COLUMBUS MCKINNON CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS ANDFINANCIAL CONDITION (form 10-Q)

Published: 2022-01-27 16:31:24 ET CMCO

Executive Overview

The Company is a leading worldwide designer, manufacturer and marketer of intelligent motion solutions, including motion control products, technologies, automated systems and services, that efficiently and ergonomically move, lift, position and secure materials. Our key products include hoists, crane components, precision conveyors, actuators, rigging tools, light rail workstations, and digital power and motion control systems. These are highly relevant, professional-grade solutions that solve customers' critical material handling requirements.

Founded in 1875, we have grown to our current size and leadership position through organic growth and acquisitions. We developed our leading market position over our 146-year history by emphasizing technological innovation, manufacturing excellence and superior customer service. In addition, acquisitions significantly broadened our product lines and services and expanded our geographic reach, end user markets and customer base. In accordance with our Blueprint for Growth 2.0 Strategy, we are simplifying the business utilizing our 80/20 process, improving our operational excellence, and ramping the growth engine by investing in new product development and a digital platform to grow profitably. We expect shareholder value will be enhanced by expanding EBITDA margins and return on invested capital ("ROIC").

Our revenue base is geographically diverse with approximately 41% derived from customers outside the U.S. for the nine months ended December 31, 2021. We believe this diversity balances the impact of changes that occur in local economies, as well as benefits the Company by providing access to growing emerging markets. We monitor both U.S. and Eurozone Industrial Capacity Utilization statistics as well as the ISM Production Index as indicators of anticipated demand for our products. In addition, we continue to monitor the potential impact of other global and U.S. trends including, industrial production, trade tariffs, raw material cost inflation, interest rates, foreign currency exchange rates, and activity of end-user markets around the globe.

From a strategic perspective, we are investing in new products as we focus on our greatest opportunities for growth. We maintain a strong North American market share with significant leading market positions in hoists, lifting and sling chain, forged attachments, actuators, and digital power and motion control systems for the material handling industry. We seek to maintain and enhance our market share by focusing our sales and marketing activities toward select North American and global market sectors including general industrial, energy, automotive, heavy OEM, entertainment, and construction and infrastructure.

In March 2021, the Company announced that it had entered into a definitive agreement to acquire Dorner. The acquisition of Dorner closed on April 7, 2021. Dorner, headquartered in Hartland, Wisconsin, is a leading automation solutions company providing unique, patented technologies in the design, application, manufacturing and integration of high-precision conveying systems. Dorner is a leading supplier to the stable life sciences, food processing, and consumer packaged goods markets as well as the high growth industrial automation and e-commerce sectors. The addition of Dorner provides attractive complementary adjacencies including sortation and asynchronous conveyance systems.

Further, on December 1, 2021, the Company completed its acquisition of Garvey. Garvey is a leading accumulation systems solutions company providing unique, patented systems for the automation of production processes whose products complement those of Dorner. The acquisitions of Dorner and Garvey accelerate the Company's shift to intelligent motion and serves as a platform to expand capabilities in advanced, higher technology automation solutions.

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

Our principal raw materials and components purchases were approximately $255 million in fiscal 2021 (or 59% of Cost of product sold) and include steel, consisting of rod, wire, bar, structural, and other forms of steel; electric motors; bearings; gear reducers; castings; steel and aluminum enclosures and wire harnesses; electro-mechanical components and standard variable drives. These commodities are all available from multiple sources. We purchase most of these raw materials and components from a limited number of strategic and preferred suppliers under agreements which are negotiated on a companywide basis

through our global purchasing group. Currently, as a result of supply chain challenges, we are experiencing higher raw material costs. To date, we have raised prices to our customers to cover these increased raw material costs.

We operate in a highly competitive and global business environment. We face a variety of opportunities in those markets and geographies, including trends toward increasing productivity of the global labor force and the expansion of market opportunities in Asia and other emerging markets. While we execute our long-term growth strategy, we are supported by our strong free cash flow as well as our liquidity position and flexible debt structure.

Results of Operations

Three Months Ended December 31, 2021 and December 31, 2020

Net sales in the fiscal 2022 quarter ended December 31, 2021 were $216,088,000, up $49,541,000 or 29.7% from the fiscal 2021 quarter ended December 31, 2020 net sales of $166,547,000. Net sales were positively impacted by the acquisition of Dorner and Garvey which contributed $36,382,000, $8,983,000 due to increased sales volume, and $5,646,000 due to price increases. Foreign currency translation favorably impacted sales by $1,470,000 for the three months ended December 31, 2021.

Gross profit in the fiscal 2022 quarter ended December 31, 2021 was $75,057,000, an increase of $19,742,000 or 35.7% from the fiscal 2021 quarter ended December 31, 2020 gross profit of $55,315,000. Gross profit margin was 34.7% in the fiscal 2022 third quarter compared to 33.2% in the fiscal 2021 third quarter. The increase in gross profit was due to $16,703,000 in gross profit as a result of the acquisitions of Dorner and Garvey, $3,604,000 in increased productivity net of other cost changes, higher sales volume which increased gross profit by $3,243,000, $1,375,000 of price increases net of material inflation, and $251,000 in costs incurred in the prior year quarter due to factory closures that did not reoccur. These gross profit increases were offset by $3,045,000 in increased product liability costs, which includes the settlement of a matter for $2,850,000, $515,000 in acquisition related inventory amortization at Garvey, $455,000 in net higher business realignment costs than the prior year, $450,000 in backlog amortization related to the Garvey acquisition, and $421,000 in increased tariffs. The translation of foreign currencies had a $548,000 unfavorable impact on gross profit in the three months ended December 31, 2021.

Selling expenses were $24,468,000 and $18,829,000, or 11.3% of net sales, in both the fiscal 2022 and 2021 third quarters. Selling expense increased by $3,686,000 for costs incurred by Dorner and Garvey and $272,000 in business realignment costs during the three months ended December 31, 2021. The remaining increase relates to variable selling costs which have increased with sales. Foreign currency translation had a $196,000 favorable impact on selling expenses in the three months ended December 31, 2021.

General and administrative expenses were $25,144,000 and $19,859,000, or 11.6% and 11.9% of net sales, in the fiscal 2022 and 2021 third quarters, respectively. The increase in general and administrative expenses was due to $2,602,000 in general and administrative expenses incurred by Dorner and Garvey, $1,643,000 in higher incentive compensation expense and stock compensation expense, and $370,000 in acquisition and integration expenses in the three months ended December 31, 2021. Foreign currency translation had a $88,000 favorable impact on general and administrative expenses in the three months ended December 31, 2021.

Research and development expenses were $3,875,000 and $3,038,000, or 1.8% of net sales, in both the fiscal 2022 and 2021 third quarters. The increase in research and development expenses was due to $447,000 in research and development expenses incurred by Dorner and Garvey and $100,000 in higher incentive compensation expense and stock compensation expense.

Amortization of intangibles was $6,254,000 and $3,142,000 in the fiscal 2022 and 2021 third quarters, respectively, with the increase related to new intangible assets recorded from the Dorner and Garvey acquisitions.

Interest and debt expense was $4,375,000 in the third quarter ended December 31, 2021 compared to $2,986,000 in the third quarter ended December 31, 2020. The increase is related to higher interest and debt expense incurred on the Company's new Term Loan B as a result of the Dorner acquisition and related debt refinancing, as well as the subsequent Garvey acquisition and Accordion borrowings.

Investment income of $76,000 and $495,000 in the third quarters ended December 31, 2021 and 2020, respectively, related to earnings on marketable securities held in the Company's wholly owned captive insurance subsidiary and the Company's equity method investment in EMC, described in Note 6 of the financial statements.

Other income was $455,000 in the third quarter ended December 31, 2021 compared to other expense of $144,000 in the third quarter ended December 31, 2020.

Income tax expense as a percentage of income from continuing operations before income tax expense was 10% and 9% in the third quarters ended December 31, 2021 and December 31, 2020, respectively. Typically these percentages vary from the U.S. statutory rate of 21% primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income for these subsidiaries.

For the three months ended December 31, 2021, the rates are lower than the U.S. statutory rate by 8 percentage points primarily due to the impact of carrying back a taxable loss in FY 2021 to prior tax years. For the three months ended December 31, 2020, the rates are lower than the U.S. statutory rate primarily as a result of pre-tax losses in certain jurisdictions.

The Company estimates that the effective tax rate related to continuing operations will be approximately 15% to 17% for fiscal 2022.

Nine Months Ended December 31, 2021 and December 31, 2020

Net sales in the nine months ended December 31, 2021 were $653,187,000, up $189,780,000 or 41.0% from the fiscal 2021 nine months ended December 31, 2020 net sales of $463,407,000. Net sales were positively impacted by the acquisitions of Dorner and Garvey which contributed $104,100,000, $66,703,000 due to increased sales volume, and $11,617,000 due to price increases. Foreign currency translation favorably impacted sales by $7,360,000 for the nine months ended December 31, 2021.

Gross profit in the nine months ended December 31, 2021 was $230,255,000, an increase of $74,118,000 or 47.5% from the nine months ended December 31, 2020 gross profit of $156,137,000. Gross profit margin was 35.3% in the nine months ended December 31, 2021 compared to 33.7% in the nine months ended December 31, 2020. The increase in gross profit was due to $43,963,000 in gross profit as a result of the acquisitions of Dorner and Garvey, higher sales volume which increased gross profit by $23,109,000, $11,867,000 in increased productivity net of other cost changes, $2,973,000 of price increases net of material inflation, and $2,672,000 in costs incurred in the prior year due to factory closures that did not reoccur. These gross profit increases were offset by $3,496,000 in acquisition related inventory amortization at Dorner and Garvey, $3,045,000 in increased product liability costs, including a settlement of $2,850,000, a prior year gain in the amount of $2,189,000 recorded for a building sold in China that did not reoccur, $2,158,000 in increased tariffs, $1,040,000 net higher business realignment costs than the prior year, $521,000 in higher acquisition integration costs, and $450,000 in backlog amortization related to the Garvey acquisition. The translation of foreign currencies had a $2,433,000 favorable impact on gross profit in the nine months ended December 31, 2021.

Selling expenses were $72,107,000 and $56,087,000, or 11.0% and 12.1% of net sales, in the nine months ended December 31, 2021 and 2020, respectively. Selling expense increased by $10,386,000 for costs incurred by Dorner and Garvey. The remaining increase relates to variable selling costs which have increased with sales as well as higher personnel costs as a result of annual merit increases. Foreign currency translation had a $983,000 unfavorable impact on selling expenses in the nine months ended December 31, 2021.

General and administrative expenses were $78,495,000 and $53,842,000, or 12.0% and 11.6% of net sales, in the nine months ended December 31, 2021 and 2020, respectively. The increase in general and administrative expenses was due to $9,347,000 in general and administrative expenses incurred by Dorner and Garvey, $7,827,000 in acquisition expenses, which include costs related to a transaction bonus which are classified as general and administrative expense, $5,423,000 in higher incentive compensation expense and stock compensation expense, and $515,000 in net higher business realignment costs than in the prior year period. These increases were offset by $1,026,000 in reduced bad debt expense in the nine months ended December 31, 2021 compared to the nine months ended December 31, 2020 as a result of improving economic conditions due to the lessening impact of COVID-19 in the nine months ended December 31, 2021. Foreign currency translation had a $522,000 unfavorable impact on general and administrative expenses in the nine months ended December 31, 2021.

Research and development expenses were $11,283,000 and $8,703,000, or 1.7% and 1.9% of net sales, in the nine months ended December 31, 2021 and 2020, respectively. The increase in research and development expenses was due to $1,184,000 in research and development expenses incurred by Dorner and Garvey and $424,000 in higher incentive compensation expense and stock compensation expense.

Amortization of intangibles was $18,648,000 and $9,449,000 in the nine months ended December 31, 2021 and 2020, respectively, with the increase related to new intangible assets recorded from the Dorner and Garvey acquisitions.

Interest and debt expense was $14,774,000 in the nine months ended December 31, 2021 compared to $9,192,000 in the nine months ended December 31, 2020. The increase is related to higher interest and debt expense incurred on the Company's Bridge Facility and new Term Loan B as a result of the Dorner acquisition and related debt refinancing, as well as the subsequent Garvey acquisition and Accordion borrowings.

The Company incurred $14,803,000 in Cost of debt refinancing during the nine months ended December 31, 2021 as a result of the Dorner acquisition and related refinancing as described in Note 9 of the financial statements. There were no similar expenses incurred in the nine months ended December 31, 2020. Investment income of $624,000 and $1,429,000 in the nine months ended December 31, 2021 and 2020, respectively, related to earnings on marketable securities held in the Company's wholly owned captive insurance subsidiary and the Company's equity method investment in EMC, described in Note 6 of the financial statements.

Other income was $744,000 in the nine months ended December 31, 2021 compared to other expense of $20,081,000 in the nine months ended December 31, 2020. The prior year expense primarily related to a $18,933,000 settlement charge as a result of the termination of one of the Company's U.S. pension plans, as described in Note 10 of the financial statements. There were no similar expenses incurred in the nine months ended December 31, 2021.

Income tax expense as a percentage of income from continuing operations before income tax expense was 13% and (45)% in the nine months ended December 31, 2021 and December 31, 2020, respectively. Typically these percentages vary from the U.S. statutory rate of 21% primarily due to varying effective tax rates at the Company's foreign subsidiaries, and the jurisdictional mix of taxable income for these subsidiaries.

For the nine months ended December 31, 2021, the rates are lower than the U.S. statutory rate by 9 percentage points primarily as a result of the impact of carrying back the taxable loss in FY 2021 to prior tax years as well as the impact of equity compensation.

For the nine months ended December 31, 2020, the rates are lower than the U.S. statutory rate primarily as a result of the impacts associated with pre-tax losses in the U.S. related to the pension settlement expense recorded of $18,933,000 for the year, the U.S. R&D credit, and the utilization of net operating losses that previously had a full valuation allowance against them.

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash totaled $106,949,000 at December 31, 2021, a decrease of $95,428,000 from the March 31, 2021 balance of $202,377,000.

Cash flow from operating activities

Net cash provided by operating activities was $23,727,000 for the nine months ended December 31, 2021 compared to $71,948,000 for the nine months ended December 31, 2020. Net income of $17,834,000 along with non-cash adjustments to net income of $59,720,000, of which $31,245,000 is from Depreciation and amortization and $14,803,000 is from Cost of debt refinancing as a result of the Dorner acquisition, were the primary drivers contributing to cash provided by operations for the nine months ended December 31, 2021. These increases in cash for the nine months ended December 31, 2021 were offset by an increase of $42,215,000 in inventories as the Company increased inventory due to current supply chain constraints, a decrease in trade accounts payable of $4,229,000, an increase in prepaid expenses of $5,544,000, and a decrease of $5,472,000 in accrued expenses and non-current liabilities. The decrease in accrued expenses and non-current liabilities primarily consists a decrease in customer deposits as well as $6,885,000 in cash paid for amounts included in the measurement of operating lease liabilities during the nine months ended December 31, 2021.

The net cash provided by operating activities for the nine months ended December 31, 2020 primarily consisted of non-cash adjustments to net income of $42,439,000, decrease in trade accounts receivable of $34,254,000, and a decrease in inventory of $20,786,000 for the nine months ended December 31, 2020.

Cash flow from investing activities

Net cash used by investing activities was $550,933,000 for the nine months ended December 31, 2021 compared with net cash provided by investing activities of $846,000 for the nine months ended December 31, 2020. The most significant use of cash was $539,778,000 to purchase Dorner and Garvey, net of cash acquired, as well as $9,506,000 in capital expenditures.

The net cash provided by investing activities for the nine months ended December 31, 2020 was primarily due to $5,453,000 in proceeds received from a sale of a building owned in China, offset by $5,904,000 in capital expenditures.

Cash flow from financing activities

Net cash provided by financing activities was $433,252,000 for the nine months ended December 31, 2021 and net cash used by financing activities was $7,680,000 for the nine months ended December 31, 2020. The most significant sources of cash were $725,000,000 in gross proceeds from the issuance of long term debt and $207,000,000 in gross proceeds from an equity offering, which were used to fund the Dorner and Garvey acquisitions. These sources of cash were offset by $467,725,000 in repayments of debt, $26,184,000 in fees related to the debt and equity offering, and dividends paid in the amount of $4,852,000. As noted in Note 8 of the financial statements, during the second quarter of fiscal 2022, the Company modified its cross currency swap and interest rate swap. As such, the associated cash flows from hedging activities are classified as financing activities in the Statement of Cash Flows which resulted in a net cash outflow of $453,000 during the nine months ended December 31, 2021.

The most significant uses of cash for the nine months ended December 31, 2020 were $3,338,000 in repayments on the prior Term Loan and dividends paid in the amount of $4,294,000.

We believe that our cash on hand, cash flows, and borrowing capacity under our new First Lien Facility will be sufficient to fund our ongoing operations and debt obligations, and capital expenditures for at least the next twelve months. This belief is dependent upon successful execution of our current business plan and effective working capital utilization. No material restrictions exist in accessing cash held by our non-U.S. subsidiaries. Additionally we expect to meet our U.S. funding needs without repatriating non-U.S. cash and incurring incremental U.S. taxes. As of December 31, 2021, $69,663,000 of cash and cash equivalents were held by foreign subsidiaries.

On January 31, 2017 the Company entered into a Credit Agreement ("Credit Agreement") and $545,000,000 of debt facilities ("Facilities") in connection with the STAHL acquisition. The Facilities consist of a Revolving Facility ("Revolver") in the amount of $100,000,000 and a $445,000,000 First Lien Term Loan ("Term Loan"). The Term Loan had a seven-year term maturing in 2024. On August 26, 2020, the Company entered into a Second Amendment to the Credit Agreement (as amended by the First Amendment, dated as of February 26, 2018). The Second Amendment extended the $100,000,000 secured Revolver which was originally set to expire on January 31, 2022 to August 25, 2023.

As discussed in Note 2, the Company completed its acquisition of Dorner on April 7, 2021 and entered into a $750,000,000 First Lien Facility with JPMorgan Chase Bank, PNC Capital Markets LLC, and Wells Fargo Securities LLC. The First Lien Facility consists of a New Revolving Credit Facility in an aggregate amount of $100,000,000 and a $650,000,000 Bridge Facility. Proceeds from the Bridge Facility were used, among other things, to finance the purchase price for the Dorner acquisition, pay related fees, expenses and transaction costs, and refinance the Company's outstanding borrowings under its prior Term Loan and Revolver.

In addition to the debt borrowing described above, the Company commenced and completed an underwritten public offering of 4,312,500 shares of its common stock at a price of $48.00 per share for total gross proceeds of $207,000,000. The Company used all of the net proceeds from the equity offering to repay in part outstanding borrowings under its Bridge Facility. The equity offering closed on May 4, 2021. Following the repayment of outstanding borrowings under the Bridge Facility, the Bridge Facility was refinanced with a syndicated Term Loan B facility on May 14, 2021.

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

1) Term Loan B: An aggregate $450,000,000 Term Loan B facility, which requires quarterly principal amortization of 0.25% with the remaining principal due at the maturity date. In addition, if the Company has Excess Cash Flow (ECF) as defined in the Credit Agreement for the First Lien Facility (the "Credit Agreement"), the ECF Percentage of the Excess Cash Flow for each fiscal year minus optional prepayments of the Loans (except prepayments of Revolving Loans that are not accompanied by a corresponding permanent reduction of Revolving Commitments) pursuant to Section 2.10(a) of the Credit Agreement other than to the extent that any such prepayment is funded with the proceeds of Funded Debt, shall be applied toward the prepayment of the Term Loan B facility. The ECF Percentage is defined as 50% stepping down to 25% or 0% based on the achievement of specified Secured Leverage Ratios as of the last day of such fiscal year. Further, the Company may draw additional Incremental Facilities (referred to as an "Accordion") by executing and delivering to JPMorgan Chase Bank, N.A. an Increased Facility Activation Notice specifying the amount of such increase requested. Lenders shall have no obligation to participate in any increase unless they agree to do so in their sole discretion.

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

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

4) Prepayments: Provisions permitting a Borrower to voluntarily prepay either the Term Loan B facility or Revolver in whole or in part at any time, and provisions requiring certain mandatory prepayments of the Term Loan B facility or Revolver on the occurrence of certain events which will permanently reduce the commitments under the Credit Agreement, each without premium or penalty, subject to reimbursement of certain costs of the Lenders. A prepayment premium of 1% of the principal amount of the First Lien Term Facility is required if the prepayment is associated with a Repricing Transaction and it were to occur within the first three months following the closing date.

5) Covenants: Provisions containing covenants required of the Company and its subsidiaries including various affirmative and negative financial and operational covenants. The key financial covenant is triggered only on any date when any Extension of Credit under the New Revolving Credit Facility is outstanding (excluding any Letters of Credit) (the "Covenant Trigger"), and prohibits the Total Leverage Ratio for the Reference Period ended on such date from exceeding (i) 6.75:1.00 as of any date of determination prior to June 30, 2021, (ii) 5.50:1.00 as of any date of determination on June 30, 2021 and thereafter but prior to June 30, 2022, (iii) 4.50:1.00 as of any date of determination on June 30, 2022 and thereafter but prior to June 30, 2023 and (iv) 3.50:1.00 as of any date of determination on June 30, 2023 and thereafter.

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

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

Further, in the first quarter of fiscal 2022, the Company recorded $5,432,000 in deferred financing costs on the First Lien Term Facility, which will be amortized over seven years. The Company recorded $4,027,000 in deferred financings costs on the New Revolving Credit Facility, of which $3,050,000 is related to the New Revolving Credit Facility and $977,000 is carried over from the Company's prior Revolver as certain Revolver lenders increased their borrowing capacity. These balances will be amortized over five years and are classified in Other assets since no funds were drawn on the New Revolving Credit Facility.

Also discussed in Note 2, the Company completed its acquisition of Garvey on November 30, 2021 and borrowed additional funds in accordance with the Accordion feature under its existing Term Loan B to increase the principal amount of the Term Loan B facility by $75,000,000. Proceeds from the Accordion were used, among other things, to finance the purchase price for the Garvey acquisition, pay related fees, expenses, and transaction costs. No material amendment to the terms of the Term Loan B facility or the First Lien Facility was necessary for the Company to exercise this Accordion feature.

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

The outstanding principal balance of the Term Loan B facility was $512,560,000 as of December 31, 2021, which includes $75,000,000 in principal balance from the Accordion exercised in the third quarter of fiscal 2022. The Company made $6,315,000 in principal payments on the Term Loan B facility during the three months ended December 31, 2021 of which $1,315,000 was required. During the nine months ended December 31, 2021, the Company made $12,440,000 in principal payments on the Term Loan B facility of which $2,440,000 was required. The Company is obligated to make $5,250,000 of principal payments on the Term Loan B facility over the next 12 months plus applicable ECF payments, if required, however, plans to pay down approximately $40,000,000 in principal payments in total during such 12 month period. This amount has been recorded within the current portion of long term debt on the Company's Condensed Consolidated Balance Sheet with the remaining balance recorded as long term debt.

There were no outstanding borrowings and $17,109,000 in outstanding letters of credit issued against the New Revolving Credit Facility as of December 31, 2021. The outstanding letters of credit as of December 31, 2021 consisted of $1,102,000 in commercial letters of credit and $16,007,000 of standby letters of credit.

The gross balance of deferred financing costs on the Term Loan B facility was $6,323,000, which includes $892,000 from the Accordion exercise, as of December 31, 2021 and $14,690,000 on the prior Term Loan as of March 31, 2021, respectively. The accumulated amortization balances were $669,000 and $8,744,000 as of December 31, 2021 and March 31, 2021, respectively.

The gross balance of deferred financing costs associated with the New Revolving Credit Facility was $4,027,000 as of December 31, 2021 and the prior Revolver was $3,615,000 as of March 31, 2021, which are included in Other assets on the Condensed Consolidated Balance Sheet. The accumulated amortization balances were $604,000 and $2,313,000 as of December 31, 2021 and March 31, 2021, respectively.

In connection with Dorner acquisition, the Company recorded a finance lease for a manufacturing facility in Hartland, WI under a 23 year lease agreement which terminates in 2035. The outstanding balance on the finance lease obligation is $14,213,000 as of December 31, 2021 of which $530,000 has been recorded within the Current portion of long term debt and the remaining balance recorded within Term loan and revolving credit facility on the Company's Condensed Consolidated Balance Sheet. See Note 15, Leases, for further details.

Unsecured and uncommitted lines of credit are available to meet short-term working capital needs for certain of our subsidiaries operating outside of the U.S. The lines of credit are available on an offering basis, meaning that transactions under the line of credit will be on such terms and conditions, including interest rate, maturity, representations, covenants and events of default, as mutually agreed between our subsidiaries and the local bank at the time of each specific transaction. As of December 31, 2021, unsecured credit lines totaled approximately $2,501,000, of which $0 was drawn. In addition, unsecured lines of $12,900,000 were available for bank guarantees issued in the normal course of business of which $9,478,000 was utilized. Capital Expenditures

In addition to keeping our current equipment and plants properly maintained, we are committed to replacing, enhancing and upgrading our property, plant and equipment to support new product development, improve productivity and customer responsiveness, reduce production costs, increase flexibility to respond effectively to market fluctuations and changes, meet environmental requirements, enhance safety and promote ergonomically correct work stations. Consolidated capital expenditures for the nine months ended December 31, 2021 and December 31, 2020 were $9,506,000 and $5,904,000, respectively. We expect capital expenditure spending in fiscal 2022 to range from $12,000,000 to $16,000,000.

Inflation and Other Market Conditions

Our costs are affected by inflation in the U.S. economy and, to a lesser extent, in non-U.S. economies including those of Europe, Canada, Mexico, South America, and Asia-Pacific. We do not believe that general inflation has had a material effect on our results of operations over the periods presented despite rising inflation levels over such periods due to our ability to pass on rising costs through annual price increases. However, increases in U.S. employee benefits costs such as health insurance and workers compensation insurance have exceeded general inflation levels. In addition we are currently experiencing higher levels of material inflation than we have seen in recent years. In the future, we may be further affected by inflation that we may not be able to pass on as price increases. However, we believe we have been successful in the past, and expect to be successful in the future, in instituting price increases to pass on these material cost increases.

Goodwill Impairment Testing

We test goodwill for impairment at least annually and more frequently whenever events occur or circumstances change that indicate there may be impairment.

These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of operating performance, or a sale or disposition of a significant portion of a reporting unit.

We test goodwill at the reporting unit level, which is one level below our operating segment. We identify our reporting units by assessing whether the components of our operating segment constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. We also aggregate components that have similar economic characteristics into single reporting units (for example, similar products and / or services, similar long-term financial results, product processes, classes of customers, etc.). With the acquisition of Dorner, we have three reporting units: the Duff Norton reporting unit, the Rest of Products reporting unit, and the Precision Conveyance reporting unit, which have goodwill totaling $9,699,000, $315,633,000, and $331,752,000, respectively, as of December 31, 2021.

We currently do not believe that it is more likely than not that the fair value of each of our reporting units is less than its applicable carrying value. Additionally, we currently do not believe that we have any significant impairment indicators or that any of our reporting units with goodwill are at risk of failing Step One of the goodwill impairment test. However, if the

projected long-term revenue growth rates, profit margins, or terminal growth rates are significantly lower, and/or the estimated weighted-average cost of capital is considerably higher, future testing may indicate impairment of one or more of the Company's reporting units and, as a result, the related goodwill may be impaired.

Refer to our Annual Report on Form 10-K for fiscal year 2021 for additional information regarding our annual goodwill impairment process.

Seasonality and Quarterly Results

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

Effects of New Accounting Pronouncements

Information regarding the effects of new accounting pronouncements is included in Note 16 to the accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include statements relating to:

Such statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed or implied by such statements, including general economic and business conditions, including the impact of the COVID-19 pandemic, conditions affecting the industries served by us and our subsidiaries, conditions affecting our customers and suppliers, competitor responses to our products and services, the overall market acceptance of such products and services, the integration of acquisitions, including the acquisition of Dorner, and other risks and uncertainties that arise from time to time are described in Item 1A "Risk Factors" of our Annual Report on Form 10-K and in other periodic filings with the SEC. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary factors and to others contained throughout this Quarterly Report on Form 10-Q. We use words like "will," "may," "should," "plan," "believe," "expect," "anticipate," "intend," "future" and other similar expressions to identify forward looking statements. These forward looking statements speak only as of their respective dates and are based on our current expectations. Except as required by applicable law, we do not undertake and specifically decline any obligation to publicly release any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated changes. Actual events or our actual operating results could differ materially from those predicted in these forward-looking statements, and any other events anticipated in the forward-looking statements may not actually occur.

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