COLUMBUS MCKINNON CORP – 10-K – Management’s Discussion and Analysis of Results of Operations and Financial Condition

 This section should be read in conjunction with our consolidated financial statements included elsewhere in this annual report. Comments on the results of operations and financial condition below refer to our continuing operations, except in the section entitled "Discontinued Operations."  

EXECUTIVE OVERVIEW

  We are a leading worldwide designer, manufacturer and marketer of material handling products, systems and services which efficiently and safely move, lift, position and secure material. Key products include hoists, actuators, cranes and rigging tools. The Company is focused on serving commercial and industrial applications that require the safety and quality provided by the Company's superior design and engineering know-how.  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 137-year history by emphasizing technological innovation, manufacturing excellence and superior after-sale service. In addition, acquisitions significantly broadened our product lines and services and expanded our geographic reach, end-user markets and customer base. Ongoing initiatives include improving our productivity and increasing penetration of the Asian, Latin American and European marketplaces. In accordance with our strategy, we have been investing in our directed sales and marketing activities, new product development and "Lean" efforts across the Company. Shareholder value will be enhanced through continued emphasis on improvement of the fundamentals including market expansion, a high degree of customer satisfaction, new product development, manufacturing efficiency, cost containment, and efficient capital investment.  Over the course of our history, we have managed through many business cycles and our solid cash flow profile has helped us grow and expand globally. We stand with a capital structure which includes sufficient cash reserves, significant revolver availability with an expiration of December 2013, fixed-rate long-term debt which expires in 2019 and a solid cash flow business profile. During fiscal 2010 we initiated projects to strategically reorganize our North American hoist and rigging operations, which were essentially completed during the first quarter of fiscal 2011. The projects included the closure of two manufacturing facilities and the significant downsizing of a third facility. The closures and downsizing resulted in a reduction of approximately 500,000 square feet of manufacturing space (or approximately 25% of total manufacturing space).  Additionally our revenue base is now more geographically diverse than at any time in our Company's history, with approximately 45% derived from customers outside the U.S. for the fiscal year ending March 31, 2012. We believe this will help balance the impact of changes that will occur in local economies as well as benefit the Company from growth in emerging markets. As in the past, we monitor both U.S. and Eurozone Industrial Capacity Utilization statistics as indicators of anticipated demand for our product. Since their June 2009 trough, these statistics have improved through April 2012. In addition, we continue to monitor the potential impact of other global and U.S. trends including industrial production, energy costs, steel price fluctuations, interest rates, currency exchange and activity of end-user markets around the globe.  From a strategic perspective, we are investing in global markets and 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 and actuators. 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 energy, construction, entertainment, mining and food processing.  Regardless of the economic climate and point in the economic cycle, we constantly explore ways to manage our operating margins as well as further improve our productivity and competitiveness. We have specific initiatives related to improved customer satisfaction, reduction of defects, shortened lead times, improved inventory turns and on-time deliveries, reduction of warranty costs, and improved working capital utilization. The initiatives are being driven by the continued implementation of our "Lean" efforts which are fundamentally changing our manufacturing and business processes to be more responsive to customer demand and improving on-time delivery and productivity. In addition to "Lean," we are working to achieve these strategic initiatives through product simplification, the creation of centers of excellence, and improved supply chain management.  We continuously monitor market prices of steel. We purchase approximately $30,000,000 to $40,000,000 of steel annually in a variety of forms including rod, wire, bar, structural and others. Generally, as we experience fluctuations in our costs, we reflect them as price increases or surcharges to our customers with the goal of being margin neutral. Some of our steel costs have increased during this year as a result of higher scrap and alloy surcharges.                                          27

--------------------------------------------------------------------------------

Table of Contents

  We are also looking for opportunities for growth via strategic acquisitions or joint ventures. The focus of our acquisition strategy centers on opportunities for non-U.S. market penetration and product line expansion in alignment with our existing core product offering.  We operate in a highly competitive and global business environment. We face a variety of opportunities in those markets and geographies, including trends toward increased utilization of the global labor force and the expansion of market opportunities in Asia and other emerging markets. While we continue to execute our long-term growth strategy, we are supported by our solid capital structure, including our cash position and flexible cost base. We are also aggressively addressing costs and restructuring opportunities to enhance future margin opportunities.  RESULTS OF OPERATIONS  Fiscal 2012 sales were $591,945,000, up 13.0%, or $67,880,000 compared with fiscal 2011. The increase in sales was primarily due to an increase of $43,735,000 in volume resulting from the economic recovery and market share gains. Price increases resulted in a $13,585,000 increase in sales. Favorable foreign currency translation impacted sales by $10,560,000. Fiscal 2011 sales were $524,065,000, up 10.1%, or $47,882,000 compared with fiscal 2010. The increase in sales was primarily due to an increase of $52,785,000 in volume resulting from the economic recovery and market share gains. Further, price increases resulted in a $4,651,000 increase in sales. These increases were offset by a reduction of sales of $2,695,000 from the October 2009 divestiture of our American Lifts business as well as a negative foreign currency impact of $6,828,000.  Our gross profit was $157,718,000, $126,052,000, and $115,939,000 in fiscal 2012, 2011 and 2010, respectively. The fiscal 2012 increase in gross profit of $31,666,000 or 25.1% is the result of $20,941,000 in increased volume, favorable manufacturing variances of $3,655,000, $3,006,000 in less restructuring related expenses included within cost of goods sold, and $2,570,000 from lower product liability expenses partially offset by a pension plan curtailment charge of $1,122,000. Foreign currency translation had a favorable impact on gross profit of $2,616,000. The fiscal 2011 increase in gross profit of $10,113,000 is the result of a $12,800,000 increase in volume, a $6,700,000 increase in restructuring benefits, $1,500,000 increase in savings on U.S. health and pension expenses, offset by a decrease of $6,800,000 from inefficiencies in our forgings operation, a decrease of $1,800,000 for increases in our product liability and asbestos related reserves, a decrease of $1,800,000 for increases in costs of materials and freight and a decrease of $487,000 for currency translation and other.  Selling expenses were $64,860,000, $62,910,000, and $64,464,000 in fiscal 2012, 2011 and 2010, respectively. As a percentage of net sales, selling expenses were 11.0%, 12.0% and 13.5% in fiscal 2012, 2011 and 2010, respectively. The increase in fiscal 2012 selling expense is primarily the result of increasing revenues year over year. Decreases in fiscal 2011 selling expense of $1,554,000 or 2.4% are due to reorganization efforts specifically in the Company's North American sales operations, partially offset by investments in non-U.S markets and commissions on higher sales.  General and administrative expenses were $46,677,000, $40,592,000 and $36,892,000 in fiscal 2012, 2011 and 2010, respectively. As a percentage of net sales, general and administrative expenses were 7.9%, 7.7% and 7.7% in fiscal 2012, 2011 and 2010, respectively. Fiscal 2012 general and administrative expenses increased by $6,085,000 or 15.0% primarily due to the new global ERP system implementation project, increased variable compensation costs, as well as higher employee related costs. Fiscal 2011 general and administrative expenses increased by $3,700,000 or 10.0% primarily due to the Company's investments in its management team in Asia and new product development.  Restructuring (gains) charges of ($1,037,000), $2,200,000 and $16,519,000, or (0.2%), 0.4% and 3.5% of net sales were recorded in fiscal 2012, 2011 and 2010, respectively. Fiscal 2012 restructuring gains were the result of a gain recognized on the sale of a previously closed manufacturing facility of ($1,462,000) offset by an employee workforce reduction effort initiated and completed at one of our European facilities. Fiscal 2011 restructuring charges of $2,700,000 were offset by a gain from the sale of a previously closed manufacturing facility totaling ($500,000).                                          28

--------------------------------------------------------------------------------

Table of Contents

  Amortization of intangibles was $2,074,000, $1,778,000 and $1,876,000 in fiscal 2012, 2011 and 2010, respectively and primarily relate to amortization of intangible assets acquired in connection with our fiscal 2009 acquisition of Pfaff.  Interest and debt expense was $14,214,000, $13,532,000 and $13,225,000 in fiscal 2012, 2011 and 2010, respectively. As a percentage of net sales, interest and debt expense was 2.4%, 2.6% and 2.8% in fiscal 2012, 2011 and 2010, respectively.  

We incurred costs of $3,939,000 in fiscal 2011 related to the repurchase of outstanding debt. Further discussion on this topic is included below in the Liquidity and Capital Resources section and Note 12 of our consolidated financial statements. No such costs were incurred in Fiscal 2012.

  Investment income of $1,018,000, $3,041,000 and $1,544,000, in fiscal 2012, 2011 and 2010, respectively, related to marketable securities held in the Company's wholly owned captive insurance subsidiary. The fiscal 2011 $3,041,000 gain primarily is the result of the market recovery and sale of securities previously impaired in fiscal 2009.  

Foreign currency exchange loss (gain) was $316,000, $452,000, and ($344,000) in fiscal 2012, 2011 and 2010, respectively, as a result of foreign currency volatility related to purchases and intercompany debt.

  Other income, net was $1,179,000, $1,375,000, and $2,260,000 in fiscal 2012, 2011 and 2010, respectively. Other income in fiscal 2012 includes a gain of <money>$850,000 calculated on the acquisition of the remaining ownership interest of an investment which the Company previously had a 20% ownership interest.  Income tax expense (benefit) as a percentage of income (loss) from continuing operations before income tax (benefit) expense was 21.0%, 817.6% and (41.5)% in fiscal 2012, 2011 and 2010, respectively. The unusual percentage experienced during the year ended March 31, 2011 is related to the recording of a deferred tax asset valuation allowance in the amount of $42,983,000.  

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totalled $89,473,000, $80,139,000, and $63,968,000 at March 31, 2012, 2011 and 2010, respectively.

  Net cash provided by operating activities was $23,587,000, $3,280,000 and $29,867,000 in fiscal 2012, 2011 and 2010, respectively. The net cash provided by operating activities in fiscal 2012 consisted of $26,967,000 in net income which was largely due to increased sales volume, a decrease in prepaid expenses and other assets of $3,776,000 and increases in trade accounts payable and accrued and non-current liabilities of $3,862,000 and $5,906,000, respectively, offset by increases in trade accounts receivables and inventories of $9,823,000 and $17,489,000 respectively. The increase in inventory during fiscal 2012 was primarily to meet increasing sales volume and expected future customer demand.  The net cash provided by operating activities in fiscal 2011 consisted of $7,033,000 in net income before a $42,983,000 non-cash charge related to the recording of valuation allowances against deferred tax assets, and increases in trade accounts payable and accrued and non-current liabilities of $4,027,000 and $1,668,000 respectively, offset by increases in trade accounts receivables, inventory, and prepaid expenses and other assets of $6,683,000, $9,848,000 and $5,178,000, respectively. The increase in inventories during the prior year was to meet expected future customer demand as well as avoid disruption of supply during major facility consolidation projects. The increase in prepaid expenses in the prior year was due to the timing of certain prepaid expenditures.  Net cash used by investing activities was $13,541,000, $4,344,000 and $1,350,000 in fiscal 2012, 2011 and 2010, respectively. The net cash used by investing activities in fiscal 2012 consisted of $13,765,000 in capital expenditures (of which $5,248,000 relates to implementation of our global ERP system) and $3,356,000 for the purchase of the remaining 80% interest in Yale Lifting Solutions (Pty) Ltd based in South Africa, partially offset by $1,971,000 net proceeds from the sale of our vacant property in Cedar Rapids, Iowa in the period. The net cash used by investing activities in fiscal 2011 consisted of $12,543,000 in capital expenditures (of which $3,642,000 related to the initial investment in our global ERP system) offset by $6,621,000 in cash generated from the net sales of marketable securities (related to the settlement of certain product liability insurance claims) and net proceeds of $1,182,000 primarily from the sale of our vacant property in Muskegon, Michigan.                                          29

--------------------------------------------------------------------------------

Table of Contents

  Net cash generated by financing activities was $474,000 and $15,794,000 in fiscal 2012 and 2011 respectively compared with net cash used by financing activities of $5,418,000 in fiscal 2010. The net cash generated by financing activities in fiscal 2012 consisted of $1,436,000 of proceeds from exercises of stock options offset by $361,000 of net payments under international lines of credit and $1,036,000 in repayment of debt. The Net cash generated in fiscal 2011 was due to the refinancing of the $124,855,000 outstanding 8 7/8% Notes with a new issuance of $150,000,000 7 7/8% Notes. Offsetting the proceeds from the offering was $3,154,000 paid for tender and call redemption premiums on the 8 7/8% Notes and $3,185,000 paid for direct financing costs which have been deferred.  We believe that our cash on hand, cash flows, and borrowing capacity under our Revolving Credit Facility will be sufficient to fund our ongoing operations and budgeted 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 the incremental U.S. taxes. As of March 31, 2012, $33,242,000 of cash and cash equivalents were held by foreign subsidiaries.  

We have an amended, restated and expanded revolving credit facility dated December 31, 2009. The Revolving Credit Facility provides availability up to a maximum of $85,000,000 and expires December 31, 2013.

   Provided there is no default, we may, on a one-time basis, request an increase in the availability of the Revolving Credit Facility by an amount not exceeding $65,000,000, subject to lender approval. The unused portion of the Revolving Credit Facility totalled $70,286,000, net of outstanding borrowings of $0 and outstanding letters of credit of $14,714,000, as of March 31, 2012. The outstanding letters of credit at March 31, 2012 consisted of $5,425,000 in commercial letters of credit (including a significant letter of credit related to a large customer order, amounting to $2,590,000 which will mature in May 2012) and $9,289,000 of standby letters of credit.  Interest on the revolver is payable at varying Eurodollar rates based on LIBOR or prime plus a spread determined by our total leverage ratio amounting to 150 or 50 basis points, respectively, at March 31, 2012. The Revolving Credit Facility is secured by all domestic inventory, receivables, equipment, real property, subsidiary stock (limited to 65% of non-U.S. subsidiaries) and intellectual property.  The corresponding credit agreement associated with the Revolving Credit Facility places certain debt covenant restrictions on us, including certain financial requirements and restrictions on dividend payments, with which we were in compliance as of March 31, 2012. Key financial covenants include a minimum fixed charge coverage ratio of 1.25x, a maximum total leverage ratio, net of cash, of 3.50x, and maximum annual capital expenditures of $18,000,000 excluding capital expenditures for a global ERP system. Our actual fixed charges coverage ratio and total leverage ratio, as calculated per the terms of our Revolving Credit Facility, were 3.42x and 1.45x, respectively, at March 31, 2012.  During the fourth quarter of fiscal year 2011, the Company refinanced its 8 7/8% Notes through the issuance of $150,000,000 principal amount of 7 7/8% Senior Subordinated Notes due 2019 in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended ("Unregistered 7 7/8% Notes"). The proceeds from the sale of the Unregistered 7 7/8% Notes were used to repurchase or redeem all of the outstanding 8 7/8% Notes amounting to $124,855,000 and to fund working capital and other corporate activities. The offering price of the Unregistered 7 7/8% Notes was 98.545% after adjustment for the original issue discount. Provisions of the Unregistered 7 7/8% Notes include, without limitation, restrictions on indebtedness, asset sales, and dividends and other restrictive payments. Until February 1, 2014, the Company may redeem up to 35% of the outstanding Unregistered 7 7/8% Notes at a redemption price of 107.875% with the proceeds of equity offerings, subject to certain restrictions.  On or after February 1, 2015, the Unregistered 7 7/8% Notes are redeemable at the option of the Company, in whole or in part, at a redemption price of 103.938%, reducing to 100% on February 1, 2017. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the Unregistered 7 7/8% Notes may require us to repurchase all or a portion of such holder's Unregistered 7 7/8% Notes at a purchase price equal to 101% of the principal amount thereof. The Unregistered 7 7/8% Notes are guaranteed by certain existing and future U.S. subsidiaries and are not subject to any sinking fund requirements.                                          30

--------------------------------------------------------------------------------

Table of Contents

  During the first quarter of fiscal year 2012, the Company exchanged its $150,000,000 outstanding Unregistered 7 7/8% Notes for a like principal amount of 7 7/8% Senior Subordinated Notes due 2019 registered under the Securities Act of 1933, as amended ("7 7/8% Notes"). All of the Unregistered 7 7/8% Notes were exchanged in the transaction. The 7 7/8% Notes contain identical terms and provisions as the Unregistered 7 7/8% Notes.  

Our capital lease obligations related to property and equipment leases amounted to $4,842,000 at March 31, 2012. Capital lease obligations are included in senior debt in the consolidated balance sheets.

  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, 2012, significant unsecured credit lines totalled approximately $10,361,000, of which $112,000 was drawn.  

CONTRACTUAL OBLIGATIONS

  The following table reflects a summary of our contractual obligations in millions of dollars as of March 31, 2012, by period of estimated payments due:                                                    Fiscal        Fiscal 2014-       Fiscal 2016-       More Than                                     Total          2013         Fiscal 2015        Fiscal 2017       Five Years Long-term debt obligations (a)    $   154.8     $      1.1     $          2.4     $          0.8     $     150.5 Operating lease obligations (b)        13.5            4.6                5.8                3.1               - Purchase obligations (c)                  -              -                  -                  -               - Interest obligations (d)               81.7           12.2               24.0               23.8            21.7 Letter of credit obligations           14.7           14.7                  -                  -               - Bank guarantees                         7.4            7.4 Uncertain tax positions                 2.4              -                2.4                  -               - Other long-term liabilities reflected on the Company's balance sheet under GAAP (e)           96.7              -               33.8               34.9            28.0 Total                             $   371.2     $     40.0     $         68.4     $         62.6     $     200.2             (a) As described in Note 12 to consolidated financial statements.            (b) As described in Note 19 to consolidated financial statements.   

(c) We have no purchase obligations specifying fixed or minimum quantities to be

purchased. We estimate that, at any given point in time, our open purchase

      orders to be executed in the normal course of business approximate $40       million.  

(d) Estimated for our Senior Subordinated Notes due 2/1/19 and other senior

debt.

(e) As described in Note 11 to our consolidated financial statements. Excludes

uncertain tax positions of $2.4 million shown separately above.We have no additional off-balance sheet obligations that are not reflected above.

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 2012, 2011 and 2010 were $13,765,000, $12,543,000 and $7,245,000, respectively. We expect capital expenditure spending in fiscal 2013 to be in the range of $14,000,000 to $17,000,000, excluding acquisitions and strategic partnerships.                                          31

--------------------------------------------------------------------------------

Table of Contents

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 primarily due to overall low inflation levels over such periods and our ability to generally pass on rising costs through annual price increases and surcharges. However, U.S. employee benefits costs such as health insurance, workers compensation insurance, pensions as well as energy and business insurance have exceeded general inflation levels. In the future, we may be further affected by inflation that we may not be able to pass on as price increases. With changes in worldwide demand for steel and fluctuating scrap steel prices over the past several years, we experienced fluctuations in our costs that we have reflected as price increases and surcharges to our customers. We believe we have been successful in instituting surcharges and price increases to pass on these material cost increases. We will continue to monitor our costs and reevaluate our pricing policies.  

SEASONALITY AND QUARTERLY RESULTS

  Our quarterly results may be materially affected by the timing of large customer orders, periods of high vacation and holiday concentrations, restructuring charges and other costs attributable to our facility rationalization program, divestitures, acquisitions and the magnitude of rationalization integration costs. Therefore, our operating results for any particular fiscal quarter are not necessarily indicative of results for any subsequent fiscal quarter or for the full fiscal year.  DISCONTINUED OPERATIONS  In May 2002, we completed the divestiture of substantially all of the assets of ASI which comprised the principal business unit in our former Solutions - Automotive segment. Proceeds from this sale included an 8% subordinated note in the principal amount of $6,800,000 payable over 10 years. Due to the uncertainty of its collection, the note was recorded at its estimated net realizable value of $0 at the time of the divestiture. Principal payments received on the note are recorded as income from discontinued operations at the time of receipt. Accordingly, $1,052,000, and $396,000 of income from discontinued operations was recorded in fiscal 2012, and 2011 respectively, net of tax. All interest and principal payments required under the note have been made to date. The Company expects that the loan will be fully collected by the end of fiscal 2013.  

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. 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.  Revenue Recognition. Sales are recorded when title passes to the customer which is generally at the time of shipment to the customer. The Company performs ongoing credit evaluations of its customers' financial condition, but generally does not require collateral to support customer receivables. The credit risk is controlled through credit approvals, limits and monitoring procedures. Accounts receivable are reported at net realizable value and do not accrue interest.  Pension and Other Postretirement Benefits. The determination of the obligations and expense for pension and postretirement benefits is dependent on our selection of certain assumptions that are used by actuaries in calculating such amounts. Those assumptions are disclosed in Note 13 to our fiscal 2012 consolidated financial statements and include the discount rates, expected long-term rate of return on plan assets and rates of future increases in compensation and healthcare costs.                                          32

--------------------------------------------------------------------------------

Table of Contents

  The pension discount rate assumptions of 4.70%, 5.75%, and 6.0%, as of March 31, 2012, 2011, and 2010, respectively, are based on long-term AA rated corporate and municipal bond rates. The decrease in the discount rate for fiscal 2012 resulted in a $11,500,000 increase in the projected benefit obligation. The decrease in the discount rates for fiscal 2011 resulted in an $4,700,000 increase in the projected benefit obligation as of March 31, 2011. The rate of return on plan assets assumptions of 7.5% for each of the years ended March 31, 2012, 2011 and 2010 is based on the targeted plan asset allocation (approximately 70% equities and 30% fixed income) and their long-term historical returns. Our under-funded status for all pension plans as of March 31, 2012 and 2011 was $65,123,000 and $32,366,000, or 30.3% and 18.2% of the projected benefit obligation, respectively. Our pension contributions during fiscal 2012 and 2011 were approximately $5,974,000 and $7,796,000, respectively. The under-funded status may result in future pension expense increases. Pension expense for the March 31, 2013 fiscal year is expected to approximate $7,137,000, slightly less than the fiscal 2012 amount of $7,547,000, which includes a curtailment charge of $1,120,000. Pension funding contributions for the March 31, 2013 fiscal year is expected to increase by approximately $4,412,000 compared to fiscal 2012. The compensation increase assumption of 2% as of March 31, 2012, 2011, and 2010 is based on expected wage trends and historical patterns. The healthcare costs inflation assumptions of 8.0% 8.5%, and 8.0% for fiscal 2012, 2011, and 2010, respectively, are based on anticipated trends. Healthcare costs in the United States have increased substantially over the last several years. If this trend continues, the cost of postretirement healthcare will increase in future years.  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. As a result, 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.  Accounts Receivable Reserves. Allowances for doubtful accounts and credit memo reserves are also judgmentally determined based on formulas applied to historical bad debt write-offs and credit memos issued, assessing potentially uncollectible customer accounts and analyzing the accounts receivable aging. Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted. At March 31, 2012 the allowance for doubtful accounts totaled $2,700,000.  Impairment of depreciable and amortizable long-lived assets. Property, plant and equipment and certain intangibles are depreciated or amortized over their assigned lives. We test long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable and exceed their fair market value. The following summarizes the value of long-lived assets subject to impairment testing when events or circumstances indicate potential impairment (amounts in millions):                                                             Balance as of                                                           March 31, 2012         Property, plant and equipment, net                   $        61.7         Acquired intangibles with estimable useful lives              15.8         Other assets                                                   6.6    Impairment may exist if the carrying amount of the asset in question exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. The impairment loss, if any, would be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair market value as determined by appropriate valuation techniques.  Goodwill impairment testing. Our goodwill balance, $106,435,000 as of March 31, 2012 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.                                          33

--------------------------------------------------------------------------------

Table of Contents

  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.). We have four reporting units, only two of which have goodwill. Our Duff-Norton reporting unit and Rest of Products reporting unit have goodwill totaling $9,821,000 and $96,614,000, respectively, at March 31, 2012.  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 two-step impairment test.  In order to perform the two-step impairment test, we use the discounted cash flow method to estimate the fair value of each of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating profit margins and cash flows, the terminal growth rate and the discount rate. Management projects revenue growth rates, operating margins and cash flows based on each reporting unit's current business, expected developments and operational strategies over a five-year period. In estimating the terminal growth rate, we consider our historical and projected results, as well as the economic environment in which our reporting units operate. The discount rates 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.  We performed our qualitative assessment during the fourth quarter 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 two-step goodwill impairment test for any of our reporting units.  Marketable Securities. On a quarterly basis, we review our marketable securities for declines in market value that may be considered other than temporary. We generally consider market value declines to be other than temporary if there are declines for a period longer than six months and in excess of 20% of original cost. We also consider the nature of the underlying investments and other market conditions.  Deferred Tax Asset Valuation Allowance.  During the fiscal year ended March 31, 2011, the Company recorded a non-cash charge of $42,983,000 included within its provision for income taxes. The balance of the valuation allowance at March 31, 2012 is $53,325,000. This charge relates to the Company's determination that a full valuation allowance against its deferred tax assets generated in the U.S. was necessary. The deferred tax assets relate principally to liabilities related to employee benefit plans, insurance reserves, U.S. tax credits, and U.S. net operating loss carryforwards. The U.S. net operating loss carryforwards have been generated primarily as a result of restructuring costs in fiscal years 2010 and 2011. Accounting rules require a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available and objectively verifiable evidence, it is more likely than not that such assets will not be realized. The existence of cumulative losses for a certain threshold period is a significant form of negative evidence used in the assessment. During the third quarter ended December 31, 2010, the Company determined that it would be in a three-year cumulative pretax loss position in the U.S. at March 31, 2011 primarily due to restructuring-related charges incurred in the U.S. to-date in fiscal 2011, despite our expectations of future profitability. If a cumulative loss threshold is met, the accounting rules indicate that forecasts of future profitability are generally not sufficient positive evidence to overcome the presumption that a valuation allowance is necessary.  The recording of this non-cash charge does not impact the Company's ability to realize the economic benefit of its deferred tax assets (including those related to net operating loss carryforwards) amounting to $58,226,000 on a gross basis at March 31, 2012 on future tax returns. In future periods, the allowance could be reduced or reversed based on sufficient objectively verifiable evidence indicating that it is more likely than not that a portion or all of the Company's deferred tax assets will be realized.                                          34

--------------------------------------------------------------------------------

Table of Contents

  The Internal Revenue Code imposes limitations on a corporation's ability to utilize NOLs if it experiences an "ownership change." In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three year period. If we were to experience an ownership change, utilization of our NOLs would be subject to an annual limitation determined by multiplying the market value of our outstanding shares of stock at the time of the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years within the allowed NOL carryforward period. The amount of the limitation may, under certain circumstances, be increased or decreased by built-in gains or losses held by us at the time of the change that are recognized in the five-year period after the change.  

Effects of New Accounting Pronouncements

  In December 2011, the FASB issued Accounting Standards Update ("ASU") 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. Among the new provisions in ASU 2011-05 was a requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements); however this reclassification requirement is indefinitely deferred by ASU 2011-12 and will be further deliberated by the FASB at a future date.  In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210)-Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The ASU is effective for annual periods beginning on or after January 1, 2013 and interim periods therein. We are currently evaluating the impact this update will have on our consolidated financial statements.  In September 2011, the FASB issued ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment. The amendment permits entities to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing relevant events or circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to follow the existing provisions of the two-step impairment test. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. We adopted the new guidance for our annual goodwill impairment test, which we tested as of our measurement date of February 29, 2012. The adoption of this standard did not have a material impact on our consolidated financial statements.  In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income ("ASU 2011-05"), effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The issuance of ASU 2011-5 is intended to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance in ASU 2011-5 supersedes the presentation options in ASC Topic 220 and facilitates convergence of U.S. generally accepted accounting principles and International Financial Reporting Standards by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity and requiring that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company does not expect that the adoption of ASU 2011-05 will have a significant impact on the Company's consolidated financial statements.  In May 2011 the FASB issued ASU No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards ("IFRS") ("ASU 2011-04"). ASU 2011-04 represents the converged guidance of the FASB and the International Accounting Standards Board (the "Boards") on fair value measurements. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. The amendments in this ASU are required to be applied prospectively, and are effective for interim and annual periods beginning after December 15, 2011. The Company does not expect that the adoption of ASU 2011-04 will have a significant impact on the Company's consolidated financial statements.                                          35

--------------------------------------------------------------------------------

Table of Contents

  In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB's Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 was March 28, 2011.  The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.  

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

  This report may include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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, 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, facility consolidations and other restructurings, our asbestos-related liability, the integration of acquisitions and other factors disclosed in our periodic reports filed with the Commission. Consequently such forward-looking statements should be regarded as our current plans, estimates and beliefs. We do not undertake and specifically decline any obligation to publicly release the results of 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 events.