COLUMBUS MCKINNON CORP (CMCO) FY 2025 MD&A

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

This section should be read in conjunction with our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data of this Form 10-K.

EXECUTIVE OVERVIEW

Columbus McKinnon Corporation ("Columbus McKinnon" or the "Company") is a leading worldwide designer, manufacturer and marketer of intelligent motion solutions that move the world forward and improve lives by efficiently and ergonomically moving, lifting, positioning and securing materials. Key products include hoists, crane components, precision conveyor systems, rigging tools, light rail workstations and digital power and motion control systems. These are highly relevant, professional-grade solutions that solve our customers’ critical material handling requirements.

Founded in 1875, we have grown to our current size and leadership position through organic growth and acquisitions. We developed our leading market position over our 150-year history by emphasizing technological innovation, manufacturing excellence and superior customer service. In accordance with our strategic framework, we are building out our business system ("CMBS") and growth framework to be market-led, customer-centric, and operationally excellent with our people and values at the core. We believe this will transform Columbus McKinnon into a top-tier intelligent motion solutions company. We expect our strategy will enhance shareholder value by growing sales and expanding EBITDA margins.

Our revenue base is geographically diverse with approximately 44% derived from customers outside the U.S. for the year ended March 31, 2025. We believe this diversity balances the impact of changes that occur in local economies, as well as benefits the Company by providing access to growing emerging markets. We monitor both U.S. and Eurozone Industrial Capacity Utilization statistics as well as the ISM Production Index as indicators of anticipated demand for our products. In addition, we continue to monitor the potential impact of other global and U.S. trends including, industrial production, trade tariffs, raw material cost inflation, interest rates, foreign currency exchange rates, and activity of end-user markets around the globe.

From a strategic perspective, we are investing in new products and channels as we focus on our greatest opportunities for growth. We have leading market positions in hoists, lifting and sling chain, forged attachments, actuators, precision conveyors and digital power and motion control systems for the material handling industry. We are focusing our sales and marketing activities toward select North American and global market sectors including general industrial, energy, automotive, heavy OEM, entertainment, construction and infrastructure, life sciences food and beverage, e-commerce and consumer products.

On May 31, 2023, the Company completed its acquisition of montratec GmbH ("montratec"), a leading automation solutions company that designs and develops intelligent automation and transport systems for interlinking industrial production and logistics processes. montratec product offerings compliment the previous acquisitions of both Dorner and Garvey, and these acquisitions are collectively expected to accelerate the Company’s shift to intelligent motion solutions and serve as a platform to expand capabilities in advanced, higher technology automation solutions.

Regardless of the economic climate and point in the economic cycle, we constantly explore ways to increase operating margins as well as further improve our productivity and competitiveness. We have specific initiatives to reduce lead-times, improve on-time deliveries, reduce warranty costs, and improve material and factory productivity. The initiatives are being driven by the implementation of our business operating system, CMBS. We are working to achieve these strategic initiatives through business simplification, operational excellence, and profitable growth initiatives. We believe these initiatives will enhance future operating margins.

Our principal raw materials and components purchases were approximately $375 million in fiscal 2025 (or 59% of Cost of product sold) and include steel, consisting of rod, wire, bar, structural, and other forms of steel; electric motors; bearings; gear reducers; castings; steel and aluminum enclosures and wire harnesses; electro-mechanical components; and standard variable drives and controls. These commodities are all available from multiple sources. We purchase most of these raw materials and components from a limited number of strategic and preferred suppliers under agreements which are negotiated on a company-wide basis through our global purchasing group. Currently, as a result of global inflation and tariffs, we are experiencing higher raw material costs and availability issues for select raw materials and components. To date, we have raised prices to our customers to cover these increased raw material costs and are working with our supply base to prioritize shipments and improve availability of key components.

We operate in a highly competitive and global business environment. We see a variety of opportunities in our markets and geographies, including trends toward automation and increasing labor productivity and the expansion of market opportunities in

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Asia and other emerging markets. While we execute our long-term growth strategy, we are supported by our strong free cash flow as well as our liquidity position and flexible debt structure.

On February 10, 2025, the Company announced that it had entered into a definitive agreement to acquire Kito. The Kito Acquisition closing is subject to certain conditions, including regulatory approval as required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) and other customary closing conditions described in the stock purchase agreement entered into by the Company and Kito in connection with the Kito Acquisition. The Kito Acquisition is expected to meaningfully improve the Company's scale, enhance our collective geographic reach, significantly expand our lifting securement and consumables portfolio and enhance our customer value proposition.

With global engineering, manufacturing, distribution, and operations, Kito provides a broad range of products and solutions for the most demanding applications. Kito’s people, products, solutions, and service have innovated the lifting and securement industry throughout its long history. Kito's iconic brands include Kito, Crosby, Harrington, Gunnebo Industries, and Peerless. We expect that the Kito Acquisition will strengthen our core lifting business and further the Company's position as a leading worldwide, designer, manufacturer and marketer of intelligent motion solutions that move the world forward and improve lives by efficiently and ergonomically moving, lifting, positioning and securing materials. The Company anticipates the Kito Acquisition to close during fiscal 2026.

RESULTS OF OPERATIONS

The following discussion is a comparison between fiscal 2025 and fiscal 2024 results. For a discussion of our results of operations for fiscal 2024 compared to fiscal 2023, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2024, which was filed with the SEC on May 29, 2024.

Fiscal 2025 Compared to Fiscal 2024

Fiscal 2025 sales were $963,027,000, a decrease of 5.0%, or $50,513,000 compared with fiscal 2024 sales of $1,013,540,000. Fiscal 2025 sales were positively impacted by price increases of $12,548,000 as well as $2,655,000 of incremental sales from the montratec acquisition.  Offsetting these increases were lower sales volume of $60,238,000. The translation of foreign currency had an unfavorable impact of $5,478,000.

Gross profit was $325,680,000 and $374,838,000 or 33.8% and 37.0% of net sales in fiscal 2025 and 2024, respectively.  The fiscal 2025 decrease in gross profit was $49,158,000 or 13.1%. The decrease in gross profit was due to start-up costs totaling $6,919,000 related to the Monterrey, Mexico facility, $15,178,000 of costs incurred to close our Charlotte Manufacturing Operations and two of our Precision Conveyance operations which includes employee severance costs and asset-related impairments, $33,007,000 due to lower sales volumes, $1,999,000 due to higher product liability expenses, $648,000 of net business realignment costs, and $171,000 of additional costs due to Hurricane Helene's impact on one of our facilities. These decreases were offset by $9,456,000 of price increases net of material inflation and other manufacturing costs changes and $799,000 as a result of the acquisition of montratec. The translation of foreign currencies had a $1,491,000 unfavorable impact on gross profit for the year ended March 31, 2025.

Selling expenses were $110,043,000 and $105,341,000, or 11.4% and 10.4% of net sales in fiscal years 2025 and 2024, respectively. Selling expenses increased by $909,000 as a result of the montratec acquisition, $929,000 for net business realignment costs, $891,000 for net factory and warehouse consolidation cost and $802,000 primarily related to trade show and travel costs including the Company's strategic partner conference that was not held in the prior year. The remaining increase is due to higher employee related costs during the year ended March 31, 2025. Foreign currency translation had a $769,000 favorable impact on selling expenses in the year ended March 31, 2025

General and administrative expenses were $107,249,000 and $106,760,000 or 11.1% and 10.5% of net sales in fiscal 2025 and 2024, respectively. The increase includes $7,803,000 of net deal and integration costs primarily attributable to the Kito Acquisition and $1,299,000 of expense to record a reserve against an accounts receivable balance for a customer who declared bankruptcy in January 2025. These increases were offset by lower employee related costs of $2,485,000 including lower incentive-based compensation. Additionally, the Company had lower stock based compensation costs of $4,903,000 compared to the prior year and lower net headquarter relocation expenses of $1,686,000. Foreign currency translation had a $841,000 favorable impact on general and administrative expenses for the year ended March 31, 2025.

Research and development expenses were $23,869,000 and $26,193,000 in fiscal 2025 and 2024, respectively. As a percentage of consolidated net sales, research and development expenses were 2.5% and 2.6% in fiscal 2025 and 2024, respectively.

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Amortization of intangibles were $29,946,000 and $29,396,000 in fiscal 2025 and 2024, respectively, with fluctuation attributable to foreign currency translation.

Interest and debt expense was $32,426,000 and $37,957,000 in fiscal 2025 and 2024, respectively. The decrease is a result of a reduction in the Company's long term debt as a result of accelerated principal payments and lower interest rates.

Investment income of $1,302,000 and $1,759,000, in fiscal 2025 and 2024, respectively, related to earnings on marketable securities held in the Company’s wholly owned captive insurance subsidiary and the Company's equity method investment in EMC, described in Note 7 to our March 31, 2025 consolidated financial statements.

Other expense was $25,775,000 and $7,597,000 in fiscal 2025 and fiscal 2024, respectively. The increase primarily relates to the non-cash settlement charge of $23,634,000 associated with the termination of one of the Company's U.S. pension plans in current year ending March 31, 2025 described in Note 13 of the financial statements.

Income tax expense as a percentage of income from continuing operations before income tax expense was 6.7% and 24.2% in fiscal 2025 and 2024, respectively. Typically these percentages vary from the U.S. statutory rate of 21% due to varying effective tax rates at the Company's foreign subsidiaries and the jurisdictional mix of income for these subsidiaries.

In fiscal 2025, the tax effect of the pension termination described in Note 13 reduced the effective tax rate by 17 percentage points.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents, and restricted cash totaled $53,933,000 and $114,376,000, at March 31, 2025 and 2024, respectively.

Liquidity

Our primary sources of liquidity are funds generated by operating activities and available capacity for borrowings on our $175.0 million revolving credit facility (“Revolver”) maturing May 14, 2026 and our secured asset-based revolving credit facility (“AR Securitization”) maturing June 19, 2026. Our ability to fund our operations, to make planned capital investments, to make scheduled debt payments and to repay or refinance indebtedness depends on our future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business, and other factors, some of which are beyond our control. Our liquidity as of March 31, 2025 was $240,155,000 comprising cash and cash equivalents of $53,683,000 and $159,583,000 of availability on the Revolver and $26,889,000 of availability on the AR Securitization. We believe that our current resources, together with anticipated cash flows from operations and borrowing capacity under the Revolver and AR Securitization facilities, will be sufficient to finance our operations, meet our current cash requirements, and fund anticipated capital investments for at least the next 12 months. We may, however, seek additional financing to fund future growth or refinance our existing indebtedness through the debt capital markets, but we cannot be assured that such financing will be available on favorable terms, or at all.

Cash flow from operating activities

Net cash provided by operating activities was $45,612,000 and $67,198,000 in fiscal 2025 and 2024, respectively. In fiscal 2025, the net loss of $5,138,000 and non-cash adjustments to net loss of $75,503,000 contributed to cash provided by operations. The non-cash adjustments included $48,187,000 of depreciation and amortization, $23,634,000 related to the settlement of one of the Company's pension plans, $10,105,000 of non-cash lease expense, $6,256,000 of stock-based compensation, and $3,911,000 related to the impairment of Charlotte Manufacturing Operation's and two Precision Conveyance leases (refer to Note 3) offset by $20,256,000 of deferred income taxes and related valuation allowance. Changes in working capital reduced cash from operations by $18,664,000 as a result of an increase in prepaid expenses and other current assets of $20,998,000, and an increase of $13,042,000 in inventories, offset by an increase of trade payables of $11,144,000 and a decrease in trade accounts receivable of $4,482,000. Cash provided by operations also included a decrease of $9,587,000 in other non-current liabilities primarily due to lease payments for fiscal 2025.

Cash flow from investing activities

Net cash used for investing activities was $19,891,000 and $133,364,000 in fiscal 2025 and 2024, respectively. The use of cash in fiscal 2025 primarily consisted of $21,411,000 in capital expenditures. The most significant use of cash in fiscal 2024 related to the Company's purchase of montratec for $108,145,000.

Cash flow from financing activities

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Net cash used for financing activities was $86,747,000 in fiscal 2025 compared to net cash provided by financing activities of $48,201,000 in fiscal 2024. The most significant uses of cash were for $60,670,000 in debt repayments, $10,000,000 of shares repurchased as treasury stock during the year, a $6,711,000 payment to the former owners of montratec for the contingent consideration agreement (refer to Note 3 for additional information) and $8,042,000 in dividend payments Associated cash flows from hedging activities are classified as financing activities in the Statement of Cash Flows, which resulted in a net cash inflow of $474,000.

We believe that our cash on hand, cash flows, and borrowing capacity under our Amended and Restated Credit Agreement will be sufficient to fund our ongoing operations and debt obligations, and capital expenditures for at least the next twelve months. This belief is dependent upon successful execution of our current business plan and effective working capital utilization. No material restrictions exist in accessing cash held by our non-U.S. subsidiaries. We expect to meet our funding needs with cash provided by our U.S. operations, as well as by repatriating non-U.S. cash. We do not expect to incur significant incremental U.S. taxes as we repatriate funds. As of March 31, 2025, $38,689,000 of cash and cash equivalents were held by foreign subsidiaries.

CAPITAL EXPENDITURES

In addition to keeping our current equipment and plants properly maintained, we are committed to replacing, enhancing and upgrading our property, plant and equipment to support new product development, improve productivity and customer responsiveness, reduce production costs, increase flexibility to respond effectively to market fluctuations and changes, meet environmental requirements, enhance safety and promote ergonomically correct work stations. Our capital expenditures for fiscal 2025 and 2024 were $21,411,000 and $24,813,000, respectively. Excluded from capital expenditures is $318,000 and $690,000, in property, plant and equipment purchases included in accounts payable at March 31, 2025 and 2024, respectively. We expect capital expenditure spending in fiscal 2026 to range from $20,000,000 to $30,000,000.

INFLATION AND OTHER MARKET CONDITIONS

Our costs are affected by inflation in the U.S. economy and, to a lesser extent, in non-U.S. economies including those of Europe, Canada, Mexico, South America, and Asia-Pacific. We do not believe that general inflation has had a material effect on our results of operations over the periods presented despite rising inflation due to our ability to pass on rising costs through price increases. We are currently experiencing higher raw material, freight, and logistics costs than we have seen in recent years, which we have been able to recover with pricing actions. In the future, we may not be able to pass on these cost increases to our customers.

SEASONALITY AND QUARTERLY RESULTS

Quarterly results may be materially affected by the timing of large customer orders, periods of high vacation and holiday concentrations, legal settlements, gains or losses in our portfolio of marketable securities, restructuring charges, favorable or unfavorable foreign currency translation, divestitures and acquisitions. Therefore, the operating results for any particular fiscal quarter are not necessarily indicative of results for any subsequent fiscal quarter or for the full fiscal year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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Goodwill and indefinite-lived intangible asset impairment testing.  Our goodwill balance of $710,807,000 as of March 31, 2025, is subject to impairment testing. We test goodwill for impairment at least annually, as of the end of February, and more frequently whenever events occur or circumstances change that indicate there may be impairment. These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of operating performance, or a sale or disposition of a significant portion of a reporting unit.

We test goodwill at the reporting unit level, which is one level below our operating segment. We identify our reporting units by assessing whether the components of our operating segment constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. We also aggregate components that have similar economic characteristics into single reporting units (for example, similar products and / or services, similar long-term financial results, product processes, classes of customers, or in circumstances where the components share assets or other resources and have other economic interdependencies). We have three reporting units, Linear Motion Products (formerly referred to as Duff-Norton), Rest of Products and Precision Conveyance, and have goodwill totaling $9,699,000, $305,110,000, and $395,998,000, respectively, at March 31, 2025. montratec, which was acquired in fiscal 2024, has been included in the Precision Conveyance reporting unit.

Annual Goodwill Impairment Test

When we evaluate the potential for goodwill impairment, we assess a range of qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy, and changes in key personnel and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative impairment test. We also proceed to the quantitative model when economic or other business factors indicate that the fair value of our reporting units may have declined since our last quantitative impairment test. We performed the qualitative assessment as of February 28, 2025 and determined the quantitative test should be performed for the Precision Conveyance reporting unit as the businesses in this reporting unit were recently acquired resulting in a relatively small difference between the reporting unit's book and fair value. We performed sensitivities and other analysis and determined that goodwill is not impaired as of March 31, 2025 for the Precision Conveyance reporting unit.

The qualitative assessment as of February 28, 2025 for the Rest of Products and Linear Motion Products reporting units determined it was not more likely than not that the fair value of the reporting units were less than their applicable carrying value. Accordingly, we did not perform the quantitative goodwill impairment test for the Rest of Products and Linear Motion Products reporting units during fiscal 2025.

Quantitative Test for the Precision Conveyance Group

In order to perform the quantitative impairment test for the Precision Conveyance reporting unit, we used the discounted cash flow method to estimate fair value. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, EBITDA margins and cash flows based on internal forecasts, and the discount rate (weighted-average cost of capital). Management projects discounted cash flows based on the reporting unit's current business, expected developments and operational strategies over a seven-year period. In estimating the terminal growth rate, we consider our historical and projected results, as well as the economic environment in which the reporting unit operates. The discount rate utilized for the reporting unit reflects management’s assumptions of marketplace participants’ cost of capital and risk assumptions, both specific to the reporting unit and overall in the economy.

Testing goodwill for impairment under the quantitative method described above requires us to estimate fair value of the reporting unit using significant estimates and judgmental factors. The compound annual growth rate for revenue during the first seven years of our projections was approximately 9.7% for the Precision Conveyance reporting unit. This reflects the higher expected growth rates on our precision conveyor business compared to our other businesses. The terminal value was calculated assuming a projected growth rate of 3.5% after seven years. This rate reflects our estimate of long-term growth into perpetuity in the precision conveyance vertical market and as well as expected increases in the consumer price index. The estimated discount rate was determined to be 12.0% for the Precision Conveyance reporting unit. This was estimated based upon an analysis of similar companies and their debt to equity mix, their related volatility and the size of their market capitalization. We also consider any additional risk of the Precision Conveyance reporting unit achieving its forecast, and adjust the discount rate applied when determining the reporting unit’s estimated fair value. The quantitative test results indicate that the Precision Conveyance reporting unit is not impaired as its fair value exceeds its book value by 2.6%.

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Holding all other assumptions constant, a reduction in the compound annual growth rate for revenue in the first seven years of the model by one percentage point would reduce fair value by $42,700,000. Similarly, a 50 basis increase in the discount rate would reduce fair value by $35,600,000 and a 25 basis point reduction in the terminal growth rate would reduce fair value by $15,386,000. While the Precision Conveyance reporting unit was not determined to be impaired, it may be at risk of future impairment if the related business does not perform as projected, or if market factors utilized in the impairment analysis deteriorate, including an unfavorable change in the discount rate. We will monitor the Precision Conveyance reporting unit's performance against its forecasts in fiscal 2026 as part of our quarterly analysis of impairment indicators.

We further test our indefinite-lived intangible asset balance of $46,294,000 consisting of trademarks for acquisitions prior to fiscal 2025. Similar to goodwill, we first assess various qualitative factors in the analysis. If, after completing this assessment, it is determined that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value, we proceed to a quantitative impairment test. We performed the qualitative assessment as of February 28, 2025 and determined that it was not more likely than not that the fair value of each of our indefinite-lived intangible assets was less than its applicable carrying value.

Effects of New Accounting Pronouncements

Information regarding the effects of new accounting pronouncements is included in Note 21 to the accompanying consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

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