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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 |
For the quarterly period ended December 31, 2021
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Commission File Number 001-34362
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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.) |
205 Crosspoint Parkway | Buffalo | NY | 14068 |
(Address of principal executive offices) | (Zip code) |
| (716) | 689-5400 |
(Registrant's telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report.) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | CMCO | Nasdaq Global Select Market |
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.
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Large accelerated filer | ☒ | 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
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Part I. Financial Information | |
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Item 1. | Condensed Consolidated Financial Statements (Unaudited) | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Part II. Other Information | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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 | | $ | 106,699 | | | $ | 202,127 | |
Trade accounts receivable, less allowance for doubtful accounts ($5,439 and $5,686, respectively) | | 125,879 | | | 105,464 | |
Inventories | | 175,099 | | | 111,488 | |
Prepaid expenses and other | | 33,449 | | | 22,763 | |
Total current assets | | 441,126 | | | 441,842 | |
Property, plant, and equipment, net | | 98,219 | | | 74,753 | |
Goodwill | | 657,084 | | | 331,176 | |
Other intangibles, net | | 400,560 | | | 213,362 | |
Marketable securities | | 11,099 | | | 7,968 | |
Deferred taxes on income | | 2,138 | | | 20,080 | |
Other assets | | 61,247 | | | 61,251 | |
Total assets | | $ | 1,671,473 | | | $ | 1,150,432 | |
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LIABILITIES AND SHAREHOLDERS' EQUITY: | | | | |
Current liabilities: | | | | |
Trade accounts payable | | $ | 74,061 | | | $ | 68,593 | |
Accrued liabilities | | 116,410 | | | 110,816 | |
Current portion of long term debt and finance lease obligations | | 40,530 | | | 4,450 | |
Total current liabilities | | 231,001 | | | 183,859 | |
Term loan and finance lease obligations | | 480,589 | | | 244,504 | |
Other non current liabilities | | 214,248 | | | 191,920 | |
Total liabilities | | 925,838 | | | 620,283 | |
Shareholders' equity: | | | | |
Voting common stock; 50,000,000 shares authorized; 28,492,200 and 23,984,299 shares issued and outstanding | | 285 | | | 240 | |
Additional paid in capital | | 503,701 | | | 296,093 | |
Retained earnings | | 308,223 | | | 293,802 | |
Accumulated other comprehensive loss | | (66,574) | | | (59,986) | |
Total shareholders' equity | | 745,635 | | | 530,149 | |
Total liabilities and shareholders' equity | | $ | 1,671,473 | | | $ | 1,150,432 | |
See accompanying notes.
COLUMBUS McKINNON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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| | 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 | | $ | 216,088 | | | $ | 166,547 | | | $ | 653,187 | | | $ | 463,407 | |
Cost of products sold | | 141,031 | | | 111,232 | | | 422,932 | | | 307,270 | |
Gross profit | | 75,057 | | | 55,315 | | | 230,255 | | | 156,137 | |
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Selling expenses | | 24,468 | | | 18,829 | | | 72,107 | | | 56,087 | |
General and administrative expenses | | 25,144 | | | 19,859 | | | 78,495 | | | 53,842 | |
Research and development expenses | | 3,875 | | | 3,038 | | | 11,283 | | | 8,703 | |
Amortization of intangibles | | 6,254 | | | 3,142 | | | 18,648 | | | 9,449 | |
| | 59,741 | | | 44,868 | | | 180,533 | | | 128,081 | |
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Income from operations | | 15,316 | | | 10,447 | | | 49,722 | | | 28,056 | |
Interest and debt expense | | 4,375 | | | 2,986 | | | 14,774 | | | 9,192 | |
Cost of debt refinancing | | — | | | — | | | 14,803 | | | — | |
Investment (income) loss | | (76) | | | (495) | | | (624) | | | (1,429) | |
Foreign currency exchange (gain) loss | | 512 | | | 602 | | | 1,047 | | | 1,083 | |
Other (income) expense, net | | (455) | | | 144 | | | (744) | | | 20,081 | |
Income (loss) before income tax expense (benefit) | | 10,960 | | | 7,210 | | | 20,466 | | | (871) | |
Income tax expense (benefit) | | 1,066 | | | 616 | | | 2,632 | | | (392) | |
Net income (loss) | | $ | 9,894 | | | $ | 6,594 | | | $ | 17,834 | | | $ | (479) | |
| | | | | | | | |
Average basic shares outstanding | | 28,469 | | | 23,928 | | | 27,887 | | | 23,871 | |
Average diluted shares outstanding | | 28,840 | | | 24,201 | | | 28,255 | | | 23,871 | |
| | | | | | | | |
Basic income (loss) per share: | | $ | 0.35 | | | $ | 0.28 | | | $ | 0.64 | | | $ | (0.02) | |
| | | | | | | | |
Diluted income (loss) per share: | | $ | 0.34 | | | $ | 0.27 | | | $ | 0.63 | | | $ | (0.02) | |
| | | | | | | | |
Dividends declared per common share | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.12 | | | $ | 0.12 | |
See accompanying notes.
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) | | $ | 9,894 | | | $ | 6,594 | | | $ | 17,834 | | | $ | (479) | |
Other comprehensive income (loss), net of tax: | | | | | | | | |
Foreign currency translation adjustments | | (2,215) | | | 9,216 | | | (4,365) | | | 18,648 | |
Change in derivatives qualifying as hedges, net of taxes of $(136), $(29), $824, $(49) | | 410 | | | 100 | | | (2,489) | | | 169 | |
Change in pension liability and postretirement obligation, net of taxes of $(52), $81, $(93), $(3,259) | | 151 | | | (288) | | | 266 | | | 11,652 | |
Total other comprehensive income (loss) | | (1,654) | | | 9,028 | | | (6,588) | | | 30,469 | |
Comprehensive income (loss) | | $ | 8,240 | | | $ | 15,622 | | | $ | 11,246 | | | $ | 29,990 | |
See accompanying notes.
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 | | $ | 240 | | | $ | 296,093 | | | $ | 293,802 | | | $ | (59,986) | | | $ | 530,149 | |
Net income (loss) | | — | | | — | | | (7,263) | | | — | | | (7,263) | |
Change in foreign currency translation adjustment | | — | | | — | | | — | | | 2,076 | | | 2,076 | |
Change in derivatives qualifying as hedges, net of tax of $(31) | | — | | | — | | | — | | | 96 | | | 96 | |
Change in pension liability and postretirement obligations, net of tax of $34 | | — | | | — | | | — | | | (97) | | | (97) | |
Issuance of 4,312,500 shares of common stock in May 2021 offering at $48.00 per share, net of issuance costs of $8,340 | | 43 | | | 198,662 | | | — | | | — | | | 198,705 | |
Stock options exercised, 12,682 shares | | — | | | 290 | | | — | | | — | | | 290 | |
Stock compensation expense | | — | | | 2,262 | | | — | | | — | | | 2,262 | |
Restricted stock units released, 58,081 shares, net of shares withheld for minimum statutory tax obligation | | 1 | | | (1,766) | | | — | | | — | | | (1,765) | |
Balance at June 30, 2021 | | $ | 284 | | | $ | 495,541 | | | $ | 286,539 | | | $ | (57,911) | | | $ | 724,453 | |
Net income (loss) | | — | | | — | | | 15,203 | | | — | | | 15,203 | |
Dividends declared | | — | | | — | | | (1,706) | | | — | | | (1,706) | |
Change in foreign currency translation adjustment | | — | | | — | | | — | | | (4,226) | | | (4,226) | |
Change in derivatives qualifying as hedges, net of tax of $986 | | — | | | — | | | — | | | (2,995) | | | (2,995) | |
Change in pension liability and postretirement obligations, net of tax of $(74) | | — | | | — | | | — | | | 212 | | | 212 | |
Stock compensation - directors | | — | | | 480 | | | — | | | — | | | 480 | |
Stock options exercised, 38,744 shares | | — | | | 1,122 | | | — | | | — | | | 1,122 | |
Stock compensation expense | | — | | | 2,762 | | | — | | | — | | | 2,762 | |
Restricted stock units released, 32,665 shares, net of shares withheld for minimum statutory tax obligation | | — | | | (147) | | | — | | | — | | | (147) | |
Balance at September 30, 2021 | | $ | 284 | | | $ | 499,758 | | | $ | 300,036 | | | $ | (64,920) | | | $ | 735,158 | |
Net income | | — | | | — | | | 9,894 | | | — | | | 9,894 | |
Dividends declared | | — | | | — | | | (1,707) | | | — | | | (1,707) | |
Change in foreign currency translation adjustment | | — | | | — | | | — | | | (2,215) | | | (2,215) | |
Change in derivatives qualifying as hedges, net of tax of $(136) | | — | | | — | | | — | | | 410 | | | 410 | |
Change in pension liability and postretirement obligations, net of tax of $(52) | | — | | | — | | | — | | | 151 | | | 151 | |
Stock compensation - directors | | — | | | 240 | | | — | | | — | | | 240 | |
Stock options exercised, 47,292 shares | | 1 | | | 1,107 | | | — | | | — | | | 1,108 | |
Stock compensation expense | | — | | | 2,741 | | | — | | | — | | | 2,741 | |
Restricted stock units released, 5,937 shares, net of shares withheld for minimum statutory tax obligation | | — | | | (145) | | | — | | | — | | | (145) | |
Balance at December 31, 2021 | | $ | 285 | | | $ | 503,701 | | | $ | 308,223 | | | $ | (66,574) | | | $ | 745,635 | |
See accompanying notes.
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 | | $ | 238 | | | $ | 287,256 | | | $ | 290,441 | | | $ | (114,350) | | | $ | 463,585 | |
Net income (loss) | | — | | | — | | | (2,969) | | | — | | | (2,969) | |
Change in net unrealized gain on investments | | — | | | — | | | — | | | 2,802 | | | 2,802 | |
Change in derivatives qualifying as hedges, net of tax of $4 | | — | | | — | | | — | | | (13) | | | (13) | |
Change in pension liability and postretirement obligations, net of tax of $(537) | | — | | | — | | | — | | | 1,869 | | | 1,869 | |
Stock options exercised, 11,236 shares | | — | | | 183 | | | — | | | — | | | 183 | |
Stock compensation expense | | — | | | 2,071 | | | — | | | — | | | 2,071 | |
Restricted stock units released, 68,369 shares, net of shares withheld for minimum statutory tax obligation | | 1 | | | (927) | | | — | | | — | | | (926) | |
Balance at June 30, 2020 | | $ | 239 | | | $ | 288,583 | | | $ | 287,472 | | | $ | (109,692) | | | $ | 466,602 | |
Net income (loss) | | — | | | — | | | (4,104) | | | — | | | (4,104) | |
Dividends declared | | — | | | — | | | (1,433) | | | — | | | (1,433) | |
Change in foreign currency translation adjustment | | — | | | — | | | — | | | 6,631 | | | 6,631 | |
Change in derivatives qualifying as hedges, net of tax of $(24) | | — | | | — | | | — | | | 82 | | | 82 | |
Change in pension liability and postretirement obligations, net of tax of $(2,817) | | — | | | — | | | — | | | 10,071 | | | 10,071 | |
Stock compensation - directors | | — | | | 269 | | | — | | | — | | | 269 | |
Stock options exercised, 12,220 shares | | | | 243 | | | — | | | — | | | 243 | |
Stock compensation expense | | — | | | 1,649 | | | — | | | — | | | 1,649 | |
Restricted stock units released,35,023 shares, net of shares withheld for minimum statutory tax obligation | | — | | | (54) | | | — | | | — | | | (54) | |
Balance at September 30, 2020 | | $ | 239 | | | $ | 290,690 | | | $ | 281,935 | | | $ | (92,908) | | | $ | 479,956 | |
Net income (loss) | | — | | | — | | | 6,594 | | | — | | | 6,594 | |
Dividends declared | | — | | | — | | | (1,434) | | | — | | | (1,434) | |
Change in foreign currency translation adjustment | | — | | | — | | | — | | | 9,216 | | | 9,216 | |
Change in derivatives qualifying as hedges, net of tax of $(29) | | — | | | — | | | — | | | 100 | | | 100 | |
Change in pension liability and postretirement obligations, net of tax of $81 | | — | | | — | | | — | | | (288) | | | (288) | |
Stock compensation - directors | | — | | | 135 | | | — | | | — | | | 135 | |
Stock options exercised, 66,965 | | 1 | | | 1,399 | | | — | | | — | | | 1,400 | |
Stock compensation expense | | — | | | 1,716 | | | — | | | — | | | 1,716 | |
Restricted stock units released, 4,954 shares, net of shares withheld for minimum statutory tax obligation | | — | | | (71) | | | — | | | — | | | (71) | |
Balance at December 31, 2020 | | $ | 240 | | | $ | 293,869 | | | $ | 287,095 | | | $ | (83,880) | | | $ | 497,324 | |
See accompanying notes.
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) | | 17,834 | | | (479) | |
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | | | | |
Depreciation and amortization | | 31,245 | | | 21,203 | |
Deferred income taxes and related valuation allowance | | (1,940) | | | (7,344) | |
Net loss (gain) on sale of real estate, investments and other | | (390) | | | (1,262) | |
Stock based compensation | | 8,485 | | | 5,840 | |
Amortization of deferred financing costs | | 1,274 | | | 1,986 | |
Cost of debt refinancing | | 14,803 | | | — | |
Loss (gain) on hedging instruments | | 682 | | | — | |
Non-cash pension settlement expense (See Note 10) | | — | | | 18,933 | |
Gain on Sale of building (See Note 2) | | (375) | | | (2,638) | |
Non-cash lease expense | | 5,936 | | | 5,721 | |
Changes in operating assets and liabilities, net of effects of business acquisitions: | | | | |
Trade accounts receivable | | 3,931 | | | 34,254 | |
Inventories | | (42,215) | | | 20,786 | |
Prepaid expenses and other | | (5,544) | | | (1,564) | |
Other assets | | (298) | | | 545 | |
Trade accounts payable | | (4,229) | | | (8,764) | |
Accrued liabilities | | 2,608 | | | (9,922) | |
Non-current liabilities | | (8,080) | | | (5,347) | |
Net cash provided by (used for) operating activities | | 23,727 | | | 71,948 | |
| | | | |
INVESTING ACTIVITIES: | | | | |
Proceeds from sales of marketable securities | | 3,441 | | | 4,231 | |
Purchases of marketable securities | | (6,357) | | | (4,067) | |
Capital expenditures | | (9,506) | | | (5,904) | |
Proceeds from sale of building, net of transaction costs | | 461 | | | 5,453 | |
Dividend received from equity method investment | | 324 | | | 587 | |
Proceeds from insurance reimbursement | | 482 | | | 100 | |
Proceeds from sale of fixed assets | | — | | | 446 | |
Purchase of businesses, net of cash acquired (See Note 2) | | (539,778) | | | — | |
Net cash provided by (used for) investing activities | | (550,933) | | | 846 | |
| | | | |
FINANCING ACTIVITIES: | | | | |
Proceeds from the issuance of common stock | | 2,520 | | | 1,828 | |
Borrowings under line-of-credit agreements | | — | | | 25,000 | |
Payments under line-of-credit agreements | | — | | | (25,000) | |
Repayment of debt | | (467,725) | | | (3,338) | |
Fees paid for revolver extension (See Note 9) | | — | | | (826) | |
Proceeds from issuance of long-term debt | | 725,000 | | | — | |
Proceeds from equity offering | | 207,000 | | | — | |
Fees related to debt and equity offering | | (26,184) | | | — | |
Cash inflows from hedging activities | | 13,234 | | | — | |
Cash outflows from hedging activities | | (13,687) | | | — | |
Payment of dividends | | (4,852) | | | (4,294) | |
Other | | (2,054) | | | (1,050) | |
Net cash provided by (used for) financing activities | | 433,252 | | | (7,680) | |
Effect of exchange rate changes on cash | | (1,474) | | | 8,062 | |
Net change in cash and cash equivalents | | (95,428) | | | 73,176 | |
Cash, cash equivalents, and restricted cash at beginning of year | | 202,377 | | | 114,700 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 106,949 | | | $ | 187,876 | |
| | | | |
Supplementary cash flow data: | | | | |
Interest paid | | $ | 12,687 | | | $ | 7,208 | |
Income taxes paid (refunded), net | | $ | 4,367 | | | $ | 4,325 | |
Restricted cash presented in Other assets | | $ | 250 | | | $ | 250 | |
See accompanying notes.
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
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 | $ | 8,058 | |
Working Capital | 24,229 | |
Property, plant, and equipment, net | 26,104 | |
Intangible assets | 190,000 | |
Other assets | 658 | |
Other liabilities | (3,734) | |
Finance lease liabilities | (14,582) | |
Deferred and other taxes, net | (39,644) | |
Goodwill | 289,923 | |
Total | $ | 481,012 | |
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 | $ | 216,088 | | $ | 194,218 | | | $ | 653,187 | | $ | 541,498 | |
Net income (loss) | 7,776 | | 6,437 | | | 39,997 | | (29,061) | |
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.
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.
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 | $ | 15,373 | | $ | 10,796 | |
Additional customer advances received | 26,807 | | 28,411 | |
Revenue recognized from customer advances | (28,460) | | (24,636) | |
Customer advances recorded from Dorner acquisition | 4,144 | | — | |
Customer advances recorded from Garvey acquisition | 10,606 | | — | |
Other (1) | (354) | | 1,187 | |
December 31, ending balance | |