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Item 7. Management’s Discussion and Analysis

2023-05-25 compared with 2022-05-25 · 111 added, 131 removed, 104 unchanged (70% of the section changed)

Management’s Discussion and Analysis of Results of Operations and Financial Condition

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 of this Form 10-K.

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We developed our leading market position over our 148-year history by emphasizing technological innovation, manufacturing excellence and superior customer service.

In addition, acquisitions significantly broadened our product lines and services and expanded our geographic reach, end-user markets and customer base.

In accordance with our Blueprint for Growth 2.0 Strategy, we are simplifying the business utilizing our 80/20 process, improving our operational excellence, and ramping the growth engine by investing in new product development and a digital platform to grow profitably.

We believe shareholder value will be enhanced by expanding EBITDA margins and return on invested capital ("ROIC").

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, expanding EBITDA margins and increasing our return on invested capital ("ROIC").

Our revenue base is geographically diverse with approximately 39% derived from customers outside the U.S.

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We seek to maintain and enhance our market share by focusing our sales and marketing activities toward select North American and global market sectors including general industrial, energy, automotive, heavy OEM, entertainment, and construction and infrastructure.

In March 2021, the Company announced that it had entered into a definitive agreement to acquire Dorner.

The acquisition of Dorner closed on April 7, 2021.

Dorner, headquartered in Hartland, Wisconsin, is a leading automation solutions company providing unique, patented technologies in the design, application, manufacturing and integration of high-precision conveying systems.

In fiscal 2022, the Company completed its acquisitions of Dorner and Garvey.

Dorner is a leading supplier to the stable life sciences, food processing, and consumer packaged goods markets as well as the high growth industrial automation and e-commerce sectors.

The addition of Dorner provides attractive complementary adjacencies including sortation and asynchronous conveyance systems.

Further, on December 1, 2021, the Company completed its acquisition of Garvey.

Garvey is a leading accumulation systems solutions company providing unique, patented systems for the automation of production processes whose products complement those of Dorner.

The acquisitions of Dorner and Garvey accelerate the Company’s shift to intelligent motion and serve as a platform to expand capabilities in advanced, higher technology automation solutions.

The acquisitions of Dorner and Garvey accelerate the Company’s shift to intelligent motion.

In April 2023, the Company announced that it had entered into a definitive agreement to acquire 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 complement both Dorner and Garvey, and further the Company's shift to intelligent motion 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.

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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 supply chain challenges, 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.

Currently, as a result of global inflation, 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.

The Company is moving from its past as an industrial company to a top-tier intelligent motion company.

We have refocused our Company on faster growing markets as demonstrated by the Dorner and Garvey acquisitions.

We are benefiting from increased trends for safety, industrial automation, manufacturing on-shoring and workforce productivity initiatives.

Our long-term growth strategy is supported by our strong free cash flow as well as our liquidity position and flexible debt structure.

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 Asia and other emerging markets.

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

RESULTS OF OPERATIONS

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For a discussion of our results of operations for fiscal 2022 compared to fiscal 2021, 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, 2022, which was filed with the SEC on May 25, 2022.

Fiscal 2022 Compared to 2021

Fiscal 2023 Compared to Fiscal 2022

Fiscal 2023 sales were $936,240,000, an increase of 3.3%, or $29,685,000 compared with fiscal 2022 sales of $906,555,000.

Sales for the fiscal year were positively impacted by $144,587,000 of incremental sales from the Dorner and Garvey acquisitions as well as increased sales volume of $89,955,000 and price increases of $20,002,000.

Favorable foreign currency translation also increased sales by $2,369,000.

Sales for the fiscal year were positively impacted by $22,436,000 of incremental sales from the Garvey acquisition as well as price increases of $46,987,000.

Offsetting these increases were $9,154,000 in decreased sales volume and unfavorable foreign currency translation of $30,584,000.

Gross profit was $342,099,000 and $315,730,000 or 36.5% and 34.8% of net sales in fiscal 2023 and 2022, respectively.

The fiscal 2022 increase in gross profit of $95,505,000 or 43.4% is the result of the Dorner and Garvey acquisitions, which added $53,627,000 of gross profit net of acquisition related costs, $30,746,00 in higher sales volume, $10,551,000 in higher productivity net of other manufacturing cost increases, $5,953,000 of price increases net of material inflation and $2,671,000 in prior year factory closure costs which did not recur.

These increases were offset by $3,045,000 in increased product liability costs, $2,627,000 in increased tariffs costs, $2,189,000 from a gain recorded in the prior year for a building sold in China classified as Cost of products sold that did not recur, and $776,000 in increased severance costs in fiscal 2022.

The translation of foreign currencies had a $594,000 favorable impact on gross profit for the year ended March 31, 2022.

The fiscal 2023 increase in gross profit of $26,369,000 or 8.4% is the result of the $22,614,000 of price increases net of material inflation, $9,521,000 in gross profit as a result of the acquisition of Garvey, $7,663,000 of prior year acquisition amortization for inventory step up, backlog and integration costs that did not reoccur, $2,850,000 from a prior year product liability settlement which did not reoccur, $1,606,000 of prior year business realignment costs that did not reoccur, $674,000 of decreased product liability costs, and $629,000 of decreased tariffs offset by $5,019,000 of decreased productivity net of other cost changes and $3,365,000 from lower sales volumes.

The translation of foreign currencies had a $10,804,000 unfavorable impact on gross profit for the year ended March 31, 2023.

Selling expenses were $102,528,000 and $99,187,000, or 11.0% and 10.9% of net sales in fiscal years 2023 and 2022.

Selling expense increased $15,161,000 as a result of the Dorner and Garvey acquisitions.

The remaining increase is due to variable selling costs as the Company continues to recover from the COVID-19 pandemic.

Foreign currency translation had a $304,000 unfavorable impact on selling expenses.

Selling expense increased $2,417,000 as a result of the Garvey acquisition, $2,250,000 as the result of increased business realignment costs, and $2,744,000 from increased travel and trade show expenses.

Foreign currency translation had a $4,095,000 favorable impact on selling expenses.

General and administrative expenses were $94,794,000 and $102,128,000 or 10.1% and 11.3% of net sales in fiscal 2023 and 2022, respectively.

The increase is primarily due to the Dorner and Garvey acquisitions adding $10,596,000 of ongoing general and administrative costs and $5,625,000 of acquisition deal costs.

In addition, general and administrative costs increased $4,868,000 due to higher incentive compensation and stock based compensation expense.

Foreign currency translation had a $238,000 unfavorable impact on general and administrative expenses.

The decrease in general and administrative expenses was due to a net decrease of $8,960,000 in acquisition and deal integration costs and a decrease of $1,495,000 in stock-based compensation expense.

The decrease in stock-based compensation expense was the result of the performance condition not being fully met on the Company's fiscal 2021 performance shares.

Partially offsetting these decreases were $1,989,000 of higher general and administrative expenses incurred by the Garvey acquisition including the accrual of additional contingent consideration as discussed in Note 3 of the financial statements and $1,667,000 of higher net business realignment costs.

Foreign currency translation had a $2,220,000 favorable impact on general and administrative expenses for the year ended March 31, 2023.

Research and development expenses were $20,935,000 and $15,351,000 in fiscal 2023 and 2022, respectively.

As a percentage of consolidated net sales, research and development expenses were 2.2% and 1.7% in fiscal 2023 and 2022.

The increase in research and development expenses is primarily due to $1,722,000 of acquisition and acquisition related costs and $456,000 in higher incentive compensation and stock based compensation expense.

Foreign currency translation had a $15,000 unfavorable impact on research and development expenses.

Amortization of intangibles were $25,283,000 and $12,623,000 in fiscal 2022 and 2021, respectively, with the increase related to new intangible assets recorded from the Dorner and Garvey acquisition.

The increase in research and development expenses was due to additional spending to achieve strategic goals related to new product development.

Amortization of intangibles were $26,001,000 and $25,283,000 in fiscal 2023 and 2022, respectively, with the increase related to new intangible assets recorded from the Garvey acquisition.

Interest and debt expense was $27,942,000 and $20,126,000 in fiscal 2023 and 2022, respectively.

The increase is related to higher interest rates as well as higher average borrowing outstanding as a result of the Dorner and Garvey acquisitions.

The Company incurred $14,803,000 in Cost of debt refinancing in fiscal 2022 as a result of the Dorner acquisition and related refinancing as described in Note 12 to our March 31, 2022 consolidated financial statements.

The increase is related to higher interest rates, as well as increased borrowings to finance the Garvey acquisition.

The Company incurred $14,803,000 in Cost of debt refinancing in 2022.

As described in Note 12 to our March 31, 2023 consolidated financial statements, this was a result of the Dorner acquisition and related refinancing during fiscal 2022.

There were no similar expenses incurred in fiscal 2023.

Investment income of $315,000 and $46,000, in fiscal 2023 and 2022, 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, 2023 consolidated financial statements.

Foreign currency exchange resulted in a loss of $1,574,000 and $941,000 in fiscal 2022 and 2021, respectively, as a result of foreign currency volatility related to foreign currency denominated sales and purchases and intercompany debt.

Other income was $1,122,000 in fiscal 2022 and other expense was $20,850,000 in fiscal 2021.

The decrease in expense is primarily related to a $19,038,000 settlement charge as a result of the termination of one of the Company's U.S.

pension plans in fiscal 2021 as described in Note 13 to our March 31, 2022 consolidated financial statements.

Foreign currency exchange resulted in a gain of $2,189,000 and a loss $1,574,000 in fiscal 2023 and 2022, respectively.

This favorable change was due to the recent strengthening of the Euro in comparison to the U.S.

Other income was $2,072,000 in fiscal 2023 and $1,122,000 in fiscal 2022.

As described in Note 13, the increase in Other income is primarily related to a tax indemnification reimbursement received from STAHL's former owners in accordance with the share purchase agreement.

Income tax expense as a percentage of income from continuing operations before income tax expense was 35.0% and 22.9% in fiscal 2023 and 2022, respectively.

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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 2021 the tax rate was primarily reduced by 6.9 percentage points primarily due to federal tax credits including research and development tax credits.

In fiscal 2023, the rate was unfavorably impacted 3 percentage points due to settlement of income tax assessments related to tax periods prior to the Company’s acquisition of Stahl Cranesystems GmbH (“STAHL").

In accordance with the tax indemnification clause of the share purchase agreement, the Company received full reimbursement from STAHL’s prior owner which was recorded as a gain in Other (income) expense, net on the Consolidated Statements of Operations.

The tax rate also reflects an unfavorable impact of 2 percentage points due to the recording of a U.S.

state tax valuation allowance.

The valuation allowance primarily relates to changes in the Company’s expectations regarding its ability to more likely than not utilize certain state net operating losses prior to their expiration.

The tax rate was also unfavorably affected by non-deductible compensation and U.S.

taxes on foreign earnings.

These increased the rate by 2 percentage points each.

LIQUIDITY AND CAPITAL RESOURCES

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In fiscal 2023, net income of $48,429,000 and non-cash adjustments to net income of $61,111,000 were the largest contributors.

Of the non-cash adjustments, $41,924,000 was Depreciation and amortization and $14,803,000 was Cost of debt refinancing as a result of the Dorner acquisition.

Net working capital increases reduced operating cash flows by $45,859,000, which included an increase of $40,201,000 in inventories as the Company increased inventory due to current supply chain constraints and an increase in trade accounts receivable of $18,988,000 attributable to strong fourth quarter sales.

This was partially offset by an increase in trade accounts payable of $12,681,000.

Of the non-cash adjustments, $41,947,000 was depreciation and amortization and $10,425,000 was stock-based compensation.

Net working capital increases reduced operating cash flows by $12,092,000, which included an increase of $9,087,000 in inventories as the Company increased inventory due to continuing supply chain constraints and a $13,964,000 decrease in accounts payable as the Company purchased less inventory in the final month of fiscal 2023 compared to fiscal 2022.

This was partially offset by an increase in accrued liabilities of $9,150,000.

The increase in accrued liabilities is primarily related to an increase in customer down payments.

In addition non-current liabilities decreased by $13,689,000.

The decrease in non-current liabilities primarily consists of $9,059,000 in cash paid for amounts included in the measurement of operating lease liabilities for fiscal 2022.

The decrease in non-current liabilities primarily consists of $8,872,000 in cash paid for amounts included in the measurement of operating lease liabilities in fiscal 2023.

Cash flow from investing activities

Net cash used for investing activities was $13,932,000 and $554,311,000 in fiscal 2023 and 2022, respectively.

In fiscal 2022, the most significant use of cash in investing activities was $539,778,000 to purchase Dorner and Garvey, net of cash acquired, as well as $13,104,000 in capital expenditures.

Cash flow from by financing activities

Net cash provided by (used for) financing activities was $420,700,000 and $(10,189,000) in fiscal 2022 and 2021, respectively.

In fiscal 2022, the most significant sources of cash were $725,000,000 in gross proceeds from the issuance of long term debt and $207,000,000 in gross proceeds from an equity offering, which were used to fund the Dorner and Garvey acquisitions.

These sources of cash were offset by $477,846,000 in repayments of debt, $26,184,000 in fees related to the debt and equity offering, and dividends paid in the amount of $6,562,000.

As noted in Note 8 of the financial statements, during the second quarter of fiscal 2022, the Company modified its cross currency swap and interest rate swap.

As such, the associated cash flows from hedging activities are classified as financing activities in the Statement of Cash Flows, which resulted in a net cash outflow of $789,000.

We believe that our cash on hand, cash flows, and borrowing capacity under our new First Lien Facility will be sufficient to fund our ongoing operations and debt obligations, and capital expenditures for at least the next twelve months.

In fiscal 2023, the most significant uses of cash in investing activities was $12,632,000 in capital expenditures and $1,616,000 related to a working capital adjustment for the Garvey acquisition described in Note 3 of the financial statements.

Cash flow from financing activities

Net cash used for financing activities was $49,987,000 in fiscal 2023 compared to net cash provided by financing activities of $420,700,000 in fiscal 2022.

In fiscal 2023, the most significant uses of cash were $40,550,000 in the repayment of debt and $8,008,000 in dividend payments.

We believe that our cash on hand, cash flows, and borrowing capacity under our First Lien Facilities (as defined below) 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.

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As of March 31, 2023, $74,694,000 of cash and cash equivalents were held by foreign subsidiaries.

On January 31, 2017 the Company entered into a Credit Agreement ("Credit Agreement") and $545,000,000 of debt facilities ("Facilities") in connection with the STAHL acquisition.

The Facilities consist of a Revolving Facility ("Revolver") in the

amount of $100,000,000 and a $445,000,000 1st Lien Term Loan ("Term Loan").

The Term Loan has a seven-year term maturing in 2024.

On August 26, 2020, the Company entered into a Second Amendment to the Credit Agreement (as amended by the First Amended Credit Agreement, dated as of February 26, 2018).

The Second Amended Credit Agreement extended the $100,000,000 secured Revolver which was originally set to expire on January 31, 2022 to August 25, 2023.

As discussed in Note 3, the Company completed its acquisition of Dorner on April 7, 2021 and entered into a $750,000,000 First Lien Facility with JPMorgan Chase Bank, PNC Capital Markets LLC, and Wells Fargo Securities LLC.

The First Lien Facilities consist of a Revolving Facility in an aggregate amount of $100,000,000 and a $650,000,000 Bridge Facility.

Proceeds from the Bridge Facility were used, among other things, to finance the purchase price for the Dorner acquisition, pay related fees, expenses and transaction costs, and refinance the Company's borrowings under its prior Term Loan and Revolver.

In addition to the debt borrowing described above, the Company commenced and completed an underwritten public offering of 4,312,500 shares of its common stock at a price of $48.00 per share for total gross proceeds of $207,000,000.

The Company used all of the net proceeds from the equity offering to repay part of its outstanding borrowings under its Bridge Facility.

The equity offering closed on May 4, 2021.

Following the repayment of outstanding borrowings under the Bridge Facility, the Bridge Facility was refinanced with a syndicated Term Loan B facility on May 14, 2021.

The key terms of the Term Loan B facility are as follows:

1) Term Loan B:

An aggregate $450,000,000 Term Loan B facility, which requires quarterly principal amortization of 0.25% with the remaining principal due at the maturity date.

In addition, if the Company has Excess Cash Flow (ECF) as defined in the Credit Agreement for the First Lien Facility (the “Credit Agreement”), the ECF Percentage of the Excess Cash Flow for each fiscal year minus optional prepayments of the Loans (except prepayments of Revolving Loans that are not accompanied by a corresponding permanent reduction of Revolving Commitments) pursuant to Section 2.10(a) of the Credit Agreement other than to the extent that any such prepayment is funded with the proceeds of Funded Debt, shall be applied toward the prepayment of the Term Loan B facility.

The ECF Percentage is defined as 50% stepping down to 25% or 0% based on the achievement of specified Secured Leverage Ratios as of the last day of such fiscal year.

Further, the Company may draw additional Incremental Facilities (referred to as an "Accordion") by executing and delivering to JPMorgan Chase Bank, N.A.

an Increased Facility Activation Notice specifying the amount of such increase requested.

Lenders shall have no obligation to participate in any increase unless they agree to do so in their sole discretion.

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

3) Fees and Interest Rates:

Commitment fees and interest rates are determined on the basis of either a Eurocurrency rate or a Base rate plus an applicable margin, which is based upon the Company's Total Leverage Ratio (as defined in the Credit Agreement) in the case of Revolver loans.

4) Prepayments:

Provisions permitting a Borrower to voluntarily prepay either the Term Loan B facility or Revolver in whole or in part at any time, and provisions requiring certain mandatory prepayments of the Term Loan B facility or Revolver on the occurrence of certain events which will permanently reduce the commitments under the Credit Agreement, each without premium or penalty, subject to reimbursement of certain costs of the Lenders.

5) Covenants:

Provisions containing covenants required of the Company and its subsidiaries including various affirmative and negative financial and operational covenants.

The key financial covenant is triggered only on any date when any Extension of Credit under the New Revolving Credit Facility is outstanding (excluding any Letters of Credit) (the “Covenant Trigger”), and prohibits the Total Leverage Ratio for the Reference Period ended on such date from exceeding (i) 6.75:1.00 as of any date of determination prior to June 30, 2021, (ii) 5.50:1.00 as of any date of determination on June 30, 2021 and thereafter but prior to June 30, 2022, (iii) 4.50:1.00 as of any date of determination on June 30, 2022 and thereafter but prior to June 30, 2023 and (iv) 3.50:1.00 as of any date of determination on June 30, 2023 and thereafter.

6) Collateral:

Obligations under the First Lien Facilities are secured by liens on substantially all assets of the Company and its material domestic subsidiaries.

In fiscal 2022, the Company incurred $14,803,000 in debt extinguishment costs of which $5,946,000 relates to the Company's prior Term Loan, $326,000 relates to the Company's prior Revolver, and $8,531,000 relates to fees paid on the portion of the First Lien Facilities that were associated with the Bridge Facility, all of which were incurred in the first quarter of fiscal 2022.

These costs are classified as Cost of debt refinancing in the Condensed Consolidated Statements of Operations.

Further, in the first quarter of fiscal 2022, the Company recorded $5,432,000 in deferred financing costs on the First Lien Term Facility, which will be amortized over seven years.

The Company recorded $4,027,000 in deferred financings costs on the New Revolving Credit Facility, of which $3,050,000 is related to the New Revolving Credit Facility and $977,000 is carried over from the Company's prior Revolver as certain Revolver lenders increased their borrowing capacity.

These balances will be amortized over five years and are classified in Other assets since no funds were drawn on the New Revolving Credit Facility.

Also discussed in Note 3, the Company completed its acquisition of Garvey on November 30, 2021 and borrowed additional funds in accordance with the Accordion feature under its existing Term Loan B to increase the principal amount of the Term Loan B facility by $75,000,000.

Proceeds from the Accordion were used, among other things, to finance the purchase price for the Garvey acquisition, pay related fees, expenses, and transaction costs.

No material amendment to the terms of the Term Loan B facility or the First Lien Facility was necessary for the Company to exercise this Accordion feature.

In the third quarter of fiscal 2022, the Company recorded $892,000 in deferred financing costs on the Accordion, which will be amortized over the remaining life of the Term Loan B.

The outstanding principal balance of the Term Loan B facility was $502,560,000 as of March 31, 2022, which includes $75,000,000 in principal balance from the Accordion exercised in the third quarter of fiscal 2022 and the outstanding balance of the Term Loan was $254,900,000 as of March 31, 2021.

The Company made $22,440,000 of principal payment on the Term Loan B during fiscal 2022 and $4,450,000 of principal payment on the Term Loan during fiscal 2021.

The Company is obligated to make $5,260,000 of principal payments on the Term Loan B facility over the next 12 months plus applicable ECF payments, if required, however, plans to pay down approximately $40,000,000 in principal payments in total during such 12 month period.

This amount has been recorded within the current portion of long term debt on the Company's Condensed Consolidated Balance Sheet with the remaining balance recorded as long term debt.

There were no outstanding borrowings and $17,151,000 outstanding letters of credit issued against the New Revolving Credit Facility as of March 31, 2022.

The outstanding letters of credit at March 31, 2022 consisted of $849,000 in commercial letters of credit and $16,302,000 of standby letters of credit.

The gross balance of deferred financing costs on the Term Loan B facility was $6,323,000, which includes $892,000 from the Accordion exercise, as of March 31, 2022, and $14,690,000 on the prior Term Loan as of March 31, 2021, respectively.

The accumulated amortization balances were $898,000 and $8,744,000 as of March 31, 2022 and 2021, respectively.

The gross balance of deferred financing costs associated with the New Revolving Credit Facility was $4,027,000 as of March 31, 2022 and the prior Revolver was $3,615,000 as of March 31, 2021, which are included in Other assets on the Condensed Consolidated Balance Sheet.

The accumulated amortization balance is $805,000 and $2,313,000 as of March 31, 2022 and March 31, 2021, respectively.

In connection with Dorner acquisition, the Company recorded a finance lease for a manufacturing facility in Hartland, WI under a 23 year lease agreement which terminates in 2035.

The outstanding balance on the finance lease obligation is $14,084,000 as of March 31, 2022 of which $544,000 has been recorded within the Current portion of long term debt and the remaining balance recorded within Term loan and finance lease obligations on the Company's Condensed Consolidated Balance Sheet.

See Note 18, Leases , for further details.

Lines of Credit and Loans

Unsecured and uncommitted lines of credit are available to meet short-term working capital needs for certain of our subsidiaries operating outside of the U.S.

The lines of credit are available on an offering basis, meaning that transactions under the line of credit will be on such terms and conditions, including interest rate, maturity, representations, covenants, and events of default, as mutually agreed between our subsidiaries and the local bank at the time of each specific transaction.

As of March 31, 2022, unsecured credit lines totaled approximately $2,434,000, of which $0 was drawn.

In addition, unsecured lines of $12,503,000 were available for bank guarantees issued in the normal course of business of which $9,135,000 was utilized.

As discussed in Note 3 of the financial statements, the Company announced in April 2023 that it entered into an agreement to acquire montratec.

The acquisition is expected to close on May 31, 2023.

To finance the montratec acquisition, the Company expanded its New Revolving Credit Facility by $75 million.

The Company has drawn on the expanded New Revolving Credit facility to initially fund the acquisition on May 31, 2023.

In addition, the Company plans to raise approximately $50 million in additional debt by June 30, 2023 through the securitization of certain of the Company's U.S.

customer accounts receivable balances.

The Company intends to use these proceeds to partially repay borrowings under its New Revolving Credit Facility.

Please refer to Note 3 of the financial statements for additional information related to the montratec acquisition.

CAPITAL EXPENDITURES

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Our capital expenditures for fiscal 2023 and 2022 were $12,632,000 and $13,104,000, respectively.

Excluded from fiscal 2022 capital expenditures is

$329,000 and $730,000, in property, plant and equipment purchases included in accounts payable at March 31, 2022 and 2021, respectively.

Excluded from fiscal 2023 capital expenditures is $624,000 and $329,000, in property, plant and equipment purchases included in accounts payable at March 31, 2023 and 2022, respectively.

We expect capital expenditure spending in fiscal 2024 to range from $30,000,000 to 40,000,000.

The increase in expected capital expenditures is related to investments to create a machining center of excellence.

INFLATION AND OTHER MARKET CONDITIONS

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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.

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.

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We have three reporting units, Duff-Norton, Rest of Products and Precision Conveyance, and have goodwill totaling $9,699,000, $306,988,000, and $327,942,000, respectively, at March 31, 2023.

The Precision Conveyance group is new in fiscal 2022 with the acquisitions of Dorner and Garvey (refer to Note 3).

The Precision Conveyance group was new in fiscal 2022 with the acquisitions of Dorner and Garvey (refer to Note 3).

Annual Goodwill Impairment Test

When we evaluate the potential for goodwill impairment, we assess a range of qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy, and changes in key personnel and

overall financial performance.

If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative impairment test.

We also proceed to the quantitative model when economic or other business factors indicate that the fair value of our reporting units may have declined since our last quantitative test.

We performed the qualitative assessment as of February 28, 2022 and determined that it was not more likely than not that the fair value of each of our reporting units was less than that its applicable carrying value.

Accordingly, we did not perform the quantitative goodwill impairment test for any of our reporting units during fiscal 2022.

We further test our indefinite-lived intangible asset balance of $46,721,000 consisting of trademarks for acquisitions prior to fiscal 2022.

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, 2022 and determined that it was not more likely than not that the fair value of each of our indefinite-lived intangible assets was less than that its applicable carrying value.

Purchase Price Allocations for Business Combinations.

During the fiscal year ended March 31, 2022, we completed two business combination for a total purchase price of $548,743,000.

Under purchase accounting, we recorded assets and liabilities at fair value as of the acquisition dates.

We identified and assigned value to trademarks and trade names, customer relationships, favorable supply agreements, backlog, and technology.

We estimated the useful lives over which these intangible assets would be amortized.

Valuations of these assets were performed largely using discounted cash flow models and estimates of replacement cost.

These valuations support the conclusion that identifiable intangible assets had a preliminary value of $211,350,000.

The resulting goodwill was $328,357,000.

Assigning value to intangible assets requires estimates used in projecting relevant future cash flows and estimates of replacement costs, in addition to estimating useful lives of such assets.

Further estimates include an attrition rate for customer relationships, royalty rates for technology, trademarks, and patents, and a weighted average cost of capital assumption.

We performed the qualitative assessment as of February 28, 2023 and determined the quantitative test should be performed for the Rest of Products, Precision Conveyance, and Duff Norton due to volatility in our stock price and changes in our business during fiscal 2023.

We also performed sensitivities and other analysis and determined that goodwill is not impaired as of March 31, 2023.

In order to perform the quantitative impairment tests for the Rest of Products, Precision Conveyance and Duff Norton reporting units, we use 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, and the weighted-average cost of capital.

Management projects discounted cash flows based on each reporting unit’s current business, expected developments and operational strategies over a five to 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 weighted-average cost of capital utilized for each reporting unit reflect management’s assumptions of marketplace participants’ cost of capital and risk assumptions, both specific to the reporting unit and overall in the economy.

Rest of Products Reporting Unit

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 6.73% for the Rest of Products reporting unit.

The terminal value was calculated assuming a projected growth rate of 3.0% after seven years.

These rates reflect our estimate of long-term growth into perpetuity and approximates the long-term gross domestic product growth expected on a global basis as well as our normal annual price increases.

The estimated weighted-average cost of capital for the reporting unit was determined to be 11.8% for the Rest of Products 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 Rest of Products reporting unit achieving its forecast, and adjust the weighted-average cost of capital applied when determining the reporting unit’s estimated fair value.

Future changes in these estimates and assumptions could materially affect the results of our goodwill impairment tests.

For example, a decline in the terminal growth rate by 50 basis points would decrease fair market value by $15,100,000 and an increase in the weighted-average cost of capital by 50 basis points would result in a decrease in fair market value by $29,000,000 for the Rest of Products reporting unit.

Even with such changes, the fair value of the reporting unit would be greater than its net book value as of February 28, 2023, therefore indicating no impairment.

Precision Conveyance

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 9.82% for the Precision Conveyance reporting unit.

This reflects the higher expected growth rates on our conveyor business compared to our other businesses.

The terminal value was calculated assuming a projected growth rate of 3.0% after seven years.

These rates reflect our estimate of long-term growth into perpetuity and approximate the long-term gross domestic product growth expected on a global basis as well as our normal annual price

The estimated weighted-average cost of capital for the reporting units was determined to be 13.2% 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 weighted-average cost of capital applied when determining the reporting unit’s estimated fair value.

Future changes in these estimates and assumptions could materially affect the results of our goodwill impairment tests.

For example, a decline in the terminal growth rate by 50 basis points would decrease fair market value by $9,300,000 and an increase in the weighted-average cost of capital by 50 basis points would result in a decrease in fair market value by $16,600,000 for the Precision Conveyance reporting unit.

Even with such changes, the fair value of the reporting unit would be greater than its net book value as of February 28, 2023, therefore indicating no impairment.

Duff-Norton Reporting Unit

Testing goodwill for impairment under the quantitative method described above requires us to estimate fair value of the reporting unit using significant estimates and judgmental factors.

The compound annual growth rate for revenue during the first five years of our projections was approximately 9.14% for the Duff-Norton reporting unit.

The terminal value was calculated assuming a projected growth rate of 3.5% after five years.

These rates reflect our estimate of long-term growth into perpetuity and approximate the long-term gross domestic product growth expected on a global basis as well as our normal annual price increases.

The estimated weighted-average cost of capital for the reporting units was determined to be 10.4% for the Duff-Norton reporting unit.

This was estimated initially based on the Company's consolidated weighted-average cost of capital and increased for additional market risk.

We also consider any additional risk of the Duff-Norton reporting unit achieving its forecast, and adjust the weighted-average cost of capital applied when determining the reporting unit’s estimated fair value.

Future changes in these estimates and assumptions could materially affect the results of our goodwill impairment tests.

For example, a decline in the terminal growth rate by 50 basis points would decrease fair market value by $8,900,000 and an increase in the weighted-average cost of capital by 50 basis points would result in a decrease in fair market value by $12,200,000 for the Duff-Norton reporting unit.

Even with such changes, the fair value of the reporting unit would be greater than its net book value as of February 28, 2023, therefore indicating no impairment.

We further test our indefinite-lived intangible asset balance of $46,338,000 consisting of trademarks for acquisitions prior to fiscal 2023 on an annual basis for impairment.

The methodology used to value trademarks is the relief from royalty method.

The recorded book value of these trademarks in excess of the calculated fair value results in impairment.

The key estimate used in this calculation consists of an overall royalty rate applied to the sales covered by the trademark.

After performing this analysis, we determined that the fair value of these trademarks exceeded their book values, and as such, no other impairment was recorded.

Effects of New Accounting Pronouncements

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What changed 10-K

Item 7. Management’s Discussion and Analysis