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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

For the quarterly period ended September 30, 2011
or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from________to

Commission File Number:      0-27618
 
Columbus McKinnon Corporation
 (Exact name of registrant as specified in its charter)
 
 New York   16-0547600
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
140 John James Audubon Parkway, Amherst, NY   14228-1197
(Address of principal executive offices)   (Zip code)
 
(716) 689-5400
(Registrant's telephone number, including area code)
  
 
  
(Former name, former address and former fiscal year, if changed since last report.)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  :   xYes    oNo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yesx Noo

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act.
 
Large accelerated filer  o
Accelerated filer x     
Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes    x No
 
The number of shares of common stock outstanding as of October 25, 2011 was: 19,407,649 shares.
 


 
 

 
 
FORM 10-Q INDEX
COLUMBUS McKINNON CORPORATION
September 30, 2011

   
Page #
Part I. Financial Information
 
     
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
25
     
Item 3.
33
     
Item 4.
33
     
Part II. Other Information
 
     
Item 1.
34
     
Item 1A.
34
     
Item 2.
34
     
Item 3.
34
     
Item 4.
34
     
Item 5.
34
     
Item 6.
34
 
 
2

 
Part I.     Financial Information
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

   
September 30, 2011
   
March 31, 2011
 
   
 
   
 
 
   
(unaudited)
     
ASSETS:
 
(In thousands)
 
Current assets:
 
 
   
 
 
Cash and cash equivalents
  $ 78,746     $ 80,139  
Trade accounts receivable
    80,561       77,744  
Inventories
    95,315       90,031  
Prepaid expenses and other
    12,892       14,294  
Total current assets
    267,514       262,208  
Property, plant, and equipment, net
    60,844       59,360  
Goodwill
    104,953       106,055  
Other intangibles, net
    16,269       18,089  
Marketable securities
    23,990       24,592  
Deferred taxes on income
    1,060       1,217  
Other assets
    7,113       7,351  
Total assets
  $ 481,743     $ 478,872  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
Current liabilities:
               
Notes payable to banks
    271       473  
Trade accounts payable
    37,544       37,174  
Accrued liabilities
    50,776       56,502  
Current portion of long-term debt
    1,231       1,116  
Total current liabilities
    89,822       95,265  
Senior debt, less current portion
    4,200       4,949  
Subordinated debt
    148,004       147,867  
Other non-current liabilities
    69,552       68,645  
Total liabilities
    311,578       316,726  
Shareholders' equity:
               
Voting common stock; 50,000,000 shares authorized; 19,407,649 and 19,171,428 shares issued and outstanding
    193       191  
Additional paid in capital
    187,894       184,884  
Retained earnings (accumulated deficit)
    8,383       (1,072 )
ESOP debt guarantee
    (1,190 )     (1,407 )
Accumulated other comprehensive loss
    (25,115 )     (20,450 )
Total shareholders' equity
    170,165       162,146  
Total liabilities and shareholders' equity
  $ 481,743     $ 478,872  

See accompanying notes.
 
 
3

 
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ACCUMULATED DEFICIT)
(UNAUDITED)

   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands, except per share data)
 
   
 
   
 
   
 
   
 
 
Net sales
  $ 149,863     $ 132,312     $ 289,623     $ 251,399  
Cost of products sold
    110,632       101,071       214,750       192,143  
Gross profit
    39,231       31,241       74,873       59,256  
                                 
Selling expenses
    15,509       15,480       31,535       30,695  
General and administrative expenses
    10,899       9,795       22,351       19,580  
Restructuring charges
    -       347       430       1,797  
Amortization of intangibles
    509       434       1,030       863  
Operating expenses
    26,917       26,056       55,346       52,935  
                                 
Income from operations
    12,314       5,185       19,527       6,321  
Interest and debt expense
    3,557       3,371       7,061       6,604  
Investment income
    (287 )     (435 )     (549 )     (703 )
Foreign currency exchange loss (gain)
    200       (334 )     218       (338 )
Other income, net
    (300 )     (374 )     (481 )     (639 )
Income before income tax expense
    9,144       2,957       13,278       1,397  
Income tax expense
    2,877       1,222       4,232       384  
Income from continuing operations
    6,267       1,735       9,046       1,013  
Income from discontinued operations - net of tax
    409       133       409       133  
Net income
    6,676       1,868       9,455       1,146  
Retained earnings (accumulated deficit) - beginning of period
    1,707       34,156       (1,072 )     34,878  
Retained earnings - end of period
  $ 8,383     $ 36,024     $ 8,383     $ 36,024  
                                 
Average basic shares outstanding
    19,274       19,052       19,224       19,034  
Average diluted shares outstanding
    19,471       19,232       19,511       19,235  
                                 
Basic income per share:
                               
Income from continuing operations
  $ 0.33     $ 0.09     $ 0.47     $ 0.05  
Income from discontinued operations
    0.02       0.01       0.02       0.01  
Net income
  $ 0.35     $ 0.10     $ 0.49     $ 0.06  
                                 
Diluted income per share:
                               
Income from continuing operations
  $ 0.32     $ 0.09     $ 0.46     $ 0.05  
Income from discontinued operations
    0.02       0.01       0.02       0.01  
Net income
  $ 0.34     $ 0.10     $ 0.48     $ 0.06  

See accompanying notes.
 
 
4

 
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
 
Six Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2011
   
2010
 
 
 
(In thousands)
 
OPERATING ACTIVITIES:
 
 
   
 
 
Net income
  $ 9,455     $ 1,146  
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
               
Income from discontinued operations
    (409 )     (133 )
Depreciation and amortization
    5,711       5,656  
Deferred income taxes and related valuation allowance
    261       (330 )
Gain on sale of real estate/investments
    (223 )     (851 )
Stock-based compensation
    1,447       898  
Amortization of deferred financing costs
    192       139  
Changes in operating assets and liabilities:
               
Trade accounts receivable
    (3,421 )     (5,636 )
Inventories
    (6,037 )     (14,868 )
Prepaid expenses and other
    1,288       (3,611 )
Other assets
    143       151  
Trade accounts payable
    481       12,881  
Accrued and non-current liabilities
    (4,470 )     (3,293 )
Net cash provided by (used for) operating activities
    4,418       (7,851 )
                 
INVESTING ACTIVITIES:
               
Proceeds from sale of marketable securities
    3,978       6,136  
Purchases of marketable securities
    (3,538 )     (1,013 )
Capital expenditures
    (7,225 )     (4,566 )
Proceeds from sale of businesses or assets
    -       1,182  
Net cash (used for) provided by investing activities from continuing operations
    (6,785 )     1,739  
Net cash provided by investing activities from discontinued operations
    409       133  
Net cash (used for) provided by investing activities
    (6,376 )     1,872  
                 
FINANCING ACTIVITIES:
               
Proceeds from exercise of stock options
    1,733       -  
Net payments under lines-of-credit
    (202 )     (199 )
Repayment of debt
    (459 )     (465 )
Change in ESOP guarantee
    217       224  
Net cash provided by (used for) financing activities
    1,289       (440 )
Effect of exchange rate changes on cash
    (724 )     272  
Net change in cash and cash equivalents
    (1,393 )     (6,147 )
Cash and cash equivalents at beginning of period
    80,139       63,968  
Cash and cash equivalents at end of period
  $ 78,746     $ 57,821  
Supplementary cash flow data:
               
Interest paid
  $ 6,785     $ 6,459  
Income taxes paid, net of refunds
  $ 3,946     $ 2,277  

See accompanying notes.
 
 
5

 
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
 
 
Three Months Ended
   
Six Months Ended
 
 
 
September 30,
   
September 30,
   
September 30,
   
September 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
 
Net income
  $ 6,676     $ 1,868     $ 9,455     $ 1,146  
Foreign currency translation adjustments
    (6,579 )     5,762       (4,450 )     1,315  
Change in derivatives qualifying as hedges, net of deferred tax expense of $35, $99, $39, and $137
    65       184       72       254  
Unrealized holding gain (loss) arising during the period, net of deferred taxes of $0, $738, $0, and $534*
    (655 )     1,123       (412 )     744  
Reclassification adjustment for gain included in net income, net of deferred tax expense of $0, $107, $0, and $113*
    68       198       125       209  
Total Adjustments
    (587 )     1,321       (287 )     953  
Total other comprehensive (loss) income
    (7,101 )     7,267       (4,665 )     2,522  
Comprehensive (loss) income
  $ (425 )   $ 9,135     $ 4,790     $ 3,668  
 
* The zero net deferred tax benefit during the three and six months ended September 30, 2011 relates to the deferred tax asset valuation allowance.
 
See accompanying notes.
 
 
6

 
COLUMBUS McKINNON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2011

1.           Description of Business

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of Columbus McKinnon Corporation (the Company) at September 30, 2011, the results of its operations for the three and six month periods ended September 30, 2011 and September 30, 2010, and cash flows for the six months ended September 30, 2011 and September 30, 2010, have been included. Results for the period ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending March 31, 2012. The balance sheet at March 31, 2011 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. generally accepted accounting principles for complete financial statements. Certain prior year numbers have been reclassified to conform to current year reporting presentations. For further information, refer to the consolidated financial statements and footnotes thereto included in the Columbus McKinnon Corporation annual report on Form 10-K for the year ended March 31, 2011.

The Company is a leading designer, marketer and manufacturer of material handling products and services which efficiently and safely move, lift, position and secure material. Key products include hoists, rigging tools, cranes, and actuators. The Company’s material handling products are sold globally, principally to third party distributors through diverse distribution channels, and to a lesser extent directly to end-users. During the three and six months ended September 30, 2011, approximately 53% of sales were to customers in the U.S.

2.           Fair Value Measurements

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 Topic 820-10-35-37 establishes a hierarchy for inputs that may be used to measure fair value. Level 1 is defined as quoted prices in active markets that the Company has the ability to access for identical assets or liabilities. The fair value of the Company’s marketable securities is based on Level 1 inputs. Level 2 is defined as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. 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.  As of September 30, 2011, the Company’s assets and liabilities measured at fair value on recurring bases were as follows (in thousands):

 
 
 
   
Fair value measurements at reporting date using
 
 
 
 
   
Quoted prices in
   
Significant other
   
Significant
 
 
 
 
   
active markets for
   
observable
   
unobservable
 
 
 
September 30,
   
identical assets
   
inputs
   
inputs
 
Description
 
2011
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets/(Liabilities):
 
 
   
 
   
 
   
 
 
Marketable securities
  $ 23,990     $ 23,990     $ -     $ -  
Derivative assets
    120       -       120       -  
 
 
7

 
Assets that are measured on a nonrecurring basis include the Company’s reporting units that are used to test goodwill for impairment on an annual or interim basis under the provisions of ASC Topic 350-20-35-1 “Intangibles, Goodwill and Other – Goodwill Subsequent Measurement,” as well as property, plant and equipment in circumstances when the Company determines that those assets are impaired under the provisions of ASC Topic 360-10-35-17 “Property Plant and Equipment – Subsequent Measurement” and the measurement of termination benefits in connection with the Company’s restructuring plan under the provisions of ASC Topic 420 “Exit or Disposal Cost Obligations.” There were no assets or liabilities measured at fair value on a nonrecurring basis during the six months ended September 30, 2011 with the exception of the one-time termination benefits recorded during the six month period ended September 30, 2011 discussed in Note 11. The fair value of the termination benefits approximate the amount expected to be paid. Substantially all of the amounts are expected to be paid by December 31, 2011.

Fair Values of Defined Benefit Plan Assets

The Company holds fixed income securities within the assets of its defined benefit plans. The fair values of these assets were determined using the fair value hierarchy of inputs described above. These fixed income securities consist primarily of insurance contracts which are carried at their liquidation value based on actuarial calculations and the terms of the contracts. A summary of changes in Level 3 fixed income securities within those defined benefit plans during the three and six months ended September 30, 2011 is as follows (in thousands):
 
Three months ended September 30, 2011
 
 
 
Balance at July 1, 2011
  $ 16,175  
Return on investment
    210  
Disbursements
    (105 )
Balance at September 30, 2011
  $ 16,280  
         
Six Month Period Ended September 30, 2011
       
Balance at April 1, 2011
  $ 15,872  
Return on investment
    616  
Disbursements
    (208 )
Balance at September 30, 2011
  $ 16,280  
 
 
8

 
3.           Inventories

Inventories consisted of the following (in thousands):

   
September 30,
   
March 31,
 
   
2011
   
2011
 
At cost - FIFO basis:
 
 
   
 
 
Raw materials
  $ 50,415     $ 44,769  
Work-in-process
    14,334       15,175  
Finished goods
    48,844       47,329  
      113,593       107,273  
LIFO cost less than FIFO cost
    (18,278 )     (17,242 )
Net inventories
  $ 95,315     $ 90,031  

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.

4.           Marketable Securities

All of the Company’s marketable securities, which consist of equity securities and fixed income securities, have been classified as available-for-sale securities and are therefore recorded at their fair values with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive loss in the shareholders’ equity section of the balance sheet unless unrealized losses are deemed to be other-than-temporary. In such instances, the unrealized losses are reported in the consolidated statements of operations and retained earnings within investment income. Estimated fair value is based on published trading values at the balance sheet dates. The cost of securities sold is based on the specific identification method. Interest and dividend income are included in investment income in the consolidated statements of operations and retained earnings.

The marketable securities are carried as long-term assets since they are held for the settlement of the Company’s general and products liability insurance claims filed through CM Insurance Company, Inc., a wholly owned captive insurance subsidiary.  The marketable securities are not available for general working capital purposes.

In accordance with ASC Topic 320-10-35-30 “Investments – Debt & Equity Securities – Subsequent Measurement,” the Company reviews its marketable securities for declines in market value that may be considered other-than-temporary. The Company generally considers market value declines to be other-than-temporary if there are declines for a period longer than six months and in excess of 20% of original cost, or when other evidence indicates impairment.  There were no other-than-temporary impairments for the six months ended September 30, 2011 or September 30, 2010.

The following is a summary of available-for-sale securities at September 30, 2011 (in thousands):

 
 
 
   
Gross Unrealized
   
Gross Unrealized
   
Estimated Fair
 
 
 
Cost
   
Gains
   
Losses
   
Value
 
                                 
Marketable securities
  $ 23,097     $ 1,235     $ 342     $ 23,990  
 
 
9

 
The aggregate fair value of investments and unrealized losses on available-for-sale securities in an unrealized loss position at September 30, 2011 are as follows (in thousands):

   
Aggregate
   
Unrealized
 
   
Fair Value
   
Losses
 
Securities in a continuous loss position for less than 12 months
  $ 2,416     $ (339 )
Securities in a continuous loss position for more than 12 months
    292       (3 )
    $ 2,708     $ (342 )

Net realized gains related to sales of marketable securities were $58,000 and $198,000 for the three month periods ended September 30, 2011 and 2010, respectively and $121,000 and $209,000 for the six month periods then ended, respectively.

The following is a summary of available-for-sale securities at March 31, 2011 (in thousands):

 
 
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated Fair Value
 
                         
Marketable securities
  $ 23,708     $ 1,064     $ 180     $ 24,592  

5.           Goodwill and Intangible Assets

Goodwill is not amortized but is 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 two valuation techniques: an income approach and a market approach.  The Company’s reporting units are determined based upon whether discrete financial information is available and regularly reviewed, 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 reporting segment level as defined under ASC Topic 280-10-50-10 “Segment Reporting – Disclosure.” The Company has four reporting units.  Only two of the four reporting units carry goodwill at September 30, 2011 and March 31, 2011.

In accordance with ASC Topic 350-20-35-3, the measurement of impairment of goodwill consists of two steps. In the first step, the Company compares the fair value of each reporting unit to its carrying value. As part of the impairment analysis, the Company determines the fair value of each of its reporting units with goodwill using both the income approach and market approach. The income approach uses a discounted cash flow methodology to determine fair value. This methodology recognizes value based on the expected receipt of future economic benefits. Key assumptions in the income approach include a free cash flow projection, an estimated discount rate, a long-term growth rate and a terminal value. These assumptions are based upon the Company’s historical experience, current market trends and future expectations. The market approach involves the determination of implied EBITDA multiples selected from an analysis of peer companies considered to be market participants and the application of those multiples to each reporting units’ historical and forecasted earnings.

No impairment charges related to goodwill or intangible assets were recorded during the six months ended September 30, 2011 or 2010.  However, future impairment indicators, such as declines in forecasted cash flows, may cause the need for interim impairment tests which may result in additional significant impairment charges. Impairment indicators could be the result of a significant decline in the Company’s stock price, significant adverse changes in forecasted cash flows, declines in control premiums or other variables.

A summary of changes in goodwill during the six months ended September 30, 2011 is as follows (in thousands):
 
    Balance at April 1, 2011
$
 106,055 
Currency translation
 
 (1,102)
Balance at September 30, 2011
$
 104,953 
 
 
10

 
Identifiable intangible assets acquired in a business combination are amortized over their useful lives unless their useful lives are indefinite, in which case those intangible assets are tested for impairment annually (or upon identification of impairment indicators) and not amortized until their lives are determined to be finite.

Identifiable intangible assets are summarized as follows (in thousands):

 
 
September 30, 2011
   
March 31, 2011
 
 
 
Gross
Carrying
 Amount
   
Accumulated Amortization
   
Net
   
Gross
 Carrying 
Amount
   
Accumulated Amortization
   
Net
 
Trademark
  $ 5,804     $ (954 )   $ 4,850     $ 6,136     $ (841 )   $ 5,295  
Customer relationships
    14,357       (3,955 )     10,402       15,179       (3,485 )     11,694  
Other
    1,316       (299 )     1,017       1,339       (239 )     1,100  
Total
  $ 21,477     $ (5,208 )   $ 16,269     $ 22,654     $ (4,565 )   $ 18,089  

Based on the current amount of identifiable intangible assets, the estimated amortization expense for each of the fiscal years 2012 through 2016 is expected to be approximately $1,900,000.

6.           Derivative Instruments

The Company uses derivative instruments to manage selected foreign currency 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, the effective portion of 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. The ineffective portion of changes in the fair value of the derivative is reported in foreign currency exchange loss (gain) in the Company’s consolidated statement of operations. For derivatives not classified 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 Company has foreign currency forward agreements and a cross-currency swap in place to offset changes in the value of intercompany loans to certain foreign subsidiaries due to changes in foreign exchange rates. The notional amount of these derivatives is $11,970,000 and all contracts mature by September 30, 2013. These contracts are not designated as hedges.

The Company has foreign currency forward agreements in place to hedge changes in the value of recorded foreign currency liabilities due to changes in foreign exchange rates at the settlement date. The notional amount of those derivatives is $2,733,000 and all contracts mature within twelve months. These contracts are marked to market each balance sheet date and are not designated as hedges.

The Company has foreign currency forward agreements that are designated as cash flow hedges to hedge a portion of forecasted inventory purchases and sales, including multi-year contracts related to capital project sales, denominated in foreign currencies. The notional amount of those derivatives is $9,656,000 and all contracts mature within thirty-three months of September 30, 2011.

The Company is exposed to credit losses in the event of non performance by the counterparties on its financial instruments. All 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 has derivative contracts with four different counterparties as of September 30, 2011.
 
 
11

 
The following is the pre-tax effect of derivative instruments on the condensed consolidated statement of operations for the six months ended September 30, 2011 (in thousands):

Derivatives Designated
as Cash Flow  Hedges
 
Amount of Gain or
 (Loss) Recognized in
Other Comprehensive
Loss on Derivatives (Effective Portion)
 
Location of Gain or
 (Loss) Recognized in
 Income on Derivatives
 
Amount of Gain or
 (Loss) Reclassified
 from AOCL into
 Income (Effective
 Portion)
 
Foreign exchange contracts
  $ 135  
Cost of products sold
  $ 63  

Derivatives Not Designated as
Hedging Instruments
 
Location of Gain Recognized in Income on Derivatives
 
Amount of Gain Recognized in
Income on Derivatives
 
           
Foreign exchange contracts
 
Foreign currency exchange gain
  $ 988  

As of September 30, 2011, the Company had no derivatives designated as net investments or fair value hedges in accordance with ASC Topic 815, “Derivatives and Hedging.”

The following is information relative to the Company’s derivative instruments in the condensed consolidated balance sheet as of September 30, 2011 (in thousands):

Derivatives Designated as Hedging
 Instruments
 
Balance Sheet Location
 
Fair Value of Asset (Liability)
 
Foreign exchange contracts
 
Other Assets
  $ 380  
Foreign exchange contracts
 
Accrued Liabilities
  $ (1 )
 
 
 
       
Derivatives Not Designated as Hedging
Instruments
 
Balance Sheet Location
 
Fair Value of Asset (Liability)
 
Foreign exchange contracts
 
Other Assets
  $ 85  
Foreign exchange contracts
 
Accrued Liabilities
  $ (344 )

7.           Debt

The Company entered into an amended, restated and expanded revolving credit facility dated December 31, 2009. The Revolving Credit Facility provides availability up to a maximum of $85,000,000 and has an initial term ending December 31, 2013.

Provided there is no default, the Company may, on a one-time basis, request an increase in the availability of the Revolving Credit Facility by an amount not exceeding $65,000,000, subject to lender approval. The unused portion of the Revolving Credit Facility totalled $68,695,000 net of outstanding borrowings of $0 and outstanding letters of credit of $16,305,000 as of September 30, 2011.  Interest on the revolver is payable at varying Eurodollar rates based on LIBOR or prime plus a spread determined by the Company’s total leverage ratio amounting to 225 or 125 basis points, respectively, based on the Company’s leverage ratio at September 30, 2011.  The Revolving Credit Facility is secured by all U.S. inventory, receivables, equipment, real property, subsidiary stock (limited to 65% of non-U.S. subsidiaries) and intellectual property.

The corresponding credit agreement associated with the Revolving Credit Facility places certain debt covenant restrictions on the Company, including certain financial requirements and restrictions on dividend payments, with which the Company was in compliance as of September 30, 2011.  Key financial covenants include a minimum fixed charge coverage ratio of 1.25x, a maximum total leverage ratio, net of cash, of 3.50x and maximum annual capital expenditures of $18,000,000, excluding capital expenditures for a global ERP system.
 
 
12


The Company entered into a third amendment to its Revolving Credit Facility on July 15, 2011 to (i) make reductions in the ‘Applicable Rate’ grid, in recognition of improved market conditions, resulting in lower unused, Libor and Base Rate borrowing and letters of credit fees at various levels in the grid, based on the Total Leverage Ratio (ii) amend the definition of Total Funded Indebtedness to exclude commercial letters of credit. Total funded indebtedness is used in the calculation of the Total Leverage Ratio covenant (iii) allow for letters of credit to be issued for any period up to 5 days prior to the expiry date of the Revolving Credit Facility and a “basket” of $20,000,000 for letters of credit which may expire up to 1 year past the expiry date (iv) permit a general lien “basket” of $2,500,000 (v) extend the expected date for consummation of a pre-approved specific acquisition and divestiture, and (vi) increase the general Investments “basket” by $5,000,000 to $30,000,000.

On January 25, 2011, the Company issued $150,000,000 principal amount of 7 7/8% Senior Subordinated Notes due 2019 in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended (Unregistered       7 7/8% Notes). The offering price of the notes was 98.545% of par after adjustment for original issue discount.   

Provisions of the Unregistered 7 7/8% Notes include, without limitation, restrictions on indebtedness, asset sales, and dividends and other restricted payments. Until February 1, 2014, the Company may redeem up to 35% of the outstanding Unregistered 7 7/8% Notes at a redemption price of 107.875% with the proceeds of equity offerings, subject to certain restrictions. On or after February 1, 2015, the Unregistered 7 7/8% Notes are redeemable at the option of the Company, in whole or in part, at a redemption price of 103.938%, reducing to 101.969% and 100% on February 1, 2016 and February 1, 2017, respectively and are due February 1, 2019. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the Unregistered 7 7/8% Notes may require the Company to repurchase all or a portion of such holder’s Unregistered 7 7/8% Notes at a purchase price equal to 101% of the principal amount thereof. The Unregistered 7 7/8% Notes are guaranteed by certain existing and future U.S. subsidiaries and are not subject to any sinking fund requirements.

During the six months ended September 30, 2011, the Company exchanged $150,000,000 of its outstanding Unregistered 7 7/8% Notes due 2019 for a like principal amount of its 7 7/8% Notes due 2019, registered under the Securities Act of 1933, as amended (7 7/8% Notes).  All of the Unregistered 7 7/8% Senior Subordinated Notes due 2019 were exchanged in the transaction.  The 7 7/8% Notes contain identical terms and provisions as the Unregistered 7 7/8% Notes.

The carrying amount of the Company’s revolving credit facility, notes payable to banks and other senior debt approximate their fair values based on current market rates. The Company’s 7 7/8% Notes, which have a par value of $150,000,000 at September 30, 2011, have an approximate fair value of $145,500,000 based on quoted market prices.

The Company’s Notes payable to banks consist primarily of draws against unsecured non-U.S. lines of credit.  The Company’s other senior debt consists primarily of capital lease obligations.

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 September 30, 2011, significant unsecured credit lines totalled approximately $8,974,000, of which $271,000 was drawn.

Refer to the Company’s consolidated financial statements included in its annual report on Form 10-K for the year ended March 31, 2011 for further information on its debt arrangements.
 
 
13


8.           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
   
Six months ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Service costs
  $ 845     $ 985     $ 1,691     $ 1,971  
Interest cost
    2,507       2,492       5,014       4,984  
Expected return on plan assets
    (2,688 )     (2,469 )     (5,376 )     (4,938 )
Net amortization
    1,004       912       2,008       1,824  
Curtailment (see below)
    -       -       1,172       -  
Net periodic pension cost
  $ 1,668     $ 1,920     $ 4,509     $ 3,841  

During the quarter ended June 30, 2011, the Company completed negotiations with one of its labor unions which resulted in an amendment to one of its pension plans.  Within its cost of products sold for the six months ended September 30, 2011, the Company recorded a curtailment charge of $1,172,000 resulting from the amendment.

The Company currently plans to contribute approximately $11,500,000 to its pension plans in fiscal 2012.

The following table sets forth the components of net periodic postretirement benefit cost for the Company’s defined benefit postretirement plan (in thousands):

   
Three months ended
   
Six months ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
Service costs
  $ -     $ -     $ -     $ -  
Interest cost
    120       127       239       255  
Amortization of plan net losses
    82       86       164       172  
Net periodic postretirement cost
  $ 202     $ 213     $ 403     $ 427  

For additional information on the Company’s defined benefit pension and postretirement benefit plans, refer to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended March 31, 2011.
 
 
14


9.           Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands):

   
Three months ended
   
Six months ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
Numerator for basic and diluted earnings per share:
 
 
   
 
   
 
   
 
 
Net income
  $ 6,676     $ 1,868     $ 9,455     $ 1,146  
                                 
Denominators:
                               
Weighted-average common stock outstanding – denominator for basic EPS
    19,274       19,052       19,224       19,034  
Effect of dilutive employee stock options and other share-based awards
    197       180       287       201  
Adjusted weighted-average common stock outstanding and assumed conversions – denominator for diluted EPS
  $ 19,471     $ 19,232     $ 19,511     $ 19,235  

On July 26, 2010, the shareholders of the Company approved the 2010 Long Term Incentive Plan (“LTIP”).  The Company grants share based compensation to eligible participants under the LTIP.  The total number of shares of common stock with respect to which awards may be granted under the plan is 1,250,000 including 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.  

During the first six months of fiscal 2012 and 2011, a total of 162,144 and 4,125 shares of stock were issued upon the exercising of stock options related to the Company’s stock option plans. During the six months ended September 30, 2011 and 2010, 56,277 and 17,664 shares, respectively, of restricted stock vested and were issued. During the fiscal year ended March 31, 2011, 25,873 shares of restricted stock vested and were issued.

Refer to the Company’s consolidated financial statements included in its Form 10-K for the year ended March 31, 2011 for further information on its earnings per share and stock plans.

10.           Loss Contingencies

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 asbestos-related aggregate liability including related legal costs to range between $7,000,000 and $17,000,000 using actuarial parameters of continued claims for a period of 18 to 30 years from the end of the current fiscal year. The Company's estimation of its discounted asbestos-related aggregate liability that is probable and estimable, in accordance with U.S. generally accepted accounting principles approximates $11,000,000, which has been reflected as a liability in the condensed consolidated financial statements as of September 30, 2011. 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 $1,000,000 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 after-tax effect on the financial condition of the Company or its liquidity, although the net after-tax effect of any future liabilities recorded could be material to earnings in a future period.
 
 
15

 
11.           Restructuring Charges

During the six months ended September 30, 2011, the Company initiated and completed employee workforce reductions at one of its European facilities.  These reductions resulted in approximately $413,000 in one-time termination benefits recorded as restructuring costs during the six months ended September 30, 2011.  A restructuring liability in the amount of $86,600 is included within accrued liabilities related to the unpaid portion of the expenses at September 30, 2011.  The liability is expected to be fully paid by the end of the fiscal year.
 
12.           Income Taxes

Income tax expense as a percentage of income from continuing operations before income tax expense was ­31% and 41% for the three month periods ended September 30, 2011 and 2010, respectively and 32% and 27% for the six month periods then ended, respectively. Typically these percentages vary from the U.S. statutory rate primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income for these subsidiaries.  During the quarter ended September 30, 2011, the Company received notice of a tax assessment related to a prior period for one of its foreign subsidiaries.  Income tax expense for the three and six month periods ended September 30, 2011 includes approximately $900,000 in past due taxes, interest, and penalties related to the assessment. The effective tax rate for the six months ended September 30, 2010 was favorably impacted by the recording of a Mexican manufacturing zone tax benefit.

We estimate that the effective tax rate including discrete items related to continuing operations will be approximately 25% to 30% for fiscal 2012 based on the forecasted jurisdictional mix of taxable income.

During the third and fourth quarters of fiscal 2011, the Company recorded a non-cash charge of $42,983,000 included within its provision for income taxes.  This charge relates to the Company’s determination that a full valuation allowance against its deferred tax assets generated in the U.S. and at three of the Company’s foreign subsidiaries was necessary.  Accounting rules require a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available and objectively verifiable evidence, it is more likely than not that such assets will not be realized.  The existence of cumulative losses for a certain threshold period is a significant form of negative evidence used in the assessment.  If a cumulative loss threshold is met, the accounting rules indicate that forecasts of future profitability are generally not sufficient positive evidence to overcome the presumption that a valuation allowance is necessary.
 
 
16


13.           Summary Financial Information

The following information (in thousands) sets forth the condensed consolidating summary financial information of the parent and guarantors, which guarantee the 7 7/8% Senior Subordinated Notes, and the nonguarantors. The guarantors are wholly owned and the guarantees are full, unconditional, joint and several.

   
 
   
 
   
Non
   
 
   
 
 
As of September 30, 2011
 
Parent
   
Guarantors
   
Guarantors
   
Eliminations
   
Consolidated
 
Current assets:
 
 
   
 
   
 
   
 
   
 
 
Cash and cash equivalents
  $ 47,904     $ 6     $ 30,836     $ -     $ 78,746  
Trade accounts receivable
    43,516       30       37,015       -       80,561  
Inventories
    26,017       20,025       52,041       (2,768 )     95,315  
Other current assets
    6,103       439       5,801       549       12,892  
Total current assets
    123,540       20,500       125,693       (2,219 )     267,514  
Property, plant, and equipment, net
    33,768       11,423       15,653       -       60,844  
Goodwill and other intangibles, net
    40,937       31,025       49,260       -       121,222  
Intercompany
    (31,067 )     93,014       (61,154 )     (793 )     -  
Other non-current assets
    2,246       4,156       25,761       -       32,163  
Investment in subsidiaries
    206,678       -       -       (206,678 )     -  
Total assets
  $ 376,102     $ 160,118     $ 155,213     $ (209,690 )   $ 481,743  
                                         
Current liabilities
    33,497       17,456       41,881       (3,012 )     89,822  
Long-term debt, less current portion
    148,004       2,102       2,098       -       152,204  
Other non-current liabilities
    24,436       8,456       36,660       -       69,552  
Total liabilities
    205,937       28,014       80,639       (3,012 )     311,578  
Shareholders' equity
    170,165       132,104       74,574       (206,678 )     170,165  
Total liabilities and shareholders' equity
  $ 376,102     $ 160,118     $ 155,213     $ (209,690 )   $ 481,743  

 
17


For the Three months ended September 30, 2011
             
Non
             
   
Parent
   
Guarantors
   
Guarantors
   
Eliminations
   
Consolidated
 
Net sales
  $ 55,119     $ 44,889     $ 65,034     $ (15,179 )   $ 149,863  
Cost of products sold
    40,415       39,705       45,691       (15,179 )     110,632  
Gross profit
    14,704       5,184       19,343       -       39,231  
Selling, general and administrative expenses
    9,420       3,352       13,636       -       26,408  
Restructuring charges
    -       -       -       -       -  
Amortization of intangibles
    27       -       482       -       509  
      9,447       3,352       14,118       -       26,917  
Income from operations
    5,257       1,832       5,225       -       12,314  
Interest and debt expense
    3,398       65       94       -       3,557  
Other (income) and expense, net
    (254 )     11       (144 )     -       (387 )
Income before income tax expense and equity in income of subsidiaries
    2,113       1,756       5,275       -       9,144  
Income tax expense
    1,229       200       1,448       -       2,877  
Equity in income from continuing operations of subsidiaries
    5,383       -       -       (5,383 )     -  
Income (loss) from continuing operations
    6,267       1,556       3,827       (5,383 )     6,267  
Income from discontinued operations
    409       -       -       -       409  
Net income (loss)
  $ 6,676     $ 1,556     $ 3,827     $ (5,383 )   $ 6,676  

For the Six months ended September 30, 2011
             
Non
             
   
Parent
   
Guarantors
   
Guarantors
   
Eliminations
   
Consolidated
 
Net sales
  $ 103,541     $ 86,860     $ 126,371     $ (27,149 )   $ 289,623  
Cost of products sold
    77,803       75,418       88,678       (27,149 )     214,750  
Gross profit
    25,738       11,442       37,693       -       74,873  
Selling, general and administrative expenses
    16,793       9,752       27,341       -       53,886  
Restructuring charges
    12       -       418       -       430  
Amortization of intangibles
    54       -       976       -       1,030  
      16,859       9,752       28,735       -       55,346  
Income from operations
    8,879       1,690       8,958       -       19,527  
Interest and debt expense
    6,478       406       177       -       7,061  
Other (income) and expense, net
    (406 )     18       (424 )     -       (812 )
Income before income tax expense and equity in income of subsidiaries
    2,807       1,266       9,205       -       13,278  
Income tax expense
    1,364       169       2,699       -       4,232  
Equity in income from continuing operations of subsidiaries
    7,603       -       -       (7,603 )     -  
Income (loss) from continuing operations
    9,046       1,097       6,506       (7,603 )     9,046  
Income from discontinued operations
    409       -       -       -       409  
Net income (loss)
  $ 9,455     $ 1,097     $ 6,506     $ (7,603 )   $ 9,455  

 
18


For the Six months ended September 30, 2011
             
Non
             
   
Parent
   
Guarantors
   
Guarantors
   
Eliminations
   
Consolidated
 
Operating activities:
 
 
   
 
   
 
   
 
   
 
 
Net cash provided by (used for) operating activities
  $ 5,597     $ 569     $ (1,748 )   $ -     $ 4,418  
                                         
Investing activities:
                                       
Purchase of marketable securities, net
    -       -       440       -       440  
Capital expenditures
    (6,006 )     (454 )     (765 )     -       (7,225 )
Net cash used for investing activities from continuing operations
    (6,006 )     (454 )     (325 )     -       (6,785 )
Net cash provided by investing activities from discontinued operations
    409       -       -       -       409  
Net cash used for investing activities
    (5,597 )     (454 )     (325 )     -       (6,376 )
                                         
Financing activities:
                                       
Proceeds from stock options exercised
    1,733       -       -       -       1,733  
Net payments under lines-of-credit
    -       -       (202 )     -       (202 )
Other
    217       (116 )     (343 )     -       (242 )
Net cash provided by (used for) financing activities
    1,950       (116 )     (545 )     -       1,289  
Effect of exchange rate changes on cash
    -       -       (724 )     -       (724 )
Net change in cash and cash equivalents
    1,950       (1 )     (3,342 )     -       (1,393 )
Cash and cash equivalents at beginning of period
    45,954       7       34,178       -       80,139  
Cash and cash equivalents at end of period
  $ 47,904     $ 6     $ 30,836     $ -     $ 78,746  

 
19


 
 
 
   
 
   
Non
   
 
   
 
 
As of March 31, 2011
 
Parent
   
Guarantors
   
Guarantors
   
Eliminations
   
Consolidated
 
Current assets:
 
 
   
 
   
 
   
 
   
 
 
Cash and cash equivalents
  $ 45,954     $ 7     $ 34,178     $ -     $ 80,139  
Trade accounts receivable
    41,395       32       36,317       -       77,744  
Inventories
    25,937       18,497       47,597       (2,000 )     90,031  
Other current assets
    (4,407 )     698       16,404       1,599       14,294  
Total current assets
    108,879       19,234       134,496       (401 )     262,208  
Property, plant, and equipment, net
    30,451       11,866       17,043       -       59,360  
Goodwill and other intangibles, net
    40,953       31,025       52,166       -       124,144  
Intercompany
    (56,929 )     130,125       (72,773 )     (423 )     -  
Other non-current assets
    4,278       4,152       26,492       (1,762 )     33,160  
Investment in subsidiaries
    241,387       -       -       (241,387 )     -  
Total assets
  $ 369,019     $ 196,402     $ 157,424     $ (243,973 )   $ 478,872  
                                         
Current liabilities
  $ 35,792     $ 15,774     $ 44,523     $ (824 )   $ 95,265  
Long-term debt, less current portion
    147,867       2,235       2,714       -       152,816  
Other non-current liabilities
    23,214       8,506       37,678       (753 )     68,645  
Total liabilities
    206,873       26,515       84,915       (1,577 )     316,726  
Shareholders' equity
    162,146       169,887       72,509       (242,396 )     162,146  
Total liabilities and shareholders' equity
  $ 369,019     $ 196,402     $ 157,424     $ (243,973 )   $ 478,872  

 
20


For the Three months ended September 30, 2010
         
Non
             
   
Parent
   
Guarantors
   
Guarantors
   
Eliminations
   
Consolidated
 
Net sales
  $ 51,998     $ 38,179     $ 51,735     $ (9,600 )   $ 132,312  
Cost of products sold
    43,227       30,930       36,464       (9,550 )     101,071  
Gross profit
    8,771       7,249       15,271       (50 )     31,241  
Selling, general and administrative expenses
    6,066       7,607       11,602       -       25,275  
Restructuring charges
    310       -       37       -       347  
Amortization of intangibles
    29       1       404       -       434  
      6,405       7,608       12,043       -       26,056  
Income (loss) from operations
    2,366       (359 )     3,228       (50 )     5,185  
Interest and debt expense
    2,915       363       93       -       3,371  
Other (income) and expense, net
    (710 )     48       (481 )     -       (1,143 )
Income (loss) before income tax expense (benefit) and equity in income of subsidiaries
    161       (770 )     3,616       (50 )     2,957  
Income tax expense (benefit)
    438       (365 )     1,111       38       1,222  
Equity in income from continuing operations of subsidiaries
    2,012       -       -       (2,012 )     -  
Income (loss) from continuing operations
    1,735       (405 )     2,505       (2,100 )     1,735  
Income from discontinued operations
   - 133       -       -       -       133  
Net  income (loss)
  $ 1,868     $ (405 )   $ 2,505     $ (2,100 )   $ 1,868  

 
21


For the Six months ended September 30, 2010
             
Non
             
   
Parent
   
Guarantors
   
Guarantors
   
Eliminations
   
Consolidated
 
Net sales
  $ 99,371     $ 71,054     $ 99,569     $ (18,595 )   $ 251,399  
Cost of products sold
    83,060       57,961       69,867       (18,745 )     192,143  
Gross profit
    16,311       13,093       29,702       150       59,256  
Selling, general and administrative expenses
    16,543       10,685       23,047       -       50,275  
Restructuring charges
    1,760       -       37       -       1,797  
Amortization of intangibles
    57       1       805       -       863  
      18,360       10,686       23,889       -       52,935  
Income (loss) from operations
    (2,049 )     2,407       5,813       150       6,321  
Interest and debt expense
    5,715       735       154       -       6,604  
Other (income) and expense, net
    (1,183 )     (33 )     (464 )     -       (1,680 )
Income (loss) from continuing operations before income tax (benefit) expense and equity in income of subsidiaries
    (6,581 )     1,705       6,123       150       1,397  
Income tax expense (benefit)
    (2,040 )     755       1,573       96