CMCO 10-Q
Columbus Mckinnon Corp (CMCO)
10-Q
2022-01-27
For: 2021-12-31
View Original
Added on
April 08, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 | |||||
For the quarterly period ended December 31, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |||||
Commission File Number 001-34362
| (Exact name of registrant as specified in its charter) | ||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of principal executive offices) | (Zip code) | |||||||||||||
| (Registrant's telephone number, including area code) | ||||||||||||||
| (Former name, former address and former fiscal year, if changed since last report.) | ||||||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. : ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | Emerging growth company | |||||||||||||||||||||||
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of shares of common stock outstanding as of January 24, 2022 was: 28,507,674 shares.
FORM 10-Q INDEX
COLUMBUS McKINNON CORPORATION
December 31, 2021
| Page # | ||||||||
| Part I. Financial Information | ||||||||
| Item 1. | Condensed Consolidated Financial Statements (Unaudited) | |||||||
Condensed consolidated balance sheets - December 31, 2021 and March 31, 2021 | ||||||||
Condensed consolidated statements of operations - Three and nine months ended December 31, 2021 and December 31, 2020 | ||||||||
Condensed consolidated statements of comprehensive income (loss) - Three and nine months ended December 31, 2021 and December 31, 2020 | ||||||||
Condensed consolidated statements of shareholders' equity - Three and nine months ended December 31, 2021 and December 31, 2020 | ||||||||
Condensed consolidated statements of cash flows - Nine months ended December 31, 2021 and December 31, 2020 | ||||||||
Notes to condensed consolidated financial statements - December 31, 2021 | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II. Other Information | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
2
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31, 2021 | March 31, 2021 | |||||||||||||
| (unaudited) | ||||||||||||||
| ASSETS: | (In thousands) | |||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
Trade accounts receivable, less allowance for doubtful accounts ($ | ||||||||||||||
| Inventories | ||||||||||||||
| Prepaid expenses and other | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant, and equipment, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Other intangibles, net | ||||||||||||||
| Marketable securities | ||||||||||||||
| Deferred taxes on income | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY: | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Trade accounts payable | $ | $ | ||||||||||||
| Accrued liabilities | ||||||||||||||
| Current portion of long term debt and finance lease obligations | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Term loan and finance lease obligations | ||||||||||||||
| Other non current liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Shareholders' equity: | ||||||||||||||
Voting common stock; and | ||||||||||||||
| Additional paid in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Total shareholders' equity | ||||||||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||||||||
See accompanying notes.
3
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of products sold | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Selling expenses | ||||||||||||||||||||||||||
| General and administrative expenses | ||||||||||||||||||||||||||
| Research and development expenses | ||||||||||||||||||||||||||
| Amortization of intangibles | ||||||||||||||||||||||||||
| Income from operations | ||||||||||||||||||||||||||
| Interest and debt expense | ||||||||||||||||||||||||||
| Cost of debt refinancing | ||||||||||||||||||||||||||
| Investment (income) loss | ( | ( | ( | ( | ||||||||||||||||||||||
| Foreign currency exchange (gain) loss | ||||||||||||||||||||||||||
| Other (income) expense, net | ( | ( | ||||||||||||||||||||||||
| Income (loss) before income tax expense (benefit) | ( | |||||||||||||||||||||||||
| Income tax expense (benefit) | ( | |||||||||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | |||||||||||||||||||||
| Average basic shares outstanding | ||||||||||||||||||||||||||
| Average diluted shares outstanding | ||||||||||||||||||||||||||
| Basic income (loss) per share: | $ | $ | $ | $ | ( | |||||||||||||||||||||
| Diluted income (loss) per share: | $ | $ | $ | $ | ( | |||||||||||||||||||||
| Dividends declared per common share | $ | $ | $ | $ | ||||||||||||||||||||||
See accompanying notes.
4
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | |||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | |||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ||||||||||||||||||
Change in derivatives qualifying as hedges, net of taxes of $( | ( | |||||||||||||||||||
Change in pension liability and postretirement obligation, net of taxes of $( | ( | |||||||||||||||||||
| Total other comprehensive income (loss) | ( | ( | ||||||||||||||||||
| Comprehensive income (loss) | $ | $ | $ | $ | ||||||||||||||||
See accompanying notes.
5
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| (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 March 31, 2021 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Net income (loss) | ( | ( | ||||||||||||||||||||||||||||||
| Change in foreign currency translation adjustment | ||||||||||||||||||||||||||||||||
Change in derivatives qualifying as hedges, net of tax of $( | ||||||||||||||||||||||||||||||||
Change in pension liability and postretirement obligations, net of tax of $ | ( | ( | ||||||||||||||||||||||||||||||
Issuance of | ||||||||||||||||||||||||||||||||
Stock options exercised, | ||||||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
Restricted stock units released, | ( | ( | ||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Net income (loss) | ||||||||||||||||||||||||||||||||
| Dividends declared | ( | ( | ||||||||||||||||||||||||||||||
| Change in foreign currency translation adjustment | ( | ( | ||||||||||||||||||||||||||||||
Change in derivatives qualifying as hedges, net of tax of $ | ( | ( | ||||||||||||||||||||||||||||||
Change in pension liability and postretirement obligations, net of tax of $( | ||||||||||||||||||||||||||||||||
| Stock compensation - directors | ||||||||||||||||||||||||||||||||
Stock options exercised, | ||||||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
Restricted stock units released, | ( | ( | ||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Dividends declared | ( | ( | ||||||||||||||||||||||||||||||
| Change in foreign currency translation adjustment | ( | ( | ||||||||||||||||||||||||||||||
Change in derivatives qualifying as hedges, net of tax of $( | ||||||||||||||||||||||||||||||||
Change in pension liability and postretirement obligations, net of tax of $( | ||||||||||||||||||||||||||||||||
| Stock compensation - directors | ||||||||||||||||||||||||||||||||
Stock options exercised, | ||||||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
Restricted stock units released, | ( | ( | ||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
See accompanying notes.
6
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| (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 March 31, 2020 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Net income (loss) | ( | ( | ||||||||||||||||||||||||||||||
| Change in net unrealized gain on investments | ||||||||||||||||||||||||||||||||
Change in derivatives qualifying as hedges, net of tax of $ | ( | ( | ||||||||||||||||||||||||||||||
Change in pension liability and postretirement obligations, net of tax of $( | ||||||||||||||||||||||||||||||||
Stock options exercised, | ||||||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
Restricted stock units released, | ( | ( | ||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Net income (loss) | ( | ( | ||||||||||||||||||||||||||||||
| Dividends declared | ( | ( | ||||||||||||||||||||||||||||||
| Change in foreign currency translation adjustment | ||||||||||||||||||||||||||||||||
Change in derivatives qualifying as hedges, net of tax of $( | ||||||||||||||||||||||||||||||||
Change in pension liability and postretirement obligations, net of tax of $( | ||||||||||||||||||||||||||||||||
| Stock compensation - directors | ||||||||||||||||||||||||||||||||
Stock options exercised, | ||||||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
Restricted stock units released, | ( | ( | ||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Net income (loss) | ||||||||||||||||||||||||||||||||
| Dividends declared | ( | ( | ||||||||||||||||||||||||||||||
| Change in foreign currency translation adjustment | ||||||||||||||||||||||||||||||||
Change in derivatives qualifying as hedges, net of tax of $( | ||||||||||||||||||||||||||||||||
Change in pension liability and postretirement obligations, net of tax of $ | ( | ( | ||||||||||||||||||||||||||||||
| Stock compensation - directors | ||||||||||||||||||||||||||||||||
Stock options exercised, | ||||||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
Restricted stock units released, | ( | ( | ||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
See accompanying notes.
7
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended | ||||||||||||||
| December 31, 2021 | December 31, 2020 | |||||||||||||
| OPERATING ACTIVITIES: | (In thousands) | |||||||||||||
| Net income (loss) | ( | |||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Deferred income taxes and related valuation allowance | ( | ( | ||||||||||||
| Net loss (gain) on sale of real estate, investments and other | ( | ( | ||||||||||||
| Stock based compensation | ||||||||||||||
| Amortization of deferred financing costs | ||||||||||||||
| Cost of debt refinancing | ||||||||||||||
| Loss (gain) on hedging instruments | ||||||||||||||
| Non-cash pension settlement expense (See Note 10) | ||||||||||||||
| Gain on Sale of building (See Note 2) | ( | ( | ||||||||||||
| Non-cash lease expense | ||||||||||||||
| Changes in operating assets and liabilities, net of effects of business acquisitions: | ||||||||||||||
| Trade accounts receivable | ||||||||||||||
| Inventories | ( | |||||||||||||
| Prepaid expenses and other | ( | ( | ||||||||||||
| Other assets | ( | |||||||||||||
| Trade accounts payable | ( | ( | ||||||||||||
| Accrued liabilities | ( | |||||||||||||
| Non-current liabilities | ( | ( | ||||||||||||
| Net cash provided by (used for) operating activities | ||||||||||||||
| INVESTING ACTIVITIES: | ||||||||||||||
| Proceeds from sales of marketable securities | ||||||||||||||
| Purchases of marketable securities | ( | ( | ||||||||||||
| Capital expenditures | ( | ( | ||||||||||||
| Proceeds from sale of building, net of transaction costs | ||||||||||||||
| Dividend received from equity method investment | ||||||||||||||
| Proceeds from insurance reimbursement | ||||||||||||||
| Proceeds from sale of fixed assets | ||||||||||||||
| Purchase of businesses, net of cash acquired (See Note 2) | ( | |||||||||||||
| Net cash provided by (used for) investing activities | ( | |||||||||||||
| FINANCING ACTIVITIES: | ||||||||||||||
| Proceeds from the issuance of common stock | ||||||||||||||
| Borrowings under line-of-credit agreements | ||||||||||||||
| Payments under line-of-credit agreements | ( | |||||||||||||
| Repayment of debt | ( | ( | ||||||||||||
| Fees paid for revolver extension (See Note 9) | ( | |||||||||||||
| Proceeds from issuance of long-term debt | ||||||||||||||
| Proceeds from equity offering | ||||||||||||||
| Fees related to debt and equity offering | ( | |||||||||||||
| Cash inflows from hedging activities | ||||||||||||||
| Cash outflows from hedging activities | ( | |||||||||||||
| Payment of dividends | ( | ( | ||||||||||||
| Other | ( | ( | ||||||||||||
| Net cash provided by (used for) financing activities | ( | |||||||||||||
| Effect of exchange rate changes on cash | ( | |||||||||||||
| Net change in cash and cash equivalents | ( | |||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of year | ||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | ||||||||||||
| Supplementary cash flow data: | ||||||||||||||
| Interest paid | $ | $ | ||||||||||||
| Income taxes paid (refunded), net | $ | $ | ||||||||||||
| Restricted cash presented in Other assets | $ | $ | ||||||||||||
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2021
1. Description of Business
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of Columbus McKinnon Corporation ("the Company") at December 31, 2021, the results of its operations for the three and nine months ended December 31, 2021 and December 31, 2020, and cash flows for the nine months ended December 31, 2021 and December 31, 2020, have been included. Results for the period ended December 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2022. The balance sheet at March 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Columbus McKinnon Corporation Annual Report on Form 10-K for the fiscal year ended March 31, 2021 (the “2021 10-K”).
The Company is a leading worldwide designer, manufacturer, and marketer of intelligent motion solutions that efficiently and ergonomically move, lift, position, and secure materials. Key products include hoists, crane components, precision conveyor systems, accumulation tables, rigging tools, light rail workstations, and digital power and motion control systems. The Company is focused on commercial and industrial applications that require the safety and quality provided by its superior design and engineering know-how.
The Company’s products are sold globally, principally to third party distributors and crane builders through diverse distribution channels, and to a lesser extent directly to end-users. During the three and nine months ended December 31, 2021, sales to customers in the United States were each approximately 60 % and 59 % of total net sales, respectively.
2. Acquisitions & Disposals
Acquisitions
On April 7, 2021, the Company completed its acquisition of Dorner Mfg. Corp. ("Dorner") for $481,012,000 . Dorner, headquartered in Hartland, WI, is a leading automation solutions company providing unique, patented technologies in the design, application, manufacturing and integration of high-precision conveying systems. The acquisition of Dorner accelerates the Company’s shift to intelligent motion and serves as a platform to expand capabilities in advanced, higher technology automation solutions. Dorner is a leading supplier to the life sciences, food processing, and consumer packaged goods markets as well as the faster growing industrial automation and e-commerce sectors.
The results of Dorner included in the Company’s consolidated financial statements from the date of acquisition are Net sales and Income from operations of $31,064,000 and $4,157,000 , respectively, in the three months ended December 31, 2021 and Net sales and Income from operations of $98,781,000 and $8,481,000 , respectively, in the nine months ended December 31, 2021. Dorner's Income from operations in the nine months ended December 31, 2021 includes $218,000 in integration related severance costs, which have been included in General and administrative expenses. Dorner's Income from operations in the nine months ended December 31, 2021 includes acquisition related inventory amortization of $2,981,000 , which has been included in Cost of products sold.
In addition, the Company incurred acquisition integration and deal expenses in the amount of $53,000 and $8,739,000 in the three and nine months ended December 31, 2021, respectively, which are included in General and administrative expenses. The Company also incurred $970,000 in costs related to a transaction bonus that was paid 45 days after the acquisition date to key personnel of which $521,000 has been recorded as part of Cost of products sold, $350,000 has been recorded as part of Selling expenses, $74,000 has been recorded as part of General and administrative expenses, and $25,000 has been recorded as part of Research and development expenses in the nine months ended December 31, 2021.
To finance the Dorner acquisition, on April 7, 2021 the Company entered into a $750,000,000 credit facility ("First Lien Facilities") with JPMorgan Chase Bank, N.A. ("JPMorgan Chase Bank"), PNC Capital Markets LLC, and Wells Fargo Securities LLC. The First Lien Facilities consist of a Revolving Facility (the “New Revolving Credit Facility”) in an aggregate amount of $100,000,000 and a $650,000,000 First Lien Term Facility ("Bridge Facility"). Proceeds from the Bridge Facility were used, among other things, to finance the purchase price for the Dorner acquisition, pay related fees, expenses and
9
transaction costs, and refinance the Company's borrowings under its prior Term Loan and Revolver. See Note 9, Debt, for further details on the Company's new debt agreement and subsequent equity offering.
The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed as of the date of acquisition. The excess consideration of $289,923,000 has been preliminarily recorded as goodwill as of December 31, 2021. During the three months ended December 31, 2021, the Company refined its estimate of the amount of the purchase price allocated to customer relationships resulting in a decrease in the balance by $3,000,000 with an offsetting increase to goodwill, which is the primary reason for the increase in goodwill from amounts reported as of September 30, 2021. The identifiable intangible assets acquired include customer relationships of $137,000,000 , technology of $45,000,000 , and trade names of $8,000,000 . The weighted average life of the acquired identifiable intangible assets subject to amortization was estimated at 15 years at the time of acquisition. Approximately $8,000,000 of goodwill arising as a result of the acquisition is deductible for tax purposes. The allocation of the purchase price to the assets acquired and liabilities assumed of Dorner is not complete as of December 31, 2021 as the Company is continuing to gather information regarding Dorner's contingent liabilities and intangible assets.
The preliminary assignment of purchase consideration to the assets acquired and liabilities assumed is as follows (in thousands):
| Cash | $ | ||||
| Working Capital | |||||
| Property, plant, and equipment, net | |||||
| Intangible assets | |||||
| Other assets | |||||
| Other liabilities | ( | ||||
| Finance lease liabilities | ( | ||||
| Deferred and other taxes, net | ( | ||||
| Goodwill | |||||
| Total | $ | ||||
See Note 4 for assumptions used in determining the fair values of the intangible assets acquired.
The following unaudited pro forma financial information presents the combined results of operations as if the acquisition of Dorner had occurred as of April 1, 2020. The pro forma information includes certain adjustments, including depreciation and amortization expense, interest expense, and certain other adjustments, together with related income tax effects. The pro forma amounts may not be indicative of the results that actually would have been achieved had the acquisition of Dorner occurred as of April 1, 2020 and are not necessarily indicative of future results of the combined companies (in thousands):
| Three months ended | Nine months ended | ||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | ||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||
| Net income (loss) | ( | ||||||||||||||||
On December 1, 2021, the Company completed its acquisition of Garvey Corporation ("Garvey") for $67,731,000 including $907,000 in cash acquired, subject to an adjustment for working capital, cash and indebtedness and a $2,000,000 contingent payment that only becomes payable if (a) the EBITDA target set forth in the Purchase Agreement for the twelve-month period commencing on the month immediately following closing is achieved and (b) a specific current executive of Garvey remains employed with Garvey until at least March 31, 2023. The Company financed the acquisition by borrowing $75,000,000 utilizing the Accordion feature under its existing Term Loan B, discussed in Note 9. Garvey is a leading accumulation systems solutions company providing unique, patented systems for the automation of production processes whose products complement those of Dorner.
The results of Garvey are included in the Company’s consolidated financial statements from the date of acquisition. Garvey's Income from operations in the three months ended December 31, 2021 includes acquisition related amortization of backlog in the amount of $450,000 , which has been included as an offset to Net sales, and inventory amortization of $515,000 , which has been included in Cost of products sold.
10
In addition, the Company incurred acquisition integration and deal expenses in the amount of $317,000 in the three months ended December 31, 2021, which are included in General and administrative expenses.
Lastly, purchase accounting allocations are not complete at this time. The Company has preliminarily recorded: $21,040,000 in intangible assets related to backlog, trademarks and trade names, patents, engineered drawings, customer relationships; $41,829,000 in goodwill; and the remaining $4,862,000 recorded in net assets. See Note 4 for assumptions used in determining the fair values of the intangible assets acquired.
Further, pro forma financial information presenting the combined results of operations as if the Garvey acquisition had occurred as of April 1, 2020 has not been disclosed because it is not deemed a material acquisition.
Disposals
During the nine months ended December 31, 2021, the Company sold its former manufacturing facility in Lisbon, Ohio for $461,000 . This resulted in a gain of $375,000 which is included in Cost of products sold on the Condensed Consolidated Statements of Operations.
During fiscal 2021, the Company sold one of its owned manufacturing facilities in China as a result of its plan to consolidate two of its Hangzhou, China manufacturing facilities into one and reorganize its Asia Pacific operations. During the nine months ended December 31, 2020, the Company received cash in the amount of 45 million RMB (approximately $6,363,000 ) from the buyer to purchase the facility which resulted in a gain of $2,638,000 , of which $2,189,000 is included in Cost of products sold and $449,000 is included in General and administrative expenses on the Condensed Consolidated Statements of Operations during the nine months ended December 31, 2020.
3. Revenue & Receivables
Revenue Recognition:
Performance obligations
The Company has contracts with customers for standard products and custom engineered products, and determines when and how to recognize revenue for each performance obligation based on the nature and type of contract.
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 sells standard products to customers utilizing purchase orders. Payment terms for these types of contracts generally require payment within 30 to 60 days. Each standard product is deemed to be a single performance obligation and the amount of revenue recognized is based on the negotiated price. The transaction price for standard products is based on the price reflected in each purchase order. Sales incentives are offered to customers who purchase standard products and include offers such as volume-based discounts, rebates for priority customers, and discounts for early cash payments. These sales incentives are accounted for as variable consideration included in the transaction price. Accordingly, the Company reduces revenue for these incentives in the period which the sale occurs and is based on the most likely amount method for estimating the amount of consideration the Company expects to receive. These sales incentive estimates are updated each reporting period as additional information becomes available.
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. For custom engineered products, the transaction price is based upon the price stated in the contract. Variable consideration has not been identified as a significant component of transaction price for custom engineered products and services. The Company generally recognizes revenue for custom 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. These contracts often require either up front or installment payments. These types of contracts are generally accounted for as one performance obligation as the products and services are not separately identifiable. The promised services (such as inspection, commissioning, and installation) are essential in order for the delivered product to operate as intended on the customer’s site and the services are therefore highly interrelated with product functionality.
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For most custom engineered products contracts, the Company determined that while there is no alternative use for the custom engineered products, the Company does not have an enforceable right to payment (which must include a reasonable profit margin) for performance completed to date in order to meet the over time revenue recognition criteria. Therefore, revenue is recognized at a point in time (when the contract is complete). For custom engineered products contracts that contain an enforceable right to payment (including reasonable profit margin) the Company satisfies the performance obligation over time and recognizes revenue based on the extent of progress towards completion of the performance obligation. The cost-to-cost measure of progress is an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of work performed and transfer of control to the customers. Under the cost-to-cost measure of progress, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recognized proportionally as costs are incurred.
Sales and other taxes collected with revenue are excluded from revenue, consistent with the previous revenue standard. Shipping and handling costs incurred prior to shipment are considered activities required to fulfill the Company’s promise to transfer goods, and do not qualify as a separate performance obligation. Additionally, 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 types of warranties are included in the purchase price of the product and are deemed to be assurance-type warranties which are not accounted for as a separate performance obligation. Other performance obligations included in a contract (such as drawings, owner’s manuals, and training services) are immaterial in the context of the contract and are not recognized as a separate performance obligation.
For additional information on the Company’s revenue recognition policy refer to the consolidated financial statements included in the 2021 10-K.
Reconciliation of contract balances
The Company records a contract liability when cash is received prior to recording revenue. Some standard contracts require a down payment while most custom engineered contracts require installment payments. Installment payments for the custom engineered contracts typically require a portion due at inception while the remaining payments are due upon completion of certain performance milestones. For both types of contracts, these contract liabilities, referred to as customer advances, are recorded at the time payment is received and are included in Accrued liabilities on the Condensed Consolidated Balance Sheets. When the related performance obligation is satisfied and revenue is recognized, the contract liability is released into income.
The following table illustrates the balance and related activity for customer advances in the nine months ended December 31, 2021 and December 31, 2020 (in thousands):
| Customer advances (contract liabilities) | December 31, 2021 | December 31, 2020 | ||||||
| March 31, beginning balance | $ | $ | ||||||
| Additional customer advances received | ||||||||
| Revenue recognized from customer advances | ( | ( | ||||||
| Customer advances recorded from Dorner acquisition | ||||||||
| Customer advances recorded from Garvey acquisition | ||||||||
| Other (1) | ( | |||||||
| December 31, ending balance | $ | $ | ||||||
(1) Other includes the impact of foreign currency translation
Revenue was recognized prior to the right to invoice the customer which resulted in a contract asset balance in the amount of $2,563,000 and $8,559,000 as of December 31, 2021 and March 31, 2021, respectively. Contract assets are included in Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets.
Remaining Performance Obligations
As of December 31, 2021, the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) was approximately $2,189,000 . We expect to recognize approximately 71 % of these sales over the next twelve months.
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Disaggregated revenue
In accordance with FASB ASC Topic 606, the Company is required to disaggregate revenue into categories that depict how economic factors affect the nature, amount, timing and uncertainty of revenue and cash flows. The following table illustrates the disaggregation of revenue by product grouping for the three and nine months ended December 31, 2021 and December 31, 2020 (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| Net Sales by Product Grouping | December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | |||||||||||||||||||
| Industrial Products | $ | $ | $ | $ | |||||||||||||||||||
| Crane Solutions | $ | $ | |||||||||||||||||||||
| Engineered Products | $ | $ | |||||||||||||||||||||
| Precision Conveyor Products | $ | ||||||||||||||||||||||
| All other | $ | $ | |||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Industrial products include: manual chain hoists, electrical chain hoists, rigging/clamps, industrial winches, hooks, shackles, and other forged attachments. Crane solutions products include: wire rope hoists, drives and controls, crane kits and components, and workstations. Engineered products include: linear and mechanical actuators, lifting tables, rail projects, and actuations systems. Precision conveyor products include: low profile, flexible chain, large scale, sanitary and vertical elevation conveyor systems, as well as pallet system conveyors and accumulation systems. The All other product grouping includes miscellaneous revenue.
Practical expedients
Incremental costs to obtain a contract incurred by the Company primarily relate to sales commissions for contracts with a duration of one year or less. Therefore, these costs are expensed as incurred and are recorded in Selling expenses on the Condensed Consolidated Statements of Operations.
Unsatisfied performance obligations for contracts with an expected length of one year or less are not disclosed. Further, revenue from contracts with customers do not include a significant financing component as payment is generally expected within one year from when the performance obligation is controlled by the customer.
Accounts Receivable:
Effective April 1, 2020, the Company adopted “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Under ASU 2016-13, the Company is required to remeasure expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. In addition to these factors, the Company establishes an allowance for doubtful accounts based upon 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. Due to the short-term nature of such accounts receivable, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances. In response to COVID-19, the Company continues to monitor the impact that COVID-19 is having on our customers and their outstanding receivable balances and is taking preventative measures, such as reducing credit limits and increasing bad debt expense, as necessary.
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| Allowance for doubtful accounts | December 31, 2021 | December 31, 2020 | ||||||
| March 31, beginning balance | $ | $ | ||||||
| Bad debt expense | ||||||||
| Less uncollectible accounts written off, net of recoveries | ( | ( | ||||||
| Allowance recorded from Dorner acquisition | ||||||||
| Allowance recorded from Garvey acquisition | ||||||||
| Other (1) | ||||||||
| December 31, ending balance | $ | $ | ||||||
4. Fair Value Measurements
FASB ASC Topic 820 “Fair Value Measurements and Disclosures” establishes the standards for reporting financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value on a recurring basis (at least annually). Under these standards, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the "exit price") in an orderly transaction between market participants at the measurement date.
ASC 820-10-35-37 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the valuation techniques that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is separated into three levels based on the reliability of inputs as follows:
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly, involving some degree of judgment.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The availability of observable inputs can vary and is affected by a wide variety of factors, including the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that market participants would use in pricing the asset or liability at the measurement date.
The Company uses quoted market prices when valuing its marketable securities and, consequently, the fair value is based on Level 1 inputs. These marketable securities consist of equity and fixed income securities. The Company primarily uses readily observable market data in conjunction with internally developed discounted cash flow valuation models when valuing its derivative portfolio and, consequently, the fair value of the Company’s derivatives is based on Level 2 inputs. The carrying amount of the Company's pension-related annuity contract is recorded at net asset value of the contract and, consequently, its fair value is based on Level 2 inputs and is included in Other assets on the Condensed Consolidated Balance Sheets. The carrying value of the Company’s Term Loan approximates fair value based on current market interest rates for debt instruments of similar credit standing and, consequently, their fair values are based on Level 2 inputs.
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The following table provides information regarding financial assets and liabilities measured or disclosed at fair value (in thousands):
| Fair value measurements at reporting date using | ||||||||||||||||||||||||||
| December 31, | Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | |||||||||||||||||||||||
| Description | 2021 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||
| Assets/(Liabilities) measured at fair value: | ||||||||||||||||||||||||||
| Marketable securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Annuity contract | ||||||||||||||||||||||||||
| Derivative Assets (Liabilities): | ||||||||||||||||||||||||||
| Foreign exchange contracts | ( | ( | ||||||||||||||||||||||||
| Interest rate swap liability | ( | ( | ||||||||||||||||||||||||
| Cross currency swap liability | ( | ( | ||||||||||||||||||||||||
| Disclosed at fair value: | ||||||||||||||||||||||||||
| Term Loan B | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Fair value measurements at reporting date using | ||||||||||||||||||||||||||
| March 31, | Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | |||||||||||||||||||||||
| Description | 2021 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||
| Assets/(Liabilities) measured at fair value: | ||||||||||||||||||||||||||
| Marketable securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Annuity contract | ||||||||||||||||||||||||||
| Derivative assets (liabilities): | ||||||||||||||||||||||||||
| Foreign exchange contracts | ( | ( | ||||||||||||||||||||||||
| Interest rate swap liability | ( | ( | ||||||||||||||||||||||||
| Cross currency swap liability | ( | ( | ||||||||||||||||||||||||
| Disclosed at fair value: | ||||||||||||||||||||||||||
| Term loan | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
The Company does not have any non-financial assets and liabilities that are recognized at fair value on a recurring basis. At December 31, 2021, the Term Loan B has been recorded at carrying value, which approximates fair value.
Market gains, interest, and dividend income on marketable securities are recorded in Investment (income) loss on the Condensed Consolidated Statements of Operations. Changes in the fair value of derivatives are recorded in foreign currency exchange (gain) loss or other comprehensive income (loss), to the extent that the derivative qualifies as a hedge under the provisions of FASB ASC Topic 815. Interest and dividend income on marketable securities are measured based upon amounts earned on their respective declaration dates.
Assets and liabilities that were measured on a non-recurring basis during fiscal 2022 include assets and liabilities acquired in connection with the acquisitions of Dorner on April 7, 2021 and Garvey on December 1, 2021, described in Note 2. The estimated fair values allocated to the assets acquired and liabilities assumed relied upon fair value measurements based primarily on Level 3 inputs. The valuation techniques used to allocate fair values to working capital items; property, plant, and equipment; and identifiable intangible assets included the cost approach, market approach, and other income approaches. For identifiable intangible assets these techniques included the multi-period excess earnings approach, the relief from royalty approach, and other income approaches. The valuation techniques relied on a number of inputs which included the cost and condition of property, plant, and equipment and forecasted net sales and income.
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For the Dorner acquisition, significant valuation inputs included an attrition rate of 10.0 % for customer relationships, an estimated royalty rate of 5.0 % for technology, a royalty rate of 1.0 % for trademark and trade names, and a weighted average cost of capital of 11.0 %.
For the Garvey acquisition, significant valuation inputs included an attrition rate of 33.0 % for customer relationships, an estimated engineering cost per hour of $37.50 for engineered drawings, royalty rates ranging from 0.75 % to 1.5 % for trademarks and trade names, a royalty rate of 4.5 % for patents, and a weighted average cost of capital of 13.6 %.
5. Inventories
Inventories consisted of the following (in thousands):
| December 31, 2021 | March 31, 2021 | |||||||||||||
| At cost - FIFO basis: | ||||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Work-in-process | ||||||||||||||
| Finished goods | ||||||||||||||
| Total at cost FIFO basis | ||||||||||||||
| LIFO cost less than FIFO cost | ( | ( | ||||||||||||
| Net inventories | $ | $ | ||||||||||||
The acquisitions of Dorner and Garvey contributed $17,870,000 and $6,517,000 , respectively, to the increase in inventory since March 31, 2021.
An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, estimated interim results are subject to change in the final year-end LIFO inventory valuation.
6. Marketable Securities and Other Investments
In accordance with ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) are measured at fair value through earnings. The Company's marketable securities are recorded at their fair value, with unrealized changes in market value realized within Investment (income) loss on the Condensed Consolidated Statements of Operations. The impact on earnings for unrealized gains and losses was a gain of $145,000 and $195,000 in the three months ended December 31, 2021 and December 31, 2020, respectively and a gain of $214,000 and 682,000 in the nine months ended December 31, 2021 and December 31, 2020, respectively.
Consistent with prior periods, the estimated fair value is based on quoted market prices at the balance sheet dates. The cost of securities sold is based on the specific identification method. Interest and dividend income are included in Investment (income) loss in the Condensed Consolidated Statements of Operations.
Marketable securities are carried as long-term assets since they are held for the settlement of the Company’s general and product liability insurance claims filed through CM Insurance Company, Inc. ("CMIC"), a wholly owned captive insurance subsidiary. The marketable securities are not available for general working capital purposes.
Net realized gains related to sales of marketable securities were no
The Company owns a 49 % ownership interest in Eastern Morris Cranes Company Limited ("EMC"), a limited liability company organized and existing under the laws and regulations of the Kingdom of Saudi Arabia. The Company's ownership represents an equity investment in a strategic customer of STAHL serving the Kingdom of Saudi Arabia. The investment's
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7. Goodwill and Intangible Assets
Goodwill and indefinite lived trademarks are not amortized but are tested for impairment at least annually, 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 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 operating segment level as defined under ASC Topic 280-10-50-10 “Segment Reporting - Disclosure.” The Company has three reporting units as of December 31, 2021 and two reporting units as of March 31, 2021. The Duff-Norton reporting unit (which designs, manufactures and sources mechanical and electromechanical actuators and rotary unions) had goodwill of $9,699,000 at December 31, 2021 and March 31, 2021. The Rest of Products reporting unit (representing the hoist, chain, forgings, digital power, motion control, manufacturing, and distribution businesses) had goodwill of $315,633,000 and $321,477,000 at December 31, 2021 and March 31, 2021, respectively. The acquisition of Dorner in fiscal 2022 as described in Note 2 has resulted in a third reporting unit. The Precision Conveyance reporting unit (which represents high-precision conveying systems) had goodwill of $331,752,000 at December 31, 2021. The goodwill associated with the acquisition of Garvey, as described in Note 2, is included in the Precision Conveyance reporting unit.
Refer to the 2022 10-K for information regarding our annual goodwill and indefinite lived trademark impairment evaluation. Future impairment indicators, such as declines in forecasted cash flows, may cause impairment charges. Impairment charges could be based on such factors as the Company’s stock price, forecasted cash flows, assumptions used, control premiums or other variables. There were no such indicators during the three months ended December 31, 2021.
A summary of changes in goodwill during the nine months ended December 31, 2021 is as follows (in thousands):
| Balance at April 1, 2021 | $ | ||||
| Acquisition of Dorner (see Note 2) | |||||
| Acquisition of Garvey (see Note 2) | |||||
| Currency translation | ( | ||||
| Balance at December 31, 2021 | $ | ||||
During the three months ended September 30, 2021, the Company received cash in the amount of $2,357,000 from the former owner of Dorner as a result of a working capital adjustment. The adjustment contributed to the reduction in goodwill and the purchase price for Dorner from amounts reported as of June 30, 2021. During the three months ended December 31, 2021, the Company refined its estimate of customer relationships which decreased the balance by $3,000,000 with an offsetting increase to goodwill.
Goodwill is recognized net of accumulated impairment losses of $113,174,000 as of December 31, 2021 and March 31, 2021, respectively.
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Identifiable intangible assets acquired in a business combination are amortized over their estimated useful lives. Identifiable intangible assets are summarized as follows (in thousands):
| December 31, 2021 | March 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||||||||||||
| Trademark | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Indefinite lived trademark | ||||||||||||||||||||||||||||||||||||||
| Customer relationships | ( | ( | ||||||||||||||||||||||||||||||||||||
| Acquired technology | ( | ( | ||||||||||||||||||||||||||||||||||||
| Other | ( | ( | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
The Company’s intangible assets that are considered to have finite lives are amortized. The weighted-average amortization periods are 13 years for trademarks, 17 years for customer relationships, 16 years for acquired technology, 5 years for other, and 17 years in total. Trademarks with a carrying value of $47,243,000 as of December 31, 2021 have an indefinite useful life and are therefore not being amortized.
8. Derivative Instruments
The Company uses derivative instruments to manage selected foreign currency and interest rate exposures. The Company does not use derivative instruments for speculative trading purposes. All derivative instruments must be recorded on the balance sheet at fair value. For derivatives designated as cash flow hedges, changes in the fair value of the derivative is recorded as accumulated other comprehensive loss, or “AOCL,” and is reclassified to earnings when the underlying transaction has an impact on earnings. For foreign currency derivatives not designated as cash flow hedges, all changes in market value are recorded as a foreign currency exchange loss (gain) in the Company’s Consolidated Statements of Operations. The cash flow effects of derivatives are reported within net cash (used for) provided by operating activities on the Condensed Consolidated Statements of Cash Flows.
The Company is exposed to credit losses in the event of non-performance by the counterparties on its financial instruments. The counterparties have investment grade credit ratings. The Company anticipates that these counterparties will be able to fully satisfy their obligations under the contracts.
The Company's agreements with its counterparties contain provisions pursuant to which the Company could be declared in default of its derivative obligations. As of December 31, 2021, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of December 31, 2021, it could have been required to settle its obligations under these agreements at amounts which approximate the December 31, 2021 fair values reflected in the table below. During the nine months ended December 31, 2021, the Company was not in default of any of its derivative obligations.
As of December 31, 2021, the Company had no derivatives designated as net investments or fair value hedges in accordance with FASB ASC Topic 815, “Derivatives and Hedging.”
The Company has a cross currency swap agreement that is designated as a cash flow hedge to hedge changes in the value of an intercompany loan to a foreign subsidiary due to changes in foreign exchange rates. This intercompany loan is related to the acquisition of STAHL. The notional amount of this derivative is $133,430,000 , and this contract matures on March 31, 2028. During fiscal 2022, the Company modified the cross currency swap by extending it to fiscal year 2028, matching the intercompany loan. The Company has concluded that the transaction to modify the cross currency swap, as well as the modified swap, maintained hedge accounting. The modified cross currency swap is considered to have an other than
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insignificant financing element. As such, its cash flows are classified within financing activities in the Statement of Cash Flows. From its December 31, 2021 balance of AOCL, the Company expects to reclassify approximately $516,000 out of AOCL, and into foreign currency exchange loss (gain), during the next 12 months based on the contractual payments due under this intercompany loan.
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 $4,510,000 , and all contracts mature by September 30, 2022. From its December 31, 2021 balance of AOCL, the Company expects to reclassify approximately $65,000 out of AOCL during the next 12 months based on the expected 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 capital structure was below this threshold at December 31, 2021 as a result of the debt refinancing related to the Dorner acquisition (See Note 2). The Company expects to achieve this structure later in fiscal 2022.
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 on December 31, 2023 and have a total notional amount of $96,218,000 as of December 31, 2021. During fiscal 2022, the Company modified the LIBOR floor to match the new Term Loan B resulting from the Dorner related debt refinancing. The Company concluded that the modification maintained hedge accounting. The modified interest rate swap is considered to have an other than insignificant financing element as well as a more than an insignificant initial net investment. As such, its cash flows are classified as financing activities in the Statement of Cash Flows and the swap liability is considered a hybrid debt instrument. The recorded interest rate swap liability is disclosed in the tables below. 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. From its December 31, 2021 balance of AOCL, the Company expects to reclassify approximately $820,000 out of AOCL, and into interest expense, during the next 12 months.
The following is the effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended December 31, 2021 and 2020 (in thousands):
| Derivatives Designated as Cash Flow Hedges | Type of Instrument | Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives | Location of Gain or (Loss) Recognized in Income on Derivatives | Amount of Gain or (Loss) Reclassified from AOCL into Income | ||||||||||
| December 31, 2021 | Foreign exchange contracts | $ | ( | Cost of products sold | $ | ( | ||||||||
| December 31, 2021 | Interest rate swaps | Interest expense | ( | |||||||||||
| December 31, 2021 | Cross currency swaps | Foreign currency exchange (gain) loss | ||||||||||||
| December 31, 2020 | Foreign exchange contracts | ( | Cost of products sold | |||||||||||
| December 31, 2020 | Interest rate swap | ( | Interest expense | ( | ||||||||||
| December 31, 2020 | Cross currency swaps | ( | Foreign currency exchange (gain) loss | ( | ||||||||||
| Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivatives | Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||
| December 31, 2021 | Foreign currency exchange (gain) loss | $ | ||||||
| December 31, 2020 | Foreign currency exchange (gain) loss | |||||||
The following is derivative instruments on the Condensed Consolidated Balance Sheets for the nine months ended December 31, 2021 and 2020 (in thousands):
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| Derivatives Designated as Cash Flow Hedges | Type of Instrument | Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives | Location of Gain or (Loss) Recognized in Income on Derivatives | Amount of Gain or (Loss) Reclassified from AOCL into Income | ||||||||||
| December 31, 2021 | Foreign exchange contracts | $ | ( | Cost of products sold | $ | ( | ||||||||
| December 31, 2021 | Interest rate swaps | ( | Interest expense | ( | ||||||||||
| December 31, 2021 | Cross currency swaps | Foreign currency exchange (gain) loss | ||||||||||||
| December 31, 2020 | Foreign exchange contracts | ( | Cost of products sold | |||||||||||
| December 31, 2020 | Interest rate swap | ( | Interest expense | ( | ||||||||||
| December 31, 2020 | Cross currency swaps | ( | Foreign currency exchange (gain) loss | ( | ||||||||||
| Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivatives | Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||
| December 31, 2021 | Foreign currency exchange (gain) loss | $ | ||||||
| December 31, 2020 | Foreign currency exchange (gain) loss | |||||||
| Fair Value of Asset (Liability) | |||||||||||||||||
| Derivatives Designated as Hedging Instruments | Balance Sheet Location | December 31, 2021 | March 31, 2021 | ||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other | $ | |||||||||||||||
| Foreign exchange contracts | Accrued liabilities | ( | ( | ||||||||||||||
| Interest rate swap | Prepaid expenses and other | ||||||||||||||||
| Interest rate swap | Other assets | ||||||||||||||||
| Interest rate swap | Accrued liabilities | ( | ( | ||||||||||||||
| Interest rate swap | Other non current liabilities | ( | ( | ||||||||||||||
| Cross currency swap | Accrued liabilities | ( | ( | ||||||||||||||
| Cross currency swap | Other non current liabilities | ( | |||||||||||||||
9. Debt
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 First Lien Term Loan ("Term Loan"). The Term Loan had a seven-year term maturing in 2024. On August 26, 2020, the Company entered into a Second Amendment to the Credit Agreement (as amended by the First Amendment, dated as of February 26, 2018). The Second Amendment extended the $100,000,000 secured Revolver which was originally set to expire on January 31, 2022 to August 25, 2023.
As discussed in Note 2, the Company completed its acquisition of Dorner on April 7, 2021 and entered into a $750,000,000 First Lien Facility with JPMorgan Chase Bank, PNC Capital Markets LLC, and Wells Fargo Securities LLC. The First Lien Facility consists of a New Revolving Credit Facility in an aggregate amount of $100,000,000 and a $650,000,000 Bridge Facility. Proceeds from the Bridge Facility were used, among other things, to finance the purchase price for the Dorner
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acquisition, pay related fees, expenses and transaction costs, and refinance the Company's outstanding borrowings under its prior Term Loan and Revolver.
In addition to the debt borrowing described above, the Company commenced and completed an underwritten public offering of 4,312,500 shares of its common stock at a price of $48.00 per share for total gross proceeds of $207,000,000 . The Company used all of the net proceeds from the equity offering to repay in part outstanding borrowings under its Bridge Facility. The equity offering closed on May 4, 2021. Following the repayment of outstanding borrowings under the Bridge Facility, the Bridge Facility was refinanced with a syndicated Term Loan B facility on May 14, 2021.
The key terms of the Term Loan B facility are as follows:
1) Term Loan B: An aggregate $450,000,000 Term Loan B facility, which requires quarterly principal amortization of 0.25% with the remaining principal due at the maturity date. In addition, if the Company has Excess Cash Flow (ECF) as defined in the Credit Agreement for the First Lien Facility (the “Credit Agreement”), the ECF Percentage of the Excess Cash Flow for each fiscal year minus optional prepayments 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 B facility. The ECF Percentage is defined as 50% stepping down to 25% or 0% based on the achievement of specified Secured Leverage Ratios as of the last day of such fiscal year. Further, the Company may draw additional Incremental Facilities (referred to as an "Accordion") by executing and delivering to JPMorgan Chase Bank, N.A. an Increased Facility Activation Notice specifying the amount of such increase requested. Lenders shall have no obligation to participate in any increase unless they agree to do so in their sole discretion.
2) 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.
3) 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, which is based upon the Company's Total Leverage Ratio (as defined in the Credit Agreement) in the case of Revolver loans.
4) Prepayments: Provisions permitting a Borrower to voluntarily prepay either the Term Loan B facility or Revolver in whole or in part at any time, and provisions requiring certain mandatory prepayments of the Term Loan B facility 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 Facility is required if the prepayment is associated with a Repricing Transaction and it were to occur within the first three months following the closing date.
5) Covenants: Provisions containing covenants required of the Company 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 New Revolving Credit Facility is outstanding (excluding any Letters of Credit) (the “Covenant Trigger”), and prohibits the Total Leverage Ratio for the Reference Period ended on such date from exceeding (i) 6.75:1.00 as of any date of determination prior to June 30, 2021, (ii) 5.50:1.00 as of any date of determination on June 30, 2021 and thereafter but prior to June 30, 2022, (iii) 4.50:1.00 as of any date of determination on June 30, 2022 and thereafter but prior to June 30, 2023 and (iv) 3.50:1.00 as of any date of determination on June 30, 2023 and thereafter.
6) Collateral: Obligations under the First Lien Facilities are secured by liens on substantially all assets of the Company and its material domestic subsidiaries.
In the first nine months of fiscal 2022, the Company incurred $14,803,000 in debt extinguishment costs of which $5,946,000 relates to the Company's prior Term Loan, $326,000 relates to the Company's prior Revolver, and $8,531,000 relates to fees paid on the portion of the First Lien Facilities that were associated with the Bridge Facility, all of which were incurred in the first quarter of fiscal 2022. These costs are classified as Cost of debt refinancing in the Condensed Consolidated Statements of Operations.
Further, in the first quarter of fiscal 2022, the Company recorded $5,432,000 in deferred financing costs on the First Lien Term Facility, which will be amortized over seven years. The Company recorded $4,027,000 in deferred financings costs on the New Revolving Credit Facility, of which $3,050,000 is related to the New Revolving Credit Facility and $977,000 is carried over from the Company's prior Revolver as certain Revolver lenders increased their borrowing capacity. These balances will be amortized over five years and are classified in Other assets since no funds were drawn on the New Revolving Credit Facility.
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Also discussed in Note 2, the Company completed its acquisition of Garvey on November 30, 2021 and borrowed additional funds in accordance with the Accordion feature under its existing Term Loan B to increase the principal amount of the Term Loan B facility by $75,000,000 . Proceeds from the Accordion were used, among other things, to finance the purchase price for the Garvey acquisition, pay related fees, expenses, and transaction costs. No material amendment to the terms of the Term Loan B facility or the First Lien Facility was necessary for the Company to exercise this Accordion feature.
In the third quarter of fiscal 2022, the Company recorded $892,000 in deferred financing costs on the Accordion, which will be amortized over the remaining life of the Term Loan B.
The outstanding principal balance of the Term Loan B facility was $512,560,000 as of December 31, 2021, which includes $75,000,000 in principal balance from the Accordion exercised in the third quarter of fiscal 2022. The Company made $6,315,000 in principal payments on the Term Loan B facility during the three months ended December 31, 2021 of which $1,315,000 was required. During the nine months ended December 31, 2021, the Company made $12,440,000 in principal payments on the Term Loan B facility of which $2,440,000 was required. The Company is obligated to make $5,250,000 of principal payments on the Term Loan B facility over the next 12 months plus applicable ECF payments, if required, however, plans to pay down approximately $40,000,000 in principal payments in total during such 12 month period. This amount has been recorded within the current portion of long term debt on the Company's Condensed Consolidated Balance Sheet with the remaining balance recorded as long term debt.
There were no outstanding borrowings and $17,109,000 in outstanding letters of credit issued against the New Revolving Credit Facility as of December 31, 2021. The outstanding letters of credit as of December 31, 2021 consisted of $1,102,000 in commercial letters of credit and $16,007,000 of standby letters of credit.
The gross balance of deferred financing costs on the Term Loan B facility was $6,323,000, which includes $892,000 from the Accordion exercise, as of December 31, 2021 and $14,690,000 on the prior Term Loan as of March 31, 2021, respectively. The accumulated amortization balances were $669,000 and $8,744,000 as of December 31, 2021 and March 31, 2021, respectively.
The gross balance of deferred financing costs associated with the New Revolving Credit Facility was $4,027,000 as of December 31, 2021 and the prior Revolver was $3,615,000 as of March 31, 2021, which are included in Other assets on the Condensed Consolidated Balance Sheet. The accumulated amortization balances were $604,000 and $2,313,000 as of December 31, 2021 and March 31, 2021, respectively.
In connection with Dorner acquisition, the Company recorded a finance lease for a manufacturing facility in Hartland, WI under a 23 year lease agreement which terminates in 2035. The outstanding balance on the finance lease obligation is $14,213,000 as of December 31, 2021 of which $530,000 has been recorded within the Current portion of long term debt and the remaining balance recorded within Term loan and revolving credit facility on the Company's Condensed Consolidated Balance Sheet. See Note 15, Leases, for further details.
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 December 31, 2021, unsecured credit lines totaled approximately $2,501,000 , of which $0 was drawn. In addition, unsecured lines of $12,900,000 were available for bank guarantees issued in the normal course of business of which $9,478,000 was utilized.
Refer to the Company’s consolidated financial statements included in its 2021 10-K for further information on its debt arrangements.
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10. Net Periodic Benefit Cost
The following table sets forth the components of net periodic pension cost for the Company’s defined benefit pension plans (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Service costs | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ||||||||||||||||||||||
| Net amortization | ||||||||||||||||||||||||||
| Settlement | ( | |||||||||||||||||||||||||
| Net periodic pension (benefit) cost | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
Components of the net benefit costs other than the service cost component are recorded in Other (income) expense, net on the Condensed Consolidated Statements of Operations. Service costs are recorded as part of Income from operations.
During fiscal 2021, the Company settled the liabilities for one of its U.S. pension plans through a combination of (i) lump sum payments to eligible participants who elected to receive them and (ii) the purchase of annuity contracts for participants who did not elect lump sums. The lump sum payments were paid during the three months ended June 30, 2020 and resulted in a settlement charge of $2,722,000 which was recorded in Other (income) expense, net on the Condensed Consolidated Statements of Operations. During the quarter ended September 30, 2020, the Company purchased annuity contracts to settle the remaining liabilities of the terminated plan. The total settlement charge was $18,933,000 which was recorded in Other (income) expense, net on the Condensed Consolidated Statements of Operations during the nine months ending December 31, 2020. The settlement gain of $113,000 during the three months ended December 31, 2020 is the result of a true up of estimates initially recorded.
The Company currently plans to contribute approximately $5,101,000 to its pension plans in fiscal 2022.
The following table sets forth the components of net periodic postretirement benefit cost (benefit) for the Company’s defined benefit postretirement plans (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Interest cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Amortization of plan net losses | ( | ( | ( | ( | ||||||||||||||||||||||
| Net periodic postretirement (benefit) cost | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
For additional information on the Company’s defined benefit pension and postretirement benefit plans, refer to the consolidated
financial statements included in the 2021 10-K.
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11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Numerator for basic and diluted earnings per share: | ||||||||||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | |||||||||||||||||||||
| Denominators: | ||||||||||||||||||||||||||
| Weighted-average common stock outstanding – denominator for basic EPS | ||||||||||||||||||||||||||
| Effect of dilutive employee stock options and other share-based awards | ||||||||||||||||||||||||||
| Adjusted weighted-average common stock outstanding and assumed conversions – denominator for diluted EPS | ||||||||||||||||||||||||||
Stock options with respect to 156,000 common shares for the three and nine months ended December 31, 2021, respectively, were not included in the computation of diluted income per share because they were antidilutive. For the three and nine months ended December 31, 2021, 120,000 contingently issuable common shares were excluded because a performance condition had not yet been met.
Stock options, restricted stock units, and performance shares with respect to 244,000 and 1,063,000 common shares for the three and nine months ended December 31, 2020, respectively were not included in the computation of diluted income per share because they were antidilutive. The shares as of the nine months ended December 31, 2020 were antidilutive as a result of the Company's net loss. For the three and nine months ended December 31, 2020, 105,000 contingently issuable common shares were excluded because a performance condition had not yet been met.
The Company grants share based compensation to eligible participants under the 2016 Long Term Incentive Plan, as Amended and Restated in June 2019 ("2016 LTIP"). The total number of shares of common stock with respect to which awards may be granted under the 2016 LTIP were increased by 2,500,000 as a result of the June 2019 amendment and restatement. Shares not previously authorized for issuance under any of the prior stock plans and any shares not issued or subject to outstanding awards under the prior stock plans are still available for issuance.
During the first nine months of fiscal 2022, there were 99,000 shares of stock issued upon the exercising of stock options related to the Company’s stock option plans. During the fiscal year ended March 31, 2021, 125,000 shares of restricted stock units vested and were issued.
In May of fiscal 2022, the Company issued 4,312,500 shares of common stock raising proceeds of $198,705,000 net of fees in connection with the Dorner acquisition that was completed in April 2021. Refer to Notes 2 and 9 for additional details regarding this transaction.
On January 17, 2022, the Company's Board of Directors declared a dividend of $0.06 per common share. The dividend will be paid on February 22, 2022 to shareholders of record on February 11, 2022. The dividend payment is expected to be approximately $1,710,000 .
Refer to the Company’s consolidated financial statements included in its 2021 10-K for further information on its earnings per share and stock plans.
12. Loss Contingencies
From time to time, the Company is named a defendant in legal actions arising out of the normal course of business. The Company is not a party to any pending legal proceeding other than ordinary, routine litigation incidental to our business. The Company does not believe that any of our pending litigation will have a material impact on its business.
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Accrued general and product liability costs are actuarially estimated reserves based on amounts determined from loss reports, individual cases filed with the Company, and an amount for losses incurred but not reported. The aggregate amounts of reserves were $22,192,000 (gross of estimated insurance recoveries of $9,077,000 recorded in Other assets on the Condensed Consolidated Balance Sheet) as of December 31, 2021, of which $18,292,000 is included in Other non current liabilities and $3,900,000 in Accrued liabilities. The liability for accrued general and product liability costs are funded by investments in marketable securities (see Note 6).
The following table provides a reconciliation of the beginning and ending balances for accrued general and product liability:
| December 31, 2021 | March 31, 2021 | |||||||||||||
| Accrued general and product liability, beginning of period | $ | $ | ||||||||||||
| Estimated insurance recoveries | ||||||||||||||
| Add provision for claims | ||||||||||||||
| Deduct payments for claims | ( | ( | ||||||||||||
| Accrued general and product liability, end of period | $ | $ | ||||||||||||
| Estimated insurance recoveries | ( | ( | ||||||||||||
| Net accrued general and product liability, end of period | $ | $ | ||||||||||||
The per occurrence limits on the self-insurance for general and product liability coverage to Columbus McKinnon through its wholly-owned captive insurance company 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, the Company’s 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 2022. The Company also purchases excess general and product liability insurance up to an aggregate $75,000,000 limit.
Asbestos
Like many industrial manufacturers, the Company is involved in asbestos-related litigation. In continually evaluating costs relating to its estimated asbestos-related liability, the Company reviews, among other things, the incidence of past and recent claims, the historical case dismissal rate, the mix of the claimed illnesses and occupations of the plaintiffs, its recent and historical resolution of the cases, the number of cases pending against it, the status and results of broad-based settlement discussions, and the number of years such activity might continue. Based on this review, the Company has estimated its share of liability to defend and resolve probable asbestos-related personal injury claims. This estimate is highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that can affect the range of the liability. The Company will continue to study the variables in light of additional information in order to identify trends that may become evident and to assess their impact on the range of liability that is probable and estimable.
Based on actuarial information, the Company has estimated its net asbestos-related aggregate liability including related legal costs to range between $5,800,000 and $10,600,000 , net of insurance recoveries, using actuarial parameters of continued claims for a period of 37 years from December 31, 2021. The Company has estimated its asbestos-related aggregate liability that is probable and estimable, net of insurance recoveries, in accordance with U.S. generally accepted accounting principles approximates $7,765,000 . The Company has reflected the liability gross of insurance recoveries of $9,077,000 as a liability in the Condensed Consolidated Balance Sheet as of December 31, 2021. The recorded liability does not consider the impact of any potential favorable federal legislation. This liability will fluctuate based on the uncertainty in the number of future claims that will be filed and the cost to resolve those claims, which may be influenced by a number of factors, including the outcome of the ongoing broad-based settlement negotiations, defensive strategies, and the cost to resolve claims outside the broad-based settlement program. Of this amount, management expects to incur asbestos liability payments of approximately $2,400,000 over the next 12 months. Because payment of the liability is likely to extend over many years, management believes that the potential additional costs for claims will not have a material 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.
A share of the Company’s previously incurred asbestos-related expenses and future asbestos-related expenses are covered by pre-existing insurance policies. The Company had been engaged in a legal action against the insurance carriers for those policies to recover past expenses and future costs incurred. The Company came to an agreement with the insurance carriers to settle its case against them for recovery of a portion of past costs and future costs for asbestos-related legal defense costs. The agreement was finalized during the quarter ended September 30, 2020. The terms of the settlement require the carriers to pay
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gross defense costs prior to retro-premiums of 65% for future asbestos-related defense costs subject to an annual cap of $1,650,000 for claims covered by the settlement. The reimbursement net of retro-premiums is approximately 47% which resulted in a $1,830,000 increase to the Company’s asbestos liability during the second quarter of fiscal 2021.
In addition, the insurance carriers were required to reimburse the Company for past defense costs through the date of the settlement amounting to $3,006,000 which was paid during the second quarter of fiscal 2021. The reimbursement for past cost was recorded net of a contingent legal fee of $1,500,000 which was paid in the third quarter of fiscal 2021. Further, the insurance carriers are expected to cover 100% of indemnity costs related to all covered cases. Estimates of the future cost sharing have been included in the loss reserve calculation as of December 31, 2021 and March 31, 2021. The Company has recorded a receivable for the estimated future cost sharing in Other assets in the Condensed Consolidated Balance Sheet at December 31, 2021 in the amount of $9,077,000 , which offsets its asbestos reserves.
Product Liability
The Company is also involved in other unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability. The Company's estimation of its product-related aggregate liability that is probable and estimable, in accordance with U.S. generally accepted accounting principles approximates $4,787,000 , which has been reflected as a liability in the Condensed Consolidated Balance Sheet as of December 31, 2021. In some cases, the Company cannot reasonably estimate a range of loss because there is insufficient information regarding the matter. 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.
In addition, one of the Company's subsidiaries, Magnetek, Inc. ("Magnetek"), has been named, along with multiple other defendants, in asbestos-related lawsuits associated with business operations previously acquired but which are no longer owned. During Magnetek's ownership, none of the businesses produced or sold asbestos-containing products. For such claims, Magnetek is uninsured and either contractually indemnified against liability, or contractually obligated to defend and indemnify the purchaser of these former business operations. The Company aggressively seeks dismissal from these proceedings. The asbestos-related liability including legal costs is estimated to be approximately $497,000 which has been reflected as a liability in the Condensed Consolidated Balance Sheet at December 31, 2021.
Litigation-Other
In October 2010, Magnetek received a request for indemnification from Power-One, Inc. ("Power-One") for an Italian tax matter arising out of the sale of Magnetek's power electronics business to Power-One in October 2006. With a reservation of rights, Magnetek affirmed its obligation to indemnify Power-One for certain pre-closing taxes. The sale included an Italian company, Magnetek, S.p.A., and its wholly owned subsidiary, Magnetek Electronics (Shenzhen) Co. Ltd. (the “Power-One China Subsidiary”). The tax authority in Arezzo, Italy, issued a notice of audit report in September 2010 wherein it asserted that the Power-One China Subsidiary had its administrative headquarters in Italy and, therefore, it should be considered resident in Italy and subject to taxation in Italy. In November 2010, the tax authority issued a notice of tax assessment for the period of July 2003 to June 2004, alleging that taxes of approximately $2,200,000 (Euro 1,900,000 ) were due in Italy on taxable income earned by the Power-One China Subsidiary during this period. In addition, the assessment alleges potential penalties together with interest in the amount of approximately $3,000,000 (Euro 2,600,000 ) for the alleged failure of the Power-One China Subsidiary to file its Italian tax return. The Power-One China Subsidiary filed its response with the provincial tax commission of Arezzo, Italy in January 2011. A hearing before the Tax Court was held in July 2012 on the tax assessment for the period of July 2003 to June 2004. In September 2012, the Tax Court ruled in favor of the Power-One China Subsidiary dismissing the tax assessment for the period of July 2003 to June 2004. In February 2013, the tax authority filed an appeal of the Tax Court's September 2012 ruling. The Regional Tax Commission of Florence heard the appeal of the tax assessment dismissal for the period of July 2003 to June 2004 and thereafter issued its ruling finding in favor of the tax authority. Magnetek believes the court’s decision was based upon erroneous interpretations of the applicable law and appealed the ruling to the Italian Supreme Court in April 2015.
The tax authority in Arezzo, Italy also issued a tax inspection report in January 2011 for the periods July 2002 to June 2003 (fiscal period 2002/2003) and July 2004 to December 2006 (fiscal periods 2004/2005 and 2005/2006) claiming that the Power-One China Subsidiary failed to file Italian tax returns for the reported periods. In August 2012, the tax authority in Arezzo, Italy issued four notices of tax assessment for the periods July 2002 to June 2003 and July 2004 to December 2006, alleging that taxes of approximately $7,600,000 (Euro 6,700,000 ) were due in Italy on taxable income earned by the Power-One China Subsidiary together with an allegation of potential penalties in the amount of approximately $3,200,000 (Euro 2,800,000 ) for the alleged failure of the Power-One China Subsidiary to file its Italian tax returns. On June 3, 2015, the Tax Court, with four
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judgements, ruled in favor of the Power-One China Subsidiary dismissing the tax assessments for the periods of July 2002 to June 2003 and July 2004 to December 2006. On July 27, 2015, the tax authority filed four appeals of the Tax Court's ruling of June 3, 2015. In May 2016, the Regional Tax Court of Florence rejected the appeals of the tax authority and at the same time canceled the notices of assessment for the fiscal years of 2004/2005 and 2005/2006. The tax authority had up to six months to appeal the decisions. In December 2016, the Power-One China Subsidiary was served by the Italian Revenue Service with two appeals to the Italian Supreme Court regarding the two positive judgments on the tax assessments for the fiscal periods 2004/2005 and 2005/2006. In February 2017 the Power-One China Subsidiary filed two memorandum before the Italian Supreme Court in response to the appeals made by the tax authority against the positive judgments on the tax assessments for fiscal years 2004/2005 and 2005/2006. In March 2017, the Regional Tax Court of Florence rejected the appeal of the assessment for 2006 fiscal year (period July 2006-December 2006). The tax authority had until October 2017 to appeal this decision. In October 2017, the Power-One China Subsidiary was served by the Italian Revenue Service with an appeal to the Italian Supreme Court against the positive judgment on the tax assessment for fiscal year 2006. In November 2017 the Power-One China Subsidiary filed a memorandum before the Italian Supreme Court in response to the appeal made by the tax authority against the positive judgment on the tax assessment for fiscal year 2006. In February 2018 an appeal hearing was held at the Regional Tax Court of Florence regarding the Italian tax authority's claim for taxes due for fiscal year 2002/2003. In March 2018, the Regional Tax Court of Florence rejected the appeal of the assessment for 2002/2003 fiscal year. In October 2018 the Power-One China Subsidiary was served by the Italian Revenue Service with an appeal to the Italian Supreme Court against the positive judgment on the tax assessment for fiscal year 2002/2003. In November 2018 the Power-One China Subsidiary filed a memorandum with the Italian Supreme Court in response to the appeal made by the tax authority.
The Company believes it will be successful and does not expect to incur a liability related to these assessments.
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; and (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 Magnetek’s predecessor Universal Manufacturing ("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. The Company 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 legal costs related to such matters 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 had previously filed suit against Travelers in District Court seeking coverage under insurance policies in the name of Universal. In July 2019, the District Court ruled that Travelers is obligated to defend Magnetek under these policies in connection with Magnetek’s litigation against Monsanto. The Court held that Monsanto’s claims against Magnetek fall within the insuring agreement of the Travelers policies and that none of the policy exclusions precluded the possibility of coverage. The Court also held that Travelers prior settlements with other insureds under the policies did not cut off or release Magnetek’s rights under the policies. Travelers moved for reconsideration and had sought discovery from Magnetek and Monsanto in connection with that motion. On September 22, 2020, the Court issued an order denying the motion to reconsider and denying the motion to compel discovery from Magnetek. The result was that the Court’s prior order granting Magnetek partial summary judgment and requiring Travelers’ to reimburse Magnetek’s defense costs to date and fund its defense costs moving forward was now binding, subject to Travelers right to appeal. Travelers moved for a reconsideration of the order which was denied in September 2020 and in March 2021 Traveler’s window to appeal the court order closed. As a result, the Company recorded a receivable for approximately $900,000 as of March 31, 2021 for past defense costs which are to be reimbursed. The receivable was reflected as a reduction to Cost of products sold in the fourth quarter of fiscal 2021. The receivable was paid in full in April 2021.
The Company is also engaged in similar insurance coverage litigation against Transportation Insurance Company in the Circuit Court of Cook County, Illinois. The Company has sought a ruling that Transportation Insurance Company is also obligated to reimburse Magnetek’s defense costs to date and fund its defense costs moving forward. That motion is not yet fully briefed.
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Environmental Matters
Along with other manufacturing companies, the Company is subject to various federal, state and local laws relating to the protection of the environment. To address the requirements of such laws, the Company has adopted a corporate environmental protection policy which provides that all of its owned or leased facilities shall, and all of its employees have the duty to, comply with all applicable environmental regulatory standards, and the Company utilizes an environmental auditing program for its facilities to ensure compliance with such regulatory standards. The Company has also established managerial responsibilities and internal communication channels for dealing with environmental compliance issues that may arise in the course of its business. Because of the complexity and changing nature of environmental regulatory standards, it is possible that situations will arise from time to time requiring the Company to incur expenditures in order to ensure environmental regulatory compliance. However, the Company is not aware of any environmental condition or any operation at any of its facilities, either individually or in the aggregate, which would cause expenditures having a material adverse effect on its results of operations, financial condition or cash flows and, accordingly, has not budgeted any material capital expenditures for environmental compliance for fiscal 2022.
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. Magnetek further believes that FOL's obligation to the state of Connecticut was not discharged in the reorganization proceeding.
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. DEP 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 recorded a liability of $335,000 included in the amount specified above, 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, the Company has accrued as of December 31, 2021 a total of $797,000 which, in our opinion, is sufficient to deal with such matters. The Company is not aware of any environmental condition or any operation at any of its facilities, either individually or in the aggregate, which would cause expenditures to have a material adverse effect on its results of operations, financial condition or cash flows and, accordingly, has not budgeted any material capital expenditures for environmental compliance for fiscal 2022.
13. Income Taxes
Income tax expense (benefit) as a percentage of income (loss) from continuing operations before income tax expense was 10 % and 9 % in the three months ended December 31, 2021 and December 31, 2020, respectively and 13 % and (45 )% in the nine months ended December 31, 2021 and December 31, 2020, respectively. Typically these percentages vary from the U.S. statutory rate of 21 % primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of income for these subsidiaries.
For the three months ended December 31, 2021, the rates are lower than the U.S. statutory rate by 8 percentage points primarily due to the impact of carrying back a taxable loss in FY 2021 to prior tax years. For the nine months ended December 31, 2021, the rates are lower than the U.S. statutory rate by 9 percentage points primarily as a result of the impact of carrying back the taxable loss in FY 2021 to prior tax years as well as the impact of equity compensation.
For the three months ended December 31, 2020, the rates are lower than the U.S. statutory rate primarily as a result of pre-tax losses in certain jurisdictions. For the nine months ended December 31, 2020, the rates are lower than the U.S. statutory rate primarily as a result of the impacts associated with pre-tax losses in the U.S. related to the pension settlement expense recorded
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of $18,933,000 for the year, the U.S. R&D credit, and the utilization of net operating losses that previously had a full valuation allowance against them.
The Company estimates that the effective tax rate related to continuing operations will be approximately 15 % to 17 % for fiscal 2022.
Refer to the Company’s consolidated financial statements included in its 2021 10-K for further information on income taxes.
Changes in AOCL by component for the three and nine-month period ended December 31, 2021 are as follows (in thousands):
| Three months ended December 31, 2021 | ||||||||||||||||||||||||||
| Retirement Obligations | Foreign Currency | Change in Derivatives Qualifying as Hedges | Total | |||||||||||||||||||||||
| Beginning balance net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Other comprehensive income (loss) before reclassification | ( | ( | ||||||||||||||||||||||||
| Amounts reclassified from other comprehensive loss | ( | ( | ||||||||||||||||||||||||
| Net current period other comprehensive income (loss) | ( | ( | ||||||||||||||||||||||||
| Ending balance net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Nine months ended December 31, 2021 | ||||||||||||||||||||||||||
| Retirement Obligations | Foreign Currency | Change in Derivatives Qualifying as Hedges | Total | |||||||||||||||||||||||
| Beginning balance net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Other comprehensive income (loss) before reclassification | ( | ( | ( | |||||||||||||||||||||||
| Amounts reclassified from other comprehensive loss | ( | ( | ||||||||||||||||||||||||
| Net current period other comprehensive income (loss) | ( | ( | ( | |||||||||||||||||||||||
| Ending balance net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
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Details of amounts reclassified out of AOCL for the three months ended December 31, 2021 are as follows (in thousands):
| Details of AOCL Components | Amount reclassified from AOCL | Affected line item on Condensed Consolidated Statement of Operations | ||||||||||||
| Net amortization of prior service cost and pension settlement expense | ||||||||||||||
| $ | (1) | |||||||||||||
| Total before tax | ||||||||||||||
| ( | Tax (benefit) expense | |||||||||||||
| $ | Net of tax | |||||||||||||
| Change in derivatives qualifying as hedges | ||||||||||||||
| $ | Cost of products sold | |||||||||||||
| Interest expense | ||||||||||||||
| ( | Foreign currency | |||||||||||||
| ( | Total before tax | |||||||||||||
| Tax (benefit) expense | ||||||||||||||
| $ | ( | Net of tax | ||||||||||||
Details of amounts reclassified out of AOCL for the nine-month period ended December 31, 2021 are as follows (in thousands):
| Details of AOCL Components | Amount reclassified from AOCL | Affected line item on Condensed Consolidated Statement of Operations | ||||||||||||
| Net amortization of prior service cost and pension settlement expense | ||||||||||||||
| $ | (1) | |||||||||||||
| Total before tax | ||||||||||||||
| ( | Tax (benefit) expense | |||||||||||||
| $ | Net of tax | |||||||||||||
| Change in derivatives qualifying as hedges | ||||||||||||||
| $ | Cost of products sold | |||||||||||||
| Interest expense | ||||||||||||||
| ( | Foreign currency | |||||||||||||
| ( | Total before tax | |||||||||||||
| Tax (benefit) expense | ||||||||||||||
| $ | ( | Net of tax | ||||||||||||
(1)These AOCL components are included in the computation of net periodic pension cost. (See Note 10 — Net Periodic Benefit Cost for additional details.)
15. Leases
Operating leases
The Company's operating leases consist of manufacturing facilities, sales offices, distribution centers, warehouses, vehicles, and equipment. For leases with terms greater than twelve months, at lease commencement the Company recognizes a right-of-use ("ROU") asset and a lease liability. The initial lease liability is recognized at the present value of remaining lease payments over the lease term. Leases with an initial term of twelve months or less are not recorded on the Company's Condensed Consolidated Balance Sheet. The Company recognizes lease expense for operating leases on a straight-line basis over the lease term.
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The Company's operating leases have lease terms ranging from 1 to 15 years, some of which include options to extend or terminate the lease. The exercise of lease renewal options is at the Company’s sole discretion. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term. The Company’s lease agreements do not contain material residual value guarantees or any material restrictive covenants.
The following table illustrates the balance sheet classification for ROU assets and lease liabilities (in thousands):
| Balance sheet classification | December 31, 2021 | March 31, 2021 | |||||||||
| Assets | Other assets | $ | $ | ||||||||
| Current | Accrued liabilities | ||||||||||
| Non-current | Other non current liabilities | ||||||||||
| Total liabilities | $ | $ | |||||||||
Included in the ROU asset balance are leases held by Dorner and Garvey in the amount of $895,000 and $1,361,000 , respectively, as of December 31, 2021.
Operating lease expense of $2,332,000 and $2,342,000 and $6,940,000 and 6,953,000 for the three and nine months ended December 31, 2021 and December 31, 2020, respectively, is included in income from operations on the Condensed Consolidated Statements of Operations. Short-term lease expense, sublease income, and variable lease expenses were not material for the three and nine months ended December 31, 2021 and December 31, 2020.
Supplemental cash flow information related to operating leases is as follows (in thousands):
| Nine months ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | ||||||
| ROU assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||
Finance Lease
As stated in Note 9, Debt, in connection with the acquisition of Dorner, the Company recorded a finance lease for a manufacturing facility in Hartland, WI that has a 23 year lease term which terminates in 2035. The outstanding balance on the finance lease obligation is $14,213,000 as of December 31, 2021, of which $530,000 has been recorded within the Current portion of long term debt and finance lease obligations and the remaining balance is recorded within Term loan and finance lease obligations on the Company's Condensed Consolidated Balance Sheet.
Similar to the Company discount rate for operating leases, the discount rate implicit within the finance lease is not readily determinable. Therefore, the Company used its estimated incremental borrowing rate in determining the present value of lease payments. The incremental borrowing rate was determined based on the Company’s recent debt issuances, lease term, and the currency, and was determined to be 4.51 %.
Lease expense of $250,000 and $734,000 is included in Income from operations in the three and nine months ended December 31, 2021, respectively, and $162,000 and $477,000 is included in Interest and debt expense in the three and nine months ended December 31, 2021, respectively, on the Company's Condensed Consolidated Statements of Operations related to the finance lease.
Supplemental cash flow information related to finance leases is as follows (in thousands):
| Nine months ended | |||||
| December 31, 2021 | |||||
| Cash paid for amounts included in the measurement of finance lease liabilities | $ | ||||
| ROU assets obtained in exchange for new finance lease liabilities | $ | ||||
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16. Effects of New Accounting Pronouncements
Topics adopted in fiscal 2022
In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes" (Topic 740). The standard clarifies, among other topics, that the effects of an enacted change in tax law on taxes currently payable or refundable for the current year be reflected in the computation of the annual effective tax rate in the first interim period that includes the enactment date of the new legislation. The Company adopted this standard effective April 1, 2021 and the standard did not have a material impact on the financial statements for the nine months ended December 31, 2021.
Topics not yet adopted
In October 2021, the FASB issued ASU No. 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." The ASU amends ASC 805 to require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination and is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those years, with early adoption permitted. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments. We are currently evaluating the impact the standard will have on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The ASU is elective and is relief to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Optional expedients are provided for contract modification accounting under topics such as debt, leases, and derivatives. The optional amendments are effective for all entities as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 through December 31, 2022. We are currently evaluating the impact the standard will have on our consolidated financial statements if we chose to elect.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Executive Overview
The Company is a leading worldwide designer, manufacturer and marketer of intelligent motion solutions, including motion control products, technologies, automated systems and services, that efficiently and ergonomically move, lift, position and secure materials. Our key products include hoists, crane components, precision conveyors, actuators, rigging tools, light rail workstations, and digital power and motion control systems. These are highly relevant, professional-grade solutions that solve customers’ critical material handling requirements.
Founded in 1875, we have grown to our current size and leadership position through organic growth and acquisitions. We developed our leading market position over our 146-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 2.0 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. We expect shareholder value will be enhanced by expanding EBITDA margins and return on invested capital ("ROIC").
Our revenue base is geographically diverse with approximately 41% derived from customers outside the U.S. for the nine months ended December 31, 2021. We believe this diversity balances the impact of changes that occur in local economies, as well as benefits the Company by providing access to growing emerging markets. We monitor both U.S. and Eurozone Industrial Capacity Utilization statistics as well as the ISM Production Index as indicators of anticipated demand for our products. In addition, we continue to monitor the potential impact of other global and U.S. trends including, industrial production, trade tariffs, raw material cost inflation, interest rates, foreign currency exchange rates, and activity of end-user markets around the globe.
From a strategic perspective, we are investing in new products as we focus on our greatest opportunities for growth. We maintain a strong North American market share with significant leading market positions in hoists, lifting and sling chain, forged attachments, actuators, 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.
In March 2021, the Company announced that it had entered into a definitive agreement to acquire Dorner. The acquisition of Dorner closed on April 7, 2021. Dorner, headquartered in Hartland, Wisconsin, is a leading automation solutions company providing unique, patented technologies in the design, application, manufacturing and integration of high-precision conveying systems. Dorner is a leading supplier to the stable life sciences, food processing, and consumer packaged goods markets as well as the high growth industrial automation and e-commerce sectors. The addition of Dorner provides attractive complementary adjacencies including sortation and asynchronous conveyance systems.
Further, on December 1, 2021, the Company completed its acquisition of Garvey. Garvey is a leading accumulation systems solutions company providing unique, patented systems for the automation of production processes whose products complement those of Dorner. The acquisitions of Dorner and Garvey accelerate the Company’s shift to intelligent motion and serves as a platform to expand capabilities in advanced, higher technology automation solutions.
Regardless of the economic climate and point in the economic cycle, we constantly explore ways to increase operating margins as well as further improve our productivity and competitiveness. We have specific initiatives to reduce 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, CMBS. We are working to achieve these strategic initiatives through business simplification, operational excellence, and profitable growth initiatives. We believe these initiatives will enhance future operating margins.
Our principal raw materials and components purchases were approximately $255 million in fiscal 2021 (or 59% of Cost of product sold) and include steel, consisting of rod, wire, bar, structural, and other forms of steel; electric motors; bearings; gear reducers; castings; steel and aluminum enclosures and wire harnesses; electro-mechanical components and standard variable drives. These commodities are all available from multiple sources. We purchase most of these raw materials and components from a limited number of strategic and preferred suppliers under agreements which are negotiated on a companywide basis
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through our global purchasing group. Currently, as a result of supply chain challenges, we are experiencing higher raw material costs. To date, we have raised prices to our customers to cover these increased raw material costs.
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.
Results of Operations
Three Months Ended December 31, 2021 and December 31, 2020
Net sales in the fiscal 2022 quarter ended December 31, 2021 were $216,088,000, up $49,541,000 or 29.7% from the fiscal 2021 quarter ended December 31, 2020 net sales of $166,547,000. Net sales were positively impacted by the acquisition of Dorner and Garvey which contributed $36,382,000, $8,983,000 due to increased sales volume, and $5,646,000 due to price increases. Foreign currency translation favorably impacted sales by $1,470,000 for the three months ended December 31, 2021.
Gross profit in the fiscal 2022 quarter ended December 31, 2021 was $75,057,000, an increase of $19,742,000 or 35.7% from the fiscal 2021 quarter ended December 31, 2020 gross profit of $55,315,000. Gross profit margin was 34.7% in the fiscal 2022 third quarter compared to 33.2% in the fiscal 2021 third quarter. The increase in gross profit was due to $16,703,000 in gross profit as a result of the acquisitions of Dorner and Garvey, $3,604,000 in increased productivity net of other cost changes, higher sales volume which increased gross profit by $3,243,000, $1,375,000 of price increases net of material inflation, and $251,000 in costs incurred in the prior year quarter due to factory closures that did not reoccur. These gross profit increases were offset by $3,045,000 in increased product liability costs, which includes the settlement of a matter for $2,850,000, $515,000 in acquisition related inventory amortization at Garvey, $455,000 in net higher business realignment costs than the prior year, $450,000 in backlog amortization related to the Garvey acquisition, and $421,000 in increased tariffs. The translation of foreign currencies had a $548,000 unfavorable impact on gross profit in the three months ended December 31, 2021.
Selling expenses were $24,468,000 and $18,829,000, or 11.3% of net sales, in both the fiscal 2022 and 2021 third quarters. Selling expense increased by $3,686,000 for costs incurred by Dorner and Garvey and $272,000 in business realignment costs during the three months ended December 31, 2021. The remaining increase relates to variable selling costs which have increased with sales. Foreign currency translation had a $196,000 favorable impact on selling expenses in the three months ended December 31, 2021.
General and administrative expenses were $25,144,000 and $19,859,000, or 11.6% and 11.9% of net sales, in the fiscal 2022 and 2021 third quarters, respectively. The increase in general and administrative expenses was due to $2,602,000 in general and administrative expenses incurred by Dorner and Garvey, $1,643,000 in higher incentive compensation expense and stock compensation expense, and $370,000 in acquisition and integration expenses in the three months ended December 31, 2021. Foreign currency translation had a $88,000 favorable impact on general and administrative expenses in the three months ended December 31, 2021.
Research and development expenses were $3,875,000 and $3,038,000, or 1.8% of net sales, in both the fiscal 2022 and 2021 third quarters. The increase in research and development expenses was due to $447,000 in research and development expenses incurred by Dorner and Garvey and $100,000 in higher incentive compensation expense and stock compensation expense.
Amortization of intangibles was $6,254,000 and $3,142,000 in the fiscal 2022 and 2021 third quarters, respectively, with the increase related to new intangible assets recorded from the Dorner and Garvey acquisitions.
Interest and debt expense was $4,375,000 in the third quarter ended December 31, 2021 compared to $2,986,000 in the third quarter ended December 31, 2020. The increase is related to higher interest and debt expense incurred on the Company's new Term Loan B as a result of the Dorner acquisition and related debt refinancing, as well as the subsequent Garvey acquisition and Accordion borrowings.
Investment income of $76,000 and $495,000 in the third quarters ended December 31, 2021 and 2020, 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 6 of the financial statements.
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Other income was $455,000 in the third quarter ended December 31, 2021 compared to other expense of $144,000 in the third quarter ended December 31, 2020.
Income tax expense as a percentage of income from continuing operations before income tax expense was 10% and 9% in the third quarters ended December 31, 2021 and December 31, 2020, respectively. Typically these percentages vary from the U.S. statutory rate of 21% primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income for these subsidiaries.
For the three months ended December 31, 2021, the rates are lower than the U.S. statutory rate by 8 percentage points primarily due to the impact of carrying back a taxable loss in FY 2021 to prior tax years. For the three months ended December 31, 2020, the rates are lower than the U.S. statutory rate primarily as a result of pre-tax losses in certain jurisdictions.
The Company estimates that the effective tax rate related to continuing operations will be approximately 15% to 17% for fiscal 2022.
Nine Months Ended December 31, 2021 and December 31, 2020
Net sales in the nine months ended December 31, 2021 were $653,187,000, up $189,780,000 or 41.0% from the fiscal 2021 nine months ended December 31, 2020 net sales of $463,407,000. Net sales were positively impacted by the acquisitions of Dorner and Garvey which contributed $104,100,000, $66,703,000 due to increased sales volume, and $11,617,000 due to price increases. Foreign currency translation favorably impacted sales by $7,360,000 for the nine months ended December 31, 2021.
Gross profit in the nine months ended December 31, 2021 was $230,255,000, an increase of $74,118,000 or 47.5% from the nine months ended December 31, 2020 gross profit of $156,137,000. Gross profit margin was 35.3% in the nine months ended December 31, 2021 compared to 33.7% in the nine months ended December 31, 2020. The increase in gross profit was due to $43,963,000 in gross profit as a result of the acquisitions of Dorner and Garvey, higher sales volume which increased gross profit by $23,109,000, $11,867,000 in increased productivity net of other cost changes, $2,973,000 of price increases net of material inflation, and $2,672,000 in costs incurred in the prior year due to factory closures that did not reoccur. These gross profit increases were offset by $3,496,000 in acquisition related inventory amortization at Dorner and Garvey, $3,045,000 in increased product liability costs, including a settlement of $2,850,000, a prior year gain in the amount of $2,189,000 recorded for a building sold in China that did not reoccur, $2,158,000 in increased tariffs, $1,040,000 net higher business realignment costs than the prior year, $521,000 in higher acquisition integration costs, and $450,000 in backlog amortization related to the Garvey acquisition. The translation of foreign currencies had a $2,433,000 favorable impact on gross profit in the nine months ended December 31, 2021.
Selling expenses were $72,107,000 and $56,087,000, or 11.0% and 12.1% of net sales, in the nine months ended December 31, 2021 and 2020, respectively. Selling expense increased by $10,386,000 for costs incurred by Dorner and Garvey. The remaining increase relates to variable selling costs which have increased with sales as well as higher personnel costs as a result of annual merit increases. Foreign currency translation had a $983,000 unfavorable impact on selling expenses in the nine months ended December 31, 2021.
General and administrative expenses were $78,495,000 and $53,842,000, or 12.0% and 11.6% of net sales, in the nine months ended December 31, 2021 and 2020, respectively. The increase in general and administrative expenses was due to $9,347,000 in general and administrative expenses incurred by Dorner and Garvey, $7,827,000 in acquisition expenses, which include costs related to a transaction bonus which are classified as general and administrative expense, $5,423,000 in higher incentive compensation expense and stock compensation expense, and $515,000 in net higher business realignment costs than in the prior year period. These increases were offset by $1,026,000 in reduced bad debt expense in the nine months ended December 31, 2021 compared to the nine months ended December 31, 2020 as a result of improving economic conditions due to the lessening impact of COVID-19 in the nine months ended December 31, 2021. Foreign currency translation had a $522,000 unfavorable impact on general and administrative expenses in the nine months ended December 31, 2021.
Research and development expenses were $11,283,000 and $8,703,000, or 1.7% and 1.9% of net sales, in the nine months ended December 31, 2021 and 2020, respectively. The increase in research and development expenses was due to $1,184,000 in research and development expenses incurred by Dorner and Garvey and $424,000 in higher incentive compensation expense and stock compensation expense.
Amortization of intangibles was $18,648,000 and $9,449,000 in the nine months ended December 31, 2021 and 2020, respectively, with the increase related to new intangible assets recorded from the Dorner and Garvey acquisitions.
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Interest and debt expense was $14,774,000 in the nine months ended December 31, 2021 compared to $9,192,000 in the nine months ended December 31, 2020. The increase is related to higher interest and debt expense incurred on the Company's Bridge Facility and new Term Loan B as a result of the Dorner acquisition and related debt refinancing, as well as the subsequent Garvey acquisition and Accordion borrowings.
The Company incurred $14,803,000 in Cost of debt refinancing during the nine months ended December 31, 2021 as a result of the Dorner acquisition and related refinancing as described in Note 9 of the financial statements. There were no similar expenses incurred in the nine months ended December 31, 2020.
Investment income of $624,000 and $1,429,000 in the nine months ended December 31, 2021 and 2020, 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 6 of the financial statements.
Other income was $744,000 in the nine months ended December 31, 2021 compared to other expense of $20,081,000 in the nine months ended December 31, 2020. The prior year expense primarily related to a $18,933,000 settlement charge as a result of the termination of one of the Company's U.S. pension plans, as described in Note 10 of the financial statements. There were no similar expenses incurred in the nine months ended December 31, 2021.
Income tax expense as a percentage of income from continuing operations before income tax expense was 13% and (45)% in the nine months ended December 31, 2021 and December 31, 2020, respectively. Typically these percentages vary from the U.S. statutory rate of 21% primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income for these subsidiaries.
For the nine months ended December 31, 2021, the rates are lower than the U.S. statutory rate by 9 percentage points primarily as a result of the impact of carrying back the taxable loss in FY 2021 to prior tax years as well as the impact of equity compensation.
For the nine months ended December 31, 2020, the rates are lower than the U.S. statutory rate primarily as a result of the impacts associated with pre-tax losses in the U.S. related to the pension settlement expense recorded of $18,933,000 for the year, the U.S. R&D credit, and the utilization of net operating losses that previously had a full valuation allowance against them.
Liquidity and Capital Resources
Cash, cash equivalents, and restricted cash totaled $106,949,000 at December 31, 2021, a decrease of $95,428,000 from the March 31, 2021 balance of $202,377,000.
Cash flow from operating activities
Net cash provided by operating activities was $23,727,000 for the nine months ended December 31, 2021 compared to $71,948,000 for the nine months ended December 31, 2020. Net income of $17,834,000 along with non-cash adjustments to net income of $59,720,000, of which $31,245,000 is from Depreciation and amortization and $14,803,000 is from Cost of debt refinancing as a result of the Dorner acquisition, were the primary drivers contributing to cash provided by operations for the nine months ended December 31, 2021. These increases in cash for the nine months ended December 31, 2021 were offset by an increase of $42,215,000 in inventories as the Company increased inventory due to current supply chain constraints, a decrease in trade accounts payable of $4,229,000, an increase in prepaid expenses of $5,544,000, and a decrease of $5,472,000 in accrued expenses and non-current liabilities. The decrease in accrued expenses and non-current liabilities primarily consists a decrease in customer deposits as well as $6,885,000 in cash paid for amounts included in the measurement of operating lease liabilities during the nine months ended December 31, 2021.
The net cash provided by operating activities for the nine months ended December 31, 2020 primarily consisted of non-cash adjustments to net income of $42,439,000, decrease in trade accounts receivable of $34,254,000, and a decrease in inventory of $20,786,000 for the nine months ended December 31, 2020.
Cash flow from investing activities
Net cash used by investing activities was $550,933,000 for the nine months ended December 31, 2021 compared with net cash provided by investing activities of $846,000 for the nine months ended December 31, 2020. The most significant use of cash was $539,778,000 to purchase Dorner and Garvey, net of cash acquired, as well as $9,506,000 in capital expenditures.
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The net cash provided by investing activities for the nine months ended December 31, 2020 was primarily due to $5,453,000 in proceeds received from a sale of a building owned in China, offset by $5,904,000 in capital expenditures.
Cash flow from financing activities
Net cash provided by financing activities was $433,252,000 for the nine months ended December 31, 2021 and net cash used by financing activities was $7,680,000 for the nine months ended December 31, 2020. The most significant sources of cash were $725,000,000 in gross proceeds from the issuance of long term debt and $207,000,000 in gross proceeds from an equity offering, which were used to fund the Dorner and Garvey acquisitions. These sources of cash were offset by $467,725,000 in repayments of debt, $26,184,000 in fees related to the debt and equity offering, and dividends paid in the amount of $4,852,000. As noted in Note 8 of the financial statements, during the second quarter of fiscal 2022, the Company modified its cross currency swap and interest rate swap. As such, the associated cash flows from hedging activities are classified as financing activities in the Statement of Cash Flows which resulted in a net cash outflow of $453,000 during the nine months ended December 31, 2021.
The most significant uses of cash for the nine months ended December 31, 2020 were $3,338,000 in repayments on the prior Term Loan and dividends paid in the amount of $4,294,000.
We believe that our cash on hand, cash flows, and borrowing capacity under our new First Lien Facility will be sufficient to fund our ongoing operations and debt obligations, and capital expenditures for at least the next twelve months. This belief is dependent upon successful execution of our current business plan and effective working capital utilization. No material restrictions exist in accessing cash held by our non-U.S. subsidiaries. Additionally we expect to meet our U.S. funding needs without repatriating non-U.S. cash and incurring incremental U.S. taxes. As of December 31, 2021, $69,663,000 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 First Lien Term Loan ("Term Loan"). The Term Loan had a seven-year term maturing in 2024. On August 26, 2020, the Company entered into a Second Amendment to the Credit Agreement (as amended by the First Amendment, dated as of February 26, 2018). The Second Amendment extended the $100,000,000 secured Revolver which was originally set to expire on January 31, 2022 to August 25, 2023.
As discussed in Note 2, the Company completed its acquisition of Dorner on April 7, 2021 and entered into a $750,000,000 First Lien Facility with JPMorgan Chase Bank, PNC Capital Markets LLC, and Wells Fargo Securities LLC. The First Lien Facility consists of a New Revolving Credit Facility in an aggregate amount of $100,000,000 and a $650,000,000 Bridge Facility. Proceeds from the Bridge Facility were used, among other things, to finance the purchase price for the Dorner acquisition, pay related fees, expenses and transaction costs, and refinance the Company's outstanding borrowings under its prior Term Loan and Revolver.
In addition to the debt borrowing described above, the Company commenced and completed an underwritten public offering of 4,312,500 shares of its common stock at a price of $48.00 per share for total gross proceeds of $207,000,000. The Company used all of the net proceeds from the equity offering to repay in part outstanding borrowings under its Bridge Facility. The equity offering closed on May 4, 2021. Following the repayment of outstanding borrowings under the Bridge Facility, the Bridge Facility was refinanced with a syndicated Term Loan B facility on May 14, 2021.
The key terms of the Term Loan B facility are as follows:
1) Term Loan B: An aggregate $450,000,000 Term Loan B facility, which requires quarterly principal amortization of 0.25% with the remaining principal due at the maturity date. In addition, if the Company has Excess Cash Flow (ECF) as defined in the Credit Agreement for the First Lien Facility (the “Credit Agreement”), the ECF Percentage of the Excess Cash Flow for each fiscal year minus optional prepayments 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 B facility. The ECF Percentage is defined as 50% stepping down to 25% or 0% based on the achievement of specified Secured Leverage Ratios as of the last day of such fiscal year. Further, the Company may draw additional Incremental Facilities (referred to as an "Accordion") by executing and delivering to JPMorgan Chase Bank, N.A. an Increased Facility Activation Notice specifying the amount of such increase requested. Lenders shall have no obligation to participate in any increase unless they agree to do so in their sole discretion.
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2) 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.
3) 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, which is based upon the Company's Total Leverage Ratio (as defined in the Credit Agreement) in the case of Revolver loans.
4) Prepayments: Provisions permitting a Borrower to voluntarily prepay either the Term Loan B facility or Revolver in whole or in part at any time, and provisions requiring certain mandatory prepayments of the Term Loan B facility 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 Facility is required if the prepayment is associated with a Repricing Transaction and it were to occur within the first three months following the closing date.
5) Covenants: Provisions containing covenants required of the Company 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 New Revolving Credit Facility is outstanding (excluding any Letters of Credit) (the “Covenant Trigger”), and prohibits the Total Leverage Ratio for the Reference Period ended on such date from exceeding (i) 6.75:1.00 as of any date of determination prior to June 30, 2021, (ii) 5.50:1.00 as of any date of determination on June 30, 2021 and thereafter but prior to June 30, 2022, (iii) 4.50:1.00 as of any date of determination on June 30, 2022 and thereafter but prior to June 30, 2023 and (iv) 3.50:1.00 as of any date of determination on June 30, 2023 and thereafter.
6) Collateral: Obligations under the First Lien Facilities are secured by liens on substantially all assets of the Company and its material domestic subsidiaries.
In the first nine months of fiscal 2022, the Company incurred $14,803,000 in debt extinguishment costs of which $5,946,000 relates to the Company's prior Term Loan, $326,000 relates to the Company's prior Revolver, and $8,531,000 relates to fees paid on the portion of the First Lien Facilities that were associated with the Bridge Facility, all of which were incurred in the first quarter of fiscal 2022. These costs are classified as Cost of debt refinancing in the Condensed Consolidated Statements of Operations.
Further, in the first quarter of fiscal 2022, the Company recorded $5,432,000 in deferred financing costs on the First Lien Term Facility, which will be amortized over seven years. The Company recorded $4,027,000 in deferred financings costs on the New Revolving Credit Facility, of which $3,050,000 is related to the New Revolving Credit Facility and $977,000 is carried over from the Company's prior Revolver as certain Revolver lenders increased their borrowing capacity. These balances will be amortized over five years and are classified in Other assets since no funds were drawn on the New Revolving Credit Facility.
Also discussed in Note 2, the Company completed its acquisition of Garvey on November 30, 2021 and borrowed additional funds in accordance with the Accordion feature under its existing Term Loan B to increase the principal amount of the Term Loan B facility by $75,000,000. Proceeds from the Accordion were used, among other things, to finance the purchase price for the Garvey acquisition, pay related fees, expenses, and transaction costs. No material amendment to the terms of the Term Loan B facility or the First Lien Facility was necessary for the Company to exercise this Accordion feature.
In the third quarter of fiscal 2022, the Company recorded $892,000 in deferred financing costs on the Accordion, which will be amortized over the remaining life of the Term Loan B.
The outstanding principal balance of the Term Loan B facility was $512,560,000 as of December 31, 2021, which includes $75,000,000 in principal balance from the Accordion exercised in the third quarter of fiscal 2022. The Company made $6,315,000 in principal payments on the Term Loan B facility during the three months ended December 31, 2021 of which $1,315,000 was required. During the nine months ended December 31, 2021, the Company made $12,440,000 in principal payments on the Term Loan B facility of which $2,440,000 was required. The Company is obligated to make $5,250,000 of principal payments on the Term Loan B facility over the next 12 months plus applicable ECF payments, if required, however, plans to pay down approximately $40,000,000 in principal payments in total during such 12 month period. This amount has been recorded within the current portion of long term debt on the Company's Condensed Consolidated Balance Sheet with the remaining balance recorded as long term debt.
There were no outstanding borrowings and $17,109,000 in outstanding letters of credit issued against the New Revolving Credit Facility as of December 31, 2021. The outstanding letters of credit as of December 31, 2021 consisted of $1,102,000 in commercial letters of credit and $16,007,000 of standby letters of credit.
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The gross balance of deferred financing costs on the Term Loan B facility was $6,323,000, which includes $892,000 from the Accordion exercise, as of December 31, 2021 and $14,690,000 on the prior Term Loan as of March 31, 2021, respectively. The accumulated amortization balances were $669,000 and $8,744,000 as of December 31, 2021 and March 31, 2021, respectively.
The gross balance of deferred financing costs associated with the New Revolving Credit Facility was $4,027,000 as of December 31, 2021 and the prior Revolver was $3,615,000 as of March 31, 2021, which are included in Other assets on the Condensed Consolidated Balance Sheet. The accumulated amortization balances were $604,000 and $2,313,000 as of December 31, 2021 and March 31, 2021, respectively.
In connection with Dorner acquisition, the Company recorded a finance lease for a manufacturing facility in Hartland, WI under a 23 year lease agreement which terminates in 2035. The outstanding balance on the finance lease obligation is $14,213,000 as of December 31, 2021 of which $530,000 has been recorded within the Current portion of long term debt and the remaining balance recorded within Term loan and revolving credit facility on the Company's Condensed Consolidated Balance Sheet. See Note 15, Leases, for further details.
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 December 31, 2021, unsecured credit lines totaled approximately $2,501,000, of which $0 was drawn. In addition, unsecured lines of $12,900,000 were available for bank guarantees issued in the normal course of business of which $9,478,000 was utilized.
Capital Expenditures
In addition to keeping our current equipment and plants properly maintained, we are committed to replacing, enhancing and upgrading our property, plant and equipment to support new product development, improve productivity and customer responsiveness, reduce production costs, increase flexibility to respond effectively to market fluctuations and changes, meet environmental requirements, enhance safety and promote ergonomically correct work stations. Consolidated capital expenditures for the nine months ended December 31, 2021 and December 31, 2020 were $9,506,000 and $5,904,000, respectively. We expect capital expenditure spending in fiscal 2022 to range from $12,000,000 to $16,000,000.
Inflation and Other Market Conditions
Our costs are affected by inflation in the U.S. economy and, to a lesser extent, in non-U.S. economies including those of Europe, Canada, Mexico, South America, and Asia-Pacific. We do not believe that general inflation has had a material effect on our results of operations over the periods presented despite rising inflation levels over such periods due to our ability to 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 addition we are currently experiencing higher levels of material inflation than we have seen in recent years. In the future, we may be further affected by inflation that we may not be able to pass on as price increases. However, we believe we have been successful in the past, and expect to be successful in the future, in instituting price increases to pass on these material cost increases.
Goodwill Impairment Testing
We test goodwill for impairment at least annually and more frequently whenever events occur or circumstances change that indicate there may be impairment. These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of operating performance, or a sale or disposition of a significant portion of a reporting unit.
We test goodwill at the reporting unit level, which is one level below our operating segment. We identify our reporting units by assessing whether the components of our operating segment constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. We also aggregate components that have similar economic characteristics into single reporting units (for example, similar products and / or services, similar long-term financial results, product processes, classes of customers, etc.). With the acquisition of Dorner, we have three reporting units: the Duff Norton reporting unit, the Rest of Products reporting unit, and the Precision Conveyance reporting unit, which have goodwill totaling $9,699,000, $315,633,000, and $331,752,000, respectively, as of December 31, 2021.
We currently do not believe that it is more likely than not that the fair value of each of our reporting units is less than its applicable carrying value. Additionally, we currently do not believe that we have any significant impairment indicators or that any of our reporting units with goodwill are at risk of failing Step One of the goodwill impairment test. However, if the
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projected long-term revenue growth rates, profit margins, or terminal growth rates are significantly lower, and/or the estimated weighted-average cost of capital is considerably higher, future testing may indicate impairment of one or more of the Company’s reporting units and, as a result, the related goodwill may be impaired.
Refer to our Annual Report on Form 10-K for fiscal year 2021 for additional information regarding our annual goodwill impairment process.
Seasonality and Quarterly Results
Quarterly results may be materially affected by the timing of large customer orders, periods of high vacation and holiday concentrations, legal settlements, gains or losses in our portfolio of marketable securities, restructuring charges, favorable or unfavorable foreign currency translation, divestitures and acquisitions. Therefore, the operating results for any particular fiscal quarter are not necessarily indicative of results for any subsequent fiscal quarter or for the full fiscal year.
Effects of New Accounting Pronouncements
Information regarding the effects of new accounting pronouncements is included in Note 16 to the accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements relating to:
•the impact of COVID-19 on our business;
•future development and expected growth of our business and industry;
•our ability to execute our business model, our Columbus McKinnon Business System operating system and our Blueprint for Growth 2.0 Strategy;
•plans to repay additional principal on the Term Loan B facility during future periods;
•having available sufficient cash and borrowing capacity to fund ongoing operations, debt obligations and capital expenditures for the next twelve months; and
•projected capital expenditures.
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, including the impact of the COVID-19 pandemic, 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, including the acquisition of Dorner, and other risks and uncertainties that arise from time to time are described in Item 1A “Risk Factors” of our Annual Report on Form 10-K and in other periodic filings with the SEC. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary factors and to others contained throughout this Quarterly Report on Form 10-Q. 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 are based on our current expectations. Except as required by applicable law, we do not undertake and specifically decline any obligation to publicly release 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. Actual events or 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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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the market risks as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021.
Item 4. Controls and Procedures
As of December 31, 2021, an evaluation was performed under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. These disclosure controls and procedures have been designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is made known to them on a timely basis, and that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on that evaluation, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2021.
There have been no changes in the Company’s internal control over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings – none.
Item 1A. Risk Factors
There have been no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – none.
Item 3. Defaults upon Senior Securities – none.
Item 4. Mine Safety Disclosures – Not applicable
Item 5. Other Information – none.
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Item 6. Exhibits
| Garvey Stock Purchase Agreement incorporated by reference from 8-K filed on November 4, 2021. | ||||||||
| Seventh Amended and Restated By-Laws of the Company incorporated by reference from 8-K filed on November 9, 2021. | ||||||||
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934; as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934; as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Exhibit 101* | The financial statements from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended | |||||||
| 101.INS* | XBRL Instance Document | |||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| Exhibit 104* | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document) | |||||||
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COLUMBUS McKINNON CORPORATION | ||||||||
| (Registrant) | ||||||||
| Date: | January 27, 2022 | /S/ GREGORY P. RUSTOWICZ | ||||||
| Gregory P. Rustowicz | ||||||||
| Senior Vice President Finance and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
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