UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT 1934
For the quarterly period ended October 3, 2004
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
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COLUMBUS MCKINNON CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 16-0547600
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
140 JOHN JAMES AUDUBON PARKWAY, AMHERST, NY 14228-1197
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(Address of principal executive offices) (Zip code)
(716) 689-5400
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(Registrant's telephone number, including area code)
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(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): [ ] Yes [X] No
The number of shares of common stock outstanding as of October 31, 2004 was:
14,896,172 shares.
FORM 10-Q INDEX
COLUMBUS MCKINNON CORPORATION
OCTOBER 3, 2004
PAGE #
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets -
October 3, 2004 and March 31, 2004 2
Condensed consolidated statements of operations and
accumulated deficit - Three months and six months
ended October 3, 2004 and September 28, 2003 3
Condensed consolidated statements of cash flows -
Six months ended October 3, 2004 and September 28, 2003 4
Condensed consolidated statements of comprehensive income
- Three months and six months ended October 3, 2004
and September 28, 2003 5
Notes to condensed consolidated financial statements -
October 3, 2004 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Disclosure Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - none. 21
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds - none. 21
Item 3. Defaults upon Senior Securities - none. 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information - none. 21
Item 6. Exhibits and Reports on Form 8-K 21
- 1 -
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 3, MARCH 31,
2004 2004
---------- ----------
(UNAUDITED) (AUDITED)
ASSETS: (IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 9,883 $ 11,101
Trade accounts receivable 84,464 84,374
Unbilled revenues 7,477 5,160
Inventories 74,850 69,119
Net assets held for sale 2,490 2,790
Prepaid expenses 14,156 15,486
---------- ----------
Total current assets 193,320 188,030
Property, plant, and equipment, net 56,447 58,773
Goodwill and other intangibles, net 192,355 192,963
Marketable securities 22,982 25,355
Deferred taxes on income 5,113 6,388
Other assets 1,902 1,854
---------- ----------
Total assets $ 472,119 $ 473,363
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable to banks $ 5,125 $ 5,471
Trade accounts payable 25,534 30,076
Accrued liabilities 47,617 48,416
Restructuring reserve 361 561
Current portion of long-term debt 10,595 2,205
---------- ----------
Total current liabilities 89,232 86,729
Senior debt, less current portion 120,075 121,603
Subordinated debt 158,552 164,131
Other non-current liabilities 34,622 37,922
---------- ----------
Total liabilities 402,481 410,385
---------- ----------
Shareholders' equity
Common stock 149 149
Additional paid-in capital 103,760 103,914
Accumulated deficit (19,398) (25,354)
ESOP debt guarantee (4,830) (5,116)
Unearned restricted stock (23) (39)
Accumulated other comprehensive loss (10,020) (10,576)
---------- ----------
Total shareholders' equity 69,638 62,978
---------- ----------
Total liabilities and shareholders' equity $ 472,119 $ 473,363
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMLATED DEFICIT
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 122,711 $ 106,584 $ 244,369 $ 213,159
Cost of products sold 92,768 81,517 182,975 162,194
----------- ----------- ----------- -----------
Gross profit 29,943 25,067 61,394 50,965
----------- ----------- ----------- -----------
Selling expenses 12,270 11,536 24,970 23,458
General and administrative expenses 7,517 5,712 15,002 11,479
Restructuring charges 184 574 217 1,375
Amortization of intangibles 76 78 153 220
----------- ----------- ----------- -----------
20,047 17,900 40,342 36,532
----------- ----------- ----------- -----------
Income from operations 9,896 7,167 21,052 14,433
Interest and debt expense 7,141 5,730 14,189 15,402
Other (income) and expense, net (607) (1,353) (589) (4,447)
------------ ----------- ----------- -----------
Income from continuing operations before
income tax expense 3,362 2,790 7,452 3,478
Income tax expense 982 1,290 1,710 1,479
----------- ----------- ----------- -----------
Income from continuing operations 2,380 1,500 5,742 1,999
Income from discontinued operations 214 - 214 -
----------- ----------- ----------- -----------
Net income 2,594 1,500 5,956 1,999
Accumulated deficit - beginning of period (21,992) (26,048) (25,354) (26,547)
----------- ------------ ----------- -----------
Accumulated deficit - end of period $ (19,398) $ (24,548) $ (19,398) $ (24,548)
=========== =========== =========== ===========
Earnings per share data, basic and diluted:
Income from continuing operations $ 0.17 $ 0.10 $ 0.40 $ 0.14
Income from discontinued operations 0.01 - 0.01 -
----------- ---------- ----------- -----------
Net income $ 0.18 $ 0.10 $ 0.41 $ 0.14
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
----------------
OCTOBER 3, SEPTEMBER 28,
2004 2003
---------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Income from continuing operations $ 5,742 $ 1,999
Adjustments to reconcile income from
continuing operations to net cash (used
in) provided by operating activities:
Depreciation and amortization 4,652 5,375
Deferred income taxes 1,275 626
Gain on sale of real estate/investments - (3,282)
Other 655 192
Changes in operating assets and liabilities:
Trade accounts receivable and unbilled revenues (1,597) 4,255
Inventories (5,257) 6,863
Prepaid expenses 1,342 (1,596)
Other assets (135) (241)
Trade accounts payable (4,718) (3,469)
Accrued and non-current liabilities (4,781) 13,843
---------- ----------
Net cash (used in) provided by operating activities (2,822) 24,565
---------- ----------
INVESTING ACTIVITIES:
Sale (purchase) of marketable securities, net 1,991 (811)
Capital expenditures (1,948) (2,094)
Net assets held for sale 300 3,282
---------- ----------
Net cash provided by investing activities 343 377
---------- ----------
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
line-of-credit agreements 8,036 (1,090)
Repayment of debt (7,173) (124,206)
Proceeds from issuance of long-term debt - 115,000
Deferred financing costs incurred (11) (4,011)
Other 286 294
---------- ----------
Net cash provided by (used in) financing activities 1,138 (14,013)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (91) 298
---------- ----------
Net cash (used in) provided by continuing operations (1,432) 11,227
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 214 -
---------- ----------
Net change in cash and cash equivalents (1,218) 11,227
Cash and cash equivalents at beginning of period 11,101 1,943
---------- ----------
Cash and cash equivalents at end of period $ 9,883 $ 13,170
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
COLUMBUS MCKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS)
Net income $ 2,594 $ 1,500 $ 5,956 $ 1,999
---------- ---------- ---------- ----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 945 606 938 3,716
Unrealized gain on derivatives
qualifying as hedges - - - 191
Unrealized (loss) gain on investments:
Unrealized holding (losses) gains arising
during the period (294) 158 (391) 1,435
Reclassification adjustment for
(gains) losses included in net income (7) (323) 9 (109)
---------- ---------- ---------- ----------
(301) (165) (382) 1,326
---------- ---------- ---------- ----------
Total other comprehensive income 644 441 556 5,233
---------- ---------- ---------- ----------
Comprehensive income $ 3,238 $ 1,941 $ 6,512 $ 7,232
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
COLUMBUS MCKINNON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
OCTOBER 3, 2004
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting
principles for interim financial information. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the financial position of Columbus
McKinnon Corporation (the Company) at October 3, 2004, and the results of
its operations and its cash flows for the three and six-month periods ended
October 3, 2004 and September 28, 2003, have been included. Results for the
period ended October 3, 2004 are not necessarily indicative of the results
that may be expected for the year ended March 31, 2005. The balance sheet
at March 31, 2004 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, 2004.
The Company is a leading U.S. designer and manufacturer 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. 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:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
2004 2003 2004 2003
-------------------------------------------------------
Net income, as reported..................... $ 2,594 $ 1,500 $ 5,956 $ 1,999
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (183) (121) (369) (262)
-------------------------------------------------------
Net income, pro forma..................... $ 2,411 $ 1,379 $ 5,587 $ 1,737
=======================================================
Basic and diluted income per share:
As reported............................... $ 0.18 $ 0.10 $ 0.41 $ 0.14
=======================================================
Pro forma................................. $ 0.16 $ 0.09 $ 0.38 $ 0.12
=======================================================
- 6 -
3. Inventories consisted of the following:
OCTOBER 3, MARCH 31,
2004 2004
---------- -----------
At cost - FIFO basis:
Raw materials......................... $ 38,268 $ 34,657
Work-in-process....................... 12,090 10,169
Finished goods........................ 32,884 31,205
---------- -----------
83,242 76,031
LIFO cost less than FIFO cost............ (8,392) (6,912)
---------- -----------
Net inventories ....................... $ 74,850 $ 69,119
========== ===========
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. During the first six-months of fiscal 2005, the Company recorded
restructuring costs of $217 related mostly to 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." All of these costs are
related to the Products segment. The liability as of October 3, 2004
consists of severance payments and 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.
The following table provides a reconciliation of the activity related to
restructuring reserves:
EMPLOYEE FACILITY TOTAL
-----------------------------------------
Reserve at March 31, 2004 $ 161 $ 400 $ 561
Fiscal 2005 first quarter restructuring charges......... - 33 33
Cash payments........................................... (143) (81) (224)
-----------------------------------------
Reserve at July 4, 2004................................. $ 18 $ 352 $ 370
Fiscal 2005 second quarter restructuring charges........ 14 170 184
Cash payments........................................... (16) (177) (193)
-----------------------------------------
Reserve at October 3, 2004.............................. $ 16 $ 345 $ 361
=========================================
5. The following table sets forth the components of net periodic pension cost
for the Company's defined benefit pension plans:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------- -----------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
2004 2003 2004 2003
---- ---- ---- ----
Service costs.................... $ 1,190 $ 980 $ 2,380 $ 1,960
Interest cost.................... 1,755 1,678 3,510 3,356
Expected return on plan assets... (1,645) (1,351) (3,290) (2,702)
Net amortization................. 495 494 990 988
----------- ----------- ----------- -----------
Net periodic pension cost........ $ 1,795 $ 1,801 $ 3,590 $ 3,602
=========== =========== =========== ===========
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, 2004.
- 7 -
The following table sets forth the components of net periodic
postretirement benefit cost for the Company's defined benefit
postretirement plans:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
2004 2003 2004 2003
---- ---- ---- ----
Service costs...................... $ 4 $ 3 $ 8 $ 6
Interest cost ..................... 200 217 434 434
Amortization of prior service cost. - (38) - (76)
Amortization of plan net losses.... 105 161 251 322
----------- ----------- ----------- -----------
Net periodic pension cost.......... $ 309 $ 343 $ 693 $ 686
=========== =========== =========== ===========
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, 2004.
6. Income tax expense as a percentage of income from continuing operations
before income tax expense was 29.2%, 46.2%, 22.9%, and 42.5% in the fiscal
2005 and 2004 quarters and the six-month periods then ended, respectively.
The fiscal 2005 percentages vary from the U.S. statutory rate due to the
benefit from 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 fiscal 2004 percentages vary from the U.S.
statutory rate due to jurisdictional mix and the existence of losses at
certain subsidiaries for which no benefit was recorded.
7. The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
2004 2003 2004 2003
---- ---- ---- ----
Numerator for basic and diluted earnings per share:
Net income (loss) $ 2,594 $ 1,500 $ 5,956 $ 1,999
========= ========= ========= =========
Denominators:
Weighted-average common stock outstanding -
denominator for basic EPS 14,585 14,549 14,581 14,544
Effect of dilutive employee stock options 215 - 117 -
--------- --------- --------- ---------
Adjusted weighted-average common stock
outstanding and assumed conversions -
denominator for diluted EPS 14,800 14,549 14,698 14,544
========= ========= ========= =========
- 8 -
8. 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
prior to the effects of restructuring charges and amortization because
management believes this to be the most appropriate measure of operating
performance.
Segment information as of and for the six months ended October 3, 2004 and
September 28, 2003, is as follows:
SIX MONTHS ENDED OCTOBER 3, 2004
--------------------------------
PRODUCTS SOLUTIONS TOTAL
----------- ----------- -----------
Sales to external customers...................... $ 217,538 $ 26,831 $ 244,369
Operating income before restructuring
charges and amortization...................... 20,604 818 21,422
Depreciation and amortization.................... 4,176 476 4,652
Total assets..................................... 442,152 29,967 472,119
SIX MONTHS ENDED SEPTEMBER 28, 2003
-----------------------------------
PRODUCTS SOLUTIONS TOTAL
----------- ----------- -----------
Sales to external customers...................... $ 186,528 $ 26,631 $ 213,159
Operating income before restructuring
charges and amortization...................... 16,199 (171) 16,028
Depreciation and amortization.................... 4,799 576 5,375
Total assets..................................... 456,729 32,501 489,230
The following schedule provides a reconciliation of operating income before
restructuring charges and amortization with income from continuing
operations before income tax expense:
SIX MONTHS ENDED
----------------
OCTOBER 3, SEPTEMBER 28,
2004 2003
---- ----
Operating income before restructuring
charges and amortization........................................ $ 21,422 $ 16,028
Restructuring charges.............................................. (217) (1,375)
Amortization of intangibles........................................ (153) (220)
Interest and debt expense.......................................... (14,189) (15,402)
Other (expense) and income, net.................................... 589 4,447
----------- -----------
Income before income tax expense................................... $ 7,452 $ 3,478
=========== ===========
- 9 -
9. 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 1/2% Senior Subordinated Notes, and the
nonguarantors. The guarantors are wholly owned and the guarantees are full,
unconditional, joint and several.
Parent Guarantors Nonguarantors Eliminations Consolidated
-------------------------------------------------------------------
AS OF OCTOBER 3, 2004
Current assets:
Cash and cash equivalents $ 3,254 $ (953) $ 7,582 $ - $ 9,883
Trade accounts receivable and unbilled revenues 55,203 (150) 36,888 - 91,941
Inventories 33,859 19,217 22,746 (972) 74,850
Net assets held for sale 1,800 690 - - 2,490
Other current assets 8,654 625 4,877 - 14,156
-------------------------------------------------------------------
Total current assets 102,770 19,429 72,093 (972) 193,320
Property, plant, and equipment, net 24,782 13,366 18,299 - 56,447
Goodwill and other intangibles, net 95,414 57,324 39,617 - 192,355
Intercompany 105,874 (109,346) (68,750) 72,222 -
Other assets 49,412 198,751 22,029 (240,195) 29,997
-------------------------------------------------------------------
Total assets $ 378,252 $ 179,524 $ 83,288 $ (168,945) $ 472,119
===================================================================
Current liabilities $ 46,851 $ 13,937 $ 31,137 $ (2,693) $ 89,232
Long-term debt, less current portion 277,873 - 754 - 278,627
Other non-current liabilities 2,334 10,522 21,766 - 34,622
-------------------------------------------------------------------
Total liabilities 327,058 24,459 53,657 (2,693) 402,481
Shareholders' equity 51,194 155,065 29,631 (166,252) 69,638
-------------------------------------------------------------------
Total liabilities and shareholders' equity $ 378,252 $ 179,524 $ 83,288 $ (168,945) $ 472,119
===================================================================
FOR THE THREE MONTHS ENDED OCTOBER 3, 2004
Net sales $ 119,552 $ 68,243 $ 68,656 $ (12,082) $ 244,369
Cost of products sold 91,845 53,413 49,799 (12,082) 182,975
-------------------------------------------------------------------
Gross profit 27,707 14,830 18,857 - 61,394
-------------------------------------------------------------------
Selling, general and administrative expenses 15,833 10,326 13,813 - 39,972
Restructuring charges 217 - - - 217
Amortization of intangibles 118 1 34 - 153
-------------------------------------------------------------------
16,168 10,327 13,847 - 40,342
-------------------------------------------------------------------
Income from operations 11,539 4,503 5,010 - 21,052
Interest and debt expense 12,174 1,830 185 - 14,189
Other income and (expense), net 726 (237) 100 - 589
-------------------------------------------------------------------
Income before income taxes 91 2,436 4,925 - 7,452
Income tax expense 103 275 1,332 - 1,710
-------------------------------------------------------------------
Income from continuing operations (12) 2,161 3,593 - 5,742
Income from discontinued operations 214 - - - 214
-------------------------------------------------------------------
Net (loss) income $ 202 $ 2,161 $ 3,593 $ - $ 5,956
===================================================================
- 10 -
Parent Guarantors Nonguarantors Eliminations Consolidated
-------------------------------------------------------------------
FOR THE THREE MONTHS ENDED OCTOBER 3, 2004
OPERATING ACTIVITIES:
Net cash provided by (used in) operating
activities $ (72,018) $ 67,369 $ 1,827 $ - $ (2,822)
-------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale of marketable securities, net - - 1,991 - 1,991
Capital expenditures (1,580) (385) 17 - (1,948)
Net assets held for sale - 300 - - 300
-------------------------------------------------------------------
Net cash (used in) provided by investing
activities (1,580) (85) 2,008 - 343
-------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
line-of-credit agreements 8,468 - (432) - 8,036
Repayment of debt (7,052) - (121) - (7,173)
Deferred financing costs incurred (11) - - - (11)
Dividends paid 68,000 (68,000) - - -
Other 286 - - - 286
-------------------------------------------------------------------
Net cash provided by (used in) financing
activities 69,691 (68,000) (553) - 1,138
Effect of exchange rate changes on cash (34) 92 (149) - (91)
-------------------------------------------------------------------
Cash provided by continuing operations (3,941) (624) 3,133 - (1,432)
Cash provided by discontinued operations 214 - - - 214
-------------------------------------------------------------------
Net change in cash and cash equivalents (3,727) (624) 3,133 - (1,218)
Cash and cash equivalents at beginning of period 6,981 (329) 4,449 - 11,101
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,254 $ (953) $ 7,582 $ - $ 9,883
===================================================================
AS OF SEPTEMBER 28, 2003
Current assets:
Cash and cash equivalents $ 3,875 $ (760) $ 10,055 $ - $ 13,170
Trade accounts receivable and unbilled revenues 50,359 83 34,825 - 85,267
Inventories 34,635 18,256 21,468 (972) 73,387
Other current assets 9,853 1,000 5,479 - 16,332
-------------------------------------------------------------------
Total current assets 98,722 18,579 71,827 (972) 188,156
Property, plant, and equipment, net 30,355 14,457 18,827 - 63,639
Goodwill and other intangibles, net 97,226 57,363 39,185 - 193,774
Intercompany 53,173 (66,510) (58,703) 72,040 -
Other assets 59,736 208,064 22,565 (246,704) 43,661
-------------------------------------------------------------------
Total assets $ 339,212 $ 231,953 $ 93,701 $ (175,636) $ 489,230
===================================================================
Current liabilities $ 56,397 $ 10,983 $ 30,106 $ (2,875) $ 94,611
Long-term debt, less current portion 286,850 - 5,862 - 292,712
Other non-current liabilities 7,659 12,441 21,816 - 41,916
-------------------------------------------------------------------
Total liabilities 350,906 23,424 57,784 (2,875) 429,239
Shareholders' equity (11,694) 208,529 35,917 (172,761) 59,991
-------------------------------------------------------------------
Total liabilities and shareholders' equity $ 339,212 $ 231,953 $ 93,701 $ (175,636) $ 489,230
===================================================================
- 11 -
Parent Guarantors Nonguarantors Eliminations Consolidated
-------------------------------------------------------------------
FOR THE SIX MONTHS ENDED SEPTEMBER 28, 2003
Net sales $ 107,631 $ 54,487 $ 60,573 $ (9,532) $ 213,159
Cost of products sold 81,634 44,402 45,690 (9,532) 162,194
-------------------------------------------------------------------
Gross profit 25,997 10,085 14,883 - 50,965
Selling, general and administrative expenses 16,729 6,071 12,137 - 34,937
Restructuring charges 927 - 448 - 1,375
Amortization of intangibles 118 1 101 - 220
-------------------------------------------------------------------
17,774 6,072 12,686 - 36,532
-------------------------------------------------------------------
Income from operations 8,223 4,013 2,197 - 14,433
Interest and debt expense 14,965 (42) 479 - 15,402
Other (income) and expense, net (1,044) (3,287) (116) - (4,447)
-------------------------------------------------------------------
(Loss) income before income tax
(benefit) expense (5,698) 7,342 1,834 - 3,478
Income tax (benefit) expense (2,246) 2,910 815 - 1,479
-------------------------------------------------------------------
Net (loss) income $ (3,452) $ 4,432 $ 1,019 $ - $ 1,999
===================================================================
FOR THE SIX MONTHS ENDED SEPTEMBER 28, 2003
OPERATING ACTIVITIES:
Net cash provided by (used in) operating
activities $ 17,818 $ (3,067) $ 9,814 $ - $ 24,565
-------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of marketable securities, net - - (811) - (811)
Capital expenditures, net (1,810) (224) (60) - (2,094)
Other - 3,282 - - 3,282
-------------------------------------------------------------------
Net cash (used in) provided by investing
activities (1,810) 3,058 (871) - 377
-------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (payments) borrowings under revolving
line-of-credit agreements (9,929) - 8,839 - (1,090)
Repayment of debt (113,468) - (10,738) - (124,206)
Proceeds from issuance of long-term debt 115,000 - - - 115,000
Other (3,717) - - - (3,717)
-------------------------------------------------------------------
Net cash used in financing activities (12,114) - (1,899) - (14,013)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (76) 69 305 - 298
-------------------------------------------------------------------
Net change in cash and cash equivalents 3,818 60 7,349 - 11,227
Cash and cash equivalents at beginning of period 57 (820) 2,706 - 1,943
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,875 $ (760) $ 10,055 $ - $ 13,170
===================================================================
10. Like most industrial manufacturers, the Company is involved in
asbestos-related litigation. In continually evaluating 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.
- 12 -
Our actuaries have estimated our asbestos-related liability to range from
$2,800 to $12,300 through approximately March 31, 2034. The Company's
estimation of its asbestos-related liability that is probable and estimable
through 2013 ranges from $2,800 to $4,000 as of October 3, 2004. 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. The
Company has concluded that no amount within that range is more likely than
any other, and therefore has reflected $3,300,000 as a liability in the
consolidated financial statements in accordance with U.S. generally
accepted accounting principles. The recorded liability does not consider
the impact of any potential favorable federal legislation such as the "FAIR
Act". Of this amount, management expects to incur asbestos liability
payments of approximately $200 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.
- 13 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONSAND FINANCIAL CONDITION
(DOLLAR MOUNTS 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 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. They 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.
Distribution channels include general distributors, specialty distributors,
crane end users, service-after-sale distributors, original equipment
manufacturers (OEMs), government, consumer and international general line
distributors. 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. Sales from that segment 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.
Founded in 1875, we have grown to our current leadership position through
organic growth and also as the result of the 14 businesses we acquired between
February 1994 and April 1999. We developed our leading market position over our
125-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. We continue to further
integrate the operations of the acquired businesses with our previously existing
businesses. The current phase of the ongoing integration of these businesses
includes improving our productivity, further reducing our excess manufacturing
capacity and extending our cross-selling activities to the European marketplace.
This phase is in process through our Lean Manufacturing efforts, facility
rationalization program and European sales initiatives. Our Lean Manufacturing
efforts are fundamentally changing our manufacturing processes to be more
responsive to customer demand, resulting in significant inventory reductions and
improving on-time delivery and productivity. For example, we realized nearly 15%
inventory turn improvement to 5.0 times at October 3, 2004 from 4.4 times at
September 28, 2003. Over the past three years, under our facility
rationalization program, we closed 13 facilities and consolidated several
product lines, with potential opportunity for further rationalization. Also, as
previously reported, we have been undergoing assessments for possible
divestiture of several less-strategic businesses, including most of our
Solutions segment and certain businesses within our Products segment. Two
businesses were sold in fiscal 2004 and three others remain as possible
divestiture candidates. Furthermore, we are selling surplus real estate that
resulted from our facility rationalization projects. These divestitures may
result in gains or losses. To further expand our global sales, we continue to
introduce certain of our products through our existing European distribution
network that historically have been distributed only in North America.
Following several years of negative economic conditions we saw some definitive
economic improvement in the first six months of fiscal 2005. Net sales rebounded
in the first half of fiscal 2005, reflecting a 14.6% increase over the
comparable fiscal 2004 period. While this trend is encouraging, we continue to
be cautiously optimistic that the economic environment, as it impacts our
Company, is recovering. We monitor such indicators as U.S. Industrial Capacity
Utilization and Industrial Production which have been increasing since July
2003. Further, we continue to monitor the potential impact of negative global
and domestic trends, including continued steel price increases, rising interest
rates and uncertainty in end-user markets around the globe. In addition, to
enhance future revenue opportunities, we are increasing our sales and marketing
efforts in international markets and investing in the development of new
products and services.
Consistent with most companies, we have been challenged over the past several
years with significantly increased costs for fringe benefits such as health
insurance, workers compensation insurance and pension. Combined, those benefits
cost us almost $30,000 in fiscal 2004 and we work diligently to balance cost
- 14 -
control with the need to provide competitive benefits packages for our
associates. Another cost area of focus is steel pricing and availability. We
utilize approximately $36,000-$38,000 of steel annually in a variety of forms
including rod, wire, bar, structural and others. With increases in worldwide
demand for steel and significant increases in scrap steel prices, we experienced
increases in our costs that we have reflected as price increases and surcharges
to our customers. Our surcharges for certain products went into effect beginning
March 18, 2004 and currently affect most of our chain and forged attachment
products. We continue to monitor steel costs and potential surcharge
requirements on a monthly basis. Another challenging cost area results from
Sarbanes-Oxley internal control documentation and testing compliance. We are
well underway with this initiative and work to control our added internal costs
as well as those of third parties assisting with our efforts and the audit
costs. On the whole, we are encouraged, remaining cautiously optimistic for the
future.
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED OCTOBER 3, 2004 AND SEPTEMBER 28, 2003
Net sales in the fiscal 2005-quarter ended October 3, 2004 were $122,711, up
$16,127 or 15.1% from the fiscal 2004 quarter ended September 28, 2003. Net
sales for the six months ended October 3, 2004 were $244,369, an increase of
$31,210 or 14.6% from the six months ended September 28, 2003. Sales in the
Products segment increased by $14,410 or 15.2% from the previous year's quarter
and $31,010 or 16.6% from the previous year's six-month period then ended. The
increase is due primarily to the recovery of US industrial markets, as well as
the impact of price increases and surcharges due to steel price increases.
Translation of foreign currencies, particularly the Euro and Canadian dollar,
into U.S. dollars contributed $1,500 and $2,700 toward the Products segment
increase in sales for the quarter and six-month period ended October 3, 2004.
Sales in the Solutions segment increased 14.3% or $1,717 for the quarter and
0.8% or $200 for the six months ended October 3, 2004 when compared to the same
periods in the prior year. The increase in this segment for the quarter is
primarily due to improvement in our European conveyor business. The relative
flatness in this segment for the six-month period ended October 3, 2004 is the
result of improvement in our European conveyor business offset by the
divestiture of a subsidiary ($3,028) in February of 2004. Translation of foreign
currencies into U.S. dollars contributed $700 and $1,200 toward the Products
segment increase in sales for the quarter and six-month period ended October 3,
2004. Sales in the segments are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCT. 3, SEP. 28, CHANGE OCT. 3, SEP. 28, CHANGE
2004 2003 AMOUNT % 2004 2003 AMOUNT %
---- ---- ------ ----- ---- ---- ------ -----
Products $ 108,981 $ 94,571 $ 14,410 15.2 $ 217,538 $ 186,528 $ 31,010 16.6
Solutions 13,730 12,013 1,717 14.3 26,831 26,631 200 0.8
--------- --------- -------- ---------- --------- --------
Net sales $ 122,711 $ 106,584 $ 16,127 15.1 $ 244,369 $ 213,159 $ 31,210 14.6
========= ========= ======== ========== ========= ========
Gross profits and gross profit margins by operating segment are summarized as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
OCT. 3, 2004 SEP. 28, 2003 OCT. 3, 2004 SEP. 28, 2003
------------ ------------- ------------ -------------
$ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- -----
Products $ 27,805 25.5 $ 23,654 25.0 $ 57,050 26.2 $ 47,373 25.4
Solutions 2,138 15.6 1,413 11.8 4,344 16.2 3,592 13.5
--------- --------- --------- ---------
Total Gross Profit $ 29,943 24.4 $ 25,067 23.5 $ 61,394 25.1 $ 50,965 23.9
========= ========= ========= =========
The increase in the gross profit margin for the Products segment is the result
of realization of operational leverage at increased sales volumes and previous
cost containment activities. The improvement in the Solutions segment gross
profit margin was the result of the divestiture of a poor performing,
non-strategic subsidiary in February 2004 as well as improved operating
performance in the remaining businesses.
- 15 -
Selling expenses were $12,270, $11,536, $24,970, and $23,458 in the fiscal 2005
and 2004 quarters and the six-month periods then ended, respectively. The
changes in expense dollars were impacted by increased variable costs, mainly
commissions as a result of improved sales volume as well as translation from
changes in foreign exchange rates ($300 and $600 for the quarter and six-month
period ended October 3, 2004, respectively). As a percentage of consolidated net
sales, selling expenses were 10.0%, 10.8%, 10.2%, and 11.0% in the fiscal 2005
and 2004 quarters and the six-month periods then ended, respectively.
General and administrative expenses were $7,517, $5,712, $15,002, and $11,479 in
the fiscal 2005 and 2004 quarters and the six-month periods then ended,
respectively. The quarterly increase is primarily the result of variable
compensation expense ($500), increased professional costs associated with
regulatory compliance with the Sarbanes-Oxley Act and environmental matters
($800), increased research and development costs related to new product
development ($200) and currency translation impact ($200). The fiscal 2005
six-month data is higher than the prior year due to increased variable
compensation expense ($1,200), increased professional costs associated with
regulatory compliance with the Sarbanes-Oxley Act and environmental matters
($1,100), increased research and development costs related to new product
development ($300) and currency translation impact ($300). As a percentage of
consolidated net sales, general and administrative expenses were 6.1%, 5.4%,
6.1% and 5.4% in the fiscal 2005 and 2004 quarters and the six-month periods
then ended, respectively.
During the first six-months of fiscal 2005, the Company recorded restructuring
costs of $217 related mostly to 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." All of these costs are related to the Products segment. We
anticipate that our total restructuring charges for fiscal 2005 in connection
with our ongoing facility rationalization and reorganization initiatives will be
between $400 and $700. The majority of these costs relate to projects initiated
subsequent to the adoption of SFAS No. 146 and are therefore expensed as
incurred. The Company recorded restructuring charges of $1,375 in the first half
of fiscal 2004 related to this Corporate-wide reorganization plan for various
employee termination benefits. There were $1,005 of costs related to the
Products segment and $370 in the Solutions Segment.
Amortization of intangibles was $76, $78, $153, and $220 in the fiscal 2005 and
2004 quarters and six-month periods, respectively.
Interest and debt expense was $7,141, $5,730, $14,189, and $15,402 in the fiscal
2005 and 2004 quarters and the six-month periods then ended, respectively. The
fluctuations in interest expense are significantly impacted by changes in the
various credit facilities in place during the periods, described as follows. The
Company had a $70,000 Senior Second Secured Term Loan facility in place from
November 22, 2002 through July 22, 2003 with an effective interest rate of
approximately 13.8%. The Company secured $115,000 Senior Secured notes on July
22, 2003 with an interest rate of 10.0%, the proceeds from which were used to
retire the $70,000 Term Loan Facility. Effective August 4, 2003, the Company
entered into an interest rate swap agreement to convert $93.5 million of
fixed-rate debt (10%) to variable-rate debt (LIBOR plus 578.2 basis points)
through August 2008. The fiscal 2005 quarterly increase is the result of the
reversal of previously accrued deferred interest expense ($1,100) under the $70
million Senior Second Secured Term Loan facility and the favorable impact of the
swap ($300) in the second quarter of fiscal 2004. The decrease in the six-month
period ended October 3, 2004 is the result of the lower debt levels and a lower
effective interest rate. For the fiscal 2004 period, the reversal of previously
accrued deferred interest expense ($1,100 million) under the $70 million Senior
Second Secured Term Loan facility and the favorable impact of the swap ($300)
was offset by an amendment fee ($1,200). As a percentage of consolidated net
sales, interest and debt expense was 5.8%, 5.4%, 5.8%, and 7.2% in the fiscal
2005 and 2004 quarters and the six-month periods then ended, respectively.
Other (income) and expense, net was ($607), ($1,353), ($589), and ($4,447) in
the fiscal 2005 and 2004 quarters and the six-month periods then ended,
respectively. The current quarter and six-month period income consists primarily
of interest income on a note from the sale of a discontinued operation. The 2004
quarter consisted primarily of a $5,600 gain from the early extinguishment of
debt offset by the $4,900 deferred financing cost write-off associated with the
- 16 -
extinguished debt and $600 of realized gains on investments within the Company's
captive insurance company portfolio. For the six-month period ended September
28, 2003, other income consists primarily of a $3,282 gain on the sale of real
estate, the net $700 gain from the early extinguishment of debt described above,
and $400 of income from investments within the Company's captive insurance
company.
Income tax expense as a percentage of income from continuing operations before
income tax expense was 29.2%, 46.2%, 22.9%, and 42.5% in the fiscal 2005 and
2004 quarters and the six-month periods then ended, respectively. The fiscal
2005 percentages vary from the U.S. statutory rate due to the benefit from 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 fiscal
2004 percentages vary from the U.S. statutory rate due to jurisdictional mix and
the existence of losses at certain subsidiaries for which no benefit was
recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Company's Revolving Credit Facility provides availability up to a maximum of
$50,000 through March 31, 2007. Underlying collateral at October 3, 2004
amounted to $50,532. The unused portion totaled $30,531, net of outstanding
borrowings of $8,456 and outstanding letters of credit of $11,013. Interest is
payable at varying Eurodollar rates based on LIBOR or prime plus spreads
determined by the Company's leverage ratio, amounting to 250 or 125 basis points
applied to each, respectively, at October 3, 2004 (6.00%). 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.
At October 3, 2004, the Company has a Term Loan with a balance of $6,321, which
requires quarterly payments of $500. Interest is payable at varying Eurodollar
rates based on LIBOR plus a spread determined by the Company's leverage ratio
amounting to 300 basis points at October 3, 2004 (4.76%). The Term Loan is
secured by all domestic inventory, receivables, equipment, real property,
subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual
property.
The senior subordinated 8 1/2% Notes issued on March 31, 1998 amounted to
$158,552, net of original issue discount and are due March 31, 2008. Provisions
of the 8 1/2% Senior Subordinated Notes (8 1/2% Notes) include, without
limitation, restrictions on liens, indebtedness, asset sales, and dividends and
other restricted payments. The 8 1/2% 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 1/2% Notes agreement) to 100% on and after April 1,
2006. In the event of a Change of Control (as defined in the indenture for such
notes), each holder of the 8 1/2% Notes may require the Company to repurchase
all or a portion of such holder's 8 1/2% Notes at a purchase price equal to 101%
of the principal amount thereof. The 8 1/2% Notes are guaranteed by certain
existing and future domestic subsidiaries and are not subject to any sinking
fund requirements.
The senior secured 10% Notes issued on July 22, 2003 amounted to $115,000 and
are due August 1, 2010. Provisions of the 10% Notes include, without limitation,
restrictions on indebtedness, restricted payments, asset and subsidiary stock
sales, liens, and other restricted transactions. The 10% Notes are not entitled
to redemption at the option of the Company, prior to August 1, 2007 in the
absence of an equity offering. The Company may redeem up to 35% of the
outstanding notes at a redemption price of 110.0% with the proceeds of equity
offerings, subject to certain restrictions. On and after August 1, 2007, they
are redeemable at prices declining annually to 100% on and after August 1, 2009.
In the event of a Change of Control (as defined in the indenture for such
notes), each holder of the 10% Notes may require the Company 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.
- 17 -
The corresponding credit agreements associated with the Revolving Credit
Facility and the Term Loan place certain debt covenant restrictions on the
Company including certain financial requirements and a restriction on dividend
payments.
From time to time, the Company manages its debt portfolio by using interest rate
swaps to achieve an overall desired position of fixed and floating rates. The
Company entered into an interest rate swap agreement, which matured in June
2003. The cash flow hedge was considered effective and the gain or loss on the
change in fair value was reported in other comprehensive loss, net of tax and
amounted to a gain of $191 for the fiscal 2004 six-month period.
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, possible divestiture of excess facilities and certain
non-strategic operations, and improving working capital components, and new
market and new product development.
Net cash used in operating activities was $2,822 for the six months ended
October 3, 2004 compared to net cash provided by operating activities of $24,565
for the six months ended September 28, 2003. The $27,387 decrease is due to
changes in net working capital components, primarily increased accounts
receivable, increased inventories, and decreased accrued liabilities (including
a fiscal 2004 $10,600 tax refund), offset by increased income from continuing
operations of $3,743 in fiscal 2005 and the fiscal 2004 $3,282 gain from the
sale of real estate.
Net cash provided by investing activities was $343 for the six months ended
October 3, 2004 compared to $377 for the six months ended September 28, 2003. In
2005, the Company sold $1,991 of marketable equity securities to fund product
liability payments compared to the purchase of $811 of marketable equity
securities in fiscal 2004. The Company received $300 in proceeds from assets
held for sale in fiscal 2005 compared to $3,282 in fiscal 2004. Capital
expenditures were consistent at approximately $2,000 for both periods.
Net cash provided by financing activities was $1,138 for the six months ended
October 3, 2004 compared to net cash used in financing activities of $14,013 for
the six months ended September 28, 2003. The $15,151 change is primarily the
result of repayment of debt from the receipt of the $10,600 tax refund in the
first quarter of fiscal 2004 and the impact of working capital changes between
the two periods, offset by the increase in net income for the current period.
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 support new product development, reduce production costs,
increase flexibility to respond effectively to market fluctuations and changes,
meet environmental requirements, enhance safety, and promote ergonomically
correct work stations. Consolidated capital expenditures for the six months
ended October 3, 2004 and September 28, 2003 were $1,948 and $2,094,
respectively.
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 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, in the fourth
quarter of fiscal 2004, we were impacted by high inflation in steel costs which
varied by type of steel. We continue to monitor steel costs and potential
surcharge requirements on a monthly basis. In addition, employee benefit costs
such as health insurance, workers compensation insurance, pensions as well as
energy and business insurance have exceeded general inflation levels. We
generally incorporated those cost increases into our sales price increases
- 18 -
effective in early fiscal 2005 as well as surcharges on certain products that
began in March 2004. In the future, we may be further affected by inflation that
we may not be able to pass on as price increases.
SEASONALITY AND QUARTERLY RESULTS
Quarterly results may be materially affected by the timing of large customer
orders, periods of high vacation and holiday concentrations, restructuring
charges and other costs attributable to our facility rationalization program,
divestitures, acquisitions and the magnitude of rationalization integration
costs. Therefore, the operating results for any particular fiscal quarter are
not necessarily indicative of results for any subsequent fiscal quarter or for
the full fiscal year.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
On October 13, 2004, the Financial Accounting Standards Board (FASB) concluded
that Statement 123R, SHARE-BASED PAYMENT, which would require all companies to
measure compensation cost for all share-based payments (including employee stock
options) at fair value, would be effective for public companies for interim or
annual periods beginning after June 15, 2005. While the statement has not been
finalized, its current form will require the Company to expense the fair value
of stock option grants rather than disclose the impact on its consolidated net
income within the footnotes, as is our current practice.
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 the actual
results of the Company to differ materially from the results expressed or
implied by such statements, including general economic and business conditions,
conditions affecting the industries served by the Company and its subsidiaries,
conditions affecting the Company's customers and suppliers, competitor responses
to the Company's products and services, the overall market acceptance of such
products and services, the integration of acquisitions and other factors
disclosed in the Company's periodic reports filed with the Commission.
Consequently such forward-looking statements should be regarded as the Company's
current plans, estimates and beliefs. The Company does 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.
New requirements adopted by the Securities and Exchange Commission in response
to the passage of the Sarbanes-Oxley Act of 2002 will require an annual review
and evaluation of our internal control systems and attestation of these systems
by our independent auditors. We are currently reviewing our internal control
procedures and considering further documentation of such procedures that may be
necessary. While we currently believe we have identified and committed the
appropriate resources and developed an achievable plan of execution to meet all
of the new requirements in a timely manner, there is risk inherent in the
significant number of tasks to be completed over the balance of our fiscal year.
Any improvements in our internal control systems or in documentation of such
control systems could be costly to prepare or implement, divert attention of
management or finance staff, and may cause our operating expenses to increase
over the ensuing year.
- 19 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the reported market risks since the end
of Fiscal 2004.
Item 4. Disclosure Controls and Procedures
As of October 3, 2004, 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 October 3, 2004. There were no
significant changes in the Company's internal controls or in other factors
during our second quarter ended October 3, 2004.
- 20 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - none.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - none.
Item 3. Defaults upon Senior Securities - none.
Item 4. Submission of Matters to a Vote of Security Holders
On August 16, 2004, the Annual Meeting of Shareholders was held and
the following directors were elected:
12,850,233 votes cast for: Herbert P. Ladds, Jr.;
12,760,442 votes cast for: Timothy T. Tevens;
12,759,843 votes cast for: Carlos Pasqual;
12,759,643 votes cast for: Richard H. Fleming;
12,757,418 votes cast for: Ernest R. Verebelyi;
12,758,768 votes cast for: Wallace W. Creek.
Item 5. Other Information - none.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1 Columbus McKinnon Corporation Management Variable
Compensation Plan.
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-
OxleyAct of 2002.
(b) Reports on Form 8-K:
On October 21, 2004, the Company filed a Current Report on Form 8-K
with respect to its appointment of two new directors.
On October 26, 2004, the Company filed a Current Report on Form 8-K
with respect to its financial results for the second quarter of
fiscal 2005.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLUMBUS MCKINNON CORPORATION
(Registrant)
Date: NOVEMBER 3, 2004 /S/ ROBERT R. FRIEDL
---------------- ----------------------------------------
Robert R. Friedl
Vice President and Chief Financial
Officer (Principal Financial Officer)
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