Columbus McKinnon Corp: Form 10-Q for the period ended Dec 31, 2024

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 150-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% of net sales derived from customers outside the U.S. for the nine months ended December 31, 2024. 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 battery production.

In fiscal 2024, the Company acquired 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 compliment the previous acquisitions of both Dorner and Garvey, and these acquisitions are collectively expected to accelerate the Company’s shift into a provider of intelligent motion solutions 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 $396 million in fiscal 2024 (or 62% 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. While we are still experiencing some availability issues for select raw materials and components, we are working with our supply base to prioritize shipments and improve availability of key 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, 2024 and December 31, 2023

Net sales in the three months ended December 31, 2024 were $234,138,000, a decrease of $20,005,000 or 7.9% from the three months ended December 31, 2023 net sales of $254,143,000. Net sales were positively impacted by $2,333,000 due to price increases, offset by $21,295,000 of unfavorable sales volume. Foreign currency translation unfavorably impacted sales by $1,043,000 for the three months ended December 31, 2024.

Gross profit in the three months ended December 31, 2024 was $82,097,000, a decrease of $11,800,000 or 12.6% from the three months ended December 31, 2023 gross profit of $93,897,000. Gross profit margin was 35.1% in the fiscal 2025 third quarter compared to 36.9% in the fiscal 2024 third quarter. The decrease in gross profit was due to start-up costs totaling $2,603,000 related to the Monterrey, Mexico facility, $9,863,000 of lower gross profit due to lower sales volumes, and $1,999,000 due to higher product liability expenses. In addition, we incurred costs of $556,000 related to factory and warehouse consolidation activities and $376,000 of net business realignment costs. These were offset by $3,937,000 of price increases net of material inflation and other manufacturing costs changes. The translation of foreign currencies had an unfavorable impact on gross profit of $340,000 during in the three months ended December 31, 2024.

Selling expenses were $27,348,000 and $26,552,000, or 11.7% and 10.4% of net sales, in the fiscal 2025 and 2024 third quarters, respectively. The increase in selling expenses is primarily due to an increase in employee related costs of $728,000. Foreign currency translation had a $95,000 favorable impact on selling expenses in the three months ended December 31, 2024.

General and administrative expenses were $24,233,000 and $26,255,000, or 10.3% of net sales, in both the three months ended December 31, 2024 and 2023, respectively. General and administrative expenses decreased due to lower incentive-based compensation of $2,178,000 and stock based compensation of $660,000 compared to the prior year. This was offset by $1,299,000 of expense to record a reserve against an accounts receivable balance for a customer who declared bankruptcy in January of 2025. Foreign currency translation had a favorable impact of $442,000 on general and administrative expenses in the three months ended December 31, 2024.

Research and development expenses were $5,325,000 and $6,692,000, or 2.3% of net sales, in both the fiscal 2025 and 2024 third quarters.

Amortization of intangibles was $7,501,000 and $7,486,000 in the fiscal 2025 and 2024 third quarters, respectively, with the fluctuations related to foreign currency during the respective periods.

Interest and debt expense was $7,698,000 in the third quarter ended December 31, 2024 compared to $9,952,000 in the third quarter ended December 31, 2023. The decrease is a result of a reduction of the Company's long term debt as a result of accelerated principal payments and declining interest rates.

Investment income was $54,000 in the third quarter ended December 31, 2024 compared to $758,000 in the third quarter ended and December 31, 2023. Investment income relates to the 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.

Other expense was $1,029,000 in the third quarter ended December 31, 2024 compared to $5,234,000 in the third quarter ended December 31, 2023. The decrease was due to a lump sum settlement charge of $4,599,000 incurred in the third quarter of fiscal 2024 associated with the process to terminate one of the Company's U.S. pension plans. The plan termination was completed in the second quarter of fiscal 2025. The Company incurred an additional non-cash settlement charge of $433,000 in the three months ended December 31, 2024, as described in Note 10 related to the termination of this same plan.

Income tax as a percentage of the pre-tax loss was 33% and income tax as a percentage of the pre-tax income was 29% in the third quarters ended December 31, 2024 and December 31, 2023, 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, 2024 and December 31, 2023

Net sales in the nine months ended December 31, 2024 were $716,138,000, a decrease of $31,898,000 or 4.3% from the nine months ended December 31, 2023 net sales of $748,036,000. Net sales were positively impacted by $9,674,000 due to price increases, $2,655,000 of revenue from the montratec acquisition, offset by $42,838,000 of unfavorable sales volume. Foreign currency translation unfavorably impacted sales by $1,389,000 for the nine months ended December 31, 2024.

Gross profit in the nine months ended December 31, 2024 was $245,870,000, a decrease of $34,653,000 or 12.4% from the nine months ended December 31, 2023 gross profit of $280,523,000. Gross profit margin was 34.3% compared to 37.5% in the nine months ended December 31, 2024 and 2023. The decrease in gross profit was due to start-up costs totaling $6,413,000 related to the Monterrey, Mexico facility, $11,319,000 of asset impairment and other costs primarily related to the closure of our Charlotte Manufacturing Operations, $21,968,000 due to lower sales volume, $1,999,000 due to higher product liability expenses, $648,000 of net business realignment costs, and $171,000 of additional costs due to Hurricane Helene's impact on one of our facilities. These decreases were offset by $7,475,000 of price increases net of material inflation and other manufacturing costs changes and $799,000 as a result of the acquisition of montratec. The translation of foreign currencies had a $409,000 unfavorable impact on gross profit in the nine months ended December 31, 2024.

Selling expenses were $82,044,000 and $78,400,000, or 11.5% and 10.5% of net sales, in the nine months ended December 31, 2024 and 2023, respectively. Selling expenses increased by $909,000 related to the montratec acquisition, $802,000 primarily related to trade show and travel costs including the Company's strategic partner conference that was not held in the prior year and $732,000 of net factory and warehouse consolidation costs. The remaining increase is due to higher employee related costs during the nine months ended December 31, 2024. Foreign currency translation had a $175,000 unfavorable impact on selling expenses in the nine months ended December 31, 2024.

General and administrative expenses were $74,043,000 and $79,407,000, or 10.3% and 10.6% of net sales, in the nine months ended December 31, 2024 and 2023, respectively. The decrease is related to lower employee related costs of $3,202,000 including lower incentive-based compensation. Additionally, the Company had lower stock based compensation costs of $1,501,000 compared to the prior year and lower net headquarter relocation expenses of $1,562,000. This was offset by $1,299,000 of expense to record a reserve against an accounts receivable balance for a customer who declared bankruptcy in January of 2025. Foreign currency translation had a $504,000 favorable impact on general and administrative expenses in the nine months ended December 31, 2024.

Research and development expenses were $17,593,000 and $19,134,000, or 2.5% of net sales, in the nine months ended December 31, 2024 and 2023, respectively.

Amortization of intangibles was $22,548,000 and $21,871,000 in the nine months ended December 31, 2024 and 2023, respectively, with fluctuation attributable to foreign currency translation.

Interest and debt expense was $24,285,000 in the nine months ended December 31, 2024 compared to $28,788,000 in the nine months ended December 31, 2023. The decrease is a result of a reduction in the Company's long term debt as a result of accelerated principal payments and lower interest rates.

Investment income of $873,000 compared to $1,212,000 in the nine months ended December 31, 2024 and nine months ended December 31, 2023. Investment income relates to the 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.

Other expense was $25,512,000 compared to $5,840,000 in the nine months ended December 31, 2024 and nine months ended December 31, 2023. The increase primarily relates to the non-cash settlement charge of $23,634,000 associated with the termination of one of the Company's U.S. pension plans in nine months ended December 31, 2024, described in Note 10 of the financial statements.

Income tax as a percentage of the pre-tax loss was (22)% and income tax as a percentage of the pre-tax income was 26% in the nine months ended December 31, 2024 and December 31, 2023, 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.

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash totaled $41,474,000 at December 31, 2024, a decrease of $72,902,000 from the March 31, 2024 balance of $114,376,000.

Cash flow from operating activities

Net cash provided by operating activities was $10,000,000 for the nine months ended December 31, 2024 compared to $28,591,000 for the nine months ended December 31, 2023. Net loss of $2,454,000 along with non-cash adjustments of $63,698,000 contributed to cash provided by operations. The non-cash adjustments included $36,230,000 of depreciation and amortization, $23,634,000 related to the settlement of one of the Company's pension plans, $7,657,000 of non-cash lease expense, $6,677,000 of stock-based compensation, and $3,268,000 related to the impairment of Charlotte Manufacturing Operation's lease. Changes in working capital reduced cash from operations by $46,505,000 as a result of an increase of $18,894,000 in inventories, an increase in prepaid expenses and other current assets of $14,565,000, a decrease in accrued expenses of $15,240,000, and a decrease of $8,061,000 in trade payables, offset by a decrease in trade accounts receivable of $10,255,000. The increase in inventories relates to purchases required for expected future customer demand. Cash provided by operations also included a decrease of $5,225,000 in other non-current liabilities primarily due to lease payments for the nine months ended December 31, 2024.

Cash flow from investing activities

Net cash used for investing activities was $14,222,000 for the nine months ended December 31, 2024 compared to $125,965,000 for the nine months ended December 31, 2023. The use of cash for the nine months ended December 31, 2024 primarily consisted of $15,266,000 in capital expenditures. In the nine months ended December 31, 2023, the most significant use of cash in the period related to the Company's purchase of montratec for $108,145,000.

Cash flow from financing activities

Net cash used for financing activities was $69,499,000 for the nine months ended December 31, 2024 and net cash provided by financing activities was $67,771,000 for the nine months ended December 31, 2023. The most significant uses of cash were for $45,495,000 in debt repayments, $9,945,000 of shares repurchased as treasury stock during the year, a $6,711,000 payment to the former owners of montratec for the contingent consideration agreement (refer to Note 2 for additional information) and $6,039,000 in dividend payments. Cash flows from hedging activities related to the Company's cross currency swap are classified as financing activities in the Statement of Cash Flows which resulted in a net cash inflow of $393,000 during the nine months ended December 31, 2024. In the nine months ended December 31, 2023, the 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 (refer to Note 2 for additional information).

We believe that our cash on hand, cash flows, and borrowing capacity under our Amended and Restated Revolving Credit Facility 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, 2024, $38,017,000 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, 2024 and December 31, 2023 were $15,266,000 and $16,334,000, respectively. We expect capital expenditure spending in fiscal 2025 to range from $18,000,000 to $22,000,000.

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. In the past we have experienced higher raw material, freight, and logistics costs as a result of the COVID-19 pandemic, which we have been able to recover with pricing actions. In the future, we may not be able to pass on similar 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 Linear Motion Products reporting unit, the Rest of Products reporting unit, and the Precision Conveyance reporting unit, which have goodwill totaling $9,699,000, $297,709,000, and $393,142,000, respectively, as of December 31, 2024.

We currently do not believe that it is more likely than not that the fair value of any 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 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 2024 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.

As of December 31, 2024, an evaluation was performed under the supervision and with the participation of the Company’s management, including our Chief Executive Officer (the Company's principal executive officer) and Chief Financial Officer (the Company's principal 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, 2024.

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.

Except for the risk factors being updated below, there have been no material changes from the risk factors as previously disclosed in the 2024 10-K for the fiscal year ended March 31, 2024. The risks described in this report and in the 2024 10-K for the fiscal year ended March 31, 2024 are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations.

Our future operating results may be affected by price fluctuations and trade tariffs on steel, aluminum, and other raw materials purchased to manufacture our products. We may not be able to pass on increases in raw material costs to our customers.

The primary raw materials used in our chain, forging and crane building operations are steel, aluminum, and other raw materials such as motors, electrical and electronic components, castings and machined parts and components. The industries that produce these critical components and materials are also themselves highly cyclical and at times pricing and availability can be volatile due to a number of factors beyond our control, including general macroeconomic conditions, inflation, labor costs, competition, import duties, quotas, tariffs, trade regulations and agreements, and currency exchange rates. This volatility can significantly affect our raw material costs.

The United States has maintained tariffs on certain imported steel, aluminum and items originating from China, which have increased the cost of raw materials we purchase. The imposition of tariffs by the United States has resulted in retaliatory tariffs from a number of countries, including China, which also increase the cost of raw materials we purchase. The new U.S. presidential administration has implemented or announced plans to implement, as the case may be, new or increased tariffs, particularly relating to imports from China, Canada and Mexico, though it remains unclear exactly what actions will be taken or implemented. Any escalation of trade tensions, additional tariffs, retaliatory measures by foreign governments or shifts in U.S. or international trade policies could adversely impact our supply chain, increase our costs for raw materials, including significantly, or reduce demand for our products. A trade war or other significant changes in trade regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows.

In an environment of increasing raw material prices and trade tariffs, duties and quotas, competitive conditions will determine how much of the price increases we can pass on to our customers. In the future, to the extent we are unable to pass on any steel, aluminum, or other raw material price increases to our customers, our profitability could be adversely affected.

Our operations outside the U.S. pose certain risks that may adversely impact sales and earnings.

We have operations and assets located outside of the U.S., primarily in Germany, the United Kingdom, Hungary, Russia, China, Malaysia and Mexico, including our new facility in Monterrey, Mexico. In addition, we import a portion of our hoist product line from Asia and sell our products to distributors located in approximately 50 countries. In our fiscal year ended March 31, 2024, approximately 43% of our net sales were derived from non-U.S. markets. These non-U.S. operations are subject to a number of special risks, in addition to the risks of our U.S. business, including but not limited to differing protections of intellectual property, trade barriers, labor unrest, geopolitical conflicts, exchange controls, regional economic uncertainty, differing (and possibly more stringent) labor regulation, risk of governmental expropriation, U.S. and foreign customs, quotas, import duties, and tariffs (in particular, the new tariffs proposed to be implemented by the new U.S. presidential administration on goods imported into the U.S. from Mexico, where we have manufacturing operations), political and economic instability in the jurisdictions in which we operate, foreign receivables collection risk, current and changing regulatory environments, difficulty in obtaining distribution support, difficulty in staffing and managing widespread operations, differences in the availability, and terms of financing, political instability and risks of increases in taxes. In particular, in connection with our Mexican manufacturing operations, if additional tariffs or trade restrictions are implemented by the U.S. or other countries, including in connection with a global trade war, the cost of our products manufactured in Mexico or other countries and imported into the U.S. or other countries could increase, which, in turn, could adversely affect the demand for these products, make our products less competitive and have an adverse effect on our business, results of operations and margins. Any of these factors, individually or together, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. These factors may adversely affect our future profits.

Part of our strategy is to expand our worldwide market share and reduce costs by strengthening our international distribution capabilities and sourcing components in lower cost countries, such as China, Mexico, Hungary and Malaysia, including through the use of our new facility in Monterey, Mexico. Implementation of this strategy may increase the impact of the risks described above, and we cannot assure you that such risks will not have a material adverse effect on our business, results of operations or financial condition.