Columbus McKinnon Corp: Form 10-Q for the period ended Dec 31, 2023

Executive Overview

The Company is a leading worldwide designer, manufacturer and marketer of intelligent motion solutions, including motion control products, technologies, automated systems and services, that efficiently and ergonomically move, lift, position and secure materials. Our key products include hoists, crane components, precision conveyors, actuators, rigging tools, light rail workstations, and digital power and motion control systems. These are highly relevant, professional-grade solutions that solve customers’ critical material handling requirements.

Founded in 1875, we have grown to our current size and leadership position through organic growth and acquisitions. We developed our leading market position over our 149-year history by emphasizing technological innovation, manufacturing excellence and superior customer service. In accordance with our strategic framework, we are building out our business system (CMBS) and growth framework to be market-led, customer-centric, and operationally excellent with our people and values at the core. We believe this will transform Columbus McKinnon into a top-tier Intelligent Motion Solutions company. We expect our strategy will enhance shareholder value by expanding EBITDA margins and return on invested capital ("ROIC").

Our revenue base is geographically diverse with approximately 44% derived from customers outside the U.S. for the nine months ended December 31, 2023. We believe this diversity balances the impact of changes that occur in local economies, as well as benefits the Company by providing access to growing emerging markets. We monitor both U.S. and Eurozone Industrial Capacity Utilization statistics as well as the ISM Production Index as indicators of anticipated demand for our products. In addition, we continue to monitor the potential impact of other global and U.S. trends including, industrial production, trade tariffs, raw material cost inflation, interest rates, foreign currency exchange rates, and activity of end-user markets around the globe.

From a strategic perspective, we are investing in new products as we focus on our greatest opportunities for growth. We maintain a strong North American market share with significant leading market positions in hoists, lifting and sling chain, forged attachments, actuators, precision conveyors and digital power and motion control systems for the material handling industry. We seek to maintain and enhance our market share by focusing our sales and marketing activities toward select North American and global market sectors including general industrial, energy, automotive, heavy OEM, entertainment, construction and infrastructure, life sciences food and beverage, e-commerce and consumer products.

On May 31, 2023, the Company completed its acquisition of montratec GmbH ("montratec"), a leading automation solutions company that designs and develops intelligent automation and transport systems for interlinking industrial production and logistics processes. montratec product offerings complement both Dorner and Garvey, and further the Company's shift to intelligent motion and serve as a platform to expand capabilities in advanced, higher technology automation solutions.

Regardless of the economic climate and point in the economic cycle, we constantly explore ways to increase operating margins as well as further improve our productivity and competitiveness. We have specific initiatives to reduce lead-times, improve on-time deliveries, reduce warranty costs, and improve material and factory productivity. The initiatives are being driven by the implementation of our business operating system, CMBS. We are working to achieve these strategic initiatives through business simplification, operational excellence, and profitable growth initiatives. We believe these initiatives will enhance future operating margins.

Our principal raw materials and components purchases were approximately $365 million in fiscal 2023 (or 61% of Cost of product sold) and include steel, consisting of rod, wire, bar, structural, and other forms of steel; electric motors; bearings; gear reducers; castings; steel and aluminum enclosures and wire harnesses; electro-mechanical components; and standard variable drives and controls. These commodities are all available from multiple sources. We purchase most of these raw materials and components from a limited number of strategic and preferred suppliers under agreements which are negotiated on a company-wide basis through our global purchasing group. Currently, we are seeing global inflation moderate and availability improve for select raw materials and components.

We operate in a highly competitive and global business environment. We see a variety of opportunities in our markets and geographies, including trends toward automation and increasing labor productivity and the expansion of market opportunities in Asia and other emerging markets. While we execute our long-term growth strategy, we are supported by our strong free cash flow as well as our liquidity position and flexible debt structure.

Results of Operations

Three months ended December 31, 2023 and December 31, 2022

Net sales in the three months ended December 31, 2023 were $254,143,000, up $23,773,000 or 10.3% from the three months ended December 31, 2022 net sales of $230,370,000. Net sales were positively impacted by $15,535,000 of revenue from the montratec acquisition, $6,477,000 due to price increases, offset by 2,403,000 of unfavorable sales volume. Foreign currency translation favorably impacted sales by $4,164,000 for the three months ended December 31, 2023.

Gross profit in the three months ended December 31, 2023 was $93,897,000, an increase of $11,853,000 or 14.4% from the three months ended December 31, 2022 gross profit of $82,044,000. Gross profit margin was 36.9% in the fiscal 2024 third quarter compared to 35.6% in the fiscal 2023 third quarter. The increase in gross profit was due to $6,736,000 as a result of the acquisition of montratec, $4,562,000 of price increases net of manufacturing costs changes including inflation and $904,000 of favorable product liability reserve adjustments. These increases were offset by unfavorable sales volume mix of $1,179,000 and $585,000 of current year business realignment costs. The translation of foreign currencies had a $1,415,000 favorable impact on gross profit in the three months ended December 31, 2023.

Selling expenses were $26,552,000 and $25,424,000, or 10.4% and 11.0% of net sales, in the fiscal 2024 and 2023 third quarters, respectively. Selling expense increased by $2,131,000 due to the montratec acquisition offset by $989,000 due to lower net business realignment costs during the three months ended December 31, 2023. Foreign currency translation had a $450,000 unfavorable impact on selling expenses in the three months ended December 31, 2023.

General and administrative expenses were $26,255,000 and $25,143,000, or 10.3% and 10.9% of net sales, in the fiscal 2024 and 2023 third quarters, respectively. General and administrative expenses increased by $1,137,000 from the montratec acquisition, $930,000 of net business realignment costs, $195,000 of net headquarters relocation costs offset by $1,230,000 final adjustment in the prior year for the Garvey acquisition contingent consideration, and $225,000 of lower net acquisition and deal costs. Foreign currency translation had a $285,000 unfavorable impact on general and administrative expenses in the three months ended December 31, 2023.

Research and development expenses were $6,692,000 and $4,839,000, or 2.6% and 2.1% of net sales, in the fiscal 2024 and 2023 third quarters, respectively. The increase in research and development expenses was due to additional spending to achieve strategic goals related to new product development.

Amortization of intangibles was $7,486,000 and $6,459,000 in the fiscal 2024 and 2023 third quarters, respectively, with the increase related to new intangible assets recorded from the montratec acquisition.

Interest and debt expense was $9,952,000 in the third quarter ended December 31, 2023 compared to $7,303,000 in the third quarter ended December 31, 2022. The increase is related to higher variable interest rates, as well as increased borrowings to finance the montratec acquisition.

Investment income of $758,000 in the third quarter ended December 31, 2023 compared to $574,000 in the third quarter ended December 31, 2022 is related to mark-to-market adjustments on the marketable securities held in the Company’s wholly owned captive insurance subsidiary and the Company's equity method investment in EMC, described in Note 6 of the financial statements.

Foreign currency exchange gains were $1,155,000 and $3,359,000 in the fiscal 2024 and 2023 third quarters, respectively. This favorable change was primarily due to the strengthening of the Euro in comparison to the U.S. Dollar during the quarter.

Other expense was $5,234,000 in the third quarter ended December 31, 2023 compared to $79,000 in the third quarter ended December 31, 2022. As described in Note 10, the Company recorded a settlement charge in the amount of $4,599,000 associated with the process to terminate one of the Company's U.S. pension plans.

Income tax expense as a percentage of income from continuing operations before income tax expense was 29% and 28% in the third quarters ended December 31, 2023 and December 31, 2022, respectively. Typically, these percentages vary from the U.S. statutory rate of 21% primarily due to varying statutory tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of income for these subsidiaries.

Nine Months Ended December 31, 2023 and December 31, 2022

Net sales in the nine months ended December 31, 2023 were $748,036,000, up $65,639,000 or 9.6% from the nine months ended December 31, 2022 net sales of $682,397,000. Net sales were positively impacted by $28,092,000 due to price increases and $27,728,000 of revenue from the montratec acquisition offset by $240,000 of unfavorable sales volume. Foreign currency translation favorably impacted sales by $10,059,000 for the nine months ended December 31, 2023.

Gross profit in the nine months ended December 31, 2023 was $280,523,000, an increase of $29,642,000 or 11.8% from the nine months ended December 31, 2022 gross profit of $250,881,000. Gross profit margin was 37.5% in the nine months ended December 31, 2023 compared to 36.8% in the nine months ended December 31, 2022. The increase in gross profit was due to $15,777,000 of price increases net of manufacturing costs changes including inflation, $13,028,000 as a result of the acquisition of montratec and a $904,000 favorable product liability reserve adjustments. These gross profit increases were offset by $2,714,000 of unfavorable sales mix and $781,000 in current year business realignment costs. The translation of foreign currencies had a $3,428,000 favorable impact on gross profit in the nine months ended December 31, 2023.

Selling expenses were $78,400,000 and $77,197,000, or 10.5% and 11.3% of net sales, in the nine months ended December 31, 2023 and December 31, 2022, respectively. Selling expense increased by $4,597,000 due to the montratec acquisition offset by $2,970,000 due to lower net business realignment costs and $1,461,000 of lower employee related costs during the nine months ended December 31, 2023. Foreign currency translation had a $933,000 unfavorable impact on selling expenses in the nine months ended December 31, 2023.

General and administrative expenses were $79,407,000 and $68,441,000, or 10.6% and 10.0% of net sales, in the nine months ended December 31, 2023 and December 31, 2022, respectively. General and administrative expenses increased by $2,765,000 of net acquisition deal related costs, $2,607,000 from the montratec acquisition, $1,852,000 of higher stock compensation costs, $1,569,000 of net headquarters relocation costs, and $283,000 of net business realignment costs. The remaining increase of $2,482,000 is largely due to higher incentive compensation costs, lease costs and medical costs. These increases were offset by a $1,230,000 final adjustment in the prior year for the Garvey acquisition contingent consideration. Foreign currency translation had a $637,000 unfavorable impact on general and administrative expenses in the nine months ended December 31, 2023.

Research and development expenses were $19,134,000 and $15,429,000, or 2.6% and 2.3% of net sales, in the nine months ended December 31, 2023 and December 31, 2022, respectively. The increase in research and development expenses was due to additional spending to achieve strategic goals related to new product development.

Amortization of intangibles was $21,871,000 and $19,442,000 in the nine months ended December 31, 2023 and December 31, 2022, respectively, with the increase related to new intangible assets recorded from the montratec acquisition and foreign currency.

Interest and debt expense was $28,788,000 compared to $20,274,000 in the nine months ended December 31, 2023 and December 31, 2022, respectively. The increase is related to higher variable interest rates, as well as increased borrowings to finance the montratec acquisition.

Investment income of $1,212,000 compared to investment loss of $168,000 in the nine months ended December 31, 2023 and December 31, 2022, respectively, is related to mark-to-market adjustments on the marketable securities held in the Company’s wholly owned captive insurance subsidiary and the Company's equity method investment in EMC, described in Note 6 of the financial statements.

Foreign currency exchange loss was $1,074,000 compared to a foreign currency gain $1,152,000 in the nine months ended December 31, 2023 and December 31, 2022, respectively. This unfavorable change was due to the strengthening of the U.S. Dollar in comparison to the Euro and other currencies where our businesses operate during the first two quarters of fiscal 2024. The Company has begun to recover some of the prior quarters losses in the third quarter as the Euro is strengthening against the U.S. dollar.

Other expense was $5,840,000 in the nine months ended December 31, 2023 compared to other income of $1,999,000 in the nine months ended December 31, 2022. As described in Note 10, the Company recorded a settlement charge in the amount of $4,599,000 associated with the process to terminate one of the Company's U.S. pension plans. As described in Note 13, in fiscal 2023, the Company received a tax indemnification reimbursement received from STAHL's former owners in accordance with the share purchase agreement.

Income tax expense as a percentage of income from continuing operations before income tax expense was 26% and 35% in the nine months ended December 31, 2023 and December 31, 2022, respectively. Typically, these percentages vary from the U.S. statutory rate of 21% primarily due to varying statutory tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of income for these subsidiaries.

During the nine months ended December 31, 2022, the rate was unfavorably impacted 5 percentage points due to settlement of income tax assessments related to tax periods prior to the Company’s acquisition of Stahl Cranesystems GmbH (“STAHL"). In accordance with the tax indemnification clause of the share purchase agreement, the Company received full reimbursement from STAHL’s prior owner which was recorded as a gain in Other (income) expense, net on the Condensed Consolidated Statements of Operations during the period. The tax rate for the nine months ended December 31, 2022 also reflects an unfavorable impact of 4 percentage points due to the recording of a U.S. state tax valuation allowance. The valuation allowance primarily relates to changes in the Company’s expectations regarding its ability to more likely than not utilize certain state net operating losses prior to their expiration.

The Company estimates that the effective tax rate related to continuing operations will be approximately 24% to 26% for fiscal 2024.

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash totaled $103,195,000 at December 31, 2023, a decrease of $30,231,000 from the March 31, 2023 balance of $133,426,000.

Cash flow from operating activities

Net cash provided by operating activities was $28,591,000 for the nine months ended December 31, 2023 compared to $16,902,000 for the nine months ended December 31, 2022. Net income of $34,816,000 along with non-cash adjustments to net income of $49,663,000 contributed to cash provided by operations. The non-cash adjustments included $34,052,000 of depreciation and amortization, $8,473,000 of stock-based compensation, $7,080,000 of non-cash lease expense and $4,599,000 of a non-cash pension settlement charge offset by $6,495,000 of deferred income taxes and related valuation allowance. The non-cash pension settlement charge relates to certain employees electing lump sum payments associated with the termination of one of the Company's U.S. pension plans (refer to Note 10 for further details). Changes in working capital reduced cash from operations by $44,195,000 as a result of an increase of $17,764,000 in inventories, an increase in trade accounts receivable $14,911,000, a decrease in accrued expenses of $7,236,000, an increase in prepaid expenses of $2,897,000, and a decrease of $1,387,000 in trade payables. The increase in inventories relates to purchases required for expected future customer demand. Cash used for operations also included a decrease of $10,834,000 in other non-current liabilities primarily due to lease payments for the nine months ended December 31, 2023.

Cash flow from investing activities

Net cash used for investing activities was $125,965,000 for the nine months ended December 31, 2023 compared to $10,912,000 for the nine months ended December 31, 2022. The most significant use of cash in the year was $108,145,000 of cash used for purchase of montratec on May 31, 2023. Additionally, the Company used $16,334,000 for capital expenditures for the nine months ended December 31, 2023 .

Cash flow from financing activities

Net cash provided by financing activities was $67,771,000 for the nine months ended December 31, 2023 and net cash used for financing activities was $37,639,000 for the nine months ended December 31, 2022. The most significant source of cash was $120,000,000 in gross proceeds from the issuance of long-term debt, which was used to fund the montratec acquisition. This was offset by $40,447,000 in debt repayments, $6,027,000 in dividend payments and $2,859,000 in fees paid to secure the new debt borrowings. Associated cash flows from hedging activities are classified as financing activities in the Statement of Cash Flows which resulted in a net cash outflow of $1,215,000 during the nine months ended December 31, 2023.

We believe that our cash on hand, cash flows, and borrowing capacity under our Amended and Restated Credit Agreement will be sufficient to fund our ongoing operations and debt obligations, and capital expenditures for at least the next twelve months. This belief is dependent upon successful execution of our current business plan and effective working capital utilization. No material restrictions exist in accessing cash held by our non-U.S. subsidiaries. We expect to meet our funding needs with cash provided by our U.S. operations, as well as by repatriating non-U.S. cash. We do not expect to incur significant incremental

U.S. taxes as we repatriate funds. As of December 31, 2023, $58,277,000 of cash and cash equivalents were held by foreign subsidiaries.

Refer to Note 9 for further discussion of the Company's long-term debt and financing costs.

Capital Expenditures

In addition to keeping our current equipment and plants properly maintained, we are committed to replacing, enhancing and upgrading our property, plant and equipment to support new product development, improve productivity and customer responsiveness, reduce production costs, increase flexibility to respond effectively to market fluctuations and changes, meet environmental requirements, enhance safety and promote ergonomically correct work stations. Consolidated capital expenditures for the nine months ended December 31, 2023 and December 31, 2022 were $16,334,000 and $9,511,000, respectively. We expect capital expenditure spending in fiscal 2024 to range from $30,000,000 to $35,000,000.

Inflation and Other Market Conditions

Our costs are affected by inflation in the U.S. economy and, to a lesser extent, in non-U.S. economies including those of Europe, Canada, Mexico, South America, and Asia-Pacific. We do not believe that general inflation has had a material effect on our results of operations over the periods presented despite rising inflation due to our ability to pass on rising costs through price increases. We are currently experiencing higher raw material, freight, and logistics costs than we have seen in recent years, which we have been able to recover with pricing actions. In the future, we may not be able to pass on these cost increases to our customers.

Goodwill Impairment Testing

We test goodwill for impairment at least annually and more frequently whenever events occur or circumstances change that indicate there may be impairment. These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of operating performance, or a sale or disposition of a significant portion of a reporting unit.

We test goodwill at the reporting unit level, which is one level below our operating segment. We identify our reporting units by assessing whether the components of our operating segment constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. We also aggregate components that have similar economic characteristics into single reporting units (for example, similar products and / or services, similar long-term financial results, product processes, classes of customers, etc.). We have three reporting units: the Duff Norton reporting unit, the Rest of Products reporting unit, and the Precision Conveyance reporting unit, which have goodwill totaling $9,699,000, $308,693,000, and $410,035,000, respectively, as of December 31, 2023.

We currently do not believe that it is more likely than not that the fair value of each of our reporting units is less than its applicable carrying value. Additionally, we currently do not believe that we have any significant impairment indicators or that any of our reporting units with goodwill are at risk of failing Step One of the goodwill impairment test. However, if the projected long-term revenue growth rates, profit margins, or terminal growth rates are significantly lower, and/or the estimated weighted-average cost of capital is considerably higher, future testing may indicate impairment of one or more of the Company’s reporting units and, as a result, the related goodwill may be impaired.

Refer to our 2023 10-K for additional information regarding our annual goodwill impairment process.

Seasonality and Quarterly Results

Quarterly results may be materially affected by the timing of large customer orders, periods of high vacation and holiday concentrations, legal settlements, gains or losses in our portfolio of marketable securities, restructuring charges, favorable or unfavorable foreign currency translation, divestitures and acquisitions. Therefore, the operating results for any particular fiscal quarter are not necessarily indicative of results for any subsequent fiscal quarter or for the full fiscal year.

Effects of New Accounting Pronouncements

Information regarding the effects of new accounting pronouncements is included in Note 16 to the accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor created thereby under the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical or current fact, included in this Form 10-Q are forward-looking statements. Forward-looking statements reflect our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements can be identified by the use of forward-looking words, such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “future,” “likely” and other words and terms of similar meaning (including their negative counterparts or other various or comparable terminology). For example, all statements we make relating to our plans and objectives for future operations, growth or initiatives, strategies, pending acquisitions, our expected amount of capital expenditures for fiscal 2024, our expected effective tax rate for fiscal 2024, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

• the cyclical nature of our business and general macroeconomic conditions;
• increased competition with respect to our business, including with respect to our material handling and precision conveyance products;
• our ability to successfully integrate our acquisitions;
• price fluctuations and trade tariffs on steel, aluminum, and other raw materials purchased to manufacture our products and our ability to pass on price increases to our customers;
• the scarcity or unavailability of the raw materials and critical components we use to manufacture our products and the impact of such scarcity or unavailability on our ability to operate our business;
• our ability to successfully manage our backlog;
• our ability to maintain relationships with the independent distributors we use to sell our products;
• our ability to continue to attract, develop, engage, and retain qualified employees;
• changing interest rates;
• our ability to manage our indebtedness, including compliance with debt covenant restrictions in our Term Loan B, AR Securitization Facility and our New Revolving Credit Facility (each as defined herein);
• our ability to manage the risks of conducting operations outside of the United States, including currency fluctuations, trade barriers, labor unrest, geopolitical conflicts, more stringent labor regulation, tariffs, political and economic instability and governmental expropriation;
• potential product liability, as our products involve risks of personal injury and property damage;
• compliance with federal, state and local environmental protection laws, including regulatory measures meant to address climate change, which may be burdensome and lower our margins;
• our ability to adequately protect our intellectual property and refrain from infringing on the intellectual property of others;
• our ability to adequately manage and rely on our subcontractors and suppliers;
• our ability to adequately protect our information technology systems from cyberattacks or other interruptions;
• our ability to comply with the U.S. Foreign Corrupt Practices Act and other anti-corruption laws; and
• our ability to retain key members of our management team.

While we believe that the forward-looking statements in this Form 10-Q are reasonable, we caution that it is very difficult to predict the effect of known factors, and, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the SEC and public communications. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the outcomes or affect us or our operations in the way we expect. The forward-looking statements included in this Form 10-Q are made only as of the date hereof and are based on our current expectations. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise except to the extent required by applicable law.

There have been no material changes in the market risks as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023.

As of December 31, 2023, an evaluation was performed under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. These disclosure controls and procedures have been designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is made known to them on a timely basis, and that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on that evaluation, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2023.

There have been no other changes in the Company’s internal control over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023.