels has been discussed and forms the basis for the initial contingency planning. The Company believes this level of planning is appropriate at the current time, however, the planning will be further expanded if warranted by future events. The cost of the Year 2000 initiatives is not expected to be material to the Company's results of operations or financial position. The forward looking statements contained in the Year 2000 Conversions should be read in conjunction with the Company's disclosures under the heading "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995." EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income," which the Company adopted for the interim reporting period ending June 28, 1998. Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components. This includes unrealized gains or losses on the Company's available-for-sale securities, foreign currency translation adjustments, and minimum pension liability adjustments, which previously were reported in shareholders' equity, and will be included and disclosed in total comprehensive income. Compliance with this Statement does not impact financial position, net income or cash flows. The FASB also issued FAS Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information," which the Company will adopt for the year ended March 31, 1999. Statement No. 131 superseded FAS Statement No. 14 "Financial Reporting for Segments of a Business Enterprise." Statement No. 131 establishes new standards for determining segment criteria and annual and interim reporting of that data. It also establishes new disclosures about products, geographic areas and major customers. Currently, the Company reports one operating segment under Statement No. 14 and, while the impact of compliance with Statement No. 131 has not yet been determined, the Company expects to report at least two segments upon its adoption. The FASB issued FAS Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is effective for years beginning after June 15, 1999. Statement No. 133 establishes standards for the recognition and measurement of derivatives and hedging activities. At this time, the Company's management does not believe that this statement will have a material effect on the financial statements. -16-
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Forward-looking statements in this report, including without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations, and intentions are subject to change at any time at the discretion of the Company, (ii) the Company's plans and results of operations will be affected by the Company's ability to manage its growth, and (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. -17-
Part II. OTHER INFORMATION Item 1. Legal Proceedings - A settlement has been reached among all parties in a previously disclosed product liability lawsuit brought against Yale Industrial Products, Inc. prior to the fiscal 1997 acquisition. The lawsuit was settled within the policy limits of the Company's product liability insurance coverage. Item 2. Changes in Securities - 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 Exhibit 10.1 - Columbus McKinnon Corporation Monthly Retirement Benefit Plan Restatement Effective April 1, 1998 Exhibit 10.2 - Columbus McKinnon Corporation Thrift 401(K) Plan Restatement Effective January 1, 1998 There are no reports on Form 8-K. -18-
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 10, 1999 /S/ ROBERT L. MONTGOMERY, JR. ----------------- ----------------------------- Robert L. Montgomery, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) -18-