10-K 1 cmco03311910k.htm 10-K Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended March 31, 2019

Commission file number 0-27618
_________________

COLUMBUS McKINNON CORPORATION
(Exact name of Registrant as specified in its charter)

New York
 
16-0547600
(State of Incorporation)
 
(I.R.S. Employer Identification Number)

205 Crosspoint Parkway
Getzville, New York 14068
(Address of principal executive offices, including zip code)

(716) 689-5400
(Registrant’s telephone number, including area code)
_________________

Securities pursuant to section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value (and rights attached thereto)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes   o     No   ý
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.   Yes   o   No   ý
 
Indicate by checkmark 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. Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý  No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    ý.
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act.
 
Large accelerated filer  x
Accelerated filer o   
Non-accelerated filer o   
Smaller reporting company o
Emerging Growth Company o   

 
If an Emerging Growth Company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o   
     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).        Yes o   No ý
 
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2018 (the second fiscal quarter in which this Form 10-K relates) was approximately $919 million, based upon the closing price of the Company’s common shares as quoted on the Nasdaq Stock Market on such date. The number of shares of the Registrant’s common stock outstanding as of May 17, 2019 was 23,403,782 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s proxy statement for its 2019 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Registrant’s fiscal year ended March 31, 2019 are incorporated by reference into Part III of this report.

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COLUMBUS McKINNON CORPORATION
 
2019 Annual Report on Form 10-K
 
This annual report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed or implied by such statements, including general economic and business conditions, conditions affecting the industries served by us and our subsidiaries, conditions affecting our customers and suppliers, competitor responses to our products and services, the overall market acceptance of such products and services, the integration of acquisitions and other factors set forth herein under “Risk Factors.” We use words like “will,”  “may,”  “should,” “plan,”  “believe,”  “expect,” “anticipate,” “intend,” “future” and other similar expressions to identify forward looking statements.  These forward looking statements speak only as of their respective dates and we do not undertake and specifically decline 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 changes. Our actual operating results could differ materially from those predicted in these forward-looking statements, and any other events anticipated in the forward-looking statements may not actually occur.


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TABLE OF CONTENTS
 
Part I
 
 
 
 
 
 
Item 1.    
Business
 
 
 
 
 
Item 1A. 
Risk Factors
 
 
 
 
 
Item 1B.
Unresolved Staff Comments
 
 
 
 
 
Item 2.   
Properties
 
 
 
 
 
Item 3.   
Legal Proceedings
 
 
 
 
 
Item 4.    
Mine Safety Disclosures
 
 
 
 
Part II           
 
 
 
 
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
 
 
      
Item 6.  
Selected Financial Data
 
 
 
 
 
Item 7.   
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 7A    
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
Item 8.       
Financial Statements and Supplemental Data
 
 
 
 
 
Item 9.   
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
 
 
 
 
 
Item 9A.
Controls and Procedures
 
 
 
 
 
Item 9B. 
Other Information
 
 
 
 
Part III.
 
 
 
 
 
 
Item 10.  
Directors and Executive Officers of Registrant
 
 
 
 
 
Item 11.   
Executive Compensation
 
 
 
 
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
 
 
 
Item 13.         
Certain Relationships and Related Transactions, and Director Independence
 
 
 
 
 
Item 14.        
Principal Accountant Fees and Services
 
 
 
 
Part IV
 
 
 
 
 
 
Item 15 
Exhibits and Financial Statement Schedules

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PART I

Item 1.        Business
 
General

Columbus McKinnon is a leading worldwide designer, manufacturer and marketer of motion control products, technologies, systems and services that efficiently and ergonomically move, lift, position and secure materials. Key products include hoists, rigging tools, digital power control systems, and actuators. The Company is focused on commercial and industrial applications that require safety and productivity in moving material provided by our superior design and engineering know-how. Our products are used for mission critical industrial applications where we have established trusted brands with significant customer retention. Our targeted market verticals include general industrial, construction and infrastructure, mining, oil & gas, energy, aerospace, transportation, automotive, heavy equipment manufacturing and entertainment.

In the U.S., we are the market leader for hoists and material handling digital power control systems, our principal line of products, as well as certain chain, forged fittings, and actuator products. We have achieved this leadership position through strategic acquisitions, our extensive, diverse, and well-established distribution channels and our commitment to product innovation and quality. We believe the breadth of our product offering and expansive distribution channels provide us a strategic advantage in our markets. Additionally, we believe we are the market leader for manual hoist and actuator products in Europe. Our market leadership and strong brands enable us to sell more products than our competition through our extensive distribution channels in the U.S. and Europe. The acquisition of STAHL CraneSystems ("STAHL") in fiscal 2017, which is well renowned for its custom engineering lifting solutions and hoisting technology, advanced our position as a global leader in the production of explosion-protected hoists. STAHL serves independent crane builders and Engineering Procurement and Construction ("EPC") firms, providing products to a variety of end markets including automotive, general manufacturing, oil and gas, steel and concrete, power generation, as well as process industries such as chemical and pharmaceuticals.

Our Blueprint for Growth Strategy is a three-phased strategy to increase the earnings power of the Company and transform us into a growth-oriented industrial technology company. The goal of our strategy is to increase our earnings power and expand EBITDA margins, as well as improve our Return on Invested Capital. Phase I, which began early in fiscal 2018, was focused on attaining operational control and instilling a performance based culture to drive results.

We completed Phase I during fiscal 2018. In doing so, we believe we grew market share in the U.S. and achieved $6 million of synergies related to the STAHL acquisition. In addition, we introduced several new products incorporating smart hoist technologies and repaid $60 million of our long-term debt.

We began Phase II of the strategy in November 2017. This phase is about simplifying the business utilizing our 80/20 process, improving our operational excellence, and ramping the growth engine by investing in new product development and a digital platform to grow profitably. Investment in R&D will advance our smart hoist technology and enhance our customers’ digital experience so we can capitalize on the automation megatrend. We expect to double R&D expenditures by fiscal 2021 from fiscal 2017 levels, including approximately $5 million related to STAHL. Research and development costs were $13,491,000, $13,617,000, and $10,482,000 in fiscal years 2019, 2018, and 2017, respectively.

In addition to restructuring our organization to simplify how we do business, we have divested three businesses, which were not a fit with our product offerings and strategy. In March 2019, the Company announced that it had completed the divestiture of these three businesses that it had identified as not being core to its growth strategy through its simplification process. The Tire Shredder business was sold in December 2018. The remaining two businesses, which were sold in February 2019, included Crane Equipment and Service, Inc. and Stahlhammer Bommern GmbH.

Phase III of the strategy is centered on evolving the business model including optimizing our current product portfolio as well as pursuing acquisitions to advance our transformation into a leading industrial technology company. Our acquisitions of Magnetek, Inc. and STAHL and our efforts to leverage their technology are well aligned with our transformation efforts. We have demonstrated our ability to acquire companies and achieve significant synergies and growth. We will look for acquisitions in the material handling and motion control markets. We believe the automation megatrend will provide a deep pipeline of attractive, high margin companies that will continue to transform us.

Our business is cyclical in nature and sensitive to changes in general economic conditions, including changes in industrial capacity utilization, industrial production, and general economic activity indicators, like GDP growth. Both U.S. and Eurozone capacity utilization are leading market indicators for our Company.


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Business Description
 
ASC Topic 280 “Segment Reporting” establishes the standards for reporting information about operating segments in financial statements.   We provide our products and services through one operating and reportable segment.
 
We design, manufacture, and distribute a broad range of material handling products for various applications. Products include a wide variety of electric, air-powered, lever, and hand hoists, hoist trolleys, explosion-protected hoists, winches, and aluminum work stations; alloy and carbon steel chain; forged attachments, such as hooks, shackles, textile slings, clamps, and load binders; mechanical and electromechanical actuators and rotary unions; and below-the-hook special purpose lifters; power and motion control systems, such as AC and DC drive systems, radio remote controls, push button pendant stations, brakes, and collision avoidance and power delivery subsystems. These products are typically manufactured for stock or assembled to order from standard components and are sold primarily through a variety of commercial distributors and to a lesser extent, directly to end-users. The acquisition of STAHL brings market leadership with independent crane builders and EPC firms. The diverse end-users of our products are in a variety of industries including manufacturing, power generation and distribution, utilities, wind power, warehouses, commercial construction, oil and gas exploration and refining, petrochemical, marine, ship building, transportation and heavy duty trucking, agriculture, logging and mining. We also serve a niche market for the entertainment industry including permanent and traveling concerts, live theater, and sporting venues.

Products
 
Of our fiscal 2019 sales, $473,809,000, or 54%, were U.S. and $402,473,000 or 46% were non-U.S. The following table sets forth certain sales data for our products, expressed as a percentage of net sales for fiscal 2019 and 2018:
 
 
 
Fiscal Years Ended March 31,
 
 
2019
 
2018
Hoists
 
62
%
 
63
%
Chain and rigging tools
 
10

 
10

Digital power control and delivery systems
 
11

 
10

Actuators and rotary unions
 
9

 
9

Industrial cranes
 
4

 
4

Elevator application drive systems
 
3

 
3

Other
 
1

 
1

 
 
100
%
 
100
%
 
Hoists - We manufacture a wide variety of electric chain hoists, electric wire rope hoists, hand-operated hoists, winches, lever tools, and air-powered hoists. Load capacities for our hoist product lines range from one-eighth of a ton to nearly 140 tons with the acquisition of STAHL. These products are sold under our Budgit, Chester, CM, Coffing, Little Mule, Pfaff, Shaw-Box, Yale, STAHL, and other recognized brands. Our hoists are sold for use in numerous general industrial applications, as well as for use in the construction, energy, mining, food services, entertainment, and other markets. We also supply hoist trolleys, driven manually or by electric motors, that are used in conjunction with hoists.

We also offer several lines of standard and custom-designed, below-the-hook tooling, clamps, and textile strappings. Below-the-hook tooling, textile, and chain slings and associated forgings, and clamps are specialized lifting apparatus used in a variety of lifting activities performed in conjunction with hoisting or lifting applications.

STAHL primarily manufactures explosion-protected hoists and custom engineered hoists, including wire rope and manual and electric chain hoists. STAHL products are sold to a variety of end markets including automotive, general manufacturing, oil and gas, steel and concrete, power generation as well as process industries such as chemical and pharmaceuticals.
 
Chain and Rigging Tools -   We manufacture alloy and carbon steel chain for various industrial and consumer applications. U.S. federal regulations require the use of alloy chain, which we first developed, for overhead lifting applications because of its strength and wear characteristics. A line of our alloy chain is sold under the Herc-AlloyTM brand name for use in overhead lifting, pulling, and restraining applications. In addition, we also sell specialized load chain for use in hoists, as well as three grades and multiple sizes of carbon steel welded-link chain for various load securing and other non-overhead lifting applications.
 

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We produce a broad line of alloy and carbon steel closed-die forged chain attachments, including hooks, shackles, HammerloksTM, and master links. These forged attachments are used in chain, wire rope, and textile rigging applications in a variety of industries, including transportation, mining, construction, marine, logging, petrochemical, and agriculture.

In addition, we manufacture carbon steel forged and stamped products, such as load binders, logging tools, and other securing devices, for sale to the industrial and logging markets through industrial distributors, hardware distributors, mass merchandiser outlets, and Original Equipment Manufacturers ("OEMs").
 
Digital Power Control and Delivery Systems - Through our Magnetek brand, we are a leading provider of innovative power control and delivery systems and solutions for overhead material handling applications used in a number of diverse industries, including aerospace, automotive, steel, aluminum, paper, logging, mining, ship loading, nuclear power plants, and heavy movable structures. We are a major supplier in North America of power and motion control systems, which include AC and DC drive systems, radio remote controls, push button pendant stations, brakes, and collision avoidance and power delivery subsystems. While we sell primarily to OEMs of overhead cranes and hoists, we spend a great deal of effort understanding the needs of end users to gain specification. We can combine our products with engineered services to provide complete customer-specific systems solutions.

We are also a leading independent supplier of AC and DC digital motion control systems for underground coal mining equipment. Our systems are used in coal hauling vehicles, shuttle cars, scoops, and other heavy mining equipment.

Actuators and Rotary Unions -    Through our Duff-Norton and Pfaff brands, we design and manufacture industrial components such as mechanical and electromechanical actuators and rotary unions. Actuators are linear motion devices used in a variety of industries, including the transportation, paper, steel, energy, aerospace, and many other commercial industries. Rotary unions are devices that transfer a liquid or gas from a fixed pipe or hose to a rotating drum, cylinder or other device. Rotary unions are used in a variety of industries including pulp and paper, printing, textile and fabric manufacturing, rubber, and plastic.

Elevator Application Drive Systems - Through our Magnetek brand we also design, build, sell, and support elevator application-specific drive products that efficiently deliver power used to control motion, primarily in high-rise, high-speed elevator applications. We are recognized as an industry leader for DC high-performance elevator drives, as well as for AC drives used with low- and high-performance traction elevators, due to our extensive application expertise and product reliability. Our elevator product offerings are comprised of highly integrated subsystems and drives, sold mainly to elevator OEMs. In addition, our product options include a number of regenerative controls for both new building installations and elevator modernization projects that help building owners save energy.
 
Distribution and Markets
 
Our distribution channels include a variety of commercial distributors. In addition, we sell aluminum light rail systems as well as certain motion technology products directly to end-users. The following describes our global distribution channels:
 
General Distribution Channels -   Our global general distribution channels consist of:

—     Industrial distributors that serve local or regional industrial markets and sell a variety of products for maintenance repair, operating, and production, or MROP, applications through their own direct sales force.
 
— 
Rigging shops that are distributors with expertise in rigging, lifting, positioning, and load securing. Most rigging shops assemble and distribute chain, wire rope and synthetic slings, and distribute manual hoists and attachments, chain slings, and other products.
 
— 
Independent crane builders that design, build, install, and service overhead crane and light-rail systems for general industry and also distribute a wide variety of hoists and crane components. We sell electric wire rope hoists and chain hoists as well as crane components, such as end trucks, trolleys, drives, and electrification systems to crane builders.
 
Specialty Distribution Channels -   Our global specialty distribution channels consist of:

— 
National and regional distributors that market a variety of MROP supplies, including material handling products, either exclusively through large, nationally distributed catalogs, or through a combination of catalog, internet, and branch sales and a field sales force.


6


— 
Material handling specialists and integrators that design and assemble systems incorporating hoists, overhead rail systems, trolleys, scissor lift tables, manipulators, air balancers, jib arms, and other material handling products to provide end-users with solutions to their material handling problems.

— 
Entertainment equipment distributors that design, supply, and install a variety of material handling and rigging equipment for concerts, theaters, ice shows, sporting events, convention centers, and night clubs.

Pfaff International Direct -   Our German-based Pfaff business markets and sells most of its actuators directly to end-users, providing an additional method to market for us in the European region.
 
Service-After-Sale Distribution Channel -   Service-after-sale distributors include our authorized network of 23 chain repair service stations and over 221 certified hoist service and repair stations globally. This service network is designed for easy parts and service access for our large installed base of hoists and related equipment in that region.
 
OEM/Government Distribution Channels -  This channel consists of:
 
— 
OEMs that supply various component parts directly to other industrial manufacturers as well as private branding and packaging of our traditional products for material handling, lifting, positioning, and special purpose applications.

— 
Government agencies, including the U.S. and Canadian Navies and Coast Guards, that primarily purchase load securing chain and forged attachments. We also provide our products to the U.S. and other governments for a variety of military applications.

Independent Crane Builders and Engineering Procurement and Construction ("EPC") firms -   In addition to the Distribution channels mentioned above, STAHL sells explosion-protected hoists and custom engineered non-standard hoists to independent crane builders and EPC firms. Independent crane builders are lifting solution developers and final crane assemblers that source hoists as components. EPC firms are responsible for project management or construction management of production facilities that purchase lifting solutions from crane and hoist builders.

Backlog
 
Our backlog of orders at March 31, 2019 was approximately $161,456,000 compared to approximately $177,387,000 at March 31, 2018. The decrease is largely a result of divestitures and changing foreign currency rates. Our orders for standard products are generally shipped within one week. Orders for products that are manufactured to customer specifications are generally shipped within four to twelve weeks. Given the short product lead times, we do not believe that the amount of our backlog of orders is a reliable indication of our future sales.  Fluctuations in backlog can reflect the project oriented nature of certain aspects of our business.

Competitive Conditions
 
The material handling industry remains fragmented. We face competition from a wide range of regional, national, and international manufacturers globally. In addition, we often compete with individual operating units of larger, highly diversified companies.
 
The principal competitive factors affecting our business include customer service and support as well as product availability, performance, functionality, brand reputation, reliability, and price. Other important factors include distributor relationships and territory coverage.

We believe we have leading U.S. market share in various products categories including: hoists, trolleys and components, AC and DC material handling drives, screw jacks, and elevator DC drives. These product categories represent 65% of our U.S. net sales.

Major competitors for hoists are Konecranes, which acquired Terex's Material Handling and Part Solutions business segment, and Kito (and its U.S. subsidiary Harrington); for chain are Campbell Chain, Peerless Chain Company (acquired by Kito), and American Chain and Cable Company; for digital power control systems are Konecranes, Power Electronics International, Inc., Cattron Group International (a division of Laird Technologies), Conductix-Wampfler (a division of Delachaux Group), Control Techniques (a division of Emerson Electric), OMRON Corporation, KEB GmbH, and Fujitec; for forged attachments are The Crosby Group and Brewer Tichner Company; for cranes are Konecranes and a variety of independent crane builders; and for actuators and rotary unions are Deublin, Joyce-Dayton, and Nook Industries.
 

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Employees
 
At March 31, 2019, we had 3,128 employees globally. Approximately 10% of our employees are represented under three separate U.S. collective bargaining agreements which terminate at various times between May 2020 and September 2021. We also have various labor agreements with our non-U.S. employees which we negotiate from time to time. We have good relationships with our employees and positive, productive relationships with our unions. The risk of employee or union led disruption in production is remote.
 
Raw Materials and Components
 
Our principal raw materials and components are 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. 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 long-term agreements which are negotiated on a company-wide basis through our global purchasing group to take advantage of volume discounts. Generally, as we experience fluctuations in our costs, we reflect them as price increases to our customers with the goal of being margin neutral. In addition, as a result of the recent trade tariff actions with China, the Company determined its fiscal 2019 exposure for tariffs to be approximately $1,700,000 which resulted in increased cost of products sold. The Company is monitoring the impact of tariffs and is actively working to mitigate this impact through material productivity actions and pricing strategies. For all other raw materials and components, our ability to pass on these increases is determined by market conditions.  Although raw materials and some components (such as motors, bearings, gear reducers, steel and aluminum enclosures and wire harnesses, castings, electro-mechanical components, and standard variable drives) are purchased, our vertical integration enables us to produce many of the components used in the manufacturing of our products.
 
Environmental and Other Governmental Regulation
 
Like most manufacturing companies, we are subject to various federal, state, and local laws relating to the protection of the environment. To address the requirements of such laws, we have adopted a corporate environmental protection policy which provides that all of our owned or leased facilities shall comply, and all of our employees have the duty to comply with all applicable environmental regulatory standards, and we have initiated an environmental auditing program for our facilities to ensure compliance with such regulatory standards. We have also established managerial responsibilities and internal communication channels for dealing with environmental compliance issues that may arise in the course of our business. We have made and could be required to continue to make significant expenditures to comply with environmental requirements.  Because of the complexity and changing nature of environmental regulatory standards, it is possible that situations will arise from time to time requiring us to incur additional expenditures to ensure environmental regulatory compliance. However, we are not aware of any environmental condition or any operation at any of our facilities, either individually or in the aggregate, which would cause expenditures having a material adverse effect on our results of operations, financial condition or cash flows.
 
We have been a part of the Pendleton Site PRP Group since about 1993.  Many years ago, we sent pickle liquor wastes from Tonawanda, NY to the Pendleton Site for treatment and disposal.  The Pendleton Site PRP Group signed an Order on Consent with the NYS DEC in 1996 and the cleanup was concluded in the early 2000s.  The Order on Consent required a post-construction operation and maintenance period of 30 years and we are required to pay our share of the costs associated with the operation and maintenance period.  Our share of these costs is 13.4% and reserves on the books are sufficient to cover these costs for the remainder of the operations and maintenance period.

In 1986, Magnetek acquired the stock of Universal Manufacturing Corporation (“Universal”) from a predecessor of Fruit of the Loom (“FOL”), and the predecessor agreed to indemnify Magnetek against certain environmental liabilities arising from pre-acquisition activities at a facility in Bridgeport, Connecticut. Environmental liabilities covered by the indemnification agreement included completion of additional cleanup activities, if any, at the Bridgeport facility and defense and indemnification against liability for potential response costs related to offsite disposal locations. Magnetek's leasehold interest in the Bridgeport facility was assigned to the buyer in connection with the sale of Magnetek's transformer business in June 2001. FOL, the successor to the indemnification obligation, filed a petition for Reorganization under Chapter 11 of the Bankruptcy Code in 1999 and Magnetek filed a proof of claim in the proceeding for obligations related to the environmental indemnification agreement. Magnetek believes that FOL had substantially completed the clean-up obligations required by the indemnification agreement prior to the bankruptcy filing. In November 2001, Magnetek and FOL entered into an agreement involving the allocation of certain potential tax benefits and Magnetek withdrew its claims in the bankruptcy proceeding. FOL's obligation to the state of Connecticut was not discharged in the reorganization proceeding.


8


In January 2007, the Connecticut Department of Environmental Protection (“DEP”) requested parties, including Magnetek, to submit reports summarizing the investigations and remediation performed to date at the site and the proposed additional investigations and remediation necessary to complete those actions at the site. The DEP then requested additional information relating to site investigations and remediation. Magnetek and the DEP agreed to the scope of the work plan in November 2010. The Company has implemented the work plan and has recorded a liability of $456,000 as of March 31, 2019 related to the Bridgeport facility, representing the best estimate of future site investigation costs and remediation costs which are expected to be incurred in the future.

For all of the currently known environmental matters, we have accrued as of March 31, 2019 a total of $1,075,000 which, in our opinion, is sufficient to deal with such matters. Further, we believe that the environmental matters known to, or anticipated by us should not, individually or in the aggregate, have a material adverse effect on our operating results or financial condition. However, there can be no assurance that potential liabilities and expenditures associated with unknown environmental matters, unanticipated events, or future compliance with environmental laws and regulations will not have a material adverse effect on us.

In September of 2017, Magnetek received a request for defense and indemnification from Monsanto Company, Pharmacia, LLC, and Solutia, Inc. (collectively, “Monsanto”) with respect to: (1) lawsuits brought by plaintiffs claiming that Monsanto manufactured polychlorinated biphenyls ("PCBs"), exposure to which allegedly caused injury to plaintiffs; (2) lawsuits brought by municipalities and municipal entities claiming that Monsanto should be responsible for a variety of damages due to the presence of PCBs in bodies of water in those municipalities and/or in water treated by those municipal entities.  Monsanto claims to be entitled to defense and indemnification from Magnetek under a so-called “Special Undertaking” apparently executed by Universal in January of 1972, which purportedly required Universal to defend and indemnify Monsanto from liabilities “arising out of or in connection with the receipt, purchase, possession, handling, use, sale or disposition of” PCBs by Universal.
 
Magnetek has declined Monsanto’s tender, and believes that it has meritorious legal and factual defenses to the demands made by Monsanto.  Magnetek is vigorously defending against those demands and has commenced litigation to, among other things, declare the Special Undertaking void and unenforceable.  Monsanto has, in turn, commenced an action to enforce the Special Undertaking.  Magnetek intends to continue to vigorously prosecute its declaratory judgment action and to defend against Monsanto’s action against it.  As of March 31, 2019 the Company has recorded $100,000 for legal costs related to this matter. We cannot reasonably estimate a potential range of loss with respect to Monsanto’s tender because there is insufficient information regarding the underlying matters.  Management believes, however, that the potential additional costs related to such matters, if any, will not have a material effect on the financial condition of the Company or its liquidity, although the effect of any future liabilities recorded could be material to earnings in a future period.

Our operations are also governed by many other laws and regulations, including those relating to workplace safety and worker health, principally OSHA in the U.S. and others outside the U.S. and regulations thereunder. We believe that we are in substantial compliance with these laws and regulations and do not believe that future compliance with such laws and regulations will have a material adverse effect on our operating results, financial condition, or liquidity.
 
Available Information
 
Our internet address is www.cmworks.com.  We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission.


9


Item 1A.    Risk Factors
 
Columbus McKinnon is subject to a number of risk factors that could negatively affect our results from business operations or cause actual results to differ materially from those projected or indicated in any forward looking statement.  Such factors include, but are not limited to, the following:
 
Adverse changes in global economic conditions may negatively affect our industry, business, and results of operations.
 
Our industry is affected by changes in economic conditions outside our control, which can result in a general decrease in product demand from our customers. Such economic developments, like Brexit or the China trade wars, may affect our business in a number of ways. Reduced demand may drive us and our competitors to offer products at promotional prices, which would have a negative impact on our profitability. In addition, the tightening of credit in financial markets may adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations and could result in a decrease in, or cancellation of, orders for our products. If demand for our products slows down or decreases, we will not be able to maintain our revenue and we may run the risk of failing to satisfy the financial and other restrictive covenants to which we are subject under our existing indebtedness. Reduced revenue as a result of decreased demand may also reduce our planned growth and otherwise hinder our ability to improve our performance in connection with our long term strategy.
 
Our business is cyclical and is affected by industrial economic conditions.

Many of the end-users of our products are in highly cyclical industries, such as manufacturing, power generation and distribution, commercial construction, oil and gas exploration and refining, transportation, agriculture, logging, and mining that are sensitive to changes in general economic conditions. Their demand for our products, and thus our results of operations, is directly related to the level of production in their facilities, which changes as a result of changes in general economic conditions and other factors beyond our control. If there is deterioration in the general economy or in the industries we serve, our business, results of operations, and financial condition could be materially adversely affected. In addition, the cyclical nature of our business could at times also adversely affect our liquidity and ability to borrow under our revolving credit facility.
 
Our business is highly competitive and subject to consolidation of competitors. Increased competition could reduce our sales, earnings, and profitability.
 
The principal markets that we serve within the material handling industry are fragmented and highly competitive. Competition is based primarily on customer service and support as well as product availability, performance, functionality, brand reputation, reliability, and price. Our competition in the markets in which we participate comes from companies of various sizes, some of which have greater financial and other resources than we do. Increased competition could force us to lower our prices or to offer additional services at a higher cost to us, which could reduce our gross margins and net income.

The greater financial resources or the lower amount of debt of certain of our competitors may enable them to commit larger amounts of capital in response to changing market conditions. Certain competitors may also have the ability to develop product or service innovations that could put us at a disadvantage. In addition, through consolidation, some of our competitors have achieved substantially more market penetration in certain of the markets in which we operate. If we are unable to compete successfully against other manufacturers of material handling equipment, we could lose customers and our revenues may decline. There can also be no assurance that customers will continue to regard our products favorably, that we will be able to develop new products that appeal to customers, that we will be able to improve or maintain our profit margins on sales to our customers or that we will be able to continue to compete successfully in our core markets.
 
The acquisition of STAHL on January 31, 2017 resulted in a significant increase to the Company’s long term borrowings.

The increased amount of long term borrowings required the Company to dedicate a large portion of its cash flow to the servicing and repayment of its outstanding indebtedness.  While the indebtedness has significantly declined, we continue to pay down debt with free cash flow thereby reducing funds available for other operating activities, which could adversely affect our investments in our business

In connection with the acquisition of STAHL, we assumed an unfunded pension obligation which will further require cash flow to pay benefit obligations as they become due.

The STAHL pension obligation assumed in the acquisition is an unfunded pension plan valued at $80,877,000 at March 31, 2019. Therefore, the Company will be required to make current and future benefit payment obligations in addition to payments required to pay down other long term borrowings.

10



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 United States, primarily in China, Mexico, Germany, the United Kingdom, France, and Hungary. 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, 2019, approximately 46% 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, differing protections of intellectual property, trade barriers, labor unrest, exchange controls, regional economic uncertainty, differing (and possibly more stringent) labor regulation, risk of governmental expropriation, U.S. and foreign customs and tariffs, 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. 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, in particular in China, Mexico, and Hungary. Implementation of this strategy may increase the impact of the risks described above, and we cannot assure you that such risks will not have an adverse effect on our business, results of operations or financial condition.

Other risks of doing business in international markets include the increased risks and burdens of complying with different legal and regulatory standards, difficulties in managing and staffing foreign operations, recruiting and retaining talented direct sales personnel, limitations on the repatriation of funds and fluctuations of foreign exchange rates, varying levels of internet technology adoption and infrastructure and our ability to enforce contracts and our intellectual property rights in foreign jurisdictions. Additionally there are risks associated with fundamental changes to international markets, such as those that may occur as a result of the United Kingdom's potential withdrawal from the European Union ("Brexit"). Brexit may adversely affect global economic and market conditions and could contribute to volatility in the foreign exchange markets, which we may be unable to effectively manage.
In addition, our success in international expansion could be limited by barriers to international expansion such as adverse tax consequences and export controls. If we cannot manage these risks effectively, the costs of doing business in some international markets may be prohibitive or our costs may increase disproportionately to our revenue.

Our strategy depends on successful integration of acquisitions.
 
Acquisitions are a key part of our growth strategy. Our historical growth has depended, and our future growth is likely to depend on our ability to successfully implement our acquisition strategy, and the successful integration of acquired businesses into our existing business. We intend to continue to seek additional acquisition opportunities in accordance with our acquisition strategy, both to expand into new markets and to enhance our position in existing markets throughout the world. If we are unable to successfully integrate acquired businesses into our existing business or expand into new markets, our sales and earnings growth could be reduced.

Our products involve risks of personal injury and property damage, which exposes us to potential liability.
 
Our business exposes us to possible claims for personal injury or death and property damage resulting from the products that we sell. We maintain insurance through a combination of self-insurance retentions and excess insurance coverage. We monitor claims and potential claims of which we become aware and establish accrued liability reserves for the self-insurance amounts based on our liability estimates for such claims. We cannot give any assurance that existing or future claims will not exceed our estimates for self-insurance or the amount of our excess insurance coverage. In addition, we cannot give any assurance that insurance will continue to be available to us on economically reasonable terms or that our insurers would not require us to increase our self-insurance amounts. Claims brought against us that are not covered by insurance or that are in excess of insurance coverage could have a material adverse effect on our results, financial condition, or liquidity.

In addition, like many industrial manufacturers, we are also involved in asbestos-related litigation. In continually evaluating costs relating to our estimated asbestos-related liability, we review, 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, our recent and historical resolution of the cases, the number of cases pending against us, the status and results of broad-based settlement discussions, and the number of years such activity might continue. Based on this review, we estimate our 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

11


of forecasting with any certainty the numerous variables that can affect the range of the liability. We 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. We believe that the potential additional costs for claims will not have a material effect on the financial condition of the Company or its liquidity, although the effect of any future liabilities recorded could be material to earnings in a future period. See Note 16 to our March 31, 2019 consolidated financial statements included in Item 8 of this form 10K.
 
As indicated above, our self-insurance coverage is effected through our captive insurance subsidiary. The reserves of our captive insurance subsidiary are subject to periodic adjustments based upon actuarial evaluations, which adjustments impact our overall results of operations. These periodic adjustments can be favorable or unfavorable.
 
We are subject to currency fluctuations from our sales outside the U.S.
 
Our products are sold in many countries around the world. Thus, a portion of our revenues (approximately $402,473,000 in our fiscal year ended March 31, 2019) are generated in foreign currencies, including principally the Euro, the British Pound, the Canadian Dollar, the South African Rand, the Brazilian Real, the Mexican Peso, and the Chinese Yuan, and while much of the costs incurred to generate those revenues are incurred in the same currency, a portion is incurred in other currencies. Since our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, a currency translation impact on our earnings. Currency fluctuations may impact our financial performance in the future.
 
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. These industries are highly cyclical and at times pricing and availability can be volatile due to a number of factors beyond our control, including general economic conditions, labor costs, competition, import duties, tariffs, and currency exchange rates. This volatility can significantly affect our raw material costs. In an environment of increasing raw material prices and new trade tariffs, 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.
 
We rely in large part on independent distributors for sales of our products.
 
For the most part, we depend on independent distributors to sell our products and provide service and aftermarket support to our end-user customers. Distributors play a significant role in determining which of our products are stocked at their locations, and hence are most readily accessible to aftermarket buyers, and the price at which these products are sold. Almost all of the distributors with whom we transact business offer competitive products and services to our end-user customers. For the most part, we do not have written agreements with our distributors. The loss of a substantial number of these distributors or an increase in the distributors' sales of our competitors' products to our ultimate customers could materially reduce our sales and profits.

We are subject to various environmental laws which may require us to expend significant capital and incur substantial cost.
 
Our operations and facilities are subject to various federal, state, local, and foreign requirements relating to the protection of the environment, including those governing the discharges of pollutants in the air and water, the generation, management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We have made, and will continue to make, expenditures to comply with such requirements. Violations of, or liabilities under, environmental laws and regulations, or changes in such laws and regulations (such as the imposition of more stringent standards for discharges into the environment), could result in substantial costs to us, including operating costs and capital expenditures, fines and civil and criminal sanctions, third party claims for property damage or personal injury, clean-up costs, or costs relating to the temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many years, and we have remediated contamination at some of our facilities. Over time, we and other predecessor operators of such facilities have generated, used, handled, and disposed of hazardous and other regulated wastes. Additional environmental liabilities could exist, including clean-up obligations at these locations or other sites at which materials from our operations were disposed, which could result in substantial future expenditures that cannot be currently quantified and which could reduce our profits or have an adverse effect on our financial condition, operations, or liquidity.
 
We may face claims of infringement on the intellectual property of others, or others may infringe upon our intellectual property.


12


Our future success depends in part on our ability to prevent others from infringing on our proprietary rights, as well as our ability to operate without infringing upon the proprietary rights of others. We may be required at times to take legal action to protect our proprietary rights and, despite our best efforts, we may be sued for infringing on the patent rights of others. Patent litigation is costly and, even if we prevail, the cost of such litigation could adversely affect our financial condition. In addition, we could be adversely affected financially should we be judged to have infringed upon the intellectual property of others.

We rely on subcontractors or suppliers to perform their contractual obligations.
 
Some of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services we must provide to our customers. There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by our subcontractor or customer concerns about the subcontractor. Failure by our subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed upon services may materially and adversely impact our ability to perform our obligations as the prime contractor. A delay in our ability to obtain components and equipment parts from our suppliers may affect our ability to meet our customers' needs and may have an adverse effect upon our profitability.
 
We are subject to debt covenant restrictions.
 
Our revolving credit facility and Term Loan contain a financial leverage covenant and other restrictive covenants. A significant decline in our operating income or cash generating ability could cause us to violate our leverage ratio in our bank credit facility. Other material adverse changes in our business could cause us to be in default of our debt covenants. This could result in our being unable to borrow under our bank credit facility or being obliged to refinance and renegotiate the terms of our indebtedness.
 
Our business operations may be adversely affected by information systems interruptions or intrusion.

We depend on various information technologies throughout our company to administer, store, and support multiple business activities. If these systems are damaged, cease to function properly, or are subject to cyber-security attacks, such as those involving unauthorized access, malicious software and/or other intrusions, we could experience production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation. While we attempt to mitigate these risks by employing a number of measures, including employee training, technical security controls, and maintenance of backup and protective systems, our systems, networks, products, and services remain potentially vulnerable to known or unknown threats, any of which could have a material adverse affect on our business, financial condition or results of operations.

We depend on our senior management team and the loss of any member could adversely affect our operations.
 
Our success is dependent on the management and leadership skills of our senior management team. The loss of any of these individuals or an inability to attract, retain, and maintain additional personnel could prevent us from implementing our business strategy. We cannot assure you that we will be able to retain our existing senior management personnel or to attract additional qualified personnel when needed.
 
We continually evaluate and assess our personnel and may make additional changes to the members or assignments of our senior management team in the future.
 
We have entered into employment agreements with the following senior management personnel: Werner Wagner (our STAHL Managing Director) and Mark D. Morelli (our President and CEO).


Item 1B.    Unresolved Staff Comments 

None.

13



Item 2.        Properties
 
We maintain our corporate headquarters in Getzville, New York (an owned property) and, as of March 31, 2019, conducted our principal manufacturing at the following facilities:

 
 
Location
 
Products/Operations
 
Square
Footage
 
Owned or
Leased
1
 
Kunzelsau, Germany
 
Hoists
 
345,000

 
Leased
2
 
Wadesboro, NC
 
Hoists
 
180,000

 
Owned
3
 
Lexington, TN
 
Chain
 
164,000

 
Owned
 
 
Asia operation:
 
 
 
 

 
 
4
 
Hangzhou, China
 
Hoists
 
70,000

 
Owned
5
 
Hangzhou, China
 
Hoists
 
82,000

 
Owned
6
 
Charlotte, NC
 
Actuators and Rotary Unions
 
146,000

 
Leased
7
 
Menomonee Falls, WI
 
Power control systems
 
144,000

 
Leased
 
 
Tennessee forging operation:
 
 
 
 
 
 
8
 
Chattanooga, TN
 
Forged attachments
 
81,000

 
Owned
9
 
Chattanooga, TN
 
Forged attachments
 
59,000

 
Owned
10
 
Wuppertal, Germany
 
Hoists
 
124,000

 
Leased
11
 
Kissing, Germany
 
Hoists, winches, and actuators
 
107,000

 
Leased
12
 
Damascus, VA
 
Hoists
 
97,000

 
Owned
13
 
Brighton, MI
 
Overhead light rail workstations
 
71,000

 
Leased
14
 
Lisbon, OH
 
Hoists
 
37,000

 
Owned
15
 
Chester, England
 
Plate clamps
 
56,000

 
Owned
16
 
Santiago Tianguistenco, Mexico
 
Hoists
 
54,000

 
Owned
17
 
Szekesfehervar, Hungary
 
Textiles and textile strappings
 
24,000

 
Leased
18
 
Romeny-sur-Marne, France
 
Rotary unions
 
22,000

 
Owned

In addition, we have a total of 49 sales offices, distribution centers, and warehouses.  We believe that our properties have been adequately maintained, are in generally good condition and are suitable for our business as presently conducted. We also believe our existing facilities provide sufficient production capacity for our present needs and for our anticipated needs in the foreseeable future. Upon the expiration of our current leases, we believe that either we will be able to secure renewal terms or enter into leases for alternative locations at market terms.


14


Item 3.        Legal Proceedings
 
From time to time, we are named a defendant in legal actions arising out of the normal course of business. We are not a party to any pending legal proceeding other than ordinary, routine litigation incidental to our business. We do not believe that any of our pending litigation will have a material impact on our business. We maintain comprehensive general product liability insurance against risks arising out of the use of our products sold to customers through our wholly-owned New York State captive insurance subsidiary of which we are the sole policy holder.  The per occurrence limits on the self-insurance for general and product liability coverage were $2,000,000 from inception through fiscal 2003 and $3,000,000 for fiscal 2004 and thereafter.  In addition to the per occurrence limits, our coverage is also subject to an annual aggregate limit, applicable to losses only.  These limits range from $2,000,000 to $6,000,000 for each policy year from inception through fiscal 2019.  We obtain additional insurance coverage from independent insurers to cover potential losses in excess of these limits.

Like many industrial manufacturers, we are also involved in asbestos-related litigation. In continually evaluating costs relating to our estimated asbestos-related liability, we review, 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, our recent and historical resolution of the cases, the number of cases pending against us, the status and results of broad-based settlement discussions, and the number of years such activity might continue.  Because this liability is likely to extend over many years, management believes that the potential additional costs for claims will not have a material effect on the financial condition of the Company or its liquidity, although the effect of any future liabilities recorded could be material to earnings in a future period. 

The Company believes that a share of its previously incurred asbestos-related expenses and future asbestos-related expenses are covered by pre-existing insurance policies. The Company has engaged in a legal action against the insurance carriers for those policies to recover these expenses and future costs incurred. When the Company resolves this legal action, it is expected that a gain will be recorded for previously expensed cost that is recovered. During fiscal 2019 and fiscal 2018, the Company received settlement payments $484,000 and $2,362,000, respectively, net of legal fees, from its insurance carriers as partial reimbursement for asbestos-related expenses.  These partial payments have been recorded as gains in cost of products sold. The Company is continuing its actions to recover further past costs and to cover future costs.

See Note 16 to our March 31, 2019 consolidated financial statements for more information on our matters involving litigation.

Item 4.        Mine Safety Disclosures.

Not Applicable.    
 


15


PART II


Item 5.        Market for the Company’s Common Stock and Related Security Holder Matters

Our common stock is traded on the Nasdaq Global Select Market under the symbol ‘‘CMCO.” As of April 30, 2019, there were 407 holders of record of our common stock.

During fiscal 2019, the Company declared quarterly cash dividends totaling $4,903,000. On March 26, 2019, the Company's Board of Directors declared regular quarterly dividends of $0.06 per common share. The dividend was paid on May 13, 2019 to shareholders of record on May 3, 2019 and totaled approximately $1,405,000.

Our current credit agreement allows, but limits our ability to pay dividends. 

16



PERFORMANCE GRAPH

The Performance Graph shown below compares the cumulative total shareholder return on our common stock based on its market price, with the total return of the S&P SmallCap 600 Index, and the Dow Jones U.S. Diversified Industrials.  The comparison of total return assumes that a fixed investment of $100 was invested on March 31, 2014 in our common stock and in each of the foregoing indices and further assumes the reinvestment of dividends.  The stock price performance shown on the graph is not necessarily indicative of future price performance.


a5yearcumulativetotalreturnc.jpg

 


17


Item 6.        Selected Financial Data

The consolidated balance sheets as of March 31, 2019 and 2018, and the related statements of operations, cash flows, and shareholders’ equity for each of the three years ended March 31, 2019 and notes thereto appear elsewhere in this annual report. The selected consolidated financial data presented below should be read in conjunction with, and are qualified in their entirety by “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” our consolidated financial statements and the notes thereto and other financial information included elsewhere in this annual report.

 
 
 
 
 
(In million's, except per share data)
 
 
2019
 
2018
 
2017 (4)
 
2016
 
2015
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
876.3

 
$
839.4

 
$
637.1

 
$
597.1

 
$
579.6

Cost of products sold (1)
 
571.3

 
554.4

 
444.2

 
411.5

 
398.5

Gross profit
 
305.0

 
285.0

 
192.9

 
185.6

 
181.1

Selling expenses
 
97.9

 
102.0

 
77.3

 
72.9

 
69.8

General and administrative expenses (1) (2)
 
83.6

 
85.6

 
72.1

 
62.9

 
49.7

Research and development expenses (2)
 
13.5

 
13.6

 
10.5

 
7.4

 
5.2

Impairment of intangible asset
 

 

 
1.1

 

 

Net loss on sales of businesses
 
25.7

 

 

 

 

Amortization of intangibles
 
14.9

 
15.6

 
8.1

 
5.0

 
2.3

Income (loss) from operations
 
69.4

 
68.2

 
23.8

 
37.4

 
54.1

Interest and debt expense
 
17.1

 
19.7

 
11.0

 
7.9

 
12.4

Cost of debt refinancing
 

 

 
1.3

 

 
8.6

Other (income) and expense, net (1)
 
(0.6
)
 
(1.2
)
 
(1.5
)
 
(2.1
)
 
(2.9
)
Income (loss) before income taxes
 
52.9

 
49.7

 
13.0

 
31.6

 
36.0

Income tax expense (benefit)
 
10.3

 
27.6

 
4.0

 
12.0

 
8.8

Net income (loss)
 
$
42.6

 
$
22.1

 
$
9.0

 
$
19.6

 
$
27.2

 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
1.83

 
$
0.97

 
$
0.44

 
$
0.98

 
$
1.36

Diluted earnings (loss) per share
 
$
1.80

 
$
0.95

 
$
0.43

 
$
0.96

 
$
1.34

Weighted average shares outstanding – basic
 
23.3

 
22.8

 
20.6

 
20.1

 
19.9

Weighted average shares outstanding – assuming dilution
 
23.7

 
23.3

 
20.9

 
20.3

 
20.2

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (at end of period):
 
 
 
 
 
 
 
 

 
 

Total assets
 
$
1,061.6

 
$
1,142.4

 
$
1,113.8

 
$
772.9

 
$
566.1

Total debt (3)
 
300.3

 
363.3

 
421.3

 
267.6

 
126.5

Total debt, net of cash and cash equivalents
 
229.2

 
300.3

 
343.7

 
216.0

 
63.5

Total shareholders’ equity
 
431.2

 
408.2

 
341.4

 
286.3

 
268.7

 
 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
 

Net cash provided by operating activities
 
79.5

 
69.7

 
60.5

 
52.6

 
38.3

Net cash provided by (used in) investing activities
 
2.5

 
(32.6
)
 
(224.0
)
 
(203.2
)
 
(34.1
)
Net cash provided by (used in) financing activities
 
(67.8
)
 
(59.5
)
 
190.7

 
137.0

 
(48.4
)
Capital expenditures
 
(12.3
)
 
(14.5
)
 
(14.4
)
 
(22.3
)
 
(17.2
)

(1)
The Company adopted ASU 2017-07 in the first quarter of fiscal 2019. The service cost component of net periodic benefit cost above is recorded in Cost of products sold, Selling expense, and General and administrative expenses while the remaining components are recorded to Other (income) expense, net. The prior year amounts have been reclassified to

18


provide comparable presentation in line with the guidance in ASU 2017-07 based on amounts previously disclosed for the various components of net periodic pension cost (benefit).

(2)
Beginning in fiscal 2018, the Company reclassified research and development expenses previously recorded in general and administrative expense into a separate line item on the consolidated statements of operations. All prior periods presented above have been revised to reflect this presentation. Please refer to Note 2 of the Company's financial statements for additional information regarding research and development expenses.

(3)
Total debt includes all debt, including the current portion, notes payable, term loan, and subordinated debt.

(4)
The Company acquired STAHL in fiscal 2017 which was deemed to be a significant acquisition.

19


Item 7.        Management’s Discussion and Analysis of Results of Operations and Financial Condition

This section should be read in conjunction with our consolidated financial statements included elsewhere in this annual report.

EXECUTIVE OVERVIEW

We are a leading worldwide designer, manufacturer, and marketer of material handling products, systems and services which efficiently and safely move, lift, position, and secure materials. Key products include hoists, rigging tools, digital power control systems, and actuators. We are focused on serving commercial and industrial applications that require safety and productivity in moving material provided by our superior design and engineering know-how.

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 144-year history by emphasizing technological innovation, manufacturing excellence and superior customer service. In addition, acquisitions significantly broadened our product lines and services and expanded our geographic reach, end-user markets and customer base. In accordance with our Blueprint for Growth Strategy, we are simplifying the business utilizing our 80/20 process, improving our operational excellence, and ramping the growth engine by investing in new product development and a digital platform to grow profitably. Shareholder value will be enhanced by expanding EBITDA margins and return on invested capital ("ROIC").

Our revenue base is geographically diverse with approximately 46% derived from customers outside the U.S. for the year ended March 31, 2019. Our expansion within the European market with the acquisition of STAHL further expands our geographic diversity. We believe this will help balance the impact of changes that will occur in local economies, as well as benefit the Company from growth in emerging markets. We monitor both U.S. and Eurozone Industrial Capacity Utilization statistics 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 leveraging our recent acquisitions and 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, 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, and construction and infrastructure.

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 quote 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 E-PAS™. 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.

We continuously monitor market prices of steel. We purchase approximately $25,000,000 to $30,000,000 of steel annually in a variety of forms including rod, wire, bar, structural, and other forms of steel. Generally, as we experience fluctuations in our costs, we reflect them as price increases to our customers with the goal of being margin neutral. However, as a result of the recent trade tariff actions with China, the Company determined its fiscal 2019 exposure for tariffs to be approximately $1,700,000 which resulted in increased cost of products sold. The Company is monitoring the impact of tariffs and is actively working to mitigate this impact through material productivity actions and pricing strategies.

We operate in a highly competitive and global business environment. We face a variety of opportunities in those markets and geographies, including trends toward increasing productivity of the global labor force 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.

20


RESULTS OF OPERATIONS

Fiscal 2019 Compared to 2018

Fiscal 2019 sales were $876,282,000, an increase of 4.4%, or $36,863,000 compared with fiscal 2018 sales of $839,419,000. Sales for the year were positively impacted by $39,761,000 due to increased sales volume and $10,628,000 by price increases, offset by $5,957,000 in prior year sales from sold businesses.  Unfavorable foreign currency translation decreased sales by $7,569,000.

Our gross profit was $304,997,000 and $285,061,000 or 34.8% and 34.0% of net sales in fiscal 2019 and 2018, respectively.  The fiscal 2019 increase in gross profit of $19,936,000 or 7.0% is the result of $12,986,000 in increased volume, $8,573,000 in increased productivity and favorable manufacturing costs, $6,476,000 of price increases net of material inflation, and $1,078,000 in decreased product liability costs. These increases were offset by a prior year insurance settlement for $2,362,000 which did not reoccur in the current year, $1,717,000 in increased tariffs, $1,473,000 in costs incurred to consolidate the Salem, Ohio facility, and $1,223,000 in gross profit from sold businesses. The translation of foreign currencies had a $2,423,000 unfavorable impact on gross profit for the year ended March 31, 2019.

Selling expenses were $97,925,000 and $101,956,000, or 11.2% and 12.1% of net sales in fiscal years 2019 and 2018. Selling expenses from sold businesses decreased selling expenses by $346,000 in fiscal 2019.  Additionally, foreign currency translation had a $1,016,000 favorable impact on selling expenses. The remaining decrease is largely due to lower warehouse and personnel costs.
 
General and administrative expenses were $83,567,000 and $85,605,000 or 9.5% and 10.2% of net sales in fiscal 2019 and 2018, respectively. The fiscal 2019 decrease was due to a $7,031,000 net reduction of STAHL integration costs that are classified as general and administrative expense, a $1,666,000 net decrease in legal costs for an insurance recovery legal action, a $300,000 net reduction in legal costs for a former subsidiary of Magnetek involved in a litigation matter, and $619,000 in debt repricing fees incurred in the prior year. These decreases were offset by higher incentive compensation and stock compensation expense of $1,347,000, $2,317,000 in costs incurred to execute the Company's Blueprint for Growth Strategy, and increased environmental remediation accruals of $585,000. The remaining increases in general and administrative expense relates to investments in various initiatives and general inflation. Foreign currency translation had a $495,000 favorable impact on general and administrative expenses.

Research and development expenses were $13,491,000 and $13,617,000 in fiscal 2019 and 2018, respectively. As a percentage of consolidated net sales, research and development expenses were 1.5% and 1.6% in fiscal 2019 and 2018. The decrease is attributable to prior year expenses incurred by the sold business in the amount of $119,000.

A Net loss on sales of businesses in the amount of $25,672,000 was recorded in the year ended March 31, 2019. Included in the Net loss on sales of businesses is a loss on Crane Equipment and Service Inc. and Stahlhammer Bommern GmbH in the amount of $26,731,000, offset by a gain on the sale of the Tire Shredder business in the amount of $1,059,000 during the twelve months ended March 31, 2019. Included in the Net loss on sales of businesses were impairment charges of $27,753,000 recorded in fiscal 2019.
 
Amortization of intangibles remained relatively consistent at $14,900,000 and $15,552,000 in fiscal 2019 and 2018, respectively. The decrease is primarily related to foreign currency translation.
 
Interest and debt expense was $17,144,000 and $19,733,000 in fiscal 2019 and 2018, respectively, and primarily related to a decrease in interest and debt expense on the Company's Term Loan due to lower average borrowings outstanding during the fiscal 2019 period.
 
Investment income of $727,000 and $157,000, in fiscal 2019 and 2018, respectively, related to earnings on marketable securities held in the Company’s wholly owned captive insurance subsidiary and the Company's equity method investment in EMC, described in Note 7. In accordance with ASU 2016-01, investment income for fiscal 2019 included net unrealized gains of marketable securities of $183,000.

Foreign currency exchange loss was $843,000 and $1,539,000 in fiscal 2019 and 2018, respectively, as a result of foreign currency volatility related to foreign currency denominated sales and purchases and intercompany debt.

Other income, net, was $716,000 and $2,469,000 in fiscal 2019 and 2018, respectively. This includes components of pension expense (all except service costs, described in Note 13) and various non-operating income and expense related activities.


21


Income tax expense as a percentage of income from continuing operations before income tax expense was 19.5% and 55.6% in fiscal 2019 and 2018, respectively. These percentages vary from the U.S. statutory rate primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income for these subsidiaries. The effective tax rate for fiscal 2019 was affected favorably by 6.2 percentage points by certain favorable permanent adjustments, including generation and utilization of certain foreign tax credits, and by 2.8 percentage points by the reduction of the Company's one-time transition tax on earnings of certain foreign subsidiaries to zero. These favorable effects were offset unfavorably by 7.6 percentage points related to certain non-deductible losses on the sale of businesses.

Fiscal 2018 Compared to 2017

Fiscal 2018 sales were $839,419,000, an increase of 31.8%, or $202,296,000 compared with fiscal 2017 sales of $637,123,000. Sales for the year were positively impacted by $144,670,000 due to our acquisition of STAHL, $40,993,000 due to an increase in sales volume, and $2,529,000 by price increases.  Favorable foreign currency translation increased sales by $14,104,000.

Our gross profit was $285,061,000 and $192,885,000 or 34.0% and 30.3% of net sales in fiscal 2018 and 2017, respectively.  The fiscal 2018 increase in gross profit of $92,176,000 or 47.8% is the result of $53,794,000 from the acquisition of STAHL, $5,362,000 in increased productivity and favorable manufacturing costs, $1,361,000 of price increases net of material inflation, $13,227,000 in increased volume, $2,964,000 in decreased product liability costs, $8,852,000 in STAHL inventory amortization related to purchase accounting adjustments incurred in fiscal 2017 that did not reoccur in fiscal 2018, a $2,362,000 increase due to an insurance settlement, offset by $307,000 in STAHL integration costs that are classified as cost of products sold. The translation of foreign currencies had a $4,561,000 favorable impact on gross profit for the year ended March 31, 2018.

Selling expenses were $101,956,000 and $77,319,000 or 12.1% of net sales in fiscal years 2018 and 2017. STAHL contributed an additional $18,396,000 in selling expense and $616,000 of integration costs were incurred related to the acquisition of STAHL that are classified as selling expense, offset by $247,000 in expense that did not reoccur related to the Canadian lump sum pension settlement in the year ended March 31, 2018. The remainder of the increase is largely due to the increase in sales volume, additional marketing expenses, and the transition to a new warehouse in North America.  Additionally, foreign currency translation had a $2,151,000 unfavorable impact on selling expenses.

General and administrative expenses were $85,605,000 and $72,129,000 or 10.2% and 11.3% of net sales in fiscal 2018 and 2017, respectively. The fiscal 2018 increase was primarily the result of the STAHL acquisition which added $9,477,000 in recurring general and administrated expenses and $7,840,000 of integration costs were incurred related to the acquisition of STAHL that are classified as general and administrative expense, offset by $8,815,000 in STAHL related acquisition and integration costs incurred in the year ended March 31, 2017. Additionally, $1,589,000 in net legal costs were incurred for a legal action against our product liability insurance carriers, $400,000 in expected litigation costs for a former subsidiary of Magnetek, $619,000 in debt repricing fees, offset by CEO retirement and search costs of $3,085,000 that did not reoccur in fiscal 2018. The remainder of the increase is largely due to higher annual incentive plan costs expected in fiscal 2018 compared to fiscal 2017. Foreign currency translation had a $1,178,000 unfavorable impact on general and administrative expenses.

Research and development expenses were $13,617,000 and $10,482,000 in fiscal 2018 and 2017, respectively. As a percentage of consolidated net sales, research and development expenses were 1.6% in fiscal 2018 and 2017. STAHL contributed an additional $1,683,000 to research and development expenses in the year ended March 31, 2018. The remainder of the increase relates to global initiatives to develop new products.

Impairment of intangible assets of $1,125,000 in fiscal 2017 relates to the impairment of the indefinite-lived trademark of STB. After performing our annual indefinite-lived intangible asset impairment test, the Company determined that the indefinite-lived STB intangible trademark asset was fully impaired due to lower revenue and resulting cash flows than projected at the time of the acquisition. No impairment was recorded in fiscal 2018.
 
Amortization of intangibles was $15,552,000 and $8,105,000 in fiscal 2018 and 2017, respectively. The increase relates to additional amortization of intangibles related to the STAHL acquisition.
 
Interest and debt expense was $19,733,000 and $10,966,000 in fiscal 2018 and 2017, respectively. The increase in interest and debt expense relates to additional debt to fund the STAHL acquisition.
 
The fiscal 2017 debt extinguishment costs of $1,303,000 relates to the write off of unamortized deferred financing costs associated with our previous term loan and revolving credit facility refinanced as part of the STAHL acquisition. This transaction is discussed in more detail in the Liquidity and Capital Resources section. There were no debt extinguishment costs recorded in fiscal 2018.


22


Investment income of $157,000 and $462,000 in fiscal 2018 and 2017, respectively, related to earnings on marketable securities held in the Company’s wholly owned captive insurance subsidiary.

Foreign currency exchange loss was $1,539,000 and $1,232,000 in fiscal 2018 and 2017, respectively, as a result of foreign currency volatility related to foreign currency denominated purchases and intercompany debt.

Other income, net, includes components of pension expense (all except service costs, described in Note 13) and various non-operating income and expense related activities. The balance was $2,469,000 and $2,341,000 in fiscal 2018 and 2017, respectively.

Income tax expense as a percentage of income from continuing operations before income tax expense was 55.6% and 31.0% in fiscal 2018 and 2017, respectively. These percentages vary from the U.S. statutory rate primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income for these subsidiaries. Income tax expense as a percentage of income from continuing operations for fiscal 2018 increased by $17,602,000 or 35 percentage points as a result of accounting for the enactment of the Tax Cuts and Jobs Act ("the Act").

The Company revised its annual effective rate to reflect a change in the U.S. federal statutory rate from 35% to 21%, resulting from the enactment of the Act on December 22, 2017. The rate change is administratively effective upon enactment, resulting in a blended rate for fiscal year 2018. As a result, the U.S. blended statutory tax rate for fiscal 2018 is 31.55%.

The Act requires companies to remeasure certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. The Company recognized a provisional amount of $17,602,000, which is included as a component of income tax expense on the Company's statement of operations for fiscal 2018. See Note 17 for additional information regarding how the provisional amount was calculated.

Included within the provisional amount, as described above, is a one-time transition tax on the Company's total foreign post-1986 earnings and profits ("E&P") that it previously deferred from U.S. income taxes. The Company recorded a provisional amount for its one-time transition tax liability for its foreign subsidiaries, resulting in an increase in income tax expense of $1,500,000. The one-time transition tax is payable over an 8-year period (8% in each of the first five years, 15% in year six, 20% in year seven, and 25% in year 8). The difference between the provisional amount, as noted above, and the one-time transition tax relates to remeasuring the Company's deferred tax assets and liabilities at the new U.S. Federal statutory tax rate. The one-time transition tax was subsequently reversed in fiscal 2019 when our provisional accounting under the Act was finalized.


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LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents, and restricted cash totaled $71,343,000, $63,565,000, and $78,429,000 at March 31, 2019, 2018, and 2017, respectively.
 
Cash flow from operating activities

Net cash provided by operating activities was $79,499,000, $69,661,000, and $60,450,000 in fiscal 2019, 2018, and 2017, respectively. In fiscal 2019, net income of $42,577,000 and non-cash adjustments to net income of $66,436,000 contributed the most to cash provided by operating activities as well as an increase in trade accounts payable of $3,881,000. The increase in cash was offset by an increase in inventory of $15,411,000, an increase in trade accounts receivable of $11,328,000, and a decrease in accrued expenses and non-current liabilities of $6,759,000. The increase in inventory is due to the Company's initiatives to improve inventory availability. The net decrease in non-current liabilities is largely due to U.S. pension plan contributions of $11,018,000.

In addition to net income and non-cash adjustments to net income in fiscal 2018, net cash provided by operating activities increased from fiscal 2017 as a result of an increase in accrued liabilities of $11,918,000 (of which approximately $7,900,000 is due to additional incentive plan accruals), offset by an increase in inventories and decrease in non-current liabilities of $12,249,000 and $16,700,000, respectively. The decrease in non-current liabilities was primarily due to $11,211,000 in contributions made to our pension plans, excluding the effects of acquisitions.

Cash flow from investing activities

Net cash provided (used) by investing activities was $2,486,000, $(32,592,000), and $(224,039,000) in fiscal 2019, 2018, and 2017, respectively. In fiscal 2019, the most significant source of cash used by investing activities was $14,230,000 in cash received from the Sold Businesses, offset by $12,288,000 in capital expenditures. The Company also received $662,000 in net cash proceeds from the sale of marketable equity securities.

The most significant uses of cash for investing activities in fiscal 2018 related to $14,750,000 in cash paid to the former owner of STAHL related to a profit sharing agreement, net of a purchase price working capital refund, and capital expenditures of $14,515,000. Further, the Company paid cash for an investment accounted for under the equity method in the amount of $3,359,000. Offsetting these uses of cash is $326,000 in net cash proceeds from the sale of marketable equity securities.

Cash flow from by financing activities

Net cash (used) provided by financing activities was $(67,778,000), $(59,502,000), and $190,709,000 in fiscal 2019, 2018, and 2017, respectively. In fiscal 2019, the most significant uses of cash were $65,088,000 in repayments on our Term Loan and dividends paid in the amount $4,652,000, offset by $1,962,000 in net inflows from stock related transactions, which includes proceeds of $4,152,000 from stock options exercised.

The most significant use of cash in fiscal 2018 were repayments on debt of $60,144,000, of which $57,037,000 was principal payments on our Term Loan, and $619,000 in fees paid for the debt repricing. The remaining cash used for financing activities related to dividends paid of $3,658,000, offset by $4,919,000 in net inflows from stock related transactions, which included proceeds of $6,332,000 from stock options exercised.

We believe that our cash on hand, cash flows, and borrowing capacity under our New 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 successful execution of our current business plan and effective working capital utilization. No material restriction exists in accessing cash held by our non-U.S. subsidiaries.  As of March 31, 2019, $46,322,000 of cash and cash equivalents were held by foreign subsidiaries.

On January 31, 2017 the Company entered into a Credit Agreement ("Credit Agreement") and $545,000,000 of debt facilities ("Facilities") in connection with the STAHL acquisition. The Facilities consist of a Revolving Facility ("Revolver") in the amount of $100,000,000 and a $445,000,000 1st Lien Term Loan ("Term Loan"). The Term Loan has a seven-year term maturing in 2024 and the Revolver has a five-year term maturing in 2022. At March 31, 2019 the Company has not drawn from the Revolver.

The key terms of the agreement are as follows:

Term Loan: An aggregate $445,000,000 1st Lien Term Loan which requires quarterly principal amortization of 0.25% with the remaining principal due at maturity date. In addition, if the Company has Excess Cash Flow ("ECF") as defined

24


in the Credit Agreement, the ECF Percentage of the Excess Cash Flow for such fiscal year minus optional prepayment of the Loans (except prepayments of Revolving Loans that are not accompanied by a corresponding permanent reduction of Revolving Commitments) pursuant to Section 2.10(a) of the Credit Agreement other than to the extent that any such prepayment is funded with the proceeds of Funded Debt, shall be applied toward the prepayment of the Term Loan. The ECF Percentage is defined as 50% stepping down to 25% or 0% based on the Secured Leverage Ratio as of the last day of the fiscal year.

Revolver: An aggregate $100,000,000 secured revolving facility which includes sublimits for the issuance of standby letters of credit, swingline loans and multi-currency borrowings in certain specified foreign currencies.

Fees and Interest Rates: Commitment fees and interest rates are determined on the basis of either a Eurocurrency rate or a Base rate plus an applicable margin based upon the Company's Total Leverage Ratio (as defined in the Credit Agreement).

Prepayments: Provisions permitting a Borrower to voluntarily prepay either the Term Loan or Revolver in whole or in part at any time, and provisions requiring certain mandatory prepayments of the Term Loan or Revolver on the occurrence of certain events which will permanently reduce the commitments under the Credit Agreement, each without premium or penalty, subject to reimbursement of certain costs of the Lenders. A prepayment premium of 1% of the principal amount of the First Lien Term Loans is required if the prepayment is associated with a Repricing Transaction and it were to occur within the first twelve months.

Covenants: Provisions containing covenants required of the Corporation and its subsidiaries including various affirmative and negative financial and operational covenants. The key financial covenant is triggered only on any date when any Extension of Credit under the Revolving Facility is outstanding (excluding any Letters of Credit) (the “Covenant Trigger”), and permits the Total Leverage Ratio for the Reference Period ended on such date to not exceed (i) 4.50:1.00 as of any date of determination prior to December 31, 2017, (ii) 4.00:1.00 as of any date of determination on December 31, 2017 and thereafter but prior to December 31, 2018, (iii) 3.50:1.00 as of any date of determination on December 31, 2018 and thereafter but prior to December 31, 2019 and (iv) 3.00:1.00 as of any date of determination on December 31, 2019 and thereafter. As there is no amount drawn on the Revolver as of March 31, 2019 the requirement to comply with the covenant is not triggered. Had we been required to determine the covenant ratio we would have been in compliance with the covenant provisions as of March 31, 2019 and 2018.

The Facility is secured by all U.S. inventory, receivables, equipment, real property, certain subsidiary stock (limited to 65% of non-U.S. subsidiaries) and intellectual property. The Credit Agreement allows, but limits our ability to pay dividends.

On February 26, 2018, the Company amended the Credit Agreement (known as the "Amended Credit Agreement"). The Amended Credit Agreement has the same terms mentioned above except for a reduction in interest rates. The applicable rate for the repriced term loan was reduced from 3.00% to 2.50%. The Company accounted for the Amended Credit Agreement as a debt modification, therefore, debt repricing fees incurred in fiscal 2018 were expensed as General and Administrative expenses and the deferred financing fees incurred as part of the Credit Agreement (discussed below) remain unchanged.

The outstanding balance of the Term Loan was $310,463,000 and $375,463,000 as of March 31, 2019 and 2018, respectively. The Company made $65,000,000 of principal payment on the Term Loan during fiscal 2019 and $57,037,000 of principal payment on the Term Loan during fiscal 2018. The Company is obligated to make $4,450,000 of principal payments over the next 12 months, however, plans to pay down $65,000,000 in total. This amount has been recorded within the current portion of long-term debt on the Company's Consolidated Balance Sheet with the remaining balance recorded as long-term debt.

There was $0 outstanding on the Revolving Credit Facility and $17,329,000 outstanding letters of credit as of March 31, 2019. The outstanding letters of credit at March 31, 2019 consisted of $1,236,000 in commercial letters of credit and $16,093,000 of standby letters of credit.

The gross balance of deferred financing costs on the term loan was $14,690,000 as of March 31, 2019 and 2018. The accumulated amortization balances were $4,547,000 and $2,447,000 as of March 31, 2019 and 2018, respectively.

The gross balance of deferred financing costs associated with the Revolving Credit Facility is included in other assets is $2,789,000 as of March 31, 2019 and March 31, 2018. The accumulated amortization balance is $1,209,000 and $651,000 as of March 31, 2019 and March 31, 2018 respectively. These balances are classified in Other assets since no funds were drawn on the Revolving Credit Facility in fiscal 2019 and 2018.


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Unsecured and uncommitted lines of credit are available to meet short-term working capital needs for certain of our subsidiaries operating outside of the U.S. The lines of credit are available on an offering basis, meaning that transactions under the line of credit will be on such terms and conditions, including interest rate, maturity, representations, covenants, and events of default, as mutually agreed between our subsidiaries and the local bank at the time of each specific transaction. As of March 31, 2019, unsecured credit lines totaled approximately $2,468,000, of which $0 was drawn. In addition, unsecured lines of $16,437,000 were available for bank guarantees issued in the normal course of business of which $10,275,000 was utilized.

CONTRACTUAL OBLIGATIONS

The following table reflects a summary of our contractual obligations in millions of dollars as of March 31, 2019, by period of estimated payments due:
 
 
Total
 
Fiscal
2020
 
Fiscal
 2021-
Fiscal 2022
 
Fiscal
 2023-
Fiscal 2024
 
More
 Than
Five Years
Long-term debt obligations (a)
 
$
310.5

 
$
4.5

 
$
8.9

 
$
297.1

 
$

Operating lease obligations (b)
 
43.5

 
11.4

 
13.2

 
8.6

 
10.3

Purchase obligations (c)
 

 

 

 

 

Interest obligations (d)
 
70.3

 
15.9

 
31.4

 
23.0

 

Letter of credit obligations
 
17.3

 
14.6

 
2.7

 

 

Bank guarantees
 
10.3

 
10.3

 

 

 

Uncertain tax positions
 
1.0

 
1.0

 

 

 

Other long-term liabilities reflected on the Company’s balance sheet under GAAP
 
183.8

 

 
32.4

 
14.9

 
136.5

Total
 
$
636.7

 
$
57.7

 
$
88.6

 
$
343.6

 
$
146.8


(a)
As described in Note 12 to consolidated financial statements.
(b)
As described in Note 18 to consolidated financial statements.
(c)
We have no purchase obligations specifying fixed or minimum quantities to be purchased. We estimate that, at any given point in time, our cancelable open purchase orders to be executed in the normal course of business approximate $83 million.
(d)
Estimated for our Term Loan and Revolving Credit Facility and interest rate swaps as described in Note 10 and Note 12 to our consolidated financial statements. Calculated using a Eurocurrency rate of 2.60% plus an applicable margin of 2.50%.

We have no additional off-balance sheet obligations that are not reflected above.

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, and enhance safety. Our capital expenditures for fiscal 2019, 2018, and 2017 were $12,288,000, $14,515,000, and $14,368,000 respectively. Excluded from fiscal 2019 capital expenditures is $227,000, $0, and $0 in property, plant and equipment purchases included in accounts payable at March 31, 2019, 2018, and 2017, respectively. We expect capital expenditure spending in fiscal 2020 of approximately $20,000,000, excluding acquisitions and strategic alliances.

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 primarily due to overall low inflation levels over such periods and our ability to generally pass on rising costs through annual price increases. However, increases in U.S. employee benefits costs such as health insurance and workers compensation insurance have exceeded general inflation levels. In the future, we may be further affected by inflation that we may not be able to pass on as price increases.  With changes in worldwide demand for steel and fluctuating scrap steel prices over the past several years, we experienced fluctuations in our costs that we have reflected as price increases to our customers.  We believe we have been successful in instituting price increases to pass on these material cost increases.  We will continue to monitor our costs and reevaluate our pricing policies.

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SEASONALITY AND QUARTERLY RESULTS

Our 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 plan closures as well as divestitures and acquisitions. Therefore, our operating results for any particular fiscal quarter are not necessarily indicative of results for any subsequent fiscal quarter or for the full fiscal year.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We continually evaluate the estimates and their underlying assumptions, which form the basis for making judgments about the carrying value of our assets and liabilities. Actual results inevitably will differ from those estimates. If interpreted differently under different conditions or circumstances, changes in our estimates could result in material changes to our reported results.  We have identified below the accounting policies involving estimates that are critical to our financial statements. Other accounting policies are more fully described in Note 2 of our consolidated financial statements.

Insurance Reserves.  Our accrued general and product liability reserves as described in Note 16 to consolidated financial statements involve actuarial techniques including the methods selected to estimate ultimate claims, and assumptions including emergence patterns, payment patterns, initial expected losses, and increased limit factors. These actuarial estimates are subject to a high degree of uncertainty due to a variety of factors, including extended lag time in the reporting and resolution of claims, trends or changes in claim settlement patterns, insurance industry practices, and legal interpretations. Changes to these estimates could result in material changes to the amount of expense and liabilities recorded in our financial statements. Further, actual costs could differ significantly from the estimated amounts.  Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.  Other insurance reserves such as workers compensation and group health insurance are based on actual historical and current claim data provided by third party administrators or internally maintained.

Goodwill and indefinite-lived intangible asset impairment testing.  Our goodwill balance of $322,816,000 as of March 31, 2019 is subject to impairment testing.  We test goodwill for impairment at least annually, as of the end of February, 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, or in circumstances where the components share assets or other resources and have other economic interdependencies). We have four reporting units, only two of which have goodwill. Duff-Norton and Rest of Products reporting units have goodwill totaling $9,611,000, and $313,205,000, respectively, at March 31, 2019.

Interim Goodwill Impairment Test

During fiscal 2019 we classified the assets and liabilities of certain businesses as held for sale during fiscal 2019. These businesses were sold prior to the end of fiscal 2019. As a result of this interim classification, we determined an indicator of impairment existed and was required to perform an interim goodwill impairment test on the Rest of Products goodwill reporting unit (representing the hoist, chain, forgings, digital power, motion control, manufacturing, and distribution businesses). The net assets of the Rest of Products reporting unit were measured on a non-recurring basis as of May 31, 2018 in order to perform the interim quantitative goodwill impairment test.

The interim quantitative goodwill impairment test consisted of determining the fair value of the Rest of Products reporting units on a quantitative basis. To estimate the fair value of the Rest of Products reporting unit, we used significant estimates and judgmental factors. The key estimates and factors used in the discounted cash flow valuation include revenue growth rates and profit margins based on internal forecasts, terminal value, and the weighted-average cost of capital used to discount future cash flows.


27


The compound annual growth rate for revenue during the first five years of the projections was approximately 3.75%. The terminal value was calculated assuming a projected growth rate of 3.0% after five years. The estimated weighted-average cost of capital for the Rest of Products reporting unit was determined to be 11.1% based upon an analysis of similar companies and their debt to equity mix, their related volatility and the size of their market capitalization. The interim quantitative goodwill impairment test for the Rest of Products reporting unit did not indicate that goodwill was impaired. Future changes in these estimates and assumptions could materially affect the results of our goodwill impairment tests. For example, a decline in the terminal growth rate by 50 basis points would decrease fair market value by $16,000,000 and an increase in the weighted-average cost of capital by 100 basis points would result in a decrease in fair market value by $45,000,000 for the Rest of Products reporting unit. Even with such changes the fair value of the reporting unit would be greater than its net book value, therefore indicating no impairment.

Annual Goodwill Impairment Test

When we evaluate the potential for goodwill impairment, we assess a range of qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy, and changes in key personnel and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative impairment test. We also proceed to the quantitative model when economic or other business factors indicate that the fair value of our reporting units may have declined since our last quantitative test. We performed the qualitative assessment as of February 28, 2019 and determined that it was not more likely than not that the fair value of our Rest of Products unit was less than that its applicable carrying value. Accordingly, we did not perform the quantitative goodwill impairment test for the fiscal 2019 Rest of Products unit as a result of the annual impairment analysis. For our Duff-Norton unit, we decided to perform the quantitative goodwill impairment test due to increases in its net book value since the last time the quantitative test was performed.

In order to perform the quantitative impairment test for the Duff-Norton unit, we use the discounted cash flow method and comparable market method to estimate fair value. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating profit margins and cash flows, the terminal growth rate and the discount rate. Management projects revenue growth rates, operating margins and cash flows based on each reporting unit’s current business, expected developments and operational strategies over a five-year period. In estimating the terminal growth rate, we consider our historical and projected results, as well as the economic environment in which the reporting unit operates. The discount rates utilized for each reporting unit reflect management’s assumptions of marketplace participants’ cost of capital and risk assumptions, both specific to the reporting unit and overall in the economy. The comparable market method estimates fair value based on prices obtained in actual transactions. The method consists of examining selling prices for comparable assets. After studying the selling prices, value adjustments are made for any dissimilarities.

Testing goodwill for impairment under the quantitative method described above requires us to estimate fair value of the reporting unit using significant estimates and judgmental factors. The compound annual growth rate for revenue during the first five years of our projections was approximately 5.83% for the Duff-Norton reporting unit. The terminal value was calculated assuming a projected growth rate of 3.5% after five years for both reporting units. These rates reflect our estimate of long-term growth into perpetuity and approximate the long-term gross domestic product growth expected on a global basis as well as our normal annual price increases. The estimated weighted-average cost of capital for the reporting units was determined to be 12.3% for the Duff-Norton reporting unit. This was estimated initially based on the Company's consolidated weighted-average cost of capital and increased for additional market risk. We also consider any additional risk of the Duff-Norton reporting unit achieving its forecast, and adjust the weighted-average cost of capital applied when determining the reporting unit’s estimated fair value. Future changes in these estimates and assumptions could materially affect the results of our goodwill impairment tests. For example, a decline in the terminal growth rate by 50 basis points would decrease fair market value by $2,415,000 and an increase in the weighted-average cost of capital by 100 basis points would result in a decrease in fair market value by $6,877,000 for the Duff-Norton reporting unit. Even with such changes the fair value of the reporting unit would be greater than its net book value as of February 28, 2019, therefore indicating no impairment.

We further test our indefinite-lived intangible asset balance of $46,981,000 consisting of trademarks on our recent acquisitions on an annual basis for impairment. Similar to goodwill, we first assess various qualitative factors in the analysis. If, after completing this assessment, it is determined that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value, we proceed to a quantitative impairment test which includes an assessment using the relief from royalty method. We performed the qualitative assessment as of February 28, 2019 and determined that it was not more likely than not that the fair value of each of our indefinite-lived intangible assets was less than that its applicable carrying value.


28


Effects of New Accounting Pronouncements

Information regarding the effects of new accounting pronouncements is included in Note 22 to the accompanying consolidated financial statements included in this March 31, 2019 10-K report.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This report may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed or implied by such statements, including general economic and business conditions, conditions affecting the industries served by us and our subsidiaries, conditions affecting our customers and suppliers, competitor responses to our products and services, the overall market acceptance of such products and services, facility consolidations and other restructurings, our asbestos-related liability, the integration of acquisitions, and other factors disclosed in our periodic reports filed with the Commission. Consequently such forward-looking statements should be regarded as our current plans, estimates and beliefs. We do not undertake and specifically decline 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.


29


Item 7A.    Quantitative and Qualitative Disclosures About Market Risk
 
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. We are exposed to various market risks, including commodity prices for raw materials, foreign currency exchange rates, and changes in interest rates. We may enter into financial instrument transactions, which attempt to manage and reduce the impact of such changes. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

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 primarily due to overall low inflation levels over such periods and our ability to generally pass on rising costs through annual price increases. However, increases in U.S. employee benefits costs such as health insurance and workers compensation insurance have exceeded general inflation levels. In the future, we may be further affected by inflation that we may not be able to pass on as price increases. With changes in worldwide demand for steel and fluctuating scrap steel prices over the past several years, we experienced fluctuations in our costs that we have reflected as price increases to our customers. We believe we have been successful in instituting price increases to pass on these material cost increases. Further, recent trade tariffs with China are expected to increase our material costs at a rate greater than recent historical inflation.

The Company has estimated its exposure related to these tariffs to be approximately $1,700,000, which will result in increased cost of products sold based on today's regulations. The Company is monitoring the impact of tariffs and is actively working to mitigate this impact through material productivity actions and pricing strategies. We will continue to monitor our costs and reevaluate our pricing policies.

In fiscal 2019, 46% of our net sales were from manufacturing plants and sales offices in foreign jurisdictions. We manufacture our products in the United States, China, Germany, United Kingdom, Hungary, Mexico, and France and sell our products in approximately 50 countries. Our results of operations could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. With our fiscal year 2017 acquisition of STAHL, we have an increased presence in the United Arab Emirates, with total assets of approximately $10,000,000. Our operating results are exposed to fluctuations between the U.S. Dollar and the Canadian Dollar, European currencies, the South African Rand, the Mexican Peso, the Brazilian Real, and the Chinese Yuan. For example, when the U.S. dollar weakens against the Euro, the value of our net sales and net income denominated in Euros increases when translated into U.S. dollars for inclusion in our consolidated results. We are also exposed to foreign currency fluctuations in relation to purchases denominated in foreign currencies. Our foreign currency risk is mitigated since the majority of our foreign operations’ net sales and the related expense transactions are denominated in the same currency so therefore a significant change in foreign exchange rates would likely have a very minor impact on net income.  For example, excluding the impairment on the held for sale business, a 10% change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have had an impact of approximately $4,500,000 on our income from operations. In addition, the majority of our export sale transactions are denominated in U.S. dollars.

The Company has cross currency swap agreements that are designated as cash flow hedges to hedge changes in the value of intercompany loans to a foreign subsidiary due to changes in foreign exchange rates. These intercompany loans are related to the acquisition of STAHL. The notional amount of these derivatives is $198,260,000, and all of the contracts mature by January 31, 2022. From its March 31, 2019 balance of AOCL, the Company expects to reclassify approximately $1,276,000 out of AOCL, and into foreign currency exchange loss (gain), during the next 12 months based on the contractual payments due under these intercompany loans.
The Company has foreign currency forward agreements in place to offset changes in the value of other intercompany loans to foreign subsidiaries due to changes in foreign exchange rates. The notional amount of these derivatives is $3,461,000 and all of the contracts mature by June 30, 2019. These contracts are marked to market each balance sheet date and are not designated as hedges.

The Company has foreign currency forward agreements that are designated as cash flow hedges to hedge a portion of forecasted inventory purchases denominated in foreign currencies. The notional amount of those derivatives is $11,185,000 and all contracts mature by March 31, 2020. From its March 31, 2019 balance of AOCL, the Company expects to reclassify approximately $1,000 out of AOCL during the next 12 months based on the underlying transactions of the sales of the goods purchased.

The Company's policy is to maintain a capital structure that is comprised of 50-70% of fixed rate long-term debt and 30-50% of variable rate long-term debt. The Company has two interest rate swap agreements in which the Company receives interest at a variable rate and pays interest at a fixed rate. These interest rate swap agreements are designated as cash flow hedges to hedge changes in interest expense due to changes in the variable interest rate of the senior secured term loan. The amortizing interest rate swaps mature by December 31, 2023 and have a total notional amount of $197,160,000 as of March 31, 2019. The effective

30


portion of the changes in fair values of the interest rate swaps is reported in AOCL and will be reclassified to interest expense over the life of the swap agreements. The ineffective portion was not material and was recognized in the current period interest expense. From its March 31, 2019 balance of AOCL, the Company expects to reclassify approximately $565,000 out of AOCL, and into interest expense, during the next 12 months.

31


Item 8.        Financial Statements and Supplemental Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Columbus McKinnon Corporation

Audited Consolidated Financial Statements as of March 31, 2019:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
 
1
Description of Business
2
Accounting Principles and Practices
3
Acquisitions
4
Revenue Recognition
5
Fair Value Measurements
6
Inventories
7
Marketable Securities and Other Investments
8
Property, Plant, and Equipment
9
Goodwill and Intangible Assets
10
Derivative Instruments
11
Accrued Liabilities and Other Non-current Liabilities
12
Debt
13
Pensions and Other Benefit Plans
14
Employee Stock Ownership Plan ("ESOP")
15
Earnings per Share and Stock Plans
16
Loss Contingencies
17
Income Taxes
18
Rental Expense and Lease Commitments
19
Business Segment Information
20
Selected Quarterly Financial Data (unaudited)
21
Accumulated Other Comprehensive Loss
22
Effects of New Accounting Pronouncements
 
 
 
Schedule II – Valuation and Qualifying Accounts.

32


Report of Independent Registered Public Accounting Firm


To the Shareholders and the Board of Directors of Columbus McKinnon Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Columbus McKinnon Corporation (the Company) as of March 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated May 29, 2019, expressed an unqualified opinion thereon.

Adoption of ASU No. 2014-09

As discussed in Note 4 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-12 effective April 1, 2018.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP
 
We have served as the Company’s auditor since at least 1917, but we are unable to determine the specific year.
 
Buffalo, New York
May 29, 2019

33


COLUMBUS McKINNON CORPORATION

CONSOLIDATED BALANCE SHEETS
 
 
 
March 31,
 
 
2019
 
2018
 
 
(In thousands, except share data)
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
71,093

 
$
63,021

Trade accounts receivable, less allowance for doubtful accounts ($3,264 and $3,520, respectively)
 
129,157

 
127,806

Inventories
 
146,263

 
152,886

Prepaid expenses and other
 
16,075

 
16,582

Total current assets
 
362,588

 
360,295

Net property, plant, and equipment
 
87,303

 
113,079

Goodwill
 
322,816

 
347,434

Other intangibles, net
 
232,940

 
263,764

Marketable securities
 
7,028

 
7,673

Deferred taxes on income
 
27,707

 
32,442

Other assets
 
21,189

 
17,759

Total assets
 
$
1,061,571

 
$
1,142,446

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 

Current liabilities:
 
 
 
 

Trade accounts payable
 
$
46,974

 
$
46,970

Accrued liabilities
 
99,304

 
99,963

Current portion of long-term debt
 
65,000

 
60,064

Total current liabilities
 
211,278

 
206,997

Senior debt, less current portion
 

 
33

Term loan and revolving credit facility
 
235,320

 
303,221

Other non-current liabilities
 
183,814

 
223,966

Total liabilities
 
630,412

 
734,217

Shareholders’ equity:
 
 
 
 

Voting common stock: 50,000,000 shares authorized; 23,391,101 and 23,045,479 shares issued and outstanding
 
234

 
230

Additional paid-in capital
 
277,518

 
269,360

Retained earnings
 
236,459

 
197,897

Accumulated other comprehensive loss
 
(83,052
)
 
(59,258
)
Total shareholders’ equity
 
431,159

 
408,229

Total liabilities and shareholders’ equity
 
$
1,061,571

 
$
1,142,446

 
See accompanying notes.

34


COLUMBUS McKINNON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
Year Ended March 31,
 
 
2019
 
2018
 
2017
 
 
(In thousands, except per share data)
Net sales
 
$
876,282

 
$
839,419

 
$
637,123

Cost of products sold
 
571,285

 
554,358

 
444,238

Gross profit
 
304,997

 
285,061

 
192,885

Selling expenses
 
97,925

 
101,956

 
77,319

General and administrative expenses
 
83,567

 
85,605

 
72,129

Research and development expenses
 
13,491

 
13,617

 
10,482

Impairment of intangible asset
 

 

 
1,125

Net loss on sales of businesses
 
25,672

 

 

Amortization of intangibles
 
14,900

 
15,552

 
8,105

Income from operations
 
69,442

 
68,331

 
23,725

Interest and debt expense
 
17,144

 
19,733

 
10,966

Cost of debt refinancing
 

 

 
1,303

Investment (income) loss, net
 
(727
)
 
(157
)
 
(462
)
Foreign currency exchange loss (gain), net
 
843

 
1,539

 
1,232

Other (income) expense, net
 
(716
)
 
(2,469
)
 
(2,341
)
Income from continuing operations before income tax expense
 
52,898

 
49,685

 
13,027

Income tax expense
 
10,321

 
27,620

 
4,043

Net income
 
$
42,577

 
$
22,065

 
$
8,984

 
 
 
 
 
 
 
Average basic shares outstanding
 
23,276

 
22,841

 
20,591

Average diluted shares outstanding
 
23,660

 
23,335

 
20,888

 
 
 
 
 
 
 
Basic income per share
 
$
1.83

 
$
0.97

 
$
0.44

 
 
 
 
 
 
 
Diluted income per share
 
$
1.80

 
$
0.95

 
$
0.43

 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.21

 
$
0.17

 
$
0.16

 
See accompanying notes.

35


COLUMBUS McKINNON CORPORATION
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
 
March 31,
 
 
2019
 
2018
 
2017
 
 
(In thousands)
Net income
 
$
42,577

 
$
22,065

 
$
8,984

Other comprehensive income (loss), net of tax:
 


 
 

 
 

Foreign currency translation adjustments
 
(16,708
)
 
21,717

 
(9,379
)
Pension liability adjustments, net of taxes of $2,242, $(4,981), and $(6,043)
 
(5,711
)
 
12,047

 
9,453

Other post retirement obligations adjustments, net of taxes of $(126), $(153), and $(317)
 
475

 
484

 
524

Split-dollar life insurance arrangement adjustments, net of taxes of $(18), $(70), and $(82)
 
69

 
206

 
131

Change in derivatives qualifying as hedges, net of taxes of $469, $(1,519), and $900
 
(1,037
)
 
3,563

 
(3,514
)
Change in investments:
 


 
 

 
 

Unrealized holding (loss) gain arising during the period, net of taxes of $0, $(124), and $(93)
 

 
189

 
173

Reclassification adjustment for gain included in net income, net of taxes of $0, $0, and $56
 

 

 
(105
)
Net change in unrealized gain (loss) on investments
 

 
189

 
68

Total other comprehensive income (loss)
 
(22,912
)
 
38,206

 
(2,717
)
Comprehensive income
 
$
19,665

 
$
60,271

 
$
6,267

 
See accompanying notes.

36


COLUMBUS McKINNON CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share data)
 
 
Common
Stock
($0.01 par value)
 
Additional
 Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
 Comprehensive
 Loss
 
Total
Shareholders’
Equity
Balance at April 1, 2016
 
$
201

 
$
206,682

 
$
174,173

 
$
(94,747
)
 
$
286,309

Net income 2017
 

 

 
8,984

 

 
8,984

Dividends declared
 

 

 
(3,422
)
 

 
(3,422
)
Change in foreign currency translation adjustment
 

 

 

 
(9,379
)
 
(9,379
)
Change in net unrealized gain on investments, net of tax of $(37)
 

 

 

 
68

 
68

Change in derivatives qualifying as hedges, net of tax of $900
 

 

 

 
(3,514
)
 
(3,514
)
Change in pension liability and postretirement obligations, net of tax of $(6,442)
 

 

 

 
10,108

 
10,108

Stock compensation - directors
 

 
440

 

 

 
440

Stock options exercised, 27,848 shares
 
2

 
439

 

 

 
441

Stock compensation expense
 

 
5,474

 

 

 
5,474

Tax effect of exercise of stock options
 

 
(197
)
 

 

 
(197
)
Issuance of 2,273,000 shares of common stock in January 2017 offering at $22.00 per share, net of issuance costs of $2,700
 
23

 
47,283

 

 

 
47,306

Restricted stock units released, 154,897 shares, net of shares withheld for minimum statutory tax obligation
 

 
(1,268
)
 

 

 
(1,268
)
Balance at March 31, 2017
 
$
226

 
$
258,853

 
$
179,735

 
$
(97,464
)
 
$
341,350

Net income 2018
 

 

 
22,065

 

 
22,065

Dividends declared
 

 

 
(3,903
)
 

 
(3,903
)
Change in foreign currency translation adjustment
 

 

 

 
21,717

 
21,717

Change in net unrealized gain on investments, net of tax of $(124)
 

 

 

 
189

 
189

Change in derivatives qualifying as hedges, net of tax of $(1,519)
 

 

 

 
3,563

 
3,563

Change in pension liability and postretirement obligations, net of tax of $(5,205)
 

 

 

 
12,737

 
12,737

Stock compensation - directors
 

 
430

 

 

 
430

Stock options exercised, 363,091 shares
 
4

 
6,328

 

 

 
6,332

Stock compensation expense
 

 
5,156

 

 

 
5,156

Restricted stock units released, 116,775 shares, net of shares withheld for minimum statutory tax obligation
 

 
(1,407
)
 

 

 
(1,407
)
Balance at March 31, 2018
 
$
230

 
$
269,360

 
$
197,897

 
$
(59,258
)
 
$
408,229

Net income 2019
 

 

 
42,577

 

 
42,577

Dividends declared
 

 

 
(4,903
)
 

 
(4,903
)
Change in accounting principle
 

 

 
888

 

 
888

Change in foreign currency translation adjustment
 

 

 

 
(16,708
)
 
(16,708
)
Change in net unrealized gain on investments
 

 

 

 
(883
)
 
(883
)
Change in derivatives qualifying as hedges, net of tax of $469
 

 

 

 
(1,037
)
 
(1,037
)
Change in pension liability and postretirement obligations, net of tax of $2,097
 

 

 

 
(5,166
)
 
(5,166
)
Stock compensation - directors
 

 
430

 

 


 
430

Stock options exercised, 187,907 shares
 
4

 
4,148

 

 


 
4,152

Stock compensation expense
 

 
5,768

 

 


 
5,768

Restricted stock units released, 157,715 shares, net of shares withheld for minimum statutory tax obligation
 

 
(2,188
)
 

 


 
(2,188
)
Balance at March 31, 2019
 
$
234

 
$
277,518

 
$
236,459

 
$
(83,052
)
 
$
431,159


 See accompanying notes.

37


COLUMBUS McKINNON CORPORATION

 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Year ended March 31,
 
 
2019
 
2018
 
2017
Operating activities:
 
(In thousands)
Net income
 
$
42,577

 
$
22,065

 
$
8,984

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

 
 

Depreciation and amortization
 
32,675

 
36,136

 
25,162

Deferred income taxes
 
(958
)
 
19,968

 
489

Loss on sale of real estate/investments and other
 
194

 
47

 
14

Cost of debt repricing/refinancing
 

 
619

 
1,303

Loss on sales of businesses
 
25,672

 

 

Amortization/write-off of deferred financing costs
 
2,655

 
2,681

 
1,015

Stock-based compensation
 
6,198

 
5,586

 
5,914

Write-off of inventory step-up from purchase of business
 

 

 
8,852

Net loss on foreign exchange option
 

 

 
1,590

Write-off of trademark
 

 

 
1,125

Changes in operating assets and liabilities, net of effects  of business acquisitions and divestitures:
 
 

 
 
 
 

Trade accounts receivable
 
(11,328
)
 
(9,308
)
 
(785
)
Inventories
 
(15,411
)
 
(12,249
)
 
8,173

Prepaid expenses and other
 
(128
)
 
1,727

 
6,121

Other assets
 
231

 
3,338

 
(3,044
)
Trade accounts payable
 
3,881

 
3,833

 
1,002

Accrued liabilities
 
6,397

 
11,918

 
(2,380
)
Non-current liabilities
 
(13,156
)
 
(16,700
)
 
(3,085
)
Net cash provided by operating activities
 
79,499

 
69,661

 
60,450

Investing activities:
 
 

 
 

 
 

Proceeds from sale of marketable securities
 
3,266

 
653

 
12,336

Purchases of marketable securities
 
(2,604
)
 
(327
)
 
(1,571
)
Capital expenditures
 
(12,288
)
 
(14,515
)
 
(14,368
)
Proceeds from sale of real estate
 
176

 

 

Net proceeds from the sales of businesses
 
14,230

 

 

Purchases of businesses, net of cash
 

 

 
(218,846
)
Net payment to former STAHL owner
 

 
(14,750
)
 

Payment of restricted cash to former owner (see note 2)
 
(294
)
 
(294
)
 

Cash paid for equity investment
 

 
(3,359
)
 

Foreign currency option
 

 

 
(1,590
)
Net cash provided by (used for) investing activities
 
2,486

 
(32,592
)
 
(224,039
)
Financing activities:
 
 

 
 

 
 

Proceeds from issuance of common stock
 
4,152

 
6,332

 
50,439

Payment of dividends
 
(4,652
)
 
(3,658
)
 
(3,326
)
Net borrowings under line-of-credit agreements
 

 

 
(155,000
)
Repayment of debt
 
(65,088
)
 
(60,144
)
 
(125,730
)
Proceeds from issuance of long-term debt
 

 

 
445,000

Fees related to debt repricing/refinancing and equity offerings
 

 
(619
)
 
(19,409
)
Other
 
(2,190
)
 
(1,413
)
 
(1,265
)
Net cash (used for) provided by financing activities
 
(67,778
)
 
(59,502
)
 
190,709

Effect of exchange rate changes on cash
 
(6,429
)
 
7,569

 
(544
)
Net change in cash and cash equivalents
 
7,778

 
(14,864
)
 
26,576

Cash, cash equivalents, and restricted cash at beginning of year
 
63,565

 
78,429

 
51,853

Cash, cash equivalents, and restricted cash at end of year
 
$
71,343

 
$
63,565

 
$
78,429

Supplementary cash flows data:
 
 

 
 

 
 

Interest paid
 
$
14,411

 
$
18,914

 
$
10,633

Income taxes paid, net of refunds
 
$
4,840

 
$
706

 
$
1,893

Property, plant and equipment purchases included in trade accounts payable
 
$
227

 
$

 
$

See accompanying notes.

38


COLUMBUS McKINNON CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(tabular amounts in thousands, except share data)


1.     Description of Business
 
Columbus McKinnon Corporation ("the Company") is a leading worldwide designer, manufacturer, and marketer of hoists, actuators, rigging tools, digital power control systems, motion control products, and other technologies, systems, and services that efficiently and ergonomically move, lift, position, and secure materials. Key products include hoists, rigging tools, digital power control systems, actuators, elevator application drive systems, and explosion-protected hoists. The Company is focused on commercial and industrial applications that require safety and productivity in moving material. The Company’s targeted market verticals include general industrial, construction and infrastructure, mining, oil & gas, energy, aerospace, transportation, automotive, heavy equipment manufacturing, and entertainment.

The Company’s material handling products are sold globally, principally to third party distributors through diverse distribution channels and, to a lesser extent, directly to end-users. During fiscal 2019, approximately 54% of sales were to customers in the United States.


2.     Accounting Principles and Practices
  
Advertising
 
Costs associated with advertising are expensed as incurred and are included in Selling expense in the Consolidated Statements of Operations. Advertising expenses were $2,452,000, $2,683,000, and $1,748,000 in fiscal 2019, 2018, and 2017, respectively.

Cash and Cash Equivalents
 
The Company considers as cash equivalents all highly liquid investments with an original maturity of three months or less.

Concentrations of Labor
 
Approximately 10% of the Company’s employees are represented by three separate U.S. collective bargaining agreements which expire May 2020, April 2021, and September 2021.
 
Consolidation
 
These consolidated financial statements include the accounts of the Company and its global subsidiaries; all significant intercompany accounts and transactions have been eliminated.

Equity Method Investment
 
The Company has an investment in Eastern Morris Cranes Company Limited ("EMC") whose principal activity is to manufacture various electrical overhead traveling cranes. This investment represents a minority ownership interest that is accounted for under the equity method of accounting since the Company has significant influence over the investee. As a result, the Company records its portion of the gains and losses incurred by this entity in Investment (income) loss in the Consolidated Statements of Operations.  

Foreign Currency Translations
 
The Company translates foreign currency financial statements as described in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 830, “Foreign Currency Matters.” Under this method, all items of income and expense are translated to U.S. dollars at average exchange rates during the year. All assets and liabilities are translated to U.S. dollars at the year-end exchange rate. Gains or losses on translations are recorded in accumulated other comprehensive loss in the shareholders’ equity section of the balance sheet. The functional currency is the foreign currency in which the foreign subsidiaries conduct their business.  Gains and losses from foreign currency transactions are reported in foreign currency exchange loss (gain).

39

COLUMBUS McKINNON CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
(tabular amounts in thousands, except share data)


 
Goodwill
 
Goodwill is not amortized but is tested for impairment at least annually, or more frequently if indicators of impairment exist, in accordance with the provisions of ASC Topic 350-20-35-1. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The fair value of a reporting unit is determined using a discounted cash flow methodology. The Company’s reporting units are determined based upon whether discrete financial information is available and reviewed regularly, whether those units constitute a business, and the extent of economic similarities and interdependencies between those reporting units for purposes of aggregation.  The Company’s reporting units identified under ASC Topic 350-20-35-33 are at the component level, or one level below the reporting segment level as defined under ASC Topic 280-10-50-10 “Segment Reporting – Disclosure.”  As of March 31, 2019, the Company’s one segment is subdivided into two reporting units. Further, the Company adopted ASU No. 2017-04, "Simplifying the Test for Goodwill Impairment (Topic 350)," in fiscal 2018, therefore, is no longer required to compare the implied fair value of goodwill with its carrying value amount as part of step two of the goodwill test. An impairment charge is the amount by which the carrying value is greater than the reporting unit's fair value (step one).

When the Company evaluates the potential for goodwill impairment, it assesses a range of qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for its products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value or if economic or other business factors indicate that the fair value of our reporting units may have declined since our last quantitative test, the Company performs a quantitative test.

To perform the quantitative impairment test, the Company uses the discounted cash flow method to estimate the fair value of the reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating profit margins and cash flows, the terminal growth rate, and the discount rate. The Company projects revenue growth rates, operating margins and cash flows based on each reporting unit’s current business, expected developments and operational strategies over a five-year period. In estimating the terminal growth rate, the Company considers its historical and projected results, as well as the economic environment in which its reporting units operate. The discount rates utilized for each reporting unit reflect the Company’s assumptions of marketplace participants’ cost of capital and risk assumptions, both specific to the reporting unit and overall in the economy.

The Company performed its qualitative assessment as of February 28, 2019 and determined that the quantitative goodwill impairment test was not required for the Rest of Products reporting unit. Based on various conditions in the current fiscal year, such as financial performance, macroeconomic conditions, and other company specific events, the Rest of Products reporting unit's fair value was likely not less than its applicable carrying value. The qualitative assessment for the Duff-Norton reporting unit indicated that a quantitative test should be performed. Based on results of the quantitative impairment test for the Duff-Norton reporting unit, the Company determined the fair value was not less than its carrying value. See Note 9 for further discussion of goodwill and intangible assets.

Impairment of Long-Lived Assets

The Company assesses impairment of its long-lived assets in accordance with the provisions of ASC Topic 360 “Property, Plant, and Equipment.” This statement requires long-lived assets, such as property and equipment and purchased intangibles subject to amortization, to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group over its remaining useful life. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair values are determined in accordance with ASC 820.

In assessing long-lived assets for an impairment loss, assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Asset grouping requires a significant amount of judgment. Accordingly, facts and circumstances will influence how asset groups are determined for impairment testing. In assessing long-lived assets for impairment, management considered the Company’s product line portfolio, customers and related commercial agreements, labor agreements and other factors in grouping assets and liabilities at the lowest

40

COLUMBUS McKINNON CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
(tabular amounts in thousands, except share data)


level for which identifiable cash flows are independent. The Company considers projected future undiscounted cash flows, trends and other factors in its assessment of whether impairment conditions exist. While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such factors as future production volumes, customer pricing, economics, and productivity and cost initiatives, could significantly affect its estimates. In determining fair value of long-lived assets, management uses management estimates, discounted cash flow calculations, and appraisals where necessary. Other than the impairment on Held for Sale Businesses, discussed in Note 3, no impairment was recorded related to long-lived assets in the current year.

Intangible Assets

At acquisition, the Company estimates and records the fair value of purchased intangible assets which primarily consist of trade names, customer relationships, and technology.  The fair values are estimated based on management’s assessment as well as independent third party appraisals.  Such valuations may include a discounted cash flow of anticipated revenues resulting from the acquired intangible asset.

Amortization of intangible assets with finite lives is recognized over their estimated useful lives using an amortization method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized.  The straight line method is used for customer relationships.  As a result of the negligible attrition rate in our customer base, the difference between the straight line method and attrition method is not considered significant.  The estimated useful lives for our intangible assets range from 1 to 25 years.

Similar to goodwill, indefinite-lived intangible assets (including trademarks on our acquisitions) are tested for impairment on an annual basis. When the Company evaluates the potential for impairment of intangible assets, it assesses a range of qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for its products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value or if economic or other business factors indicate that the fair value of our indefinite-lived intangible assets may have declined since our last quantitative test, the Company performs a new quantitative test. The methodology used to value trademarks is the relief from royalty method. The recorded book value of these trademarks in excess of the calculated fair value triggers an impairment. The key estimate used in this calculation consists of an overall royalty rate applied to the sales covered by the trademark. After performing a qualitative assessment as of February 28, 2019, it was determined that the trademarks were not impaired.

Inventories
 
Inventories are valued at the lower of cost and net realizable value. Cost of approximately 36% and 30% of inventories at March 31, 2019 and March 31, 2018, respectively, have been determined using the LIFO (last-in, first-out) method. Costs of other inventories have been determined using the FIFO (first-in, first-out) or average cost method. FIFO cost approximates replacement cost. Costs in inventory include components for direct labor and overhead costs.
 
Marketable Securities
 
The Company’s marketable securities, which consist of equity and fixed income securities, are recorded at fair value. As described in Note 7, in the first quarter of fiscal 2019 the Company adopted ASU 2016-01 whereas all equity investments (including certain fixed income securities) in unconsolidated entities are measured at fair value through earnings. Therefore, gains and losses on marketable securities are no longer recorded in Shareholders' equity on the Consolidated Balance Sheets, rather, are realized within Investment (income) loss on the Consolidated Statements of Operations. Estimated fair value is based on published trading values at the balance sheet dates. The cost of securities sold is based on the specific identification method. Interest and dividend income are also included in Investment (income) loss on the Consolidated Statements of Operations.
 
The marketable securities are carried as long-term assets since they are held for the settlement of the Company’s general and products liability insurance claims filed through CM Insurance Company, Inc., a wholly owned captive insurance subsidiary.  The marketable securities are not available for general working capital purposes.



41

COLUMBUS McKINNON CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
(tabular amounts in thousands, except share data)


Property, Plant, and Equipment
 
Property, plant, and equipment are stated at cost and depreciated principally using the straight-line method over their respective estimated useful lives (buildings and building equipment—15 to 40 years; machinery and equipment—3 to 18 years). When depreciable assets are retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operating results.

Research and Development
 
With the acquisitions of Magnetek in September 2015 and STAHL CraneSystems (“STAHL”) in January 2017, the Company expects research and development ("R&D") costs to factor more prominently into its cost structure. Therefore, R&D costs are presented on the Consolidated Statement of Operations in order to provide transparency into these costs. Consistent with prior periods, the Company continues to account for R&D expenses in accordance with the provisions of ASC 730 and are expensed as incurred.
 
Revenue Recognition, Accounts Receivable, and Concentration of Credit Risk
 
As described in Note 4, the Company adopted ASC 606, "Revenue from Contracts with Customers," in fiscal 2019. Revenue from contracts with customers for standard products is recognized when legal title and significant risk and rewards has transferred to the customer, which is generally at the time of shipment. This is the point in time when control is deemed to transfer to the customer. The Company also sells custom engineered products and services which are contracts that are typically completed within one quarter but can extend beyond one year in duration. The Company generally recognizes revenue for customer engineered products upon satisfaction of its performance obligation under the contract which typically coincides with project completion which is when the products and services are controlled by the customer. Control is typically achieved at the later of when legal title and significant risk and rewards have transferred to the customer or the customer has accepted the asset. For both standard products and custom engineered products, the transaction price is based upon the price stated in either the purchase order or contract. Refer to Note 4 for further details.

Additionally, the Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables. The credit risk is controlled through credit approvals, limits, and monitoring procedures. Accounts receivable are reported at net realizable value and do not accrue interest. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other factors. Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted.  The Company does not routinely permit customers to return product. However, sales returns are permitted in specific situations and typically include a restocking charge or the purchase of additional product.
 
Shipping and Handling Costs
 
Shipping and handling costs are a component of cost of products sold.

Stock-Based Compensation

The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.” This standard requires all equity-based payments to employees, including grants of employee stock options, to be recognized in the Consolidated Statements of Operations based on the grant date fair value of the award.  Stock compensation expense is included in Cost of products sold, Selling, and General and administrative expense depending on the nature of the service of the employee receiving the award.  The Company uses a straight-line method of attributing the value of stock compensation expense, subject to minimum levels of expense, based on vesting. See Note 15 for further discussion of stock-based compensation.

Leases

All leases are reviewed for capital or operating classification at their inception. Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the lease term. As a result of ASC 842, "Leases," which is discussed in Note 22 and effective in fiscal 2020, the Company is currently updating existing lease policies to comply with the new standard. In the current year, the Company implemented a policy requiring leases to be centralized and tracked in the Company's leasing software.

42

COLUMBUS McKINNON CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
(tabular amounts in thousands, except share data)


The existing policy requiring a classification test prior to commencement in order to determine if the lease is operating or capital is not significantly impacted by the adoption of ASC 842, however, capital leases will be known as finance leases.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Warranties

The Company offers warranties for certain products it sells. The specific terms and conditions of those warranties vary depending upon the product sold and the country in which the Company sold the product. As noted in the Revenue Recognition note (Note 4), the Company offers standard warranties which are typically 12 months in duration for standard products and 24 to 36 months for custom engineered products. These are assurance-type warranties that do not qualify as separate performance obligations under ASC 606. The Company estimates the costs that may be incurred under its standard warranties, based largely upon actual warranty repair costs history, and records a liability in the amount of such costs in the month that revenue is recognized. The resulting accrual balance is reviewed during the year. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rate of warranty claims, and cost per claim. Changes in the Company’s product warranty accrual are as follows:

 
 
March 31,
 
 
2019
 
2018
Balance at beginning of year
 
$
3,791

 
$
4,081

Accrual for warranties issued
 
3,405

 
2,716